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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
COMMISSION FILE NUMBER 1-9085
MORGAN STANLEY GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
1585 BROADWAY
NEW YORK, N.Y.
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
13-2838811
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
10036
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 761-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $1 par value New York Stock Exchange
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Depositary Shares, each representing 1/4 of a share of 7 3/4% New York Stock Exchange
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/8 of a share of 8 3/4% New York Stock Exchange
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/8 of a share of 7 3/8% New York Stock Exchange
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/4 of a share of Series A Fixed/Adjustable New York Stock Exchange
Rate Cumulative Preferred Stock, $200 stated value
7.82% Capital Units; 7.80% Capital Units; 9.00% Capital Units; New York Stock Exchange
8.40% Capital Units; 8.20% Capital Units; 8.03% Capital Units*
6 1/2% PERQS(SM) Due July 1, 1997; 6% PERQS(SM) Due October 1, 1997; American Stock Exchange
7% PERQS(SM) Due November 15, 1997; 6% PERQS(SM) Due February 16, 1999+
Exchangeable Notes Due September 30, 2000; Exchangeable Notes Due New York Stock Exchange
December 31, 2001; Exchangeable Notes Due March 29, 2002++
PEEQS(SM) Due May 1, 2001+++ American Stock Exchange
AMEX Hong Kong 30 Index(SM) Call Warrants Expiring October 3, 1997 American Stock Exchange
Nikkei 225 Protection Step-Up Exchangeable Notes Due July 31, 2003 New York Stock Exchange
Nikkei 225 Index Call Warrants Expiring August 15, 1997 American Stock Exchange
</TABLE>
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* Each Capital Unit consists of (a) a Subordinated Debenture (of the same
rate) of Morgan Stanley Finance plc guaranteed by the Registrant and (b) a
related purchase contract of the Registrant requiring the holder to purchase
one Depositary Share representing shares (or fractional shares) of the
Registrant's Cumulative Preferred Stock (of the same rate), $200 stated
value. The Capital Units and the Depositary Shares are registered on the New
York Stock Exchange.
+ "Performance Equity-linked Redemption Quarterly-pay Securities." The issue
price and amount payable at maturity with respect to the PERQS are based on
the share price of certain non-affiliated companies.
++ Notes which are exchangeable on a defined date for equity securities of
certain non-affiliated companies.
+++ "Protected Exchangeable Equity-linked Securities." Principal protected notes
which are exchangeable for cash based on the value of the S&P 500 Index.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X]. NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 3, 1997 was approximately $6,209,256,089. For purposes of
this information, the outstanding shares of common stock owned by certain
Managing Directors and Principals of certain wholly-owned subsidiaries of the
Registrant, and subject to certain restrictions on voting and disposition, were
deemed to be shares of common stock held by affiliates.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
As of February 3, 1997, there were 158,104,726 shares of Common Stock, $1
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Morgan Stanley Group Inc. 1996 Annual Report to Stockholders -- Incorporated
in part in Form 10-K, Parts I, II and IV.
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PART I
ITEM 1. BUSINESS
Morgan Stanley Group Inc. (the "Company"*) is a holding
company that, through its subsidiaries, provides a wide range of financial
services on a global basis. Its businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring, real estate,
project finance and other corporate finance advisory activities; asset
management; merchant banking and other principal investment activities;
brokerage and research services; the trading of foreign exchange and
commodities as well as derivatives on a broad range of asset categories, rates
and indices; and global custody, securities clearance services and securities
lending. These services are provided to a large and diversified group of
clients and customers, including corporations, governments, financial
institutions and individual investors. The Company, which was formed in 1935,
conducts business from its head office in New York City and through a network
of 28 principal offices in 19 countries. At November 30, 1996, the Company
employed 11,613 people, approximately 1,500 of whom joined the Company during
fiscal 1996 as a result of the Company's acquisitions of Miller Anderson &
Sherrerd, LLP and VK/AC Holding, Inc. (see "Asset Management").
The Company conducts its broker-dealer business principally in
the United States ("U.S.") through Morgan Stanley & Co. Incorporated ("MS&Co."),
in Europe through Morgan Stanley & Co. International Limited ("MSIL"), in Japan
through Morgan Stanley Japan Limited ("MS Japan") and in the rest of Asia
through Morgan Stanley Asia Limited ("MS Asia"). Because of the increasing
integration of the international financial markets, the Company manages its
principal operating subsidiaries, including MS&Co., MSIL, MS Japan and MS Asia,
on a coordinated global basis with a view to the profitability of the enterprise
as a whole.
The Company's business activities are highly integrated and
constitute a single industry segment. Financial information concerning the
Company for each of the three periods ended November 30, 1996, November 30,
1995,** and January 31, 1995, including the amount of total revenue contributed
by classes of similar products or services that accounted for 10% or more of the
Company's consolidated revenue in any one of those periods and information with
respect to the Company's operations by geographic area, is set forth in the
Consolidated Financial Statements and the Notes thereto in the 1996 Annual
Report to Stockholders and is incorporated herein by reference.
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* Unless the context otherwise requires, the term "Company" means Morgan
Stanley Group Inc. and includes the consolidated subsidiaries of Morgan
Stanley Group Inc. Please note that in the 1996 Annual Report to
Stockholders, which is incorporated by reference in part in this Form
10-K, the term "Morgan Stanley" is generally used to refer to the
Company. Except for the historical information contained in this Form
10-K, certain items herein, including (without limitation) certain
matters discussed under Part I, Item 3, "Legal Proceedings" and under
Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (incorporated herein by reference)
("MD&A"), are forward-looking statements. The matters referred to in
such statements could be affected by the risks and uncertainties
involved in the Company's business, including (without limitation) the
effect of economic and market conditions, the level and volatility of
interest rates and currency values, the impact of current or pending
legislation and regulation and the other risks and uncertainties
detailed in Part I, Item I, "Competition, Regulation and Certain Risk
Factors" and "Risk Management" and in the MD&A.
** The Company changed its fiscal year-end from January 31 to November 30
effective for November 30, 1995 resulting in a ten-month period for
fiscal 1995.
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RECENT DEVELOPMENT *
On February 5, 1997, the Company and Dean Witter, Discover &
Co. ("DWD") announced a definitive agreement to merge. The combined company
would be a pre-eminent global financial services firm with a market
capitalization of approximately $21 billion (as of the time of the merger
announcement) and with leading market positions in the securities, asset
management and credit services businesses. The new company will be named Morgan
Stanley, Dean Witter, Discover & Co. The merger would combine Morgan Stanley's
strengths in investment banking and institutional sales and trading with DWD's
strengths in retail distribution, asset gathering and credit services. DWD has
the third largest retail brokerage operation with over 9,000 account executives
and 361 branches throughout the U.S. and manages more than $100 billion in
customer assets. Led by the Discover(R) Card, DWD is the nation's largest credit
card issuer with 39 million accounts, and the third largest in credit card
receivables. In asset management, the combination would result in a business
that manages more than $270 billion of assets on a pro forma basis.
Under the terms of the merger agreement unanimously approved
by the Boards of both companies, each of the Company's common shares will be
exchanged for 1.65 DWD common shares. Shares of the Company's preferred stock
outstanding at the date of the merger will be exchanged for shares of preferred
stock of DWD 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. Pursuant to the pooling of interests method of
accounting, prior to the time of closing each company will formally rescind any
stock repurchase authorizations existing at that time. Prior to such
rescissions, both companies may continue to repurchase stock in the open market
subject to the aggregate limitations imposed by the pooling of interests method.
As of the date hereof, the Company does not expect to actively repurchase its
stock in the open market.
INVESTMENT BANKING
UNDERWRITING
The Company is a leading global financial services firm which
provides advice to, and raises capital worldwide for, a broad group of domestic
and international clients. The Company manages and participates in public
offerings and private placements of debt, equity and other securities
denominated in U.S. dollars and other currencies in the U.S. and international
capital markets. The Company is a leading underwriter of common stock, preferred
stock and other equity-related securities, including American Depositary
Receipts ("ADRs"), Preferred Equity Redemption Cumulative Stock ("PERCS(R)"),
Performance Equity-linked Redemption Quarterly-pay Securities ("PERQSSM") and
capital securities. The Company also underwrites taxable fixed income securities
and tax exempt securities. The Company underwrites mortgage-related
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* See also 1996 Annual Report to Stockholders, "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Subsequent Events" and "Notes to Consolidated
Financial Statements, Note 13."
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securities, including private pass-throughs and collateralized mortgage
obligations ("CMOs"), and other asset-backed securities. The Company is active
as an underwriter and distributor of commercial paper and other short-term and
medium-term securities. The Company is also involved in tender offers,
repurchase programs, consent solicitations, rights offerings and exchange offers
on behalf of clients.
FINANCIAL ADVISORY SERVICES
The Company provides domestic and international corporate and
institutional clients with a wide range of advisory services on key strategic
matters such as mergers, acquisitions, joint ventures, privatizations, defenses,
divestitures, spin-offs, restructurings, proxy mechanisms and leveraged buyouts
as well as long-range financial planning. Other such services provided to
clients include advice with respect to recapitalizations, dividend policy,
valuations, foreign exchange exposures and financial risk management strategies.
The Company furnishes advice and other services relating to a wide variety of
project financings, including infrastructure, electric power and natural
resource projects. In addition, the Company provides advisory services in
connection with lease transactions and the purchase, sale and financing of real
estate.
FINANCING
The Company may, from time to time, also provide financing or
financing commitments to companies in connection with its investment banking
activities. The Company may provide extensions of credit to leveraged companies
in the form of senior or subordinated debt, as well as bridge financing on a
select basis (which may be in connection with the Company's commitment to the
Morgan Stanley Bridge Fund, L.L.C.). In fiscal 1996, the Company commenced
senior lending activities, including the origination and syndication of senior
secured loans of non-investment grade companies.
A subsidiary of the Company also acts as general partner of
Princes Gate Investors II, L.P. ("Princes Gate"), a limited partnership with
$850 million in aggregate investment capacity that was formed to invest in
special situation opportunities. Princes Gate generally makes minority equity
and equity-related investments which are short to medium-term in duration and
which arise out of the Company's worldwide investment banking activities. See
also "Merchant Banking and Other Principal Investing."
SALES, TRADING AND MARKET-MAKING ACTIVITIES
The Company provides a broad range of sales and trading
services to investors worldwide and is an active dealer in fixed income, equity,
foreign exchange and commodity products, including derivatives. In the U.S., the
Company ranks as one of the largest dealers in equity and fixed income
securities and other financial instruments. As a member of the major U.S.
securities and commodities exchanges, as well as the major foreign exchanges,
including the London and Tokyo Stock Exchanges, the Company conducts its sales
and trading activities both as principal and as agent on behalf of a wide range
of domestic and international investors. The Company trades for its own account
in equity and fixed income securities and instruments, foreign currencies,
commodities and associated derivative products. The Company also provides
financing to clients, including margin lending and other extensions of credit.
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EQUITY
The Company's equity sales, trading and market-making
activities cover domestic and foreign equity and equity-related securities (both
exchange traded and over-the-counter ("OTC")), including ADRs, Optimised
Portfolios as Listed Securities (OPALSSM), World Equity Benchmark Shares
(WEBSSM) and restricted/control stock; convertible debt and preferred
securities, including PERCS(R), PERQS(SM) and warrants; equity index products
and equity swaps; and international index arbitrage, equity repurchases, and
program and block trade execution. The Company also engages in the risk
arbitrage business, which involves, among other things, investing for the
Company's own account in securities of companies involved in publicly announced
corporate transactions in which the Company is not at the time of investment
acting as adviser or agent.
The Company provides various equity financing services,
including prime brokerage, which offers consolidated clearance and settlement of
securities trades, custody, financing, foreign exchange and portfolio reporting
services. The Company acts as principal and agent in stock borrowing and stock
loan transactions in support of the Company's domestic and international trading
and brokerage, asset management and clearing activities, and as an intermediary
between broker-dealers. A subsidiary of the Company is also engaged in the
clearance of securities for its preferred shareholders, who are registered
broker-dealers. Morgan Stanley Capital International (MSCI), a joint venture
between the Company and Capital International Perspective, S.A., markets and
distributes over 3,500 country, industry and regional benchmark indices covering
49 countries (including The World, EAFE(R) and Emerging Market Indices), and a
27-year historical database, including fundamental and valuation data on over
4,100 companies in developed and emerging market countries.
FIXED INCOME
The Company distributes and trades domestic and international
debt securities, including preferred stock and corporate debt instruments
(bonds, medium-term notes and commercial paper), offers investment strategies to
institutional accounts, develops swap and other risk management strategies for
customers, and assists corporations in their repurchase of debt. In addition,
the Company trades a full range of money market instruments, including
certificates of deposit, domestic and foreign bankers' acceptances,
floating-rate certificates of deposit and floating-rate notes. The Company is an
active dealer and market-maker in a broad range of long-term and short-term tax
exempt securities. The Company is also involved in structuring debt securities
with multiple risk/return factors designed to suit investor objectives and
repackaged asset vehicles (RAVs) through which investors can restructure asset
portfolios to provide liquidity or recharacterize risk profiles.
The Company is one of 37 primary dealers of U.S. government
securities currently recognized by the Federal Reserve Bank of New York. As
such, it is among the firms with which the Federal Reserve conducts its open
market operations and is required to submit bids in Treasury auctions, make
secondary markets in U.S. government securities, provide the Federal Reserve
Bank of New York with market information and maintain certain capital standards.
The Company is also a member of a number of selling groups responsible for the
distribution of various issues of U.S. agency and other debt securities. As
such, it is required to make secondary markets in these
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securities and to provide market information to the U.S. agency and
instrumentality issuers. The Company is also a member of the primary syndicate
that issues German government bonds, a member of the Japanese government bond
syndicate and a primary dealer in Canadian, French and Italian government bonds.
The Company also makes secondary markets in various foreign government bonds and
other foreign currency denominated bonds issued in the Eurobond market and in
the U.S.
The Company's daily trading inventory positions in government,
agency and instrumentality securities are financed substantially through the use
of repurchase agreements. The Company also borrows and lends fixed income
securities. In addition, the Company acts as an intermediary between borrowers
and lenders of short-term funds utilizing repurchase and reverse repurchase
agreements. At any given point in time, the Company may hold large positions in
certain types of securities or commitments to purchase securities of a single
issuer, sovereign governments and other entities, issuers located in a
particular country or geographic area, public and private issuers involving
developing countries or issuers engaged in a particular industry. For example,
financial instruments owned by the Company include U.S. government and agency
securities and securities issued by other sovereign governments (principally
Japan, Germany and Italy) which, in the aggregate, represented 16% of the
Company's total assets at November 30, 1996. In addition, a vast majority of all
of the collateral held by the Company for resale agreements or bonds borrowed,
which together represents 36% of the Company's total assets at November 30,
1996, consists of securities issued by the U.S. government, federal agencies or
non-U.S.
governments.
The Company trades and distributes asset-backed securities.
The Company makes markets and trades in Government National Mortgage Association
("GNMA") securities, Federal Home Loan Mortgage Corp. ("FHLMC") participation
certificates and Federal National Mortgage Association ("FNMA") obligations. The
Company enters into significant commitments, such as forward contracts, standby
arrangements and OTC options contracts, for GNMA, FHLMC and FNMA securities. The
Company also acts as an underwriter of and market-maker in mortgage-backed
securities, CMOs and related instruments, and a market-maker in commercial,
residential and real estate loan products. In this capacity, the Company takes
positions in market segments where liquidity can vary greatly from time to time.
The carrying value at November 30, 1996 of the portion of the Company's
mortgage-related portfolio traded in markets that the Company believed was
experiencing lower levels of liquidity approximated $1,544 million.
The Company also underwrites, trades, invests and makes
markets in high-yield debt securities and emerging market loans and securitized
instruments. "High-yield" refers to companies or sovereigns whose debt is rated
as non-investment grade. At November 30, 1996, the aggregate net market value of
high-yield debt securities and emerging market loans and securitized instruments
held in inventory, including the securities of issuers in which the Company has
made equity investments in connection with its merchant banking and other
principal investment activities (see "Merchant Banking and Other Principal
Investing"), was $1,635 million (a substantial portion of which was subordinated
debt), with not more than 4%, 15% and 10% of all such securities, loans and
instruments attributable to any one issuer, industry or geographic region,
respectively. For a discussion of the various risks associated with the
Company's high-yield debt and emerging market loan activities and the Company's
policies and procedures with respect to the management and monitoring of these
risks, see "Risk Management -- Policies and Procedures for
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Specific Activities." The Company also trades senior secured loans of
non-investment grade companies.
FOREIGN EXCHANGE AND COMMODITIES
The Company actively trades a number of foreign currencies on
a spot and forward basis with its customers, for its own account and to hedge
its securities positions or liabilities. In connection with its market-making
activities, the Company takes open positions in the foreign exchange market for
its own account. The Company, on a more limited basis, enters into forward
currency transactions as agent and principal. The Company is a leading
participant in currency futures trading at the International Monetary Market
division of the Chicago Mercantile Exchange and is a leading dealer in OTC and
exchange traded currency options on a worldwide basis. The Company also trades
as principal in the spot, forward and futures markets in a variety of
commodities, including precious metals, base metals, crude oil, oil products,
natural gas and related energy products. The Company is an active market-maker
in swaps and OTC options on commodities such as metals, crude oil, oil products,
natural gas and electricity, and offers a range of hedging programs relating to
production, consumption and reserve/inventory management. The Company is also an
electricity power marketer in the U.S.
DERIVATIVES
The Company actively offers to clients and trades for its own
account a variety of financial instruments described as "derivative products" or
"derivatives." These products, some of which may be complex in structure,
generally take the form of futures, forwards, options, swaps, caps, collars,
floors, swap options and similar instruments which derive their value from
underlying interest rates, foreign exchange rates or commodity or equity
instruments and indices. All of the Company's trading-related business units use
derivative products as an integral part of their respective trading strategies,
and such products are used extensively to manage the market exposure that
results from proprietary trading activities. In addition, as a dealer in certain
derivative products (most notably interest rate and currency swaps) the Company
enters into derivative contracts to meet a variety of risk management and other
financial needs of its clients. Through the Company's triple-A rated subsidiary
(Morgan Stanley Derivative Products Inc.), the Company also enters into swap and
related derivative transactions with certain clients seeking a triple-A rated
counterparty.* For a discussion of the various risks associated with the
Company's derivative activities and the Company's policies and procedures with
respect to the management and monitoring of these risks, see "Risk Management --
Policies and Procedures for Specific Activities."
RESEARCH
The Company, through its economists, industry analysts and
strategists, is engaged in a wide range of research activities. The Company
analyzes worldwide trends covering a broad
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* For a detailed discussion of the Company's use of derivatives, see 1996
Annual Report to Stockholders, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Derivative Financial
Instruments" and "Notes to Consolidated Financial Statements, Note 5."
In addition, the Company also uses derivative products (primarily
interest rate and currency swaps) to assist in asset and liability
management and to reduce borrowing costs. See 1996 Annual Report to
Stockholders, "Notes to Consolidated Financial Statements, Note 3."
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range of industries such as aerospace and defense electronics, healthcare and
insurance, as well as companies in the U.S. and internationally, and produces
publications and studies on the economy, financial markets, portfolio strategy,
technical market analyses, industry developments and individual companies. The
Company also provides analyses and forecasts relating to economic and monetary
developments affecting matters such as interest rates, foreign currencies and
securities and economic trends. Support for the sales and trading of fixed
income securities is also provided in the form of quantitative and credit
analyses and the development of research products that are distributed to the
Company's clients. In addition, the Company provides analytical support and
publishes reports on mortgage-related securities and the markets in which they
are traded and does original research on valuation techniques.
PRIVATE CLIENT SERVICES
Through its Private Client Services group ("PCS"), the Company
extends its full range of investment advisory services and financial products to
high net worth individuals and families, small and mid-sized institutions, small
corporations and professional investors from offices in the U.S., Europe and
Asia. PCS provides access to the Company's trading capabilities, its fundamental
research and analytical products and its security underwritings. PCS investment
professionals optimize global asset allocation requirements (including
implementation of asset allocation strategies devised by the Company's asset
management division) and manage the specific asset classes of private investors.
PCS also offers private investors the opportunity to co-invest with the Company
in its principal activities such as merchant banking, venture capital, foreign
exchange, commodities or specialized funds. The Company's Swiss bank subsidiary,
Bank Morgan Stanley AG, offers private banking services and the other PCS
services to selected international clients.
ASSET MANAGEMENT
Through the Company's asset management division, which now
includes the Morgan Stanley Asset Management division ("MSAM"), Miller Anderson
& Sherrerd, LLP ("MAS") and Van Kampen American Capital, Inc. ("VKAC"), the
Company provides global portfolio management to a wide range of institutions and
individual clients.
MSAM and MAS primarily manage assets for institutions around
the world, including corporations, non-profit organizations and governmental
agencies investing in domestic and international equities and fixed income
securities (including emerging markets). MSAM and MAS sponsor open-end mutual
funds and closed-end funds with assets that include equities, taxable and
tax-exempt fixed income securities and balanced and multi-asset-class products.
MSAM and MAS also manage assets through separate accounts and pooled vehicles.
MSAM provides a broad range of fiduciary and named fiduciary services for
pension funds and trusts.
On October 31, 1996, the Company completed its acquisition of
VK/AC Holding, Inc., the parent of VKAC. The addition of VKAC, the fourth
largest non-proprietary mutual fund sponsor in the U.S. with approximately $61
billion of assets under management or supervision at November 30, 1996, broadens
the Company's institutional-oriented asset management business to include the
retail market. VKAC markets and provides investment
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advisory and administrative services to open- and closed-end funds and certain
institutional clients (e.g., insurance companies, pension funds, municipalities,
high net worth individuals and mutual funds sponsored by third parties), and
markets and provides ongoing evaluation and credit surveillance for unit
investment trusts ("UITs"). VKAC's sponsored fund assets include equities and
taxable and tax-exempt fixed income securities. VKAC's sponsored UITs include
portfolios of nationally diversified and single-state insured and uninsured
municipal securities and, depending on market demand, also include portfolios of
government securities, insured and uninsured corporate debt securities, global
fixed income securities and equity securities. VKAC distributes its investment
products primarily through a large and diversified network of unaffiliated
national and regional broker-dealers, as well as commercial banks and thrifts,
insurance companies and their affiliated broker-dealers and financial planners
("Retail Distribution Firms"), although a relatively small number of Retail
Distribution Firms account for a substantial portion of sales of VKAC's
products. VKAC has proprietary and preferred distribution relationships with
several of its Retail Distribution Firms. In fiscal 1997, the Company expects to
begin distributing certain domestic and international MSAM and MAS products
through VKAC's distribution network.
As of November 30, 1996, through MSAM, MAS and VKAC, the
Company was the sponsor of 123 open-end proprietary mutual funds, 51 proprietary
closed-end funds and over 3,000 UITs.* The Company had approximately $171
billion of assets under management or supervision at November 30, 1996, of which
approximately $36 billion related to international products. Assets under
management or supervision were composed of approximately $52 billion related to
open-end mutual funds, $16 billion related to closed-end funds, $12 billion
related to UITs, $17 billion related to fiduciary accounts and $74 billion
related to separate accounts, pooled vehicles and other arrangements.
GLOBAL SECURITIES SERVICES
Through its Morgan Stanley Services division ("MS Services"),
the Company provides a full range of global custody and correspondent clearing
services, including clearance and settlement, agency lending, foreign exchange,
valuation and cash management. MS Services supports mutual funds, investment
limited partnerships, investment managers, investment funds, insurance
companies, banks, foundations, endowments, family trusts, government agencies,
public and private pension funds and broker-dealers. Through MS Services, the
Company maintains a network of 77 agent banks in 65 countries and had
approximately $144 billion in global assets under custody at November 30, 1996.
On December 10, 1996, the Company announced that it had
reached agreement with Barclays PLC ("Barclays") to acquire its institutional
global custody business for consideration to be fixed over a period of time. The
transaction involves approximately $250 billion of assets currently administered
by Barclays, and the combination of the two global custody businesses would have
increased the Company's assets under administration at November 30, 1996 to
approximately $394 billion on a pro forma basis (assuming current clients of
Barclays agree to become clients of the Company). Barclays has agreed to provide
global
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* Such funds and UITs are registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended.
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subcustodial services to the Company for a period of time after completion of
the acquisition. The acquisition is expected to be completed during the second
quarter of fiscal 1997.
MERCHANT BANKING AND OTHER PRINCIPAL INVESTING
The Company has sponsored, acts as general partner for and
invests in several limited partnerships which conduct a variety of activities
broadly described as merchant banking. Such activities include, among other
things, making commitments to purchase, and making negotiated investments in,
equity and debt securities in merger, acquisition, restructuring, private
investment and leveraged capital transactions. Such activities also include
venture capital investments and investments in real estate assets, portfolios
and operating companies. The Company typically contributes a minority of the
capital of the merchant banking funds, and clients of the Company contribute the
remaining capital. The Company typically receives management fees for operating
the merchant banking funds, as well as a share of the profits of the funds when
performance criteria have been met.
In the private equity area, Morgan Stanley Capital Partners
III, L.P. ("MSCP III") was formed in 1994 with $1.9 billion in capital
commitments to invest in private equity or equity-related securities of
operating and financial services companies. As of November 30, 1996, MSCP III,
and its predecessor funds which are no longer making new investments, had $1.8
billion of cost basis in their portfolios related to 30 companies in a wide
range of industries.
In the venture capital area, Morgan Stanley Venture Partners
III, L.P. ("MSVP III") was formed in November 1996 with $275 million in capital
commitments to invest in private equity or equity-related securities of U.S.
emerging growth companies, primarily in the healthcare and information
technology sectors. As of November 30, 1996, MSVP III's predecessor funds, which
are no longer making new investments, had $138 million of cost basis remaining
in their portfolios related to 29 companies.
In the real estate area, The Morgan Stanley Real Estate Fund
II, L.P. ("MSREF II") was formed in 1994 with approximately $1 billion in
capital commitments to invest in real estate assets. As of November 30, 1996,
MSREF II, and its predecessor fund which is no longer making new investments,
had $921 million of cost basis in real estate with a total capitalization of
$2.2 billion (including third party financing) remaining in their portfolios
relating to 33 investments.
From time to time, the Company expects to sponsor additional
funds and commit to invest in such funds.
Equity securities purchased in merchant banking and principal
investment transactions ("investments") generally are held for appreciation, are
not readily marketable and do not provide dividend income. As of November 30,
1996, the aggregate carrying value of the Company's investments (directly and
indirectly through the above-referenced funds and Princes Gate and its
affiliates and predecessors) in 95 privately held companies was $107 million and
in 23 publicly held companies was $267 million. At November 30, 1996, the
Company had aggregate commitments of approximately $208 million to make future
investments in connection with its merchant banking and other principal
investment activities (including Princes Gate). The Company's future commitments
extend until November 2006.
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It is not possible to determine whether or when the Company
will realize the value of the investments, including any appreciation, dividends
or other distributions thereon, since, among other things, such investments are
generally subject to restrictions on such realization relating to the
circumstances of particular transactions. Moreover, estimates of the eventual
realizable value of the investments fluctuate significantly over time in light
of business, market, economic and financial conditions generally or in relation
to specific transactions or other factors, including the financial leverage
involved in the underlying transactions. For a discussion of the various risks
associated with the Company's merchant banking and other principal investment
activities and the Company's policies and procedures with respect to the
management and monitoring of these risks, see "Risk Management -- Policies and
Procedures for Specific Activities."
The Company may also underwrite, trade, invest and make
markets in, and publish research with respect to, the securities and senior
loans of issuers in which the Company or the merchant banking funds have an
investment. Such securities may include equity and high-yield debt securities of
such issuers. In addition, the Company may provide financial advisory services
to, and have securities and commodity trading relationships with, these issuers.
From time to time, the Company may provide loans, financing commitments or other
extensions of credit, including on a subordinated and interim basis, to
companies (which may otherwise be leveraged) associated with its merchant
banking and other principal investment activities.
FINANCE, ADMINISTRATION AND OPERATIONS
The Company's finance, administration and operations
departments include Controllers, Credit, Corporate Services, Corporate Treasury,
Information Technology, Internal Audit, Market Risk, Legal and Compliance, Tax,
Office of Development and Operations. These departments support the Company's
diverse global businesses through the processing of securities, foreign exchange
and commodities transactions; receipt and delivery of funds and securities;
safeguarding of customers' securities; internal financial controls, including
management of global expenses, capital structure and funding; and ensuring
compliance with regulatory and legal requirements. In addition, the Company has
integrated recruitment, staffing, compensation and benefits, and career
development and training initiatives to ensure that its human resources are
aligned with strategic objectives. Certain of these areas also assist in the
management and monitoring of the risks associated with the Company's business
activities (see "Risk Management -- Risk Management and Monitoring Control
Structure").
COMPETITION, REGULATION AND CERTAIN RISK FACTORS
The Company encounters intense competition in all aspects of
the financial services business and competes worldwide directly with other
firms, both domestic and international, a significant number of which have
greater capital and other resources. Among the principal competitive factors
affecting the Company's business are the Company's general reputation, the
overall quality of its professionals, its ability to maintain existing client
relationships and develop new ones, and its capability in originating and
marketing innovative products and services. Moreover, the Company's ability to
access capital at competitive rates (which is generally dependent on the
Company's credit ratings) and commit capital are important competitive factors
in relation not only to generating potentially higher sales and trading
revenues, but also attracting business opportunities involving the facilitation
of major transactions by clients.
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In addition to competition from firms traditionally engaged in
the financial services business, there has been increased competition from other
sources, such as commercial banks, insurance companies and other companies
offering financial services. As a result of recent or pending legislative and
regulatory initiatives in the U.S. to remove or relieve certain restrictions on
commercial banks, competition in some markets which have traditionally been
dominated by investment banks has increased and may continue to increase in the
near future. Such competition, among other things, affects the Company's ability
to attract and retain highly skilled individuals. In addition, the two
complementary trends in the financial services industry of consolidation and
globalization present, among other things, technological, risk management and
other infrastructure challenges that will require effective resource allocation
in order for the Company to remain competitive.
The Company's business is, and the securities, commodities and
financial services industries generally are, subject to extensive regulation in
the U.S. at both the federal and state levels and internationally. Various
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of customers
participating in those markets. MS&Co. and certain other subsidiaries of the
Company are broker dealers. MS&Co. is registered as a broker-dealer with the
Securities and Exchange Commission ("SEC") and in all 50 states, the District of
Columbia and Puerto Rico, and is a member of the National Association of
Securities Dealers, Inc. ("NASD") and the New York Stock Exchange, Inc.
("NYSE"). Broker-dealers are subject to regulation by state securities
administrators in those states in which they conduct business. Broker-dealers
are also subject to regulations that cover all aspects of the securities
business, including sales and trading practices, use and safekeeping of
customers' funds and securities, capital structure, record-keeping and the
conduct of directors, officers and employees. The SEC, other governmental
regulatory authorities, including state securities commissions, and
self-regulatory organizations may institute administrative proceedings, which
may result in censure, fine, the issuance of cease-and-desist orders, the
suspension or expulsion of a broker-dealer or member, its officers or employees
or other similar consequences. Additional legislation and regulations, including
those relating to the activities of affiliates of broker-dealers, changes in
rules promulgated by the SEC or other governmental regulatory and
self-regulatory authorities (such as changes to the U.S. Internal Revenue Code
and related regulations or rules promulgated by the Financial Accounting
Standards Board) or changes in the interpretation or enforcement of existing
laws and rules, may directly affect the manner of operation and profitability of
the Company.*
As a futures commission merchant, MS&Co. is registered with
the Commodity Futures Trading Commission ("CFTC") and its activities in the
futures and options-on-futures markets are subject to regulation by the CFTC and
various domestic boards of trade and other commodity exchanges. Certain
subsidiaries of the Company are registered as commodity trading advisers and/or
commodity pool operators with the CFTC. The Company's futures and
options-on-futures business is also regulated by the National Futures
Association, a not-for-profit
- ----------
* For a discussion of recent accounting matters that could have an impact
on the Company's future financial condition, see 1996 Annual Report to
Stockholders, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Potential Impact of Financial
Accounting Standards Board Pronouncements and Exposure Drafts on the
Company's Financial Statements."
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<PAGE> 13
membership corporation, which has been designated a registered futures
association by the CFTC and of which MS&Co. is a member.
As a broker-dealer, MS&Co. is subject to the SEC's temporary
risk assessment rules which require, among other things, that a broker-dealer
maintain and preserve certain information, describe risk management policies and
procedures and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have a material
impact on the financial and operational condition of the broker-dealer. As a
futures commission merchant, MS&Co. is also subject to the CFTC's risk
assessment rules which have certain requirements similar to the SEC's rules and
also require the reporting of certain "trigger events" when net capital is
reduced by substantial amounts.
The Company and certain other subsidiaries, including MS&Co.,
Morgan Stanley Asset Management Inc., MAS and certain affiliates of VKAC, are
registered as investment advisers with the SEC and in certain states. Virtually
all aspects of the Company's investment advisory business are subject to various
federal and state laws and regulations. These laws and regulations are primarily
intended to benefit the investment product holder and generally grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict the Company from carrying on its investment advisory
business in the event that it fails to comply with such laws and regulations. In
such event, the possible sanctions which may be imposed include the suspension
of individual employees, limitations on the Company's engaging in the investment
advisory business for specified periods of time, the revocation of registrations
under applicable laws or other censures and fines.
With respect to OTC derivatives, the Company is a member of
the International Swaps and Derivatives Association (ISDA), the Group of 30 and
the Derivatives Policy Group, a group of securities firms formed at the request
of the SEC and CFTC to address concerns regarding the OTC derivatives activities
of U.S. broker-dealer affiliates not subject to direct regulatory oversight. The
Derivatives Policy Group has agreed to adhere to a voluntary oversight framework
relating to reporting, capital, management controls and counterparty
relationships.
Margin lending by certain subsidiaries of the Company is
subject to the margin rules of the Board of Governors of the Federal Reserve
System and the NYSE. Morgan Stanley Trust Company, the Company's principal
subsidiary that engages in custodial activities, is subject to regulation by the
New York State Banking Department.
Certain of the Company's government securities activities are
conducted through Morgan Stanley Market Products Inc., which is a member of the
NASD and is registered as a government securities broker-dealer with the SEC and
in certain states. The Department of the Treasury has promulgated regulations
concerning, among other things, capital adequacy, custody and use of government
securities and transfers and control of government securities subject to
repurchase transactions. The rules of the Municipal Securities Rulemaking Board,
which are enforced by the NASD, govern the municipal securities activities of
the Company.
Companies in the merchant banking portfolio that are in
certain regulated industries (e.g., insurance, public utilities or broadcasting)
could subject the Company to additional regulation by virtue of the Company's
affiliation with the merchant banking funds that own equity interests in such
companies or otherwise. For example, one merchant banking portfolio company owns
several
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<PAGE> 14
insurance companies which subjects the Company to certain state insurance
holding company regulations that require the Company, among other things, to
register with certain state regulatory authorities. These state insurance
regulations also generally prohibit the acquisition of a controlling interest in
the Company (which may be deemed to occur upon the acquisition of 10% or more of
the outstanding voting stock of the Company) without the prior approval of the
relevant state commissioners of insurance.
The Company's business is also subject to extensive regulation
by various non-U.S. governments, securities exchanges, central banks and
regulatory bodies, especially in those jurisdictions in which the Company
maintains an office. For example, the Company's business in the United Kingdom
is regulated by The Securities and Futures Authority Limited, the Bank of
England and the Investment Management Regulatory Organisation Limited, and a
number of exchanges, including the London Stock Exchange and the London
International Financial Futures and Options Exchange. The Deutsche Bundesbank,
the Bundesaufsichtsamt fuer das Kreditwesen (the Federal Banking Supervisory
Authority), the Bundesaufsichtsamt fuer den Wertpapierhandel (the Federal
Supervisory Authority for Securities Trading), the Deutsche Terminboerse (the
German Futures Exchange) and the Frankfurt Stock Exchange regulate the Company's
activities in the Federal Republic of Germany. The Company's business in Japan
is subject to Japanese law applicable to foreign securities firms and related
regulations of the Japanese Ministry of Finance and to the rules of the Bank of
Japan, the Japanese Securities Dealers Association and several Japanese
securities and futures exchanges, including the Tokyo Stock Exchange, the Osaka
Securities Exchange and the Tokyo International Financial Futures Exchange. The
Monetary Authority of Singapore and the Singapore International Monetary
Exchange Ltd. regulate the Company's business in Singapore; and the Company's
operations in Hong Kong are regulated by the Securities and Futures Commission,
The Stock Exchange of Hong Kong Ltd. and the Hong Kong Futures Exchange Ltd.
As registered broker-dealers and member firms of the NYSE,
certain subsidiaries of the Company, including MS&Co., are subject to the SEC's
net capital rule, and as a futures commission merchant MS&Co. is subject to the
net capital requirements of the CFTC and various commodity exchanges. Many
non-U.S. securities exchanges and regulatory authorities also either have
imposed or are considering imposing rules relating to capital requirements that
apply to subsidiaries of the Company (such as rules that have been or will be
promulgated in connection with the European Union Capital Adequacy Directive),
including certain European subsidiaries that are considered banking
organizations under local law. These rules, which specify minimum capital
requirements, are designed to measure general financial integrity and liquidity
and require that at least a minimum amount of assets be kept in relatively
liquid form. Compliance with the capital requirements may limit those operations
of the Company that require the intensive use of capital, such as underwriting,
merchant banking and trading activities, and the financing of customer account
balances, and also restricts the Company's ability to withdraw capital from its
subsidiaries, which in turn may limit the Company's ability to pay dividends,
repay debt or redeem or purchase shares of its outstanding capital stock. A
change in such rules, or the imposition of new rules, affecting the scope,
coverage, calculation or amount of capital requirements, or a significant
operating loss or any unusually large charge against capital, would adversely
affect the ability of the Company to pay dividends or to expand or even maintain
present levels of business.
The "European Monetary Union" is scheduled to commence on
January 1, 1999 when the European Currency Unit ("ECU") will be replaced by the
"Euro" at a conversion rate of
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<PAGE> 15
1:1, and those national currencies which are to participate in the European
Monetary Union will ultimately cease to exist as separate currencies by virtue
of being replaced by the Euro. During a transition period of approximately three
years, the national currencies would continue to be in circulation as units of
the Euro at a rate of exchange irrevocably fixed during the course of 1998. At
present, there is uncertainty as to (i) the countries that will participate in
the European Monetary Union, (ii) the conversion rates of the participating
currencies into the Euro and (iii) whether commencement of the European Monetary
Union will occur on time. The European Monetary Union would have an impact on
certain of the Company's businesses (e.g., foreign exchange and certain cash and
derivative products related to the ECU and the participating currencies);
however, the effects of the European Monetary Union have not been quantified at
this time due to the uncertainties indicated above, and the Company will
continue to monitor developments in this area.
The widespread use of computer programs that rely on two-digit
date programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 which could lead to business
delays and disruptions in the U.S. and internationally. The Company has been
modifying its computer systems to address this issue. However, due to the
interdependent nature of computer systems, the Company may be adversely impacted
in the year 2000 depending on whether it or other entities not affiliated with
the Company address this issue successfully.
RISK MANAGEMENT *
RISK MANAGEMENT POLICY
Risk is an inherent part of the Company's businesses and
activities. The financial services business and its profitability are affected
by many factors of a national and international nature, including economic and
market conditions, broad trends in business and finance, legislation and
regulation affecting the national and international financial communities,
inflation, the availability of capital, the availability of credit and the level
and volatility of interest rates, currency values and market prices. The extent
to which the Company properly and effectively identifies, assesses, monitors and
manages each of the various types of risks involved in its activities is
critical to its soundness and profitability. The Company's broad-based portfolio
of business activities helps reduce the impact that volatility in any particular
area or related areas may have on its net revenues as a whole. From an
operational perspective, the Company seeks to identify, assess, monitor and
manage, in accordance with defined policies and procedures, the following
principal risks involved in each area of business activity: market risk, credit
risk, operational risk, legal risk and funding risk. **
Risk management at the Company is an integrated process with
independent oversight which requires constant communication, judgment and
knowledge of specialized products and markets. The Company's senior management
takes an active role in the risk management
- ----------
* For a further discussion of the Company's risk management policies and
procedures, see 1996 Annual Report to Stockholders, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Management" and "Notes to Consolidated Financial
Statements, Note 5."
** For a discussion of the Company's policies addressing funding risk, see
1996 Annual Report to Stockholders, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources -- Funding and Capital Policies."
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<PAGE> 16
process and has developed policies and procedures that require specific
administrative and business functions to assist in the identification,
assessment and control of various risks. In recognition of the increasingly
varied and complex nature of the financial services business, the Company's risk
management policies and procedures are evolutionary in nature and are subject to
ongoing review, modification and revision. Many of the Company's risk management
and control practices are subject to periodic review by the Company's internal
auditors and independent accountants, as well as interactions with various
regulatory authorities. The Company continues to be committed to employing
qualified personnel with appropriate expertise in each of its various
administrative and business areas to implement effectively the Company's risk
management and monitoring systems and processes.
RISK MANAGEMENT AND MONITORING CONTROL STRUCTURE
The Company has developed a multi-tiered approach for
monitoring and managing its risks. The Finance and Risk Committee, authorized by
the Company's Board of Directors, is chaired by the Company's Chief Financial
Officer and is composed of senior officers with familiarity and expertise in
dealing with risk management principles. It establishes the overall risk
management policies of the Company, reviews the Company's performance relative
to these policies, allocates capital among business activities of the Company,
monitors the availability of sources of financing, reviews the foreign exchange
risk of the Company, and oversees liquidity and interest rate sensitivity of the
Company's asset and liability position. The Firm Risk Manager heads the Firm
Risk Management Group (the Market Risk, Credit and Internal Audit Departments
that are all independent of the Company's business areas), which assists senior
management and the Finance and Risk Committee in establishing, monitoring and
controlling the Company's overall risk profile. With respect to the Company's
major trading divisions (fixed income, equity, commodities and foreign
exchange), division risk managers manage and monitor positions and set the
overall division risk profile on a worldwide basis within established market
risk limits, review major trading positions and strategies, and report major
market and position events to the Firm Risk Manager. Desk risk managers perform
similar functions with respect to a product area or particular product at the
business unit and trading desk level.
During fiscal 1996, the Company established a Risk Management
Advisory Board which advises the Firm Risk Management Group on risk measurement
methodologies, models and systems and establishes review procedures for models
used by the Company for valuation and risk measurement. Other departments within
the Company, which are independent of the Company's business areas, that also
are actively involved in monitoring the Company's risk profile include:
Controllers, Corporate Treasury, Information Technology, Legal and Compliance,
Tax and Operations. In addition, the Company has certain commitment committees,
composed of a cross-section of the Company's senior officers from various
disciplines, that are involved in managing and monitoring the risks associated
with the Company's diverse businesses. The High-Yield Commitment Committee and
Equity Commitment Committee determine whether the Company should participate in
a transaction involving the underwriting or placement of high-yield or equity
securities, respectively, where the Company's capital and reputation may be at
risk, and evaluate the potential revenues and risks involved with respect to
particular transactions.
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<PAGE> 17
MANAGEMENT AND MONITORING OF PRINCIPAL RISKS
Market risk refers to the risk that a change in the level of
one or more market prices, rates, indices, volatilities, correlations or other
market factors, such as liquidity, will result in losses for a specified
position or portfolio. The Company manages the market risk associated with its
trading activities Company-wide, on a divisional level worldwide and on an
individual product basis. Specific market risk guidelines and limits have been
approved for the Company and each trading division of the Company worldwide by
the Finance and Risk Committee. Discrete market risk limits are assigned to
business units and trading desks within trading areas which are compatible with
the trading division limits. Division risk managers, desk risk managers and the
Market Risk Department all monitor market risk measures against limits. The
Market Risk Department independently reviews the Company's trading portfolios on
a regular basis from a market risk perspective which includes value at risk and
other quantitative and qualitative risk measurements and analyses. The Company
may use measures, such as rate sensitivity, convexity, volatility and time decay
measurements, to estimate market risk and to assess the sensitivity of positions
to changes in market conditions. Stress testing, which measures the impact on
the value of existing portfolios of specified changes in market factors, for
certain products is performed periodically and reviewed by division risk
managers, desk risk managers and the Market Risk Department.
The Company's exposure to credit risk arises from the
possibility that a counterparty to a transaction might fail to perform under its
contractual commitment, resulting in the Company incurring losses. The Finance
and Risk Committee has approved Company-wide credit guidelines which limit the
Company's credit exposure to any one counterparty. Specific credit risk limits
based on the credit guidelines also have been approved by the Finance and Risk
Committee for each type of counterparty (by rating category) as well as
secondary positions of high-yield and emerging market debt, and the Credit
Department administers and monitors the credit limits among trading divisions on
a worldwide basis. In addition to monitoring credit limits, the Company manages
the credit exposure relating to its trading activities by reviewing counterparty
financial soundness periodically, by entering into master netting agreements and
collateral arrangements with counterparties in appropriate circumstances and by
limiting the duration of exposure. In certain cases, the Company may also close
out transactions or assign them to other counterparties to mitigate credit risk.
Operational risk refers to the risk of human error and
malfeasance or deficiencies in the Company's operating systems. There is
considerable fluctuation within each year and from year to year in the volume of
business that the Company must process, clear and settle with the trend toward
increased transaction volume. The Company is exposed to operational risk from
processing and settlement problems which may be especially acute in some
non-U.S. markets, particularly emerging markets, and during periods of heavy
trading volume in certain U.S. markets. The Company has developed and continues
to enhance specific policies and procedures that are designed to provide, among
other things, that: (1) all transactions are accurately recorded and properly
reflected in the Company's books and records and confirmed on a timely basis;
(2) cash disbursements/deliveries and receipts/deliveries of securities are
authorized, controlled and reconciled; (3) position valuations are subject to
periodic independent review procedures; (4) profit and loss information reported
to management, reflected in the Company's books and records, and reported to tax
authorities incorporates all activity; (5) collateral and adequate documentation
(e.g.,
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<PAGE> 18
master agreements) are obtained from counterparties in appropriate
circumstances; (6) valuation and risk models are periodically reviewed as
appropriate; and (7) information systems function as intended and are utilized
appropriately by authorized personnel.
Legal risk includes the risk of non-compliance with applicable
legal and regulatory requirements and the risk that a counterparty's performance
obligations will be unenforceable. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts its business (see
"Competition, Regulation and Certain Risk Factors"). The Company has established
legal standards and procedures on a worldwide basis that are designed to ensure
compliance with all applicable statutory and regulatory requirements. The
Company, principally through the Legal and Compliance Department, has also
established procedures, such as the Company's Code of Conduct, that are designed
to ensure that senior management's policies relating to conduct, ethics and
business practices are followed globally. The Company also conducts on a regular
basis education and training programs that emphasize protection of client
interests and maintenance of the Company's reputation and global business
franchise. In connection with its business, the Company has various procedures
addressing a variety of issues, such as regulatory capital requirements, sales
and trading practices, new products, use and safekeeping of customer funds and
securities, money-laundering and record-keeping. The Company has also
established certain procedures to mitigate the risk that a counterparty's
performance obligations will be unenforceable. In particular, the Company has
adopted procedures, which are generally product-specific and vary in accordance
with risk profile and market practice, to consider counterparty legal authority
and capacity, adequacy of legal documentation, the permissibility of a
transaction under local law and whether applicable bankruptcy or insolvency laws
limit or alter contractual remedies.
POLICIES AND PROCEDURES FOR SPECIFIC ACTIVITIES
Positions and commitments taken by the Company in connection
with its merchant banking and other principal investment activities (see
"Merchant Banking and Other Principal Investing") often may involve substantial
amounts of capital and subject the Company to, among other things, risk due to
significant exposure to one issuer, industry or business. Additionally, the
equity securities owned by the Company and the funds sponsored by the Company in
connection with the Company's principal investment activities are generally not
highly liquid. All proposed investments made by the Company and the funds
sponsored by the Company are reviewed and approved by senior professionals of
the Company, and any proposed loans, financing commitments or other extensions
of credit made by the Company in connection with its merchant banking and
investment banking activities are reviewed and approved by senior management.
The Company analyzes projected cash flows and returns of the prospective
investment and sensitivities to changes in economic assumptions, and reviews,
among other things, the prospective portfolio company's industry and its
relative position in such industry as well as its future prospects. In the case
of equity investments, the Company also negotiates with the portfolio company's
other equity holders certain rights related to the management and strategic
direction of the business, significant portfolio company transactions and exit
strategy. With respect to any loans, financing commitments or other extensions
of credit, the Company reviews the creditworthiness of the counterparty, the
availability to the counterparty of financing generally, the likely overall
financial return and the Company's available capital and funding sources. After
any investment or loan, financing commitment or other extension of credit is
made, the Company regularly monitors the investment or counterparty by, among
other things, reviewing related business plans, financial performance and
industry trends.
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<PAGE> 19
The Company's trading and underwriting of high-yield debt
securities and emerging market loans and securitized instruments also subject
the Company to market and credit risks. For example, securities held by the
Company in connection with its high-yield trading activities typically rank
subordinate to bank debt of the issuer and may rank subordinate to other debt of
the issuer. The market for these securities has been, and may in the future be,
characterized by periods of illiquidity. The liquidity of any particular issue
may be significantly better or worse than the overall liquidity of the
high-yield market at any time, depending on the quality of the issuer, and
during certain periods market quotations may not represent firm bids of dealers
or prices of actual sales. In addition, the Company through its market-making
and trading activities may be the sole or principal source of liquidity in
certain issues and, as a result, may substantially affect the prices at which
such issues trade. To mitigate the potential impact on the Company's operating
results of the greater risk inherent in high-yield debt securities and emerging
market loans and securitized instruments, the Company has policies to control
total inventory positions in these securities and instruments. Additionally, as
indicated above, the Company has credit policies to control exposures to
individual high-yield issuers and emerging market counterparties.
Derivatives facilitate risk transfer and enhance liquidity in
the marketplace, and the origination and trading of derivatives have been
utilized as efficient and cost effective tools that enable users to adjust risk
profiles, such as interest rate or currency risk, or to take proprietary trading
positions. Widespread acceptance of derivatives has contributed to the
development of more complex OTC products structured for particular clients to
address specific financing and risk management needs.* Derivative transactions
may have both on- and off-balance sheet implications, depending on the nature of
the contract, and the Company's use of derivative products may subject the
Company to various risks.** In times of market stress, liquidity in certain
derivatives positions, as well as in underlying cash instruments, may be
reduced. Credit risk in the context of OTC derivative transactions relates to
the potential for a counterparty to default on its contract and is represented
by the replacement cost of all contracts in a gain position (after considering
the effects of master netting agreements where applicable) rather than by the
gross notional or contractual values. The risks associated with derivative
products, including credit and market risks, are managed in a manner consistent
with the Company's overall risk management policies as described above. The
Company's exposure to changes in interest rates, foreign currencies and other
factors is managed on an individual product basis, generally by entering into
offsetting or other positions in a variety of financial instruments and
derivative products. In addition, with respect to certain exchange-listed
derivatives, the Company has agreements with customers that permit the Company
to close out positions or require additional collateral (and in many cases
require excess collateral) if certain events occur. In certain instances, the
Company may also limit the types of derivative products that may be traded in a
particular account.
- ----------
* As previously indicated, the Company also uses derivative products
(primarily interest rate and currency swaps) to assist in asset and
liability management and to reduce borrowing costs. The risks
associated with derivatives activities in this context are managed in a
manner consistent with the Company's overall risk management policies.
** It should be noted, however, that in many cases derivatives serve to
reduce, rather than increase, the Company's exposure to losses from
market, credit and other risks.
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ITEM 2. PROPERTIES
The Company's executive offices are located at 1585 Broadway,
New York, New York, where the Company occupies approximately 958,000 square feet
as its New York headquarters. The Company also occupies approximately 364,000
square feet at 750 Seventh Avenue, New York, New York. Both the 1585 Broadway
and 750 Seventh Avenue buildings are owned by the Company. The Company also
leases space at various other locations in Manhattan under leases expiring
between 1997 and 2002 and aggregating approximately 748,000 square feet. In
addition, the Company leases space in Brooklyn, New York aggregating
approximately 383,000 square feet under a lease expiring in 2013.
The Company's London headquarters are located at 25 Cabot
Square, Canary Wharf (approximately three miles east of the City of London), and
occupy approximately 641,000 square feet (inclusive of common areas) of a
building constructed by the Company. The Company owns the ground lease
obligation and the freehold interest in the land and the building. The Company
also leases approximately 350,000 square feet at 20 Cabot Square, Canary Wharf,
under a lease arrangement expiring in 2020.
The Company's Tokyo headquarters are located at Yebisu GPT,
Ebisu, Shibuya-ku, where the Company occupies approximately 143,000 square feet
of office space under a lease arrangement expiring in 1998, but renewable at the
Company's option in two-year increments.
VKAC has corporate offices located in Oakbrook Terrace,
Illinois, where it occupies approximately 191,000 square feet under a lease
expiring in 2006, and corporate offices in Houston, Texas, where it occupies
approximately 186,000 square feet under a lease expiring in 2000.
Most of the Company's other offices in the U.S. and
internationally are located in leased premises, the leases for which expire at
various dates through 2016. Facilities owned or occupied by the Company and its
subsidiaries are believed to be adequate for the purposes for which they are
currently used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following litigation matters:
I. The National Commercial Bank v. Morgan Stanley Asset
Management Inc., et al. On May 2, 1994, a complaint was filed in the United
States District Court for the Southern District of New York by The National
Commercial Bank ("NCB") against Morgan Stanley Asset Management Inc. ("MSAM
Inc.") and three present and former MSAM Inc. employees. The complaint alleged
that NCB established a managed account at MSAM Inc. in or about February 1993 to
trade United States Treasury securities and that in August 1993 that account
suffered substantial losses. The complaint alleged violations of sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
and rule 10b-5 promulgated thereunder, common law fraud, common law constructive
fraud, breach of fiduciary duty, breach of contract, negligence and negligent
misrepresentation, and sought compensatory damages in excess of $39 million,
punitive damages in an unspecified amount, costs, attorneys' fees and interest.
On June 28, 1994, defendants filed answers to the complaint. On July 11, 1994,
defendants filed third-party
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<PAGE> 21
complaints against two employees of NCB, asserting claims over and for
contribution and indemnity in the event defendants are determined to be liable
to NCB. The complaint, answers and third-party complaints were thereafter
amended. The claims against MSAM Inc.'s two present employees were thereafter
dismissed without prejudice as were their claims against the two employees of
NCB. Discovery is proceeding. On October 1, 1996, MSAM Inc. filed a motion for
partial summary judgment on the claims under sections 10(b) and 20(a) of the
Exchange Act and rule 10b-5 promulgated thereunder and for common law fraud,
constructive fraud and negligent misrepresentation.
II. NASDAQ Antitrust Litigation. On December 16, 1994, a
consolidated amended complaint was filed in the United States District Court for
the Southern District of New York against a total of 33 defendants, including
MS&Co. The consolidated amended complaint alleged that MS&Co. and other
participants and market makers on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") engaged in a conspiracy to fix the
"spread" between bid and asked prices for securities traded on the NASDAQ in
violation of Section 1 of the Sherman Act. The plaintiff class was alleged to
include persons throughout the United States who are customers of the defendants
or their affiliates and who purchased or sold securities on the NASDAQ during
the period from May 1, 1989 through May 27, 1994. Plaintiffs were alleged to
have been damaged in that they paid more for securities purchased on the NASDAQ,
or received less for securities sold, than they would have but for the alleged
conspiracy. The consolidated amended complaint sought compensatory damages,
treble damages, declaratory and injunctive relief, attorneys' fees and costs.
Judgment against each of the defendants was sought on a joint and several basis.
On February 2, 1995, MS&Co. and the other named defendants filed a motion to
dismiss, which was granted on August 10, 1995 with leave to replead. On August
22, 1995, plaintiffs filed a Refiled Consolidated Complaint which was identical
in substance to the dismissed pleading except that it lists by name the stocks
that plaintiffs contend were the subject of the alleged conspiracy. On December
18, 1995, MS&Co. filed its answer. On December 26, 1996, the court granted, in
part, plaintiffs' motion for class certification. Discovery is proceeding.
III. MGN Pension Trustees Ltd., et al. v. Morgan Stanley Trust
Company. On October 20, 1995, a complaint was filed against Morgan Stanley Trust
Company ("MSTC") in the United States District Court for the Eastern District of
New York by MGN Pension Trustees Ltd. (as trustee of the Mirror Group Pension
Scheme) and The Law Debenture Trust Corporation plc (as trustee of the Maxwell
Communication Pension Plan). The complaint alleged that MSTC breached a variety
of duties purportedly owed to certain pension plans whose assets were managed by
an entity controlled by the late Robert Maxwell. The complaint asserted claims
for breach of contract, breach of fiduciary duty, aiding and abetting a breach
of fiduciary duty, participation in a breach of fiduciary duty, fraud and aiding
and abetting a fraud, and sought between $21.5 million and $142.3 million in
compensatory damages, punitive damages in an unspecified amount, return of
commissions, interest, costs and attorneys' fees. By orders dated November 27,
1996 and January 27, 1997, the court granted MSTC's motion to dismiss the action
on the grounds of forum non conveniens. Plaintiffs have filed a notice of appeal
to the United States Court of Appeals for the Second Circuit.
IV. Global Opportunity Fund Litigation. On December 19, 1995, 20
investors in a Cayman Islands investment fund named The Global Opportunity Fund
(the "Fund") brought an action against Morgan Stanley Bank Luxembourg, S.A.
("MSBL") in Luxembourg Commercial
20
<PAGE> 22
Court seeking damages in the amount of $44 million and costs. The apparent core
of plaintiffs' complaint is that MSBL was responsible for providing certain net
asset valuations to the Fund and performed that function in a negligent manner.
A hearing is scheduled for November 5-6, 1997.
V. County of Orange and Moorlach v. Morgan Stanley & Co., Inc. On
June 11, 1996, an adversary proceeding was commenced by Orange County and its
Treasurer-Tax Collector against MS&Co. The proceeding was originally filed in
the United States Bankruptcy Court for the Central District of California, where
Orange County's Chapter 9 bankruptcy proceeding was then pending. The action is
now pending before the United States District Court for the Central District of
California. The complaint asserts that Orange County, acting through its former
Treasurer-Tax Collector, entered into various reverse repurchase agreements and
other transactions with MS&Co. which were beyond the County's authority or ultra
vires, and, therefore, void. The complaint also asserts that MS&Co. allowed
Orange County to enter into unsuitable transactions. In addition, the complaint
alleges that MS&Co. violated the automatic stay provisions of the Bankruptcy
Code when it liquidated the County's collateral and closed out certain reverse
repurchase transactions subsequent to the County's December 6, 1994 bankruptcy
filing. The complaint asserts claims for ultra vires, setoff, equitable
subordination, restitution, enforcement of the automatic stay, avoidance of
post-petition transfers and negligence, and seeks compensatory damages in an
unspecified amount, declaratory and injunctive relief, restitution, interest,
various costs and attorneys' fees. On August 29, 1996, MS&Co. filed its answer
to the complaint. Discovery is proceeding.
VI. Department of Justice NASDAQ Investigation. On July 17, 1996,
MS&Co. and 23 other dealers who make markets in securities traded on NASDAQ
entered into a stipulation and order with the United States Department of
Justice which simultaneously filed a civil complaint in the United States
District Court for the Southern District of New York alleging that the 24 market
makers had violated section 1 of the Sherman Act. The complaint asserts, and
MS&Co. denies, that the various market makers had entered into a so-called
"quoting convention" under which the market makers avoided the use of odd-eighth
quotes when the spread between the bid and ask price was at least 3/4. The
stipulation and order commits the 24 market makers to avoid engaging in certain
practices which could support the existence of a purported "quoting convention"
and to adopt various procedures to assure compliance with their agreement. The
stipulation and order is subject to court approval and, if approved, will result
in the dismissal of the complaint.
VII. Other. In addition to the matters described above, the
Company, including MS&Co., has been named from time to time as a defendant in
various legal actions, including arbitrations, arising in connection with its
activities as a global diversified financial services institution, certain of
which include large claims for punitive damages. The Company, including MS&Co.,
is also involved, from time to time, in investigations and proceedings by
governmental and self-regulatory agencies.
In view of the inherent difficulty of predicting the outcome
of such matters, particularly in cases such as some of those described above in
which substantial damages are sought, the Company cannot state what the eventual
outcome of pending matters will be. The Company is contesting the allegations
made in each pending matter and believes, based on current knowledge and after
consultation with counsel, that the outcome of such matters will not have a
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<PAGE> 23
material adverse effect on the Company's Consolidated Financial Statements
incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fiscal quarter ended November 30, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information relating to the principal market in which the
Registrant's Common Stock is traded, the high and low sales prices per share for
each full quarterly period within the two most recent fiscal periods, the
approximate number of holders of record of Common Stock and the frequency and
amount of any cash dividends declared for the two most recent fiscal periods is
set forth under the caption "Quarterly Results" on page 88 of the Registrant's
1996 Annual Report to Stockholders and such information is hereby incorporated
herein by reference.
In connection with the acquisition of VK/AC Holding, Inc., the
parent of VKAC, on October 31, 1996, MSAM Holdings II, Inc., a subsidiary of the
Company ("MSAM II"), issued 259,058 shares of its 4% Exchangeable Redeemable
Preferred Stock (the "MSAM II Preferred Stock"), exchangeable into common stock
of the Company. The MSAM II Preferred Stock was issued in four series (Series A
through D) to certain members of the management of VKAC, all of whom were
accredited investors, in exchange for an aggregate of 87,110 shares of stock
held by such persons in VK/AC Holding, Inc. in a transaction exempt from
registration with the SEC pursuant to Section 4(2) of the Securities Act of
1933, as amended. The Series A, Series B, Series C and Series D MSAM II
Preferred Stock may be exchanged during a 30-day period beginning November 1,
1997, 1998, 1999 and 2000, respectively, and upon the occurrence of certain
events, including a change of control of MSAM II or the Company. Each share of
MSAM II Preferred Stock is exchangeable into 2.0554985 shares of common stock of
the Company, subject to adjustment from time to time to take into account
certain events relating to the Company or the Company's outstanding common stock
that may occur, including stock dividends or distributions, stock splits,
combinations or reclassifications, consolidations or mergers (the "Exchange
Ratio"). As a result of the proposed merger of the Company and DWD, the holders
of the MSAM II Preferred Stock will have the right, at their option, to exchange
any share of MSAM II Preferred Stock on the closing of the merger for either (I)
a number of shares of common stock of the new company, Morgan Stanley, Dean
Witter, Discover & Co. ("MSDWD"), equal to the product of (a) the Exchange
Ratio and (b) 1.65 (the number of shares of MSDWD that will be exchanged for
each share of the Company's common stock as part of the merger) or (II) cash in
an amount equal to the greater of (x) $100 per share of MSAM II Preferred Stock
plus accrued and unpaid dividends or (y) the then current fair market value of
the number of shares of MSDWD common stock determined in accordance with (I)
above. See Part I, Item I, "Recent Development."
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data for the Registrant and its
subsidiaries for each of the last five fiscal periods is set forth under the
same caption on the inside cover of the 1996 Annual Report to
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<PAGE> 24
Stockholders. Such information (other than the information contained in the
column entitled "Fiscal Period Ended November 30, 1995 Annualized (Unaudited)")
is hereby incorporated herein by reference and should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto contained on
pages 52 to 88 of such Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations is set forth under the same caption on pages 30 to 50
of the 1996 Annual Report to Stockholders. Such information is hereby
incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 52 to
88 of such Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and
its subsidiaries, together with the Notes thereto and the Report of Independent
Auditors thereon, are contained in the 1996 Annual Report to Stockholders on
pages 51 to 88, and such information is hereby incorporated herein by reference,
including the information appearing under the caption "Quarterly Results" on
page 88 of such Annual Report.
The Statement of Financial Condition at December 31, 1996 and
1995 for the Morgan Stanley U.K. Group Profit Sharing Scheme (the "Plan"), the
Statement of Changes in Plan Equity for the Years Ended December 31, 1996, 1995
and 1994 together with the Notes thereon and the Report of Independent Chartered
Accountants appear as Exhibit 99.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information about each of
the Company's directors and executive officers on November 30, 1996:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Richard B. Fisher 60 Chairman of the Board of Directors,
Managing Director and director of the
Company and MS&Co.
John J. Mack 52 President, Managing Director and director
of the Company and MS&Co.
Barton M. Biggs 64 Managing Director and director of the
Company and MS&Co.
Peter F. Karches 45 Managing Director and director of the
Company and MS&Co.
Sir David A. Walker 57 Managing Director and director of the
Company and MS&Co. and director and
Executive Chairman of Morgan Stanley Group
(Europe) Plc
Robert P. Bauman 65 Director of the Company
Daniel B. Burke 68 Director of the Company
S. Parker Gilbert 63 Director of the Company
Allen E. Murray 67 Director of the Company
Paul J. Rizzo 69 Director of the Company
Jonathan M. Clark 59 General Counsel and Secretary of the
Company and MS&Co. and Managing Director
and director of MS&Co.
Philip N. Duff 39 Chief Financial Officer and Managing
Director of the Company and MS&Co. and
director of MS&Co.
Eileen K. Murray 38 Treasurer of the Company and MS&Co., Chief
Accounting Officer of the Company and
Managing Director of MS&Co.
</TABLE>
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<PAGE> 26
All directors hold office until the next annual meeting of
stockholders and until their respective successors have been duly elected and
qualified. Officers serve at the discretion of the Board of Directors.
There are no family relationships among any directors or executive officers.
Mr. Fisher has served as Chairman of the Board of Directors of the
Company and MS&Co. since January 1991. From January 1984 through December 1990,
he served as President of the Company and MS&Co. He has been a director and a
Managing Director of the Company since July 1975 and a director and a Managing
Director of MS&Co. since July 1970. He has also been a member of the Executive
Committee of the Board of Directors (the "Executive Committee") from March 1986
and its Chairman from May 1991. He was a partner of Morgan Stanley & Co., the
predecessor of MS&Co., from July 1970 through June 1975.
Mr. Mack has been President of the Company and MS&Co. since June
1993. He has been a director and a Managing Director of the Company since
December 1987 and was a director and a Managing Director of the Company from
January 1979 to March 1986. Mr. Mack has been a director and a Managing Director
of MS&Co. since January 1979. He has also been a member of the Executive
Committee since December 1987.
Mr. Biggs has been a director and a Managing Director of the
Company since May 1991 and a director and a Managing Director of MS&Co. since
July 1973. He was a director and a Managing Director of the Company from July
1975 to March 1986. He has also been a member of the Executive Committee since
May 1991. He was a partner in Morgan Stanley & Co. from June 1973 through June
1975. Mr. Biggs is chairman of the board of directors of The Latin America
Discovery Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley
Africa Investment Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan
Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., The Morgan Stanley High
Yield Fund, Inc., The Pakistan Investment Fund, Inc., The Thai Fund, Inc., The
Turkish Investment Fund, Inc., The Brazilian Investment Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Institutional Fund, Inc., Morgan Stanley Fund, Inc.,
Morgan Stanley Russia & New Europe Fund, Inc. and Morgan Stanley Universal Fund,
Inc.
Mr. Karches has been a director and a Managing Director of the
Company since February 1994 and a director and a Managing Director of MS&Co.
since January 1985. He has also been a member of the Executive Committee since
February 1994.
Sir David Walker has been a director of the Company since November
1994, a Managing Director of the Company since May 1995, a director of MS&Co.
since February 1995 and a Managing Director of MS&Co. since November 1994. He
has served as a director and the Executive Chairman of Morgan Stanley Group
(Europe) Plc since December 1994. He has also been a member of the Executive
Committee since November 1994. Before joining the Company, Sir David Walker was
Deputy Chairman of Lloyds Bank Plc in England. From 1988 to 1992 he was Chairman
of the Securities and Investments Board, the British authority that regulates
the securities markets. From 1982 to 1988 he was the executive director of the
Bank of England and
25
<PAGE> 27
remained as a non-executive director at the Bank until early 1993. Sir David
Walker has been a non-executive director of Reuters Holdings PLC since April
1994.
Mr. Bauman has been the non-executive chairman of British
Aerospace PLC since May 1994. He served as chief executive officer of SmithKline
Beecham Plc from 1989 until April 1994. Mr. Bauman is also a director of CIGNA
Corporation and Union Pacific Corporation. Mr. Bauman has been a non-executive
director of Reuters Holdings PLC since March 1994. Mr. Bauman has been a
director of the Company since April 1996.
Mr. Burke is retired. He served as chief executive officer of
Capital Cities/ABC, Inc. from 1990 until February 1994. He also served as
president and chief operating officer of that corporation from 1986 until
February 1994 and was one of its directors from 1967 until February 1996. Mr.
Burke is also a director of Consolidated Rail Corporation, Darden Restaurants,
Inc., Rohm and Haas Company and The Washington Post Company. Mr. Burke has been
a director of the Company since February 1994 and serves on both the Audit
Committee of the Board of Directors (the "Audit Committee") and the Compensation
Committee of the Board of Directors (the "Compensation Committee").
Mr. Gilbert is retired. He served as Chairman of the Board of
Directors of the Company and MS&Co. from January 1984 through December 1990. He
served as President of the Company and MS&Co. from January 1983 through December
1983. He was a Managing Director of the Company from July 1975 through December
1990 and a director and a Managing Director of MS&Co. from May 1970 through
December 1990. From January 1969 through June 1975, Mr. Gilbert was a partner in
Morgan Stanley & Co. He has been a director of the Company since July 1975. Mr.
Gilbert is also a director of Burlington Resources Inc., ITT Industries, Inc.,
and Taubman Centers, Inc.
Mr. Murray is retired. He served as chairman of the board of
directors and chief executive officer of Mobil Corporation from February 1986
until March 1994 and as one of its directors from May 1977 until March 1994. Mr.
Murray also served as president and chief operating officer of that corporation
from November 1984 until March 1993. He is also a director of Lockheed Martin
Corporation, Metropolitan Life Insurance Company and Minnesota Mining &
Manufacturing Company. Mr. Murray has been a director of the Company since
November 1992. Mr. Murray is chairman of the Audit Committee and serves on the
Compensation Committee.
Mr. Rizzo is retired. He served as vice chairman of the board of
directors of International Business Machines Corporation from January 1993
through December 1994 and from February 1983 to September 1987 and as a senior
vice president from 1974 until February 1983. He has been a partner in Franklin
Street Partners since 1992. From September 1987 until 1992, he was dean of
Kenan-Flagler Business School at the University of North Carolina-Chapel Hill.
Mr. Rizzo is also a director of Cox Enterprises, Inc., Johnson & Johnson, Kenan
Transport Company, The McGraw-Hill Companies, Inc. and Ryder System, Inc. Mr.
Rizzo was a director of the Company from July 1986 through December 1992 and has
been a director since February 1995. Mr. Rizzo is chairman of the Compensation
Committee and serves on the Audit Committee.
Mr. Clark has been the General Counsel and Secretary of the
Company and MS&Co. since February 1993. He has also been a director and a
Managing Director of MS&Co since
26
<PAGE> 28
February 1993. Before joining the Company, Mr.
Clark was a partner of Davis Polk & Wardwell, a New York law firm.
Mr. Duff has been the Chief Financial Officer of the Company and
MS&Co. since February 1994. He has been a Managing Director of the Company since
November 1995, a director of MS&Co. since November 1995 and a Managing Director
of MS&Co. since February 1993. From January 1991 to February 1993, he was a
Principal of MS&Co.
Ms. Murray has been the Treasurer of the Company and MS&Co. since
May 1996 and Chief Accounting Officer of the Company since March 1994. She has
been a Managing Director of MS&Co. since February 1994. From January 1991 to
January 1994, she was a Principal of MS&Co.
27
<PAGE> 29
ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation. The following
table summarizes the compensation paid by the Company and its subsidiaries to
the Company's five most highly compensated executive officers who were serving
as executive officers at November 30, 1996 (the "named executive officers") for
services rendered in all capacities to the Company and its subsidiaries for
Fiscal 1994, Fiscal 1995 and Fiscal 1996 (as used in Part III, "Fiscal 1994"
refers to the twelve-month period from February 1, 1994 to January 31, 1995;
"Fiscal 1995" refers to the ten-month period from February 1, 1995 to November
30, 1995; and "Fiscal 1996" refers to the twelve-month period from December 1,
1995 to November 30, 1996).
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------- -------------------------
Restricted Securities
Stock Underlying All Other
Name and Award(s) Options Compensation
Principal Position Year (2) Salary ($)(3) Bonus ($)(3)(4) ($)(5) (#)(6) ($)(7)
- ---------------------------- ------- ------------- --------------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Richard B. Fisher: 1996 $ 575,000 $5,756,250 $4,142,128 -- $19,650
Chairman of the 1995 477,329 4,187,004 2,072,349 -- 15,150
Board
of Directors and 1994 575,000 2,062,500 -- 198,276 15,000
Managing
Director(1)
John J. Mack: 1996 $ 550,000 $5,771,875 $4,154,366 181,598 $19,650
President and 1995 456,575 4,140,308 2,046,186 -- 15,150
Managing Director 1994 550,000 2,025,000 -- 193,192 15,000
Barton M. Biggs: 1996 $ 450,000 $3,490,625 $2,365,182 -- $18,150
Managing Director 1995 373,562 2,801,713 1,294,128 -- 13,650
1994 450,000 1,700,000 -- 149,130 15,000
Peter F. Karches: 1996 $ 450,000 $5,521,875 $3,958,326 181,598 $19,650
Managing Director 1995 373,562 3,891,267 1,906,223 -- 15,150
1994 300,000 2,025,000 -- 193,192 15,000
Sir David A 1996 $ 426,745 $3,505,159 $2,376,550 181,598 $18,150
Walker(8):
Managing Director 1995 360,991 1,721,585 687,335 -- 3,244
1994(9) 86,252 119,418 -- 6,938 --
</TABLE>
(1) As of the date hereof, the Company does not have an executive officer
designated as "Chief Executive Officer"; however, for purposes of complying with
rules of the SEC, Mr. Fisher is deemed the "CEO" in this table.
(2) In February 1995, the Board of Directors approved a change in the fiscal
year-end of the Company from January 31 to November 30. Figures for Fiscal 1995
relate to the ten-month period commencing on February 1, 1995 and ending on
November 30, 1995.
(3) Includes amounts contributed by each of the named executive officers to
various deferred compensation plans of the Company.
28
<PAGE> 30
(4) Includes amounts representing annual cash bonus. The amounts reported also
include the value of units awarded pursuant to the 1988 Capital Accumulation
Plan, a plan which provides participation in certain investments that the
Company has made directly or indirectly in other entities.
(5) The amounts reported represent the market value of the Company's common
stock, par value $1.00 per share (the "Common Stock"), underlying vested and
unvested restricted stock units at the date of grant, without taking into
account any diminution in value attributable to the restrictions on such stock
units. Awards of restricted stock units were made on December 9, 1996 for
performance in Fiscal 1996; the closing price of the Common Stock on that date
as reported on the Consolidated Transaction Reporting System was $58 per share.
Awards of restricted stock units were made on December 11, 1995 for performance
in Fiscal 1995; the closing price of the Common Stock on that date as reported
on the Consolidated Transaction Reporting System was $42.75 per share.
The vesting schedule for restricted stock units awarded as part of Fiscal 1996
compensation to all officers of the Company, including the named executive
officers, is as follows: 75% of each award reported in the table above vested
upon grant; the remaining 25% of the award will vest in five equal annual
installments. The vesting schedule for restricted stock units awarded as part of
Fiscal 1995 compensation to all Managing Directors, including the named
executive officers, is as follows: 60% of each award reported in the table above
vested upon grant; the remaining 40% of each award will vest in ten equal annual
installments. Dividend equivalents are paid on restricted stock units (including
unvested units) at the same rate as dividends paid to stockholders of Common
Stock.
Vested and unvested restricted stock units awarded as part of Fiscal 1996
compensation generally do not convert into shares of Common Stock and are not
transferable for five years after award. Vested and unvested restricted stock
units awarded as part of Fiscal 1995 compensation generally do not convert into
shares of Common Stock and are not transferable for ten years after award.
Restricted stock units, whether vested or unvested, may not be sold, assigned,
exchanged, pledged, hypothecated or otherwise disposed of or encumbered prior to
the lapse of restrictions on transferability. Restricted stock units, whether
vested or unvested, are subject to forfeiture in certain circumstances specified
by the Compensation Committee.
The aggregate number of restricted stock units (including units awarded prior
to the years reported) and the market value ascribed thereto as of November 30,
1996 for each of the named executive officers are as follows: Mr. Fisher-
393,440 ($23,753,940); Mr. Mack- 388,883 ($23,478,811); Mr. Biggs- 248,467
($15,001,195); Mr. Karches- 476,741 ($28,783,238) and Sir David Walker- 57,053
($3,444,575). Such number of restricted stock units and market values ascribed
to them give effect to restricted stock unit awards granted subsequent to the
end of Fiscal 1996. The value ascribed to restricted stock units above has been
reported in accordance with the rules of the SEC. The value ascribed to stock
units by the Compensation Committee differs from the amounts reported herein.
The initial value ascribed to vested restricted stock units by the Compensation
Committee(which represented 75% of the award for Fiscal 1996 and 60% of the
award for Fiscal 1995)is based on fair market value at the time of grant, as
determined by the Compensation Committee. The Compensation Committee also
grants additional stock units which vest over time (which represented 25% of
the award for Fiscal 1996 and 40% of the award for Fiscal 1995) in order to
compenstate for significant restrictions on disposition (by sale or otherwise)
of the shares of Common Stock corresponding to all stock units. The value of
stock-based compensation earned cannot be realized
29
<PAGE> 31
immediately and will be dependent on the market value of the Company's stock
well into the future.
(6) Awards of stock options were made during Fiscal 1996 to certain Managing
Directors, including certain named executive officers. These stock options were
considered a supplement to, and not a part of, year-end compensation for Fiscal
1996. Awards of stock options were also made to all Managing Directors,
including the named executive officers, for services performed in Fiscal 1994.
The vesting schedule for stock options awarded in Fiscal 1996 is as follows: 20%
of each award reported in the table above will vest annually from 1998 through
2000 and the remaining 40% will vest in 2001. The stock options awarded in
Fiscal 1996 become exercisable upon vesting and the expiration date is February
26, 2003.
The vesting schedule for stock options awarded as part of Fiscal 1994
compensation is as follows: 60% of each award reported in the table above vested
and was exercisable upon grant, the remaining 40% of each award will vest and be
exercisable in nine annual installments. The expiration date for the stock
options awarded as part of Fiscal 1994 compensation is January 31, 2005. The
terms of these stock option awards may vary slightly in certain non-U.S.
jurisdictions.
Stock options, whether vested or unvested, may not be sold, assigned, exchanged,
pledged, hypothecated or otherwise disposed of or encumbered. Stock options,
whether vested or unvested, are subject to forfeiture in certain circumstances
specified by the Compensation Committee. Any shares acquired upon the exercise
of options awarded as part of Fiscal 1994 compensation generally may not be
transferred or sold prior to January 31, 2005, except to the extent required to
cover the exercise price and tax liability arising upon exercise.
(7) The amounts reported for Messrs. Fisher, Mack, Biggs and Karches consist of
contributions by the Company to the Company's Deferred Profit Sharing Plan
("DPSP") and the Company's Employee Stock Ownership Plan ("ESOP"). For amounts
reported for Fiscal 1996, the Company contributed 39% to the DPSP and 61% to the
ESOP; for Mr. Biggs, the Company contributed 42% to the DPSP and 58% to the
ESOP. For amounts reported for Fiscal 1995, the Company contributed 21% to the
DPSP and 79% to the ESOP; for Mr. Biggs, the Company contributed 23% to the DPSP
and 77% to the ESOP. For amounts reported for Fiscal 1994, the Company
contributed 50% to the DPSP and 50% to the ESOP. Contributions to the DPSP and
the ESOP are made on December 31 and relate to the preceding twelve months. The
amounts reported for Sir David Walker consist of contributions by the Company to
the Morgan Stanley UK Group Profit Sharing Scheme.
(8) U.S. Dollar amounts reported for Sir David Walker have been converted from
Pound Sterling amounts at the average daily spot exchange rates for Fiscal 1994,
1995 and 1996, respectively.
(9) Sir David Walker joined the Company on November 18, 1994 and the amounts
reported for Fiscal 1994 represent compensation received from that date through
the end of Fiscal 1994.
Compensation to Managing Directors and Principals of MS&Co. who are not
executive officers of the Company may exceed the compensation paid to the named
executive officers.
30
<PAGE> 32
Stock Options. The following table provides information
concerning stock options granted to the following named executive officers
during Fiscal 1996.
<TABLE>
<CAPTION>
OPTION GRANTS IN THE LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE GRANT DATE
NAME GRANTED (#)(1) IN FISCAL YEAR ($/SH)(2) EXPIRATION DATE PRESENT VALUE ($)(3)
- ------------------------------ ------------- -------------- --------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
John J. Mack ............ 181,598 4.2% $ 49.56 February 26, 2003 $3,000,000
Peter F. Karches ........ 181,598 4.2% $ 49.56 February 26, 2003 $3,000,000
Sir David A. Walker ..... 181,598 4.2% $ 49.56 February 26, 2003 $3,000,000
</TABLE>
- ----------
(1) The stock option grants provide that 20% will vest annually from 1998
through 2000, and the remaining 40% will vest in 2001. The stock
options become exercisable upon vesting.
(2) The Compensation Committee approved the grant of stock options on
February 26, 1996 with an exercise price equal to the average high and
low sale price of a share of Common Stock as reported on the
Consolidated Transaction Reporting System on February 26, 1996.
(3) Options were valued using a modified Black-Scholes option pricing
model. The assumptions used as the variables in the model include:
25.2% volatility (Common Stock price daily volatility for the two-year
period prior to February 20, 1996); a 5.66% risk-free rate of return
(the average continuous yield of a seven-year zero coupon U.S. Treasury
Bond expiring February 15, 2003); a 1.5% annual dividend yield (the
annualized dividend yield during February 1996); and a seven-year
option life (equal to the term of the option, assuming exercise at the
end of the option term). The data relating to the hypothetical value is
presented pursuant to SEC rules. The actual amount, if any, realized
upon the exercise of stock options will depend on the market price of
the Common Stock relative to the exercise price of the stock option at
the time the stock option is exercised. There is no assurance that the
hypothetical values of the stock options reflected in the table will be
realized.
31
<PAGE> 33
Option Exercises and Fiscal Year-End Values. The following
table provides information concerning stock option exercises in Fiscal 1996 and
unexercised stock options held by each named executive officer as of November
30, 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FY-END (#)(2) FY-END ($)(3)
----------------------------- -----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- -------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard B. Fisher ....... 100,000 $3,460,020 379,914 71,370 $15,436,336 $2,098,992
John J. Mack ............ 248,220 7,830,351 316,226 251,132 12,794,294 3,788,336
Barton M. Biggs ......... 57,780 1,851,864 256,862 53,676 10,541,519 1,578,611
Peter F. Karches ........ 45,000 1,531,829 285,066 251,132 11,370,999 3,788,336
Sir David A. Walker ..... -- -- -- 188,536 -- 1,947,387
- ---------------------
</TABLE>
(1) The valuation represents the difference between the average high and
low sale price of a share of Common Stock, as reported on the
Consolidated Transaction Reporting System on the date of exercise, and
the exercise price of the options exercised.
(2) The sale or disposition of shares of Common Stock underlying certain of
the options is restricted.
(3) The value of unexercised, in-the-money options is based upon the
difference between the exercise prices of all such options and $59.16,
the fair market value, as determined by the Compensation Committee, of
a share of Common Stock at the end of Fiscal 1996. The actual amount,
if any, realized upon exercise of stock options will depend upon the
market price of the Common Stock relative to the exercise price per
share of Common Stock of the stock option at the time the stock option
is exercised. There is no assurance that the values of unexercised
in-the-money stock options reflected in this table will be realized.
Pension Plans. MS&Co.'s Pension Plan (the "Pension Plan") is a
defined benefit pension plan which covers all employees of MS&Co. who have
completed at least one year of service with MS&Co. or one of its affiliates.
There is no maximum age limit to the eligibility requirements. The Pension Plan
provides for normal retirement benefits beginning at age 65 but permits earlier
retirement at or after attaining age 55 with ten years of Vesting Service as
defined in the Pension Plan (five years if hired prior to January 1, 1988),
subject to a reduction in benefits if payments commence earlier than age 60.
Salary is defined to include the highest five years of base compensation during
the last ten years prior to retirement, excluding bonuses, overtime and other
supplemental compensation. All participants become vested after completing five
years of service.
In addition to the Pension Plan, MS&Co. has adopted an Excess
Benefit Plan for participants in the Pension Plan whose benefits are reduced
pursuant to limitations imposed by the Internal Revenue Code of 1986, as
amended, on pensions paid under federal income tax qualified plans. Employees
covered by the Excess Benefit Plan receive a benefit equal to the amount of
benefit disallowed under the Pension Plan due to such limitations, including for
1996 a $150,000 compensation limit (subject to being increased in $10,000
increments based on annual rates of
32
<PAGE> 34
inflation) on the amount of compensation that can be taken into account for
qualified pension plan purposes.
MS&Co. also maintains a Supplemental Executive Retirement Plan
covering current and former Managing Directors and Principals of MS&Co. who are
not less than 55 years of age and have completed at least five years of service
and whose age plus years of service equals or exceeds 65. Benefits without any
reduction are paid if payment occurs at or after age 60. Benefits payable under
the Supplemental Executive Retirement Plan, however, are reduced by benefits
payable under the Pension Plan and the Excess Benefit Plan and pension plans of
affiliates of MS&Co. and of former employers. For participants who commence
receiving benefits in 1989 and beyond, the annual benefit payable under the
Supplemental Executive Retirement Plan (as reduced in the preceding sentence) is
further reduced to the extent that total retirement benefits do not exceed
$140,000. Participants are fully vested under the Supplemental Executive
Retirement Plan at all times. Messrs. Fisher and Biggs currently meet the
eligibility requirements of the Supplemental Executive Retirement Plan.
The following table illustrates the total estimated annual
normal retirement pension benefits, including Excess Benefit Plan and
Supplemental Executive Retirement Plan amounts, payable upon normal retirement
at age 65 to participants for the specified remuneration and years of credited
service classifications set forth below. Benefit amounts are computed on a
straight-life annuity basis. There is no off-set for the payment of social
security benefits although the calculation of benefits takes social security
covered compensation into consideration.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
ANNUAL PENSION BENEFITS BASED ON YEARS OF CREDITED SERVICE AT AGE 65
FINAL
AVERAGE
SALARY 5 YRS. 10 YRS. 15 YRS. 20 YRS. 25 YRS. 30 YRS. 35 YRS.
-------- ------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000 $20,000 $30,000 $40,000 $50,000 $50,000 $55,000 $60,000
150,000 30,000 45,000 60,000 75,000 75,000 82,500 90,000
200,000 40,000 60,000 80,000 100,000 100,000 110,000 120,000
250,000 50,000 75,000 100,000 125,000 125,000 137,500 140,000
300,000 60,000 90,000 120,000 140,000 140,000 140,000 154,122
350,000 70,000 105,000 140,000 140,000 140,000 154,605 180,372
400,000 80,000 120,000 140,000 140,000 147,587 177,105 206,622
450,000 90,000 135,000 140,000 140,000 166,337 199,605 232,872
500,000 100,000 140,000 140,000 148,070 185,087 222,105 259,122
550,000 110,000 140,000 140,000 163,070 203,837 244,605 285,372
600,000 120,000 140,000 140,000 178,070 222,587 267,105 311,622
650,000 130,000 140,000 144,802 193,070 241,337 289,605 337,872
700,000 140,000 140,000 156,052 208,070 260,087 312,105 364,122
</TABLE>
The compensation of the individuals named in the Summary Compensation Table for
purposes of determining benefits under the Pension Plan, the Excess Benefit Plan
and the Supplemental Executive Retirement Plan during calendar 1996 is the
amount reported as base salary in the Summary Compensation Table above. As of
January 31, 1997, the credited years of service (rounded to the nearest whole
year) for each of the named executive officers are as follows: Mr.
33
<PAGE> 35
Fisher-35; Mr. Mack-24; Mr. Biggs-24; Mr. Karches-21; and Sir David Walker-2
(with respect to the Supplemental Executive Retirement Plan only).
Sir David Walker is a participant in the Morgan Stanley UK
Group Pension Plan (the "UK Plan"). During Fiscal 1996, the benefit structure of
the U.K. Plan was changed from a defined benefit plan to a defined contribution
plan. Permanent employees of Morgan Stanley UK Group in the United Kingdom who
are under age 65 are eligible to participate in the UK Plan as of their date of
hire. The UK Plan provisions which apply to Sir David Walker provide for normal
retirement benefits beginning at age 65 but permit earlier retirement at or
after attaining age 50, subject to a reduction in benefits if payments commence
earlier than age 60.
In addition, Sir David Walker is provided with a supplemental
benefit on the portion of his base salary which exceeds the amount of
compensation that can be taken into account for determining pension benefits
under applicable rules of the U.K. Inland Revenue, on the same general terms and
conditions as those applicable under the UK Plan. The present U.K. Inland
Revenue earnings limit is (pound)82,200 per annum (approximately $134,700 at
November 30, 1996). Sir David Walker's total retirement benefit under the UK
Plan (including the supplemental benefit) is 1/60th of final pensionable salary
multiplied by years of pensionable service as of retirement.
As of November 30, 1996, the estimated annual benefit payable
to Sir David Walker under the UK Plan and the supplemental arrangement described
above at the earliest age when a participant in the UK Plan may retire with an
unreduced benefit (age 60) was (pound)22,650 (approximately $37,100).
Director's Compensation. Messrs. Fisher, Mack, Biggs, Karches
and Walker do not receive any additional compensation for acting as directors of
the Company. Directors who are not employees of the Company or a subsidiary (the
"Outside Directors") receive a director's fee of $40,000 for each full year
served (prorated for those directors serving part of a year). Each Outside
Director who served on the Board of Directors in Fiscal 1996 has been granted
400 shares of Common Stock pursuant to the Company's 1993 Stock Plan for Outside
Directors for services to the Company during Fiscal 1996. Directors receive no
additional compensation for participation on committees of the Board.
Additional Information with Respect to Compensation Committee
Interlocks and Insider Participation in Compensation Decisions. The Company's
Compensation Committee is composed of Messrs. Rizzo, Burke and Murray, none of
whom is, or during the previous year has been, an officer or employee of the
Company.
During Fiscal 1996, no executive officer of the Company (i)
served as a member of the compensation committee (or other board committee
performing similar functions or, in the absence of any such committee, the
entire board of directors) of another entity, one of whose executive officers
served on the Company's Compensation Committee; (ii) served as a director of
another entity, one of whose executive officers served on the Company's
Compensation Committee; or (iii) served as a member of the compensation
committee (or other board committee performing similar functions or, in the
absence of any such committee, the entire board of directors) of another entity,
one of whose executive officers served as a director of the Company.
34
<PAGE> 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Agreements. Certain stockholders of the Company hold
their shares of Common Stock subject to agreements relating to, among other
things, the voting and disposition of such shares. Such agreements include the
Stockholders' Agreement dated as of February 14, 1986, as amended (the
"Stockholders' Agreement"), among the Company and those persons who were
stockholders (the "Recapitalization Signatories") of the Company at the time of
a recapitalization effected in contemplation of the Company's initial public
offering (all of whom were Managing Directors or Principals of MS&Co. and
employees of the Company at such time) and certain agreements (the "MAS
Agreements") entered into between the Company and certain former general
partners of MAS (the "MAS Signatories") who received shares of Common Stock in
connection with the Company's purchase of MAS completed on January 3, 1996. In
addition, various voting agreements (the "Plan Agreements" and, together with
the Stockholders' Agreement and the MAS Agreements, the "Voting Agreements")
have been entered into between the Company, certain of its employees and/or a
trustee for a trust that holds shares of Common Stock on behalf of such
employees (together with the Recapitalization Signatories and the MAS
Signatories, the "Signatories") in connection with the granting to such
employees of stock awards, stock unit awards and/or option awards under each of
the Company's 1988 Equity Incentive Compensation Plan (the "1988 Equity
Incentive Compensation Plan") and the Company's 1995 Equity Incentive
Compensation Plan (the "1995 Equity Incentive Compensation Plan" and,
collectively with the 1988 Equity Incentive Compensation Plan, the "Equity
Incentive Compensation Plans"), options under the Company's 1986 Stock Option
Plan (the "Stock Option Plan") and performance units under the Company's
Performance Unit Plan (the "Performance Unit Plan"). The shares of Common Stock
subject to the Plan Agreements have been issued pursuant to stock awards or
stock unit awards and performance units granted to eligible employees under the
Equity Incentive Compensation Plans and the Performance Unit Plan, respectively,
and upon the exercise of options granted to eligible employees under the Equity
Incentive Compensation Plans and the Stock Option Plan, respectively. Shares of
the Company's ESOP Convertible Preferred Stock (the "ESOP Stock"), each of which
is entitled to 2.7 votes with respect to each matter to be voted on by
shareholders, are not subject to any of the Voting Agreements.
The Voting Agreements provide that, before any vote of the
stockholders of the Company occurs, a preliminary vote (the "Preliminary Vote")
will be taken at which each Signatory who is an employee of the Company on such
date may vote all of his shares of Common Stock subject to the Voting Agreements
in such manner as such Signatory may determine in his sole discretion. At any
meeting of the stockholders called to vote with respect to any corporate action,
a Signatory who was an employee of the Company at the time of the Preliminary
Vote or a trustee for a trust that holds shares of Common Stock corresponding to
stock units awarded under the Equity Incentive Compensation Plans (including any
such stock units awarded to former employees who do not participate in the
Preliminary Vote) must vote the shares of Common Stock that are subject to the
Voting Agreements in accordance with the vote of the majority of the shares of
Common Stock voted in the Preliminary Vote. Signatories who are no longer
employed by the Company on the date of the Preliminary Vote do not participate
in the Preliminary Vote and are not required to vote their shares of Common
Stock in accordance with the vote of the majority of the shares of Common Stock
voted in the Preliminary Vote. At February 3, 1997, 48,250,541 shares of Common
Stock (constituting approximately 28.7% of the votes that are entitled to be
cast with respect to a corporate action) were subject to voting
35
<PAGE> 37
restrictions contained in the Voting Agreements and could be required to be
voted in accordance with the results of any Preliminary Vote.
Stock Ownership of Management. The following table shows
certain information concerning the number of shares of the Company's capital
stock beneficially owned, directly or indirectly, as of February 3, 1997, by
each director and named executive officer and by all current directors and
executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
BENEFICIAL OWNERS OWNERSHIP OF CLASS
----------------- ----------- --------
<S> <C> <C>
Richard B. Fisher(1)(2)(3)(4).......................................... 4,072,111 2.6
John J. Mack(1)(2)(3)(4)............................................... 2,345,725 1.5
Barton M. Biggs(1)(2)(3)(4)............................................ 2,517,539 1.6
Peter F. Karches(1)(2)(3)(4)........................................... 1,163,374 *
Sir David A. Walker(3)................................................. 57,131 *
Robert P. Bauman....................................................... 1,266 *
Daniel B. Burke........................................................ 3,200 *
S. Parker Gilbert(2)(4)................................................ 2,368,661 1.5
Allen E. Murray........................................................ 6,900 *
Paul J. Rizzo.......................................................... 3,726 *
All current directors and executive officers as a group
(13 persons)(1)(2)(3)(4)............................................ 12,915,119 8.1
</TABLE>
(1) Except as otherwise disclosed below, the voting and disposition of the
shares of Common Stock beneficially owned by executive officers are
subject to the Voting Agreements.
(2) Includes 331,844; 299,384; 262,826; 292,792; 89,008 and 1,422,898
shares for Messrs. Fisher, Mack, Biggs, Karches, Gilbert and all
current directors and executive officers as a group, respectively, that
may be acquired upon the exercise of options that are exercisable
within 60 days after February 3, 1997. Such options were granted
pursuant to the 1988 Equity Incentive Compensation Plan or the Stock
Option Plan.
(3) Includes 393,440; 388,883; 248,467; 476,741; 57,053 and 1,781,032
shares of Common Stock underlying stock unit awards granted Messrs.
Fisher, Mack, Biggs, Karches, Walker and all current directors and
executive officers as a group, respectively, as part of compensation
pursuant to the Equity Incentive Compensation Plans. With respect to
all such stock unit awards, an equivalent number of shares of Common
Stock held in trust may be voted in accordance with the Voting
Agreements.
(4) Includes 2,757; 2,757; 2,692; 2,757; 705 and 15,720 shares of Common
Stock into which shares of ESOP Stock are convertible which have been
allocated to Messrs. Fisher, Mack, Biggs, Karches, Gilbert and all
current directors and executive officers as a group, respectively. Each
share of ESOP Stock is convertible into two shares of Common Stock.
Each share of ESOP Stock is entitled to 2.7 votes with respect to each
matter that may be voted on. ESOP participants have the ability to
direct the voting with respect to ESOP Stock allocated to them. Such
shares are not subject to the Voting Agreements.
- ----------
* Indicates beneficial ownership of less than 1% of the outstanding Common
Stock.
36
<PAGE> 38
Principal Stockholders. The following table sets forth certain
information regarding each person or group of persons known to the Company as of
February 3, 1997 to be the beneficial owner of more than 5% of any class of the
Company's voting securities.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME OF PERSONS OR IDENTITY OF GROUP BENEFICIALLY OWNED NUMBER PERCENT
- -------------------------------------------------------- ------------------------- -------
<S> <C> <C>
Signatories to Voting Agreements(1)..................... 58,715,600 (2)(3)(4)(5) 35
</TABLE>
(1) The voting of the shares of Common Stock received in connection with
the Company's 1986 recapitalization effected in contemplation of the
Company's initial public offering (the "Recapitalization Common Stock")
is subject to the voting restrictions contained in the Stockholders'
Agreement. The voting of Common Stock issued to certain employees in
connection with the Equity Incentive Compensation Plans, the Stock
Option Plan, the Performance Unit Plan and the Company's purchase of
MAS is generally subject to similar voting restrictions. The
information provided relates to the voting power of such securities.
The Signatories to the Voting Agreements do not share dispositive
power. See "Voting Agreements" above.
Except as otherwise determined by the Board of Directors of the Company
and subject to applicable legal requirements, the Recapitalization
Signatories may dispose or transfer their Recapitalization Common Stock
only in accordance with the terms of the Stockholders' Agreement.
Similar restrictions apply to Common Stock acquired pursuant to the
Performance Unit Plan and/or Stock Option Plan (collectively with the
Recapitalization Common Stock, "Total Restricted Stock"). Shares
subject to such restrictions may only be disposed of in accordance with
the following age restrictions and percentages of Total Restricted
Stock: under age 35 -- 0%, ages 35-38 -- 10%, ages 39-42 -- 20%, ages
43-46 -- 30%, ages 47-49 -- 40%, ages 50 and above -- 50%. Such
restrictions are in effect only while a holder of such Total Restricted
Stock remains an employee of the Company.
(2) Includes 9,297,310 shares of Common Stock that may be acquired upon the
exercise of options that are exercisable within 60 days after February
3, 1997. Such options were granted pursuant to the 1988 Equity
Incentive Compensation Plan or the Stock Option Plan. Of these shares,
128,188 are not subject to the Voting Agreements.
(3) Includes 27,414,199 shares underlying stock unit awards granted
pursuant to the Equity Incentive Compensation Plans. An equivalent
number of shares of Common Stock held in trust will be voted in
accordance with the results of a Preliminary Vote.
(4) Includes 1,167,749 shares of Common Stock that are not subject to the
Voting Agreements.
(5) Does not include 998,145 shares of Common Stock into which shares of
ESOP Stock are convertible which have been allocated to the
Signatories. Each share of ESOP Stock is convertible into two shares of
Common Stock. Each share of ESOP Stock is entitled to 2.7 votes with
respect to each matter to be voted on by the Company's shareholders.
Such shares are not subject to the Voting Agreements.
37
<PAGE> 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as described herein, no director or executive
officer of the Company was indebted to the Company during Fiscal 1996 for any
amount in excess of $60,000, and there were no related party transactions among
the Company and its executive officers, directors and the holders of more than
5% of the outstanding shares of Common Stock.
Mr. Mack, through a corporation, owns an interest in an
aircraft that was utilized in Company business. Aggregate payments made by the
Company to the corporation for property and services during the period from
December 1, 1995 to December 31, 1996 were $152,585. Payments for property and
services were made on terms that the Company believes could have been obtained
from non-affiliated third parties for comparable transactions.
The Company extends, and in the ordinary course of its
business during Fiscal 1996 the Company extended, credit to certain directors,
officers and employees of the Company and MS&Co., as well as to members of their
immediate families, in connection with their purchase of securities. Such
extensions of credit have been made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with non-affiliated third parties, and did not involve more than
normal risk of collectibility or present other unfavorable features. To the
extent that officers and employees of the Company, MS&Co. and MSIL (and members
of their immediate families) wish to purchase securities in brokerage
transactions, they are ordinarily required to do so through MS&Co. or MSIL, as
the case may be, which offers them a discount of 40% on its standard commission
rate. MS&Co. and the Company's other broker-dealer subsidiaries also, from time
to time and in the ordinary course of business, enter into transactions
involving the purchase or sale of securities from or to certain directors,
officers and employees of the Company, MS&Co. and the Company's other
broker-dealer subsidiaries, as the case may be, and members of their immediate
families, as principal. Such purchases and sales of securities on a principal
basis are effected at a discount from the dealer mark-up or mark-down, as the
case may be, charged to non-affiliated third parties. Pursuant to its stock
repurchase authorization, the Company also may repurchase or acquire shares of
Common Stock in the open market and in privately negotiated transactions,
including transactions with directors, executive officers and employees. Such
transactions are in the ordinary course of business and at prevailing market
prices.
The Company, from time to time, also makes advances to certain
of its directors, officers and employees against commissions and other
compensation that would otherwise be payable to them in the ordinary course of
business and loans in connection with housing and relocation expenses. No
interest is charged by the Company on such advances and loans.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
1 Financial Statements. The financial statements required to be
filed hereunder are listed on page F-1 hereof.
38
<PAGE> 40
2 Financial Statement Schedules. The financial statement
schedules required to be filed hereunder are listed on page
F-1 hereof.
3 Exhibits. Certain of the following exhibits, as indicated
parenthetically, were previously filed as exhibits to
registration statements filed by the Registrant under the
Securities Act of 1933, as amended, or to reports or
registration statements filed by the Registrant under the
Securities Exchange Act of 1934, as amended, respectively, and
are hereby incorporated by reference to such statements or
reports.
2.1 Agreement and Plan of Merger dated as of June 21,
1996 among VK/AC Holdings, Inc., Morgan Stanley Group
Inc., MSAM Holdings II, Inc. and MSAM Acquisition
Inc. (Quarterly Report on Form 10-Q for the fiscal
quarter ended May 31, 1996).
2.2 Agreement and Plan of Merger dated as of February 4,
1997 between Dean Witter, Discover & Co. and Morgan
Stanley Group Inc. (Current Report on Form 8-K dated
February 4, 1997).
3.1 Restated Certificate of Incorporation of the Company,
as amended to date (Registration Statement on Form
8-A dated December 16, 1996).
3.2 By-Laws of the Company, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1995).
4.1 Restated Certificate of Incorporation of the Company,
as amended to date (see Exhibit 3.1).
4.2 Stockholders' Agreement dated February 14, 1986, as
amended (Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
4.3 Form of Consent and Amendment dated as of January 31,
1996 between the Company and certain signatories to
the Stockholders' Agreement referred to in Exhibit
4.2 (Annual Report on Form 10-K for the fiscal period
ended November 30, 1995).
4.4 Senior Indenture dated as of April 15, 1989 between
the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
4.5 First Supplemental Senior Indenture dated as of May
15, 1991 between the Company and The Chase Manhattan
Bank (formerly known as Chemical Bank), as trustee
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.6 Second Supplemental Senior Indenture dated as of
April 15, 1996 between the Company and The Chase
Manhattan Bank (formerly
39
<PAGE> 41
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.7 Subordinated Indenture dated as of April 15, 1989
between the Company and The First National Bank of
Chicago, as trustee (Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
4.8 First Supplemental Subordinated Indenture dated as of
May 15, 1991 between the Company and The First
National Bank of Chicago, as trustee (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
4.9 Second Supplemental Subordinated Indenture dated as
of April 15, 1996 between the Company and The First
National Bank of Chicago, as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.10 Subordinated Indenture dated as of November 15, 1993
among Morgan Stanley Finance plc, the Company, as
guarantor, and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated December 1, 1993).
4.11 Voting Agreement dated March 5, 1991 among the
Company, State Street Bank and Trust Company and
Other Persons Signing Similar Voting Agreements
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.12 Instruments defining the Rights of Security Holders,
Including Indentures - In addition to Exhibits 4.1
through 4.11 herein, pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the
Securities and Exchange Commission upon request
copies of the instruments defining the rights of
holders of long-term debt securities of the
Registrant and its subsidiaries, none of which
instruments authorizes the issuance of an amount of
securities that exceeds 10% of the total assets of
the Registrant and its subsidiaries on a consolidated
basis.
10.1+ Form of Agreement under the Morgan Stanley & Co.
Incorporated Owners' and Select Earners' Plan (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.2+ Form of Agreement under the Morgan Stanley Group Inc.
Officers' and Select Earners' Plan (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
- ----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
40
<PAGE> 42
10.3+ Morgan Stanley & Co. Incorporated Excess Benefit
Plan, as amended and restated to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.4+ Morgan Stanley & Co. Incorporated Supplemental
Executive Retirement Plan, as amended (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.5+ Morgan Stanley Group Inc. 1986 Stock Option Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.6+ Morgan Stanley Group Inc. Performance Unit Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.7+ Morgan Stanley Group Inc. Deferred Compensation Plan
for Outside Directors, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.8+ Morgan Stanley Group Inc. 1988 Equity Incentive
Compensation Plan, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.9+ Morgan Stanley Group Inc. 1995 Equity Incentive
Compensation Plan (Proxy Statement for 1996 Meeting
of Stockholders).
10.10+ Morgan Stanley Group Inc. 1988 Capital Accumulation
Plan, as amended to date (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.11+ Form of Deferred Compensation Agreement under the
Pre-Tax Incentive Program (Annual Report on Form 10-K
for the fiscal year ended January 31, 1994).
10.12+* Deferred Compensation Agreement under the Pre-Tax
Incentive Program 2.
10.13 Trust Agreement dated March 5, 1991 between the
Company and State Street Bank and Trust Company
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
- ----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
* Filed herewith.
41
<PAGE> 43
10.14* First Amendment to Trust Agreement dated April 3, 1996 between
the Company and State Street Bank and Trust Company.
10.15 Agreement of Lease dated May 13, 1986 between Morgan Stanley
& Co. Incorporated and Forest City Pierrepont Associates, as
amended (Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
10.16 Agreement of Sublease between McGraw Hill, Inc. and Morgan
Stanley & Co. Incorporated, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31, 1993).
10.17 Lease dated January 22, 1993 between Rock-McGraw, Inc. and
Morgan Stanley & Co. Incorporated (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.18 Agreement of Lease dated February 10, 1995 among Canary Wharf
Limited, Morgan Stanley UK Group and the Company (Annual
Report on Form 10-K for the fiscal year ended January 31,
1995).
10.19 Stock Option Agreement dated as of February 4, 1997 between
Dean Witter, Discover & Co., as Issuer, and Morgan Stanley
Group Inc., as Grantee (Current Report on Form 8-K dated
February 4, 1997).
11* Statement Re: Computation of Earnings Per Share.
12* Statement Re: Computation of Ratio of Earnings to Fixed
Charges and Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
13* The following portions of the Company's 1996 Annual Report to
Stockholders, which are incorporated by reference in this
Annual Report on Form 10-K, are filed as an Exhibit:
13.1 "Quarterly Results" (page 88).
13.2 "Selected Financial Data" (other than the information
contained in the column entitled "Fiscal Period Ended
November 30, 1995 Annualized (Unaudited)") (Inner
Cover).
13.3 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (pages 30 to
50).
13.4 Consolidated Financial Statements of the Company and
its subsidiaries, together with the Notes thereto and
the Report of Independent Auditors thereon (pages 51
to 88).
21* Subsidiaries of the Company.
- ----------
* Filed herewith.
42
<PAGE> 44
23.1* Consent of Ernst & Young, LLP.
23.2* Consent of Ernst & Young, LLP with respect to the Financial
Statements for the fiscal year ended December 31, 1996 for
the Morgan Stanley U.K. Group Profit Sharing Scheme.
24 Powers of Attorney (included on signature page).
27* Financial Data Schedule.
99* Financial Statements for the fiscal year ended December 31,
1996 for the Morgan Stanley U.K. Group Profit Sharing Scheme.
(b) Form 8-K dated October 2, 1996, Items 5 and 7.
- ----------
* Filed herewith.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 27, 1997.
MORGAN STANLEY GROUP INC.
By /s/ Richard B. Fisher
---------------------
Richard B. Fisher
Chairman of the Board of Directors
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Morgan Stanley
Group Inc., hereby severally constitute Jonathan M. Clark, Robert G. Scott and
Ralph L. Pellecchio, and each of them singly, our true and lawful attorneys with
full power to them and each of them to sign for us, and in our names in the
capacities indicated below, any and all amendments to the Annual Report on Form
10-K filed with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys to any and
all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th of February, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Richard B. Fisher Chairman, Managing Director
- ------------------------ and Director
(Richard B. Fisher)
/s/ John J. Mack President, Managing Director
- ------------------------ and Director
(John J. Mack)
/s/ Barton M. Biggs Managing Director and Director
- ------------------------
(Barton M. Biggs)
/s/ Peter F. Karches Managing Director and Director
- ------------------------
(Peter F. Karches)
/s/ Sir David A. Walker Managing Director and Director
- ------------------------
(Sir David A. Walker)
/s/ Philip N. Duff Chief Financial Officer
- ------------------------ and Managing Director
(Philip N. Duff)
/s/ Eileen K. Murray Treasurer and Chief Accounting
- ------------------------ Officer
(Eileen K. Murray)
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Robert P. Bauman Director
- ------------------------
(Robert P. Bauman)
/s/ Daniel B. Burke Director
- ------------------------
(Daniel B. Burke)
/s/ S. Parker Gilbert Director
- ------------------------
(S. Parker Gilbert)
/s/ Allen E. Murray Director
- ------------------------
(Allen E. Murray)
/s/ Paul J. Rizzo Director
- ------------------------
(Paul J. Rizzo)
</TABLE>
45
<PAGE> 47
Morgan Stanley Group Inc.
Index to Financial Statements
and Financial Statement Schedules
Items (14)(a)(1) and (14)(a)(2)
<TABLE>
<CAPTION>
PAGE
----
FINANCIAL STATEMENTS FORM 10-K ANNUAL REPORT
- -------------------- --------- -------------
<S> <C> <C> <C>
Report of Independent Auditors .................... 51
Consolidated Statement of Financial ............... 52
Condition at November 30, 1996
and November 30, 1995
Consolidated Statement of Income for .............. 54
the Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year Ended January 31, 1995
Consolidated Statement of Cash Flows .............. 55
for the Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year January 31, 1995
Consolidated Statement of Changes ................. 56
in Stockholders' Equity for the
Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year Ended January 31, 1995
Notes to Consolidated Financial ................... 58
Statements
FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial .................. F-2 - F-5
Information of Registrant Morgan
Stanley Group Inc. (Parent Company
Only) - Condensed Financial Statements
for the Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year Ended January 31, 1995
</TABLE>
F-1
<PAGE> 48
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Condensed Statement of Financial Condition
November 30, 1996 and November 30, 1995
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
November 30, November 30,
1996 1995
------------ ------------
<S> <C> <C>
Assets:
Cash and interest-bearing equivalents ........................ $ - $ 57,994
Financial instruments owned .................................. 700,493 543,073
Advances to subsidiaries ..................................... 39,901,432 26,201,837
Investment in subsidiaries, at equity ........................ 6,576,247 4,871,122
Other assets ................................................. 964,383 589,155
------------ ------------
Total assets ................................................. $ 48,142,555 $ 32,263,181
============ ============
Liabilities and Stockholders' Equity:
Short-term borrowings ........................................ $ 16,536,711 $ 10,173,519
Payables to subsidiaries ..................................... 11,622,531 8,037,076
Other liabilities and accrued expenses ....................... 606,418 590,534
Long-term borrowings ......................................... 12,838,590 8,287,688
------------ ------------
41,604,250 27,088,817
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ............................................. 1,222,712 817,523
Common stock, $1.00 par value; authorized 600,000,000 shares;
issued 163,236,893 shares at November 30, 1996
and 162,838,920 shares at November 30, 1995* ............... 163,237 162,839
Paid-in capital* ............................................ 1,144,305 730,356
Retained earnings ........................................... 4,503,698 3,815,224
Cumulative translation adjustments .......................... (10,512) (8,984)
------------ ------------
Subtotal ................................................. 7,023,440 5,516,958
Less:
Note receivable related to sale of preferred stock to ESOP 77,721 88,559
Common stock held in treasury, at cost
(9,894,271 shares at November 30, 1996
and 7,635,174 shares at November 30, 1995)* ............ 407,414 254,035
------------ ------------
Total stockholders' equity .............................. 6,538,305 5,174,364
------------ ------------
Total liabilities and stockholders' equity ................... $ 48,142,555 $ 32,263,181
============ ============
</TABLE>
* Amounts for fiscal 1995 have been retroactively adjusted to give effect for a
two-for-one stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 1996.
See Notes to Condensed Financial Statements.
F-2
<PAGE> 49
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Condensed Statement of Income
For the Fiscal Year Ended November 30, 1996, the Fiscal Period Ended
November 30, 1995 and the Fiscal Year Ended January 31, 1995
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Period Ended Fiscal Year Ended
REVENUES: November 30, November 30, January 31,
1996 1995 1995
------------------ -------------------- ------------------
<S> <C> <C> <C>
Interest and dividends $ 3,037,461 $ 1,490,239 $ 1,312,628
Principal transactions (63,439) 22,090 11,875
Fiduciary fees 20,914 15,137 12,683
Other 2,026 370 (93)
------------------ -------------------- ------------------
Total revenues 2,996,962 1,527,836 1,337,093
Interest expense 3,002,423 1,540,677 1,263,495
Expenses excluding interest 1,080 8,231 10,312
------------------ -------------------- ------------------
(Loss) income before income tax (benefit) provision
and equity in earnings of subsidiaries (6,541) (21,072) 63,286
Income tax (benefit) provision (8,092) (17,544) 29,296
------------------ -------------------- ------------------
Income (loss) before equity in earnings of subsidiaries 1,551 (3,528) 33,990
Equity in earnings of subsidiaries, net of tax 1,028,010 603,665 360,884
------------------ -------------------- ------------------
Net income $ 1,029,561 $ 600,137 $ 394,874
================== ==================== ==================
Preferred stock dividend requirements $ 66,282 $ 54,155 $ 64,723
================== ==================== ==================
Earnings applicable to common shares (1) $ 963,279 $ 545,982 $ 330,151
================== ==================== ==================
Average common and common equivalent
shares outstanding (1) (2) 153,514,483 156,912,678 157,793,216
================== ==================== ==================
Primary earnings per share (2) $ 6.27 $ 3.48 $ 2.09
================== ==================== ==================
Fully diluted earnings per share (2) $ 5.96 $ 3.33 $ 2.02
================== ==================== ==================
</TABLE>
(1) Amounts shown are used to calculate primary earnings per share.
(2) Amounts for fiscal 1995 and fiscal 1994 have been retroactively adjusted to
give effect for a two-for-one stock split, effected in the form of a 100%
stock dividend, which became effective on January 26, 1996.
See Notes to Condensed Financial Statements.
F-3
<PAGE> 50
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Condensed Statement of Cash Flows
For the Fiscal Year Ended November 30, 1996, the Fiscal Period Ended
November 30, 1995 and the Fiscal Year Ended January 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Period Ended
November 30, November 30,
1996 1995
------------------ --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,029,561 $ 600,137
Adjustments to reconcile net income to net cash
used for operating activities:
Non-cash charges (credits) included in net income:
Deferred income taxes (62,053) (9,966)
Compensation payable in common or preferred stock 426,080 165,420
Equity in subsidiaries' earnings, net of dividends 1,668,810 818,544
(Increase) decrease in assets:
Financial instruments owned (157,420) 44,833
Investment in and advances to subsidiaries, at equity (15,804,317) (8,490,001)
Other assets (338,321) (380,582)
Increase (decrease) in liabilities:
Payables to subsidiaries 3,585,455 3,519,194
Other liabilities and accrued expenses, net of deferred liabilities 78,002 280,467
------------------ --------------------
Net cash used for operating activities (9,574,203) (3,451,954)
Cash flows from investing activities:
Purchase of Miller Anderson & Sherrerd, LLP, net of cash acquired (199,783) -
Purchase of Van Kampen American Capital, Inc.,net of cash acquired (986,425) -
------------------ --------------------
Net cash used for investing activities (1,186,208) -
Cash flows from financing activities:
Net proceeds related to short-term borrowings 6,363,192 2,875,282
Proceeds from:
Issuance of common stock 111,713 78,513
Issuance of 7-3/4% Cumulative Preferred Stock 197,174 -
Issuance of Series A Fixed/Adjustable Rate Cumulative Preferred Stock 342,833 -
Issuance of long-term borrowings 5,873,615 1,899,417
Payments for:
Repurchase of common stock (507,287) (103,126)
Repayments of long-term borrowings (1,361,913) (1,195,501)
Redemption of 9.36% Cumulative Preferred Stock (137,500)
Cash dividends (179,410) (122,941)
------------------ --------------------
Net cash provided by financing activities 10,702,417 3,431,644
------------------ --------------------
Net decrease in cash and interest-bearing equivalents (57,994) (20,310)
Cash and interest-bearing equivalents, at beginning of year 57,994 78,304
------------------ --------------------
Cash and interest-bearing equivalents, at end of year $ - $ 57,994
================== ====================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31,
1995
------------------
<S> <C>
Cash flows from operating activities:
Net income $ 394,874
Adjustments to reconcile net income to net cash
used for operating activities:
Non-cash charges (credits) included in net income:
Deferred income taxes 19,747
Compensation payable in common or preferred stock 116,481
Equity in subsidiaries' earnings, net of dividends 79,878
(Increase) decrease in assets:
Financial instruments owned 48,955
Investment in and advances to subsidiaries, at equity (5,700,470)
Other assets (110,979)
Increase (decrease) in liabilities:
Payables to subsidiaries 3,885,791
Other liabilities and accrued expenses, net of deferred liabilities (139,983)
------------------
Net cash used for operating activities (1,405,706)
Cash flows from investing activities:
Purchase of Miller Anderson & Sherrerd, LLP, net of cash acquired -
Purchase of Van Kampen American Capital, Inc.,net of cash acquired -
------------------
Net cash used for investing activities -
Cash flows from financing activities:
Net proceeds related to short-term borrowings 822,433
Proceeds from:
Issuance of common stock 20,477
Issuance of 7-3/4% Cumulative Preferred Stock -
Issuance of Series A Fixed/Adjustable Rate Cumulative Preferred Stock -
Issuance of long-term borrowings 2,153,858
Payments for:
Repurchase of common stock (287,123)
Repayments of long-term borrowings (1,201,955)
Redemption of 9.36% Cumulative Preferred Stock
Cash dividends (151,297)
------------------
Net cash provided by financing activities 1,356,393
------------------
Net decrease in cash and interest-bearing equivalents (49,313)
Cash and interest-bearing equivalents, at beginning of year 127,617
------------------
Cash and interest-bearing equivalents, at end of year $ 78,304
==================
</TABLE>
In connection with the Company's acquisition of Miller Anderson & Sherrerd, LLP,
the Company issued 2,012,264 shares of common stock having a fair value on the
date of acquisition, January 3, 1996, of approximately $83 million.
See Notes to Condensed Financial Statements.
F-4
<PAGE> 51
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Notes to Condensed Financial Statements
1. General
The condensed financial statements of Morgan Stanley Group Inc. (the
"Company") should be read in conjunction with the consolidated financial
statements of Morgan Stanley Group Inc. and Subsidiaries and the notes
thereto.
2. Transactions with subsidiaries
The Company has transactions with its subsidiaries determined on an
agreed-upon basis and has guaranteed certain unsecured lines of credit and
contractual obligations of its subsidiaries.
3. Change in Fiscal Year-End
On February 28, 1995, the Board of Directors approved a change in the
Company's fiscal year-end from January 31 to November 30. This change
became effective for the fiscal period ended November 30, 1995, and,
accordingly, this report includes the results for the fiscal year ended
November 30, 1996 ("fiscal 1996"), the 10-month period from February 1,
1995 through November 30, 1995 ("fiscal 1995"), and those for the fiscal
year ended January 31, 1995 ("fiscal 1994").
4. Subsequent Event
On February 5, 1997, the Company and Dean Witter, Discover & Co. announced
a definitive agreement to merge. The combined company would be a
pre-eminent global financial services firm with a market capitalization of
approximately $21 billion (as of the time of the merger announcement date)
and with leading market positions in the securities, asset management and
credit services business. The new company will be named Morgan Stanley,
Dean Witter, Discover & Co. Under the terms of the merger agreement
unanimously approved by the Boards of both companies, each of the Company's
common shares will be exchanged for 1.65 DWD common shares. The
transaction, which is expected to be completed in mid-1997, is intended to
be 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.
F-5
<PAGE> 52
Exhibit Index
-------------
Exhibit No. Exhibit
----------- -------
2.1 Agreement and Plan of Merger dated as of June 21,
1996 among VK/AC Holdings, Inc., Morgan Stanley Group
Inc., MSAM Holdings II, Inc. and MSAM Acquisition
Inc. (Quarterly Report on Form 10-Q for the fiscal
quarter ended May 31, 1996).
2.2 Agreement and Plan of Merger dated as of February 4,
1997 between Dean Witter, Discover & Co. and Morgan
Stanley Group Inc. (Current Report on Form 8-K dated
February 4, 1997).
3.1 Restated Certificate of Incorporation of the Company,
as amended to date (Registration Statement on Form
8-A dated December 16, 1996).
3.2 By-Laws of the Company, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1995).
4.1 Restated Certificate of Incorporation of the Company,
as amended to date (see Exhibit 3.1).
4.2 Stockholders' Agreement dated February 14, 1986, as
amended (Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
4.3 Form of Consent and Amendment dated as of January 31,
1996 between the Company and certain signatories to
the Stockholders' Agreement referred to in Exhibit
4.2 (Annual Report on Form 10-K for the fiscal period
ended November 30, 1995).
4.4 Senior Indenture dated as of April 15, 1989 between
the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
4.5 First Supplemental Senior Indenture dated as of May
15, 1991 between the Company and The Chase Manhattan
Bank (formerly known as Chemical Bank), as trustee
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.6 Second Supplemental Senior Indenture dated as of
April 15, 1996 between the Company and The Chase
Manhattan Bank (formerly
<PAGE> 53
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.7 Subordinated Indenture dated as of April 15, 1989
between the Company and The First National Bank of
Chicago, as trustee (Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
4.8 First Supplemental Subordinated Indenture dated as of
May 15, 1991 between the Company and The First
National Bank of Chicago, as trustee (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
4.9 Second Supplemental Subordinated Indenture dated as
of April 15, 1996 between the Company and The First
National Bank of Chicago, as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.10 Subordinated Indenture dated as of November 15, 1993
among Morgan Stanley Finance plc, the Company, as
guarantor, and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated December 1, 1993).
4.11 Voting Agreement dated March 5, 1991 among the
Company, State Street Bank and Trust Company and
Other Persons Signing Similar Voting Agreements
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.12 Instruments defining the Rights of Security Holders,
Including Indentures - In addition to Exhibits 4.1
through 4.11 herein, pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the
Securities and Exchange Commission upon request
copies of the instruments defining the rights of
holders of long-term debt securities of the
Registrant and its subsidiaries, none of which
instruments authorizes the issuance of an amount of
securities that exceeds 10% of the total assets of
the Registrant and its subsidiaries on a consolidated
basis.
10.1+ Form of Agreement under the Morgan Stanley & Co.
Incorporated Owners' and Select Earners' Plan (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.2+ Form of Agreement under the Morgan Stanley Group Inc.
Officers' and Select Earners' Plan (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
- ----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
<PAGE> 54
10.3+ Morgan Stanley & Co. Incorporated Excess Benefit
Plan, as amended and restated to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.4+ Morgan Stanley & Co. Incorporated Supplemental
Executive Retirement Plan, as amended (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.5+ Morgan Stanley Group Inc. 1986 Stock Option Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.6+ Morgan Stanley Group Inc. Performance Unit Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.7+ Morgan Stanley Group Inc. Deferred Compensation Plan
for Outside Directors, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.8+ Morgan Stanley Group Inc. 1988 Equity Incentive
Compensation Plan, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.9+ Morgan Stanley Group Inc. 1995 Equity Incentive
Compensation Plan (Proxy Statement for 1996 Meeting
of Stockholders).
10.10+ Morgan Stanley Group Inc. 1988 Capital Accumulation
Plan, as amended to date (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.11+ Form of Deferred Compensation Agreement under the
Pre-Tax Incentive Program (Annual Report on Form 10-K
for the fiscal year ended January 31, 1994).
10.12+* Deferred Compensation Agreement under the Pre-Tax
Incentive Program 2.
10.13 Trust Agreement dated March 5, 1991 between the
Company and State Street Bank and Trust Company
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
- ----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
* Filed herewith.
<PAGE> 55
10.14* First Amendment to Trust Agreement dated April 3, 1996 between
the Company and State Street Bank and Trust Company.
10.15 Agreement of Lease dated May 13, 1986 between Morgan Stanley
& Co. Incorporated and Forest City Pierrepont Associates, as
amended (Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
10.16 Agreement of Sublease between McGraw Hill, Inc. and Morgan
Stanley & Co. Incorporated, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31, 1993).
10.17 Lease dated January 22, 1993 between Rock-McGraw, Inc. and
Morgan Stanley & Co. Incorporated (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.18 Agreement of Lease dated February 10, 1995 among Canary Wharf
Limited, Morgan Stanley UK Group and the Company (Annual
Report on Form 10-K for the fiscal year ended January 31,
1995).
10.19 Stock Option Agreement dated as of February 4, 1997 between
Dean Witter, Discover & Co., as Issuer, and Morgan Stanley
Group Inc., as Grantee (Current Report on Form 8-K dated
February 4, 1997).
11* Statement Re: Computation of Earnings Per Share.
12* Statement Re: Computation of Ratio of Earnings to Fixed
Charges and Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
13* The following portions of the Company's 1996 Annual Report to
Stockholders, which are incorporated by reference in this
Annual Report on Form 10-K, are filed as an Exhibit:
13.1 "Quarterly Results" (page 88).
13.2 "Selected Financial Data" (other than the information
contained in the column entitled "Fiscal Period Ended
November 30, 1995 Annualized (Unaudited)") (Inner
Cover).
13.3 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (pages 30 to
50).
13.4 Consolidated Financial Statements of the Company and
its subsidiaries, together with the Notes thereto and
the Report of Independent Auditors thereon (pages 51
to 88).
21* Subsidiaries of the Company.
- ----------
* Filed herewith.
<PAGE> 56
23.1* Consent of Ernst & Young, LLP.
23.2* Consent of Ernst & Young, LLP with respect to the
Financial Statements for the fiscal year ended
December 31, 1996 for the Morgan Stanley U.K. Group
Profit Sharing Scheme.
24 Powers of Attorney (included on signature page).
27* Financial Data Schedule.
99* Financial Statements for the fiscal year ended December 31,
1996 for the Morgan Stanley U.K. Group Profit Sharing Scheme.
- ----------
* Filed herewith.
<PAGE> 1
EXHIBIT 10.12
MORGAN STANLEY GROUP INC.
PRE-TAX INCENTIVE PROGRAM 2
DEFERRED COMPENSATION AGREEMENT
This DEFERRED COMPENSATION AGREEMENT (this "Agreement") is made as of
the date indicated on the signature page hereof by and between MORGAN STANLEY
GROUP INC., a Delaware corporation (the "Company"), and the employee identified
on the signature page hereof (the "Participant").
WHEREAS, the Participant wishes to make an irrevocable election to
defer the receipt of a portion of his or her bonus or commissions for the fiscal
year of the Company indicated on the signature page hereof; and
WHEREAS, the Company and the Participant wish to set forth herein
certain terms and conditions applicable to the amounts of bonus or commissions
to be deferred as provided herein; and
WHEREAS, the Participant acknowledges that with respect to deferred
amounts subject to the terms and conditions of this Agreement the Participant
will be an unsecured creditor of the Company with no ownership rights in any
assets of any kind; and
WHEREAS, the Participant further acknowledges that, while he or she
may make elections, subject to the terms and conditions of this Agreement,
pursuant to which the balance of his or her Account (as defined herein) will be
deemed to be allocated among the several Performance Options (as defined herein)
for purposes of measuring the increase or decrease in the value thereof, nothing
contained herein shall require the Company to make an actual investment of
assets corresponding to any amount of compensation deferred by the Participant;
NOW, THEREFORE, in consideration of the provisions contained in this
Agreement and with reference to the foregoing recitals, the Company and the
Participant agree as follows:
1. DEFINED TERMS. As used in this Agreement, the following terms
shall have the indicated meanings:
(a) "Account" means the bookkeeping account maintained on the books
and records of the Company to record Deferred Amounts and credits or debits
thereto in accordance with this Agreement and any other terms of the
Program. An Account is established only for purposes of measuring a
deferred benefit and not to segregate
<PAGE> 2
2
assets or to identify assets that may be used to make payments hereunder.
(b) "Account Value" means the amount reflected on the books and
records of the Company as the value of the Account at any date of
determination, as determined in accordance with this Agreement.
(c) "Beneficiaries" means the beneficiary or beneficiaries designated
by the Participant to receive any payments under Section 7 of this
Agreement in the event of the Participant's death. Such designation may be
revoked or changed by the Participant at any time. Any such designation,
revocation or change shall be in writing, signed by the Participant and
delivered to the Office of Development or to such other office or
individual as the Company may direct. If the Participant does not designate
a Beneficiary to which payments are to be made upon the Participant's
death, or if no Beneficiary survives the Participant, payments under
Section 7 of this Agreement subsequent to the death of the Participant will
be made to the Participant's estate. If a Beneficiary survives the
Participant but dies prior to the completion of the payments contemplated
to be made to that Beneficiary under Section 7 of this Agreement, the
unpaid portion of such payments at the death of the Beneficiary shall be
paid to the Beneficiary's estate.
(d) "Deferral Election" means an irrevocable election of the
Participant to defer payment of a portion of his or her bonus or
commissions subject to the terms and conditions of the Program.
(e) "Deferred Amount" means the amount of bonus or commissions
deferred by the Participant pursuant to a Deferral Election.
(f) "Distribution Election" means an irrevocable election of the
Participant as to (i) the year in which distribution of the Account Value
will begin and (ii) the installment payment method to be used for
distribution of the Account Value.
(g) "Fiscal Year" means a fiscal year of the Company.
(h) "Full Career Retirement" means termination of the Participant's
employment with the Company or any Subsidiary or affiliate thereof on or
after the date the Participant (A) has attained age 50 and completed at
least 12 years of service as a Managing Director or 15 years as an officer
of the Company or any Subsidiary or affiliate thereof, (B) has completed at
least 20 years of service with the Company or any Subsidiary or affiliate
thereof or (C) has attained age 55 and has completed at least 5 years of
service with the Company or any Subsidiary or affiliate thereof and the sum
of the Participant's age and years of service equals or exceeds 65.
<PAGE> 3
3
(i) "Initial Fiscal Year" means the first Fiscal Year with respect to
which the Participant makes a Deferral Election. The Initial Fiscal Year is
indicated on the signature page hereof.
(j) "Office of Development" means the Company's Office of Development
or any other department of the Company that succeeds to the functions of
the Office of Development.
(k) "Payment Option Vesting Date" means, with respect to the
Participant (A) the fifth anniversary of the date on which the Account is
first credited, as provided in Section 3(a) below, with a deferral by the
Participant under the Program or (B) the date the Participant reaches Full
Career Retirement.
(l) "Performance Option" means the performance options made available
from time to time for selection by the Participant and other participants
in the Program to measure the return (positive or negative) to be
attributed to Deferred Amounts.
(m) "Program" means the Pre-Tax Incentive Program 2 of the Company,
the terms and conditions of the Participant's participation in which are
set forth in this Agreement.
(n) "PTIP Committee" means the committee, which shall consist of one
or more members, appointed by the Company to administer the Program.
(o) "Securities Act" means the Securities Act of 1933.
(p) "Subsidiary" means a corporation or other entity which is
consolidated with the Company for financial statement purposes.
(q) "Total Disability" means long-term disability within the meaning
of the Morgan Stanley & Co. Incorporated Basic Long Term Disability Plan
for U.S. Participants.
2. DEFERRAL ELECTIONS.
(a) ACKNOWLEDGMENT OF INITIAL DEFERRAL ELECTION. The Participant and
the Company hereby acknowledge the Participant's Initial Deferral Election, made
on or prior to the execution of this Agreement, to defer, in accordance with the
terms and conditions of the Program, payment of specified dollar amounts of
bonus or commissions as indicated on the signature page hereof.
<PAGE> 4
4
(b) SUBSEQUENT DEFERRALS. In addition to the Initial Fiscal Year,
subject to Section 8, the terms of this Agreement shall apply to any Deferral
Election by the Participant with respect to a Fiscal Year after the Initial
Fiscal Year. Any such subsequent Deferral Election shall be made by the
Participant's completion, execution and submission of a deferral election form
prescribed for such purpose by the Company, in the manner established by the
Company for subsequent Deferral Elections. The Participant's participation in
the Program for the Initial Fiscal Year, however, shall not confer on the
Participant any right to participate in the Program with respect to any
subsequent Fiscal Year, and the Participant's eligibility so to participate will
depend upon the satisfaction of eligibility criteria for such subsequent Fiscal
Years to be established by the Company in its sole discretion.
(c) REDUCTIONS IN DEFERRED AMOUNTS. If the cash portion of the
Participant's bonus or commissions for a Fiscal Year, as determined in the sole
discretion of the Company, is less than the amount indicated as the Deferred
Amount for the Fiscal Year, then the amount deferred pursuant to such Deferral
Election shall be such cash portion, rounded down to the nearest whole number.
The Company may, in its sole discretion, reduce the Participant's Deferred
Amount for a Fiscal Year.
3. THE ACCOUNT.
(a) CREDITS AND CHARGES TO THE ACCOUNT. The Deferred Amount (or such
lesser amount determined pursuant to Section 2(c)) for the Initial Fiscal Year
will be credited to the Account as of a date determined by the Company following
the end of such Initial Fiscal Year. The Account will also be credited with any
Deferred Amounts (or such lesser amount determined pursuant to Section 2(c)),
deferred by the Participant pursuant to the Program in respect of any subsequent
Fiscal Year, as of a date determined by the Company following such Fiscal Year.
Notwithstanding the foregoing, the Account will be credited with any Deferred
Amount (or such lesser amount determined pursuant to Section 2(c)) no later than
30 days after the date on which such amount would otherwise have been paid to
the Participant. The Account will be charged with any amount distributed to the
Participant or any of his or her Beneficiaries.
(b) ELECTION OF PERFORMANCE OPTIONS. The Participant agrees that the
Account Value will be deemed allocated (for purposes only of determining the
value of the Account), in minimum allocations of at least 1%, among one or more
Performance Options as indicated on the Election of Performance Option Form (or
such other form as may be prescribed for such purposes by the Company) submitted
by the Participant to the Company on or prior to the execution of this
Agreement. The Participant acknowledges that such deemed allocation is made
exclusively for the purpose of determining the Account Value from time to time
in accordance with this Agreement, and that the Company will have no obligation
to invest amounts corresponding to Deferred Amounts (including, without
<PAGE> 5
5
limitation, in investment vehicles corresponding to the Performance Options
selected by the Participant). The Participant further acknowledges that the
Company, in its sole discretion, may honor the Participant's election concerning
the Performance Options by reference to which his or her Account Value will be
calculated, or may calculate such Account Value by reference to other
Performance Options or in another manner. The Participant may change the deemed
allocation of his or her Account Value among the Performance Options then
available under the Program in accordance with procedures established by the
Office of Development from time to time; provided, however, that, unless
otherwise determined by the Company, no such reallocation shall be made more
frequently than quarterly; and provided further that no such reallocation may
result in less than 1% of the Account Value being deemed allocated to any single
Performance Option. In the event that the Participant's employment with the
Company or any Subsidiary or affiliate thereof terminates for any reason on or
after the Payment Option Vesting Date, then following such termination of
employment the Participant will continue to have the right to change the deemed
allocation of his or her Account Value among the Performance Options as provided
for in this Section 3(b).
(c) DETERMINATION OF ACCOUNT VALUE. The Company will from time to
time calculate the Account Value based on the Participant's Deferred Amounts and
his or her then-effective elections with respect to deemed allocation of the
Account among the available Performance Options. Such calculation will be based
on the best information available to the Company as of the date of
determination, which information may include estimates. The rate of return over
the relevant measurement period (i) for amounts deemed allocated to a
Performance Option other than a multi-manager fund option will track a fund or
an index of two or more funds which, in the sole judgment of the PTIP Committee,
have investment objectives similar to the relevant Performance Options, and (ii)
for amounts deemed allocated to a multi-manager fund option will track a blended
return of multi-manager fund strategies to be selected by the PTIP Committee in
its sole discretion, reduced, in the case of all rates of return determined
pursuant to the foregoing clauses (i) and (ii), by 50 basis points (on an annual
basis) or such other amount determined by the PTIP Committee in its discretion.
The Company will furnish the Participant with a statement setting forth his
Account Value as of the end of each calendar year and all credits to and
payments from the Account during such year. The Account Value reflected on such
statement will be based on the best information available to the Company as of
the end of the calendar year, which information may include estimates. The
statement will be furnished to the Participant no later than 120 days after the
end of each calendar year. Following the commencement of distribution of the
Account Value to the Participant, the Company will continue to calculate the
Account Value from time to time in the manner described above, taking into
account such distributions from the Account.
(d) COMPANY'S RIGHT TO CHANGE PERFORMANCE OPTIONS. The Company may,
from time to time and in its sole discretion, change the Performance Options
available under
<PAGE> 6
6
the Program, and nothing in this Agreement shall be construed to confer on the
Participant the right to continue to have any particular Performance Option
available for purposes of measuring the value of his Account.
4. TERMINATION OF EMPLOYMENT.
(a) TERMINATION ON OR AFTER THE PAYMENT OPTION VESTING DATE. If the
Participant's employment with the Company or any Subsidiary or affiliate thereof
terminates for any reason on or after the Payment Option Vesting Date, then
following such termination of employment the Participant will be entitled to
payments as provided in Section 6 below.
(b) TERMINATION BEFORE THE PAYMENT OPTION VESTING DATE. Subject to
Sections 5 and 7 below, if the Participant's employment with the Company or any
Subsidiary or affiliate thereof terminates for any reason (other than death or
Total Disability) before the Payment Option Vesting Date, then the Company will
pay to the Participant in U.S. dollars, as promptly as practicable following the
end of the calendar year in which such termination of employment occurs, the
lower of:
(i) the Account Value, determined as of the last day of such
calendar year; and
(ii) the sum of (A) all Deferred Amounts that have been deferred by
the Participant under the Program and (B) 50% of the amount, if any, by
which the Account Balance, determined as of the last day of such calendar
year, exceeds the sum of all such Deferred Amounts.
Following such payment neither the Participant nor any Beneficiary of the
Participant will have any further rights under this Agreement.
5. DISABILITY.
Anything in this Agreement to the contrary notwithstanding, in the
event of the Participant's Total Disability (whether or not his or her
employment terminates), the Participant will be entitled to payments as provided
in Section 6 hereof; provided, however, that the Company may, at any time in its
sole discretion, accelerate such payments to the Participant.
6. MANNER OF PAYMENT.
(a) U.S. DOLLARS. All payments to the Participant under the Program
will be in U.S. dollars. The Participant will have no right to any other form of
payment.
<PAGE> 7
7
(b) DISTRIBUTION ELECTION. The Participant will make a Distribution
Election specifying (i) a date for commencement of the distribution of the
Account Value and (ii) the installment payment method, as described in
subsection (d) below, that the Participant elects for such distribution. The
Distribution Election will be irrevocable and must be submitted to the Office of
Development or to such other office or individual as the Company may direct at
least 12 months prior to the date specified in such Distribution Election for
the commencement of distribution of the Account Value. Any Distribution Election
submitted less than 12 months prior to the date specified in such Distribution
Election for the commencement of distribution of the Account Value will not be
given effect, and distributions will not begin until 12 months following the
date such Distribution Election is submitted.
(c) COMMENCEMENT OF PAYMENT. Unless an earlier distribution is made
to the Participant pursuant to Section 4 or Section 5 above, and subject to
Section 7 below in the case of the Participant's death, distribution of the
Account Value shall commence promptly following the date designated therefor by
the Participant in his or her Distribution Election (or, in the event that such
Distribution Election is submitted less than 12 months prior to the date
specified therein for the commencement of distributions, the date 12 months
following the date such Distribution Election is submitted); provided, however,
that, except in the case of the Participant's Total Disability or death, (i) no
such distribution of the Account Value will begin prior to the later to occur of
(A) the fifth anniversary of the date on which the Account is first credited, as
provided in Section 3(a), or (B) the date on which the Participant attains age
55, and (ii) no such distribution will begin prior to termination of the
Participant's employment with the Company or any Subsidiary or affiliate
thereof. If application of the proviso of the preceding sentence results in
distribution of the Account Value not beginning on the date designated therefor
by the Participant in his or her Distribution Election (or, in the event that
such Distribution Election is submitted less than 12 months prior to the date
specified therein for the commencement of distributions, the date 12 months
following the date such Distribution Election is submitted), then such
distribution shall begin on or promptly following the first date as of which the
terms of such proviso no longer preclude such distribution, and payment shall be
made, starting with such later date, in accordance with the installment payment
method elected by the Participant in his or her Distribution Election.
(d) PAYMENT OPTIONS. In the Distribution Election the Participant
will elect to have the Account Value distributed pursuant to one of the
following installment payment methods:
(i) five annual installments;
(ii) ten annual installments;
<PAGE> 8
8
(iii) fifteen annual installments; or
(iv) twenty annual installments;
The amount of each annual installment will equal "(1/A) x B", where "A" equals
the number of annual installments remaining to be made (including the
installment with respect to which the calculation is made) and "B" equals the
Account Value as of the date the amount of such installment is determined.
(e) NO WITHDRAWALS OR LOANS. Prior to the commencement of
distributions as provided in Sections 4, 5 and 6(c) above, subject to Section 7
below in the case of the Participant's death, the Participant will have no
rights under the Program or this Agreement to make withdrawals from the Account
for any reason. In no event will the Participant be entitled to receive loans
from the Company based upon the Account Value.
7. DEATH.
If the Participant dies before payment of the first installment
payment pursuant to Section 6 above, the Account Value as of the last day of the
calendar quarter in which death occurs will be paid in a lump sum to the
Participant's Beneficiaries as soon as practicable following the date of death.
If the Participant dies following payment of the first installment payment
pursuant to Section 6 above, remaining installment payments, determined in
accordance with such Section 6, will be paid to the Participant's Beneficiaries
at the scheduled times; provided, however, that the Company may, at any time in
its sole discretion, accelerate such payments. If the Participant dies after
having received a distribution of his or her Account Value pursuant to Section
4(b), 5 or 8 or has received all distributions pursuant to Section 6, no further
payment under the Program will be made to the Participant's Beneficiaries or
estate following the Participant's death.
8. TERMINATION AND AMENDMENT.
The Company may terminate the Program, in whole or in part as to some
or all participants in the Program, at any time in its discretion and, in
connection therewith, may terminate this Agreement. No further deferrals will be
permitted after the effective date of such termination. Payment of the
Participant's Account Value, determined as of the effective date of termination
of the Program and this Agreement, will be made to the Participant (or,
following the Participant's death, his or her Beneficiaries) as soon as
practicable following the January 1 of the year following the year in which
notice of such termination is sent to the Participant. The Company may also
alter, amend, modify or suspend the Program or this Agreement at any time in its
discretion. Notwithstanding the foregoing, no alteration, amendment or
modification of this Agreement shall adversely affect the rights of the
Participant without the Participant's consent.
<PAGE> 9
9
9. PROGRAM UNFUNDED.
The Program is unfunded. The Account represents at all times an
unfunded and unsecured contractual obligation of the Company. The Participant
and each of his Beneficiaries will be unsecured creditors of the Company with
respect to all obligations owed to any of them under this Agreement or otherwise
under the Program. Amounts payable under the Program and this Agreement will be
satisfied solely out of the general assets of the Company subject to the claims
of its creditors. The Participant and his or her Beneficiaries will not have any
interest in any fund or in any specific asset of the Company of any kind by
reason of any amount credited to him or her hereunder, nor shall the Participant
or any of his or her Beneficiaries or any other person have any right to receive
any distribution under this Agreement except as, and to the extent, expressly
provided herein. The Company will not segregate any funds or assets to provide
for the distribution of the Account Value or issue any notes or security for the
payment thereof. Any reserve or other asset that the Company may establish or
acquire to assure itself of the funds to provide payments required under the
Program shall not serve in any way as security to the Participant or any of his
or her Beneficiaries for the performance of the Company under this Agreement.
10. NO INVESTMENT OBLIGATION.
The Participant acknowledges and agrees that the Company has no
obligation to invest amounts corresponding to Deferred Amounts (including,
without limitation, in investment vehicles corresponding to the Performance
Options selected by the Participant for purposes of determining the Account
Value of his or her Account). The Participant further acknowledges and agrees
that if the Company, in its sole discretion, elects to invest amounts
corresponding to Deferred Amounts in any such investment vehicles, the
Participant will have no right or interest in any such investment vehicle by
virtue of this Agreement.
11. REPRESENTATIONS AND WARRANTIES OF THE PARTICIPANT.
The Participant hereby acknowledges, represents and warrants to, and
agrees with, the Company as follows:
(a) The Participant understands that this Agreement is intended to be
exempt from registration under the Securities Act, and in accordance therewith
and in furtherance thereof, the Participant represents and warrants and agrees
as follows:
(i) The Participant has received the Brochure relating to the Program
and the letters or memoranda from the Company to the Participants regarding
same for the relevant fiscal year (the "Descriptive Materials"), has
carefully reviewed them and understands the information contained therein;
<PAGE> 10
10
(ii) The Participant acknowledges that all documents, records and
books pertaining to the Program (including, without limitation, the
Descriptive Materials) have been made available for inspection by the
Participant;
(iii) The Participant has had a reasonable opportunity to ask
questions of and receive answers from a person or persons acting on behalf
of the Company concerning the Program and all such questions have been
answered to the full satisfaction of the Participant;
(iv) No oral or written representations have been made to the
Participant concerning the Program other than as stated in the Descriptive
Materials, and no oral or written information furnished to the Participant
in connection with the Program were inconsistent with the information
stated in the Descriptive Materials;
(v) The Participant has adequate means of providing for the
Participant's current financial needs and contingencies, is able to bear
the substantial economic risks of the Program for an indefinite period of
time, has no need for liquidity in the Participant's assets placed in the
Program, and, at the present time, could afford a complete loss of such
assets;
(vi) The Participant has such knowledge and experience in financial,
tax, and business matters so as to enable the Participant to utilize the
information made available to the Participant in connection with the
Program to evaluate the merits and risks of the Program and to make an
informed decision with respect thereto;
(vii) The Participant is not relying on the Company with respect to
the tax and other economic considerations of the Program.
(b) The Participant meets the requirements to be included in one of
the categories of "accredited investor" (as defined in Rule 501 under the
Securities Act) set forth on Appendix A hereto.
(c) The Participant shall provide such information and execute and
deliver such documents as may reasonably be requested by the Company in
connection with the Program, including, without limitation, such information and
documents as may reasonably be necessary to comply with any and all laws to
which the Company is subject, and such additional information as the Company may
deem appropriate with regard to the Participant's suitability (including,
without limitation, documentation relating to the Participant's "accredited
investor" status).
(d) The representations, warranties, and agreements of the
Participant contained herein and in any other writing delivered in connection
with the transactions
<PAGE> 11
11
contemplated hereby shall be true and correct in all respects on and as of the
date of any deferral hereunder as if made on and as of such date and shall
survive the execution and delivery of this Agreement. The Participant shall
promptly inform the Company if any of the representations included in this
Section 11 shall become false for any reason.
12. GENERAL TERMS.
(a) ADMINISTRATION. The Program is administered by the PTIP
Committee, the Office of Development or such other office or individual as the
Company may appoint to administer the Program, which may adopt any rules and
procedures necessary to carry out the purposes of the Program. Each
interpretation, determination or other action made or taken pursuant to the
Program or this Agreement by the PTIP Committee, the Office of Development or
such other office or individual as the Company may appoint to administer the
Program (including without limitation (i) the selection of funds, indices or
strategies in connection with the calculation of the Account Value pursuant to
Section 3(c) above and (ii) the calculation of the Account Value) shall be final
and binding on all persons. No member of the PTIP Committee, the Office of
Development or such other office or individual as the Company may appoint to
administer the Program shall be liable to the Participant or any other
participant in the Program for any action or determination.
(b) NO RIGHT TO CONTINUED EMPLOYMENT OR PARTICIPATION. Neither this
Agreement nor any action taken or omitted to be taken hereunder shall be deemed
(i) to create or confer on the Participant any right to be retained in the
employ of the Company or any Subsidiary or other affiliate thereof or to
interfere with or to limit in any way the right of the Company or any Subsidiary
or other affiliate thereof to terminate the employment of the Participant at any
time, or (ii) to create or confer on the Participant any right to participate in
the Program in respect of any future Fiscal Year. The Participant acknowledges
that the Program is maintained by the Company for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees, and that the Participant's participation in the Program in respect of
any future Fiscal Year will depend, among other things, on the Company's
determination that the Participant is a member of such select group, such
determination to be made by the Company in its sole discretion.
(c) TAX ADVICE. The Participant acknowledges that he or she has been
advised by the Company to consult with his or her tax and other financial
advisors prior to making the Deferral Election. The Company makes no
representations or warranties concerning the tax or other financial consequences
of the Participant's Deferral Election or any payments provided for under this
Agreement.
(d) TAXES AND WITHHOLDING. As a condition to any payment or
distribution pursuant to this Agreement, the Company may require the Participant
to pay such sum to the
<PAGE> 12
12
Company as may be necessary to discharge the Company's obligations with respect
to any taxes, assessments or other governmental charges imposed on property or
income received by the Participant hereunder. In the discretion of the Company,
the Company may deduct or withhold such sum from any payment or distribution to
the Participant.
(e) GOVERNING LAW. This Agreement and the legal relations between
the parties shall be construed in accordance with and governed by the laws of
the State of New York.
(f) ARBITRATION DISCLOSURES.
- ARBITRATION IS FINAL AND BINDING ON THE PARTIES THERETO.
- THE PARTIES TO THIS AGREEMENT ARE WAIVING THEIR RIGHT TO
SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO JURY
TRIAL.
- PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN
AND DIFFERENT FROM COURT PROCEEDINGS.
- THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO
APPEAL OR TO SEEK MODIFICATION OF RULINGS BY THE
ARBITRATORS IS STRICTLY LIMITED.
- THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A
MINORITY OF ARBITRATORS WHO WERE OR ARE AFFILIATED WITH
THE SECURITIES INDUSTRY.
(g) AGREEMENT TO ARBITRATE CONTROVERSIES. IT IS AGREED THAT ANY
CONTROVERSY BETWEEN THE PARTIES HERETO ARISING OUT OF THIS AGREEMENT OR THE
PROGRAM SHALL BE SUBMITTED TO ARBITRATION CONDUCTED BEFORE THE NEW YORK STOCK
EXCHANGE (AND ONLY BEFORE SUCH EXCHANGE) OR THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC., AS THE INITIATING PARTY MAY ELECT AND IN ACCORDANCE
WITH THE RULES OBTAINING OF THE SELECTED ORGANIZATION. ARBITRATION MUST BE
COMMENCED BY SERVICE UPON THE OTHER PARTY OF A WRITTEN DEMAND FOR ARBITRATION OR
A
<PAGE> 13
13
WRITTEN NOTICE OF INTENTION TO ARBITRATE, THEREIN ELECTING THE ARBITRATION
TRIBUNAL. IN THE EVENT THE INITIATING PARTY DOES NOT MAKE SUCH ELECTION WITHIN
TEN (10) DAYS OF SUCH DEMAND OR NOTICE, THEN THE INITIATING PARTY AUTHORIZES THE
OTHER PARTY TO DO SO ON BEHALF OF THE INITIATING PARTY.
NO PARTY TO THIS AGREEMENT SHALL BRING A PUTATIVE OR CERTIFIED CLASS
ACTION TO ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT
AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION; OR WHO IS
A MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT TO
ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (i) THE CLASS
CERTIFICATION IS DENIED; OR (ii) THE CLASS IS DECERTIFIED; OR (iii) SUCH PERSON
IS EXCLUDED FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN
AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS
AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
(h) CONSTRUCTION. The headings in this Agreement have been inserted
for convenience of reference only and are to be ignored in any construction of
any provision hereof. If a provision of this Agreement is not valid or
enforceable, that fact shall in no way affect the validity or enforceability of
any other provision. Use of one gender includes the other, and the singular and
plural include each other.
(i) SUCCESSORS. The provisions of this Agreement shall be binding on
the Participant and his or her heirs and legal representatives and upon the
Company and its successors and assigns. The Participant's rights hereunder
(including without limitation the right to receive payments as provided herein)
may not be assigned.
(j) SIGNATURE IN COUNTERPARTS. This Agreement may be signed in
counterparts, each of which shall be an original, with the same effect as if
signatures thereto and hereto were upon the same instrument.
<PAGE> 14
14
IN WITNESS WHEREOF, Morgan Stanley Group Inc. and the Participant
have duly executed and delivered this Agreement as of this ___ day of _________,
____.
MORGAN STANLEY GROUP INC.
By________________________
Name:
Title:
__________________________
Name:
Social Security Number:
Initial Fiscal Year: The fiscal year of the Company ending November 30, ____.
Amount of bonus or commissions deferred for the Initial Fiscal Year: $_________
<PAGE> 15
APPENDIX A
Categories of "accredited investor" (as defined in Rule 501 under the Securities
Act):
(a) The Participant's individual net worth, alone or together with
his or her spouse, exceeds $1,000,000.
(b) The Participant had an individual adjusted gross income as
reported for United States federal income tax purposes in excess of $200,000 in
each of the two most recent years and has a reasonable expectation of reaching
the same level in the current year.
(c) The Participant had joint adjusted gross income as reported for
federal income tax purposes with his or her spouse in excess of $300,000 in each
of the two most recent years and has a reasonable expectation of reaching the
same level in the current year.
The Company, in its sole discretion, may allow a Participant to
qualify for the Program using alternative categories of "accredited investor"
status.
<PAGE> 1
EXHIBIT 10.14
FIRST AMENDMENT TO TRUST AGREEMENT
This Amendment Agreement, made as of this 3rd day of April, 1996, by
and between Morgan Stanley Group Inc., a Delaware corporation (the "Company"),
and State Street Bank and Trust Company, a Massachusetts trust company (the
"Trustee").
R E C I T A L S:
WHEREAS, the Company and the Trustee are parties to a Trust
Agreement, dated as of March 5, 1991 (the "Trust Agreement"; terms used herein
without definition shall have the meanings ascribed to such terms in the Trust
Agreement); and
WHEREAS, the Company and the Trustee now desire to amend the Trust
Agreement to reflect the adoption by the Company and the approval by its
stockholders of the Morgan Stanley Group Inc. 1995 Equity Incentive Compensation
Plan (the "1995 Plan") and to correct certain administrative
provisions of the Trust Agreement;
NOW, THEREFORE, for good and valuable consideration, the parties
hereto hereby agree as follows:
1. The first recital contained in the Trust Agreement shall be
deleted in its entirety and replaced with the following:
"WHEREAS, certain Managing Directors, Principals, officers, other key
employees and consultants, among others, of the Company or certain
subsidiaries thereof ("Participants") are eligible to receive shares
(the "Benefits") of Morgan Stanley Group Inc. common stock, par value
$1.00 per share (the "Company Stock"), pursuant to awards of stock
units under either the Morgan Stanley Group Inc. 1988 Equity
Incentive Compensation Plan or the
<PAGE> 2
2
Morgan Stanley Group Inc. 1995 Equity Incentive Compensation Plan (as
each may be amended, supplemented, replaced or extended, or any
successor plan providing for similar benefits or awards, being
hereinafter referred to collectively as the "Plan"), a copy of which
is attached hereto as Exhibit A and Exhibit B, respectively, and made
a part hereof."
2. The second recital contained in the Trust Agreement is amended by
deleting the name "Morgan Stanley International" contained therein and
substituting therefor the name "Morgan Stanley & Co. International Limited".
3. The second sentence of Section 7(g) of the Trust Agreement is
amended by deleting the reference to "Exhibit B" contained therein and
substituting therefor "Exhibit C".
4. Section 13(a) of the Trust Agreement is amended by deleting the
address contained therein and substituting therefor the following address:
"1585 Broadway, 38th Floor, New York, New York 10036, Attention: General Counsel
and Secretary".
5. Section 13(c) of the Trust Agreement is amended by deleting the
address contained therein and substituting therefor the following address:
"1585 Broadway, 38th Floor, New York, New York 10036, Attention: Legal and
Compliance Department".
6. A copy of the 1995 Plan is attached to this Amendment as Exhibit
A, but shall be designated as Exhibit B to the Trust Agreement.
7. All references to "this Agreement," "herein," "hereunder," or
words of like import contained in the Trust Agreement shall be references to the
Trust Agreement as amended by this Amendment.
<PAGE> 3
3
8. Except as expressly amended hereby, the Trust Agreement shall
remain in full force and effect. All actions taken by the parties hereto
consistent with this Amendment prior to the date hereof are hereby approved,
confirmed and ratified in all respects.
IN WITNESS WHEREOF, the Company and the Trustee have executed this
Trust Agreement as of the date first above written.
MORGAN STANLEY GROUP INC.
By:___________________________________
Jonathan M. Clark
General Counsel &
Secretary
STATE STREET BANK AND
TRUST COMPANY
By:_______________________
Title:
<PAGE> 4
EXHIBIT A
MORGAN STANLEY GROUP INC.
1995 EQUITY INCENTIVE COMPENSATION PLAN
1. PURPOSE. The purposes of the Morgan Stanley Group Inc. 1995 Equity
Incentive Compensation Plan are to attract, retain and motivate key employees of
the Company, to compensate them for their contributions to the growth and
profits of the Company and to encourage ownership by them of Stock of the
Company.
2. DEFINITIONS. As used in the Plan, the following capitalized words shall
have the meanings indicated below:
"Administrator" means the individual or individuals to whom the Committee
delegates authority under the Plan in accordance with Section 5(b).
"Award" means an award made pursuant to the terms of the Plan.
"Award Agreement" means a written agreement between Morgan Stanley or one
of its Subsidiaries which is approved in accordance with Section 12(d), which is
executed by the Participant and by an officer on behalf of Morgan Stanley or
such Subsidiary and which sets forth the terms and conditions of the Award to
the Participant.
"Award Certificate" means a written certificate issued by Morgan Stanley
or one of its Subsidiaries which is approved in accordance with Section 12(d),
which is executed by an officer on behalf of Morgan Stanley or such Subsidiary
and which sets forth the terms and conditions of an Award.
"Board" means the Board of Directors of Morgan Stanley.
"Code" means the Internal Revenue Code of 1986, as amended, and the
applicable rulings and regulations thereunder.
"Committee" means the Compensation Committee of the Board, any successor
committee thereto or any other committee appointed by the Board to administer
the Plan. The Committee shall consist of at least two individuals and shall
serve at the pleasure of the Board.
"Company" means Morgan Stanley and all of its Subsidiaries.
"Date of the Award" means the effective date of an Award (whether a
mandatory Award or an elected Award pursuant to Section 12(a)) as specified by
the Committee and set forth in the applicable Award Agreement or Award
Certificate.
"Eligible Individuals" means the individuals described in Section 6 who
are eligible for Awards under the Plan.
"Employee Trust" means any trust established by the Company in connection
with an employee benefit plan (including the Plan or the 1988 EICP) under which
current and former employees of the Company constitute the principal
beneficiaries.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the applicable rulings and regulations thereunder.
"Fair Market Value" means, with respect to a share of Stock, the fair
market value thereof as of the relevant date of determination, as determined in
accordance with a valuation methodology approved by the Committee.
"Morgan Stanley" means Morgan Stanley Group Inc.
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<PAGE> 5
"1988 EICP" means the Morgan Stanley Group Inc. 1988 Equity Incentive
Compensation Plan, as amended.
"Option" means an option to purchase Stock, the terms of which are
described in Section 9.
"Option Award" means an Award of Options, pursuant to Section 9. An Option
Award may consist of Options, the receipt of which was elected pursuant to
Section 12(a).
"Other Award" means any other form of award authorized under Section 11 of
the Plan. An Other Award may consist of Awards, the receipt of which was elected
pursuant to Section 12(a).
"Participant" means an individual to whom an Award has been made.
"Plan" means the Morgan Stanley Group Inc. 1995 Equity Incentive
Compensation Plan, as the same may be amended from time to time in accordance
with Section 16(f) below.
"SAR" means a stock appreciation right, as described in Section 10.
"SAR Award" means an Award of SARs pursuant to Section 10. A SAR Award may
be freestanding or granted in tandem with another type of Award. A SAR Award may
consist of SARs, the receipt of which was elected pursuant to Section 12(a).
"Section 162(m) Participant" means, for a given fiscal year of Morgan
Stanley, any Participant designated by the Compensation Committee by not later
than 90 days following the start of such year as a Participant (or such other
time as may be required or permitted by Section 162(m) of the Code) whose
compensation for such fiscal year may be subject to the limit on deductible
compensation imposed by Section 162(m) of the Code.
"Shares" means the shares of Stock underlying, constituting, subject to,
or corresponding to an Award.
"Stock" means the common stock, par value $1.00 per share, of Morgan
Stanley.
"Stock Award" means an Award of Shares pursuant to Section 7. A Stock
Award may consist of Stock, the receipt of which was elected pursuant to Section
12(a).
"Stock Unit" means a restricted stock unit, as described in Section 8.
"Stock Unit Award" means an Award of Stock Units, pursuant to Section 8. A
Stock Unit Award may consist of Stock Units, the receipt of which was elected
pursuant to Section 12(a).
"Subsidiary" means (i) a corporation or other entity with respect to which
Morgan Stanley, directly or indirectly, has the power, whether through the
ownership of voting securities, by contract or otherwise, to elect at least a
majority of the members of such corporation's board of directors or analogous
governing body, or (ii) any other corporation or other entity in which Morgan
Stanley, directly or indirectly, has an equity or similar interest and which the
Committee designates as a Subsidiary for purposes of the Plan.
"Substitute Awards" means Awards granted upon assumption of, or in
substitution for, outstanding awards previously granted by a company or other
entity acquired by the Company or with which the Company combines.
"Term of the Plan" means the period beginning on the date that the Plan is
adopted by the Board and ending on the date that the Plan terminates in
accordance with Section 3 or 16(f) below.
3. EFFECTIVE DATE AND TERM. The Plan shall become effective upon its
adoption by the Board subject to its approval by the stockholders of Morgan
Stanley. Prior to such stockholder approval, the Committee may grant Awards
conditioned on stockholder approval. If such stockholder approval is not
obtained at or before the first annual meeting of stockholders to occur after
the adoption of the Plan by the Board, the Plan and any Awards made thereunder
shall terminate ab initio and be of no further force and effect. In no event
shall any Awards be
2
<PAGE> 6
made under the Plan after the tenth anniversary of the date of stockholder
approval; provided, however, that no incentive stock option, within the meaning
of Section 422 of the Code, may be granted under the Plan after the tenth
anniversary of the adoption of the Plan by the Board.
4. STOCK SUBJECT TO PLAN.
(a) [ ] shares of Stock* (whether issued or unissued) shall be authorized
for issuance under the Plan (the "Section 4 Limit").
(b) The number and kind of shares authorized for issuance hereunder,
including the maximum number of Shares subject to Options or SARs as provided in
Section 4(d) below, may be equitably adjusted in the discretion of the Committee
in the event of a stock split, stock dividend, recapitalization, reorganization,
merger, consolidation, extraordinary dividend, split-up, spin-off, combination,
exchange of shares, warrants or rights offering to purchase Stock at a price
substantially below Fair Market Value or other similar corporate event affecting
the Stock in order to preserve the benefits or potential benefits intended to be
made available to Participants granted Awards. In the event of any of the
foregoing events, the number of outstanding Awards and the number and kind of
shares subject to any outstanding Award and the purchase price per share, if
any, under any outstanding Award may be equitably adjusted (including by payment
of cash to a Participant) in the discretion of the Committee in order to
preserve the benefits or potential benefits intended to be made available to
Participants granted Awards. Such adjustments shall be made by the Committee,
whose determination as to what adjustments shall be made, and the extent
thereof, shall be final. Unless otherwise determined by the Committee, such
adjusted Awards shall be subject to the same vesting schedule and restrictions
to which the underlying Award is subject. No fractional shares of Stock shall be
reserved or authorized by any such adjustment.
(c) In calculating the number of shares of Stock remaining for issuance
under the Plan, the following rules shall apply:
1. The Section 4 Limit shall be reduced by the number of Shares
subject to outstanding Awards and, for Awards which are not denominated in
Shares, by the number of Shares delivered upon payment or settlement of
the Award.
2. The Section 4 Limit shall be increased by the number of shares of
Stock tendered to pay the exercise price of any Option, SAR or Other Award
and by the number of Shares withheld from any Award to satisfy a
Participant's tax withholding obligation or, if applicable, withheld to
pay the exercise price of an Option, SAR or Other Award.
3. The Section 4 Limit shall be increased by the number of Shares
subject to an Award (or portion thereof) granted hereunder that is
forfeited, is settled through the issuance of consideration other than
Shares or otherwise terminates without the issuance of such Shares. With
respect to SAR Awards that are settled in whole or in part in Stock, this
Section 4(c)(3) shall be applied by increasing the Section 4 Limit by the
excess, if any, of the number of Shares subject to the SAR Award over the
number of Shares delivered to the Participant upon exercise of such Award.
4. Any Shares underlying Substitute Awards shall not be counted
against the Section 4 Limit and shall not be subject to Section 4(d),
except in the case of Shares with respect to which Substitute Awards are
granted to officers or directors of the Company subject to the reporting
obligations of Section 16(a) of the Exchange Act.
In no event may the operation of the foregoing result in the issuance
under the Plan of a number of Shares in excess of the Section 4 Limit.
- ---------
* Such number shall equal 86,000,000 plus the number of Shares that remain
available under the Morgan Stanley Group Inc. 1988 Equity Incentive
Compensation Plan at such time as the Compensation Committee determines
that no further award shall be made under such Plan, which number shall
not exceed 5 million shares.
3
<PAGE> 7
(d) The maximum number of Shares that may be subject to Options or SARs
granted to or elected by a Participant (i) in the fiscal year in which the Plan
is approved by the stockholders of Morgan Stanley shall equal 3,340,000 Shares,
and (ii) in each subsequent fiscal year shall equal 110% of such maximum number
for the preceding fiscal year; provided, however, that the limitation imposed by
this Section 4(d) shall not include Options or SARs granted to a Section 162(m)
Participant in accordance with Section 14(b) or 14(c) below.
5. ADMINISTRATION.
(a) The Plan shall be administered by the Committee, which shall have full
power and authority, subject to the express provisions hereof, (i) to select
Participants from among the Eligible Individuals, (ii) to make Awards in
accordance with the Plan, (iii) to determine the number of Shares subject to
each Award or the cash amount payable in connection with an Award, (iv) to
determine the terms and conditions of each Award, including, without limitation,
those related to vesting, forfeiture, payment, exercisability, and the effect,
if any, of a Participant's termination of employment with the Company or a
change in control of the Company on the outstanding Awards granted to such
Participant, and including the authority to amend the terms and conditions of an
Award after the granting thereof to a Participant in a manner that is not
prejudicial to the rights of such Participant in such Award, (v) to determine
whether the terms and conditions of each Award will be set forth in an Award
Agreement or Award Certificate and to specify and approve the provisions of the
Award Agreements and Award Certificates delivered to Participants in connection
with their Awards, (vi) to construe and interpret any Award Agreement or Award
Certificate delivered under the Plan, (vii) to prescribe, amend and rescind
rules and procedures relating to the Plan, (viii) to vary the terms of Awards to
take account of tax, securities law and other regulatory requirements of foreign
jurisdictions and (ix) to make all other determinations and to formulate such
procedures as may be necessary or advisable for the administration of the Plan.
(b) The Committee may, but need not, from time to time delegate some or
all of its authority under the Plan to an Administrator consisting of one or
more members of the Committee or of one or more officers of the Company;
provided, however, that the Committee may not delegate its authority (i) to make
Awards to Eligible Individuals (A) who are subject on the Date of the Award to
the reporting rules under Section 16(a) of the Exchange Act, (B) who are Section
162(m) Participants or (C) who are officers of Morgan Stanley who are delegated
authority by the Committee hereunder, or (ii) under Sections 5(c), 14 and 16(f)
of the Plan. Any delegation hereunder shall be subject to the restrictions and
limits that the Committee specifies at the time of such delegation or
thereafter. Nothing in the Plan shall be construed as obligating the Committee
to delegate authority to an Administrator, and the Committee may at any time
rescind the authority delegated to an Administrator appointed hereunder or
appoint a new Administrator. At all times, the Administrator appointed under
this Section 5(b) shall serve in such capacity at the pleasure of the Committee.
Any action undertaken by the Administrator in accordance with the Committee's
delegation of authority shall have the same force and effect as if undertaken
directly by the Committee, and any reference in the Plan to the Committee shall,
to the extent consistent with the terms and limitations of such delegation, be
deemed to include a reference to the Administrator.
(c) The Committee shall have full power and authority, subject to the
express provisions hereof, to construe and interpret the Plan.
(d) All determinations by the Committee in carrying out and administering
the Plan and in construing and interpreting the Plan shall be final, binding and
conclusive for all purposes and upon all persons interested herein. In the event
of any disagreement between the Committee and the Administrator, the Committee's
determination on such matter shall be final and binding on all interested
persons, including the Administrator.
(e) No member of the Committee or the Administrator shall be liable for
anything whatsoever in connection with the administration of the Plan except
such person's own willful misconduct. Under no circumstances shall any member of
the Committee or the Administrator be liable for any act or omission of any
other member of the Committee or the Administrator. In the performance of its
functions with respect to the Plan, the Committee and the Administrator shall be
entitled to rely upon information and advice furnished by the Company's
officers, the
4
<PAGE> 8
Company's accountants, the Company's counsel and any other party the Committee
or the Administrator deems necessary, and no member of the Committee or the
Administrator shall be liable for any action taken or not taken in reliance upon
any such advice.
6. ELIGIBILITY. Eligible Individuals shall include all Managing Directors,
Principals, Vice Presidents, officers, other key employees and consultants of
the Company, non-employee directors of Subsidiaries and employees and
consultants of joint ventures, partnerships or similar business organizations in
which Morgan Stanley or a Subsidiary has an equity or similar interest, other
than those individuals who may be designated by the Committee from time to time
as ineligible for such period of time as the Committee shall determine. In
accordance with rules specified by the Committee, Eligible Individuals may
include former employees or former consultants of the Company and such joint
ventures, partnerships or similar business organizations. Members of the
Committee will not be eligible to participate in the Plan. An individual's
status as an Administrator will not affect his or her eligibility to participate
in the Plan.
7. STOCK AWARDS. Stock Awards shall consist of one or more Shares of Stock
granted or offered for sale to an Eligible Individual, and shall be subject to
the terms and conditions established by the Committee in connection with the
Award and specified in the applicable Award Agreement or Award Certificate. The
Shares subject to a Stock Award may, among other things, be subject to vesting
requirements or restrictions on transferability.
8. STOCK UNIT AWARDS. Stock Unit Awards shall consist of a grant of one or
more Stock Units, and shall be subject to the terms and conditions established
by the Committee in connection with the Award and specified in the applicable
Award Agreement or Award Certificate. Each Stock Unit awarded to a Participant
shall correspond to one Share. Upon satisfaction of the conditions to vesting
and payment specified in the applicable Award Agreement or Award Certificate, a
Stock Unit will be payable, at the discretion of the Committee, in Stock or in
cash equal to Fair Market Value on the payment date of one Share.
9. OPTION AWARDS.
(a) An Option Award shall consist of the grant of an Option to purchase
such number of Shares of Stock as determined by the Committee, and shall be
subject to the terms and conditions established by the Committee in connection
with the Award and specified in the applicable Award Agreement or Award
Certificate. Upon satisfaction of the conditions to exercisability specified in
the applicable Award Agreement or Award Certificate, a Participant shall be
entitled to exercise the Option in whole or in part and to receive, upon
satisfaction or payment of the exercise price or an irrevocable notice of
exercise in the manner contemplated by Section 9(b) below, the number of Shares
in respect of which the Option shall have been exercised. Such Options may be
either nonqualified stock options or incentive stock options within the meaning
of Section 422 of the Code.
(b) Subject to the provisions of the applicable Award Agreement or Award
Certificate, the exercise price of the Option may be paid in cash or previously
owned shares of Stock or a combination thereof and, if the applicable Award
Agreement or Award Certificate so provides, in whole or in part through the
withholding of Shares subject to the Option with a value equal to the exercise
price. In accordance with the rules and procedures established by the Committee
for this purpose, the Option may also be exercised through a "cashless exercise"
procedure approved by the Committee that affords Participants the opportunity to
sell immediately some or all of the Shares underlying the exercised portion of
the Option in order to generate sufficient cash to pay the Option exercise price
and/or to satisfy withholding tax obligations related to the Option.
(c) Options which are intended to qualify as incentive stock options under
Section 422 of the Code shall expire no later than the tenth anniversary of the
date of the grant thereof.
5
<PAGE> 9
10. SAR AWARDS. An SAR Award shall consist of the grant of one or more
SARs, and shall be subject to the terms and conditions established by the
Committee in connection with the Award and specified in the applicable Award
Agreement or Award Certificate. Upon satisfaction of the conditions to the
payment specified in the applicable Award Agreement or Award Certificate, each
SAR shall entitle a Participant to an amount, if any, equal to the Fair Market
Value of a Share on the date of exercise over the SAR exercise price specified
in the applicable Award Agreement or Award Certificate. At the discretion of the
Committee, payments to a Participant upon exercise of an SAR may be made in
Shares, cash or a combination thereof.
11. OTHER AWARDS. The Committee shall have the authority to specify the
terms and provisions of other forms of equity-based or equity-related Awards not
described above which the Committee determines to be consistent with the purpose
of the Plan and the interests of the Company, which Awards may provide for cash
payments based in whole or in part on the value or future value of Stock, for
the acquisition or future acquisition of Stock, or any combination thereof.
Other Awards shall also include cash payments (including the cash payment of
dividend equivalents) under the Plan which may be based on one or more criteria
determined by the Committee which are unrelated to the value of Stock and which
may be granted in tandem with, or independent of, other Awards under the Plan.
12. AWARDS IN GENERAL.
(a) Awards under the Plan may, in the discretion of the Committee, be made
in substitution in whole or in part for cash or other compensation payable to an
Eligible Individual. In accordance with rules and procedures established by the
Committee, an Eligible Individual may elect to receive one form of Award
permitted under the Plan in lieu of any other form of Award, or may elect to
receive an Award under the Plan in lieu of all or part of any compensation which
otherwise might have been paid to such Eligible Individual; provided, however,
that any such election shall not require the Committee to make any Award to such
Eligible Individual. Any such substitute or elective Awards shall have terms and
conditions consistent with the provisions of the Plan applicable to such Award.
At the discretion of the Committee, Stock Units may at any time be substituted
for the portion of a Stock Award that has not vested in accordance with the
provisions of the applicable Award Agreement or Award Certificate. The
substitution contemplated by the previous sentence may be made at any time prior
to the applicable vesting date of the Stock Award.
(b) For purposes of determining the number of Shares subject to an Award,
the Committee may value the Shares at a discount to Fair Market Value to reflect
the various restrictions, conditions and limitations set forth in the Plan and
the applicable Award Agreement or Award Certificate or otherwise applicable to
the Shares.
(c) With respect to any dividend or distribution on the Shares
corresponding to an Award, the Committee may in its discretion authorize current
or deferred payments (payable in cash or Stock or a combination thereof) or
appropriate adjustments to the outstanding Award to reflect such dividend or
distribution.
(d) In accordance with the procedures specified by, and subject to the
approval of, the Committee, Participants may be given the opportunity to defer
the payment or settlement of an Award to one or more dates selected by the
Participant. In connection with such deferral, the Committee may provide that
Awards so deferred may be credited with a notional return during the period of
deferral based upon the corresponding return on one or more investments
designated by the Committee or elected by the Participant in accordance with the
procedures established by the Committee for this purpose. The Committee shall
have the right at any time to accelerate the payment or settlement of any Award
granted under the Plan, including, without limitation, any Award subject to a
prior deferral election.
(e) The terms and provisions of an Award shall be set forth in a written
Award Agreement or Award Certificate approved by the Committee and delivered or
made available to the Participant as soon as practicable following the Date of
the Award.
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<PAGE> 10
(f) The vesting, exercisability, payment and other restrictions applicable
to an Award (which may include, without limitation, restrictions on
transferability or provision for mandatory resale to the Company) shall be
determined by the Committee and set forth in the applicable Award Agreement or
Award Certificate. Notwithstanding the foregoing, the Committee may accelerate
(i) the vesting or payment of any Award, (ii) the lapse of restrictions on any
Award (including a Stock Award) or (iii) the date on which any Option or SAR
first becomes exercisable. The date of a Participant's termination of employment
for any reason shall be determined in the sole discretion of the Committee. The
Committee shall also have full authority to determine and specify in the
applicable Award Agreement or Award Certificate the effect, if any, that a
Participant's termination of employment for any reason will have on the vesting,
exercisability, payment or lapse of restrictions applicable to an outstanding
Award.
13. CERTAIN RESTRICTIONS.
(a) Except as otherwise provided by the terms of any applicable Employee
Trust, prior to the exercise of any Option or SAR Award or payment of Stock
pursuant to any Stock Unit Award or Other Award, the Participant shall not have
any rights as a stockholder with respect to any Shares of Stock subject to such
Option or SAR or corresponding to such Stock Unit or Other Award. Subject to the
terms of any applicable Employee Trust, each Participant shall be the beneficial
owner of any Shares actually issued by the Company in connection with an Award.
Unless otherwise determined by the Committee, certificates representing the
Participant's Shares shall be issued in the name of a nominee holder to be
designated by the Committee. Except for the risk of forfeiture and the
restrictions on transfer which may apply to certain Shares (including
restrictions relating to any dividends or other rights), the Participant shall
be entitled to all rights of ownership, including, without limitation, the right
(i) to vote such Shares, subject for as long as the Participant is employed by
the Company, except where the constraints of local law dictate otherwise, to the
preliminary voting procedures set forth in the voting agreement, if any, set
forth in the Award Agreement or Award Certificate and (ii) to receive cash or
stock dividends thereon.
(b) Unless the Committee determines otherwise, no Award granted under the
Plan shall be transferable other than by will or by the laws of descent and
distribution; provided, however, that the Committee may, subject to such terms
and conditions as the Committee shall specify, permit the transfer of an Award
to a Participant's family members or to one or more trusts established in whole
or in part for the benefit of one or more of such family members; provided,
further, that the restrictions in this sentence shall not apply to the Shares
received in connection with an Award after the date that the restrictions on
transferability of such Shares set forth in the applicable Award Agreement or
Award Certificate have lapsed. During the lifetime of the Participant, an
Option, SAR or similar-type Other Award shall be exercisable only by him or by
the family member or trust to whom such Option, SAR or Other Award has been
transferred in accordance with the previous sentence.
14. PROVISIONS APPLICABLE TO SECTION 162(m) PARTICIPANTS.
(a) Anything in the Plan to the contrary notwithstanding, unless the
Committee determines otherwise, all compensation (other than base salary,
dividend equivalents and distributions from the Company's deferred compensation
plans, capital accumulation or carried interest plans or other compensation
plans designated by the Committee) paid by the Company to Section 162(m)
Participants for a given fiscal year shall be paid under the Plan and subject to
the terms and provisions of this Section 14.
(b) (i) Commencing with the fiscal year of Morgan Stanley beginning
December 1, 1995 and for each other fiscal year of Morgan Stanley ending during
the Term of the Plan, unless the Compensation Committee determines otherwise,
each Section 162(m) Participant will be eligible to earn under the Plan an
annual bonus amount whose value will be dependent upon the attainment for the
applicable fiscal year of specified performance targets related to designated
performance goals for such fiscal year selected by the Committee from among the
performance goals specified in Section 14(d) below. No later than 90 days
following the commencement of each fiscal year (or by such other time as may be
required or permitted by Section 162(m) of the Code), the Committee shall, in
writing, (A) designate each Section 162(m) Participant, (B) select the
performance goal or goals
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<PAGE> 11
applicable to the fiscal year, (C) establish the various targets and bonus
amounts which may be earned for such year by each Section 162(m) Participant and
(D) specify the relationship between performance goals and targets and the bonus
amount to be earned by each Section 162(m) Participant for such year.
(ii) The Committee may specify that the annual bonus amount for a fiscal
year will be earned if the applicable target is achieved for one goal or for any
one of a number of goals. The Committee may also provide that the annual bonus
amount for a fiscal year will be earned only if a target is achieved for more
than one performance goal. The Committee may also provide that the annual bonus
amount to be earned for a given fiscal year will vary based upon different
levels of achievement of the applicable performance targets.
(iii) Following the completion of each fiscal year, the Committee shall
certify in writing whether the applicable performance targets have been achieved
for such year and the bonus amounts, if any, payable to Section 162(m)
Participants for such fiscal year. The bonus amounts payable to a Section 162(m)
Participant will be paid annually following the end of the applicable fiscal
year after such certification by the Committee in the form of cash or other
permissible Awards with a value as of the Date of the Award, determined in
accordance with Section 12(b), equal to the value of the annual bonus amount
earned by the Section 162(m) Participant for such fiscal year. In determining
the bonus amount earned by a Section 162(m) Participant for a given fiscal year,
the Committee shall have the right to reduce (but not to increase) the bonus
amount payable at a given level of performance to take into account additional
factors that the Committee may deem relevant to the assessment of individual or
corporate performance for the year.
(iv) Anything in this Section 14(b) to the contrary notwithstanding, the
maximum annual bonus amount that may be earned by a Section 162(m) Participant
for (A) the fiscal year in which the Plan is approved by the stockholders of
Morgan Stanley shall equal $25 million and (B) each subsequent fiscal year shall
equal 110% of such maximum amount for the preceding fiscal year. In the event
that all or a portion of an annual bonus awarded to a Section 162(m) Participant
for a given fiscal year is paid in whole or in part in the form of Awards under
the Plan, then for purposes of determining the number of Shares subject to such
Award, the Committee may value the Shares at a discount to Fair Market Value to
reflect the various restrictions, conditions and limitations set forth in the
Plan and the applicable Award Agreement or Award Certificate or otherwise
applicable to the Shares, but such discount shall not exceed 50% of the Fair
Market Value as of the relevant date of determination, as determined in
accordance with a valuation methodology approved by the Committee.
(c) In addition to any other compensation payable under Section 14(b)
above, the Committee may grant Awards to a Participant that vest or become
exercisable upon the attainment of performance targets related to one or more
performance goals selected by the Committee from among the goals specified in
Section 14(d) below. Subject to Section 4(d) above, the Committee may also grant
Section 162(m) Participants Options or SARs with a per share exercise price
equal to the Fair Market Value of a share of Stock on the date of grant of the
Option or SAR.
(d) For purposes of this Section 14, performance goals shall be limited to
one or more of the following: (i) predicted economic value per share of Stock,
(ii) earnings per share, (iii) return on average common equity, (iv) pre-tax
income, (v) pre-tax operating income, (vi) net revenue, (vii) net income, (viii)
profits before taxes, (ix) book value per share, (x) stock price and (xi)
earnings available to common stockholders.
(e) Without further action by the Board, the provisions of this Section 14
shall cease to apply on the effective date of the repeal of Section 162(m) of
the Code (and any successor provision thereto).
15. INVESTMENT REPRESENTATION. Each Award shall be conditioned on the
Participant making any representations required in the applicable Award
Agreement or Award Certificate. Each Award shall also be conditioned upon the
making of any filings and the receipt of any consents or authorizations required
to comply with, or required to be obtained under, applicable local law.
8
<PAGE> 12
16. MISCELLANEOUS PROVISIONS.
(a) As a condition to the making of any Award, the vesting or payment of
any Award or the lapse of the restrictions pertaining thereto (including those
related to the exercise of an Option or SAR), the Company may require the
Participant to pay such sum to the Company as may be necessary to discharge the
Company's obligations with respect to any taxes, assessments or other
governmental charges imposed on property or income received by a Participant
pursuant to the Plan. In accordance with rules and procedures established by the
Committee and in the discretion of the Committee, such payment may be in the
form of cash or other property. In accordance with rules and procedures
established by the Committee, in satisfaction of such taxes, assessments or
other governmental charges the Company may, in the discretion of the Committee,
make available for delivery a lesser number of Shares in payment or settlement
of an Award or permit a Participant to tender previously owned Shares to satisfy
such withholding obligation. At the discretion of the Committee, the Company may
deduct or withhold from any payment or distribution to a Participant whether or
not pursuant to the Plan. In accordance with rules and procedures established by
the Committee, the Company may offer loans to Participants to satisfy
withholding requirements on such terms as the Committee may determine, which
terms may in the discretion of the Committee be non-interest bearing.
(b) The Plan shall not give rise to any right on the part of any
Participant to continue in the employ of the Company.
(c) All expenses and costs in connection with the administration of the
Plan or issuance of Shares, Options, SARs, Stock Units or Other Awards hereunder
shall be borne by the Company.
(d) The headings of sections herein are included solely for convenience of
reference and shall not affect the meaning of any of the provisions of the Plan.
(e) The Plan and all rights hereunder shall be construed in accordance
with and governed by the internal laws of the State of Delaware.
(f) The Board or Committee may modify, amend, suspend or terminate the
Plan in whole or in part at any time; provided, however, that such modification,
amendment, suspension or termination shall not, without a Participant's consent,
affect adversely the rights of such Participant with respect to any Award
previously made. No amendment to the Plan may render any member of the Committee
eligible to receive an Award at any time while such member is serving on the
Committee.
9
<PAGE> 1
EXHIBIT 11
MORGAN STANLEY GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED PERIOD ENDED YEAR ENDED
NOVEMBER 30 NOVEMBER 30 JANUARY 31
1996 1995 (1) 1995 (1)
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY:
Common stock and common stock equivalents:
Average common shares outstanding 152,993,389 154,307,918 153,976,502
Average common shares issuable
under employee benefit plans 521,094 2,604,760 3,816,714
------------ ------------ ------------
Total average common and common
equivalent shares outstanding 153,514,483 156,912,678 157,793,216
============ ============ ============
Earnings:
Net income $ 1,029 $ 600 $ 395
Less:Preferred stock dividend
requirements 66 54 65
------------ ------------ ------------
Earnings applicable to common shares $ 963 $ 546 $ 330
============ ============ ============
Primary earnings per share $ 6.27 $ 3.48 $ 2.09
============ ============ ============
FULLY DILUTED:
Common stock and common stock equivalents:
Average common shares outstanding 152,993,389 154,307,918 153,976,502
Average common shares issuable
under employee benefit plans 1,789,532 3,122,650 3,816,714
Common shares issuable upon conversion
of ESOP preferred stock 7,461,951 7,557,596 7,617,748
------------ ------------ ------------
Total average common and common
equivalent shares outstanding 162,244,872 164,988,164 165,410,964
============ ============ ============
Earnings:
Net income $ 1,029 $ 600 $ 395
Less:Preferred stock dividend
requirements 62 51 62
------------ ------------ ------------
Earnings applicable to common shares $ 967 $ 549 $ 333
============ ============ ============
Fully diluted earnings per share $ 5.96 $ 3.33 $ 2.02
============ ============ ============
</TABLE>
(1) Share and per share amounts for Fiscal 1995 and Fiscal 1994 have been
retroactively adjusted to give effect for a two-for-one common stock
split, effected in the form of a 100% stock dividend, which became effective
on January 26, 1996.
<PAGE> 1
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED JANUARY 31,
NOVEMBER 30, NOVEMBER 30, --------------------------------------
1996 1995 1995 1994 1993
----------------- ------------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
Earnings:
Income before income taxes $1,572 $ 883 $ 594 $1,200 $ 793
Add: Fixed charges, net 7,407 5,538 5,916 5,055 4,397
------ ------ ------ ------ ------
Income before income taxes and
fixed charges, net $8,979 $6,421 $6,510 $6,255 $5,190
====== ====== ====== ====== ======
Fixed charges:
Total interest expense (1) $7,368 $5,512 $5,899 $5,020 $4,362
Interest factor in rents (2) 38 37 41 35 35
------ ------ ------ ------ ------
Total fixed charges $7,406 $5,549 $5,940 $5,055 $4,397
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 1.2 1.2 1.1 1.2 1.2
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Earnings:
Income before income taxes $1,572 $ 883 $ 594 $1,200 $ 793
Add: Fixed charges, net 7,407 5,538 5,916 5,055 4,397
------ ------ ------ ------ ------
Income before income taxes and
fixed charges, net $8,979 $6,421 $6,510 $6,255 $5,190
====== ====== ====== ====== ======
Fixed charges:
Total interest expense (1) $7,368 $5,512 $5,899 $5,020 $4,362
Interest factor in rents (2) 38 37 41 35 35
Preferred stock dividends (3) 101 80 97 85 82
------ ------ ------ ------ ------
Total fixed charges and preferred
stock dividends $7,507 $5,629 $6,037 $5,140 $4,479
====== ====== ====== ====== ======
Ratio of earnings to fixed charges and
preferred stock dividends 1.2 1.1 1.1 1.2 1.2
</TABLE>
(1) Total interest expense for the period ended November 30, 1995 and the
fiscal year ended January 31, 1995 includes capitalized interest.
(2) Interest factor in rents represents one-third of rent expense, which is
considered representative of the interest factor.
(3) The preferred stock dividend amounts represent pre-tax earnings required
to cover dividends on preferred stock.
<PAGE> 1
Exhibit 13.1
14 Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Fiscal 1996
------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
(Dollars in Millions, Feb. 29, May 31, Aug. 31, Nov. 30,
Except Share Data) 1996 1996 1996 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Investment banking $ 399 $ 542 $ 431 $ 572
Principal transactions:
Trading 704 565 427 514
Investments (7) 38 29 26
Commissions 154 159 148 152
Interest and dividends 1,933 1,946 2,144 1,678
Asset management
and administration 122 143 137 180
Other 3 _ _ 5
------------------------------------------------------------------------
Total revenues 3,308 3,393 3,316 3,127
Interest expense 1,859 1,865 2,029 1,615
------------------------------------------------------------------------
Net revenues 1,449 1,528 1,287 1,512
------------------------------------------------------------------------
Expenses excluding interest:
Compensation and benefits 705 750 645 763
Occupancy and equipment 86 86 89 101
Brokerage, clearing and
exchange fees 66 68 65 75
Communications 33 34 38 41
Business development 37 42 37 54
Professional services 42 53 58 73
Other 40 39 40 44
------------------------------------------------------------------------
Total expenses
excluding interest 1,009 1,072 972 1,151
------------------------------------------------------------------------
Income before income
taxes 440 456 315 361
Provision for income taxes 167 155 96 125
------------------------------------------------------------------------
Net income $ 273 $ 301 $ 219 $ 236
------------------------------------------------------------------------
Earnings applicable to
common shares(2) $ 257 $ 284 $ 204 $ 218
------------------------------------------------------------------------
Per common share(3):
Primary earnings(4) $ 1.64 $ 1.83 $ 1.32 $ 1.43
Fully diluted earnings(4) $ 1.57 $ 1.75 $ 1.27 $ 1.36
Cash dividends $ 0.175 $ 0.175 $ 0.175 $ 0.175
Book value $ 28.34 $ 29.73 $ 30.78 $ 35.03
Average common and
equivalent shares(2)(3) 156,549,243 155,143,633 154,034,233 153,234,429
Stock price range(3)(5) $39 1/8-52 1/2 $ 46-53 1/2 $42 1/8-54 1/4 $47 1/4-60 1/4
------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Fiscal 1995(1)
------------------------------------------------------------------------------------------
Month Quarter Quarter Quarter
Ended Ended Ended Ended
(Dollars in Millions, Feb. 28, May 31, Aug. 31, Nov. 30,
Except Share Data) 1995 1995 1995 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Investment banking $ 80 $ 273 $ 355 $ 503
Principal transactions:
Trading 114 438 352 218
Investments - (6) 69 39
Commissions 37 131 130 139
Interest and dividends 588 1,742 1,899 1,710
Asset management
and administration 31 88 96 95
Other 1 1 1 _
-----------------------------------------------------------------------------------------
Total revenues 851 2,667 2,902 2,704
Interest expense 558 1,656 1,751 1,536
-----------------------------------------------------------------------------------------
Net revenues 293 1,011 1,151 1,168
-----------------------------------------------------------------------------------------
Expenses excluding interest:
Compensation and benefits 138 475 575 607
Occupancy and equipment 27 80 84 85
Brokerage, clearing and
exchange fees 20 66 64 61
Communications 11 34 31 32
Business development 14 34 30 32
Professional services 14 40 37 40
Other 11 31 32 35
-----------------------------------------------------------------------------------------
Total expenses
excluding interest 235 760 853 892
-----------------------------------------------------------------------------------------
Income before income
taxes 58 251 298 276
Provision for income taxes 20 85 89 89
-----------------------------------------------------------------------------------------
Net income $ 38 $ 166 $ 209 $ 187
-----------------------------------------------------------------------------------------
Earnings applicable to
common shares(2) $ 33 $ 150 $ 192 $ 171
-----------------------------------------------------------------------------------------
Per common share(3):
Primary earnings(4) $ 0.22 $ 0.95 $ 1.23 $ 1.08
Fully diluted earnings(4) $ 0.21 $ 0.91 $ 1.17 $ 1.04
Cash dividends $ - $ 0.16 $ 0.16 $ 0.16
Book value $ 24.13 $ 25.19 $ 26.34 $ 28.18
Average common and
equivalent shares(2)(3) 154,037,668 157,595,614 157,236,918 158,415,826
Stock price range(3)(5) $30 7/16-33 11/16 $33 1/16-39 13/16 $37 15/16-43 7/16 $41 7/8-49 3/4
-------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1995's quarterly periods reflect the change in the Company's fiscal
year-end (see Note 1). Since fiscal 1995 consists of the 10-month period
from February 1, 1995 to November 30, 1995, the first quarter consists
only of the results for the month ended February 28, 1995.
(2) Amounts shown are used to calculate primary earnings per share.
(3) Fiscal 1995 amounts have been retroactively adjusted to give effect for a
two-for-one stock split, effected in the form of a 100% stock dividend,
which became effective on January 26, 1996.
(4) Summation of the quarters' earnings per common share does not equal the
annual amounts due to the averaging effect of the number of shares and
share equivalents throughout the year.
(5) Prices represent the range of sales per share on the New York Stock
Exchange for the periods indicated. The number of stockholders
of record at November 30, 1996 approximated 1,490. The number of
beneficial owners of common stock is believed to exceed this number.
88
<PAGE> 1
Exhibit 13.2
Selected Financial Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL
PERIOD ENDED
FISCAL DECEMBER 30, FISCAL FISCAL FISCAL FISCAL
YEAR ENDED 1995 PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
(DOLLARS IN MILLIONS, NOVEMBER 30, ANNUALIZED NOVEMBER 30, JANUARY 31, JANUARY 31, JANUARY 31,
EXCEPT SHARE AND EMPLOYEE DATA) 1996 (UNAUDITED) 1995 1995 1994 1993
----------- ------------ ------------ ----------- ----------- -----------
(12 months) (10 months)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Revenues:
Investment banking $ 1,944 $ 1,453 $ 1,211 $ 919 $ 1,238 $ 965
Principal transactions:
Trading 2,210 1,346 1,122 1,104 1,459 953
Investments 86 122 102 139 158 128
Commissions 613 525 437 449 393 312
Interest and dividends 7,701 7,127 5,939 6,406 5,660 4,814
Asset management
and administration 582 372 310 350 258 200
Other 8 4 3 9 10 10
----------- ----------- ----------- ----------- ----------- -----------
Total revenues 13,144 10,949 9,124 9,376 9,176 7,382
Interest expense 7,368 6,601 5,501 5,875 5,020 4,362
----------- ----------- ----------- ----------- ----------- -----------
Net revenues 5,776 4,348 3,623 3,501 4,156 3,020
----------- ----------- ----------- ----------- ----------- -----------
Expenses excluding interest:
Compensation and benefits 2,863 2,154 1,795 1,733 2,049 1,457
Other 1,341 1,134 945 1,115 907 770
Relocation charge -- -- -- 59 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total expenses
excluding interest 4,204 3,288 2,740 2,907 2,956 2,227
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes 1,572 1,060 883 594 1,200 793
Provision for income taxes 543 340 283 199 414 283
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 1,029 $ 720 $ 600 $ 395 $ 786 $ 510
=========== =========== =========== =========== =========== ===========
Earnings applicable to
common shares(1) $ 963 $ 655 $ 546 $ 330 $ 731 $ 461
=========== =========== =========== =========== =========== ===========
BALANCE SHEET:
Total assets $ 196,446 $ 143,753 $ 143,753 $ 116,694 $ 97,242 $ 80,353
Total capital(2) $ 18,917 $ 14,345 $ 14,345 $ 12,057 $ 9,813 $ 6,570
Stockholders' equity $ 6,538 $ 5,174 $ 5,174 $ 4,555 $ 4,469 $ 3,434
Long-term borrowings(2) $ 12,379 $ 9,171 $ 9,171 $ 7,502 $ 5,344 $ 3,136
Average common and
equivalent shares(1)(3) 153,514,483 156,912,678 156,912,678 157,793,216 152,416,576 156,247,600
PER COMMON SHARE:(3)
Primary earnings $ 6.27 $ 4.18 $ 3.48 $ 2.09 $ 4.80 $ 2.95
Fully diluted earnings $ 5.96 $ 4.00 $ 3.33 $ 2.02 $ 4.58 $ 2.86
Cash dividends $ 0.70 $ 0.64(4) $ 0.48 $ 0.60 $ 0.54 $ 0.478
Book value $ 35.03 $ 28.18 $ 28.18 $ 24.89 $ 23.07 $ 18.36
OTHER DATA:
Return on average common equity 20.9% 16.2% 16.2%(5) 8.8% 23.7% 17.6%
Income tax rate 34.5% 32.0% 32.0% 33.5% 34.5% 35.7%
Pretax margin 27.2% 24.4% 24.4% 17.0% 28.9% 26.3%
Number of employees 11,613 9,238 9,238 9,685 8,273 7,421
CHANGE FROM PRIOR YEAR:
Net revenues 32.8% 24.2% 3.5% (15.8%) 37.6% 5.6%
Net income 42.9% 82.3% 51.9% (49.7%) 54.1% 7.4%
Common stockholders' equity 21.3% 15.9% 15.9% 2.1% 28.3% 22.3%
=========== =========== =========== =========== =========== ===========
</TABLE>
- ---------------------
(1) Amounts shown are used to calculate primary earnings per share.
(2) These amounts exclude the current portion of long-term borrowings and
include Capital Units.
(3) All share and per share amounts for fiscal 1992 through fiscal 1995
have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend,
which became effective on January 26, 1996.
(4) Quarterly dividend is annualized.
(5) Return on average common equity for fiscal period ended November 30,
1995 has been annualized.
Fiscal 1995 was a 10-month period resulting from the change in Morgan Stanley's
fiscal year-end from January 31 to November 30. The information presented for
"Fiscal Period Ended November 30, 1995 Annualized" is intended to facilitate
more meaningful comparisons with the full-year operating results of fiscal 1996
and prior years.
<PAGE> 1
Exhibit 13.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS*
RESULTS OF OPERATIONS
The Company's business, particularly its involvement in primary and secondary
markets for all types of financial products, including derivatives, is subject
to substantial positive and negative fluctuations due to a variety of factors
that cannot be predicted with great certainty, including variations in the fair
value of securities and other financial products and the volatility and
liquidity of trading markets. Fluctuations also occur due to the level of market
activity and the size, number and timing of transactions or assignments
(including realization of returns from the Company's principal and merchant
banking investments). As a result, net income and revenues in any particular
period may not be representative of full-year results and may vary significantly
from year to year and from quarter to quarter. In addition, results of
operations in the past have been and in the future may continue to be materially
affected by many factors of a national and international nature, including
economic and market conditions; the availability of capital; the level and
volatility of interest rates; currency values and other market indices; the
availability of credit; inflation; and legislative and regulatory developments.
Such factors may also have an impact on the Company's ability to achieve its
strategic objectives, including (without limitation) profitable global
expansion.
The Company's results of operations also may be materially affected by
competitive factors. In addition to competition from firms traditionally engaged
in the securities business, there has been increased competition from other
sources, such as commercial banks, insurance companies and other companies
offering financial services. As a result of recent or pending legislative and
regulatory initiatives in the U.S. to remove or relieve certain restrictions on
commercial banks, competition in some markets which have traditionally been
dominated by investment banks has increased and may continue to increase in the
near future. Such competition, among other things, affects the Company's ability
to attract and retain highly skilled individuals. In addition, the two
complementary trends in the financial services industry of consolidation and
globalization present, among other things, technological, risk management and
other infrastructure challenges that will require effective resource allocation
in order for the Company to remain competitive.
The favorable market and economic conditions which characterized fiscal
1995 continued throughout fiscal 1996, contributing to higher industry-wide
revenues and to record levels of earnings and net revenues for the Company. The
Company's performance in fiscal 1996 reflected the balanced mix of its global
businesses coupled with these favorable market conditions. All three of the
Company's core businesses -- investment banking, sales and trading, and asset
management -- generated record earnings.
Throughout the year, the U.S. economy deviated little from its course of
moderate growth with low inflation. Bond markets, however, were unsettled as the
U.S. economy alternately slowed and accelerated, albeit within a relatively
narrow range, leaving the markets off balance and making forecasts related to
inflation more difficult. After faltering briefly in July due to concerns of
higher inflation and interest rates, the equity markets, in particular,
rebounded to record levels amid renewed signs of moderate economic growth, which
have kept the Federal Reserve from altering interest rates since January 1996.
In addition, U.S. equity markets were positively impacted by record levels of
cash inflows into mutual funds, which facilitated increased demand for new
issues and propelled numerous domestic stock indices to record levels. The
potential for higher rates of return in the U.S. as compared with other
countries also contributed to higher inflows of funds from foreign investors
into the U.S. markets.
In European markets, the first half of fiscal 1996 experienced less robust
market conditions as compared with the U.S., as economic performance remained
relatively stable in many European countries. In general, European markets
became more buoyant in the latter half of the fiscal year, partly driven by a
stronger than expected performance in the U.K. economy and lower interest rates
in Germany. Japanese markets were
- --------------------------------------------------------------------------------
* Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements, as well as a discussion of some of the
risks and uncertainties involved in the Company's business that could affect the
matters referred to in such statements.
30 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 2
relatively weak throughout the year, reflecting a lackluster economic outlook,
as well as concerns regarding the nation's banking industry, particularly its
vulnerability to non-performing real estate loans. Markets in Southeast Asia
generally experienced slower economic growth with the exception of Hong Kong,
which had a year of solid growth in anticipation of the impending change in its
sovereignty.
The worldwide market for mergers and acquisitions continued to be strong
during fiscal 1996, resulting in overall improved investment banking conditions.
The need for economies of scale, location, financial capacity and the ability to
compete globally contributed to an aggressive acquisition marketplace which was
further stimulated by relatively low interest rates and the high level of stock
prices.
The Company's record levels of revenues and earnings are in part
reflective of the robust financial markets that characterized fiscal 1996;
however, the Company recognizes the cyclical nature of many aspects of the
global financial services industry. As a result, the Company intends to manage
its business for the long term and help mitigate the potential effects of market
downturns by strengthening its competitive position in the global financial
services industry through diversification of its revenue sources and enhancement
of its global franchise. Maintaining high levels of profitable business activity
and effectively allocating resources, monitoring costs and managing risks will
continue to affect the overall financial results of the Company.
In an effort to create the platform to support the Company's long-term
strategic goal of expanding recurring fee-based revenues, on January 3, 1996 the
Company acquired Miller Anderson & Sherrerd, LLP ("MAS"), a premier
Philadelphia-based institutional asset management firm, and on October 31, 1996
completed its acquisition of VK/AC Holding, Inc., the parent of Van Kampen
American Capital, Inc. ("VKAC"), the country's fourth largest non-proprietary
mutual fund provider with approximately $61 billion in assets under management
or supervision at fiscal year-end. The MAS and VKAC acquisitions combine the
well-developed distribution and customer servicing strengths of VKAC with the
well-regarded investment performance record of Morgan Stanley Asset Management
and MAS. In addition, the Company agreed to purchase Barclays PLC's
institutional global custody business, which will also strengthen the Company's
global franchise, particularly in Europe, and increase fee-based revenues.
For a description of the Company's business, including its trading in cash
instruments and derivative products, its merchant banking and other principal
investment activities, and its high-yield underwriting and trading policies, and
their respective risks, see Part I, Item I, of the Company's Annual Report on
Form 10-K for the fiscal year ended November 30, 1996 ("Form 10-K").
SUBSEQUENT EVENTS
The Company believes that the financial services industry is entering an era of
unprecedented convergence and consolidation. Those firms that want to control
their own destinies in the next century must have leading market positions in
all of their businesses, balanced sources of earnings, broad-based customer
access, and a global presence among both providers and users of capital.
On February 5, 1997, the Company and Dean Witter, Discover & Co. ("DWD")
announced a definitive agreement to merge. The combined company would be a
pre-eminent global financial services firm with a market capitalization of
approximately $21 billion (as of the time of the merger announcement) and with
leading market positions in the securities, asset management and credit services
businesses. The new Company will be named Morgan Stanley, Dean Witter, Discover
& Co.
The Company and DWD have complementary origination and distribution skills
and institutional and retail capabilities. The merger would combine the
Company's strengths in investment banking and institutional sales and trading
with DWD's strengths in retail distribution, asset gathering and credit
services. DWD has the third largest retail brokerage operation with over 9,000
account executives and 361 branches throughout the U.S. and manages more than
$100 billion in customer assets. Led by the Discover(R) Card, DWD is the
nation's largest credit card issuer with 39 million accounts, and is the third
largest in credit card receivables. In asset management, the combination would
1996 MORGAN STANLEY ANNUAL REPORT 31
<PAGE> 3
SUBSEQUENT EVENTS
(CONTINUED)
result in a business that manages more than $270 billion of assets on a pro
forma basis. The Company believes that the merger would be consistent with its
long-term strategic goals-particularly, to broaden the Company's client and
customer base, expand the fee-based portions of the Company's business and
become the pre-eminent global financial services organization.
Under the terms of the merger agreement unanimously approved by the Boards
of both companies, each of the Company's common shares will be exchanged for
1.65 DWD common shares. 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.
Pursuant to the pooling of interests method of accounting, prior to the time of
closing each company will formally rescind any stock repurchase authorizations
existing at that time. Prior to such rescissions, both companies may continue to
repurchase stock in the open market subject to the aggregate limitations imposed
by the pooling of interests method. For a discussion of certain selected pro
forma financial data giving effect to the merger, see Note 13 to the
Consolidated Financial Statements.
In connection with the merger announcement, with respect to the Company's
long-term debt ratings, Moody's Investors Service ("Moody's") placed the
Company's rating (A1) on review for possible upgrade, and Standard & Poor's
("S&P") affirmed the Company's rating (A+). With respect to the Company's
short-term debt ratings, Moody's affirmed its rating (P1), and S&P placed the
Company's rating (A1+) on CreditWatch with negative implications. The overall
effect of these ratings announcements is not expected to have a material impact
on the Company's cost of financing or business activities. See also "Liquidity
and Capital Resources -- Funding and Capital Policies" herein.
FISCAL 1996 COMPARED WITH FISCAL 1995
In February 1995, the Board of Directors approved a change in the
Company's fiscal year-end from January 31 to November 30, effective for the
fiscal period ended November 30, 1995. The discussion which follows compares the
results of operations for fiscal 1996 (the 12-month period from December 1, 1995
to November 30, 1996) with those for fiscal 1995 (the 10-month period from
February 1, 1995 to November 30, 1995). Since fiscal 1995 consists of a 10-month
reporting period, results of operations for that period are not directly
comparable with the financial results of fiscal 1996 and fiscal 1994.
<TABLE>
<CAPTION>
REVENUES AND EARNINGS
- ------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995
(12 MONTHS (10 MONTHS
ENDED ENDED
NOV. 30, 1996) NOV. 30, 1995)
-------------- --------------
<S> <C> <C>
Total revenues $13,144 $9,124
Net revenues (total revenues less interest expense) $ 5,776 $3,623
Total expenses excluding interest $ 4,204 $2,740
Income before taxes $ 1,572 $ 883
Net income $ 1,029 $ 600
------- ------
</TABLE>
The Company's fiscal 1996 record levels of revenues and earnings reflect a
strong global market for mergers and acquisitions, as well as improved sales and
trading results primarily driven by favorable economic conditions and increased
customer trading volume. These results were partially offset by increased costs
for incentive-based compensation, as well as increased non-compensation expenses
associated with the Company's higher level of global business activities. The
Company's return on equity for fiscal 1996 was 20.9% as compared with 16.2% (on
an annualized basis) for fiscal 1995.
32 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 4
<TABLE>
<CAPTION>
INVESTMENT BANKING REVENUES
- -------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995
(12 MONTHS (10 MONTHS
ENDED ENDED
NOV. 30, 1996) NOV. 30, 1995)
-------------- --------------
<S> <C> <C>
Debt underwriting revenues $ 545 $ 364
Equity underwriting revenues 623 371
Advisory fees from merger, acquisition
and restructuring transactions 776 476
------ -------
Total investment banking revenues $1,944 $ 1,211
------ -------
</TABLE>
Investment banking revenues attained record levels due to significantly
increased revenues from merger, acquisition and restructuring transactions, as
well as increased levels of equity and debt underwriting activities. The
worldwide merger and acquisition markets remained robust for the second
consecutive year with more than $1 trillion of transactions (per Securities Data
Company) announced during the year, including record volume in the U.S. The
improved advisory revenues were attributable to this increased transaction
volume and historically high stock prices, as well as the Company's strong
global presence and broad client base in industries such as health care, banking
and other financial services, telecommunications, media and entertainment, and
utilities. Advisory revenues also were positively affected by strategic advisory
services provided to clients in some of the year's largest transactions.
Equity underwriting revenues increased, resulting from a strong primary
calendar as new issuances were readily absorbed by the increased flows of money
into the equity markets. Additionally, reduced concerns regarding inflation and
lower interest rates positively affected the demand for new equity issuances.
Revenues from debt financing activity were positively affected by a
relatively stable interest rate environment as the Federal Reserve Board
maintained interest rates at a constant level subsequent to a modest decrease in
the Federal Funds rate in January 1996. Debt underwriting revenues increased,
reflecting in part a continued demand for corporate new issues as interest rates
remained relatively low, an increased level of high-yield issuance activity and
increased revenues from securitized debt transactions. Debt underwriting
generated primary revenues from fixed income derivative products of $118 million
as compared with $101 million in fiscal 1995, resulting from a continuation in
derivatives-related financing activity by corporations and sovereign
governments, coupled with increased investor demand for structured and
repackaged instruments.
<TABLE>
<CAPTION>
SECONDARY REVENUES
- ------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995
(12 MONTHS (10 MONTHS
ENDED ENDED
NOV. 30, 1996) NOV. 30, 1995)
-------------- --------------
<S> <C> <C>
Principal trading revenues:
Equities $ 978 $ 409
Fixed income 926 489
Foreign exchange 169 156
Commodities 137 68
------- ------
Total principal trading revenues 2,210 1,122
Commissions revenues 603 419
Net interest revenues 69 396
------- ------
Total secondary revenues $ 2,882 $1,937
------- ------
</TABLE>
Secondary revenues (combined principal trading and trading-related commissions
and net interest revenues) increased significantly, reflecting improved revenues
from trading in equity, fixed income and commodity products.
1996 MORGAN STANLEY ANNUAL REPORT 33
<PAGE> 5
FISCAL 1996 COMPARED WITH FISCAL 1995
(CONTINUED)
For a discussion of the Company's derivative trading activities, see "Derivative
Financial Instruments" herein.
Equity trading revenues reached record levels in fiscal 1996, reflecting
increased customer trading activity, particularly in the U.S., as the continuing
strong market was driven by low inflation, a moderately growing economy and
relatively low interest rates. Equity cash products were positively affected as
individual investors infused money into mutual funds at a record level. Revenues
from equity derivative products increased as the Company expanded its
proprietary trading activities to capitalize on increased levels of volatility,
particularly in the U.S. options and futures markets.
Fixed income trading revenues increased, primarily due to higher revenues
from emerging market, high-yield, swaps and securitized debt trading. High-yield
trading revenues benefited from increased volumes as positive corporate earnings
increased investor demand for high-yield issues. Emerging market revenues
increased, in part, due to higher levels of volatility in Russian securities, as
well as the strengthening of Latin American markets, specifically in developing
countries such as Mexico, Argentina and Brazil. Swaps trading revenue increased
significantly, benefiting from an increased customer base, significant increases
in volume, and a favorable interest rate environment. Securitized debt trading
revenues increased substantially as the Company increased its focus on this
market segment by expanding its level of activity in securitized debt products.
Revenues from trading in mortgage-backed securities and commercial whole loans
contributed significantly to the overall revenue increases as securitizations
increased and innovative structures were created.
Revenues from foreign exchange trading were affected by decreased
volatility, driven by the narrowing of inflation rates around the world and the
approaching European monetary union.
Commodities trading revenues reached record levels in fiscal 1996,
benefiting from volatile markets that have been buoyed by low inventories,
robust demand and the industry's expectation for much of fiscal 1996 that Iraq
would re-enter the world crude oil market. Revenues from energy-related products
increased significantly due to increased volatility as the prices of natural
gas, crude oil, and heating oil increased to their highest levels since the
early 1990s. In addition, higher revenues were attained from commodity-related
products, including derivatives, as the customer base for these products and the
use of such products for risk management purposes expanded.
Commission revenues increased, primarily reflecting increased market
participation by investors resulting from favorable market conditions and a
strong primary calendar, particularly in the U.S. In addition, commission
revenues improved as institutional investors purchased more foreign and emerging
market issuances.
Interest and dividend revenues and expense are a function of the level and
mix of total assets, including financial instruments owned and resale and
repurchase agreements, and the prevailing level, term structure and volatility
of interest rates. Net interest revenues decreased in fiscal 1996, partly
attributable to changes in the mix of the Company's fixed income inventory,
coupled with the general trend in interest rates. In addition, the decline in
net interest revenues reflected increased financing costs associated with higher
average levels of balance sheet usage, particularly in equity-related
businesses. Interest and dividend revenues and expense should be viewed in the
broader context of principal trading results. Decisions relating to principal
transactions in securities are based on an overall review of aggregate revenues
and costs associated with each transaction or series of transactions. This
review includes an assessment of the potential gain or loss associated with a
trade, the interest income or expense associated with financing or hedging the
Company's positions, and potential underwriting, commission or other revenues
associated with related primary or secondary market sales.
34 MORGAN STANLEY ANNUAL REPORT
<PAGE> 6
Principal transaction investment revenues aggregating $86 million were
recognized in fiscal 1996 as compared with $102 million in fiscal 1995. The
lower level of revenues in fiscal 1996 reflects decreases in the carrying value
of certain of the Company's merchant banking investments, partially offset by
higher revenues associated with the Company's other principal investments,
including real estate investments.
<TABLE>
<CAPTION>
ASSET MANAGEMENT AND ADMINISTRATION
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995
(12 MONTHS (10 MONTHS
ENDED ENDED
NOV. 30, 1996) NOV. 30, 1995)
-------------- --------------
<S> <C> <C>
Asset management and administration revenues $ 582 $ 310
----- -----
(DOLLARS IN BILLIONS)
Customer assets under management or supervision (at fiscal year-ends) $ 171 $ 55
----- -----
Customer assets under administration (at fiscal year-ends) $ 144 $ 111
----- -----
</TABLE>
Asset management and administration revenues, which include fees for asset
management and non-interest revenues earned from correspondent clearing and
custody services, increased and reflected growth in both asset management
activities and global clearing and custody services resulting from the Company's
continuing strategic emphasis on these businesses. Customer assets under
management or supervision increased significantly, reflecting the addition of
$40 billion of assets from MAS and $61 billion of assets from VKAC during the
year, appreciation in the value of customer portfolios, particularly in equity
funds, as well as continued growth in international and emerging market funds.
As of November 30, 1996, the Company was the sponsor of 123 open-end proprietary
mutual funds, 51 proprietary closed-end funds and over 3,000 unit investment
trusts. At November 30, 1996, the Company's $171 billion of assets under
management or supervision included approximately $36 billion related to
international products, and was composed of approximately $52 billion of
open-end mutual funds, $16 billion of closed-end funds, $12 billion of unit
investment trusts, $17 billion of fiduciary accounts and $74 billion of separate
accounts, pooled vehicles and other arrangements.
Customer assets under administration also increased, reflecting additional
assets placed under custody with the Company, as well as appreciation in the
value of customer portfolios.
Subsequent to November 30, 1996, the Company announced that it had reached
an agreement with Barclays PLC ("Barclays") to acquire its institutional global
custody business for consideration to be fixed over a period of time. The
transaction involves approximately $250 billion of assets currently administered
by Barclays, and the combination of Barclays with the Company's global custody
business would have increased the Company's assets under administration at
November 30, 1996 to approximately $394 billion on a pro forma basis (assuming
that current clients of Barclays agree to become clients of the Company).
Barclays has agreed to provide global subcustodial services to the Company for
a period of time after completion of the acquisition. The acquisition is
expected to be completed during the second quarter of fiscal 1997.
1996 MORGAN STANLEY ANNUAL REPORT 35
<PAGE> 7
FISCAL 1996 COMPARED WITH FISCAL 1995
(CONTINUED)
<TABLE>
<CAPTION>
EXPENSES EXCLUDING INTEREST
- -----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995
(12 MONTHS (10 MONTHS
ENDED ENDED FISCAL 1995
NOV. 30, 1996) NOV. 30, 1995) ANNUALIZED
-------------- -------------- -----------
<S> <C> <C> <C>
Compensation and benefits $ 2,863 $1,795 $ 2,154
Occupancy and equipment 362 276 331
Brokerage, clearing and
exchange fees 274 211 253
Communications 146 108 130
Business development 170 110 132
Professional services 226 131 157
Other 163 109 131
------- ------ -------
Total expenses excluding interest $ 4,204 $2,740 $ 3,288
------- ------ -------
</TABLE>
Fiscal 1996's total non-interest expenses increased significantly from
prior-period levels, partially due to the Company's change in fiscal year-end,
which resulted in a 10-month fiscal period for fiscal 1995. In order to
facilitate a more meaningful comparison with fiscal 1996, the non-interest
expenses of fiscal 1995 are discussed below on an annualized basis. Total
non-interest expenses increased $916 million over annualized fiscal 1995
expenses. Within that category, employee compensation and benefits expense
increased $709 million, reflecting increased levels of incentive compensation
based on record fiscal 1996 revenues and earnings, as well as the impact of
salaries and benefits relating to additional personnel hired during the year or
joining the Company as a result of the MAS and VKAC acquisitions. Other
non-interest expenses increased $207 million over annualized fiscal 1995
expenses, which included $48 million of operating costs related to MAS and VKAC.
Occupancy and equipment expenses increased $31 million over annualized fiscal
1995 expenses, principally reflecting costs associated with the Company's New
York relocation, new leased office space in Tokyo, and the occupancy costs of
MAS and VKAC. Brokerage, clearing and exchange fees increased $21 million over
annualized fiscal 1995 expenses, reflecting increased trade volumes, both
domestically and in Europe, and the continued growth in the international
component of the Company's sales and trading activities. Business development
and professional services expenses increased $107 million over annualized fiscal
1995 expenses, reflecting significantly higher travel and entertainment,
consulting and advertising costs as a result of the increased level of the
Company's global business activities. Other expenses increased $32 million over
annualized fiscal 1995 expenses, which primarily reflects the amortization of
goodwill related to the acquisitions of MAS and VKAC.
As discussed above, a portion of the increase in fiscal 1996
non-compensation expenses is due to the significantly higher overall level of
business activity as compared with fiscal 1995. Although fiscal 1996's
non-compensation expenses increased significantly, these expenses (excluding
occupancy and equipment costs) as a percentage of the Company's net revenues
were consistent with historical levels of approximately 18%. The Company
continuously monitors these expenses in order to control the level of
discretionary spending.
36 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 8
FISCAL 1995 COMPARED WITH FISCAL 1994
The Company's fiscal 1995 revenues and earnings reflected a strong global market
for mergers and acquisitions, improved sales and trading results primarily
driven by increased customer trading volume, and a reduction in business
development and professional services expenses resulting from the Company's
cost-control initiatives. These results were partially offset by increased costs
for incentive-based compensation and occupancy and equipment expenses related to
the Company's relocation to its New York headquarters at 1585 Broadway.
Since fiscal 1995 consists of a 10-month reporting period, results of
operations for this period are not directly comparable with the financial
results of prior fiscal years. Amounts for fiscal 1994 are given in parentheses.
Revenues net of interest expense (net revenues) increased to $3,623
million ($3,501 million), and net income totaled $600 million ($395 million),
reflecting improved conditions in the global securities industry as rising stock
prices and falling interest rates continued throughout most of 1995.
Investment banking revenues increased to $1,211 million ($919 million) due
to significantly higher levels of merger and acquisition revenues and increased
debt and equity underwriting revenues, reflecting a higher level of debt and
equity financing activity as well as a stronger market share resulting from
strategic investments made in personnel during 1994 to strengthen client service
capabilities.
Financial advisory fees from merger, acquisition and restructuring
transactions, areas in which the Company maintains a strong global franchise,
increased to $476 million ($379 million), benefiting from an active worldwide
market. The increase in advisory revenues was due in part to the broad range of
strategic advisory services provided to clients in many of the year's most
active industry sectors, including banking and other financial services, media,
telecommunications, health care and technology.
Equity underwriting revenues were $371 million ($364 million). Equity
financing activity was positively affected by favorable market conditions in
both the U.S. and Europe, which included continued strong demand for initial
public offerings, increased corporate restructurings, diminished concerns about
inflation and lower interest rates. The Company increased its market share for
worldwide equity underwriting and lead-managed a number of innovative and
notable transactions.
Debt underwriting revenues increased to $364 million ($176 million),
reflecting favorable market conditions and a more stable interest rate
environment as the Federal Reserve Board held short-term interest rates constant
in the first half of the year and subsequently reduced short-term interest rates
in July as economic growth and inflation remained stable. Debt underwriting
generated primary revenues from fixed income derivative products of $101 million
as compared with $61 million in fiscal 1994, resulting from increased financing
activity by corporations and sovereign governments, coupled with increased
investor demand for structured investments.
Secondary revenues (combined principal trading and trading-related
commissions and net interest revenues), including derivatives, increased to
$1,937 million ($1,886 million). Principal transaction revenues from trading
activities increased to $1,122 million ($1,104 million), primarily reflecting
improved revenues from trading in equity and fixed income products.
Equity trading revenues were $409 million ($510 million). These revenues
remained strong and reflected increased customer-driven activity as most major
global equity markets rallied, positively impacting revenues from virtually all
types of cash and derivative products. Options and futures benefited from
relatively higher volatilities and increased trading volumes.
Fixed income trading revenues increased to $489 million ($347 million),
benefiting from increased trading volumes as investors returned to the fixed
income markets after 1994's difficult trading environment.
1996 MORGAN STANLEY ANNUAL REPORT 37
<PAGE> 9
FISCAL 1995 COMPARED WITH FISCAL 1994
(CONTINUED)
The Company's global corporate, emerging market and high-yield activities
produced substantially higher revenue levels as conditions stabilized globally,
specifically in Mexico and the emerging markets.
Revenues from foreign exchange trading improved to $156 million ($148
million), primarily attributable to periods of increased volatility in the first
half of 1995, most notably in U.S. dollar/deutsche mark and U.S. dollar/yen, as
well as the subsequent strengthening of the U.S. dollar vs. the yen and the
deutsche mark during the latter half of 1995.
Revenues from commodities trading declined to $68 million ($99 million),
resulting from difficult market conditions in most energy-related products.
Commission revenues were $437 million ($449 million), primarily reflecting
higher levels of activity throughout the 10-month fiscal period as market
participation by investors increased. Additionally, increased primary equity
activity contributed toward higher volumes in secondary markets.
Net interest revenues were $438 million ($531 million). In fiscal 1995,
the continuing effect of a flat yield curve in the U.S. had a negative impact on
the Company's net interest and dividend revenues. As noted above in the
comparison of fiscal 1996 with fiscal 1995, interest and dividend revenues and
expense reflect principal trading strategies and should be viewed in the broader
context of principal trading and investment banking results.
Principal transaction investment revenues aggregating $102 million were
recognized in fiscal 1995 as compared with $139 million in fiscal 1994,
including revenues related to the increase in the carrying value of the
Company's merchant banking investment in Southern Pacific Rail Corporation and
several real estate investments.
Asset management and administration revenues of $310 million ($350
million) reflected growth in both asset management activities and global
clearing and custody services resulting from the Company's continuing strategic
emphasis on these businesses. Customer assets under management increased to $55
billion ($49 billion), reflecting appreciation in the value of customer
portfolios, particularly in equity funds, as well as continued growth in
international and emerging market funds. Customer assets under administration
increased to $111 billion ($90 billion), primarily reflecting additional assets
placed under custody with the Company, as well as appreciation in the value of
customer portfolios.
Fiscal 1995's total non-interest expenses decreased to $2,740 million
($2,907 million), primarily due to the Company's change in fiscal year-end,
resulting in a 10-month fiscal period. For a more meaningful comparison with
non-interest expense of prior fiscal years, fiscal 1995 non-interest expenses
are discussed below on an annualized basis. Total non-interest expenses
increased in fiscal 1995 on an annualized basis. Within that category, employee
compensation and benefits expenses increased, reflecting increased levels of
incentive compensation based on higher revenues and earnings, as well as the
annualized impact of salaries and benefits relating to additional personnel
hired during 1994. Excluding fiscal 1994's non-recurring relocation charge
discussed below, other non-interest expenses increased marginally on an
annualized basis. Occupancy and equipment expenses increased $28 million on an
annualized basis, principally reflecting costs associated with the Company's New
York relocation. Brokerage, clearing and exchange fees increased $23 million on
an annualized basis, reflecting increased trade volumes, both domestically and
in Europe, business mix changes and the continued growth in the international
component of the Company's sales and trading activities. These increases in
non-interest expenses on an annualized basis were substantially offset, however,
as business development and professional services expenses decreased $40 million
on an annualized basis, reflecting significantly lower recruiting and travel
costs directly related to the Company's cost-containment initiatives.
38 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 10
Fourth quarter fiscal 1994 expenses include a pre-tax relocation charge of
$59 million relating to the Company's decision to vacate much of its New York
City office space at 1251 Avenue of the Americas and to relocate staff formerly
occupying that space to a new headquarters building at 1585 Broadway. The charge
includes both the remaining post-move lease commitment (expiring in 1998) and
the write-off of the remaining net book value of improvements at the old site.
The relocation charge also includes similar charges relating to the Company's
move of its Tokyo office to newly leased space in 1996; the Tokyo-related
provision consists largely of the write-off of improvements and restoration
costs for the space being vacated. As of November 30, 1996, approximately $22
million of costs relating to the relocation charge have yet to be expended.
LIQUIDITY AND CAPITAL RESOURCES
THE BALANCE SHEET
The Company's total assets increased from $143.8 billion at November 30, 1995 to
$196.4 billion at November 30, 1996, primarily reflecting growth in financial
instruments owned, resale and repurchase agreements, and securities borrowed.
Due to the favorable operating conditions throughout fiscal 1996, the Company
operated with a larger balance sheet as compared with fiscal 1995, as well as
higher levels of balance sheet leverage. The growth is primarily attributable to
the Company's fixed income activities, most notably foreign sovereign government
obligations, corporate debt and reverse repurchase agreements used in both
financing activities and the Company's fixed income matched book activities. The
Company was positioned to capitalize on favorable conditions in the global fixed
income markets, particularly in the global high yield and sovereign debt
markets. Corporate equities inventory, including equity-related derivatives,
increased due to continued client demand for such securities, as well as from
larger proprietary trading positions held by the Company. Securities borrowed
also rose during 1996, reflecting an increase in collateralized lending to
facilitate higher levels of customer activity, as well as increases related to
the Company's proprietary trading activities. The increase in other assets was
primarily due to the goodwill associated with the acquisitions of MAS and VKAC
in fiscal 1996. A substantial portion of the Company's total assets consists of
highly liquid marketable securities and short-term receivables arising
principally from securities transactions. The highly liquid nature of these
assets provides the Company with flexibility in financing and managing its
business. Balance sheet leverage ratios often are reviewed by counterparties and
creditors in order to evaluate a securities firm's overall financial risk.
Details of ending assets, month-end average assets and leverage ratios for
fiscal 1996 and fiscal 1995 are as follows:
[PIE CHART]
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENTS OWNED
(As of November 30, 1996)
<S> <C>
Derivative contracts 15.9%
Corporate equities 17.8%
Corporate and other debt 22.6%
Physical commodities 0.5%
U.S. government and agency securities 15.7%
Other sovereign government obligations 27.5%
</TABLE>
1996 MORGAN STANLEY ANNUAL REPORT 39
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995
-------------------------- ---------------------------
ASSETS AT AVERAGE ASSETS AT AVERAGE
NOVEMBER 30, ASSETS FOR NOVEMBER 30, ASSETS FOR
1996 FISCAL 1996 1995 FISCAL 1995
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Cash, deposits and receivables $ 20,956 $ 15,809 $ 10,286 $ 12,690
Financial instruments owned 70,747 61,082 58,600 52,387
Securities purchased under
agreements to resell and
securities borrowed 100,137 92,959 72,955 66,539
Property, equipment and
leasehold improvements
and other assets 4,606 2,677 1,912 1,725
------------------------ -----------------------
Total assets $ 196,446 $ 172,527 $143,753 $ 133,341
======================== =======================
Leverage ratios:
Total assets/equity 30.1x 31.8x 27.8x 27.8x
Net assets(1)/equity 20.8x 21.1x 18.9x 18.6x
------------------------ -----------------------
</TABLE>
(1) Net assets represent total assets less the lower of securities purchased
under agreements to resell or securities sold under agreements to
repurchase.
FUNDING AND CAPITAL POLICIES
The Company's Finance and Risk Committee, which includes senior officers from
each of the major capital commitment areas, among other things, establishes the
overall funding and capital policies of the Company, reviews the Company's
performance relative to these policies, allocates capital among business
activities of the Company, monitors the availability of sources of financing,
reviews the foreign exchange risk of the Company, and oversees the liquidity and
interest rate sensitivity of the Company's asset and liability position. See
also "Risk Management" herein. The primary goal of the Company's funding and
liquidity activities is to ensure the stability of the Company's funding base
and provide adequate financing sources over a wide range of potential credit
ratings and market environments.
Many of the Company's businesses are capital-intensive. Capital is
required to finance, among other things, the Company's securities inventories,
underwriting, principal investments, merchant banking activities and investments
in fixed assets. As a policy, the Company attempts to maintain sufficient
capital and funding sources in order to have the capacity to finance itself on a
fully collateralized basis at all times, including periods of financial stress.
Currently, the Company believes that it has sufficient capital to meet its
needs. In addition, the Company attempts to maintain total equity, on a
consolidated basis, at least equal to the sum of all its subsidiaries' equity.
Subsidiary equity capital requirements are determined by regulatory requirements
(if applicable), asset mix, leverage considerations and earnings volatility.
The Company's purchases of MAS and VKAC during fiscal 1996 were financed
with a combination of cash, debt, and newly issued equity totaling approximately
$1,525 million. The Company financed the cash portion of these purchases with a
combination of internally generated equity capital and the proceeds of its debt
and preferred equity issuances during fiscal 1996. The Company was able to meet
the capital and financing requirements for these purchases while maintaining
sufficient capital and liquidity resources to provide continuing financial
flexibility for its ongoing business and operating needs.
40 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 12
The Company views return on equity to be an important measure of its
performance, in the context of both the particular business environment in which
the Company is operating as well as its peer group's results. In this regard,
the Company actively manages its consolidated capital position based upon, among
other things, business opportunities, capital availability and rates of return
together with internal capital policies, regulatory requirements and rating
agency guidelines and therefore may, in the future, expand or contract its
capital base to address the changing needs of its businesses. The Company has
also returned internally generated equity capital which is in excess of the
needs of its businesses through common stock repurchases and dividends.
The Company funds its balance sheet on a global basis. The Company's
funding needs are satisfied from capital, including equity and long-term debt;
medium-term notes; internally generated funds; repurchase agreements; U.S.,
Canadian, French and Euro commercial paper; letters of credit; unsecured bond
borrows; German Schuldschein loans; securities lending; buy/sell agreements;
municipal reinvestments; master notes; deposits; and committed and uncommitted
lines of credit. All repurchase transactions and a portion of the Company's bank
borrowings and securities lending are made on a collateralized basis.
The Company follows a funding strategy which is designed to ensure that
the tenor of the Company's liabilities equals or exceeds the expected holding
period of the assets being financed. Short-term funding generally is obtained at
rates related to U.S., Euro or Asian money market rates for the currency
borrowed. Repurchase transactions are effected at negotiated rates. Other
borrowing costs are negotiated depending upon prevailing market conditions (see
Note 2 to the Consolidated Financial Statements).
The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others from which it draws funds in a
variety of currencies. The volume of the Company's borrowings generally
fluctuates in response to changes in the amount of resale transactions
outstanding, the level of the Company's securities inventories and overall
market conditions. Availability and cost of financing to the Company can vary
depending upon market conditions, the volume of certain trading activities, the
Company's credit ratings and overall availability of credit to the securities
industry. Pursuant to its liquidity policy, the Company attempts to maintain
cash and unhypothecated marketable securities equal to at least 110% of its
outstanding short-term unsecured borrowings. In addition, the Company has in
place a contingency funding strategy which provides a comprehensive one-year
action plan in the event of a severe funding disruption; the plan is updated
annually.
The Company continually seeks to expand its global secured borrowing
capacity. In support of this strategy, Morgan Stanley & Co. Incorporated
("MS&Co."), the Company's U.S. broker-dealer subsidiary, maintains a master
collateral facility. This facility enables MS&Co. to pledge certain collateral
to secure loan arrangements, letters of credit and other financial
accommodations. Morgan Stanley & Co. International Limited ("MSIL"), the
Company's U.K. broker-dealer subsidiary, can secure committed funding from a
syndicate of banks by providing a broad range of collateral under repurchase
agreements.
The Company views long-term debt as a stable source of funding for core
inventories and illiquid assets and therefore maintains a long-term
debt-to-capitalization ratio of at least 60% based upon the current composition
of its balance sheet. In general, fixed assets are financed with fixed rate
long-term debt, and inventories and all current assets are financed with a
combination of short-term funding, floating rate long-term debt, or fixed rate
long-term debt swapped to a floating basis. The Company uses derivative products
(primarily interest rate and currency swaps) to assist in asset and liability
management and to reduce borrowing costs (see Note 3 to the Consolidated
Financial Statements).
1996 MORGAN STANLEY ANNUAL REPORT 41
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
The Company's reliance on external sources to finance a significant
portion of its day-to-day operations makes access to global sources of financing
important. The cost and availability of financing generally are dependent on the
Company's short-term and long-term debt ratings. In addition, the Company's debt
ratings can have a significant impact on certain trading revenues, particularly
in those businesses where longer term counterparty performance is critical, such
as over-the-counter derivative transactions. The Company's short-term and
long-term senior debt ratings as of January 31, 1997 are presented below. See
also "Subsequent Events" herein.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
SHORT-TERM LONG-TERM
AGENCY RATING RATING
----------- ---------
<S> <C> <C>
Moody's Investors Service P1 A1
Standard & Poor's A1+ A+
IBCA A1+ AA-
Thomson BankWatch TBW1 AA
Dominion Bond Rating Service(1) R1 (Middle) n/a
----------- ---------
</TABLE>
(1) Dominion Bond Rating Service rates the Company's Canadian commercial paper
program.
As the Company continues its global expansion and as revenues are increasingly
derived from various currencies, foreign currency management is a key element of
the Company's financial policies. The Company benefits from operating in a
number of different currencies because weakness in any particular currency often
is offset by strength in another currency. The Company closely monitors its
exposure to fluctuations in currencies and, where cost-justified, adopts
strategies to reduce the impact of these fluctuations on the Company's financial
performance. These strategies include engaging in various hedging activities to
manage income and cash flows denominated in foreign currencies and using foreign
currency borrowings, when appropriate, to finance investments outside the U.S.
FISCAL 1996 AND SUBSEQUENT ACTIVITY
During the fiscal year ended November 30, 1996, the Company took several steps
to extend the maturity of its liabilities, reduce its reliance on unsecured
short-term funding and increase its capital. These steps resulted in a net
increase in capital of $4,572 million to $18,917 million at November 30, 1996.
The additions to capital included net issuances of senior notes and subordinated
debt aggregating $4,688 million. As of November 30, 1996, the aggregate
outstanding principal amount of the Company's Senior Indebtedness (as defined in
the Company's public debt shelf registration statements) was approximately $29.4
billion. During the second quarter of fiscal 1996, the Company filed a shelf
registration statement for the issuance of up to $4,286 million of additional
debt securities, warrants to purchase debt securities, or preferred stock.
Subsequent to November 30, 1996, the Company filed a shelf registration
statement for the issuance of up to $6 billion of additional debt securities,
warrants, preferred stock or purchase contracts or any combination thereof in
the form of units.
Subsequent to November 30, 1996, the Company and Morgan Stanley Finance
plc, a U.K. subsidiary ("MS plc"), issued 8.03% Capital Units in an aggregate
amount of $134 million. Each Capital Unit consists of (a) a Subordinated
Debenture of MS plc guaranteed by the Company, and (b) a related Purchase
Contract issued by the Company requiring the holder to purchase one Depositary
Share representing shares (or fractional shares) of the Company's 8.03%
Cumulative Preferred Stock.
Between November 30, 1996 and January 31, 1997, additional debt
obligations aggregating approximately $1,780 million were issued. These notes
have maturities from 1997 to 2017.
The Company maintains a senior revolving credit agreement with a group of
banks. Under the terms of the credit agreement, the banks are committed to
42 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 14
provide up to $2.5 billion for up to 364 days. Any loans outstanding on the
commitment termination date will mature on the first anniversary of the
commitment termination date. At November 30, 1996, $365 million was outstanding
under this credit agreement.
The Company maintains a master collateral facility that enables MS&Co. to
pledge certain collateral to secure loan arrangements, letters of credit and
other financial accommodations. As part of this facility, MS&Co. also maintains
a secured committed credit agreement with a group of banks that are parties to
the master collateral facility under which such banks are committed to provide
up to $1.25 billion for up to 364 days. Any loans outstanding on the commitment
termination date will mature on the first anniversary of the commitment
termination date. In January 1997, this facility was renewed, and the amount of
the commitment was increased to $1.5 billion. At November 30, 1996, no
borrowings were outstanding under this secured facility.
The Company also maintains a revolving committed financing facility that
enables MSIL to secure committed funding from a syndicate of banks by providing
a broad range of collateral under repurchase agreements. Such banks are
committed to provide up to an aggregate of $1.25 billion available in 12 major
currencies for up to 364 days. Any amounts outstanding on the commitment
termination date may, at MSIL's option, be extended to mature on or before the
first anniversary of the commitment termination date. In December 1996, this
facility was renewed, and the amount of the commitment was increased to $1.55
billion. At November 30, 1996, no borrowings were outstanding under this secured
facility.
The Company anticipates that it will continue to utilize these facilities
for short-term funding from time to time (see Note 2 to the Consolidated
Financial Statements).
During fiscal 1996, the Company redeemed all 5,500,000 shares of its 9.36%
Cumulative Preferred Stock at a redemption price of $25.156 per share, which
reflects the stated value of $25 per share together with an amount equal to all
dividends accrued and unpaid to, but excluding, the redemption date.
Subsequent to November 30, 1996, the Company redeemed all 975,000 shares
of its 8.88% Cumulative Preferred Stock at a redemption price of $201.632 per
share, which reflects the stated value of $200 per share together with an amount
equal to all dividends accrued and unpaid to, but excluding, the redemption
date.
During fiscal 1996, the Company issued 4,000,000 Depositary Shares,
representing 1,000,000 shares of 7-3/4% Cumulative Preferred Stock, in an
aggregate amount of $200 million. Each Depositary Share represents 1/4 of a
share of such preferred stock.
During fiscal 1996, the Company issued 6,900,000 Depositary Shares,
representing 1,725,000 shares of Series A Fixed/Adjustable Rate Cumulative
Preferred Stock ("FRAPS"), in the aggregate amount of $345 million. The FRAPS
will pay a fixed dividend rate of 5.91% through 2001, after which it will pay a
floating rate based upon certain U.S. Treasury securities. Each Depositary Share
represents 1/4 of a share of such preferred stock.
During the fiscal year ended November 30, 1996, the Company repurchased
shares of its common stock at an aggregate cost of $507 million and an average
cost per share of $44.25. On January 7, 1997, the Board of Directors authorized
the purchase, in the open market or otherwise, subject to market conditions and
certain other factors, of an additional $400 million of the Company's common
stock. Common stock repurchases between November 30, 1996 and January 31, 1997
aggregated $62 million; the unused portion of its stock repurchase authorization
at such date was approximately $593 million. See also "Subsequent Events"
herein. The Company also issued shares of common stock pursuant to employee
compensation plans (see Note 8 to the Consolidated Financial Statements).
At November 30, 1996, certain assets of the Company, such as real
property, equipment and leasehold improvements of $1.3 billion, and goodwill and
other intangible assets of $1.3 billion, are illiquid. In addition, certain
equity investments made in connection with the Company's merchant banking and
other principal investment activities, high-yield debt securities, emerging
market debt, and certain collateralized mortgage obligations and
mortgage-related loan products are
1996 MORGAN STANLEY ANNUAL REPORT 43
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)
not highly liquid. In connection with its merchant banking and other principal
investment activities, the Company has equity investments (directly or
indirectly through funds managed by the Company) in privately and publicly held
companies. As of November 30, 1996, the aggregate carrying value of the
Company's equity investments in privately held companies (including direct
investments and partnership interests) was $107 million, and its aggregate
investment in publicly held companies was $267 million.
The Company acts as an underwriter of and as a market-maker in
mortgage-backed pass-through securities, collateralized mortgage obligations and
related instruments, and as a market-maker in commercial, residential and real
estate loan products. In this capacity, the Company takes positions in market
segments where liquidity can vary greatly from time to time. The carrying value
of the portion of the Company's mortgage-related portfolio at November 30, 1996
traded in markets that the Company believed was experiencing lower levels of
liquidity approximated $1,544 million.
In addition, at November 30, 1996, the aggregate value of high-yield debt
securities and emerging market loans and securitized instruments held in
inventory was $1,635 million (a substantial portion of which was subordinated
debt) with not more than 4%, 15% and 10% of all such securities, loans and
instruments attributable to any one issuer, industry or geographic region,
respectively. Non-investment grade securities generally involve greater risk
than investment grade securities due to the lower credit ratings of the issuers,
which typically have relatively high levels of indebtedness and are, therefore,
more sensitive to adverse economic conditions. In addition, the market for
non-investment grade securities and emerging market loans and securitized
instruments has been, and may in the future be, characterized by periods of
volatility and illiquidity. The Company has in place credit and other risk
policies and procedures to control total inventory positions and risk
concentrations for non-investment grade securities and emerging market loans and
securitized instruments.
The Company also has commitments to fund certain fixed assets and other
less liquid investments, including at November 30, 1996 approximately $208
million in connection with its merchant banking and other principal investment
activities. Additionally, the Company has provided and will continue to provide
financing, including margin lending and other extensions of credit to clients.
The Company may, from time to time, also provide financing or financing
commitments to companies in connection with its investment banking and merchant
banking activities. The Company may provide extensions of credit to leveraged
companies in the form of senior or subordinated debt, as well as bridge
financing on a select basis (which may be in connection with the Company's
commitment to the Morgan Stanley Bridge Fund, LLC). Subsequent to November 30,
1996, the Company had a loan of $225 million outstanding in connection with its
securitized debt underwriting activities, as well as a $400 million commitment
to provide bridge financing (a portion of which is anticipated to be syndicated
through the Morgan Stanley Bridge Fund, LLC) in connection with its high-yield
underwriting activities.
The Company also engages in senior lending activities, including
origination, syndication and trading of senior secured loans of non-investment
grade companies. Such companies are more sensitive to adverse economic
conditions than investment grade issuers, but the loans are generally made on a
secured basis and are senior to the non-investment grade securities of these
issuers that trade in the capital markets. As of November 30, 1996, the
aggregate value of senior secured loans and positions held by the Company was
$178 million, and aggregate senior secured loan commitments were $42 million.
Subsequent to November 30, 1996, the Company entered into one senior secured
loan commitment in the amount of $158 million.
The gross notional and fair value amounts of derivatives used by the
Company for asset and liability management and as part of its trading activities
are summarized in Notes 3 and 5, respectively, to the Consolidated Financial
Statements. See also "Derivative Financial Instruments" herein.
44 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 16
The widespread use of computer programs that rely on two-digit date
programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 which could lead to business
delays and disruptions in the U.S. and internationally. Since 1994, the Company
has been modifying its computer systems to address this issue. However, due to
the interdependent nature of computer systems, the Company may be adversely
impacted in the year 2000 depending on whether it or other entities not
affiliated with the Company address this issue successfully.
REGULATORY CAPITAL REQUIREMENTS
MS&Co. is a registered broker-dealer and a registered futures commission
merchant and, accordingly, is subject to the minimum net capital requirements of
the Securities and Exchange Commission and the Commodity Futures Trading
Commission. MSIL, a London-based broker-dealer subsidiary, is regulated by the
Securities and Futures Authority ("SFA") in the United Kingdom and, accordingly,
is subject to the Financial Resources Requirements of the SFA. Morgan Stanley
Japan Limited ("MSJL"), a Tokyo-based broker-dealer, is regulated by the
Japanese Ministry of Finance. MS&Co., MSIL and MSJL have consistently operated
in excess of their respective regulatory requirements (see Note 7 to the
Consolidated Financial Statements).
Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their applicable local capital adequacy requirements. In addition,
Morgan Stanley Derivative Products Inc., a triple-A rated subsidiary through
which the Company conducts some of its derivative activities, has established
certain operating restrictions which have been reviewed by various rating
agencies.
EFFECTS OF INFLATION AND CHANGES IN FOREIGN EXCHANGE RATES
Because the Company's assets to a large extent are liquid in nature, they are
not significantly affected by inflation. However, inflation may result in
increases in the Company's expenses, which may not be readily recoverable in the
price of services offered. To the extent inflation results in rising interest
rates and has other adverse effects upon the securities markets and on the value
of financial instruments, it may adversely affect the Company's financial
position and profitability.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Non-U.S. dollar assets typically are financed by
direct borrowing or swap-based funding in the same currency. Changes in foreign
exchange rates affect non-U.S. dollar revenues as well as non-U.S. dollar
expenses. Those foreign exchange exposures that arise and are not hedged by an
offsetting foreign currency exposure are actively managed by the Company to
minimize risk of loss due to currency fluctuations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company actively offers to clients and trades for its own account a variety
of financial instruments described as "derivative products" or "derivatives."
These products generally take the form of futures, forwards, options, swaps,
caps, collars, floors, swap options and similar instruments which derive their
value from underlying interest rates, foreign exchange rates or commodity or
equity instruments and indices. All of the Company's trading-related divisions
use derivative products as an integral part of their respective trading
strategies, and such products are used extensively to manage the market exposure
that results from a variety of proprietary trading activities (see Note 5 to the
Consolidated Financial Statements). In addition, as a dealer in certain
derivative products, most notably interest rate and currency swaps, the Company
enters into derivative contracts to meet a variety of risk management and other
financial needs of its clients. Given the highly integrated nature of derivative
products and related cash instruments in the determination of overall trading
division profitability and the context in which the Company manages its trading
areas, it is not meaningful to allocate trading revenues between the derivative
and underlying cash instrument components. Moreover, the risks associated with
the Company's derivative activities, including
1996 MORGAN STANLEY ANNUAL REPORT 45
<PAGE> 17
DERIVATIVE FINANCIAL INSTRUMENTS
(continued)
market and credit risks, are managed on an integrated basis with associated cash
instruments in a manner consistent with the Company's overall risk management
policies and procedures (see "Risk Management" herein). It should be noted that
while particular risks may be associated with the use of derivatives, in many
cases derivatives serve to reduce, rather than increase, the Company's exposure
to losses from market, credit and other risks.
<TABLE>
<CAPTION>
[PIE CHART]
DERIVATIVE FINANCIAL INSTRUMENTS OWNED
NET REPLACEMENT COST
(As of November 30, 1996)
<S> <C>
Foreign exchange contracts and options 19.3%
Equity securities contracts 20.4%
Commodity forwards, options and swaps 12.3%
Mortgage-backed securities forward
contracts, swaps and options 2.0%
Interest rate and currency swaps
and options 44.2%
Other fixed income securities contracts 1.8%
</TABLE>
The total notional value of derivative trading contracts outstanding as of
November 30, 1996 was $1,317 billion (as compared with $985 billion as of
November 30, 1995). While these amounts are an indication of the Company's
degree of use of derivatives for trading purposes, they do not represent the
Company's market or credit exposure and may be more indicative of customer
utilization of derivatives. The Company's exposure to market risk relates to
changes in interest rates, foreign currency exchange rates or the fair value of
the underlying financial instruments or commodities. The Company's exposure to
credit risk at any point in time is represented by the fair value of such
contracts reported as assets. Such total fair value outstanding as of November
30, 1996 was $11.2 billion. Approximately $9.0 billion of that credit risk
exposure was with counterparties rated single-A or better (see Note 5 to the
Consolidated Financial Statements).
The Company also uses derivative products (primarily interest rate,
currency and equity swaps) to assist in asset and liability management and to
reduce borrowing costs (see Note 3 to the Consolidated Financial Statements).
The Company believes that derivatives are valuable tools that can provide
cost-effective solutions to complex financial problems and remains committed to
providing its clients with innovative financial products. The Company
established Morgan Stanley Derivative Products Inc. to offer derivative products
to clients who will enter into derivative transactions only with triple-A rated
counterparties. In addition, the Company, through its continuing involvement
with regulatory, self-regulatory and industry activities such as the
International Swaps and Derivatives Association Inc. (ISDA), the Securities
Industry Association, the Group of 30 and the U.S. securities firms' Derivatives
Policy Group, provides leadership in the development of policies and practices
in order to maintain confidence in the markets for derivative products, which is
critical to the Company's ability to assist clients in meeting their overall
financial needs.
RISK MANAGEMENT
Risk is an inherent part of the Company's businesses and activities. The extent
to which the Company properly and effectively identifies, assesses, monitors and
manages each of the various types of risks involved in its activities is
critical to its soundness and profitability. The Company's broad-based portfolio
of business activities helps reduce the impact that volatility in any particular
area or related areas may have on its net revenues as a whole. From an
operational perspective, the Company seeks to identify, assess, monitor and
manage, in accordance with defined policies and procedures, the following
principal risks involved in each area of business activity: market risk, credit
risk, operational risk, legal risk and funding risk (discussed in "Liquidity and
Capital Resources -- Funding and Capital Policies" herein).
Risk management at the Company is an integrated process with independent
oversight which requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that
46 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 18
require specific administrative and business functions to assist in the
identification, assessment and control of various risks. In recognition of the
increasingly varied and complex nature of the financial services business, the
Company's risk management policies and procedures are evolutionary in nature and
are subject to ongoing review, modification and revision.
The Company has developed a multi-tiered approach for monitoring and
managing its risks. The Finance and Risk Committee, authorized by the Company's
Board of Directors, is chaired by the Company's Chief Financial Officer and is
composed of senior officers with familiarity and expertise in dealing with risk
management principles. It establishes the overall risk management policies of
the Company, reviews the Company's performance relative to these policies,
allocates capital among business activities of the Company, monitors the
availability of sources of financing, reviews the foreign exchange risk of the
Company, and oversees the liquidity and interest rate sensitivity of the
Company's asset and liability position (see also "Liquidity and Capital
Resources -- Funding and Capital Policies" herein). The Firm Risk Manager heads
the Firm Risk Management Group (described below) which assists senior management
and the Finance and Risk Committee in establishing, monitoring and controlling
the Company's overall risk profile. With respect to the Company's major trading
divisions (fixed income, equity, commodities and foreign exchange), division
risk managers monitor and manage positions and set the overall division risk
profile on a worldwide basis within established market risk limits, review major
trading positions and strategies, and report major market and position events to
the Firm Risk Manager. Desk risk managers perform similar functions with respect
to a product area or particular product at the business unit and trading desk
level.
The Firm Risk Management Group, which has operational responsibility for
identifying, monitoring and reporting to senior management on the Company's
exposure to risk, consists of three departments that are all independent of the
Company's business areas: the Market Risk Department monitors the Company's
market risk profile on a worldwide basis, which includes all divisional,
geographic and product-line market risks; the Credit Department manages and
monitors counterparty exposure limits on a worldwide basis; and the Internal
Audit Department, which also reports to the Audit Committee of the Board of
Directors, assesses the Company's operations and control environment through
periodic examinations of business and operational areas.
During fiscal 1996, the Company established a Risk Management Advisory
Board which advises the Firm Risk Management Group on risk measurement
methodologies, models and systems and establishes review procedures for models
used by the Company for valuation and risk measurement. Other departments within
the Company that also are independent of the Company's business areas and are
actively involved in monitoring the Company's risk profile include: Controllers,
Corporate Treasury, Information Technology, Legal and Compliance, Tax and
Operations.
The Company also has certain commitment committees, composed of a cross
section of the Company's senior officers from various disciplines, that are
involved in managing and monitoring the risks associated with the Company's
diverse businesses. The High-Yield Commitment Committee and Equity Commitment
Committee determine whether the Company should participate in a transaction
involving the underwriting or placement of high-yield or equity securities,
respectively, where the Company's capital and reputation may be at risk, and
evaluate the potential revenues and risks involved with respect to particular
transactions.
The Company manages the various risks associated with its activities on a
Company-wide basis, on a divisional level worldwide and on an individual product
basis. Specific market risk guidelines and limits have been approved for the
Company and each trading division of the Company worldwide by the Finance and
Risk Committee. Discrete market risk limits are assigned to business units and
trading desks within trading areas which are compatible with the trading
division limits.
1996 MORGAN STANLEY ANNUAL REPORT 47
<PAGE> 19
RISK MANAGEMENT
(CONTINUED)
Division risk managers, desk risk managers and the Market Risk Department all
monitor market risk measures against limits. The Market Risk Department
independently reviews the Company's trading portfolios on a regular basis from a
market risk perspective which includes value at risk and other quantitative and
qualitative risk measurements and analyses. The Company may use measures, such
as rate sensitivity, convexity, volatility and time decay measurements, to
estimate market risk and to assess the sensitivity of positions to changes in
market conditions. Stress testing, which measures the impact on the value of
existing portfolios of specified changes in market factors, for certain products
is performed periodically and reviewed by division risk managers, desk risk
managers and the Market Risk Department.
The Finance and Risk Committee has approved Company-wide credit guidelines
which limit the Company's credit exposure to any one counterparty. Specific
credit risk limits based on the credit guidelines also have been approved by the
Finance and Risk Committee for each type of counterparty (by rating category) as
well as secondary positions of high-yield and emerging market debt, and the
Credit Department administers and monitors the credit limits among trading
divisions on a worldwide basis. The Company manages the credit exposure relating
to its trading activities by reviewing counterparty financial soundness
periodically; entering into master netting agreements and collateral
arrangements with counterparties in appropriate circumstances; and limiting the
duration of exposure. In certain cases, the Company may also close out
transactions or assign them to other counterparties to mitigate credit risk.
In addition, the Company's Controllers and Operations Departments monitor
position, profit/loss and balance sheet information through reconciliation
procedures, and analyze business unit profitability, position market prices and
aged positions. The Company also has established legal standards and procedures
on a worldwide basis that are designed to ensure compliance with applicable
statutory and regulatory requirements and that senior management's policies
relating to conduct, ethics and business practices are followed to protect
client interests and maintain the Company's reputation and business franchise.
Many of the Company's risk management and control practices are subject to
periodic review by the Company's internal auditors and independent accountants,
as well as interactions with various regulatory authorities. The Company
continues to be committed to employing qualified personnel with appropriate
expertise in each of its various administrative and business areas to implement
effectively the Company's risk management and monitoring systems and processes.
For a detailed discussion of the Company's risk management policies and
procedures, see Item I, Part I, of the Form 10-K.
The Company's division risk managers and the Market Risk Department
evaluate the impact of historical changes in market conditions on the value of
the Company's financial instrument portfolios in order to determine the
potential gains or losses that would arise from normal and abnormal movements in
interest rates, foreign exchange rates, equity prices and commodity prices. This
quantification of potential gains and losses under varying scenarios and
situations is a component of the Company's risk management procedures. The
hypothetical results of these analyses, however, are not necessarily predictive
of future results.
Historical results, while also not predictive of future results, similarly
provide a measure of the Company's effectiveness in managing the risks inherent
in its various businesses, including market risks related to its global
portfolios of financial instruments. The diversification of the Company's
activities within and across business lines and prudent risk management have
helped the Company reduce volatility in net revenues. The Company's underwriting
and sales and trading businesses (which include fixed income, equity,
commodities and foreign exchange) historically have been more volatile than its
fee-based businesses (which include investment banking advisory services,
securities services and asset management).
48 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 20
The Company's performance in mitigating volatility is demonstrated by the
following weekly distribution of its underwriting and sales and trading net
revenues for fiscal 1996 and fiscal 1995.
[BAR GRAPH]
DISTRIBUTION OF WEEKLY UNDERWRITING AND SALES AND TRADING NET REVENUES
Fiscal Years 1995-1996 (Dollars in Millions)(1)
$(5)-0 $0-10 $10-20 $20-40 $40-60 $60+
------ ----- ------ ------ ------ ----
Fixed Income 1 6 13 48 25 3
Equity 0 1 7 61 23 4
Foreign Exchange 2 91 3 0 0 0
Commodities 20 74 2 0 0 0
(1) Amounts include principal trading, commissions, net interest and
underwriting revenues. Fiscal 1995 represents the 10-month period ended
November 30, 1995.
The bars represent the number of weeks in which net revenues from each
activity fell within a particular range.
The Company's management of revenues from its underwriting and sales and
trading activities is complemented by its continuing strategic emphasis on more
stable fee-based businesses. The stability and continuing growth in the
Company's fee-based businesses is presented in the following charts, which
provide a weekly distribution of fee-based net revenues for fiscal 1996 and
fiscal 1995 and a three-year summary of fee-based and underwriting and sales and
trading net revenues.
[BAR GRAPH]
DISTRIBUTION OF WEEKLY FEE-BASED NET REVENUES
Fiscal Years 1995-1996 (Dollars in Millions)(1)
$0-10 $10-20 $20+
----- ------ ----
Investment Banking
Advisory Services 46 27 23
Securities Services 94 2 0
Asset Management 92 4 0
(1) Amounts include investment banking advisory fees and fees commissions and
net interest revenues related to securities services and asset management
business. Fiscal 1995 represents the 10-month period ended November 30, 1995.
[BAR GRAPH]
NET REVENUES
Fiscal Years 1994-1995 (Dollars in Billions)(1)
1994 1995 1996
---- ---- ----
Fee-Based $1.0 $1.2 $1.7
Underwriting and Sales and Trading $2.4 $3.0 $4.1
(1) Amounts exclude net revenues from Merchant Banking. Fiscal 1995 represents
the 10-month period ended November 30, 1995, annualized.
1996 MORGAN STANLEY ANNUAL REPORT 49
<PAGE> 21
POTENTIAL IMPACT OF FINANCIAL ACCOUNTING STANDARDS BOARD PRONOUNCEMENTS AND
EXPOSURE DRAFTS ON THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement introduced a new approach to accounting for transactions
involving the transfer of financial assets, including securitizations and
repurchase and securities lending transactions. This approach could result in
certain transactions that traditionally have been accounted for as financings to
be accounted for instead as purchases or sales. It also could result in
requiring that the collateral obtained in certain types of secured lending
transactions be recorded on the balance sheet with a corresponding liability to
return such assets to their previous owners.
As initially proposed, SFAS No. 125 would have been effective for
transactions occurring after December 31, 1996, and it was to be applied
prospectively. In December, 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127
permits a one-year delay to January 1, 1998 for SFAS No. 125 provisions that
relate to (1) accounting for financial asset collateral obtained by secured
lenders and (2) repurchase agreement, dollar-roll, securities lending and
similar transactions. Securitizations are unaffected by SFAS No. 127. The
Company believes that the adoption of SFAS No. 125 will not have a material
impact on its Consolidated Financial Statements.
In June 1996, the FASB also released an exposure draft entitled
"Accounting for Derivative and Similar Financial Instruments and for Hedging
Activities" (the "Hedge Accounting ED") that would provide comprehensive
standards for the recognition and measurement of derivatives and other similar
financial instruments used in hedging activities (collectively referred to as
derivatives). The Hedge Accounting ED, among other things, would require all
derivatives to be recorded on the Statement of Financial Condition at fair value
with changes in fair value being recorded in either net income or in a separate
component of stockholders' equity, depending on the designation of the
derivative.
The Company believes that application of the Hedge Accounting ED would
result in accounting that does not accurately reflect the economic substance or
intent of many derivative hedging transactions. The Company has expressed this
concern, among others, in a comment letter to the FASB.
As currently proposed, the Company would be required to adopt this
proposal for its fiscal year ended November 30, 1998. The Company believes that,
if adopted in its current form, this proposal would not have a material effect
on its consolidated financial statements.
In October 1995, the FASB also released an exposure draft entitled
"Consolidated Financial Statements: Policies and Procedures" (the "Consolidation
ED"). The Consolidation ED, among other things, would significantly change
current consolidation practices with respect to determining which entities are
to be included in consolidated financial statements. The Consolidation ED could
potentially require the Company to consolidate certain of its merchant banking
investments, which, as part of the Company's trading and investment activities,
currently are carried in its consolidated financial statements at fair value.
The Company believes that application of the Consolidation ED would result
in a confusing and inappropriate financial statement presentation. Compliance
with the proposal also would involve significant incremental resources and
costs. The Company has expressed these concerns in a comment letter to the FASB.
As currently proposed, the Company would be required to adopt the Consolidation
ED for its fiscal year ended November 30, 1998. The Company believes that, if
adopted in its current form, the Consolidation ED would have a material effect
on both its results of operations as well as its financial condition. These
effects, however, have not been quantified at this time. Currently, the FASB is
reconsidering the conclusions reached in the Consolidation ED.
The Company intends to follow these proposals closely in 1997.
50 1996 MORGAN STANLEY ANNUAL REPORT
<PAGE> 1
Exhibit 13.4
REPORT OF INDEPENDENT AUDITORS
The Stockholders and
Board of Directors of
Morgan Stanley Group Inc.
We have audited the accompanying Consolidated Statement of Financial Condition
of Morgan Stanley Group Inc. at November 30, 1996 and November 30, 1995 and the
related Consolidated Statements of Income, Cash Flows and Changes in
Stockholders' Equity for the year ended November 30, 1996, the ten-month period
ended November 30, 1995 and the year ended January 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Morgan Stanley
Group Inc. at November 30, 1996 and November 30, 1995, and the consolidated
results of operations and cash flows for the year ended November 30, 1996, the
ten-month period ended November 30, 1995 and the year ended January 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
January 7, 1997
51
<PAGE> 2
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA) 1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and interest-bearing equivalents $ 4,545 $ 2,471
Cash and securities deposited with clearing
organizations or segregated under federal
and other regulations (securities at fair value
of $2,474 at November 30, 1996 and
$859 at November 30, 1995) 3,164 1,339
Financial instruments owned:
U.S. government and agency securities 11,079 12,480
Other sovereign government obligations 19,473 13,792
Corporate and other debt 15,978 10,690
Corporate equities 12,622 13,185
Derivative contracts 11,220 8,043
Physical commodities 375 410
Securities purchased under agreements to resell 60,457 45,886
Securities borrowed 39,680 27,069
Receivables:
Customers 5,761 3,413
Brokers, dealers and clearing organizations 5,421 1,475
Interest and dividends 1,320 1,082
Fees and other 745 506
Property, equipment and leasehold improvements,
at cost, net of accumulated depreciation
and amortization of $614 at November 30, 1996
and $462 at November 30, 1995 1,301 1,286
Other assets 3,305 626
-------- --------
Total assets $196,446 $143,753
======== ========
</TABLE>
* Amounts for fiscal 1995 have been retroactively adjusted to give effect for a
two-for-one stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 1996.
See Notes to Consolidated Financial Statements.
52
<PAGE> 3
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 20,461 $ 11,703
Financial instruments sold, not yet purchased:
U.S. government and agency securities 10,196 6,459
Other sovereign government obligations 6,513 8,972
Corporate and other debt 1,112 1,076
Corporate equities 8,889 3,585
Derivative contracts 9,982 7,537
Physical commodities 476 71
Securities sold under agreements to repurchase 83,296 60,738
Securities loaned 8,975 9,340
Payables:
Customers 18,629 13,818
Brokers, dealers and clearing organizations 1,820 1,974
Interest and dividends 1,478 1,019
Other liabilities and accrued expenses 972 595
Accrued compensation and benefits 1,746 1,192
Long-term borrowings 14,498 9,635
--------- ---------
189,043 137,714
--------- ---------
Capital Units 865 865
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock 1,223 818
Common stock, $1.00 par value; authorized
600,000,000 shares; issued 163,236,893 shares
at November 30, 1996 and 162,838,920 shares
at November 30, 1995* 163 163
Paid-in capital* 1,144 730
Retained earnings 4,504 3,815
Cumulative translation adjustments (11) (9)
--------- ---------
Subtotal 7,023 5,517
Less:
Note receivable related to sale of preferred stock to ESOP 78 89
Common stock held in treasury, at cost
(9,894,271 shares at November 30, 1996
and 7,635,174 shares at November 30, 1995)* 407 254
--------- ---------
Total stockholders' equity 6,538 5,174
--------- ---------
Total liabilities and stockholders' equity $ 196,446 $ 143,753
========= =========
</TABLE>
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 53
<PAGE> 4
Consolidated Statement of Income
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL PERIOD ENDED FISCAL YEAR ENDED
NOVEMBER 30, NOVEMBER 30, JANUARY 31,
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA) 1996 1995 1995
----------------- ------------------- -----------------
<S> <C> <C> <C>
Revenues:
Investment banking $ 1,944 $ 1,211 $ 919
Principal transactions:
Trading 2,210 1,122 1,104
Investments 86 102 139
Commissions 613 437 449
Interest and dividends 7,701 5,939 6,406
Asset management and administration 582 310 350
Other 8 3 9
------------ ------------ ------------
Total revenues 13,144 9,124 9,376
Interest expense 7,368 5,501 5,875
------------ ------------ ------------
Net revenues 5,776 3,623 3,501
------------ ------------ ------------
Expenses excluding interest:
Compensation and benefits 2,863 1,795 1,733
Occupancy and equipment 362 276 303
Brokerage, clearing and exchange fees 274 211 230
Communications 146 108 122
Business development 170 110 165
Professional services 226 131 164
Other 163 109 131
Relocation charge -- -- 59
------------ ------------ ------------
Total expenses excluding interest 4,204 2,740 2,907
------------ ------------ ------------
Income before income taxes 1,572 883 594
Provision for income taxes 543 283 199
------------ ------------ ------------
Net income $ 1,029 $ 600 $ 395
============ ============ ============
Preferred stock dividend requirements $ 66 $ 54 $ 65
------------ ------------ ------------
Earnings applicable to common shares(1) $ 963 $ 546 $ 330
------------ ------------ ------------
Average common and common equivalent shares
============ ============ ============
outstanding(1)(2) 153,514,483 156,912,678 157,793,216
------------ ------------ ------------
Primary earnings per share(2) $ 6.27 $ 3.48 $ 2.09
------------ ------------ ------------
Fully diluted earnings per share(2) $ 5.96 $ 3.33 $ 2.02
============ ============ ============
</TABLE>
(1) Amounts shown are used to calculate primary earnings per share.
(2) Amounts for fiscal 1995 and fiscal 1994 have been retroactively adjusted to
give effect for a two-for-one stock split, effected in the form of a 100%
stock dividend, which became effective on January 26, 1996.
See Notes to Consolidated Financial Statements.
54 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES
<PAGE> 5
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL PERIOD ENDED FISCAL YEAR ENDED
NOVEMBER 30, NOVEMBER 30, JANUARY 31,
(DOLLARS IN MILLIONS) 1996 1995 1995
----------------- ------------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,029 $ 600 $ 395
Adjustments to reconcile net income to net
cash used for operating activities:
Non-cash charges included in net income:
Deferred income taxes (343) (111) (128)
Compensation payable in common
or preferred stock 426 165 116
Depreciation and amortization 168 107 104
Relocation charge -- -- 59
Changes in assets and liabilities:
Cash and securities deposited with
clearing organizations or segregated
under federal and other regulations (1,825) 777 (1,454)
Financial instruments owned, net of finan-
cial instruments sold, not yet purchased (2,620) (9,098) (1,086)
Securities borrowed, net of
securities loaned (12,976) (547) (3,063)
Receivables and other assets (7,812) 813 1,076
Payables and other liabilities, net of
deferred liabilities 6,169 3,947 258
======== ======= =======
Net cash used for operating activities (17,784) (3,347) (3,723)
Cash flows from investing activities:
Net payments for:
Property, equipment and leasehold improvements (152) (336) (415)
Purchase of Miller Anderson & Sherrerd, LLP ("MAS"),
net of cash acquired (200) -- --
Purchase of Van Kampen American Capital, Inc.,
net of cash acquired (986) -- --
-------- ------- -------
Net cash used for investing activities (1,338) (336) (415)
Cash flows from financing activities:
Net proceeds related to short-term borrowings 8,693 1,430 1,707
Securities sold under agreements to repurchase,
net of securities purchased under agreements
to resell 7,987 642 1,451
Proceeds from:
Issuance of 7-3/4% Cumulative Preferred Stock 197 -- --
Issuance of Series A Fixed/Adjustable Rate
Cumulative Preferred Stock 343 -- --
Issuance of common stock 112 79 20
Issuance of long-term borrowings 6,057 2,402 2,955
Issuance of Capital Units -- 513 230
Payments for:
Redemption of 9.36% Cumulative Preferred Stock (138) -- --
Repurchases of common stock (507) (103) (287)
Repayments of long-term borrowings (1,369) (1,196) (1,202)
Cash dividends (179) (123) (151)
-------- ------- -------
Net cash provided by financing activities 21,196 3,644 4,723
======== ======= =======
Net increase (decrease) in cash and
interest-bearing equivalents 2,074 (39) 585
Cash and interest-bearing equivalents, at
beginning of period 2,471 2,510 1,925
======== ======= =======
Cash and interest-bearing equivalents, at end of period $ 4,545 $ 2,471 $ 2,510
======== ======= =======
</TABLE>
Cash payments for income taxes totaled $591 million, $233 million and $657
million in fiscal 1996, fiscal 1995 and fiscal 1994, respectively.
Cash payments for interest approximated interest expense for all periods.
See Notes to Consolidated Financial Statements.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 55
<PAGE> 6
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
PREFERRED COMMON
(DOLLARS IN MILLIONS) STOCK STOCK(1)
--------- --------
<S> <C> <C>
Balance, January 31, 1994 $ 820 $ 156
Conversion of ESOP Preferred Stock (1) --
Issuance of common stock -- 2
Repurchases of common stock -- --
Compensation payable in common stock -- 2
ESOP shares allocated, at cost -- --
Net income -- --
Cash dividends -- --
Translation adjustments -- --
======= =====
Balance, January 31, 1995 819 160
Conversion of ESOP Preferred Stock (1) --
Issuance of common stock -- 3
Repurchases of common stock -- --
Compensation payable in common stock -- --
ESOP shares allocated, at cost -- --
Net income -- --
Cash dividends -- --
Translation adjustments -- --
======= =====
Balance, November 30, 1995 818 163
Issuance of common stock in connection with MAS acquisition -- --
Redemption of 9.36% Cumulative Preferred Stock (138) --
Issuance of 7-3/4% Cumulative Preferred Stock 200 --
Issuance of Series A Fixed/Adjustable Rate Cumulative Preferred Stock 345 --
Conversion of ESOP Preferred Stock (2) --
Issuance of common stock -- 4
Repurchases of common stock -- --
Retirement of treasury stock -- (4)
Compensation payable in common stock -- --
ESOP shares allocated, at cost -- --
Net income -- --
Cash dividends -- --
Translation adjustments -- --
------- -----
Balance, November 30, 1996 $ 1,223 $ 163
======= =====
</TABLE>
(1) Amounts for fiscal 1993 through fiscal 1995 have been retroactively adjusted
to give effect for a two-for-one stock split, effected in the form of a 100%
stock dividend, which became effective on January 26, 1996.
See Notes to Consolidated Financial Statements.
56
<PAGE> 7
<TABLE>
<CAPTION>
CUMULATIVE
PAID-IN RETAINED TRANSLATION
(DOLLARS IN MILLIONS) CAPITAL(1) EARNINGS ADJUSTMENTS
---------- -------- -----------
<S> <C> <C> <C>
Balance, January 31, 1994 $ 739 $ 3,094 $ (3)
Conversion of ESOP Preferred Stock 1 -- --
Issuance of common stock 18 -- --
Repurchases of common stock -- -- --
Compensation payable in common stock (132) -- --
ESOP shares allocated, at cost -- -- --
Net income -- 395 --
Cash dividends -- (151) --
Translation adjustments -- -- (7)
======= ======= ====
Balance, January 31, 1995 626 3,338 (10)
Conversion of ESOP Preferred Stock 1 -- --
Issuance of common stock 76 -- --
Repurchases of common stock -- -- --
Compensation payable in common stock 27 -- --
ESOP shares allocated, at cost -- -- --
Net income -- 600 --
Cash dividends -- (123) --
Translation adjustments -- -- 1
======= ======= ====
Balance, November 30, 1995 730 3,815 (9)
Issuance of common stock in connection with MAS acquisition 9 -- --
Redemption of 9.36% Cumulative Preferred Stock -- -- --
Issuance of 7-3/4% Cumulative Preferred Stock (3) -- --
Issuance of Series A Fixed/Adjustable Rate Cumulative Preferred Stock (2) -- --
Conversion of ESOP Preferred Stock 2 -- --
Issuance of common stock 108 -- --
Repurchases of common stock -- -- --
Retirement of treasury stock -- (161) --
Compensation payable in common stock 300 -- --
ESOP shares allocated, at cost -- -- --
Net income -- 1,029 --
Cash dividends -- (179) --
Translation adjustments -- -- (2)
------- ------- ----
Balance, November 30, 1996 $ 1,144 $ 4,504 $(11)
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
NOTE RECEIVABLE COMMON STOCK
RELATED TO SALE HELD IN
OF PREFERRED TREASURY,
(DOLLARS IN MILLIONS) STOCK TO ESOP AT COST TOTAL
--------------- ------------ -------
<S> <C> <C> <C>
Balance, January 31, 1994 $(109) $(228) $ 4,469
Conversion of ESOP Preferred Stock -- -- 0
Issuance of common stock -- -- 20
Repurchases of common stock -- (287) (287)
Compensation payable in common stock -- 237 107
ESOP shares allocated, at cost 9 -- 9
Net income -- -- 395
Cash dividends -- -- (151)
Translation adjustments -- -- (7)
===== ===== =======
Balance, January 31, 1995 (100) (278) 4,555
Conversion of ESOP Preferred Stock -- -- 0
Issuance of common stock -- -- 79
Repurchases of common stock -- (103) (103)
Compensation payable in common stock -- 127 154
ESOP shares allocated, at cost 11 -- 11
Net income -- -- 600
Cash dividends -- -- (123)
Translation adjustments -- -- 1
===== ===== =======
Balance, November 30, 1995 (89) (254) 5,174
Issuance of common stock in connection with MAS acquisition -- 74 83
Redemption of 9.36% Cumulative Preferred Stock -- -- (138)
Issuance of 7-3/4% Cumulative Preferred Stock -- -- 197
Issuance of Series A Fixed/Adjustable Rate Cumulative Preferred Stock -- -- 343
Conversion of ESOP Preferred Stock -- -- 0
Issuance of common stock -- -- 112
Repurchases of common stock -- (507) (507)
Retirement of treasury stock -- 165 0
Compensation payable in common stock -- 115 415
ESOP shares allocated, at cost 11 -- 11
Net income -- -- 1,029
Cash dividends -- -- (179)
Translation adjustments -- -- (2)
----- ----- -------
Balance, November 30, 1996 $ (78) $(407) $ 6,538
===== ===== =======
</TABLE>
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 57
<PAGE> 8
1 Summary of Significant Accounting Policies
ORGANIZATION AND BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Morgan Stanley
Group Inc. and its U.S. and international subsidiaries (collectively, the
"Company"), including Morgan Stanley & Co. Incorporated ("MS&Co."), Morgan
Stanley & Co. International Limited ("MSIL"), and Morgan Stanley Japan Limited
("MSJL").
The Consolidated Financial Statements are prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions regarding certain trading inventory valuations, the
potential outcome of litigation and other matters that affect the financial
statements and related disclosures. Management believes that the estimates
utilized in the preparation of the Consolidated Financial Statements are prudent
and reasonable. Actual results could differ from these estimates.
The Company, through its subsidiaries, provides a wide range of
financial services on a global basis. Its businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring, real
estate, project finance and other corporate finance advisory activities; asset
management; merchant banking and other principal investment activities;
brokerage and research services; the trading of foreign exchange and commodities
as well as derivatives on a broad range of asset categories, rates and indices;
and global custody, securities clearance services and securities lending. These
services are provided to a large and diversified group of clients and customers,
including corporations, governments, financial institutions and individual
investors.
All material intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in the Consolidated Financial
Statements for prior years have been reclassified to conform with the fiscal
1996 presentation.
CHANGE IN FISCAL YEAR-END
On February 28, 1995, the Board of Directors approved a change in the Company's
fiscal year-end from January 31 to November 30. This change became effective for
the fiscal period ended November 30, 1995, and, accordingly, this report
includes the results for the fiscal year ended November 30, 1996 ("fiscal
1996"), the 10-month period from February 1, 1995 through November 30, 1995
("fiscal 1995"), and for the fiscal year ended January 31, 1995 ("fiscal 1994").
FINANCIAL INSTRUMENTS USED FOR
TRADING AND INVESTMENT
Financial instruments, including derivatives, used in the Company's trading
activities are recorded at fair value, and unrealized gains and losses are
reflected in trading revenues. Interest revenue and expense arising from
financial instruments used in trading activities are reflected in the
Consolidated Statement of Income as interest income or expense. The fair values
of the trading positions generally are based on listed market prices. If listed
market prices are not available or if liquidating the Company's positions would
reasonably be expected to impact market prices, fair value is determined based
on other relevant factors, including dealer price quotations and price
quotations for similar instruments traded in different markets, including
markets located in different geographic areas. Fair values for certain
derivative contracts are derived from pricing models which consider current
market and contractual prices for the underlying financial instruments or
commodities, as well as time value and yield curve or volatility factors
underlying the positions. Purchases and sales of financial instruments are
recorded in the accounts on trade date. Unrealized gains and losses arising from
the Company's dealings in over-the-counter ("OTC") financial instruments,
including derivative contracts related to financial instruments and commodities,
are presented in the accompanying Consolidated Statement of Financial Condition
on a net-by-counterparty basis consistent with Financial Accounting Standards
Board ("FASB") Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts."
Equity securities purchased in connection with merchant banking and
other principal investment activi-
58
<PAGE> 9
ties are initially carried in the Consolidated Financial Statements at their
original costs. The carrying value of such equity securities is adjusted when
changes in the underlying fair values are readily ascertainable, generally as
evidenced by listed market prices or transactions which directly affect the
value of such equity securities. Downward adjustments relating to such equity
securities are made in the event that the Company determines that the eventual
realizable value is less than the carrying value. The carrying value of
investments made in connection with principal real estate activities which do
not involve equity securities are adjusted periodically based on independent
appraisals, estimates prepared by the Company of discounted future cash flows of
the underlying real estate assets or other indicators of fair value.
Loans made in connection with merchant banking and investment banking
activities are carried at cost plus accrued interest less reserves, if deemed
necessary, for estimated losses.
FINANCIAL INSTRUMENTS USED FOR
ASSET AND LIABILITY MANAGEMENT
The Company uses interest rate and currency swaps to manage the interest rate
and currency exposure arising from certain borrowings. Swaps used to hedge debt
are designated as hedges and are matched to the debt by notional amount and
maturity. The periodic receipts or payments from each swap are recognized
ratably over the term of the swap as an adjustment to interest expense. Gains
and losses resulting from the termination of hedge contracts prior to their
stated maturity are recognized ratably over the remaining life of the instrument
being hedged. The Company also uses foreign exchange forward contracts to manage
the currency exposure relating to its net monetary investment in non-U.S. dollar
functional currency operations. The gain or loss from revaluing these contracts
is deferred and reported within cumulative translation adjustments in
stockholders' equity, net of tax effects, with the related unrealized amounts
due from or to counterparties included in receivables from or payables to
brokers, dealers and clearing organizations.
COLLATERALIZED SECURITIES TRANSACTIONS
Securities purchased under agreements to resell (reverse repurchase agreements)
and securities sold under agreements to repurchase (repurchase agreements),
principally government and agency securities, are treated as financing
transactions and are carried at the amounts at which the securities will
subsequently be resold or reacquired as specified in the respective agreements;
such amounts include accrued interest. Reverse repurchase and repurchase
agreements are presented net-by-counterparty in the accompanying Consolidated
Statement of Financial Condition where net presentation is consistent with FASB
Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements." It is the Company's policy to take possession of
securities purchased under agreements to resell. The Company monitors the fair
value of the underlying securities as compared with the related receivable or
payable, including accrued interest, and, as necessary, requests additional
collateral. Where deemed appropriate, the Company's agreements with third
parties specify its rights to request additional collateral.
Securities borrowed and securities loaned are carried at the amounts of
cash collateral advanced and received in connection with the transactions. The
Company measures the fair value of the securities borrowed and loaned against
the cash collateral on a daily basis. Additional cash is obtained as necessary
to ensure such transactions are adequately collateralized.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations having non-U.S. dollar functional
currencies are translated at year-end rates of exchange, and the income
statements are translated at weighted average rates of exchange for the year. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation," gains or losses resulting from translating
foreign currency financial statements, net of hedge gains or losses and related
tax effects, are reflected in cumulative translation adjustments, a separate
component of stockholders' equity. Gains or losses resulting from foreign
currency transactions are included in net income.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 59
<PAGE> 10
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Depreciation of property and equipment is provided on a straight-line basis over
the estimated useful lives of the related assets. Amortization of leasehold
improvements is provided on a straight-line basis over the lesser of the
estimated useful life of the asset or, where applicable, the remaining life of
the lease.
COMMON SHARE DATA
Earnings per share is based on the weighted average number of common shares and
share equivalents outstanding and gives effect to preferred stock dividend
requirements. Common share and stock option share data for fiscal 1995 and
fiscal 1994 have been retroactively adjusted throughout the Consolidated
Financial Statements to reflect a two-for-one common stock split, effected in
the form of a 100% stock dividend, declared on January 4, 1996 and payable on
January 26, 1996 to holders of record on January 16, 1996.
On April 3, 1996, the Company's stockholders approved an increase in the
number of authorized shares of common stock from 300,000,000 to 600,000,000.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for its stock-based
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Under the provisions of APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased and not held
for resale, with an original maturity of three months or less, to be
interest-bearing equivalents for purposes of this statement.
In connection with the purchase of Miller Anderson & Sherrerd, LLP
("MAS"), the Company issued approximately $66 million of notes payable, as well
as 2,012,264 shares of common stock having a fair value on the date of
acquisition, January 3, 1996, of approximately $83 million. In addition, in
connection with the purchase of VK/AC Holding, Inc., the parent of Van Kampen
American Capital, Inc. ("VKAC"), the Company assumed approximately $162 million
of long-term debt (see Note 12).
INCOME TAXES
Income taxes are provided in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires the calculation of deferred taxes using the
asset and liability method. Under this method, deferred tax balances must be
adjusted to reflect enacted changes in income tax rates, and deferred taxes
generally must be provided on all book and tax basis differences.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis over
periods from five to 25 years and are periodically evaluated for impairment.
Goodwill of approximately $1.3 billion is included in the Company's Consolidated
Statement of Financial Condition as a component of Other Assets (see Note 12).
2 Short-Term Borrowings
Short-term funding generally is obtained at rates related to U.S., Euro or Asian
money rates for the currency and term borrowed and includes loans payable on
demand. Secured borrowings included in these loans, which may fluctuate
significantly from time to time, were $11 million and $29 million at November
30, 1996 and November 30, 1995, respectively. Short-term borrowings at November
30, 1996 and November 30, 1995 also included commercial paper of $14,153 million
and $8,412 million,
60
<PAGE> 11
respectively, with approximate weighted average interest rates of 5.3% and 5.9%,
respectively.
The Company maintains a senior revolving credit agreement with a group of
banks. Under the terms of the credit agreement, the banks are committed to
provide up to $2.5 billion for up to 364 days. Any loans outstanding on the
commitment termination date will mature on the first anniversary of the
commitment termination date. The agreement contains restrictive covenants which
require, among other things, that the Company maintain stockholders' equity of
at least $4,115 million as of November 30, 1996. At November 30, 1996, $365
million was outstanding under this credit agreement.
The Company maintains a master collateral facility that enables MS&Co.
to pledge certain collateral to secure loan arrangements, letters of credit and
other financial accommodations. As part of this facility, MS&Co. maintains a
secured committed credit agreement with a group of banks that are parties to the
master collateral facility under which such banks are committed to provide up to
$1.25 billion for up to 364 days. Any loans outstanding on the commitment
termination date will mature on the first anniversary of the commitment
termination date. The credit agreement contains restrictive covenants which
require, among other things, that MS&Co. maintain specified levels of
consolidated stockholders' equity and Net Capital, as defined. In January 1997,
this facility was renewed, and the amount of the commitment was increased to
$1.5 billion. At November 30, 1996, no borrowings were outstanding under this
secured facility.
The Company maintains a revolving committed financing facility that
enables MSIL to secure committed funding from a syndicate of banks by providing
a broad range of collateral under repurchase agreements. Such banks are
committed to provide up to an aggregate of $1.25 billion available in 12 major
currencies for up to 364 days. Any amounts outstanding on the commitment
termination date, at MSIL's option, may be extended to mature on or before the
first anniversary of the commitment termination date. The facility agreements
contain restrictive covenants which require, among other things, that MSIL
maintain specified levels of Shareholders' Equity and Financial Resources, each
as defined. In December 1996, this facility was renewed, and the amount of the
commitment was increased to $1.55 billion. At November 30, 1996, no borrowings
were outstanding under this secured facility.
The Company anticipates that it will continue to utilize these
facilities for short-term funding from time to time.
3 Long-Term Borrowings
MATURITIES AND TERMS
Long-term borrowings at fiscal year-end consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
U.S. Dollar Non-U.S. Dollar(1)
- ---------------------------------------------------------------------------------------------------------------
Index/ Nov. 30, Nov. 30,
Fixed Floating Equity Fixed Floating 1996 1995
(Dollars in Millions) Rate Rate Linked Rate Rate Total Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Due in fiscal 1996 $ - $ - $ - $ - $ - $ - $ 1,329
Due in fiscal 1997 628 1,400 497 96 363 2,984 2,704
Due in fiscal 1998 374 2,228 566 462 280 3,910 1,424
Due in fiscal 1999 753 764 319 206 357 2,399 788
Due in fiscal 2000 75 10 22 28 44 179 70
Due in fiscal 2001 1,235 285 68 47 18 1,653 664
Thereafter 2,715 - 116 516 26 3,373 2,656
-----------------------------------------------------------------------------
Total $ 5,780 $4,687 $1,588 $1,355 $1,088 $14,498 $ 9,635
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Weighted average
coupon at fiscal year-end 7.6% 5.7% n/a 5.3% 3.4% 6.3% 6.8%
-----------------------------------------------------------------------------
</TABLE>
(1) Weighted average coupon was calculated utilizing non-U.S. dollar interest
rates.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 61
<PAGE> 12
MEDIUM-TERM NOTES
Included in the table above are medium-term notes of $8,271 million and $2,882
million at November 30, 1996 and November 30, 1995, respectively. The effective
weighted average interest rate on all medium-term notes was 5.8% in fiscal 1996
and 6.2% in fiscal 1995. Maturities of these notes range from fiscal 1997
through fiscal 2023.
STRUCTURED DEBT
U.S. dollar index/equity linked debt includes various structured instruments
whose payments and redemption values are linked to the performance of a specific
index (i.e., Standard & Poor's 500), a basket of stocks or a specific equity
security. To minimize the exposure resulting from movements in the underlying
equity position or index, the Company has entered into various equity swap
contracts and purchased options which effectively convert the borrowing costs
into floating rates based upon London Interbank Offered Rates
("LIBOR"). These instruments are included in the preceding table at their
redemption values based on the performance of the underlying indices, baskets of
stocks, or specific equity securities at November 30, 1996 and November 30,
1995.
OTHER DEBT
U.S. dollar contractual floating rate debt bears interest based on a variety of
money market indices, including LIBOR and Federal Funds rates. Non-U.S. dollar
contractual floating rate debt bears interest based on Euro floating rates.
Included in the Company's long-term debt are subordinated notes of
$1,325 million and $1,298 million at November 30, 1996 and November 30, 1995,
respectively. The effective weighted average interest rate on these subordinated
notes was 7.0% in fiscal 1996 and fiscal 1995. Maturities of the subordinated
notes range from fiscal 1999 to fiscal 2016.
Certain of the Company's long-term debt is redeemable prior to maturity
at the option of the holder. These notes contain certain provisions which
effectively enable noteholders to put the notes back to the Company and
therefore are scheduled in the foregoing table to mature in fiscal 1997 through
fiscal 1999. The stated maturities of these notes, which aggregate $1,480
million, are from 1998 to 2004.
In fiscal 1995, MS&Co., the Company's U.S. broker-dealer subsidiary,
issued approximately $263 million of 6.81% fixed rate subordinated Series C
notes, $96 million of 7.03% fixed rate subordinated Series D notes, $82 million
of 7.28% fixed rate subordinated Series E notes and $25 million of 7.82% fixed
rate subordinated Series F notes. These notes have maturities from 2001 to 2016.
The terms of such notes contain restrictive covenants which require, among other
things, that MS&Co. maintain specified levels of Consolidated Tangible Net Worth
and Net Capital, each as defined. In fiscal 1996, MS&Co. issued an additional
$50 million of Series C notes.
ASSET AND LIABILITY MANAGEMENT
A substantial portion of the Company's fixed rate long-term debt is used to fund
highly liquid marketable securities and short-term receivables arising from
securities transactions. The Company uses interest rate swaps to more closely
match the duration of this debt to the duration of the assets being funded and
to minimize interest rate risk. These swaps effectively convert certain of the
Company's fixed rate debt into floating rate obligations. In addition, for
non-U.S. dollar currency debt that is not used to fund assets in the same
currency, the Company has entered into currency swaps which
62
<PAGE> 13
effectively convert the debt into U.S. dollar obligations. The Company's use of
swaps for asset and liability management reduced its interest expense and
effective average borrowing rate as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal
(Dollars in Millions) 1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Net reduction in interest expense from swaps
for the fiscal year $ 24 $22 $ 93
Weighted average coupon of long-term
debt at fiscal year-end(1) 6.3% 6.8% 7.0%
Effective average borrowing rate for
long-term debt after swaps at fiscal year-end(1) 6.1% 6.5% 6.7%
---------------------------------
</TABLE>
(1) Included in the weighted average and effective average calculations are
non-U.S. dollar interest rates.
The effective weighted average interest rate on the Company's index/equity
linked notes, which is not included in the table above, was 5.6% and 6.0% in
fiscal 1996 and fiscal 1995, respectively, after giving effect to the related
hedges.
The table below summarizes the notional or contract amounts of these
swaps by maturity and weighted average interest rates to be received and paid as
of November 30, 1996. Swaps utilized to hedge the Company's structured debt are
presented at their redemption values:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
U.S. Dollar Non-U.S. Dollar(1)
- -----------------------------------------------------------------------------------------------------------------
Receive Receive Receive Receive
Fixed Floating Index/ Fixed Floating Nov. 30, Nov. 30,
Pay Pay Equity Pay Pay 1996 1995
(Dollars in Millions) Floating Floating Linked Floating Floating(2) Total Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturing in fiscal 1996 $ - $ - $ - $ - $ - $ - $ 681
Maturing in fiscal 1997 628 200 497 96 357 1,778 1,238
Maturing in fiscal 1998 343 175 566 462 221 1,767 860
Maturing in fiscal 1999 456 200 319 206 82 1,263 588
Maturing in fiscal 2000 75 - 22 28 44 169 70
Maturing in fiscal 2001 800 5 68 47 - 920 -
Thereafter 885 - 116 516 - 1,517 1,388
--------------------------------------------------------------------------------
Total $ 3,187 $ 580 $1,588 $1,355 $704 $ 7,414 $ 4,825
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Weighted average at
fiscal year-end(3)
Receive rate 7.2% 5.8% n/a 5.1% 3.3%
Pay rate 5.6% 6.0% n/a 4.9% 5.9%
--------------------------------------------------------------------------------
</TABLE>
(1) The differences between the receive rate and the pay rate may reflect
differences in the rate of interest associated with the underlying
currency.
(2) These amounts include currency swaps used to effectively convert debt
denominated in one currency into obligations denominated in another
currency.
(3) The table was prepared under the assumption that interest rates remain
constant at year-end levels. The variable interest rates to be received or
paid will change to the extent that rates fluctuate. Such changes may be
substantial. Variable rates presented generally are based on LIBOR or
Treasury bill rates.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 63
<PAGE> 14
As noted above, the Company uses interest rate and currency swaps to modify the
terms of its existing debt. Activity during the periods in the notional value of
the swap contracts used by the Company for asset and liability management (and
the unrecognized gain at period end) is summarized in the table below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Fiscal Fiscal
(Dollars in Millions) 1996 1995
-----------------------
<S> <C> <C>
Notional value at beginning of period $4,825 $ 3,740
Additions 3,453 1,546
Matured (643) (359)
Terminated (157) (108)
Effect of foreign currency translation on non-U.S. dollar notional values
and changes in redemption values on structured debt (64) 6
-----------------------
Notional value at fiscal year-end $7,414 $ 4,825
-----------------------
-----------------------
Unrecognized gain at fiscal year-end $ 150 $ 225
-----------------------
-----------------------
</TABLE>
The Company also uses interest rate swaps to modify certain of its repurchase
financing agreements. The Company had interest rate swaps with notional values
of approximately $1.1 billion and $2.1 billion as of November 30, 1996 and
November 30, 1995, respectively, and unrecognized gains of approximately $14
million and $45 million as of November 30, 1996 and November 30, 1995,
respectively, for such purpose. The unrecognized gains on these swaps were
offset by unrecognized losses on certain of the Company's repurchase financing
agreements.
The estimated fair value of the Company's long-term debt, based on rates
available to the Company at November 30, 1996 and November 30, 1995 for debt
with similar terms and maturities, and the aggregate carrying value of this debt
are presented in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Nov. 30, Nov. 30,
(Dollars in Millions) 1996 1995
----------------------
<S> <C> <C>
Fair value of long-term debt $14,751 $ 9,954
Unrecognized loss (253) (319)
----------------------
Carrying value of long-term debt $14,498 $ 9,635
----------------------
----------------------
</TABLE>
4 Commitments and Contingencies
LEASES AND RELATED COMMITMENTS
The Company incurred rent expense under operating leases in the amounts of $101
million, $97 million and $113 million in fiscal 1996, fiscal 1995 and fiscal
1994, respectively. Minimum remaining rental payments, excluding amounts related
to the Company's termination of certain leased office space as described below,
are approximately as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Fiscal Year (Dollars in Millions)
--------------------
<S> <C>
1997 $ 126
1998 111
1999 87
2000 79
2001 69
Thereafter 364
---
</TABLE>
Rentals are subject to periodic escalation charges.
64
<PAGE> 15
During 1995, the Company relocated the majority of its New York City
employees from existing leased space at 1221 and 1251 Avenue of the Americas to
space in the Company's buildings at 1585 Broadway and 750 Seventh Avenue that
were purchased in fiscal 1993 and fiscal 1994, respectively. The total
investment in these two buildings totaled approximately $700 million, which is
being depreciated over the useful lives of the various assets comprising the
investment.
During fiscal 1994, the Company recognized a pretax charge of $59
million ($39 million after tax, which reduced primary and fully diluted earnings
per share by $.25 and $.24, respectively). The charge was in connection with the
moves discussed above and a move to new leased office space in Tokyo. The charge
specifically covered the Company's termination of certain leased office space
and the write-off of remaining leasehold improvements in both cities.
OTHER COMMITMENTS AND CONTINGENCIES
The Company had approximately $3.3 billion of letters of credit outstanding at
November 30, 1996 to satisfy various collateral requirements.
Financial instruments sold, not yet purchased represent obligations of
the Company to deliver specified financial instruments at contracted prices,
thereby creating commitments to purchase the financial instruments in the market
at prevailing prices. Consequently, the Company's ultimate obligation to satisfy
the sale of financial instruments sold, not yet purchased may exceed the amounts
recognized in the Consolidated Statement of Financial Condition.
The Company also has commitments to fund certain fixed assets and other
less liquid investments, including at November 30, 1996 approximately $208
million in connection with its merchant banking and other principal investment
activities. Additionally, the Company has provided and will continue to provide
financing, including margin lending and other extensions of credit to clients
(including subordinated loans on an interim basis to leveraged companies
associated with its investment banking and its merchant banking and other
principal investment activities), that may subject the Company to increased
credit and liquidity risks.
The Company and its subsidiaries have been named as defendants in
certain legal actions and have been involved in certain investigations and
proceedings in the ordinary course of business. It is the opinion of management,
based on current knowledge and after consultation with counsel, that the outcome
of such matters will not have a material adverse effect on the Company's
Consolidated Financial Statements contained herein.
5 Trading Activities
TRADING REVENUES
The Company manages its trading businesses by product groupings and therefore
has established distinct, worldwide trading divisions having responsibility for
equity, fixed income, foreign exchange and commodities products. Because of the
integrated nature of the markets for such products, each product area trades
cash instruments as well as related derivative products (i.e., options, swaps,
futures, forwards and other contracts with respect to such underlying
instruments or commodities). Revenues related to trading are summarized below by
trading division. The "Total" column includes all trading revenues plus the
portion of those commission and interest revenues and expenses which result from
trading activities. Commissions and Net Interest (interest
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 65
<PAGE> 16
revenues less interest expense) as reported in the Company's Consolidated
Statement of Income also include results from the Company's securities services
business and other business activities:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Dollars in Millions) Trading Commissions Net Interest Total
-----------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1996
Equities $ 978 $ 536 $(166) $ 1,348
Fixed Income 926 66 252 1,244
Foreign Exchange 169 1 - 170
Commodities 137 - (17) 120
-----------------------------------------------
Trading-related revenues 2,210 603 69 2,882
Securities services and other - 10 264 274
-----------------------------------------------
$ 2,210 $ 613 $ 333 $ 3,156
-----------------------------------------------
-----------------------------------------------
FISCAL 1995
Equities $ 409 $ 367 $ 103 $ 879
Fixed Income 489 52 306 847
Foreign Exchange 156 - 3 159
Commodities 68 - (16) 52
-----------------------------------------------
Trading-related revenues 1,122 419 396 1,937
Securities services and other - 18 42 60
-----------------------------------------------
$ 1,122 $ 437 $ 438 $ 1,997
-----------------------------------------------
-----------------------------------------------
FISCAL 1994
Equities $ 510 $ 351 $ (60) $ 801
Fixed Income 347 60 419 826
Foreign Exchange 148 1 4 153
Commodities 99 2 5 106
-----------------------------------------------
Trading-related revenues 1,104 414 368 1,886
Securities services and other - 35 163 198
-----------------------------------------------
$ 1,104 $ 449 $ 531 $ 2,084
-----------------------------------------------
-----------------------------------------------
</TABLE>
The Company's trading activities are both client-driven and proprietary. The
Company enters into specific contracts and carries inventories to meet the needs
of its clients. Its trading portfolios also are managed with a view toward the
risk and profitability of the portfolios to the Company. The nature of the
equities, fixed income, foreign exchange and commodities activities conducted by
the Company, including the use of derivative products in these businesses, and
the market, credit and concentration risk management policies and procedures
covering these activities are discussed below.
EQUITIES
The Company makes markets and trades in the global secondary markets for
equities and convertible debt and is a dealer in equity warrants, exchange
traded and OTC equity options, index futures, equity swaps and other
sophisticated equity derivatives. The Company's activities as a dealer primarily
are client-driven, with the objective of meeting clients' needs while earning a
spread between the premiums paid or received on its contracts with clients and
the cost of hedging such transactions in the cash or forward market or with
other derivative
66
<PAGE> 17
transactions. The Company limits its market risk related to these contracts,
which stems primarily from underlying equity/index price and volatility
movements, by employing a variety of hedging strategies, such as delta hedging
(delta is a measure of a derivative contract's price movement based on the
movement of the price of the security or index underlying the contract). The
Company also takes proprietary positions in the global equity markets by using
derivatives, most commonly futures and options, in addition to cash positions,
intending to profit from market price and volatility movements in the underlying
equities or indices positioned.
Equity option contracts give the purchaser of the contract the right to
buy (call) or sell (put) the equity security or index underlying the contract at
an agreed-upon price (strike price) during or at the conclusion of a specified
period of time. The seller (writer) of the contract is subject to market risk,
and the purchaser is subject to market risk (to the extent of the premium paid)
and credit risk. Equity swap contracts are contractual agreements whereby one
counterparty receives the appreciation (or pays the depreciation) on an equity
investment in return for paying another rate, often based upon equity index
movements or interest rates. The counterparties to the Company's equity
transactions include commercial banks, investment banks, broker-dealers,
investment funds and industrial companies.
FIXED INCOME
The Company is a market-maker for U.S. and non-U.S. government securities,
corporate bonds, money market instruments, medium-term notes and Eurobonds,
high-yield securities, emerging market securities, mortgage- and other
asset-backed securities, preferred stock and tax-exempt securities. In addition,
the Company is a dealer in interest rate and currency swaps and other related
derivative products, OTC options on U.S. and foreign government bonds and
mortgage-backed forward agreements ("TBA"), options and swaps. In this capacity,
the Company facilitates asset and liability management for its customers in
interest rate and currency swaps and related products and OTC government bond
options.
Swaps used in fixed income trading are, for the most part, contractual
agreements to exchange interest payment streams (i.e., an interest rate swap may
involve exchanging fixed for floating interest payments) or currencies (i.e., a
currency swap may involve exchanging yen for U.S. dollars in one year at an
agreed-upon exchange rate). The Company profits by earning a spread between the
premium paid or received for these contracts and the cost of hedging such
contracts. The Company seeks to manage the market risk of its swap portfolio,
which stems from interest rate and currency movements and volatility, by using
modeling that quantifies the sensitivity of its portfolio to movements in
interest rates and currencies and by adding positions to or selling positions
from its portfolio as needed to minimize such sensitivity. Typically, the
Company adjusts its positions by entering into additional swaps or interest rate
and foreign currency futures, foreign currency forwards and underlying
government bonds. The Company manages the risk related to its option portfolio
by using a variety of hedging strategies such as delta hedging, which includes
the use of futures and forward contracts to hedge market risk. The Company also
is involved in using debt securities to structure products with multiple
risk/return factors designed to suit investor objectives.
The Company is an underwriter of and a market-maker in mortgage-backed
securities and collateralized mortgage obligations ("CMO") as well as
commercial, residential and real estate loan products. The Company also
structures mortgage-backed swaps for its clients, enabling them to derive the
cash flows from an underlying mortgage-backed security without purchasing the
cash position. It earns the spread between the premium inherent in the swap and
the cost of hedging the swap contract through the use of cash positions or TBA
contracts. The Company also uses TBAs in its role as a dealer in mortgage-backed
securities and facilitates customer trades by taking positions in the TBA
market. Typically, these positions are hedged by offsetting TBA
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 67
<PAGE> 18
contracts or underlying cash positions. The Company profits by earning the
bid-offer spread on such transactions. Further, the Company uses TBAs to ensure
delivery of underlying mortgage-backed securities in its CMO issuance business.
As is the case with all mortgage-backed products, market risk associated with
these instruments results from interest rate fluctuations and changes in
mortgage prepayment speeds. The counterparties to the Company's fixed income
transactions include investment advisors, commercial banks, insurance companies,
investment funds and industrial companies.
FOREIGN EXCHANGE
The Company is a market-maker in a number of foreign currencies. In this
business, it actively trades currencies in the spot and forward markets earning
a dealer spread. The Company seeks to manage its market risk by entering into
offsetting positions. The Company conducts an arbitrage business in which it
seeks to profit from inefficiencies between the futures, spot and forward
markets. The Company also makes a market in foreign currency options. This
business largely is client-driven and involves the purchasing and writing of
European and American style options and certain sophisticated products to meet
specific client needs. The Company profits in this business by earning spreads
between the options' premiums and the cost of the hedging of such positions. The
Company limits its market risk by using a variety of hedging strategies,
including the buying and selling of the currencies underlying the options based
upon the options' delta equivalent. Foreign exchange option contracts give the
purchaser of the contract the right to buy (call) or sell (put) the currency
underlying the contract at an agreed-upon strike price at or over a specified
period of time. Forward contracts and futures represent commitments to purchase
or sell the underlying currencies at a specified future date at a specified
price. The Company also takes proprietary positions in major currencies to
profit from market price and volatility movements in the currencies positioned.
The majority of the Company's foreign exchange business relates to
major foreign currencies such as deutsche marks, yen, pound sterling, French
francs, Swiss francs, lire and Canadian dollars. The balance of the business
covers a broad range of other currencies. The counterparties to the Company's
foreign exchange transactions include commercial banks, investment banks,
broker-dealers, investment funds and industrial companies.
COMMODITIES
The Company, as a major participant in the world commodities markets, trades in
physical precious, base and platinum group metals, electricity, energy products
(principally oil, refined oil products and natural gas) as well as a variety of
derivatives related to these commodities such as futures, forwards and exchange
traded and OTC options and swaps. Through these activities, the Company provides
clients with a ready market to satisfy end users' current raw material needs and
facilitates their ability to hedge price fluctuations related to future
inventory needs. The former activity at times requires the positioning of
physical commodities. Derivatives on those commodities, such as futures,
forwards and options, often are used to hedge price movements in the underlying
physical inventory. The Company profits as a market-maker in physical
commodities by capturing the bid and offer spread inherent in the physical
markets.
To facilitate hedging for its clients, the Company often is required to
take positions in the commodity markets in the form of forward, option and swap
contracts involving oil, natural gas and electricity. The Company generally
hedges these positions by using a variety of hedging techniques such as delta
hedging, whereby the Company takes positions in the physical markets and/or
positions in other commodity derivatives such as futures and forwards to offset
the market risk in the underlying derivative. The Company profits from this
business by earning a spread between the premiums paid or received for these
derivatives and the cost of hedging such derivatives.
68
<PAGE> 19
The Company also maintains proprietary trading positions in commodity
derivatives, including futures, forwards and options in addition to physical
commodities, to profit from price and volatility movements in the underlying
commodities markets.
Forward, option and swap contracts on commodities are structured
similarly to like-kind derivative contracts for cash financial instruments. The
counterparties to OTC commodity contracts include precious metals producers,
refiners and consumers as well as shippers, central banks, and oil, gas and
electricity producers.
RISK MANAGEMENT
Risk management at the Company is an integrated process with independent
oversight which requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administration and business functions to assist
in the identification, assessment and control of various risks. In recognition
of the increasingly varied and complex nature of the financial services
business, the Company's risk management policies and procedures are evolutionary
in nature and are subject to ongoing review, modification and revision. Many of
the Company's risk management and control practices are subject to periodic
review by the Company's internal auditors and independent accountants, as well
as interactions with various regulatory authorities. The Company continues to be
committed to employing qualified personnel with appropriate expertise in each of
its various administrative and business areas to implement effectively the
Company's risk management and monitoring systems and processes.
The Company has developed a multi-tiered approach for monitoring and
managing its risks. The Finance and Risk Committee, authorized by the Company's
Board of Directors, is chaired by the Company's Chief Financial Officer and is
composed of senior officers with familiarity and expertise in dealing with risk
management principles. It establishes the overall risk management policies of
the Company, reviews the Company's performance relative to these policies,
allocates capital among business activities of the Company, monitors the
availability of sources of financing, reviews the foreign exchange risk of the
Company, and oversees the liquidity and interest rate sensitivity of the
Company's asset and liability position. The Firm Risk Manager heads the Firm
Risk Management Group (described below) and assists senior management and the
Finance and Risk Committee in establishing, monitoring and controlling the
Company's overall risk profile. With respect to the Company's major trading
divisions (fixed income, equity, commodities and foreign exchange), division
risk managers monitor and manage positions and set the overall division risk
profile on a worldwide basis within established market risk limits, review major
trading positions and strategies, and report major market and position events to
the Firm Risk Manager. Desk risk managers perform similar functions with respect
to a product area or particular product at the business unit and trading desk
level.
The Firm Risk Management Group has operational responsibility for
identifying, monitoring and reporting to senior management on the Company's
exposure to risk. The Firm Risk Management Group includes three departments that
are all independent of the Company's business areas: the Market Risk Department
monitors the Company's market risk profile on a worldwide basis, which includes
all divisional, geographic and product-line market risks; the Credit Department
manages and monitors counterparty exposure limits on a worldwide basis; the
Internal Audit Department, which also reports to the Audit Committee of the
Board of Directors, assesses the Company's operations and control environment
through periodic examinations of business and operational areas.
During fiscal 1996, the Company established a Risk Management Advisory
Board which advises the Firm Risk Management Group on risk measurement
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 69
<PAGE> 20
methodologies, models and systems and establishes review procedures for models
used by the Company for valuation and risk measurement. Other departments within
the Company that are independent of the Company's business areas and also are
actively involved in monitoring the Company's risk profile include: Controllers,
Corporate Treasury, Information Technology, Legal and Compliance, Tax and
Operations.
In addition, the Company has certain commitment committees that are
involved in managing and monitoring the risks associated with the Company's
diverse businesses. These committees are composed of a cross section of the
Company's senior officers from various disciplines. The High-Yield Commitment
Committee and Equity Commitment Committee determine whether the Company should
participate in a transaction involving the underwriting or placement of
high-yield or equity securities, respectively, where the Company's capital and
reputation may be at risk, and evaluate the potential revenues and risks
involved with respect to a particular transaction.
MARKET RISK
Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, volatilities, correlations or other market factors, such
as liquidity, will result in losses for a specified position or portfolio.
The Company manages the market risk associated with its trading
activities Company-wide, on a divisional level worldwide and on an individual
product basis. Specific market risk guidelines and limits have been approved for
the Company and each trading division of the Company worldwide by the Finance
and Risk Committee. Discrete market risk limits are assigned to business units
and trading desks within trading areas which are compatible with the trading
division limits. Division risk managers, desk risk managers and the Market Risk
Department all monitor market risk measures against limits.
The Market Risk Department independently reviews the Company's trading
portfolios on a regular basis from a market risk perspective which includes
value at risk and other quantitative and qualitative risk measurements and
analyses. The Company may use measures, such as rate sensitivity, convexity,
volatility and time decay measurements, to estimate market risk and to assess
the sensitivity of positions to changes in market conditions. Stress testing,
which measures the impact on the value of existing portfolios of specified
changes in market factors, for certain products is performed periodically and is
reviewed by division risk managers, desk risk managers and the Market Risk
Department.
CREDIT RISK
The Company's exposure to credit risk arises from the possibility that a
counterparty to a transaction might fail to perform under its contractual
commitment, resulting in the Company incurring losses. The Finance and Risk
Committee has approved Company-wide credit guidelines which limit the Company's
credit exposure to any one counterparty. Specific credit risk limits based on
the credit guidelines also have been approved by the Finance and Risk Committee
for each type of counterparty (by rating category) as well as secondary
positions of high-yield and emerging market debt.
The Credit Department administers and monitors the credit limits among
trading divisions on a worldwide basis. In addition to monitoring credit limits,
the Company manages the credit exposure relating to its trading activities by
reviewing counterparty financial soundness periodically, by entering into master
netting agreements and collateral arrangements with counterparties in
appropriate circumstances and by limiting the duration of exposure. In certain
cases, the Company also may close out transactions or assign them to other
counterparties to mitigate credit risk.
70
<PAGE> 21
CONCENTRATION RISK
The Company is subject to concentration risk by holding large positions in
certain types of securities or commitments to purchase securities of a single
issuer, including sovereign governments and other entities, issuers located in a
particular country or geographic area, public and private issuers involving
developing countries or issuers engaged in a particular industry. Financial
instruments owned by the Company include U.S. government and agency securities
and securities issued by other sovereign governments (principally Japan, Germany
and Italy), which, in the aggregate, represented approximately 16% of the
Company's total assets at November 30, 1996. In addition, substantially all of
the collateral held by the Company for resale agreements or bonds borrowed,
which together represented approximately 36% of the Company's total assets at
November 30, 1996, consists of securities issued by the U.S. government, federal
agencies or other sovereign government obligations. Positions taken and
commitments made by the Company, including positions taken and underwriting and
financing commitments made in connection with its merchant banking and principal
investment activities, often involve substantial amounts and significant
exposure to individual issuers and businesses, including non-investment grade
issuers. The Company seeks to limit concentration risk through the use of the
systems and procedures described in the preceding discussions of market and
credit risk.
CUSTOMER ACTIVITIES
The Company's customer activities involve the execution, settlement, custody and
financing of various securities and commodities transactions on behalf of
customers. Customer securities activities are transacted on either a cash or
margin basis. Customer commodities activities, which include the execution of
customer transactions in commodity futures transactions (including options on
futures), are transacted on a margin basis.
The Company's customer activities may expose it to off-balance sheet
credit risk. The Company may have to purchase or sell financial instruments at
prevailing market prices in the event of the failure of a customer to settle a
trade on its original terms or in the event cash and securities in customer
margin accounts are not sufficient to fully cover customer losses. The Company
seeks to control the risks associated with customer activities by requiring
customers to maintain margin collateral in compliance with various regulations
and Company policies.
NOTIONAL/CONTRACT AMOUNTS AND FAIR
VALUES OF DERIVATIVES
The gross notional or contract amounts of derivative instruments and fair value
(carrying amount) of the related assets and liabilities at November 30, 1996 and
November 30, 1995, as well as the average fair value of those assets and
liabilities for the year ended November 30, 1996 and the period ended November
30, 1995, are presented in the table which follows. Fair value represents the
cost of replacing these instruments and is further described in Note 1. Future
changes in interest rates, foreign currency exchange rates or the fair values of
the financial instruments, commodities or indices underlying these contracts may
ultimately result in cash settlements exceeding fair value amounts recognized in
the Consolidated Statement of Financial Condition. Assets represent unrealized
gains on purchased exchange traded and OTC options and other contracts
(including interest rate, foreign exchange and other forward contracts and
swaps) in gain positions net of any unrealized losses owed to these
counterparties on offsetting positions in situations where netting is consistent
with FASB Interpretation No. 39. Similarly, liabilities represent net
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 71
<PAGE> 22
amounts owed to counterparties. These amounts will vary based on changes in the
fair values of underlying financial instruments and/or the volatility of such
underlying instruments:
<TABLE>
<CAPTION>
Fiscal Year-End Fiscal Year-End Average
Gross Notional/ Fair Values(3) Fair Values(3)(4)
Contract Amount(1)(2) --------------------------- ---------------------------
Assets Liabilities Assets Liabilities
--------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 (Dollars in Billions, at fiscal year-end ) 1996 1995 1996 1995 1996 1995 1996 1995
$622 $401 Interest rate and currency swaps
and options (including caps,
floors and swap options) $ 4.9 $3.8 $ 5.0 $3.8 $4.2 $3.7 $3.8 $ 3.8
362 260 Foreign exchange forward
and futures contracts and options 2.2 1.9 2.0 1.9 1.6 2.0 1.6 2.2
31 21 Mortgage-backed securities forward
contracts, swaps and options 0.2 0.1 0.1 0.1 0.2 0.1 0.1 0.1
178 199 Other fixed income securities
contracts (including futures
contracts and options) 0.2 0.1 0.2 0.4 0.2 0.3 0.4 0.3
61 57 Equity securities contracts (including
equity swaps, futures contracts,
and warrants and options) 2.3 1.4 1.5 0.8 1.6 1.5 1.1 0.9
63 47 Commodity forwards, futures,
options and swaps 1.4 0.7 1.2 0.5 1.3 1.0 0.7 0.9
------------- --------------------------------------------------------
$ 1,317 $ 985 Total $11.2 $8.0 $10.0 $7.5 $9.1 $8.6 $7.7 $ 8.2
------------- --------------------------------------------------------
------------- --------------------------------------------------------
</TABLE>
(1) The notional amounts of derivatives have been adjusted to reflect the
effects of leverage, where applicable.
(2) Notional amounts include purchased and written options of $247 billion and
$193 billion, respectively, at November 30, 1996, and $139 billion and $100
billion, respectively, at November 30, 1995.
(3) These amounts represent carrying value (exclusive of collateral) at November
30, 1996 and November 30, 1995, respectively, and do not include receivables
or payables related to exchange traded futures contracts.
(4) Amounts are calculated using a monthly average.
The gross notional or contract amounts of these instruments are indicative
of the Company's degree of use of derivatives for trading purposes but do not
represent the Company's exposure to market or credit risk. Credit risk arises
from the failure of a counterparty to perform according to the terms of the
contract. The Company's exposure to credit risk at any point in time is
represented by fair value of the contracts reported as assets. These amounts are
presented on a net-by-counterparty basis consistent with FASB Interpretation
No. 39 but are not reported net of collateral, which the Company obtains with
respect to certain of these transactions to reduce its exposure to credit
losses. The Company monitors the creditworthiness of counterparties to these
transactions on an ongoing basis and requests additional collateral when deemed
necessary. The Company believes that the ultimate settlement of the transactions
outstanding at November 30, 1996 will not have a material effect on the
Company's financial condition.
72
<PAGE> 23
The remaining maturities of the Company's swaps and other derivative
products at November 30, 1996 and November 30, 1995 are summarized in the
following table, showing notional values by year of expected maturity:
<TABLE>
<CAPTION>
Greater
Less than 1 to 3 3 to 5 than
(Dollars in Billions) 1 Year Years Years 5 Years Total
--------- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
NOVEMBER 30, 1996
Interest rate and currency swaps
and options (including caps,
floors and swap options) $132 $191 $119 $180 $ 622
Foreign exchange forward and
futures contracts and options 338 20 4 -- 362
Mortgage-backed securities forward
contracts, swaps and options 20 1 2 8 31
Other fixed income securities
contracts (including futures
contracts and options) 132 39 6 1 178
Equity securities contracts
(including equity swaps,
futures contracts, and
warrants and options) 50 9 2 -- 61
Commodity forwards, futures
options and swaps 50 10 2 1 63
---- ---- ---- ---- ------
Total $722 $270 $135 $190 $1,317
---- ---- ---- ---- ------
---- ---- ---- ---- ------
Percent of total 55% 21% 10% 14% 100%
---- ---- ---- ---- ------
---- ---- ---- ---- ------
NOVEMBER 30, 1995
Interest rate and currency swaps
and options (including caps,
floors and swap options) $ 97 $138 $ 74 $ 92 $ 401
Foreign exchange forward and
futures contracts and options 253 4 3 -- 260
Mortgage-backed securities forward
contracts, swaps and options 16 -- 2 3 21
Other fixed income securities
contracts (including futures
contracts and options) 142 34 16 7 199
Equity securities contracts
(including equity swaps,
futures contracts, and
warrants and options) 54 3 -- -- 57
Commodity forwards, futures
options and swaps 38 7 2 -- 47
---- ---- ---- ---- ------
Total $600 $186 $ 97 $102 $ 985
---- ---- ---- ---- ------
---- ---- ---- ---- ------
Percent of total 61% 19% 10% 10% 100%
---- ---- ---- ---- ------
---- ---- ---- ---- ------
</TABLE>
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 73
<PAGE> 24
The credit quality of the Company's trading-related derivatives at November 30,
1996 and November 30, 1995 is summarized in the table below, showing the fair
value of the related assets by counterparty credit rating. The actual credit
ratings are determined by external rating agencies or by equivalent ratings used
by the Company's Credit Department:
<TABLE>
<CAPTION>
Collater-
alized Other
Non- Non-
Invest- Invest-
ment ment
(Dollars in Millions) AAA AA A BBB Grade Grade Total
------ ------ ------ ------ ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NOVEMBER 30, 1996
Interest rate and currency swaps
and options (including caps, floors
and swap options) $ 739 $1,393 $1,977 $ 674 $ 25 $ 152 $ 4,960
Foreign exchange forward contracts
and options 727 824 539 28 -- 50 2,168
Mortgage-backed securities forward
contracts, swaps and options 66 65 64 19 -- 5 219
Other fixed income securities
contracts (including options) 53 52 41 22 6 31 205
Equity securities contracts (including
equity swaps, warrants and options) 1,074 274 408 60 426 43 2,285
Commodity forwards, options and swaps 95 318 318 280 72 300 1,383
------ ------ ------ ------ ---- ---- -------
Total $2,754 $2,926 $3,347 $1,083 $529 $581 $11,220
------ ------ ------ ------ ---- ---- -------
------ ------ ------ ------ ---- ---- -------
Percent of total 24% 26% 30% 10% 5% 5% 100%
------ ------ ------ ------ ---- ---- -------
------ ------ ------ ------ ---- ---- -------
NOVEMBER 30, 1995
Interest rate and currency swaps
and options (including caps, floors
and swap options) $ 660 $1,269 $1,148 $ 535 $ 88 $ 141 $ 3,841
Foreign exchange forward contracts
and options 548 531 674 83 -- 27 1,863
Mortgage-backed securities forward
contracts, swaps and options 23 31 36 7 12 14 123
Other fixed income securities
contracts (including options) 25 33 33 42 -- 4 137
Equity securities contracts (including
equity swaps, warrants and options) 612 98 232 143 178 159 1,422
Commodity forwards, options and swaps 103 129 152 126 -- 147 657
------ ------ ------ ------ ---- ---- -------
Total $1,971 $2,091 $2,275 $ 936 $278 $ 492 $ 8,043
------ ------ ------ ------ ---- ---- -------
------ ------ ------ ------ ---- ---- -------
Percent of total 25% 26% 28% 12% 3% 6% 100%
------ ------ ------ ------ ---- ---- -------
------ ------ ------ ------ ---- ---- -------
</TABLE>
The Company has also obtained assets posted as collateral by investment grade
counterparties amounting to $948 million and $883 million at November 30, 1996
and November 30, 1995, respectively.
74
<PAGE> 25
6 Preferred Stock and Capital Units
Preferred stock is composed of the following issues:
<TABLE>
<CAPTION>
Shares Outstanding at Balance at
---------------------- ----------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
(Dollars in Millions) 1996 1995 1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
ESOP Convertible Preferred Stock,
liquidation preference $35.88 3,699,302 3,758,133 $ 133 $ 135
9.36% Cumulative Preferred Stock, stated value $25 -- 5,500,000 -- 138
Series A Fixed/Adjustable Rate Cumulative
Preferred Stock, stated value $200 1,725,000 -- 345 --
7-3/4% Cumulative Preferred Stock, stated value $200 1,000,000 -- 200 --
7-3/8% Cumulative Preferred Stock, stated value $200 1,000,000 1,000,000 200 200
8.88% Cumulative Preferred Stock, stated value $200 975,000 975,000 195 195
8-3/4% Cumulative Preferred Stock, stated value $200 750,000 750,000 150 150
--------- --------- --------- ---------
Total $1,223 $ 818
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Each issue of preferred stock ranks in parity with all other preferred
stock.
During fiscal 1996, the Company redeemed all 5,500,000 shares of its 9.36%
Cumulative Preferred Stock at a redemption price of $25.156 per share, which
reflected the stated value of $25 per share together with an amount equal to all
dividends accrued and unpaid to, but excluding, the redemption date.
During fiscal 1996, the Company issued 4,000,000 Depositary Shares,
representing 1,000,000 shares of 7-3/4% Cumulative Preferred Stock, in an
aggregate amount of $200 million. Each Depositary Share represents 1/4 of a
share of such preferred stock.
During fiscal 1996, the Company issued 6,900,000 Depositary Shares,
representing 1,725,000 shares of Series A Fixed/Adjustable Rate Cumulative
Preferred Stock ("FRAPS"), in the aggregate amount of $345 million. The FRAPS
will pay a fixed dividend rate of 5.91% through 2001, after which it will pay a
floating rate based upon certain U.S. Treasury securities. Each Depositary Share
represents 1/4 of a share of such preferred stock.
Subsequent to November 30, 1996, the Company redeemed all 975,000 shares
of its 8.88% Cumulative Preferred Stock at a redemption price of $201.632 per
share, which reflects the stated value of $200 per share together with an amount
equal to all dividends accrued and unpaid to, but excluding, the redemption
date.
The Company has Capital Units outstanding which were issued by the Company
and Morgan Stanley Finance plc ("MS plc"), a U.K. subsidiary. A Capital Unit
consists of (a) a Subordinated Debenture of MS plc guaranteed by the Company and
having maturities from 2013 to 2015 and (b) a related Purchase Contract issued
by the Company, which may be accelerated by the Company beginning approximately
one year after the issuance of each Capital Unit, requiring the holder to
purchase one Depositary Share representing shares (or fractional shares) of the
Company's Cumulative Preferred Stock. The aggregate amount of Capital Units
outstanding was $865 million at November 30, 1996 and November 30, 1995.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 75
<PAGE> 26
Subsequent to November 30, 1996, the Company and MS plc issued 8.03%
Capital Units in the aggregate amount of $134 million which mature in 2016.
The estimated fair value of the Capital Units was $866 million and $872
million at November 30, 1996 and November 30, 1995, respectively.
7 Common Stock and Stockholders' Equity
During the fiscal year ended November 30, 1996, the Company repurchased or
acquired shares of its common stock at an aggregate cost of $507 million and an
average cost per share of $44.25. The Company's unused portion of its stock
repurchase authorization at November 30, 1996 was approximately $256 million. On
January 7, 1997, the Board of Directors authorized the purchase, in the open
market or otherwise, subject to market conditions and certain other factors, of
an additional $400 million of the Company's common stock. The Company also
retired 4,003,636 shares of treasury stock during fiscal 1996.
MS&Co. is a registered broker-dealer and a registered futures commission
merchant and, accordingly, is subject to the minimum net capital requirements of
the Securities and Exchange Commission ("SEC"), the New York Stock Exchange
("NYSE") and the Commodity Futures Trading Commission. MS&Co. has consistently
operated in excess of these requirements with aggregate net capital, as defined,
totaling $1,357 million at November 30, 1996, which exceeded the amount required
by $1,055 million. MSIL, a London-based broker-dealer subsidiary, is subject to
the capital requirements of the Securities and Futures Authority, and MSJL, a
Tokyo-based broker-dealer, is subject to the capital requirements of the
Japanese Ministry of Finance. MSIL and MSJL have consistently operated in excess
of their respective regulatory capital requirements.
Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their local capital adequacy requirements.
Advances, dividend payments and other equity withdrawals from MS&Co.,
MSIL, MSJL and other regulated subsidiaries are restricted by the regulations of
the SEC, NYSE and other regulatory agencies and by subordinated noteholders and
certain banks. Morgan Stanley Derivative Products Inc., the Company's triple-A
rated derivative products subsidiary, also has established certain operating
restrictions which have been reviewed by various rating agencies. At November
30, 1996, approximately $2,264 million of equity of the Company's subsidiaries
may be restricted as to the payment of dividends and advances.
Cumulative translation adjustments include gains or losses resulting from
translating foreign currency financial statements from their respective
functional currencies to U.S. dollars, net of hedge gains or losses and related
tax effects. The Company uses foreign currency contracts and designates certain
non-U.S. dollar currency debt as hedges to manage the currency exposure relating
to its net monetary investments in non-U.S. dollar functional currency
subsidiaries. Increases or decreases in the value of the Company's net foreign
investments generally are tax-deferred for U.S. purposes, but the related hedge
gains and losses are taxable currently. Therefore, the gross notional amounts of
the contracts and debt designated as hedges exceed the Company's net foreign
investments to result in effective hedging on an after-tax basis. The Company
attempts to protect its net book value from the effects of fluctuations in
currency exchange rates on its net monetary investments in non-U.S. dollar
subsidiaries by selling the appropriate non-U.S. dollar currency in the forward
market. However, under some circumstances, the Company may elect not to hedge
its net monetary investments in certain foreign operations due to market
conditions, including the availability of various currency contracts at
acceptable costs. Information relating to the
76
<PAGE> 27
hedging of the Company's net monetary investments in non-U.S. dollar functional
currency subsidiaries and their effects on cumulative translation adjustments is
summarized below:
<TABLE>
<CAPTION>
Nov. 30, Nov. 30,
(Dollars in Millions) 1996 1995
------ -------
<S> <C> <C>
Net investments in non-U.S. dollar functional
currency subsidiaries $1,279 $ 1,243
------ -------
Gross notional amounts of foreign exchange contracts
and non-U.S. dollar debt designated as hedges(1) $2,247 $ 2,082
------ -------
Cumulative translation adjustments resulting from
net investments in subsidiaries with a non-U.S.
dollar functional currency $ 100 $ 185
Cumulative translation adjustments resulting from
realized or unrealized gains or losses on hedges,
net of tax (111) (194)
------ -------
Total cumulative translation adjustments $ (11) $ (9)
------ -------
------ -------
</TABLE>
(1) Notional amounts represent the contractual currency amount translated at
respective fiscal year-end spot rates.
8 Employee Compensation Plans
The Company has adopted a variety of compensation plans for certain of its
employees. These plans are designed to facilitate a pay-for-performance policy,
provide compensation commensurate with other leading financial services industry
companies and provide for internal ownership in order to align the interests of
employees with the long-term interests of the Company's stockholders. The
following summarizes these plans:
EQUITY INCENTIVE COMPENSATION PLAN
Stock units representing employees' rights to receive unrestricted common shares
("Stock Units") are awarded annually to key employees; compensation expense for
all such awards (including those subject to forfeiture) amounted to $447
million, $157 million and $124 million for fiscal 1996, fiscal 1995 and fiscal
1994, respectively. Compensation expense for such awards was determined based on
the fair value of the Company's common stock (as defined in the plan). Stock
Units had been awarded pursuant to the 1988 Equity Incentive Compensation Plan.
On April 3, 1996, the Company's stockholders approved the 1995 Equity Incentive
Compensation Plan and Stock Unit awards subsequent to this date will be granted
under this plan only. For purposes of this footnote, the term "EICP" shall refer
collectively to the 1988 Equity Incentive Compensation Plan and the 1995 Equity
Incentive Compensation Plan.
Stock Units generally will convert to shares of the Company's common stock
within five or 10 years from grant (or earlier in the event of the holder's
death or retirement, as defined). Holders of Stock Units generally have all the
rights of a common stockholder, subject to restrictions on transfer of ownership
of the units for the five- or 10-year period. Holders of the Stock Units
generally will forfeit ownership only in certain limited situations, including
termination for cause during the restriction period. In addition, holders of the
Stock Units having a 10-year restriction period, which were awarded in respect
of services for fiscal years 1992 to 1995, and holders of Stock Units which were
awarded in respect of services for fiscal 1996, will generally forfeit ownership
of a portion of their Stock Units if their employment is terminated before the
end of the relevant restriction period.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 77
<PAGE> 28
Activity related to Stock Units accrued pursuant to the EICP is as
follows:
<TABLE>
<CAPTION>
==================================================
Stock Units
--------------------------------------------------
Fiscal 1996 Fiscal 1995(1) Fiscal 1994(1)
--------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of period 30,922,176 27,828,734 24,035,010
Awarded 7,540,581 3,776,284 4,515,630
Converted(2) (3,496,503) (395,122) (362,548)
Forfeited (437,306) (287,720) (359,358)
-------------------------------------------------
Outstanding at end of period 34,528,948 30,922,176 27,828,734
=================================================
</TABLE>
(1) Approximately 29% and 24% of the Stock Units awarded in fiscal 1995 and
fiscal 1994, respectively, were subject to a 10-year restriction period.
(2) Amounts represent Stock Units converted to unrestricted common shares.
On April 3, 1996, the Company's stockholders approved the reservation of
87,466,484 shares of common stock for awards under the EICP(including stock
options). At November 30, 1996, approximately 79,000,000 shares reserved for
future awards under the EICP remain (net of fiscal 1996 awards).
STOCK OPTION AWARDS
Prior to fiscal 1989, stock options had been awarded pursuant to the Company's
1986 Stock Option Plan which provided for the granting of stock options having
an exercise price not less than the fair value of the Company's common stock (as
defined in the plan) on the date of grant. Such options generally became
exercisable over a three-year period and expire 10 years from the date of the
grant. Since fiscal 1989, stock options have been awarded pursuant to the EICP.
Options awarded under the EICP are exercisable at a price equal to the fair
value of the Company's common stock (as defined in the plan) and will generally
expire seven years (for options awarded for fiscal 1993 service and prior) or 10
years (for options awarded for fiscal 1996, fiscal 1995 and fiscal 1994 service)
from grant.
The following table sets forth activity relating to the Company's stock
option awards:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995 Fiscal 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period 21,433,120 $23.17 24,709,000 $21.82 14,493,848 $15.00
Granted 4,512,473 49.82 124,360 35.00 11,277,708 29.75
Exercised (4,283,950) 13.69 (3,215,456) 12.73 (991,056) 11.39
Forfeited (485,870) 38.15 (184,784) 31.52 (71,500) 37.33
---------- ----------- ----------- ----------- ---------- -----------
Options outstanding at
end of period 21,175,773 30.43 21,433,120 23.17 24,709,000 21.82
---------- ----------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ----------- ---------- -----------
Options exercisable at
end of period 11,725,504 $22.80 15,045,750 $20.44 18,274,658 $19.09
---------- ----------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ----------- ---------- -----------
</TABLE>
78
<PAGE> 29
The following table presents information relating to stock options outstanding
at November 30, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
EXERCISE OPTIONS OPTIONS REMAINING
PRICE OUTSTANDING EXERCISABLE LIFE IN YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$10 - $19 4,799,206 4,799,206 1.1
$20 - $29 10,895,552 6,905,434 8.2
$30 - $39 1,138,358 -- 4.6
$40 - $49 4,178,954 20,864 6.1
$50 - $60 163,703 -- 8.7
- ----------------------------------------------------------------------------------------------------
Total 21,175,773 11,725,504 6.0
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value at date of grant for options granted during
fiscal 1996 and fiscal 1995 was $14.99 and $11.49 per option, respectively. The
fair value of options at date of grant was estimated using the Black-Scholes
option pricing model utilizing the following weighted average assumptions:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
FISCAL FISCAL
1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 5.5% 6.2%
Expected option life in years 5.3 6.6
Expected stock price volatility 27.5% 26.3%
Expected dividend yield 1.6% 1.9%
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
Had the Company elected to recognize compensation cost based on the fair value
of the options at the date of grant as prescribed by SFAS No. 123, fiscal 1996
net income, primary earnings per share and fully diluted earnings per share
would have been reduced by $43 million, $.27 per share and $.27 per share,
respectively. Fiscal 1995 net income, primary earnings per share and fully
diluted earnings per share would have been reduced by $1 million, $.01 per
share, and $.01 per share, respectively.
CAPITAL ACCUMULATION PLAN
Under the Capital Accumulation Plan ("CAP"), vested units consisting of
unsecured rights to receive payments based on notional interests in existing and
future risk-capital investments made directly or indirectly by the Company ("CAP
Units") are granted to key employees. The value of the CAP Units awarded for
services rendered in fiscal 1996, fiscal 1995 and fiscal 1994 was approximately
$7 million, $9 million and $14 million, respectively, all of which relate to
vested units.
CARRIED INTEREST PLANS
Under the Carried Interest Plans, certain key employees effectively participate
in a portion of the Company's realized gains from certain of its equity
investments in merchant banking transactions. Compensation expense for fiscal
1996, fiscal 1995 and fiscal 1994 related to these plans aggregated $0.2
million, $10 million and $24 million, respectively.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 79
<PAGE> 30
REAL ESTATE FUND PLANS
On September 26, 1995, the Board of Directors approved the adoption of the
Morgan Stanley Real Estate Compensation Plan and the Morgan Stanley Real Estate
Profits Participation Plan. Under these plans, select employees and consultants
may participate in certain gains realized by the Company's real estate funds.
Compensation expense relating to these plans aggregated $13 million and $9
million for fiscal 1996 and fiscal 1995, respectively.
The Company also has established a worldwide profit sharing plan and an
employee stock ownership plan for the benefit of substantially all its U.S.
employees. The following summarizes these plans:
PROFIT SHARING PLAN
The Company sponsors a qualified non-contributory profit sharing plan covering
substantially all its U.S. employees and also provides cash payment of profit
sharing to employees of its international subsidiaries. Contributions are made
at the discretion of management based upon the financial performance of the
Company. Total profit sharing expense for fiscal 1996, fiscal 1995 and fiscal
1994 (excluding Company contributions to the Employee Stock Ownership Plan,
which increased in fiscal 1995) was $30 million, $10 million and $23 million,
respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In July 1990, the Company's Board of Directors authorized the establishment of a
$140 million leveraged employee stock ownership plan, funded through an
independently managed trust. The Morgan Stanley Group Inc. and Subsidiaries
Employee Stock Ownership Plan ("ESOP") was established to broaden internal
ownership of the Company and to provide benefits to its employees in a
cost-effective manner. Each of the 3,699,302 preferred shares outstanding at
November 30, 1996 is held by the ESOP trust, is convertible into two shares of
the Company's common stock and is entitled to annual dividends of $2.78 per
preferred share. The ESOP trust funded its stock purchase through a loan of $140
million from the Company. The ESOP trust note, due September 19, 2010
(extendable at the option of the ESOP trust to September 19, 2015), bears a
10-3/8% interest rate per annum with principal payable without penalty on or
before the due date. The ESOP trust expects to make principal and interest
payments on the note from funds provided by dividends on the shares of
convertible preferred stock and contributions from the Company. The note
receivable from the ESOP trust is reflected as a reduction in the Company's
stockholders' equity. Shares allocated to employees generally may not be
withdrawn until the employee's death, disability, retirement or termination.
Upon withdrawal, each share of ESOP preferred stock generally will be converted
into two shares of the Company's common stock. If the fair value of such two
common shares at conversion is less than the $35.88 liquidation value of an ESOP
preferred share, the Company will pay the withdrawing employee the difference in
additional common shares or cash.
Contributions to the ESOP by the Company and allocation of ESOP shares to
employees are made annually at the discretion of the Board of Directors. The
cost of shares allocated to participants' accounts amounted to $9 million in
fiscal 1996, $11 million in fiscal 1995 and $10 million in fiscal 1994. The ESOP
debt service costs for fiscal 1996, fiscal 1995 and fiscal 1994 were paid from
dividends received on preferred stock held by the plan and from Company
contributions.
9 Employee Benefit Plans
The Company sponsors various pension plans for the majority of its
worldwide employees. It provides certain other postretirement benefits,
primarily health care and life insurance, to eligible employees. The Company
also provides certain benefits to former or inactive employees prior to
retirement. The following summarizes these plans:
PENSION PLANS
Substantially all of the U.S. employees of the Company and its U.S. affiliates
are covered by a non-contributory
80
<PAGE> 31
pension plan that is qualified under Section 401(a) of the Internal Revenue Code
(the "Qualified Plan"). Two unfunded supplementary plans (the "Supplemental
Plans") cover certain executives. In addition to the Qualified Plan and the
Supplemental Plans (collectively, the "U.S. Plans"), the Company maintains a
separate pension plan which covers substantially all employees of the Company's
U.K. subsidiaries (the "U.K. Plan"). Eight other international subsidiaries also
have pension plans covering substantially all of their employees. These pension
plans generally provide pension benefits that are based on each employee's years
of credited service and compensation during the final years of employment. The
Company's policy is to fund the accrued cost of the Qualified Plan, the U.K.
Plan and the other international plans currently. Liabilities for benefits
payable under the Supplemental Plans are accrued by the Company and are funded
when paid to the beneficiaries.
During fiscal 1996, the benefit structure of the U.K. Plan was changed
from a defined benefit plan to a defined contribution plan. Under the defined
contribution plan, benefits are determined by the purchasing power of the
accumulated value of contributions paid. Under the defined benefit plan,
benefits were expressed as a proportion of earnings at or near retirement based
on years of service. In fiscal 1996, the Company's expense related to the
defined contribution U.K. Plan was $3 million.
Pension expense for fiscal 1996, fiscal 1995 and fiscal 1994 includes the
following components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995 FISCAL 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Plans
Service cost, benefits earned during the period $ 10 $ 6 $ 8
Interest cost on projected benefit obligation 15 11 11
Return on plan assets (36) (34) 1
Difference between actual and expected return on assets 20 22 (15)
Net amortization (3) (3) (3)
- -------------------------------------------------------------------------------------------------------------------
Total U.S. Plans 6 2 2
U.K. Plan
Service cost, benefits earned during the period 6 6 6
Interest cost on projected benefit obligation 3 3 2
Return on plan assets (4) (5) -
Difference between actual and expected return on assets 1 2 (3)
- -------------------------------------------------------------------------------------------------------------------
Total U.K. Plan 6 6 5
Other international plans 6 5 5
- -------------------------------------------------------------------------------------------------------------------
Total pension expense $ 18 $ 13 $ 12
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table provides the assumptions used in determining the projected
benefit obligation for the U.S. Plans and the U.K. Plan as of November 30, 1996
and November 30, 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1996 NOVEMBER 30, 1995
- ----------------------------------------------------------------------------------------------------------------
U.S. PLANS U.K. PLAN U.S. PLANS U.K. PLAN
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average discount rate 7.75% 9.0% 7.5% 9.0%
Rate of increase in future compensation levels 5.0% 7.0% 5.0% 7.0%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0% 9.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 81
<PAGE> 32
The following table sets forth the funded status of the U.S. Plans and the U.K.
Plan as of November 30, 1996 and November 30, 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NOVEMBER 30, 1996 NOVEMBER 30, 1995
- -------------------------------------------------------------------------------------------------------------------
U.S. PLANS U.K. PLAN U.S. PLANS U.K. PLAN
- -------------------------------------------------------------------------------------------------------------------
QUALIFIED SUPPLEMENTAL QUALIFIED SUPPLEMENTAL
(DOLLARS IN MILLIONS) PLAN PLANS PLAN PLANS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of
vested benefit obligation $ (112) $(28) $ (59) $(100) $(24) $ (31)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ (123) $(49) $ (61) $(112) $(44) $ (31)
Effect of future salary increases (32) (17) -- (33) (16) (8)
- -------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (155) (66) (61) (145) (60) (39)
Plan assets at fair market
value (primarily listed
stocks and bonds) 219 -- 58 192 -- 43
- -------------------------------------------------------------------------------------------------------------------
Projected benefit obligation
less than or (in excess of)
plan assets 64 (66) (3) 47 (60) 4
Unrecognized net (gain) or loss (28) 11 -- (3) 9 (13)
Unrecognized prior service cost (1) (1) -- (1) (1) --
Unrecognized net (asset)
obligation at January 1, 1987,
net of amortization (9) 4 -- (13) 5 --
- -------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension
cost at fiscal year-end $ 26 $(52) $ (3) $ 30 $(47) $ (9)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
POSTRETIREMENT BENEFITS
The Company's obligation for certain postretirement benefits provided to
eligible employees is accounted for in accordance with SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions."
The net postretirement benefit cost consists of the following components:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL 1996 FISCAL 1995 FISCAL 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned during the period $ 1 $1 $ 2
Interest cost on accumulated postretirement benefit obligation 2 2 2
- -------------------------------------------------------------------------------------------------------------------
Net postretirement benefit cost $ 3 $3 $ 4
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE> 33
The following table provides information on the status of the Company's
postretirement benefit plans as of November 30, 1996 and November 30, 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
NOV. 30 NOV. 30
(DOLLARS IN MILLIONS) 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(17) $(13)
Fully eligible active plan participants (4) (5)
Other active plan participants (12) (17)
- -------------------------------------------------------------------------------------------------
Total (33) (35)
Unrecognized net loss 1 7
Unrecognized prior service cost 1 --
- -------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $(31) $(28)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
The accumulated postretirement benefit obligation was determined by utilizing a
discount rate of 7.75% at November 30, 1996 and 7.5% at November 30, 1995, and
by applying the provisions of the Company's medical plans, the established
maximums and sharing of costs, the relevant actuarial assumptions and the health
care cost trend rates which are projected at 8.0% and which grade down to 5.9%
in 2001 and decrease further to 4.9% in 2007.
The effect of a 1% change in the assumed cost trend rate would change the
accumulated postretirement benefit obligation by approximately $5 million as of
November 30, 1996 and would change the net periodic postretirement benefit cost
by $1 million for fiscal 1996.
POSTEMPLOYMENT BENEFITS
Effective February 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." Among its provisions, SFAS No. 112
establishes accounting standards for employers who provide benefits to former or
inactive employees after employment but before retirement. Postemployment
benefits include, but are not limited to, salary continuation, supplemental
unemployment benefits, severance benefits, disability-related benefits, and
continuation of benefits such as health care benefits and life insurance
coverage. The effect of the adoption of SFAS No. 112 was not material to the
Company's fiscal 1996, fiscal 1995 or fiscal 1994 Consolidated Financial
Statements.
10 Income Taxes
The provision for income taxes consists of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
FISCAL FISCAL FISCAL
(DOLLARS IN MILLIONS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ 500 $ 180 $ 165
U.S. state and local 209 103 142
Non-U.S. 177 111 20
- ----------------------------------------------------------------------------------------------------------
886 394 327
------ ----- ------
Deferred:
U.S. federal (249) (40) (75)
U.S. state and local (68) (33) (64)
Non-U.S. (26) (38) 11
- ----------------------------------------------------------------------------------------------------------
(343) (111) (128)
------ ----- ------
Provision for income taxes $ 543 $ 283 $ 199
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 83
<PAGE> 34
The following table reconciles the provision to the U.S. federal statutory
income tax rate:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FISCAL FISCAL FISCAL
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
U.S. state and local income taxes, net of
U.S. federal income tax benefits 5.9 5.1 8.5
Lower tax rates applicable to
non-U.S. earnings (3.4) (8.6) (9.1)
Reduced tax rate applied to dividends (0.3) (0.5) (0.6)
Other (2.7) 1.0 (0.3)
- -------------------------------------------------------------------------------------------------------------------
Effective income tax rate 34.5% 32.0% 33.5%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Lower tax rates applicable to non-U.S. earnings include the benefit of foreign
tax credits utilized against U.S. federal income taxes. The Company intends to
permanently reinvest earnings of international subsidiaries or repatriate such
earnings only when it is tax effective to do so. U.S. federal income taxes that
would be payable upon repatriation are estimated to be $487 million. Under SFAS
No. 109, deferred income taxes reflect the net tax effects of temporary
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when such differences are expected to reverse. Significant components
of the Company's deferred tax assets and liabilities as of November 30, 1996 and
November 30, 1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NOV. 30, NOV. 30,
(DOLLARS IN MILLIONS) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee compensation and benefit plans $778 $ 585
Accrued expenses not yet deductible
for tax purposes 14 21
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 792 606
Deferred tax liabilities:
Valuation of inventory, investments and receivables 42 245
Depreciation and amortization 29 28
Fund distribution costs 56 --
Other 33 31
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 160 304
Net deferred tax assets $632 $ 302
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE> 35
The Company's income tax provision excludes currency hedging-related income tax
provisions of $72 million and $3 million in fiscal 1996 and fiscal 1995,
respectively, as well as an income tax benefit of $72 million in fiscal 1994,
credited directly to the cumulative translation adjustments component of
consolidated stockholders' equity. Also not included in the Company's income tax
provision are income tax benefits of $81 million in fiscal 1996, $38 million in
fiscal 1995 and $9 million in fiscal 1994, attributable to the vesting of Stock
Unit awards and the exercise of stock options, credited directly to paid-in
capital; and $3 million in fiscal 1996, $3 million in fiscal 1995 and $4 million
in fiscal 1994, attributable to ESOP dividends, credited directly to retained
earnings.
11 Geographic Area Data
The Company's business activities are highly integrated and constitute a single
industry segment for purposes of SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise." Total revenues, net revenues, income before taxes and
identifiable assets of the Company's operations by geographic area are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES NET REVENUES
- -------------------------------------------------------------------------------------------------------------------
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
(DOLLARS IN MILLIONS) 1996 1995 1994 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International
Europe $ 5,616 $ 3,856 $ 3,942 $1,429 $ 1,018 $ 776
Asia 768 649 603 699 565 475
- -------------------------------------------------------------------------------------------------------------------
Total 6,384 4,505 4,545 2,128 1,583 1,251
North America 15,207 8,553 8,332 3,947 2,264 2,516
Eliminations (8,447) (3,934) (3,501) (299) (224) (266)
- -------------------------------------------------------------------------------------------------------------------
Total $ 13,144 $ 9,124 $ 9,376 $5,776 $ 3,623 $ 3,501
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INCOME BEFORE TAXES IDENTIFIABLE ASSETS
- -------------------------------------------------------------------------------------------------------------------
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
1996 1995 1994 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International
Europe $ 328 $262 $ 11 $ 113,734 $ 85,393 $ 65,110
Asia 161 186 56 21,561 17,363 18,413
- -------------------------------------------------------------------------------------------------------------------
Total 489 448 67 135,295 102,756 83,523
North America 1,083 435 527 200,096 139,801 120,360
Eliminations -- -- -- (138,945) (98,804) (87,189)
- -------------------------------------------------------------------------------------------------------------------
Total $1,572 $883 $594 $ 196,446 $143,753 $116,694
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Because of the international nature of the financial markets and the resulting
geographic integration of the Company's business, the Company manages its
business with a view to the profitability of the enterprise as a whole, and, as
such, profitability by geographic area is not necessarily meaningful.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 85
<PAGE> 36
12 Acquisitions
In the first quarter of fiscal 1996, the Company completed its purchase of MAS,
an institutional investment manager, for $350 million, payable in a combination
of cash, notes and common stock of the Company. The Company's fiscal 1996
results include the results of MAS since January 3, 1996, the date of
acquisition.
In the fourth quarter of fiscal 1996, the Company completed its purchase
of VKAC for $1.175 billion. The consideration for the purchase of the equity of
VKAC consisted of cash and approximately $26 million of preferred securities
issued by one of the Company's subsidiaries and exchangeable into common stock
of the Company. The Company's fiscal 1996 results include the results of VKAC
since October 31, 1996, the date of acquisition.
Subsequent to November 30, 1996, the Company announced that it had reached
an agreement with Barclays PLC ("Barclays") to acquire its institutional global
custody business for consideration to be fixed over a period of time. The
transaction involves approximately $250 billion of assets currently administered
by Barclays, and the combination of Barclays with the Company's global custody
business would have increased the Company's assets under administration at
November 30, 1996 to approximately $394 billion on a pro forma basis (assuming
that current clients of Barclays agree to become clients of the Company).
Barclays has agreed to provide global subcustodial services to the Company for a
period of time after completion of the acquisition. The acquisition is expected
to be completed during the second quarter of fiscal 1997.
13 Announced Merger with Dean Witter, Discover & Co. (Unaudited)
On February 5, 1997, the Company and Dean Witter, Discover & Co. ("DWD")
announced a definitive agreement to merge. The combined company would be a
pre-eminent global financial services firm with a market capitalization of
approximately $21 billion (as of the merger announcement date) and with leading
market positions in the securities, asset management and credit services
businesses. Under the terms of the agreement unanimously approved by the Boards
of both companies, each of the Company's common shares will be exchanged for
1.65 DWD common shares.
The transaction, which is expected to be completed in mid-1997, is
intended to be 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. Pursuant to the pooling of interests
method of accounting, prior to the time of closing each company will formally
rescind any stock repurchase authorizations existing at that time. Prior to such
rescissions, both companies may continue to repurchase stock in the open market
subject to the aggregate limitations imposed by the pooling of interests method.
The following table sets forth certain pro forma combined selected
financial data giving effect to the merger under the pooling of interests method
of accounting. The amounts presented below have been prepared by combining the
Company's financial data for fiscal 1996, the twelve months ended November 30,
1995 and November 30, 1994 with DWD's financial data for
86
<PAGE> 37
the years ended December 31, 1996, 1995 and 1994, respectively. The pro forma
combined primary and fully diluted earnings per common share for the respective
periods presented is based on the combined weighted average number of common
shares and share equivalents of the Company and DWD. The number of common shares
and share equivalents of the Company is based on an exchange ratio of 1.65
shares of DWD common shares for each issued and outstanding share and share
equivalent of the Company.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Unaudited, Dollars in Millions Except Per Share Amounts) 1996 1995 1994
------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA(1)
Net revenues $ 12,006 $ 9,798 $ 8,612
Income before income taxes 3,117 2,292 1,962
Net income 1,980 1,465 1,257
Primary earnings per share 3.22 2.30 1.96
Fully diluted earnings per share 3.14 2.25 1.93
BALANCE SHEET DATA (AT END OF PERIOD)(2)
Total assets $ 238,860
Total liabilities 227,158
Total equity 11,702
------------------------------------
</TABLE>
(1) The income statement data presented in this table exclude the effect of
(i) the positive effects of potential increased revenues or 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.
(2) Pro forma balances for 1996 represent the Company's balance sheet amounts
at November 30, 1996 combined with DWD's balance sheet amounts at December
31, 1996.
MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 87
<PAGE> 38
14 Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Fiscal 1996
------------------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
(Dollars in Millions, Feb. 29, May 31, Aug. 31, Nov. 30,
Except Share Data) 1996 1996 1996 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Investment banking $ 399 $ 542 $ 431 $ 572
Principal transactions:
Trading 704 565 427 514
Investments (7) 38 29 26
Commissions 154 159 148 152
Interest and dividends 1,933 1,946 2,144 1,678
Asset management
and administration 122 143 137 180
Other 3 _ _ 5
------------------------------------------------------------------------
Total revenues 3,308 3,393 3,316 3,127
Interest expense 1,859 1,865 2,029 1,615
------------------------------------------------------------------------
Net revenues 1,449 1,528 1,287 1,512
------------------------------------------------------------------------
Expenses excluding interest:
Compensation and benefits 705 750 645 763
Occupancy and equipment 86 86 89 101
Brokerage, clearing and
exchange fees 66 68 65 75
Communications 33 34 38 41
Business development 37 42 37 54
Professional services 42 53 58 73
Other 40 39 40 44
------------------------------------------------------------------------
Total expenses
excluding interest 1,009 1,072 972 1,151
------------------------------------------------------------------------
Income before income
taxes 440 456 315 361
Provision for income taxes 167 155 96 125
------------------------------------------------------------------------
Net income $ 273 $ 301 $ 219 $ 236
------------------------------------------------------------------------
Earnings applicable to
common shares(2) $ 257 $ 284 $ 204 $ 218
------------------------------------------------------------------------
Per common share(3):
Primary earnings(4) $ 1.64 $ 1.83 $ 1.32 $ 1.43
Fully diluted earnings(4) $ 1.57 $ 1.75 $ 1.27 $ 1.36
Cash dividends $ 0.175 $ 0.175 $ 0.175 $ 0.175
Book value $ 28.34 $ 29.73 $ 30.78 $ 35.03
Average common and
equivalent shares(2)(3) 156,549,243 155,143,633 154,034,233 153,234,429
Stock price range(3)(5) $39 1/8-52 1/2 $ 46-53 1/2 $42 1/8-54 1/4 $47 1/4-60 1/4
------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Fiscal 1995(1)
------------------------------------------------------------------------------------------
Month Quarter Quarter Quarter
Ended Ended Ended Ended
(Dollars in Millions, Feb. 28, May 31, Aug. 31, Nov. 30,
Except Share Data) 1995 1995 1995 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Investment banking $ 80 $ 273 $ 355 $ 503
Principal transactions:
Trading 114 438 352 218
Investments - (6) 69 39
Commissions 37 131 130 139
Interest and dividends 588 1,742 1,899 1,710
Asset management
and administration 31 88 96 95
Other 1 1 1 _
-----------------------------------------------------------------------------------------
Total revenues 851 2,667 2,902 2,704
Interest expense 558 1,656 1,751 1,536
-----------------------------------------------------------------------------------------
Net revenues 293 1,011 1,151 1,168
-----------------------------------------------------------------------------------------
Expenses excluding interest:
Compensation and benefits 138 475 575 607
Occupancy and equipment 27 80 84 85
Brokerage, clearing and
exchange fees 20 66 64 61
Communications 11 34 31 32
Business development 14 34 30 32
Professional services 14 40 37 40
Other 11 31 32 35
-----------------------------------------------------------------------------------------
Total expenses
excluding interest 235 760 853 892
-----------------------------------------------------------------------------------------
Income before income
taxes 58 251 298 276
Provision for income taxes 20 85 89 89
-----------------------------------------------------------------------------------------
Net income $ 38 $ 166 $ 209 $ 187
-----------------------------------------------------------------------------------------
Earnings applicable to
common shares(2) $ 33 $ 150 $ 192 $ 171
-----------------------------------------------------------------------------------------
Per common share(3):
Primary earnings(4) $ 0.22 $ 0.95 $ 1.23 $ 1.08
Fully diluted earnings(4) $ 0.21 $ 0.91 $ 1.17 $ 1.04
Cash dividends $ - $ 0.16 $ 0.16 $ 0.16
Book value $ 24.13 $ 25.19 $ 26.34 $ 28.18
Average common and
equivalent shares(2)(3) 154,037,668 157,595,614 157,236,918 158,415,826
Stock price range(3)(5) $30 7/16-33 11/16 $33 1/16-39 13/16 $37 15/16-43 7/16 $41 7/8-49 3/4
-------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1995's quarterly periods reflect the change in the Company's fiscal
year-end (see Note 1). Since fiscal 1995 consists of the 10-month period
from February 1, 1995 to November 30, 1995, the first quarter consists
only of the results for the month ended February 28, 1995.
(2) Amounts shown are used to calculate primary earnings per share.
(3) Fiscal 1995 amounts have been retroactively adjusted to give effect for a
two-for-one stock split, effected in the form of a 100% stock dividend,
which became effective on January 26, 1996.
(4) Summation of the quarters' earnings per common share does not equal the
annual amounts due to the averaging effect of the number of shares and
share equivalents throughout the year.
(5) Prices represent the range of sales per share on the New York Stock
Exchange for the periods indicated. The number of stockholders
of record at November 30, 1996 approximated 1,490. The number of
beneficial owners of common stock is believed to exceed this number.
88
<PAGE> 1
EXHIBIT 21
MORGAN STANLEY GROUP INC. SUBSIDIARIES
As of February 18, 1997
<TABLE>
<CAPTION>
YEAR OF
JURISDICTION OF INCORPORATION/
INCORPORATION FORMATION
<S> <C> <C>
MORGAN STANLEY GROUP INC. Delaware 1975
Fourth Street Development Co. Incorporated Delaware 1990
Fourth Street Ltd. Delaware 1990
Jolter Investments Inc. Delaware 1989
Morgan Rundle Inc. Delaware 1978
MR Ventures Inc. Delaware 1982
Morgan Stanley ABS Capital Inc. Delaware 1997
Morgan Stanley Advisory Partnership Inc. Delaware 1985
Morgan Stanley Asset Management (CPO) Inc. Delaware 1996
Morgan Stanley Asset Management Inc. Delaware 1980
Morgan Stanley Asset Management Holdings Inc. Delaware 1995
Miller Anderson & Sherrerd, LLP Pennsylvania 1971
Morgan Stanley Baseball, Inc. Delaware 1989
Morgan Stanley Capital Group Inc. Delaware 1984
Morgan Stanley Capital I Inc. Delaware 1985
Morgan Stanley Capital (Jersey) Limited Jersey, Channel Is. 1987
Morgan Stanley Capital Partners III, Inc. Delaware 1993
Morgan Stanley Capital Services Inc. Delaware 1985
Morgan Stanley Commercial Mortgage Capital, Inc. Delaware 1994
Morgan Stanley Commodities Management, Inc. Delaware 1992
Morgan Stanley Derivative Products Inc. Delaware 1994
Morgan Stanley Developing Country Debt II, Inc. Delaware 1991
Morgan Stanley Emerging Markets Inc. Delaware 1990
Morgan Stanley Equity (C.I.) Limited Jersey, Channel Is. 1995
Morgan Stanley Equity Investors Inc. Delaware 1988
Morgan Stanley Finance (Jersey) Limited Jersey, Channel Is. 1990
Morgan Stanley Global Emerging Markets, Inc. Delaware 1996
Morgan Stanley Insurance Agency Inc. Delaware 1985
Morgan Stanley (Jersey) Limited Jersey, Channel Is. 1986
Morgan Stanley LEF I, Inc. Delaware 1989
Morgan Stanley Leveraged Capital Fund Inc. Delaware 1985
Morgan Stanley Leveraged Equity Fund II, Inc. Delaware 1987
Morgan Stanley Capital Partners Asia Limited Hong Kong 1992
Morgan Stanley Leveraged Equity Holdings Inc. Delaware 1987
Morgan Stanley Market Products Inc. Delaware 1987
Morgan Stanley Mortgage Capital Inc. New York 1984
Morgan Stanley Overseas Finance Ltd. Cayman Islands 1997
Morgan Stanley Overseas Services (Jersey) Limited Jersey, Channel Is. 1986
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
YEAR OF
JURISDICTION OF INCORPORATION/
INCORPORATION FORMATION
<S> <C> <C>
MORGAN STANLEY GROUP INC. (CONTINUED)
Morgan Stanley Real Estate Investment Management Inc. Delaware 1990
Morgan Stanley Real Estate Fund, Inc. Delaware 1989
MSREF I, L.L.C. Delaware 1995
MSREF I-CO, L.L.C. Delaware 1995
Morgan Stanley Real Estate Investment Management II, Inc. Delaware 1994
MSREF II-CO, L.L.C. Delaware 1995
Morgan Stanley Realty Incorporated Delaware 1969
Brooks Harvey & Co., Inc. Delaware 1971
Morgan Stanley Realty of California Inc. California 1970
Morgan Stanley Realty of Illinois Inc. Delaware 1989
Brooks Harvey of Florida, Inc. Florida 1978
Brooks Harvey & Co. of Hawaii, Inc. Delaware 1981
Morgan Stanley Realty Japan Ltd. Japan 1991
BH-MS Realty Inc. Delaware 1983
BH-MS Leasing Inc. Delaware 1983
BH-Sartell Inc. Delaware 1983
The Morgan Stanley Scholarship Fund Inc.
(Not-for-Profit) Delaware 1985
Morgan Stanley Senior Funding, Inc. Delaware 1996
Morgan Stanley Services Inc. Delaware 1988
Morgan Stanley Technical Services Inc. Delaware 1989
Morgan Stanley Technical Services MB/VC Inc. Delaware 1993
Morgan Stanley Trust Company New York 1992
Morgan Stanley Venture Capital Inc. Delaware 1984
Morgan Stanley Venture Capital II, Inc. Delaware 1992
Morgan Stanley Venture Capital III, Inc. Delaware 1996
Morgan Stanley Ventures Inc. Delaware 1984
Morstan Development Company, Inc. Delaware 1971
Moranta, Inc. Georgia 1979
Porstan Development Company, Inc. Oregon 1982
MS 10020, Inc. Delaware 1994
MS 10036, Inc. Delaware 1996
MS Financing Inc. Delaware 1986
Morgan Stanley 750 Building Corp. Delaware 1994
MS Tokyo Properties Ltd. Japan 1989
MS Holdings Incorporated Delaware 1995
MS Venture Capital (Japan) Inc. Delaware 1989
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
YEAR OF
JURISDICTION OF INCORPORATION/
INCORPORATION FORMATION
<S> <C> <C>
MORGAN STANLEY GROUP INC. (CONTINUED)
MSAM Holdings II, Inc. Delaware 1996
VK/AC Holding, Inc. Delaware 1992
Van Kampen American Capital, Inc. Delaware 1992
ACCESS Investor Services, Inc. Delaware 1987
Advantage Capital Credit Services, Inc. Delaware 1987
American Capital Contractual Services, Inc. New York 1957
Van Kampen American Capital Advisors, Inc. Delaware 1974
Van Kampen American Capital Asset Management, Inc. Delaware 1936
Van Kampen American Capital Distributors, Inc. Delaware 1974
Van Kampen American Capital Exchange Corp. California 1975
Van Kampen American Capital Insurance Agency of Illinois, Inc. Illinois 1996
Van Kampen American Capital Investment Advisory Corp. Delaware 1982
Van Kampen American Capital Management, Inc. Delaware 1990
Van Kampen American Capital Recordkeeping Services, Inc. Delaware 1997
Van Kampen American Capital Services, Inc. Delaware 1975
Van Kampen American Capital Trust Company Texas 1986
Van Kampen Merritt Equity Holdings Corp. Delaware 1990
Van Kampen Merritt Equity Advisors Corp. Delaware 1992
VKAC Cayman Limited Cayman Islands 1995
VK/AC System, Inc. Delaware 1996
MSBF Inc. Delaware 1995
MSCP III Holdings, Inc. Delaware 1994
MSIT Holdings, Inc. Delaware 1996
MSPL Co. Inc. Delaware 1990
MSREF II, Inc. Delaware 1994
MSREF II, L.L.C. Delaware 1995
MSUH Holdings I, Inc. Delaware 1996
MSUH Holdings II, Inc. Delaware 1996
MS SP Urban Horizons, Inc. Delaware 1996
MS Urban Horizons, Inc. Delaware 1994
PG Holdings, Inc. Delaware 1991
PG Investors, Inc. Delaware 1991
PG Investors II, Inc. Delaware 1996
Pierpont Power, Inc. New York 1987
Romley Computer Leasing Inc. Delaware 1985
Strategic Investments I, Inc. Delaware 1996
MORGAN STANLEY & CO. INCORPORATED Delaware 1969
Morgan Stanley Flexible Agreements Inc. Delaware 1992
MS Securities Services Inc. Delaware 1981
Prime Dealer Services Corp. Delaware 1994
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
YEAR OF
JURISDICTION OF INCORPORATION/
INCORPORATION FORMATION
<S> <C> <C>
MORGAN STANLEY GROUP INC. (CONTINUED)
MORGAN STANLEY INTERNATIONAL INCORPORATED Delaware 1963
Bank Morgan Stanley AG Switzerland 1973
Morgan Stanley AOZT Russia 1994
Morgan Stanley Asia (China) Limited Hong Kong 1991
Morgan Stanley Asia Holdings I Inc. Delaware 1990
Morgan Stanley Asia Holdings II Inc. Delaware 1990
Morgan Stanley Asia Holdings III Inc. Delaware 1990
Morgan Stanley Asia Holdings IV Inc. Delaware 1990
Morgan Stanley Asia Holdings V Inc. Delaware 1990
Morgan Stanley Asia Holdings VI Inc. Delaware 1990
Morgan Stanley Asia Pacific (Holdings) Limited Cayman Islands 1995
Morgan Stanley Asia Regional (Holdings) I LLC Cayman Islands 1995
Morgan Stanley Asia Limited Hong Kong 1984
Morgan Stanley Futures (Hong Kong) Limited Hong Kong 1988
Morgan Stanley Hong Kong Securities Limited Hong Kong 1988
Morgan Stanley Pacific Limited Hong Kong 1987
Morgan Stanley Asia Regional (Holdings) II LLC Cayman Islands 1995
Morgan Stanley Asia Regional (Holdings) III LLC Cayman Islands 1995
Morgan Stanley Asia (Singapore) Pte Rep. of Singapore 1992
Morgan Stanley Asset Management Singapore Company Rep. of Singapore 1990
Morgan Stanley Capital Group (Singapore) Pte Rep. of Singapore 1990
Morgan Stanley Futures (Singapore) Pte Rep. of Singapore 1992
Morgan Stanley Asia Regional (Holdings) IV LLC Cayman Islands 1995
Morgan Stanley Japan (Holdings) Ltd. Cayman Islands 1984
Morgan Stanley Japan Limited Hong Kong 1993
Morgan Stanley Asia Pacific (Holdings) I Limited Cayman Islands 1995
Morgan Stanley Asia (Taiwan) Ltd. Rep. of China 1990
Morgan Stanley Asset & Investment Trust Management Co., Limited Japan 1987
Morgan Stanley Australia Limited Australia 1989
Morgan Stanley Bank Luxembourg S.A. Luxembourg 1989
Morgan Stanley Canada Limited Canada 1982
Morgan Stanley Capital SA France 1989
Morgan Stanley Capital (Luxembourg) S.A. Luxembourg 1993
Morgan Stanley Financial Services Beteiligungs GmbH Germany 1993
Morgan Stanley Financial Services GmbH & Co. KG Germany 1993
Morgan Stanley Group (Europe) Plc England 1988
Morgan Stanley Asset Management Limited England 1986
Morgan Stanley Capital Group Limited England 1993
Morgan Stanley (Europe) Limited England 1993
Morgan Stanley Finance plc England 1993
Morgan Stanley Properties Limited England 1986
Morgan Stanley Property Management (UK) Limited England 1987
Morgan Stanley Services (UK) Limited England 1993
Morgan Stanley UK Group England 1976
Morgan Stanley & Co. International Limited England 1986
Morgan Stanley International Nominees Limited England 1994
Morgan Stanley & Co. Limited England 1986
Morgan Stanley Securities Limited England 1986
Morstan Nominees Limited England 1986
MS Leasing UK Limited England 1991
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
YEAR OF
JURISDICTION OF INCORPORATION/
INCORPORATION FORMATION
<S> <C> <C>
MORGAN STANLEY GROUP INC. (CONTINUED)
MORGAN STANLEY INTERNATIONAL INCORPORATED (CONTINUED)
Morgan Stanley Holding (Deutschland) GmbH Germany 1990
Morgan Stanley Bank AG Germany 1986
Morgan Stanley Hong Kong Nominees Limited Hong Kong 1988
Morgan Stanley International Insurance Ltd. Bermuda 1995
Morgan Stanley Latin America Incorporated Delaware 1994
Morgan Stanley Administadora de Carteiras Ltda. Brazil 1996
Morgan Stanley do Brasil Ltda. Brazil 1995
MS Carbocol Advisors Incorporated Delaware 1995
Morgan Stanley Mauritius Company Limited Mauritius 1993
Morgan Stanley Asset Management India Private Limited India 1993
Morgan Stanley India Securities Private Limited India 1995
Morgan Stanley India Private Limited India 1995
Morgan Stanley Offshore Investment Company Ltd. Cayman Islands 1987
Morgan Stanley S.A. France 1992
Morgan Stanley SICAV Management S.A. Luxembourg 1988
Morgan Stanley South Africa (Pty) Limited South Africa 1994
Morgan Stanley SPV I (Cayman Islands) LLC Cayman Islands 1996
Farlington Corporation Ireland 1996
Morgan Stanley SPV II (Cayman Islands) LLC Cayman Islands 1996
Morgan Stanley (Structured Products) Jersey Limited Jersey, Channel Is. 1994
Morgan Stanley Wertpapiere GmbH Germany 1989
MS Italy (Holdings) Inc. Delaware 1990
Banca Morgan Stanley SpA Italy 1990
MS LDC, Ltd. Delaware 1991
MSAM/Kokusai (Cayman Islands), Inc. Cayman Islands 1996
MSL Incorporated Delaware 1976
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form 10-K
of Morgan Stanley Group Inc. of our report dated January 7, 1997, included in
the 1996 Annual Report to Shareholders of Morgan Stanley Group Inc.
Our audits also included the financial statement schedule of Morgan Stanley
Group Inc. listed in item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-18005, Form S-3 No. 333-01655, Form S-3 No. 33-58611, Form
S-3 No. 33-51413, Form S-8 No. 333-08571, Form S-8 No. 33-13177, Form S-8 No.
33-37652, Form S-8 No. 33-18184, and Form S-8 No. 33-42464) of Morgan Stanley
Group Inc. and in the related Prospectuses of our report dated January 7, 1997,
with respect to the consolidated financial statements and schedule of Morgan
Stanley Group Inc. included and incorporated by reference in this Annual Report
on Form 10-K for the fiscal year ended November 30, 1996.
New York, New York
February 27, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
TO THE DIRECTORS OF MORGAN STANLEY GROUP INC.
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-42464 and Form S-8 No. 18184) of Morgan Stanley Group Inc. and
in the related Prospectus of our report dated 18 February 1997, with respect to
the financial statements of the Morgan Stanley UK Group Profit Sharing Scheme
included in the 1996 Annual Report on Form 10-K for the fiscal year ended 30
November 1996.
Ernst & Young
Chartered Accountants
Registered Auditor
London
February 27, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at November 30, 1996 and the
Consolidated Statement of Income for the Twelve Months Ended November 30, 1996
and is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> NOV-30-1996
<CASH> 7,709
<RECEIVABLES> 13,247
<SECURITIES-RESALE> 60,457
<SECURITIES-BORROWED> 39,680
<INSTRUMENTS-OWNED> 70,747
<PP&E> 1,301
<TOTAL-ASSETS> 196,446
<SHORT-TERM> 20,461
<PAYABLES> 22,899
<REPOS-SOLD> 83,296
<SECURITIES-LOANED> 8,975
<INSTRUMENTS-SOLD> 37,168
<LONG-TERM> 14,498
0
1,223
<COMMON> 163
<OTHER-SE> 5,152
<TOTAL-LIABILITY-AND-EQUITY> 196,446
<TRADING-REVENUE> 2,210
<INTEREST-DIVIDENDS> 7,701
<COMMISSIONS> 613
<INVESTMENT-BANKING-REVENUES> 1,944
<FEE-REVENUE> 582
<INTEREST-EXPENSE> 7,368
<COMPENSATION> 2,863
<INCOME-PRETAX> 1,572
<INCOME-PRE-EXTRAORDINARY> 1,572
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,029
<EPS-PRIMARY> 6.27
<EPS-DILUTED> 5.96
</TABLE>
<PAGE> 1
Exhibit 99
MORGAN STANLEY UK GROUP PROFIT
SHARING SCHEME
Report and Financial Statements
31 December 1996 and 1995
<PAGE> 2
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
TO THE MORGAN STANLEY GROUP INC. UK PROFIT SHARING SCHEME COMMITTEE
AND PARTICIPANTS IN THE MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME
We have audited the accompanying statement of financial condition of the Morgan
Stanley UK Group Profit Sharing Scheme ("the Scheme") as of 31 December 1996 and
1995 and the related statement of income and changes in plan equity for the
years ended 31 December 1996, 1995 and 1994. These financial statements are the
responsibility of the Scheme's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with United States 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial condition of the Scheme as of 31 December
1996 and 1995 and the income and changes in plan equity for the years ended 31
December 1996, 1995 and 1994 in conformity with United States generally accepted
accounting principles.
Ernst & Young
Chartered Accountants
Registered Auditor
London
18 February 1997
<PAGE> 3
Morgan Stanley UK Group Profit Sharing Scheme
STATEMENT OF FINANCIAL CONDITION
at 31 December 1996
<TABLE>
<CAPTION>
1996 1995
Notes $ $
<S> <C> <C> <C>
ASSETS
Investment in Morgan Stanley Group Inc.
common stock at market value (cost $9,587,360) 3,4 19,373,829 13,189,121
Amounts due from trustee 99,827 9,466
Employee contributions receivable 1,380,689 2,737,363
--------- ---------
20,854,345 15,935,950
========== ==========
LIABILITIES AND PLAN EQUITY
Dividend income, net of withholding taxes, payable
to participants 99,825 9,465
Plan equity 20,754,520 15,926,485
---------- ----------
20,854,345 15,935,950
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 4
Morgan Stanley UK Group Profit Sharing Scheme
STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY
for the years ended 31 December 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
Notes $ $ $
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend from Morgan Stanley Group
Inc. Common Stock 252,685 160,989 167,520
Less: United States taxes withheld 37,902 24,148 25,105
---------- ---------- ----------
NET INVESTMENT INCOME 214,783 136,841 142,415
Gain on sales/transfers of Morgan Stanley Group
Inc. Common Stock 3 1,261,443 518,552 183,380
Change in unrealised appreciation of
investment 4 4,784,690 3,158,900 (1,791,131)
EMPLOYEE CONTRIBUTIONS
Current year 1,395,261 2,737,495 2,371,487
---------- ---------- ----------
INCOME FOR THE YEAR 7,656,177 6,551,788 906,151
Less: Dividend income payable to participants 202,148 128,791 134,006
United Kingdom income tax payable 12,635 8,050 8,409
Withdrawals disbursed to participants 2,172,670 828,659 289,513
Value of shares transferred to participants 440,689 127,626 97,680
---------- ---------- ----------
INCREASE IN PLAN EQUITY 4,828,035 5,458,662 376,543
PLAN EQUITY AT 1 JANUARY 15,926,485 10,467,823 10,091,280
---------- ---------- ----------
PLAN EQUITY AT 31 DECEMBER 20,754,520 15,926,485 10,467,823
========== ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 5
Morgan Stanley UK Group Profit Sharing Scheme
NOTES TO THE FINANCIAL STATEMENTS
at 31 December 1996, 1995 and 1994
1. DETAILS OF THE SCHEME
SCHEME DESCRIPTION
On 12 November 1987, the Morgan Stanley UK Group Profit Sharing Scheme was
established in the United Kingdom by a trust deed made between Morgan Stanley
Group Inc., a U.S. company, its subsidiary Morgan Stanley UK Group and Noble
Lowndes Settlement Trustees Limited. The Scheme allows employees of Morgan
Stanley UK Group to accumulate pre-tax profit share contributions in the form of
shares of Morgan Stanley Group Inc. common stock.
ELIGIBILITY
Full time employees of Morgan Stanley UK Group with at least one year of
service, commencing from the first of the month after the date of joining, are
eligible to participate in the Scheme. Employees may elect to participate in the
Scheme for the full amount of their profit share, up to a maximum of the lesser
of 10% of UK base salary or (pound sterling) 8,000 ((pound sterling) 3,000 for
expatriates)).
FUNDING POLICY
Amounts invested by employees are invested by Noble Lowndes Settlement Trustees
Limited, as trustee, in Morgan Stanley Group Inc. shares which are held by the
trustee in their name on the employee's behalf. Shares in respect of the
previous qualifying period are appropriated to employees within two weeks of 31
December (the qualifying date). Trustee fees and brokerage commissions are borne
by Morgan Stanley UK Group, the employer. During the first two years after
allocation (the Retention Period) certain statutory restrictions apply limiting
members' ability to deal in or withdraw their shares. After the Retention
Period, members may withdraw their shares or instruct the trustees to sell their
shares and withdraw the cash proceeds. The cost of withdrawals from the Scheme
is determined on a first in first out basis within the relevant participant
allocation.
TAXATION
The United Kingdom Board of Inland Revenue has approved the scheme under
Schedule 9, UK Finance Act 1978 and the Scheme itself is thus exempt from
taxation. Employee contributions to the Scheme are not liable to income tax if
shares are held by the Trustees for at least three years after appropriation. If
participants' shares are sold prior to the end of the three year period, some or
all of the income tax benefits are lost.
2. ACCOUNTING POLICIES
FOREIGN CURRENCIES
Monetary assets and liabilities denominated in currencies other than US dollars
are translated at the rate of exchange ruling at the balance sheet date except
for employee contributions receivable, which are translated at the rate ruling
at the time of share purchase, which occurs shortly after the balance sheet
date. Transactions in foreign currencies are translated at the approximate rate
of exchange ruling at the date of the transaction.
VALUATION OF INVESTMENT
The investment is recorded at market value based on the closing market price on
the New York Stock Exchange. Change in unrealised appreciation of the investment
is based on a weighted average cost.
4
<PAGE> 6
Morgan Stanley UK Group Profit Sharing Scheme
NOTES TO THE FINANCIAL STATEMENTS
at 31 December 1996, 1995 and 1994
2. ACCOUNTING POLICIES (continued)
DIVIDEND INCOME
Dividend income is recorded when the applicable dividends are declared.
Dividends are received by the trustees net of US withholding tax and are
allocated to participants according to their share allocation net of United
Kingdom withholding tax.
3. CHANGES IN HOLDINGS OF MORGAN STANLEY GROUP INC. COMMON STOCK
<TABLE>
<CAPTION>
Number Total
of shares cost
$
<S> <C> <C>
At 1 January 1994 116,709 4,623,152
Add: Purchase, January 1994 26,280 1,834,116
------- ---------
142,989 6,457,268
Less: Sales of shares during the year (4,297) (111,436)
Transfers of shares during the year (1,466) (92,377)
------- ---------
At 31 December 1995 137,226 6,253,455
Add: Purchase January 1995 39,564 2,371,619
------- ---------
176,790 8,625,074
Less: Sales of shares during the year (11,518) (328,974)
Transfers of shares during the year (1,686) (108,759)
------- ---------
At 31 December 1995 163,586 8,187,341
Add: Purchase January 1996 33,071 2,751,935
Less: Sales of shares January 1996 (7,337) (190,392)
Add: Two for one stock split 26 January 1996 189,320 --
------- ---------
378,640 10,748,884
Less: Sales of shares during the year (30,809) (694,307)
Transfers of shares during the year (8,683) (467,217)
------- ---------
At 31 December 1996 339,148 9,587,360
======= =========
</TABLE>
Each stock purchase was made in one transaction representing more than 5% of the
current value of the Scheme at the beginning of the year.
5
<PAGE> 7
Morgan Stanley UK Group Profit Sharing Scheme
NOTES TO THE FINANCIAL STATEMENTS
at 31 December 1996, 1995 and 1994
3. CHANGES IN HOLDINGS OF MORGAN STANLEY GROUP INC. COMMON STOCK (continued)
Sales/transfers of Morgan Stanley Group Inc. Common Stock:
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
Aggregate proceeds of sales 2,172,670 828,659 289,513
Aggregate cost of sales (884,699) (328,974) (111,436)
--------- -------- -------
Net gain on sales 1,287,971 499,685 178,077
--------- -------- -------
Aggregate proceeds of transfers 440,689 127,626 97,680
Aggregate cost of transfers (467,217) (108,759) (92,377)
--------- -------- -------
Net gain on transfers (26,528) 18,867 5,303
--------- -------- -------
1,261,443 518,552 183,380
========= ======= =======
</TABLE>
6
<PAGE> 8
Morgan Stanley UK Group Profit Sharing Scheme
NOTES TO THE FINANCIAL STATEMENTS
at 31 December 1996, 1995 and 1994
4. CHANGE IN UNREALISED APPRECIATION OF INVESTMENTS
At 31 December 1996 the closing price on the New York Stock Exchange for Morgan
Stanley Group Inc. common stock was $57.125 per share.
<TABLE>
<CAPTION>
Number
of shares $
<S> <C> <C>
Market value at 31 December 1996 339,148 19,373,829
Average cost at 31 December 1996 339,148 9,587,360
---------
Unrealised appreciation at 31 December 1996 9,786,469
Unrealised appreciation at 31 December 1995 5,001,779
---------
Increase in unrealised appreciation for 1996 4,784,690
=========
Market value at 31 December 1995 163,586 13,189,121
Average cost at 31 December 1995 163,586 8,187,342
---------
Unrealised appreciation at 31 December 1995 5,001,779
Unrealised appreciation at 31 December 1994 1,842,879
---------
Increase in unrealised appreciation for 1995 3,158,900
=========
Market value at 31 December 1994 137,226 8,096,334
Average cost at 31 December 1994 137,226 6,253,455
---------
Unrealised appreciation at 31 December 1994 1,842,879
Unrealised appreciation at 31 December 1993 3,634,010
---------
Decrease in unrealised appreciation for 1994 (1,791,131)
==========
</TABLE>
5. NUMBER OF PARTICIPANTS
There were 878 participants as of 31 December 1996, 543 participants as of 31
December 1995 and 548 participants as of 31 December 1994.
7
<PAGE> 9
Morgan Stanley UK Group Profit Sharing Scheme
NOTES TO THE FINANCIAL STATEMENTS
at 31 December 1996, 1995 and 1994
6. POST BALANCE SHEET EVENT
On 5 February 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
("Dean Witter") announced a definitive agreement to merge. Under the terms of
the definitive agreement unanimously approved by the Boards of both companies,
each of Morgan Stanley Group Inc.'s common shares will be exchanged for 1.65
Dean Witter common shares.
The transaction, which is expected to be completed in mid-1997, is intended to
be 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 impact of this merger on the Scheme is yet
to be determined.
8
