<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 15, 1997
Dean Witter, Discover & Co.
---------------------------
(exact name of registrant as specified in its charter)
Delaware 1-11758 36-3145972
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
Two World Trade Center, New York, New York 10048
------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (212) 392-2222
--------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 5. OTHER EVENTS
As previously disclosed in Dean Witter, Discover & Co.'s ("DWD") current report
on Form 8-K dated February 4, 1997, DWD and Morgan Stanley Group Inc. ("Morgan
Stanley") announced a definitive agreement to merge (the "Merger"). This
transaction is intended to be accounted for as a pooling of interests and the
new company will be named Morgan Stanley, Dean Witter, Discover & Co. Under the
terms of the definitive agreement each of Morgan Stanley's common shares will be
exchanged for 1.65 of DWD's common shares. The Merger, which is expected to be
completed in mid-1997, is subject to customary closing conditions, including
certain regulatory approvals and the approval of the stockholders of both
companies.
Attached and incorporated by reference as Exhibits 99.1 and 99.2, respectively,
are certain financial information for Morgan Stanley and unaudited pro forma
combined financial information for the combined entity giving effect to the
Merger. The pro forma combined financial information is being furnished solely
to comply with Rule 3.05 of Regulation S-X and will be updated as soon as
comparable first quarter DWD financial information becomes available.
Item 7(c). FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS
Exhibit No. Description
- ----------- -----------
99.1 The unaudited consolidated interim statement of financial condition of
Morgan Stanley as of February 28, 1997 and the unaudited consolidated
interim statements of income of Morgan Stanley for the three months
ended February 28, 1997 and February 29, 1996.
99.2 The Morgan Stanley, Dean Witter, Discover & Co. unaudited pro forma
condensed combined statement of financial condition at December 31,
1996, and the unaudited pro forma condensed combined statements of
income for the three months ended December 31, 1996 and December 31,
1995.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
DEAN WITTER, DISCOVER & CO.
______________________________
(Registrant)
By: /s/ Ronald T. Carman
______________________________
Ronald T. Carman
Senior Vice President
Dated : April 14, 1997
<PAGE>
Exhibit No. Description
- ----------- -----------
99.1 The unaudited consolidated interim statement of financial condition of
Morgan Stanley as of February 28, 1997 and the unaudited consolidated
interim statements of income of Morgan Stanley for the three months
ended February 28, 1997 and February 29, 1996.
99.2 The Morgan Stanley, Dean Witter, Discover & Co. unaudited pro forma
condensed combined statement of financial condition at December 31,
1996, and the unaudited pro forma condensed combined statements of
income for the three months ended December 31, 1996 and December 31,
1995.
<PAGE>
EXHIBIT 99.1
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
February 28,
1997 November 30,
(Unaudited) 1996
-------------- --------------
<S> <C> <C>
Cash and interest-bearing equivalents $ 4,488 $ 4,545
Cash and securities deposited with clearing organizations or segregated
under federal and other regulations (securities at market value of
$990 at February 28, 1997 and $2,474
at November 30, 1996) 1,490 3,164
Financial instruments owned:
U.S. government and agency securities 15,219 11,079
Other sovereign government obligations 18,205 19,473
Corporate and other debt 17,905 15,978
Corporate equities 14,242 12,622
Derivative contracts 12,818 11,220
Physical commodities 287 375
Securities purchased under agreements to resell 70,029 60,457
Securities borrowed 50,394 39,680
Receivables:
Customers 10,368 5,761
Brokers, dealers and clearing organizations 1,995 5,421
Interest and dividends 1,495 1,320
Fees and other 1,029 745
Property, equipment and leasehold improvements, at cost, net of
accumulated depreciation and amortization of $655 at February 28,
1997 and $614
at November 30, 1996 1,274 1,301
Other assets 3,534 3,305
------------- -------------
Total assets $ 224,772 $ 196,446
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>
4
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN MILLIONS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 28,
1997 November 30,
(Unaudited) 1996
--------- ---------
<S> <C> <C>
Short-term borrowings $ 22,241 $ 20,461
Financial instruments sold, not yet purchased:
U.S. government and agency securities 13,991 10,196
Other sovereign government obligations 8,355 6,513
Corporate and other debt 1,242 1,112
Corporate equities 8,762 8,889
Derivative contracts 11,006 9,982
Physical commodities 36 476
Securities sold under agreements to repurchase 95,919 83,296
Securities loaned 10,432 8,975
Payables:
Customers 21,041 18,629
Brokers, dealers and clearing organizations 4,113 1,820
Interest and dividends 1,244 1,478
Other liabilities and accrued expenses 1,344 972
Accrued compensation and benefits 1,081 1,746
Long-term borrowings 16,470 14,498
--------- ---------
217,277 189,043
--------- ---------
Capital Units 999 865
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock 1,027 1,223
Common stock, $1.00 par value; authorized
600,000,000 shares; issued 163,821,105
shares at February 28, 1997 and 163,236,893
shares at November 30, 1996 164 163
Paid-in capital 892 1,144
Retained earnings 4,767 4,504
Cumulative translation adjustments (14) (11)
--------- ---------
Subtotal 6,836 7,023
Less:
Note receivable related to sale of
preferred stock to ESOP 76 78
Common stock held in treasury, at cost
(5,796,887 shares at February 28, 1997 and
9,894,271 shares at November 30, 1996) 264 407
--------- ---------
Total stockholders' equity 6,496 6,538
--------- ---------
Total liabilities and stockholders' equity $ 224,772 $ 196,446
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 4
<PAGE>
5
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Investment banking $ 442 $ 399
Principal transactions:
Trading 751 704
Investments 56 (7)
Commissions 182 154
Interest and dividends 2,367 1,933
Asset management and administration 278 122
Other -- 3
------------- -------------
Total revenues 4,076 3,308
Interest expense 2,282 1,859
------------- -------------
Net revenues 1,794 1,449
------------- -------------
Expenses excluding interest:
Compensation and benefits 879 705
Occupancy and equipment 100 86
Brokerage, clearing and exchange
fees 84 66
Communications 40 33
Business development 59 37
Professional services 60 42
Other 62 40
------------- -------------
Total expenses excluding
interest 1,284 1,009
------------- -------------
Income before income taxes 510 440
Provision for income taxes 194 167
------------- -------------
Net income $ 316 $ 273
============= =============
Earnings applicable to common shares (1) $ 297 $ 257
============= =============
Average common and common equivalent
shares outstanding (1) 158,307,567 156,549,243
============= =============
Primary earnings per share $ 1.88 $ 1.64
============= =============
Fully diluted earnings per share $ 1.80 $ 1.57
============= =============
</TABLE>
(1) Amounts shown are used to calculate primary earnings per share.
See Notes to Condensed Consolidated Financial Statements.
Page 5
<PAGE>
6
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 316 $ 273
Adjustments to reconcile net income
to net cash used for operating activities:
Non-cash charges included in net income (1) 28
Changes in assets and liabilities:
Cash and securities deposited with
clearing organizations or segregated
under federal and other regulations 1,674 (416)
Financial instruments owned, net of
financial instruments sold, not yet purchased (1,705) 4,878
Securities borrowed, net of securities loaned (9,257) (4,551)
Receivables and other assets (2,045) (6,074)
Payables and other liabilities 4,179 (225)
------- -------
Net cash used for operating activities (6,839) (6,087)
Cash flows from investing activities:
Net payments for:
Property, equipment and leasehold
improvements (16) (47)
Purchase of Miller Anderson & Sherrerd, LLP, net
of cash acquired -- (200)
------- -------
Net cash used for investing activities (16) (247)
Cash flows from financing activities:
Net proceeds related to short-term borrowings 1,780 1,213
Securities sold under agreements to
repurchase, net of securities
purchased under agreements to resell 3,051 3,269
Proceeds from:
Issuance of common stock 15 39
Issuance of long-term borrowings 3,434 2,814
Issuance of Capital Units 134 --
Payments for:
Repurchases of common stock (62) (350)
Repayments of long-term borrowings (1,306) (207)
Redemption of 8.88% Cumulative Preferred Stock (195) --
Cash dividends (53) (49)
------- -------
Net cash provided by financing activities 6,798 6,729
------- -------
Net (decrease)/increase in cash and interest-bearing equivalents (57) 395
Cash and interest-bearing equivalents, at
beginning of period 4,545 2,471
------- -------
Cash and interest-bearing equivalents, at end of period $ 4,488 $ 2,866
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 6
<PAGE>
7
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
In connection with the Company's fiscal 1996 acquisition of Miller Anderson &
Sherrerd, LLP, 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.
Page 7
<PAGE>
8
MORGAN STANLEY GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The information furnished in this quarterly report has been prepared
pursuant to the Securities and Exchange Commission's rules and
regulations. The Condensed Consolidated Financial Statements reflect all
adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for the fair statement of the
results for the interim period and should be read in connection with the
Annual Report on Form 10-K for the fiscal year ended November 30, 1996
(file no. 1-9085)("Form 10-K"). The nature of the business of Morgan
Stanley Group Inc. and its domestic and foreign subsidiaries
(collectively, the "Company") is such that the results of any interim
period may not be indicative of the results for the full year. Prior
period financial statements have been reclassified, where appropriate, to
conform to the fiscal 1997 presentation.
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 Condensed Consolidated Statement of Income as interest
income or expense. The fair values of 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 Condensed
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." Reverse repurchase and repurchase agreements are presented
net-by-counterparty where net presentation is consistent with FASB
Interpretation No. 41, "Offsetting of Amounts Related to Certain
Repurchase and Reverse Repurchase Agreements."
The Company also enters into various financial instrument related
derivative contracts, such as interest rate swaps, currency swaps and
forward contracts, as an end user to manage the interest rate and currency
exposure arising from certain borrowings. Net revenues from derivatives
used in the Company's asset and liability management are recognized
ratably over the term of the contract as an adjustment to interest
expense.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried in the Condensed
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 of 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.
Page 8
<PAGE>
9
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.
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.
2. Long-Term Borrowings
Long-term borrowings at February 28, 1997 scheduled to mature within one
year aggregate $2,626 million.
During the three month period ended February 28, 1997, the Company issued
senior notes aggregating $3,424 million, including non-U.S. dollar
currency notes aggregating $295 million, primarily pursuant to its public
debt shelf registration statements. The weighted average coupon interest
rate of these notes at February 28, 1997 was 6.1%; the Company has entered
into certain transactions to obtain floating interest rates based on
either short-term LIBOR or repurchase agreement rates for Treasury
securities. Maturities in the aggregate of these notes for the fiscal
years ending November 30 are as follows: 1997, $12 million; 1998, $64
million; 1999, $652 million; 2000, $567 million; 2001, $21 million; and
thereafter, $2,108 million. As of February 28, 1997, the aggregate
outstanding principal amount of the Company's Senior Indebtedness (as
defined in the aforementioned registration statements) was approximately
$32.5 billion.
From March 1, 1997 to March 31, 1997, additional senior notes aggregating
$226 million were issued primarily pursuant to the Company's public debt
shelf registration statements. These notes have maturities from 1999 to
2002.
3. Derivative Contracts and Other Commitments and Contingencies
In the normal course of business, the Company enters into a variety of
derivative contracts related to financial instruments and commodities. The
Company uses swap agreements in its trading activities and in managing its
interest rate exposure. The Company also uses forward and option
contracts, futures and swaps in its trading activities; these financial
instruments also are used to hedge the U.S. dollar cost of certain foreign
currency exposures. In addition, financial futures and forward contracts
are actively traded by the Company and are used to hedge proprietary
inventory. The Company also enters into delayed delivery, when-issued, and
warrant and option contracts involving securities. These instruments
generally represent future commitments to swap interest payment streams,
exchange currencies or purchase or sell other financial instruments on
specific terms at specified future dates. Many of these products have
maturities that do not extend beyond one year; swaps and options and
warrants on equities typically have longer maturities. For further
discussion of these matters, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Derivative
Financial Instruments", and Note 5 to the Consolidated Financial
Statements, included in the Form 10-K.
These derivative instruments involve varying degrees of off-balance sheet
market risk. Future changes in interest rates, foreign currency exchange
rates or the fair values of the financial instruments, commodities or
indices underlying these contracts ultimately may result in cash
settlements exceeding fair value amounts recognized in the Condensed
Consolidated Statement of Financial Condition, which, as described in Note
1, are recorded at fair value, representing the cost of replacing those
instruments.
Page 9
<PAGE>
10
The Company's exposure to credit risk with respect to these derivative
instruments at any point in time is represented by the 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 credit quality of the Company's trading-related derivatives at
February 28, 1997 and November 30, 1996 is summarized in the tables 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>
February 28, 1997
- ----------------------------------------------------------------------------------------------------
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>
Interest rate
and currency
swaps and options
(including caps,
floors and swap
options) and
other fixed
income securities
contracts $ 968 $ 1,679 $ 2,154 $ 567 $ 19 $ 292 $ 5,679
Foreign exchange
forward contracts
and options 1,102 1,634 829 70 -- 109 3,744
Mortgage-backed
securities forward
contracts, swaps
and options 68 45 53 15 -- 9 190
Equity securities
contracts
(including equity
swaps, warrants
and options) 757 475 387 95 384 9 2,107
Commodity forwards,
options and swaps 99 329 264 252 4 150 1,098
------- ------- ------- ------- ------- ------- -------
Total $ 2,994 $ 4,162 $ 3,687 $ 999 $ 407 $ 569 $12,818
======= ======= ======= ======= ======= ======= =======
Percent of total 23% 32% 29% 8% 3% 5% 100%
======= ======= ======= ======= ======= ======= =======
</TABLE>
Page 10
<PAGE>
11
<TABLE>
<CAPTION>
November 30, 1996
- ----------------------------------------------------------------------------------------------------
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>
Interest rate
and currency
swaps and options
(including caps,
floors and swap
options) and
other fixed
income securities
contracts $ 792 $ 1,445 $ 2,018 $ 696 $ 31 $ 183 $ 5,165
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
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%
======= ======= ======= ======= ======= ======= =======
</TABLE>
A substantial portion of the Company's securities and commodities
transactions are collateralized and are executed with and on behalf of
commercial banks and other institutional investors, including other
brokers and dealers. Positions taken and commitments made by the Company,
including positions taken and underwriting and financing commitments made
in connection with its merchant banking and other 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 created in its businesses
through a variety of separate but complementary financial, position and
credit exposure reporting systems, including the use of trading limits
based in part upon the Company's review of the financial condition and
credit ratings of its counterparties.
See also "Business -- Risk Management" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk
Management" in the Form 10-K for discussions of the Company's risk
management policies and procedures.
The Company had approximately $2.9 billion of letters of credit
outstanding at February 28, 1997 to satisfy various collateral
requirements.
Page 11
<PAGE>
12
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 Condensed Consolidated Financial Statements
contained herein.
4. Preferred Stock and Capital Units
Preferred stock is composed of the following issues. Each issue of
preferred stock ranks in parity with all other preferred stock.
<TABLE>
<CAPTION>
Shares Outstanding at Balance at
------------------------------------- ---------------------------------
February 28, November 30, February 28, November 30,
1997 1996 1997 1996
--------------- -------------------- --------------- ----------------
(in millions)
<S> <C> <C> <C> <C>
ESOP Convertible
Preferred Stock,
liquidation preference
$35.88 3,687,031 3,699,302 $ 132 $ 133
Series A Fixed/Adjustable
Rate Cumulative Preferred
Stock, stated value $200 1,725,000 1,725,000 345 345
7-3/4% Cumulative
Preferred Stock,
stated value $200 1,000,000 1,000,000 200 200
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 - 195
8-3/4% Cumulative
Preferred Stock,
stated value $200 750,000 750,000 150 150
-------------- --------------
Total $ 1,027 $ 1,223
============== ==============
</TABLE>
On December 3, 1996, the Company announced that it had called for
redemption, on January 3, 1997, 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, January 3, 1997.
Page 12
<PAGE>
13
Included in the Company's Condensed Consolidated Statement of Financial
Condition at February 28, 1997 and November 30, 1996 are Capital Units
issued by the Company and Morgan Stanley Finance plc, a U.K. subsidiary
("MS plc"). A Capital Unit consists of (a) a Subordinated Debenture of MS
plc guaranteed by the Company and having maturities from 2013 to 2017, 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.
In the first quarter of fiscal 1997, the Company and MS plc issued 8.03%
Capital Units in an aggregate amount of $134 million.
5. Stockholders' Equity
Morgan Stanley & Co. Incorporated ("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, the New York Stock Exchange and the Commodity Futures Trading
Commission. MS&Co. has consistently operated in excess of these
requirements with aggregate net capital, as defined, totaling $1,596
million at February 28, 1997, which exceeded the amount required by $1,255
million. Morgan Stanley & Co. International Limited ("MSIL"), a
London-based broker-dealer subsidiary, is subject to capital requirements
of the Securities and Futures Authority, and Morgan Stanley Japan Limited
("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 applicable local capital adequacy
requirements.
6. Acquisitions
During the first quarter of fiscal 1996, the Company completed its
acquisition of Miller Anderson & Sherrerd, LLP ("MAS"), a
Philadelphia-based institutional investment manager, for approximately
$350 million. The Company's results for the three months ended February
29, 1996 include the results of MAS from January 3, 1996, the date of
acquisition.
In the fourth quarter of fiscal 1996, the Company completed its purchase
of Van Kampen American Capital, Inc. ("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.
On April 3, 1997, the Company announced the acquisition of the
institutional global custody business of Barclays PLC ("Barclays"). The
amount of consideration for this business is to be fixed over a period of
time based on account retention. The transaction involves approximately
$250 billion of assets currently administered by Barclays, and the
combination of Barclays with the Company's global custody businesses would
have increased the Company's assets under administration at February 28,
1997 to approximately $400 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.
Page 13
<PAGE>
14
The goodwill and other intangible assets associated with these
transactions are amortized on a straight-line basis over periods from five
to 25 years and are periodically evaluated for impairment.
7. Announced Merger with Dean Witter, Discover & Co.
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 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. Shares of the Company's preferred stock outstanding
will be exchanged for preferred stock of DWD having substantially
identical terms. 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.
8. New Accounting Pronouncement
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128
establishes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 replaces the presentation of primary EPS with basic
EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution
and is calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS is computed similarly to fully diluted EPS.
SFAS No. 128 is effective for financial statement periods ending after
December 15, 1997, and requires restatement of all prior period EPS data.
The adoption of SFAS No. 128 would not have had, and is not expected to
have, a material impact on the Company's EPS computations.
Page 14
<PAGE>
EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
The following unaudited pro forma condensed combined statement of financial
condition combines the historical consolidated balance sheet of Dean Witter,
Discover and Co. ("DWD") and the historical consolidated statement of financial
condition of Morgan Stanley Group Inc. ("Morgan Stanley") giving effect to the
Merger as though it had been consummated on February 28, 1997 after giving
effect to the pro forma adjustments described in the notes to the pro forma
condensed combined financial statements. The following unaudited pro forma
condensed combined statements of income combines the historical consolidated
statements of income of DWD and Morgan Stanley giving effect to the Merger,
which is intended to be accounted for as a pooling of interests after giving
effect to the pro forma adjustments described in the notes to the pro forma
condensed combined financial statements. This information should be read in
conjunction with the audited consolidated financial statements and other
financial information contained in DWD's Annual Report on Form 10-K for the year
ended December 31, 1996, including the notes thereto and the audited
consolidated statements and other financial information contained in Morgan
Stanley's Annual Report on Form 10-K for the fiscal year ended November 30, 1996
and the unaudited consolidated interim financial statements contained in Morgan
Stanley's Quarterly Report on Form 10-Q for the period ended February 28, 1997,
including the notes thereto. These unaudited pro forma condensed combined
financial statements are not necessarily indicative of the operating results and
financial position that might have been achieved had the merger occurred as of
the beginning of the earliest period presented nor are they necessarily
indicative of operating results and financial position which may occur in the
future.
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
(IN MILLIONS)
<TABLE>
<CAPTION>
DWD Morgan Stanley
Historical Historical Pro Forma Pro Forma
December 31, 1996February 28, 1997Adjustments (a) Combined
---------------------------------------------- ------------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $1,999 $4,488 $6,487
Cash and securities deposited with clearing organizations
or segregated under federal and other regulations 2,045 1,490 3,535
Financial instruments owned:
U.S. government and agency securities 951 15,219 16,170
Other sovereign government obligations 0 18,205 18,205
Corporate and other debt 923 17,905 18,828
Corporate equities 40 14,242 14,282
Derivative contracts 0 12,818 12,818
Physical commodities 0 287 287
Securities purchased under agreements to resell 3,564 70,029 73,593
Securities borrowed 3,866 50,394 54,260
Receivables:
Consumer loans (net of allowances of $815) 22,373 0 22,373
Customers, net 2,839 10,368 13,207
Brokers, dealers and clearing organizations 0 1,995 1,995
Fees, interest and other 805 2,524 3,329
Other assets 3,009 4,808 7,817
---------------------------------------------- ------------
Total assets $42,414 $224,772 $267,186
---------------------------------------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and other short-term borrowings $5,865 $22,241 $28,106
Deposits 7,213 0 7,213
Financial instruments sold, not yet purchased:
U.S. government and agency securities 1,199 13,991 15,190
Other sovereign government obligations 0 8,355 8,355
Corporate and other debt 64 1,242 1,306
Corporate equities 11 8,762 8,773
Derivative contracts 0 11,006 11,006
Physical commodities 0 36 36
Securities sold under agreements to repurchase 3,567 95,919 99,486
Securities loaned 3,932 10,432 14,364
Payables:
Customers 3,433 21,041 24,474
Brokers, dealers and clearing organizations 0 4,113 4,113
Interest and dividends 200 1,244 1,444
Other liabilities and accrued expenses 3,622 2,425 6,047
Long-term borrowings 8,144 16,470 24,614
---------------------------------------------- ------------
37,250 217,277 254,527
---------------------------------------------- ------------
Capital Units 0 999 999
---------------------------------------------- ------------
Commitments and contingencies
</TABLE>
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
(IN MILLIONS)
<TABLE>
<CAPTION>
DWD Morgan Stanley
Historical Historical Pro Forma Pro Forma
December 31, 1996February 28, 1997Adjustments (a) Combined
---------------------------------------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity:
<S> <C> <C> <C> <C>
Preferred stock 0 1,027 1,027
Common stock (1) 3 164 (160)(b) 7
Paid-in capital (1) 2,703 892 160 (b) 3,755
Retained earnings 2,973 4,767 (264)(b) 7,476
Cumulative translation adjustments 0 (14) (14)
---------------------------------------------- ------------
Subtotal 5,679 6,836 (407) 12,108
Less:
Stock compensation related deductions (83) 76 (7)
Common stock held in treasury, at cost 598 264 (264)(b) 598
---------------------------------------------- ------------
Total stockholders' equity 5,164 6,496 0 11,660
---------------------------------------------- ------------
Total liabilities and stockholders' equity $42,414 $224,772 $0 $267,186
---------------------------------------------- ------------
</TABLE>
(1) DWD historical amounts have been restated to reflect a two-for-one stock
split which became effective January 14, 1997.
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DWD Morgan Stanley
Historical Historical
Three Months Three Months
Ended Ended Pro Forma
December 31, 1996February 28, 1997 Combined
---------------------------------- -------------
Revenues:
<S> <C> <C> <C>
Investment banking $78 $442 $520
Principal transactions:
Trading 109 751 860
Investments 0 56 56
Commissions 294 182 476
Merchant and cardmember fees 461 0 461
Servicing fees 204 0 204
Interest and dividends 969 2,367 3,336
Asset management and administration 299 278 577
Other 29 0 29
---------------------------------- -------------
Total revenues 2,443 4,076 6,519
Interest expense 405 2,282 2,687
Provision for losses on credit receivables 420 0 420
---------------------------------- -------------
Net revenues 1,618 1,794 3,412
---------------------------------- -------------
Expenses excluding interest:
Compensation and benefits 559 879 1,438
Occupancy and equipment 67 62 129
Brokerage, clearing and exchange fees 10 84 94
Information processing and communications 199 78 277
Business development 254 59 313
Professional services 36 60 96
Other 129 62 191
---------------------------------- -------------
Total expenses excluding interest 1,254 1,284 2,538
---------------------------------- -------------
Income before income taxes 364 510 874
Provision for income taxes 136 194 330
---------------------------------- -------------
Net income $228 $316 $544
---------------------------------- -------------
Preferred stock dividend requirements 0 19 19
---------------------------------- -------------
Earnings applicable to common shares (1) $228 $297 $525
---------------------------------- -------------
Average common and common equivalent
shares outstanding (1) (2) 334,280,968 158,307,567 595,488,454
Primary earnings per share (2) $0.68 $1.88 $0.88
Fully diluted earnings per share (2) $0.68 $1.80 $0.86
</TABLE>
(1) Amounts shown are used to calculate primary earnings per share.
(2) DWD historical share and per share amounts have been restated to reflect a
two-for-one stock split which became effective January 14, 1997.
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DWD Morgan Stanley
Historical Historical
Three Months Three Months
Ended Ended Pro Forma
December 31, 1995February 29, 1996 Combined
---------------------------------- -------------
Revenues:
<S> <C> <C> <C>
Investment banking $49 $399 $448
Principal transactions:
Trading 111 704 815
Investments 0 (7) (7)
Commissions 274 154 428
Merchant and cardmember fees 344 0 344
Servicing fees 162 0 162
Interest and dividends 905 1,933 2,838
Asset management and administration 259 122 381
Other 24 3 27
---------------------------------- -------------
Total revenues 2,128 3,308 5,436
Interest expense 403 1,859 2,262
Provision for losses on credit receivables 287 0 287
---------------------------------- -------------
Net revenues 1,438 1,449 2,887
---------------------------------- -------------
Expenses excluding interest:
Compensation and benefits 497 705 1,202
Occupancy and equipment 62 58 120
Brokerage, clearing and exchange fees 10 66 76
Information processing and communications 181 61 242
Business development 224 37 261
Professional services 27 42 69
Other 144 40 184
---------------------------------- -------------
Total expenses excluding interest 1,145 1,009 2,154
---------------------------------- -------------
Income before income taxes 293 440 733
Provision for income taxes 115 167 282
---------------------------------- -------------
Net income $178 $273 $451
---------------------------------- -------------
Preferred stock dividend requirements 0 16 16
---------------------------------- -------------
Earnings applicable to common shares (1) $178 $257 $435
---------------------------------- -------------
Average common and common equivalent
shares outstanding (1) (2) 351,746,068 156,549,243 610,052,319
Primary earnings per share (2) $0.51 $1.64 $0.71
Fully diluted earnings per share (2) $0.51 $1.57 $0.70
</TABLE>
(1) Amounts shown are used to calculate primary earnings per share.
(2) DWD historical share and per share amounts have been restated to reflect a
two-for-one stock split which became effective January 14, 1997.
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note (a): Basis of Presentation
The unaudited pro forma condensed combined statement of financial condition
combines the historical consolidated balance sheet of DWD at December 31, 1996
with the historical consolidated statement of financial condition of Morgan
Stanley at February 28, 1997. The unaudited pro forma condensed combined
statements of income combine the historical consolidated statements of income of
DWD for the three months ended December 31, 1996 and 1995 with the historical
consolidated statements of income of Morgan Stanley for the three months ended
February 28, 1997 and February 29, 1996. Certain amounts reflected in the
historical financial statement presentations of both companies have been
reclassified to conform to the unaudited pro forma condensed combined
presentation.
The unaudited pro forma condensed combined financial statements exclude
(i) the effect of any potential changes in revenues or any operating
synergies which may be achieved upon combining the resources of the companies
(ii) investment banking, legal and miscellaneous transaction costs of the
Merger, which will be reflected as an expense in the period the Merger is
consummated, and (iii) costs associated with the integration and consolidation
of the companies which are not presently estimable.
Transactions between DWD and Morgan Stanley are not material in relation to the
unaudited pro forma condensed combined financial statements and therefore,
intercompany balances have not been eliminated from the pro forma combined
amounts. DWD and Morgan Stanley are in the process of reviewing their
respective accounting policies and do not expect there to be any significant
adjustments necessary in order to conform such policies.
In January 1997, DWD acquired Lombard Brokerage, Inc. which was accounted for as
a purchase transaction. During 1996, Morgan Stanley acquired Miller Anderson &
Sherrerd, LLP and Van Kampen American Capital, Inc., both accounted for as
purchase transactions. In April 1997, Morgan Stanley announced the acquisition
of the institutional global custody business of Barclays PLC. No pro forma
effect has been given to these transactions as the effect is not material.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note (b): Pro Forma Adjustments
The pro forma adjustments to common stock, paid-in capital and retained earnings
accounts at December 31, 1996 reflect (i) an exchange of 158.0 million shares of
common stock, par value $1.00 per share of Morgan Stanley for 260.7 million
shares (using the exchange ratio of 1.65) of common stock, par value $.01 per
share of DWD and (ii) the cancellation and retirement of all shares of Morgan
Stanley common stock held in treasury. The number of shares of DWD common stock
to be issued at consummation of the Merger will be based upon the actual number
of shares of Morgan Stanley common stock outstanding at that time.
Note (c): Pro Forma Earnings Per Share
The pro forma combined primary and fully diluted earnings per common share for
the respective periods presented are based on the combined weighted average
number of common shares and share equivalents of DWD and Morgan Stanley. The
number of common shares and share equivalents of Morgan Stanley is based on an
exchange ratio of 1.65 shares of DWD common shares for each issued and
outstanding share and share equivalent of Morgan Stanley.
