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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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): May 31, 1997
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
36-3145972
Delaware 1-11758 -----------------------
----------------------- ----------------------- (IRS EMPLOYER
(STATE OR OTHER (COMMISSION FILE NUMBER) IDENTIFICATION NUMBER)
JURISDICTION OF
INCORPORATION)
1585 Broadway, New York, New York 10036
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(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(212) 761-4000
--------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Dean Witter, Discover & Co., Two World Trade Center, New York, NY 10048
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") merged (the
"Merger") with and into Dean Witter, Discover & Co. ("the Corporation") in a
merger of equals, pursuant to which each outstanding share of common stock,
par value $1.00 per share, of Morgan Stanley ("Morgan Stanley Common Stock")
was converted into the right to receive 1.65 shares (the "Merger
Consideration") of common stock, par value $.01 per share, of the Corporation
("Corporation Common Stock"). On June 2, 1997, the Corporation announced that
the Merger had been completed, at which time all shares of Morgan Stanley
Common Stock ceased to be outstanding, and each share thereafter represented
the right to receive the Merger Consideration, and each share of Morgan
Stanley preferred stock was converted into the right to receive one share of a
corresponding series of preferred stock of the Corporation. The Corporation is
the surviving corporation of the Merger and was renamed Morgan Stanley, Dean
Witter, Discover & Co. at the effective time of the Merger.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Morgan Stanley.
The audited consolidated statement of financial condition of Morgan
Stanley as of November 30, 1996 and November 30, 1995 and the related
consolidated statements of income, cash flows and changes in
shareholders' equity for each of the years in the three year period ended
November 30, 1996 and 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 were
previously filed by the Corporation as Exhibit 99.1 in each of its
Current Reports on Form 8-K dated February 28, 1997 and April 15, 1997,
respectively, and are incorporated herein by reference.
(b) Financial Information.
The year end audited supplemental financial information for the
Corporation is contained in Exhibit 99.3 including Management's
Discussion and Analysis of Financial Condition and Results of Operations
of the Corporation, the audited Supplemental Consolidated Statements of
Financial Condition at fiscal year ends 1996 and 1995 and the audited
Supplemental Consolidated Statements of Income, Changes in Shareholders'
Equity and Cash Flows for the fiscal years ended 1996, 1995 and 1994, and
the notes thereto.
The first quarter unaudited supplemental financial information for the
Corporation is contained in Exhibit 99.4 including Management's
Discussion and Analysis of Financial Condition and Results of Operations
of the Corporation, the unaudited interim Supplemental Consolidated
Statement of Financial Condition at first fiscal quarter end 1997, the
audited Supplemental Consolidated Statement of Financial Condition at
fiscal year end 1996 and the unaudited interim Supplemental Consolidated
Statements of Income and Cash Flows for the first fiscal quarters ended
1997 and 1996, and the notes thereto.
(c) Exhibits
See the Index to Exhibits attached hereto.
ITEM 8. CHANGE IN FISCAL YEAR
On May 31, 1997, the Corporation determined to change the day on which its
fiscal year ends from December 31 to November 30.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Morgan Stanley, Dean Witter,
Discover & Co.
(REGISTRANT)
Date: June 2, 1997 /s/ William J. O'Shaughnessy
By:__________________________________
(SIGNATURE)
Name:William J. O'Shaughnessy
Title: Assistant Secretary
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<C> <S>
2 Amended and Restated Agreement and Plan of Merger dated as of April
10, 1997 (incorporated by reference to Annex I to the Joint Proxy
Statement/Prospectus included as part of the Corporation's
Registration Statement on Form S-4 (File No. 333-25003) filed on April
11, 1997).
3.1 Amended and Restated Certificate of Incorporation of the Corporation.
3.2 Amended and Restated By-Laws of the Corporation.
15.1 Letter of Awareness from Deloitte & Touche LLP concerning Unaudited
Financial Information.
15.2 Letter of Awareness from Ernst & Young LLP concerning Unaudited
Financial Information.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Ernst & Young LLP.
99.1 Press release dated May 28, 1997 issued by the Corporation and Morgan
Stanley, announcing the results of the Corporation's 1997 Annual
Meeting of Stockholders and Morgan Stanley's Special Meeting of
Stockholders.
99.2 Press release dated June 2, 1997 issued by the Corporation, announcing
the consummation of the Merger.
99.3 Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Corporation including the audited
Supplemental Consolidated Statements of Financial Condition at fiscal
year ends 1996 and 1995 and the audited Supplemental Consolidated
Statements of Income, Changes in Shareholders' Equity and Cash Flows
for the fiscal years ended 1996, 1995 and 1994, and the notes thereto.
99.4 Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Corporation including the unaudited
interim Supplemental Consolidated Statement of Financial Condition at
first fiscal quarter end 1997, the audited Supplemental Consolidated
Statement of Financial Condition at fiscal year end 1996 and the
unaudited interim Supplemental Consolidated Statements of Income and
Cash Flows for the first fiscal quarters ended 1997 and 1996, and the
notes thereto.
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EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
MAY 31, 1997
ARTICLE I
NAME
----
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
Morgan Stanley, Dean Witter, Discover & Co.
ARTICLE II
ADDRESS
-------
The address of the Corporation's registered office in the State of Delaware is
The Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
PURPOSE
-------
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
CAPITALIZATION
--------------
The total number of shares of stock which the Corporation shall have authority
to issue is one billion seven hundred eighty million (1,780,000,000), consisting
of thirty million (30,000,000) shares of Preferred Stock, par value $0.01 per
share (hereinafter referred to as "Preferred Stock"), and one billion seven
hundred fifty million (1,750,000,000) shares of Common Stock, par value $0.01
per share (hereinafter referred to as "Common Stock").
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to provide for the issuance of
shares of Preferred Stock in series and, by filing a certificate pursuant to the
applicable law of the State of Delaware (hereinafter referred to as a "Preferred
Stock Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers,
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preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, determination
of the following:
(1) The designation of the series, which may be by distinguishing number,
letter or title.
(2) The number of shares of the series, which number the Board of Directors
may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding).
(3) The amounts payable on, and the preferences, if any, of shares of the
series in respect of dividends, and whether such dividends, if any, shall be
cumulative or noncumulative.
(4) Dates at which dividends, if any, shall be payable.
(5) The redemption rights and price or prices, if any, for shares of the
series.
(6) The terms and amount of any sinking fund provided for the purchase or
redemption of shares of the series.
(7) The amounts payable on, and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation.
(8) Whether the shares of the series shall be convertible into or
exchangeable for shares of any other class or series, or any other security,
of the Corporation or any other corporation, and, if so, the specification of
such other class or series of such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates
at which such shares shall be convertible or exchangeable and all other terms
and conditions upon which such conversion or exchange may be made.
(9) Restrictions on the issuance of shares of the same series or of any
other class or series.
(10) The voting rights, if any, of the holders of shares of the series.
The Common Stock shall be subject to the express terms of the Preferred Stock
and any series thereof. Except as may be provided in this Certificate of
Incorporation or in a Preferred Stock Designation or by applicable law, the
holders of shares of Common Stock shall be entitled to one vote for each such
share upon all questions presented to the stockholders, the Common Stock shall
have the exclusive right to vote for the election of directors and for all other
purposes, and holders of Preferred Stock shall not be entitled to receive notice
of any meeting of stockholders at which they are not entitled to vote. The
holders of the shares of Common Stock shall at all times, except as otherwise
provided in this Certificate of Incorporation or as required by law, vote as one
class, together with the holders of any other class or series of stock of the
Corporation accorded such general voting rights.
The Corporation shall be entitled to treat the person in whose name any share
of its stock is registered as the owner thereof for all purposes and shall not
be bound to recognize any
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equitable or other claim to, or interest in, such share on the part of any other
person, whether or not the Corporation shall have notice thereof, except as
expressly provided by applicable law.
ARTICLE V
BY-LAWS
-------
In furtherance of, and not in limitation of, the powers conferred by law, the
Board of Directors is expressly authorized and empowered:
(1) to adopt, amend or repeal the Bylaws of the Corporation; provided,
however, that the Bylaws adopted by the Board of Directors under the powers
hereby conferred may be amended or repealed by the Board of Directors or by
the stockholders having voting power with respect thereto, provided further
that, in the case of amendments by stockholders, the affirmative vote of the
holders of at least 80 percent of the voting power of the then outstanding
Voting Stock, voting together as a single class, shall be required in order
for the stockholders to alter, amend or repeal any provision of the Bylaws or
to adopt any additional Bylaw; and
(2) from time to time to determine whether and to what extent, and at what
times and places, and under what conditions and regulations, the accounts and
books of the Corporation, or any of them, shall be open to inspection of
stockholders; and, except as so determined or as expressly provided in this
Certificate of Incorporation or in any Preferred Stock Designation, no
stockholder shall have any right to inspect any account, book or document of
the Corporation other than such rights as may be conferred by applicable law.
The Corporation may in its Bylaws confer powers upon the Board of Directors in
addition to the foregoing and in addition to the powers and authorities
expressly conferred upon the Board of Directors by applicable law.
ARTICLE VI
ACTION OF STOCKHOLDERS
----------------------
Subject to the rights of the holders of any series of Preferred Stock or any
other series or class of stock as set forth in this Certificate of
Incorporation, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing in lieu of a meeting of such stockholders.
ARTICLE VII
BOARD OF DIRECTORS
------------------
Subject to the rights of the holders of any series of Preferred Stock, or any
other series or class of stock as set forth in this Certificate of
Incorporation, to elect additional directors under specified circumstances, the
number of directors of the Corporation shall be fixed in
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such manner as prescribed by the Bylaws of the Corporation and may be increased
or decreased from time to time in such manner as prescribed by the Bylaws.
Unless and except to the extent that the Bylaws of the Corporation shall so
require, the election of directors of the Corporation need not be by written
ballot.
The directors, other than those who may be elected by the holders of any
series of Preferred Stock or any other series or class of stock as set forth in
this Certificate of Incorporation, shall be divided into three classes,
initially consisting of 6, 4 and 4 directors. One class of directors initially
consisting of 4 directors shall be initially elected for a term expiring at the
annual meeting of stockholders to be held in 1998, another class initially
consisting of 4 directors shall be initially elected for a term expiring at the
annual meeting of stockholders to be held in 1999, and another class initially
consisting of 6 directors shall be initially elected for a term expiring at the
annual meeting of stockholders to be held in 2000. Members of each class shall
hold office until their successors are elected and qualified. At each annual
meeting of the stockholders of the Corporation commencing with the 1998 annual
meeting, directors elected to succeed those directors whose terms then expire
shall be elected by a plurality vote of all votes cast at such meeting to hold
office for a term expiring at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until his
or her successor shall have been duly elected and qualified.
Subject to the rights of the holders of any series of Preferred Stock, or any
other series or class of stock as set forth in this Certificate of
Incorporation, to elect additional directors under specified circumstances,
vacancies resulting from death, resignation, retirement, disqualification,
removal from office or other cause, and newly created directorships resulting
from any increase in the authorized number of directors, may be filled only by
the affirmative vote of a majority of the remaining directors, though less than
a quorum of the Board of Directors, and directors so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
office of the class to which they have been elected expires and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of authorized directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Subject to the rights of the holders of any series of Preferred Stock, or any
other series or class of stock as set forth in this Certificate of
Incorporation, to elect additional directors under specified circumstances, any
director may be removed from office at any time, but only for cause and by the
affirmative vote of the holders of at least 80 percent of the voting power of
the then outstanding Voting Stock, voting together as a single class.
ARTICLE VIII
INDEMNIFICATION
---------------
Each person who is or was a director or officer of the Corporation shall be
indemnified by the Corporation to the fullest extent permitted from time to
time by the General Corporation Law of the State of Delaware as the same exists
or may hereafter be amended (but, if permitted by applicable law, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment) or any other applicable laws
as presently or hereafter in effect. The Corporation may, by action of the
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Board of Directors, provide indemnification to employees and agents (other than
a director or officer) of the Corporation, to directors, officers, employees or
agents of a subsidiary, and to each person serving as a director, officer,
partner, member, employee or agent of another corporation, partnership, limited
liability company, joint venture, trust or other enterprise, at the request of
the Corporation, with the same scope and effect as the foregoing indemnification
of directors and officers of the Corporation. The Corporation shall be required
to indemnify any person seeking indemnification in connection with a proceeding
(or part thereof) initiated by such person only if such proceeding (or part
thereof) was authorized by the Board of Directors or is a proceeding to enforce
such person's claim to indemnification pursuant to the rights granted by this
Certificate of Incorporation or otherwise by the Corporation. Without limiting
the generality or the effect of the foregoing, the Corporation may enter into
one or more agreements with any person which provide for indemnification greater
or different than that provided in this Article VIII. Any amendment or repeal
of this Article VIII shall not adversely affect any right or protection existing
hereunder in respect of any act or omission occurring prior to such amendment or
repeal.
ARTICLE IX
DIRECTORS' LIABILITY
--------------------
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) under Section 174 of the General Corporation Law of the
State of Delaware, or (4) for any transaction from which the director derived an
improper personal benefit. Any amendment or repeal of this Article IX shall not
adversely affect any right or protection of a director of the Corporation
existing hereunder in respect of any act or omission occurring prior to such
amendment or repeal.
If the General Corporation Law of the State of Delaware shall be amended, to
authorize corporate action further eliminating or limiting the liability of
directors, then a director of the Corporation, in addition to the circumstances
in which he is not liable immediately prior to such amendment, shall be free of
liability to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended.
ARTICLE X
AMENDMENTS
----------
Except as may be expressly provided in this Certificate of Incorporation, the
Corporation reserves the right at any time and from time to time to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation or a Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by
applicable law, and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article X;
provided, however, that any amendment or repeal of Article VIII or Article IX of
this Certificate of Incorporation shall not adversely affect any right or
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protection existing thereunder in respect of any act or omission occurring prior
to such amendment or repeal, and provided further that no Preferred Stock
Designation shall be amended after the issuance of any shares of the series of
Preferred Stock created thereby, except in accordance with the terms of such
Preferred Stock Designation and the requirements of applicable law.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, and in addition to approval by the Board of Directors, the affirmative
vote of the holders of at least 80 percent of the voting power of the then
outstanding Voting Stock, voting together as a single class, shall be required
to amend, repeal or adopt any provision inconsistent with paragraph (1) of
Article V, Article VI, Article VII or this second paragraph of this Article X.
For the purposes of this Certificate of Incorporation, "Voting Stock" shall mean
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors.
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CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
ESOP CONVERTIBLE PREFERRED STOCK
OF
DEAN WITTER, DISCOVER & CO.
------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of
Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 3,902,438 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Issuance.
-------------------------
(A) The shares of such series shall be designated ESOP CONVERTIBLE
PREFERRED STOCK (hereinafter referred to as the "ESOP Preferred Stock") and such
series shall consist of
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3,902,438 shares. Such number of shares may be increased or decreased from time
to time by resolution of the Committee (as hereinafter defined), but no such
increase shall result in such series consisting of more than 4,000,000 shares,
and no decrease shall reduce the number of shares of ESOP Preferred Stock to a
number less than that of shares of ESOP Preferred Stock then outstanding plus
the number of shares issuable upon exercise of any rights, options or warrants
or upon conversion of outstanding securities issued by the Corporation relating
to such shares. Notwithstanding the preceding sentence, the Board may increase
the number of shares of ESOP Preferred Stock to a number greater than 4,000,000
shares, or may decrease the number of such shares, subject only to any
limitations imposed by applicable law or the Certificate of Incorporation. Any
shares of ESOP Preferred Stock redeemed or purchased by the Corporation shall
remain issued and outstanding for all purposes (except that as long as such
shares are held by the Corporation or its nominee, no dividends shall be paid on
such shares and they shall neither be entitled to vote nor counted for quorum
purposes) and may thereafter be transferred by the Corporation from time to time
to a trustee or trustees referred to in paragraph (B) of this Section 1
(whereupon the voting and dividend rights of such shares shall be restored);
provided that the Corporation may provide at the time of or at any time after
such redemption or purchase that any such shares then held by the Corporation or
its nominee shall be retired, and such shares shall then be restored to the
status of authorized but unissued shares of Preferred Stock of the Corporation.
For the purposes of this Certificate of Designation, the "Committee" shall mean
any committee of the Board to whom the Board, pursuant to Section 141(c) of the
General Corporation Law of the State of Delaware, delegates authority to perform
the functions of the Board set forth in this Certificate of Designation.
(B) Shares of ESOP Preferred Stock shall be issued only to a trustee
or trustees acting on behalf of an employee stock ownership trust or plan or
other employee benefit plan (a "Plan") of the Corporation. In the event of any
sale, transfer or other disposition (hereinafter a "transfer") of shares of ESOP
Preferred Stock to any person (including, without limitation, any participant in
the Plan) other than (x) any trustee or trustees of the Plan, (y) any pledgee of
such shares acquiring such shares as security for any loan or loans made to the
Plan or to any trustee or trustees acting on behalf of the Plan or (z) the
Corporation, the shares of ESOP Preferred Stock so transferred, upon such
transfer and without any further
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action by the Corporation or the holder, shall be automatically converted into
shares of Common Stock at the Conversion Price (as hereinafter defined) and on
the terms otherwise provided for the conversion of shares of ESOP Preferred
Stock into shares of Common Stock pursuant to Section 5 hereof and no such
transferee shall have any of the voting powers, preferences and relative,
participating, optional or special rights ascribed to shares of ESOP Preferred
Stock hereunder, but, rather, only the powers and rights pertaining to the
Common Stock into which such shares of ESOP Preferred Stock shall be so
converted; provided, however, that in the event of a foreclosure or other
realization upon shares of ESOP Preferred Stock pledged as security for any loan
or loans made to the Plan or to the trustee or the trustees acting on behalf of
the Plan, the pledged shares so foreclosed or otherwise realized upon shall be
converted automatically into shares of Common Stock at the Conversion Price and
on the terms otherwise provided for conversions of shares of ESOP Preferred
Stock into shares of Common Stock pursuant to Section 5 hereof. In the event of
such a conversion, such transferee shall be treated for all purposes as the
record holder of the shares of Common Stock into which the ESOP Preferred Stock
shall have been converted as of the date of such conversion. Certificates
representing shares of ESOP Preferred Stock shall be legended to reflect such
restrictions on transfer. Notwithstanding the foregoing Provisions of this
Section 1, shares of ESOP Preferred Stock (i) may be converted into shares of
Common Stock as provided by Section 5 hereof and the shares of Common Stock
issued upon such conversion may be transferred by the holder thereof as
permitted by law and (ii) be redeemable by the Corporation upon the terms and
conditions provided by Sections 6, 7 and 8 hereof.
2. Dividends and Distributions.
----------------------------
(A) (1) Subject to the provisions for adjustment hereinafter set
forth, the holders of shares of ESOP Preferred Stock (other than the Corporation
or its nominee) shall be entitled to receive, when and as declared by the Board
out of funds legally available therefor, cash dividends ("Preferred Dividends")
payable in accordance with either of the following elections, as the Board shall
elect from time to time in its absolute discretion:
(i) in an amount per share initially equal to $2.78 per share per
annum, and no more (such amount, as adjusted from time to time pursuant to
the terms hereof, including during any period in which a
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Semiannual Payment Election (as defined below) shall be in effect, the
"Annual Dividend Rate"), payable annually in arrears on December 31 (or
such later date not more than four business days thereafter as the Board
may from time to time elect in its absolute discretion; such date, the
"Annual Payment Date") of each year (such election, the "Annual Payment
Election") beginning on the Annual Payment Date occurring immediately after
the effective date of such Annual Payment Election; or
(ii) in an amount per share initially equal to $2.78 per share per
annum, and no more (such amount, as adjusted from time to time pursuant to
the terms hereof, including during any period in which an Annual Payment
Election is in effect, the "Semiannual Dividend Rate"; and the Semiannual
Dividend Rate and the Annual Dividend Rate, as in effect at any time, are
each hereinafter referred to as the "Preferred Dividend Rate"),
semiannually in arrears, one-half on each June 30 and December 31 (or, in
either case, such later date not more than four business days after either
of such dates as the Board may from time to time elect in its absolute
discretion; such dates, the "Semiannual Payment Dates") of each year (such
election, the "Semiannual Payment Election"), beginning on the Semiannual
Payment Date occurring immediately after the effective date of such
Semiannual Payment Election;
provided that any Semiannual Payment Election shall be made effective only
during the period beginning on January 5 and ending on June 29 in each year.
The Board shall give prompt notice to the holders of the ESOP Preferred Stock of
any Semiannual Payment Election or Annual Payment Election and any election to
alter any Dividend Payment Date pursuant to this Section 2(A)(1). Each Annual
Payment Date or Semiannual Payment Date, as applicable, is hereinafter referred
to as a "Dividend Payment Date", and each payment of a Preferred Dividend shall
be made to holders of record at the opening of business on such Dividend Payment
Date.
(2) Preferred Dividends shall begin to accrue on outstanding shares
of ESOP Preferred Stock from the date of issuance of such shares, except that
with respect to any shares of ESOP Preferred Stock redeemed or purchased by the
Corporation and then reissued, Preferred Dividends shall accrue on such shares
from their date of reissuance. Preferred Dividends shall accrue on a daily
basis, whether or not the Corporation shall then have earnings or surplus
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(computed on the basis of a 360-day year of twelve 30-day months in case of any
period less than one year) based on the Preferred Dividend Rate in effect on
such date; provided however, that if a Semiannual Payment Election or an Annual
Payment Election becomes effective on or after such date and before the
immediately succeeding Dividend Payment Date, payments in respect of dividends
on the ESOP Preferred Stock made on or after the effective date of such
Semiannual Payment Election or Annual Payment Election and on or before such
Dividend Payment Date shall be computed using the Preferred Dividend Rate in
effect on the date of such payment; provided further, the dividends payable on
the first Dividend Payment Date following the issuance of the ESOP Preferred
Stock shall be in an amount equal to the Annual Dividend Rate for a full annum
or the Semiannual Dividend Rate for a full semiannum, as applicable. Accrued
but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on
which they first become payable, but no interest shall accrue on accumulated but
unpaid Preferred Dividends.
(B) So long as any shares of ESOP Preferred Stock shall be
outstanding, no dividend shall be declared or paid or set apart for payment on
any other series of stock ranking on a parity with the ESOP Preferred Stock as
to dividends, unless there shall also be or have been declared and paid or set
apart for payment on the ESOP Preferred Stock, like dividends for all dividend
payment periods of the ESOP Preferred Stock ending on or before the dividend
payment date of such parity stock, ratably in proportion to the respective
amounts of dividends (1) accumulated and unpaid or payable on such parity stock,
on the one hand, and (2) accumulated and unpaid through the dividend payment
period or periods of the ESOP Preferred Stock next preceding such dividend
payment date, on the other hand. If full cumulative dividends on the ESOP
Preferred Stock have not been declared and paid or set apart for payment when
due, the Corporation shall not declare or pay or set apart for payment any
dividends or make any other distributions on, or make any payment on account of
the purchase, redemption or other retirement of, any other class of stock or
series thereof of the Corporation ranking, as to dividends or upon dissolution,
junior to the ESOP Preferred Stock until full cumulative dividends on the ESOP
Preferred Stock shall have been paid or declared and set apart; provided,
however, that the foregoing shall not apply to (i) any dividend or distribution
payable solely in any shares of, or options, warrants or rights to subscribe for
or purchase shares of, any stock ranking, as to dividends and upon dissolution,
11
<PAGE>
junior to the ESOP Preferred Stock or (ii) the acquisition of shares of any
stock ranking, as to dividends and upon dissolution, junior to the ESOP
Preferred Stock in exchange solely for or by conversion solely into shares of
any other stock ranking junior to the ESOP Preferred Stock as to dividends and
upon dissolution.
(C) Any dividend payment made on shares of ESOP Preferred Stock shall
first be credited against the earliest accumulated but unpaid dividend due with
respect to such shares.
3. Liquidation Preference.
-----------------------
(A) In the event of any dissolution or liquidation of the
Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of any series or class or classes of
stock of the Corporation ranking junior to ESOP Preferred Stock upon dissolution
or liquidation, the holders of ESOP Preferred Stock (other than the Corporation
or its nominee) shall be entitled to receive the Liquidation Price (as
hereinafter defined) per share in effect at the time of dissolution or
liquidation plus an amount equal to all dividends accrued (whether or not
accumulated) and unpaid on the ESOP Preferred Stock to the date of final
distribution to such holders; but such holders shall not be entitled to and
shall not otherwise receive any further payments. The Liquidation Price per
share that holders of ESOP Preferred Stock shall receive upon dissolution or
liquidation shall be $35.875, subject to adjustment as hereinafter provided.
If, upon any dissolution or liquidation of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of ESOP
Preferred Stock shall be insufficient to pay in full the preferential amount
aforesaid and liquidating payments on any other shares ranking, as to
dissolution or liquidation, on a parity with ESOP Preferred Stock, then such
assets, or the proceeds thereof, shall be distributed among the holders of ESOP
Preferred Stock and any such other shares ratably in accordance with the
respective amounts that would be payable on such shares of ESOP Preferred Stock
and any such other shares if all amounts payable thereon were paid in full. For
the purposes of this Section 3, neither a consolidation or merger of the
Corporation with or into one or more corporations, nor the sale, transfer, lease
or exchange (for cash, shares of equity stock, securities or other
consideration) of all or substantially all of the
12
<PAGE>
assets of the Corporation, nor the distribution to the stockholders of the
Corporation of all or substantially all of the consideration for such sale,
unless such consideration (apart from assumption of liabilities) or the net
proceeds thereof consists substantially entirely of cash, shall be deemed to be
a dissolution or liquidation, voluntary or involuntary.
(B) Subject to the rights of the holders of shares of any series or
class or classes of stock ranking on a parity with or senior to ESOP Preferred
Stock upon dissolution or liquidation, upon any dissolution or liquidation of
the Corporation, after payment shall have been made in full to the holders of
ESOP Preferred Stock as provided in this Section 3, but not prior thereto, any
other series or class or classes of stock ranking junior to ESOP Preferred Stock
upon dissolution or liquidation shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
of the Corporation remaining to be paid or distributed, and the holders of ESOP
Preferred Stock shall not be entitled to share therein.
4. Ranking and Voting of Shares.
-----------------------------
(A) Each of (i) the Corporation's 7-3/8% Cumulative Preferred Stock,
with a liquidation value of $200.00 per share, (ii) the Corporation's 7-3/4%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii)
the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a
liquidation value of $200.00 per share, (iv) if issued, the Corporation's 7.82%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (v)
if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii)
if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (viii) if issued, the Corporation's
8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share
and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, shall rank on a parity with ESOP
Preferred Stock as to dividends and as to distribution of assets upon
dissolution or liquidation.
Unless otherwise provided in the Certificate of Incorporation of the
Corporation, as the same may be
13
<PAGE>
amended, or in a Certificate of Designation of Rights and Preferences relating
to any subsequent series of Preferred Stock, the ESOP Preferred Stock shall rank
on a parity with all series of the Corporation's Preferred Stock, other than the
Corporation's Series A Junior Participating Preferred Stock to which the ESOP
Preferred Stock shall rank senior, as to dividends and as to the distribution of
assets upon dissolution or liquidation.
(B) The holders of shares of ESOP Preferred Stock (other than the
Corporation or its nominee) shall have the following voting rights:
(1) The holders of ESOP Preferred Stock shall be entitled to vote on
all matters submitted to a vote of the stockholders of the Corporation, voting
together with the holders of Common Stock as one class. The holder of each
share of ESOP Preferred Stock shall be entitled to a number of votes equal to
1.35 times the number of shares of Common Stock into which such share of ESOP
Preferred Stock could be converted on the record date for determining the stock
holders entitled to vote; it being understood that whenever the "Conversion
Price" (as defined in Section 5 hereof) is adjusted as provided in Section 9
hereof, the number of votes of the ESOP Preferred Stock shall also be corres
pondingly adjusted. Notwithstanding the immediately preceding sentence, if the
governing body of the New York Stock Exchange or any other securities listing
service or exchange (each, an "Exchange") or any relevant governmental or
regulatory entity (each such entity, and each governing body of an Exchange, a
"Regulating Entity") shall have disapproved of such voting power or taken or
threatened any action against the Corporation or in respect of any of its
securities in accordance with Rule 19c-4 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), or any other rule or listing standard
of any Regulating Entity regarding the voting power of securities, or if the
Board of Directors determines in its sole judgment that any Regulating Entity
may so disapprove or take or threaten any such action, the holder of each share
of ESOP Preferred Stock shall be entitled to a maximum number of votes
permissible (consistent with continued listing of the Corporation's securities
on any such Exchange) in accordance with the interpretations of any such rule or
listing standard by such Regulating Entity, as determined by the Board.
(2) Except as otherwise required by law or set forth herein, holders
of ESOP Preferred Stock shall have no
14
<PAGE>
special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for the taking of any corporate action, including the issuance of any
Preferred Stock now or hereafter authorized; provided, however, that the vote of
at least 66-2/3% of the outstanding shares of ESOP Preferred Stock, voting
separately as a series, shall be necessary to approve any alteration, amendment
or repeal of any provision of the Certificate of Incorporation or any
alteration, amendment or repeal of any provision of the resolutions relating to
the designation, preferences and rights of ESOP Preferred Stock (including any
such alteration, amendment or repeal effected by any merger or consolidation in
which the Corporation is the surviving or resulting corporation, but not
including any alteration or amendment of rights expressly provided for in
Section (B)(1) above or in Section 2(A)(1)), if such amendment, alteration or
repeal would alter or change the powers, preferences, or special rights of the
ESOP Preferred Stock so as to affect them adversely.
5. Conversion into Common Stock.
-----------------------------
(A) A holder of shares of ESOP Preferred Stock shall be entitled, at
any time prior to the close of business on the date fixed for redemption of such
shares pursuant to Section 6, 7 or 8 hereof, to cause any or all of such shares
to be converted into shares of Common Stock. The number of shares of Common
Stock into which each share of the ESOP Preferred Stock may be converted shall
be determined by dividing the Liquidation Price in effect at the time of
conversion by the Conversion Price (as hereinafter defined) in effect at the
time of conversion. The initial Conversion Price per share at which shares of
Common Stock shall be issuable upon conversion of any shares of ESOP Preferred
Stock shall be $10.871, subject to adjustment as hereinafter provided; that is,
a conversion rate initially equivalent to three and three-tenths (3-3/10) shares
of Common Stock for each share of ESOP Preferred Stock, which is subject to
adjustment as hereinafter provided.
(B) Any holder of shares of ESOP Preferred Stock desiring to convert
such shares into shares of Common Stock shall surrender, if certificated, the
certificate or certificates representing the shares of ESOP Preferred Stock
being converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock
15
<PAGE>
powers relating thereto), or if uncertificated, a duly executed stock power
relating thereto, at the principal executive office of the Corporation or the
offices of the transfer agent for the ESOP Preferred Stock or such office or
offices in the continental United States of an agent for conversion as may from
time to time be designated by notice to the holders of the ESOP Preferred Stock
by the Corporation or the transfer agent for the ESOP Preferred Stock,
accompanied by written notice of conversion. Such notice of conversion shall
specify (i) the number of shares of ESOP Preferred Stock to be converted and the
name or names in which such holder wishes the Common Stock and any shares of
ESOP Preferred Stock not to be so converted to be issued, and (ii) the address
to which such holder wishes delivery to be made of a confirmation of such
conversion, if uncertificated, or any new certificates which may be issued upon
such conversion, if certificated.
(C) Upon surrender, if certificated, of a certificate representing a
share or shares of ESOP Preferred Stock for conversion, or if uncertificated, of
a duly executed stock power relating thereto, the Corporation shall issue and
send by hand delivery (with receipt to be acknowledged) or by first class mail,
postage prepaid, to the holder thereof or to such holder's designee, at the
address designated by such holder, if certificated, a certificate or
certificates for, or if uncertificated, confirmation of, the number of shares of
Common Stock to which such holder shall be entitled upon conversion. If there
shall have been surrendered shares of ESOP Preferred Stock only part of which
are to be converted, the Corporation shall issue and deliver to such holder or
such holder's designee, if certificated, a new certificate or certificates
representing the number of shares of ESOP Preferred Stock that shall not have
been converted, or if uncertificated, confirmation of the number of shares of
ESOP Preferred Stock that shall not have been converted.
(D) The issuance by the Corporation of shares of Common Stock upon a
conversion of shares of ESOP Preferred Stock into shares of Common Stock made at
the option of the holder thereof shall be effective as of the earlier of (i) the
delivery to such holder or such holder's designee of the certificates
representing the shares of Common Stock issued upon conversion thereof, if
certificated, or confirmation, if uncertificated, and (ii) the commencement of
business on the second business day after the surrender of the certificate or
certificates, if certificated, or a duly executed stock power, if
uncertificated, for the shares of
16
<PAGE>
ESOP Preferred Stock to be converted. On and after the effective date of
conversion, the person or persons entitled to receive Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock, and no allowance or adjust ment shall be
made in respect of dividends payable to holders of Common Stock of record on any
date prior to such effective date. The Corporation shall not be obligated to
pay any dividend that may have accrued or have been declared but that is not
payable to holders of shares of ESOP Preferred Stock if the Dividend Payment
Date for such dividend is on or subsequent to the effective date of conversion
of such shares.
(E) The Corporation shall not be obligated to deliver to holders of
ESOP Preferred Stock any fractional share or shares of Common Stock issuable
upon any conversion of such shares of ESOP Preferred Stock, but in lieu thereof
may make a cash payment in respect thereof in any manner permitted by law.
(F) The Corporation shall at all times reserve and keep available out
of its authorized and unissued Common Stock or treasury Common Stock, solely for
issuance upon the conversion of shares of ESOP Preferred Stock as herein
provided, such number of shares of Common Stock as shall from time to time be
issuable upon the conversion of all the shares of ESOP Preferred Stock then
outstanding.
6. Redemption at the Option of the Corporation.
--------------------------------------------
(A) The ESOP Preferred Stock shall be redeemable, in whole or in
part, at the option of the Corporation at any time after September 19, 2000, out
of funds legally available therefor, at a redemption price per share equal to
100% of the Liquidation Price plus an amount equal to all accrued (whether or
not accumulated) and unpaid dividends thereon to the date fixed for redemption.
Payment of the redemption price shall be made by the Corporation in cash or
shares of Common Stock, or a combination thereof, as permitted by paragraph (E)
of this Section 6. From and after the date fixed for redemption, dividends on
shares of ESOP Preferred Stock called for redemption will cease to accrue and
all rights of the holder in respect of such shares shall cease, except the right
to receive the redemption price. Upon payment of the redemption price, such
shares shall be deemed to have been transferred to the Corporation, to be held
as treasurer shares or to be retired, in either case as provided in Sec-
tion 1(A). If less than all of the
17
<PAGE>
outstanding shares of ESOP Preferred Stock are to be redeemed, the Corporation
shall either redeem a portion of the shares of each holder determined pro rata
based on the number of shares held by each holder or shall select the shares to
be redeemed by lot, as may be determined by the Board.
(B) Notice of redemption will be sent to the holders of ESOP
Preferred Stock at the address on the books of the Corporation or any transfer
agent for ESOP Preferred Stock by first class mail, postage prepaid, mailed not
less than twenty (20) days nor more than sixty (60) days prior to the redemption
date or in any other manner provided by law. Each notice shall state: (i) the
redemption date; (ii) the total number of shares of ESOP Preferred Stock to be
redeemed and, if fewer than all the shares held by such
holder are to be redeemed, the number of such shares to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places where certificates,
if certificated, for such shares are to be surrendered for payment of the
redemption price; (v) that dividends on the shares to be redeemed will cease to
accrue on such redemption date; (vi) whether such redemption price should be
paid in cash or in shares of Common Stock; and (vii) the conversion rights of
the shares to be redeemed, the period within which conversion rights may be
exercised and the Conversion Price and number of shares of Common Stock issuable
upon conversion of a share of ESOP Preferred Stock at the time. Upon surrender
of the certificates, if certificated, for any shares so called for redemption,
or upon the date fixed for redemption, if uncertificated, such shares, if not
previously converted, shall be redeemed by the Corporation as of the close of
business on the date fixed for redemption and at the redemption price set forth
in this Section 6.
(C) The Corporation may, in its sole discretion and notwithstanding
anything to the contrary in paragraph (A) of this Section 6, at any time within
one year after either of the following events:
(i) there shall be a change in the federal tax law or regulations of
the United States of America or of an interpretation or application of such
law or regulations or of a determination by a court of competent
jurisdiction that in any case has the effect of precluding the Corporation
from claiming (other than for purposes of calculating any alternative
minimum tax) any of the tax deductions for dividends paid on
18
<PAGE>
the ESOP Preferred Stock when such dividends are used as provided under
Section 404(k)(2) of the Internal Revenue Code of 1986, as amended (the
"Code"), as in effect on December 31, 1995.
(ii) the Corporation shall certify to the holders of the ESOP
Preferred Stock that the Corporation has determined in good faith that the
Plan either is not qualified as a "stock bonus plan" within the meaning of
Section 401(a) of the Code or is not an "employee stock ownership plan"
within the meaning of Section 4975(e)(7) of the Code,
elect either to (a) redeem, out of funds legally available therefor, any or all
of such ESOP Preferred Stock for cash or, if the Corporation so elects, in
shares of Common Stock, or a combination of such shares of Common Stock and
cash, as permitted by paragraph (E) of this Section 6, at a redemption price
equal to (x) if the relevant event is as provided in clause (i) above, the
Liquidation Price per share on the date fixed for redemption, plus an amount
equal to accrued (whether or not accumulated) and unpaid dividends thereon to
the date fixed for redemption or (y) if the relevant event is as provided in
clause (ii) above, an amount calculated on the basis of the redemption prices
provided in paragraph (D) of this Section 6 on the date fixed for redemption or
(b) exchange any or all of such shares of ESOP Preferred Stock for securities of
at least equal value (as determined by an independent appraiser) that constitute
"qualifying employer securities" with respect to a holder of ESOP Preferred
Stock within the meaning of Section 409(l) of the Code and Section 407(d)(5) of
the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), or
any successor provisions of law. If the Corporation elects to redeem any or all
of the ESOP Preferred Stock pursuant to clause (a) of the preceding sentence,
notice of such redemption shall be given as required in paragraph (B) of this
Section 6, and if the Corporation elects to exchange any or all of the ESOP
Preferred Stock for securities of at least equal value pursuant to clause (b) of
the preceding sentence, it will cause notice of such election to be sent to the
holders of ESOP Preferred Stock at the address shown on the books of the
Corporation or any transfer agent for ESOP Preferred Stock by first class mail,
postage prepaid, mailed not less than twenty (20) days nor more than sixty (60)
days prior to the date of exchange or in any other manner required by law. Each
notice shall state: (i) the exchange date; (ii) the total number of shares of
ESOP Preferred Stock to be
19
<PAGE>
exchanged and, if fewer than all the shares held by such holder are to be
exchanged, the number of shares held by such holder to be exchanged; (iii) the
exchange rate; (iv) the place or places where certificates, if certificated, for
such shares are to be surrendered for exchange; and (v) that dividends on the
shares to be exchanged will cease to accrue an such exchange date.
(D) Notwithstanding anything to the contrary in paragraph (A) of this
Section 6, in the event that the Plan is, or contributions thereto are,
terminated, the Corporation may, in its sole discretion, call for redemption any
or all of the then outstanding ESOP Preferred Stock, upon notice as required in
paragraph (B) of this Section 6, out of funds legally available therefor, at a
redemption price per share equal to the following percentages of the Liquidation
Price in effect on the date fixed for redemption:
<TABLE>
<CAPTION>
During the Twelve-
Month Period Percentage of
Beginning September 19, Liquidation Price
------------------------- -----------------
<S> <C>
1996 103.10
1997 102.33
1998 101.55
1999 100.78
2000 100.00
</TABLE>
and thereafter at 100%, plus, in each case, an amount equal to all accrued
(whether or not accumulated) and unpaid dividends thereon to the date fixed for
redemption. Payment of the redemption price shall be made by the Corporation in
cash or shares of Common Stock, or a combination thereof, as permitted by
paragraph (E) of this Section 6. From and after the date fixed for redemption,
dividends on shares of ESOP Preferred Stock called for redemption will cease to
accrue and all rights of the holder in respect of such shares shall cease,
except the right to receive the redemption price. Upon payment of the
redemption price, such shares shall be deemed to have been transferred to the
Corporation, to be held as treasury shares or to be retired, in either case as
provided in Section 1(A).
(E) The Corporation, at its option, may make payment of the
redemption price required upon redemption of shares of ESOP Preferred Stock in
cash or in shares of Common Stock, or in a combination of such shares and cash,
any such shares of Common Stock to be valued for such purpose at their Fair
Market Value (as defined in paragraph 9(H)(2)); provided, however, that in
calculating
20
<PAGE>
their Fair Market Value the Adjustment Period (as defined in paragraph 9(H)(2))
shall be deemed to be the five (5) consecutive trading days preceding the date
of redemption.
7. Redemption at the Option of the Holder.
---------------------------------------
(A) Unless otherwise provided by law, shares of ESOP Preferred Stock
shall be redeemed by the Corporation at the option of the holder, at any time
and from time to time upon notice to the Corporation given not less than five
business days prior to the date fixed by the holder in such notice, when and to
the extent necessary for such holder to provide for distributions required to be
made under, or to satisfy an investment election provided to participants in
accordance with, the Plan or any successor plan or when the holder elects to
redeem shares of ESOP Preferred Stock in connection with any Preferred Dividend
(a "Dividend Redemption"), in shares of Common Stock legally available therefor,
at a redemption price equal to the higher of (x) the Liquidation Price per share
on the date fixed for redemption and (y) the Fair Market Value (as defined in
paragraph 9(H)(2)) of the number of shares of Common Stock into which each share
of ESOP Preferred Stock is convertible at the time the notice of such redemption
is given, plus in either case an amount equal to accrued (whether or not
accumulated) and unpaid dividends thereon to the date fixed for redemption (such
higher price on any date, together with such accrued and unpaid dividends, the
"Special Redemption Price"). At the election of the Corporation, such redemp-
tion may instead be made out of funds legally available therefor in cash or a
combination of Common Stock and cash. Any shares of Common Stock shall be valued
for the purposes of redemption pursuant to this paragraph (A) as provided by
paragraph (E) of Section 6. In the case of any Dividend Redemption, such holder
shall give the notice specified above on the fifth business day after the
related Dividend Payment Date and such redemption shall be effective as to such
number of shares of ESOP Preferred Stock as shall equal (x) the aggregate amount
of such Preferred Dividends paid with respect to shares of ESOP Preferred Stock
allocated or credited to the accounts of participants in the Plan or any
successor plan that are used to repay any loan associated with such allocated or
credited shares divided by (y) the Special Redemption Price specified above in
this paragraph (A).
(B) Unless otherwise provided by law, shares of ESOP Preferred
Stock shall be redeemed by the Corporation at the option of the holder, at any
time and from time to
21
<PAGE>
time upon notice to the Corporation given not less than five business days prior
to the date fixed by the holder in such notice, upon certification by such
holder to the Corporation of the following events: (i) when and to the extent
necessary for such holder to make any payments of principal, interest or premium
due and payable (whether voluntary, scheduled, upon acceleration or otherwise)
upon any obligations of the trust established under the Plan in connection with
the acquisition of ESOP Preferred Stock or any indebtedness, expenses or costs
incurred by the holder for the benefit of the Plan; or (ii) when and if it shall
be established to the satisfaction of the holder that the Plan has not initially
been determined by the Internal Revenue Service to be qualified as a "stock
bonus plan" and an "employee stock ownership plan" within the meaning of Section
401(a) or 4975(e)(7) of the Code, respectively, in shares of Common Stock
legally available therefor, at a redemption price equal to the Liquidation Price
plus an amount equal to accrued and unpaid dividends thereon to the date fixed
for redemption. At the election of the Corporation, such redemption may instead
be made out of funds legally available therefor in cash or a combination of
Common Stock and cash. Any shares of Common Stock shall be valued for the
purposes of redemption pursuant to this paragraph (B) as provided by paragraph
(E) of Section 6.
8. Consolidation, Merger, etc.
---------------------------
(A) If the Corporation shall consummate any consolidation or merger
or similar transaction, however named, pursuant to which the outstanding shares
of Common Stock are by operation of law exchanged solely for or changed,
reclassified or converted solely into securities of any successor or resulting
company (including the Corpora tion) that constitute "qualifying employer
securities" with respect to a holder of ESOP Preferred Stock within the meanings
of Section 409(l) of the Code and Section 407(d)(5) of ERISA, or any successor
provision of law, and, if applicable, for a cash payment in lieu of fractional
shares, if any, then, in such event, the terms of such consolidation or merger
or similar transaction shall provide that the shares of ESOP Preferred Stock of
such holder shall be converted into or exchanged for and shall become preferred
securities of such successor or resulting company, having in respect of such
company insofar as possible (taking into account, without limitation, any
requirements relating to the listing of such preferred securities on any
national securities exchange or the qualification of such preferred securities
for trading in any over-the-counter market) the
22
<PAGE>
same powers, preferences and relative, participating, optional or other special
rights (including the redemption rights provided by Sections 6, 7 and 8 hereof),
and the qualifications, limitations or restrictions thereon, that the ESOP
Preferred Stock had immediately prior to such transaction; provided, however,
that after such transaction each security into which the ESOP Preferred Stock is
so converted or for which it is exchanged shall be convertible, pursuant to the
terms and conditions provided by Section 5 hereof, into the number and kind of
qualifying employer securities receivable by a holder equivalent to the number
of shares of Common Stock into which such shares of ESOP Preferred Stock could
have been converted pursuant to Section 5 hereof immediately prior to such
transaction and provided further that if by virtue of the structure of such
transaction, a holder of Common Stock is required to make an election with
respect to the nature and kind of considera tion to be received in such
transaction, which election cannot practicably be made by the holders of the
ESOP Preferred Stock, then such election shall be deemed to be solely for
"qualifying employer securities" (together, if applicable, with a cash payment
in lieu of fractional shares) with the effect provided above on the basis of the
number and kind of qualifying employer securities receivable by a holder of the
number of shares of Common Stock into which the shares of ESOP Preferred Stock
could have been converted pursuant to Section 5 hereof immediately prior to such
transaction (it being understood that if the kind or amount of qualifying
employer securities receivable in respect of each share of Common Stock upon
such transaction is not the same for each such share, then the kind and amount
of qualifying employer securities deemed to be receivable in respect of each
share of Common Stock for purposes of this proviso shall be the kind and amount
so receivable per share of Common Stock by a plurality of such shares). The
rights of the ESOP Preferred Stock as preferred equity of such successor or
resulting company shall successively be subject to adjustments pursuant to
Section 9 hereof after any such transaction as nearly equivalent as practicable
to the adjustments provided for by such Section prior to such transaction. The
Corporation shall not consummate any such merger, consolidation or similar
transaction unless all the terms of this paragraph (A) are complied with.
(B) If the Corporation shall consummate any consolidation or merger
or similar transaction, however named, pursuant to which the outstanding shares
of Common Stock are by operation of law exchanged for or changed,
23
<PAGE>
reclassified or converted into other shares or securities or cash or any other
property, or any combination thereof, other than any such consideration which is
constituted solely of qualifying employer securities that are common stock or
common equity (as referred to in paragraph (A) of this Section 8) and cash
payments, if applicable, in lieu of fractional shares or other interests,
outstanding shares of ESOP Preferred Stock shall, without any action on the part
of the Corporation or any holder thereof (but subject to paragraph (C) of this
Section 8), be automatically converted immediately prior to the consummation of
such merger, consolidation or similar transaction into shares of Common Stock at
the Conversion Price then in effect.
(C) If the Corporation shall enter into any agreement providing for
any consolidation or merger or similar transaction described in paragraph (B) of
this Section 8, then the Corporation shall as soon as practicable thereafter
(and in any event at least ten (10) business days before consummation of such
transaction) give notice of such agreement and the material terms thereof to
each holder of ESOP Preferred Stock and each such holder shall have the right to
elect, by written notice to the Corporation, to receive, upon consummation of
such transaction (if and when such transaction is consummated), out of funds
legally available therefor, from the Corporation or the successor of the
Corporation, in redemption of such ESOP Preferred Stock, in lieu of any cash or
other securities which such holder would otherwise be entitled to receive under
paragraph (B) of this Section 8, a cash payment equal to the Liquidation Price
per share on the date fixed for such transaction, plus an amount equal to
accrued (whether or not accumulated) and unpaid dividends thereon to the date
fixed for such transaction. No such notice of redemption shall be effective
unless given to the Corporation prior to the close of business of the fifth
business day prior to consummation of such transaction, unless the Corporation
or the successor of the Corporation shall waive such prior notice, but any
notice or redemption so given prior to such time may be withdrawn by notice of
withdrawal given to the Corporation prior to the close of business on the fifth
business day prior to consummation of such transaction.
9. Anti-dilution Adjustments.
--------------------------
(A)(1) In the event the Corporation shall, at any time or from time
to time while any of the shares of the ESOP Preferred Stock are outstanding, (i)
pay a dividend or make a distribution in respect of the Common Stock in shares
24
<PAGE>
of Common Stock or (ii) subdivide the outstanding shares of Common Stock into a
greater number of shares, in each case whether by reclassification of shares,
recapitalization of the Corporation (excluding a recapitalization or reclass-
ification effected by a merger or consolidation to which Section 8 applies) or
otherwise, then, in such event, the Conversion Price shall, subject to the
provisions of paragraphs (E) and (F) of this Section 9, automatically be
adjusted by dividing such Conversion Price by a fraction (the "Section 9(A)
Fraction"), the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock outstanding immediately before such event.
Such adjustment to the Conversion Price shall be effective, upon payment of such
dividend or distribution in respect of the Common Stock, as of the record date
for the determination of stockholders entitled to receive such dividend or
distribution (on a retroactive basis), and in the case of a subdivision shall
become effective immediately as of the effective date thereof. An adjustment to
the Conversion Price pursuant to this Section 9(A)(1) shall have no effect on
the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred
Stock.
(2) In the event the Corporation shall, at any time or from time to
time while any of the shares of the ESOP Preferred Stock are outstanding,
combine the outstanding shares of Common Stock into a lesser number of
shares, whether by reclassification of shares, recapitalization of the
Corporation (excluding a recapitalization or reclassification effected by a
merger, consolidation or other transaction to which Section 8 applies) or
otherwise, then, in such event, the Conversion Price shall, subject to the
provisions of paragraph (F) of this Section 9, automatically be adjusted by
dividing the Conversion Price in effect immediately before such event by the
Section 9(A) Fraction. An adjustment to the Conversion Price made pursuant
to this paragraph 9(A)(2) shall be given effect immediately as of the
effective date of such combination and shall have no effect on the
Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred
Stock.
(B) In the event the Corporation shall, at any time or from time to
time while any of the shares of ESOP Preferred Stock are outstanding, issue
to holders of shares of Common Stock as a dividend or distribu tion,
including by way of a reclassification of shares
25
<PAGE>
or a recapitalization of the Corporation, any right or warrant to purchase
shares of Common Stock (but not including as a right or warrant for this
purpose any security convertible into or exchangeable for shares of Common
Stock) for a consideration having a Fair Market Value (as hereinafter
defined) per share less than the Fair Market Value of a share of Common
Stock on the date of issuance of such right or warrant (other than pursuant
to any employee or director incentive, compensation or benefit plan or
arrangement of the Corporation or any subsidiary of the Corporation
heretofore or hereafter adopted), then, in such event, the Conversion Price
shall, subject to the provisions of paragraphs (E) and (F) of this Sec-
tion 9, automatically be adjusted by dividing such Conversion Price by a
fraction (the "Section 9(B) Fraction"), the numerator of which is the number
of shares of Common Stock outstanding immediately before such issuance of
rights or warrants plus the maximum number of shares of Common Stock that
could be acquired upon exercise in full of all such rights and warrants and
the denominator of which is the number of shares of Common Stock
outstanding immediately before such issuance of warrants or rights plus the
number of shares of Common Stock that could be purchased at the Fair Market
Value of a share of Common Stock at the time of such issuance for the
maximum aggregate consideration payable upon exercise in full of all such
rights and warrants. Such adjustment to the Conversion Price shall be
effective upon such issuance of rights or warrants. An adjustment to the
Conversion Price pursuant to this Section 9(B) shall have no effect on the
Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred
Stock.
(C)(1) In the event the Corporation shall, at any time or from time
to time while any of the shares of ESOP Preferred Stock are outstanding,
issue, sell or exchange shares of Common Stock (other than pursuant to (x)
any right or warrant to purchase or acquire shares of Common Stock
(including as such a right or warrant for this purpose any security
convertible into or exchangeable for shares of Common Stock) or (y) any
employee or director incentive, compensation or benefit plan or arrangement
of the Corporation or any subsidiary of the Corporation heretofore or
hereafter adopted) at a purchase price per share less than the Fair Market
Value of a share of Common Stock on the date of such issuance, sale or
exchange, then, in such
26
<PAGE>
event, the Conversion Price shall, subject to the provisions of paragraphs
(E) and (F) of this Section 9, automatically be adjusted by dividing such
Conversion Price by a fraction (the "Section 9(C)(1) Fraction"), the
numerator of which is the number of shares of Common Stock outstanding
immediately before such issuance, sale or exchange plus the number of shares
of Common Stock so issued, sold or exchanged and the denominator of which is
the number of shares of Common Stock outstanding immediately before such
issuance, sale or exchange plus the number of shares of Common Stock that
could be purchased at the Fair Market Value of a share of Common Stock at
the time of such issuance, sale or exchange for the maximum aggregate
consideration paid therefor.
(2) In the event that the Corporation shall, at any time or from time
to time while any ESOP Preferred Stock is outstanding, issue, sell or
exchange any right or warrant to purchase or acquire shares of Common Stock
(including as such a right or warrant for this purpose any security
convertible into or exchangeable for shares of Common Stock other than
pursuant to any employee or director incentive, compensation or benefit plan
or arrangement of the Corporation or any subsidiary of the Corporation
heretofore or hereafter adopted) for a consideration having a Fair Market
Value, on the date of such issuance, sale or exchange, less than the Non-
Dilutive Amount (as hereinafter defined), then, in such event, the
Conversion Price shall, subject to the provisions of paragraphs (E) and (F)
of this Section 9, automatically be adjusted by dividing such Conversion
Price by a fraction (the "Section 9(C)(2) Fraction"), the numerator of which
is the number of shares of Common Stock outstanding immediately before such
issuance of rights or warrants plus the maximum number of shares of Common
Stock that could be acquired upon exercise in full of all such rights and
warrants and the denominator of which is the number of shares of Common
Stock outstanding immediately before such issuance of rights or warrants
plus the number of shares of Common Stock that could be purchased at the
Fair Market Value of a share of Common Stock at the time of such issuance
for the total of (x) the maximum aggregate consideration payable at the time
of the issuance, sale or exchange of such right or warrant and (y) the
maximum aggregate consideration payable upon exercise in full of all such
rights or warrants.
27
<PAGE>
(3) An adjustment to the Conversion Price pursuant to this Section
9(C) shall be effective upon the effective date of any issuance, sale or
exchange described in paragraph (1) or (2) above. Any such adjustment shall
have no effect on the Liquidation Price or the Preferred Dividend Rate of
the ESOP Preferred Stock.
(D) In the event the Corporation shall, at any time or from time to
time while any of the shares of ESOP Preferred Stock are outstanding, make
an Extraordinary Distribution (as hereinafter defined) in respect of the
Common Stock, whether by dividend, distribution, reclassification of shares
or recapitalization of the Corporation (including capitalization or
reclassification effected by a merger or consolidation to which Section 8
does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of
Common Stock, then, in such event, the Conversion Price shall, subject to
the provisions of paragraphs (E) and (F) of this Section 9, automatically be
adjusted by dividing such Conversion Price by a fraction (the "Section 9(D)
Fraction"), the numerator of which is the product of (a) the number of
shares of Common Stock outstanding immediately before such Extraordinary
Distribution or Pro Rata Repurchase minus, in the case of a Pro Rata
Repurchase, the number of shares of Common Stock repurchased by the
Corporation multiplied by (b) the Fair Market Value of a share of Common
Stock on the day before the ex-dividend date with respect to an Extra-
ordinary Distribution that is paid in cash and on the distribution date with
respect to an Extraordinary Distribution that is paid other than in cash, or
on the applicable expiration date (including all extensions thereof) of any
tender offer that is a Pro Rata Repurchase or on the date of purchase with
respect to any Pro Rata Repurchase that is not a tender offer, as the case
may be, and the denominator of which is (i) the product of (x) the number of
shares of Common Stock outstanding immediately before such Extraordinary
Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value
of a share of Common Stock on the day before the ex-dividend date with
respect to an Extraordinary Distribution that is paid in cash and on the
distribution date with respect to an Extraordinary Distribution that is paid
other than in cash, or on the applicable expiration date (including all
extensions thereof) of any tender offer that is a Pro Rata Repurchase, or on
the date of purchase with respect to
28
<PAGE>
any Pro Rata Repurchase that is not a tender offer, as the case may be,
minus (ii) the Fair Market Value of the Extraordinary Distribution or the
aggregate purchase price of the Pro Rata Repurchase, as the case may be. The
Corporation shall send each holder of ESOP Preferred Stock (i) notice of its
intent to make any Extraordinary Distribution and (ii) notice of any offer
by the Corporation to make a Pro Rata Repurchase, in each case at the same
time as, or as soon as practicable after, such offer is first communicated
to holders of Common Stock or, in the case of an Extraordinary
Distribution, the announcement of a record date in accordance with the rules
of any stock exchange on which the Common Stock is listed or admitted to
trading. Such notice shall indicate the intended record date and the amount
and nature of such dividend or distribution, or the number of shares subject
to such offer for a Pro Rata Repurchase and the purchase price payable by
the Corporation pursuant to such offer, as well as the Conversion Price and
the number of shares of Common Stock into which a share of ESOP Preferred
Stock may be converted at such time. An adjustment to the Conversion Price
pursuant to this Section 9(D) shall be effective (i) in the case of an
Extraordinary Dividend as of the record date for the determination of
holders entitled to receive such Extraordinary Dividend (on a retroactive
basis) and (ii) in the case of a Pro Rata Repurchase upon the expiration
date thereof (if such Pro Rata Repurchase is a tender offer) or the
effective date thereof (if such Pro Rata Repurchase is not a tender offer).
Any such adjustment shall have no effect on the Liquidation Price or the
Preferred Dividend Rate of the ESOP Preferred Stock.
(E) The Board shall have the authority to determine that any
adjustment to the Conversion Price provided for in paragraph (A)(1), (B),
(C) or (D) of this Section 9 shall not be made (or if already made, to
determine that such adjustment shall be cancelled prospectively), and in
lieu thereof to declare a dividend in respect of the ESOP Preferred Stock in
shares of ESOP Preferred Stock (a "Special Dividend") in such a manner that
a holder of ESOP Preferred Stock will become a holder of that number of
shares of ESOP Preferred Stock equal to the product of the number of such
shares held prior to such event times the Section 9(A), Section 9(B),
Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as appli-
29
<PAGE>
cable. The declaration of such a Special Dividend shall be authorized, if at
all, by the Board no later than 30 calendar days following the authorization
by the Board (or by a committee duly authorized by the Board) of the
transaction or other event described in any of the foregoing paragraphs
(A)(1), (B), (C) or (D) that would otherwise result in an adjustment to the
Conversion Price being made pursuant to any such paragraphs, and if the
Board does not authorize the declaration of a Special Dividend by the end of
such 30-day period, then no such Special Dividend shall be declared and the
adjustment to the Conversion Price provided for in paragraph (A)(1), (B),
(C) or (D) of this Section 9 shall become final and binding on the
Corporation and all stockholders of the Corporation. Concurrently with the
declaration of any Special Dividend pursuant to this paragraph (E), the
Conversion Price, the Liquidation Price and the Preferred Dividend Rate of
all shares of ESOP Preferred Stock shall be adjusted by dividing the
Conversion Price, the Liquidation Price and the Preferred Dividend Rate,
respectively, in effect immediately before such event by the Section 9(A),
Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as
appli cable.
(F) Unless the Board determines otherwise, and notwithstanding any
other provision of this Section 9, any adjustment to the Conversion Price
provided for in any of paragraphs (A), (B), (C) or (D) of this Section 9
shall not be made unless such adjustment would require an increase or
decrease of at least one percent (1%) in the Conversion Price and,
similarly, the Board shall not declare any Special Dividend pursuant to
paragraph (E) of this Section 9 unless such Special Dividend or adjustment
would require an increase or decrease of at least one percent (1%) in the
number of shares of ESOP Preferred Stock outstanding. Any lesser adjustment
to the Conversion Price or Special Dividend shall be carried forward and
shall be made no later than the time of, and together with, the next
subsequent adjustment to the Conversion Price or Special Dividend which,
together with any adjustment or adjustments or Special Dividend or Dividends
so carried forward, shall amount to an increase or decrease of at least one
percent (1%) of the Conversion Price or an increase or decrease of at least
one percent (1%) in the number of shares of ESOP Preferred Stock
outstanding, whichever the case be.
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<PAGE>
(G) If the Corporation shall make any dividend or distribution on the
Common Stock or issue any Common Stock, other capital stock or other
security of the Corporation or any rights or warrants to purchase or acquire
any such security, which transaction does not result in an adjustment to the
Conversion Price or to the number of shares of ESOP Preferred Stock out-
standing pursuant to the foregoing provisions of this Section 9, the Board
may, in its sole discretion, consider whether such action is of such a
nature that some type of equitable adjustment should be made in respect of
such transaction. If in such case the Board determines that some type of
adjustment should be made, an adjustment shall be made effective as of such
date as determined by the Board. The determination of the Board as to
whether some type of adjustment should be made pursuant to the foregoing
provisions of this Section 9(G), and, if so, as to what adjustment should be
made and when, shall be final and binding on the Corporation and all
stockholders of the Corporation. The Corporation shall be entitled, but not
required, to make such additional adjustments, in addition to those required
by the foregoing provisions of this Section 9, as shall be necessary in
order that any dividend or distribution in shares of capital stock of the
Corporation, subdivision, reclassification or combination of shares of the
Corporation or any reclassification of the Corporation shall not be taxable
to holders of the Common Stock.
(H) For purposes hereof, the following definitions shall apply:
(1) "Extraordinary Distribution" shall mean any dividend or other
distribution to holders of Common Stock (effected while any of the shares of
ESOP Preferred Stock are outstanding) of (i) cash or (ii) any shares of capital
stock of the Corporation (other than shares of Common Stock), other securities
of the Corporation (other than securities of the type referred to in paragraph
(B) of this Section 9), evidences of indebtedness of the Corporation or any
other person or any other property (including shares of any subsidiary of the
Corporation), or any combination of the foregoing, where the aggregate amount of
such cash dividend or other distribution together with the amount of all cash
dividends and other distributions made during the preceding period of twelve
months, when combined with the aggregate amount of all Pro Rata Repurchases (for
this purpose, including only that portion of the aggregate
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<PAGE>
purchase price of such Pro Rata Repurchase that is in excess of the Fair Market
Value of the Common Stock repurchased as determined on the applicable expiration
date (including all extensions thereof) of any tender offer or exchange offer
that is a Pro Rata Repurchase, or the date of purchase with respect to any other
Pro Rata Repurchase that is not a tender offer or exchange offer) made during
such period, exceeds twelve and one-half percent (12-1/2%) of the aggregate Fair
Market Value of all shares of Common Stock outstanding on the day before the ex-
dividend date with respect to such Extraordinary Distribution that is paid in
cash and on the distribution date with respect to an Extraordinary Distribution
that is paid other than in cash. The Fair Market Value of an Extraordinary
Distribution for purposes of paragraph (D) of this Section 9 shall be the sum of
the Fair Market Value of such Extraordinary Distribution plus the aggregate
amount of any cash dividends or other distributions that are not Extraordinary
Distributions made during such twelve-month period and not previously included
in the calculation of an adjustment pursuant to paragraph (D) of this Sec-
tion 9, but shall exclude the aggregate amount of regular quarterly dividends
declared by the Board and paid by the Corporation in such twelve-month period.
(2) "Fair Market Value" shall mean, as to shares of Common Stock or
any other class of capital stock or securities of the Corporation or any other
issuer that are publicly traded, the average of the Current Market Prices (as
hereinafter defined) of such shares or securities for each day of the Adjustment
Period (as hereinafter defined). "Current Market Price" of publicly traded
shares of Common Stock or any other class of capital stock or other security of
the Corporation or any other issuer for a day shall mean the last reported sales
price, regular way, or, in case no sale takes place on such day, the average of
the reported closing bid and asked prices, regular way, in either case as
reported on the New York Stock Exchange Composite Tape or, if such security is
not listed or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which such security is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") National Market System or, if such security is not
quoted on such National Market System, the average of the closing bid and asked
prices on such day in the over-the-counter market as reported by NASDAQ or, if
bid and asked prices for such security on such day shall not have been reported
through NASDAQ, the average of the bid and
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<PAGE>
asked prices for such day as furnished by any New York Stock Exchange member
firm regularly making a market in such security selected for such purpose by the
Board. "Adjustment Period" shall mean the period of five consecutive trading
days, selected by the Board during the twenty (20) trading days preceding, and
including, the date as of which the Fair Market Value of a security is to be
determined. The "Fair Market Value" of any security that is not publicly traded
or of any other property shall mean the fair value thereof as determined by an
independent investment banking or appraisal firm experienced in the valuation of
such securities or property selected in good faith by the Board, or, if no such
investment banking or appraisal firm is in the good faith judgment of the Board
available to make such determination, as determined in good faith by the Board.
(3) "Non-Dilutive Amount" in respect of an issuance, sale or exchange
by the Corporation of any right or warrant to purchase, or acquire shares of
Common Stock (including any security convertible into or exchangeable for shares
of Common Stock) shall mean the difference between (i) the product of the Fair
Market Value of a share of Common Stock on the day preceding the first public
announcement of such issuance, sale or exchange multiplied by the maximum number
of shares of Common Stock that could be acquired on such date upon the exercise
in full of such rights or warrants (including upon the conversion or exchange of
all such convertible or exchangeable securities), whether or not exercisable (or
convertible or exchangeable) at such date, and (ii) the aggregate amount payable
pursuant to such right or warrant to purchase or acquire such maximum number of
shares of Common Stock; provided, however, that in no event shall the Non-
Dilutive Amount be less than zero. For purposes of the foregoing sentence, in
the case of a security convertible into or exchangeable for shares of Common
Stock, the amount payable pursuant to a right or warrant to purchase or acquire
shares of Common Stock shall be the Fair Market Value of such security on the
date of the issuance, sale or exchange of such security by the Corporation.
(4) "Pro Rata Repurchase" shall mean any purchase of shares or Common
Stock by the Corporation or any subsidiary thereof, whether for cash, shares of
capital stock of the Corporation, other securities of the Corporation,
evidences of indebtedness of the Corporation or any other person or any other
property (including shares of a subsidiary of the Corporation), or any
combination thereof,
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<PAGE>
effected while any of the shares of ESOP Preferred Stock are outstanding,
pursuant to any tender offer or exchange offer subject to Section 13(e) of the
Exchange Act, or any successor provision of law, or pursuant to any other offer
available to substantially all holders of Common Stock; provided, however, that
no purchase of shares by the Corporation or any subsidiary thereof made in open
market transactions shall be deemed a Pro Rata Repurchase. For purposes of this
Section 9(H), shares shall be deemed to have been purchased by the Corporation
or any subsidiary thereof "in open market transactions" if they have been
purchased substantially in accordance with the requirements of Rule 10b-18 as in
effect under the Exchange Act on the date shares of ESOP Preferred Stock are
initially issued by the Corporation or on such other terms and conditions as the
Board shall have determined are reasonably designed to prevent such purchases
from having a material effect on the trading market for the Common Stock.
(I) Whenever an adjustment to the Conversion Price of the ESOP
Preferred Stock is required pursuant to this Section 9, the Corporation shall
forthwith place on file with the transfer agent for the Common Stock and the
ESOP Preferred Stock, if there be one, and with the Treasurer of the
Corporation, a statement signed by the Treasurer or any Assistant Treasurer of
the Corporation stating the adjusted Conversion Price determined as provided
herein. In addition, whenever a Special Dividend is declared pursuant to
paragraph (E) of this Section 9, (i) the maximum number of shares of ESOP
Preferred Stock shall be adjusted by multiplying 3,902,438 (or such other number
as shall be the maximum number of shares of ESOP Preferred Stock in effect prior
to the authorization of such Special Dividend) by the Section 9(A), Section
9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as the case may
be, (ii) the Board shall take action as is necessary so that a sufficient number
of shares of ESOP Preferred Stock are designated with respect to any increase in
the number of shares of ESOP Preferred Stock to be outstanding as a result of
such Special Dividend and (iii) the Corporation shall forthwith place on file
with the transfer agent for the Common Stock and the ESOP Preferred Stock, if
there be one, and with the Treasurer of the Corporation, a statement signed by
the Treasurer or any Assistant Treasurer of the Corporation stating the adjusted
maximum number of shares of ESOP Preferred Stock, Conversion Price, Liquidation
Price and Preferred Dividend Rate determined as provided herein. The statement
required by either of the two preceding sentences shall set forth in
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<PAGE>
reasonable detail such facts as shall be necessary to show the reason and the
manner of computing such adjustments, including any determination of Fair Market
Value involved in such computation. Promptly after each adjustment to the
maximum number of shares of ESOP Preferred Stock, Conversion Price, the
Liquidation Price, the Preferred Dividend Rate, or the number of shares of ESOP
Preferred Stock outstanding, the Corporation shall mail a notice thereof and of
the then prevailing maximum number of shares of ESOP Preferred Stock, Conversion
Price, Liquidation Price, Preferred Dividend Rate and number of shares of ESOP
Preferred Stock outstanding to each holder of shares of ESOP Preferred Stock.
10. Miscellaneous.
--------------
(A) All notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have given upon the earlier of receipt
thereof of three (3) business days after the mailing thereof if sent by
registered mail (unless first-class mail shall be specifically permitted for
such notice under the terms hereof) with postage prepaid, addressed: (i) if to
the Corporation, to its office at Two World Trade Center, New York, New York
10048 (Attention: Secretary) or to the transfer agent for the ESOP Preferred
Stock, or other agent of the Corporation designated as permitted hereof or (ii)
if to any holder of the ESOP Preferred Stock or Common Stock, as the case may
be, to such holder at the address of such holder as listed in the stock record
books of the Corporation (which may include the records of any transfer agent
for Common Stock) or (iii) to such other address as the Corporation or any such
holder, as the case may be, shall have designated by notice similarly given.
(B) The term "Common Stock" as used herein means the Corporation's
Common Stock, par value $0.01 per share, as the same exists at the date of
filing of this Certificate of Designation pursuant to Section 151 of the General
Corporation Law of the State of Delaware, or any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or par value to without par value, or from
without par value to par value. In the event that, at any time as a result of
an adjustment made pursuant to Section 9 hereof, the holder of any shares of the
ESOP Preferred Stock upon thereafter surrendering such shares for conversion
shall become entitled to receive any shares or other securities of the
Corporation other than shares of Common Stock, the anti-dilution provisions
contained in Section 9
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<PAGE>
hereof shall apply in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to Common Stock, and the provisions of Sections 1
through 8 and 10 hereof respect to the Common Stock shall apply on like or
similar terms to any such other shares or securities.
(C) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of ESOP Preferred Stock or shares of Common Stock or other
securities issued on account of ESOP Preferred Stock pursuant thereto or
certificates representing such shares or securities. The Corporation shall not,
however, be required to pay any such tax which may be payable in respect of any
transfer involved in the issuance or delivery of shares of ESOP Preferred Stock
or Common Stock or other securities in a name other than that in which the
shares of ESOP Preferred Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any shares or securities other than a payment to
the registered holder thereof, and shall not be required to make any such
issuance, delivery or payment unless and until the person otherwise entitled to
such issuance, delivery or payment has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable.
(D) In the event that a holder of shares of ESOP Preferred Stock
shall not by written notice designate the name in which shares of Common Stock
to be issued upon conversion or exchange of such shares should be registered or
to whom payment upon redemption of shares of ESOP Preferred Stock should be made
or the address to which the certificate or certificates representing such
shares, or such payment, should be sent, the Corporation shall be entitled to
register such shares, and make such payment, in the name of the holder of such
ESOP Preferred Stock as shown on the records of the Corporation and to send the
certificate or certificates or other documentation repre senting such shares, or
such payment, to the address of such other holder shown on the records of the
Corporation.
(E) The Corporation may appoint, and from time to time discharge and
change, a transfer agent for the ESOP Preferred Stock. Upon any such
appointment or discharge of a transfer agent, the Corporation, shall send notice
thereof by first-class mail, postage prepaid, to each holder of record of ESOP
Preferred Stock.
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B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
---------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
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CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7-3/8% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
______________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
______________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 1,000,000 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
7-3/8%
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<PAGE>
Cumulative Preferred Stock, par value $0.01 per share, with a stated value of
$200.00 per share (the "Cumulative Preferred Stock"). The stated value per
share of Cumulative Preferred Stock shall not for any purpose be considered to
be a determination by the Board with respect to the capital and surplus of the
Corporation. The number of shares of Cumulative Preferred Stock shall be
1,000,000. The Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7-3/8% per annum.
Dividends on the Cumulative Preferred Stock, calculated as a percentage of the
stated value, will be payable quarterly on February 28, May 30, August 30 and
November 30 (each a "dividend payment date"). Dividends on shares of the
Cumulative Preferred Stock will be cumulative from the date of initial issuance
of such shares of Cumulative Preferred Stock. Dividends will be payable, in
arrears, to holders of record as they appear on the stock books of the
Corporation on such record dates, not more than 60 days nor less than 10 days
preceding the payment dates thereof, as shall be fixed by the Board or the
Committee. The amount of dividends payable for the initial dividend period or
any period shorter than a full dividend period shall be calculated on the basis
of a 360-day year of twelve 30-day months. No dividends may be declared or paid
or set apart for payment on any Parity Preferred Stock (as defined in paragraph
9(b) below) with regard to the payment of dividends unless there shall also be
or have been declared and paid or set apart for payment on the Cumulative
Preferred Stock, like dividends for all dividend payment periods of the
Cumulative Preferred Stock ending on or before the dividend payment date of such
Parity Preferred Stock, ratably in proportion to the respective amounts of
dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock,
on the one hand, and (y) accumulated and unpaid through the dividend payment
period or periods of the Cumulative Preferred Stock next preceding such dividend
payment date, on the other hand. For the purposes of this Certificate of
Designation, the "Committee" shall mean any committee of the Board to whom the
Board, pursuant to Section 141(c) of the General Corporation Law of the State of
Delaware, delegates authority to
39
<PAGE>
perform the functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock)
40
<PAGE>
plus an amount equal to all dividends (whether or not earned or declared)
accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock
to the date of final distribution. The holders of the Cumulative Preferred
Stock will not be entitled to receive the Liquidation Preference until the
liquidation preference of any other class of stock of the Corporation ranking
senior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. After payment of the full amount of
the Liquidation Preference and such dividends, the holders of shares of
Cumulative Preferred Stock will not be entitled to any further participation in
any distribution of assets by the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of shares of Parity Preferred
Stock shall be insufficient to pay in full the preferential amount aforesaid,
then such assets, or the proceeds thereof, shall be distributable among such
holders ratably in accordance with the respective amounts which would be payable
on such shares if all amounts payable thereon were paid in full. For the
purposes hereof, neither a consolidation or merger of the Corporation with or
into any other corporation, nor a merger of any other corporation with or into
the Corporation, nor a sale or transfer of all or any part of the Corporation's
assets for cash or securities shall be considered a liquidation, dissolution or
winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares
41
<PAGE>
of Cumulative Preferred Stock shall have the right, with holders of shares of
any one or more other class or series of stock upon which like voting rights
have been conferred and are exercisable (voting together as a class), to elect
two of the authorized number of members of the Board at the Corporation's next
annual meeting of stockholders and at each subsequent annual meeting of
stockholders until such arrearages have been paid or set apart for payment, at
which time such right shall terminate, except as herein or by law expressly
provided, subject to revesting in the event of each and every subsequent default
of the character above mentioned. Upon any termination of the right of the
holders of shares of Cumulative Preferred Stock as a class to vote for directors
as herein provided, the term of office of all directors then in office elected
by the holders of shares of Cumulative Preferred Stock shall terminate
immediately.
Any director who shall have been so elected pursuant to this paragraph may be
removed at any time, either with or without cause. Any vacancy thereby created
may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the
42
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time and all other classes or series of stock upon which like voting rights have
been conferred and are exercisable (voting together as a class) given in person
or by proxy, either in writing or at any meeting called for the purpose, shall
be necessary to permit, effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger, consolidation
or otherwise, of any of the provisions of the Certificate of Incorporation
(including this resolution or any provision hereof) that would materially and
adversely affect any power, preference, or special right of the shares of
Cumulative Preferred Stock or of the holders thereof; provided, however, that
any increase in the amount of authorized Common Stock or authorized Preferred
Stock or any increase or decrease in the number of shares of any series of
Preferred Stock or the creation and issuance of other series of Common Stock
or Preferred Stock, in each case ranking on a parity with or junior to the
shares of Cumulative Preferred Stock with respect to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding up,
shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days'
43
<PAGE>
prior notice mailed to the holders of the shares to be redeemed at their
addresses as shown on the stock books of the Corporation; provided, however,
that shares of the Cumulative Preferred Stock shall not be redeemable prior to
August 30, 1998. Subject to the foregoing, on or after such date, shares of the
Cumulative Preferred Stock are redeemable at $200.00 per share together with an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside
44
<PAGE>
by the Corporation and unclaimed at the end of two years from the redemption
date shall revert to the general funds of the Corporation, after which reversion
the holders of such shares so called for redemption shall look only to the
general funds of the Corporation for the payment of the amounts payable upon
such redemption. Any interest accrued on funds so deposited shall be paid to
the Corporation from time to time.
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
45
<PAGE>
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up,
or both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from
those of the Cumulative Preferred Stock, if the holders of stock of such
class or classes shall be entitled by the terms thereof to the receipt
of dividends or of amounts distributed upon liquidation, dissolution or
winding up, as the case may be, in proportion to their respective
dividend rates or liquidation prices, without preference or priority of
one over the other as between the holders of such stock and the holders
of shares of Cumulative Preferred Stock (the term "Parity Preferred
Stock" being used to refer to any stock on a parity with the shares of
Cumulative Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both,
if such class shall be Common Stock or if the holders of the Cumulative
Preferred Stock shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of stock of
such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a
liquidation value of $35.88 per share, (ii) the Corporation's 7-3/4%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(iii) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a
liquidation value of $200.00 per share,(iv) if issued, the Corporation's 7.82%
Cumulative Preferred Stock, with a liquidation value of
46
<PAGE>
$200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative
Preferred Stock, with a liquidation value of $200.00 per share, (vi) if
issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's
8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share and (ix) if issued,
the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation
value of $200.00 per share.
47
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
48
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7.82% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 611,238 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
7.82% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the
49
<PAGE>
"Cumulative Preferred Stock"). The stated value per share of Cumulative
Preferred Stock shall not for any purpose be considered to be a determination by
the Board with respect to the capital and surplus of the Corporation. The
maximum number of shares of Cumulative Preferred Stock shall be 611,238. The
Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7.82% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
50
<PAGE>
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided, that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary of
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date
51
<PAGE>
of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the
shares of Cumulative Preferred Stock or on any Parity Preferred Stock
with respect to payment of dividends, shall be in arrears for an
aggregate number of days equal to six calendar quarters or more, whether
or not consecutive, the holders of the outstanding shares of Cumulative
Preferred Stock shall have the right, with holders of shares of any one
or more other class or series of stock upon which like
52
<PAGE>
voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given
53
<PAGE>
in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined in
paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock;
or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate
of Incorporation (including this resolution or any provision hereof)
that would materially and adversely affect any power, preference, or
special right of the shares of Cumulative Preferred Stock or of the
holders thereof; provided, however, that any increase in the amount of
authorized Common Stock or authorized Preferred Stock or any increase or
decrease in the number of shares of any series of Preferred Stock or the
creation and issuance of other series of Common Stock or Preferred
Stock, in each case ranking on a parity with or junior to the shares of
Cumulative Preferred Stock with respect to the payment of dividends and
the distribution of assets upon liquidation, dissolution or winding up,
shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the
54
<PAGE>
Cumulative Preferred Stock shall not be redeemable prior to November 30, 1998.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
55
<PAGE>
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if
the holders of stock of such class or classes shall be entitled by the
terms thereof to the receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
preference or priority to the holders of shares of the Cumulative
Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up,
or both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from
those of the Cumulative Preferred Stock, if the holders of stock of such
class or classes shall be entitled by the terms thereof to the receipt
of dividends or of amounts distributed upon liquidation, dissolution or
winding up, as the case may be, in proportion to their respective
dividend rates or
56
<PAGE>
liquidation prices, without preference or priority of one over the other
as between the holders of such stock and the holders of shares of
Cumulative Preferred Stock (the term "Parity Preferred Stock" being used
to refer to any stock on a parity with the shares of Cumulative
Preferred Stock, either as to dividends or upon liquidation, dissolution
or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both,
if such class shall be Common Stock or if the holders of the Cumulative
Preferred Stock shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of stock of
such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
57
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By:/s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
58
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7.80% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation"), the issuance of a series of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of
1,150,000 of the shares of Preferred Stock which the Corporation has authority
to issue, is authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation which may be applicable to the Preferred Stock) as follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the 7.80%
Cumulative Preferred Stock, par value $0.01 per share, with a stated value of
$200.00 per share (the "Cumulative Preferred Stock"). The stated value per
59
<PAGE>
share of Cumulative Preferred Stock shall not for any purpose be considered to
be a determination by the Board with respect to the capital and surplus of the
Corporation. The maximum number of shares of Cumulative Preferred Stock shall
be 1,150,000. The Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7.80% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board forth in this Certificate of Designation.
60
<PAGE>
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock
-----------------------
shall rank, as to liquidation, dissolution or winding up of the Corporation,
prior to the shares of Common Stock and any other class of stock of the
Corporation ranking junior to the Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding up of the Corporation, so that in the event
of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be
entitled to receive out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
before any distribution is made to holders of shares of Common Stock or any
other such junior stock, an amount equal to $200.00 per share (the "Liquidation
Preference" of a share of Cumulative Preferred Stock) plus an amount equal to
all dividends (whether or not earned or declared) accrued and accumulated and
unpaid on the shares of Cumulative Preferred Stock to the date
61
<PAGE>
of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series of
stock upon which like
62
<PAGE>
voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may be
removed at any time, either with or without cause. Any vacancy thereby created
may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
the Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class)
63
<PAGE>
given in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that would
materially and adversely affect any power, preference, or special right of
the shares of Cumulative Preferred Stock or of the holders thereof; provided,
however, that any increase in the amount of authorized Common Stock or
authorized Preferred Stock or any increase or decrease in the number of
shares of any series of Preferred Stock or the creation and issuance of other
series of Common Stock or Preferred Stock, in each case ranking on a parity
with or junior to the shares of Cumulative Preferred Stock with respect to
the payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such powers, preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stocks
books of the Corporation; provided, however, that shares of the
64
<PAGE>
Cumulative Preferred Stock shall not be redeemable prior to February 28, 1999.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declined) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
65
<PAGE>
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase or decrease or change
in the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if
the holders of stock of such class or classes shall be entitled by the
terms thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up, or
both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from those
of the Cumulative Preferred Stock, if the holders of stock of such class or
classes shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributed upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
66
<PAGE>
liquidation prices, without preference or priority of one over the other
as between the holders of such stock and the holders of shares of
Cumulative Preferred Stock (the term "Parity Preferred Stock" being used
to refer to any stock on a parity with the shares of Cumulative
Preferred Stock, either as to dividends or upon liquidation, dissolution
or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if
such class shall be Common Stock or if the holders of the Cumulative
Preferred Stock shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of stock in
such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
67
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
68
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
9.00% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
__________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
__________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 720,900 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
9.00% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the "Cumulative Preferred Stock"). The stated
value per share of Cumulative Preferred Stock shall not for any
69
<PAGE>
purpose be considered to be a determination by the Board with respect to the
capital and surplus of the Corporation. The maximum number of shares of
Cumulative Preferred Stock shall be 720,900. The Cumulative Preferred Stock is
issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 9.00% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
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<PAGE>
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The Shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date
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<PAGE>
of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days equal
to six calendar quarters or more, whether or not consecutive, the holders of the
outstanding shares of Cumulative Preferred Stock shall have the right, with
holders of shares of any one or more other class or series of stock upon which
like
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voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given
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in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger, consolidation
or otherwise, of any of the provisions of the Certificate of Incorporation
(including this resolution or any provision hereof) that would materially and
adversely affect any power, preference, or special right of the shares of
Cumulative Preferred Stock or of the holders thereof; provided, however, that
any increase in the amount of authorized Common Stock or authorized Preferred
Stock or any increase or decrease in the number of shares of any series of
Preferred Stock or the creation and issuance of other series of Common Stock
or Preferred Stock, in each case ranking on a parity with or junior to the
shares of Cumulative Preferred Stock with respect to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding up,
shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time, in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the
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Cumulative Preferred Stock shall not be redeemable prior to February 28, 2000.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
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7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitation provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, whether or
not the dividend rates, dividend payment dates, or redemption or liquidation
prices per share thereof be different from those of the Cumulative Preferred
Stock, if the holders of stock of such class or classes shall be entitled by
the terms thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or
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<PAGE>
liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of Cumulative
Preferred Stock (the term "Parity Preferred Stock" being used to refer to any
stock on a parity with the shares of Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, as the
context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in preference or priority to the holders of stock of such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/ Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
77
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
78
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
8.40% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of
Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 996,776 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
8.40% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the "Cumulative Preferred Stock"). The stated
value per share of Cumulative Preferred Stock shall not for any purpose be
considered to be a determination by the
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Board with respect to the capital and surplus of the Corporation. The total
number of shares of Cumulative Preferred Stock shall be 996,776. The Cumulative
Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 8.40% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or
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<PAGE>
declared and set aside for payment or other distribution made upon the Common
Stock or on any other stock of the Corporation ranking junior to or on a parity
with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or
any other stock of the Corporation ranking junior to or on a parity with the
Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise
acquired for any consideration (or any payment be made to or available for a
sinking fund for the redemption of any shares of such stock; provided, however,
that any moneys theretofore deposited in any sinking fund with respect to any
Preferred Stock of the Corporation in compliance with the provisions of such
sinking fund may thereafter be applied to the purchase or redemption of such
Preferred Stock in accordance with the terms of such sinking fund, regardless of
whether at the time of such application full cumulative dividends upon shares of
the Cumulative Preferred Stock outstanding to the last dividend payment date
shall have been paid or declared and set apart for payment) by the Corporation;
provided that any such junior or parity Preferred Stock or Common Stock may be
converted into or exchanged for stock of the Corporation ranking junior to the
Cumulative Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date of final distribution. The holders of
the Cumulative Preferred Stock will not be entitled to receive the Liquidation
Preference until the liquidation preference of any other class of stock of the
Corporation ranking senior to the Cumulative Preferred Stock as to rights
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<PAGE>
upon liquidation, dissolution or winding up shall have been paid (or a sum set
aside therefor sufficient to provide for payment) in full. After payment of the
full amount of the Liquidation Preference and such dividends, the holders of
shares of Cumulative Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of shares of
Parity Preferred Stock shall be insufficient to pay in full the preferential
amount aforesaid, then such assets, or the proceeds thereof, shall be
distributable among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all amounts payable thereon
were paid in full. For the purposes hereof, neither a consolidation or merger
of the Corporation with or into any other corporation, nor a merger of any other
corporation with or into the Corporation, nor a sale or transfer of all or any
part of the Corporation's assets for cash or securities shall be considered a
liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares
of Cumulative Preferred Stock or on any Parity Preferred Stock with respect
to payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series of
stock upon which like voting rights have been conferred and are exercisable
(voting together as a class), to elect two of the authorized number of
members of the Board at the Corporation's next annual meeting of stockholders
and at each subsequent annual meeting of stockholders until such arrearages
have been
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<PAGE>
paid or set apart for payment, at which time such right shall terminate, except
as herein or by law expressly provided, subject to revesting in the event of
each and every subsequent default of the character above mentioned. Upon any
termination of the right of the holders of shares of Cumulative Preferred Stock
as a class to vote for directors as herein provided, the term of office of all
directors then in office elected by the holders of shares of Cumulative
Preferred Stock shall terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may be
removed at any time, either with or without cause. Any vacancy thereby created
may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given in person or by proxy, either in
writing or at any meeting called for the purpose, shall be necessary to permit,
effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any
class or series of
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shares ranking prior (as that term is defined in paragraph 9(a) hereof) to
the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that
would materially and adversely affect any power, preference, or special
right of the shares of Cumulative Preferred Stock or of the holders
thereof; provided, however, that any increase in the amount of authorized
Common Stock or authorized Preferred Stock or any increase or decrease in
the number of shares of any series of Preferred Stock or the creation and
issuance of other series of Common Stock or Preferred Stock, in each case
ranking on a parity with or junior to the shares of Cumulative Preferred
Stock with respect to the payment of dividends and the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such powers, preferences or special
rights.
(c) The foregoing voting provisions shall not apply if, at or prior to
the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of Cumulative Preferred
Stock shall have been redeemed or called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the Cumulative
Preferred Stock shall not be redeemable prior to August 30, 2000. Subject to
the foregoing, on or after such date, shares of the Cumulative Preferred Stock
are redeemable at $200.00 per share together with an amount equal to all
dividends (whether or not earned or declared) accrued and accumulated and unpaid
to, but excluding, the date fixed for redemption.
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If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or
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<PAGE>
decrease in the amount of authorized Common Stock or any increase, decrease or
change in the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up, or
both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from those
of the Cumulative Preferred Stock, if the holders of stock of such class or
classes shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributed upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of Cumulative
Preferred Stock (the term "Parity Preferred Stock" being used to refer to
any stock on a parity with the shares of Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both, as
the context may require); and
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(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may
be, in preference or priority to the holders of stock of such class or
classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/ Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
87
<PAGE>
B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By:/s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
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CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
8.20% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
______________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
______________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 847,500 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall
be the 8.20% Cumulative Preferred Stock, par value $0.01 per share,
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with a stated value of $200.00 per share (the "Cumulative Preferred Stock").
The stated value per share of Cumulative Preferred Stock shall not for any
purpose be considered to be a determination by the Board with respect to the
capital and surplus of the Corporation. The total number of shares of
Cumulative Preferred Stock shall be 847,500. The Cumulative Preferred Stock is
issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 8.20% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment
date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative
from the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
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Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date
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of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series
of stock upon which like
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voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given
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in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that would
materially and adversely affect any power, preference, or special right of
the shares of Cumulative Preferred Stock or of the holders thereof;
provided, however, that any increase in the amount of authorized Common
Stock or authorized Preferred Stock or any increase or decrease in the
number of shares of any series of Preferred Stock or the creation and
issuance of other series of Common Stock or Preferred Stock, in each case
ranking on a parity with or junior to the shares of Cumulative Preferred
Stock with respect to the payment of dividends and the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such powers, preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the
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Cumulative Preferred Stock shall not be redeemable prior to November 30, 2000.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
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7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both whether
or not the dividend rates, dividend payment dates, or redemption or
liquidation prices per share thereof be different from those of the
Cumulative Preferred Stock, if the holders of stock of such class or classes
shall be entitled by the terms thereof to the receipt of dividends or of
amounts distributed upon liquidation, dissolution or winding up, as the case
may be, in proportion to their respective dividend rates or
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liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of Cumulative
Preferred Stock (the term "Parity Preferred Stock" being used to refer to
any stock on a parity with the shares of Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both, as
the context may require); and
(c) junior to shares of the Cumulative Preferred stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may
be, in preference or priority to the holders of stock of such class or
classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
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B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
98
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CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7-3/4% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 1,000,000 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
-----------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
7-3/4% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the
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"Cumulative Preferred Stock"). The stated value per share of Cumulative
Preferred Stock shall not for any purpose be considered to be a determination by
the Board with respect to the capital and surplus of the Corporation. The
number of shares of Cumulative Preferred Stock shall be 1,000,000. The
Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. (a) Holders of shares of Cumulative Preferred Stock will
---------
be entitled to receive, when, as and if declared by the Board or the Committee
(as hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7-3/4% per annum.
Dividends on the Cumulative Preferred Stock, calculated as a percentage of the
stated value, will be payable quarterly on February 28, May 30, August 30 and
November 30 (each a "dividend payment date"). Dividends on shares of the
Cumulative Preferred Stock will be cumulative from the date of initial issuance
of such shares of Cumulative Preferred Stock. Dividends will be payable, in
arrears, to holders of record as they appear on the stock books of the
Corporation on such record dates, not more than 60 days nor less than 10 days
preceding the payment dates thereof, as shall be fixed by the Board or the
Committee. The amount of dividends payable for the initial dividend period or
any period shorter than a full dividend period shall be calculated on the basis
of a 360-day year of twelve 30-day months. No dividends may be declared or paid
or set apart for payment on any Parity Preferred Stock (as such term is defined
in paragraph 9(b) below) with regard to the payment of dividends unless there
shall also be or have been declared and paid or set apart for payment on the
Cumulative Preferred Stock, like dividends for all dividend payment periods of
the Cumulative Preferred Stock ending on or before the dividend payment date of
such Parity Preferred Stock, ratably in proportion to the respective amounts of
dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock,
on the one hand, and (y) accumulated and unpaid through the dividend payment
period or periods of the Cumulative Preferred Stock next preceding such dividend
payment date, on the other hand. For the purposes of this Certificate of
Designation, the "Committee" shall mean any committee of the Board to whom the
Board, pursuant to Section 141(c) of the General Corporation Law of the State of
Delaware, delegates authority to perform the
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functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
(b) If one or more amendments to the Internal Revenue Code of 1986, as
amended (the "Code"), are enacted that reduce the percentage of the dividends
received deduction as specified in Section 243(a)(1) of the Code or any
successor provision (the "Dividends Received Percentage") to below 70%, the
amount of each dividend payable per share of the Cumulative Preferred Stock for
dividend payments made on or after the date of enactment of such change will be
adjusted by multiplying the amount of the dividend payable determined as
described above (before adjustment) by a factor, which will be the number
determined in accordance with the following formula (the "DRD Formula"), and
rounding the result to the nearest cent:
1 - (.35(1 - .70))
------------------
1 - (.35(1 - DRP))
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For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the Code,
other than a change in the percentage of the dividends received deduction set
forth in Section 243(a)(1) of the Code or any successor provision, will give
rise to an adjustment. Notwithstanding the foregoing provisions, in the event
that, with respect to any such amendment, the Corporation will receive either an
unqualified opinion of nationally recognized independent tax counsel selected by
the Corporation or a private letter ruling or similar form of authorization from
the Internal Revenue Service to the effect that such an amendment would not
apply to dividends payable on the Cumulative Preferred Stock, then any such
amendment will not result in the adjustment provided for pursuant to the DRD
Formula. The opinion referenced in the previous sentence will be based upon a
specific exception in the legislation amending the DRP or upon a published
pronouncement of the Internal Revenue Service addressing such legislation.
Unless the context otherwise requires, references to dividends in this
Certificate of Designation will mean dividends as adjusted by the DRD Formula.
The Corporation's calculation of the dividends payable, as so adjusted and as
certified accurate as to calculation and reasonable as to method by the
independent certified public accountants then regularly engaged by the
Corporation, will be final and not subject to review absent manifest error.
If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on a dividend
payment date has been declared, the amount of dividend payable on such dividend
payment date will not be increased. Instead, an amount, equal to the excess of
(x) the product of the dividends paid by the Corporation on such dividend
payment date and the DRD Formula (where the DRP used in the DRD Formula would be
equal to the reduced Dividends Received Percentage) over (y) the dividends paid
by the Corporation on such dividend payment date, will be payable to holders of
record on the next succeeding dividend payment date in addition to any other
amounts payable on such date.
In the event that the amount of dividends payable per share of the
Cumulative Preferred Stock will be adjusted pursuant to the DRD Formula, the
Corporation will cause notice of each such adjustment to be sent to
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the holders of record as they appear on the stock books of the Corporation on
such record dates, not more than 60 days nor less than 10 days preceding the
payment dates thereof as shall be fixed by the Board or the Committee.
In the event that the Dividends Received Percentage is reduced to 40% or
less, the Corporation may, at its option, redeem the Cumulative Preferred Stock,
in whole but not in part, as described in paragraph 6 hereof.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date of final distribution. The holders of
the Cumulative Preferred Stock will not be entitled to receive the Liquidation
Preference until the liquidation preference of any other class of stock of the
Corporation ranking senior to the Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding up shall have been paid (or a sum set aside
therefor sufficient to provide for payment) in full. After payment of the full
amount of the Liquidation Preference and such dividends, the holders of shares
of Cumulative Preferred Stock will not be entitled to any further participation
in any distribution of assets by the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of shares of Parity Preferred
Stock shall be insufficient to pay in full the preferential amount aforesaid,
then such assets, or the proceeds thereof,
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shall be distributable among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were paid in full. For the purposes hereof, neither a consolidation or
merger of the Corporation with or into any other corporation, nor a merger of
any other corporation with or into the Corporation, nor a sale or transfer of
all or any part of the Corporation's assets for cash or securities shall be
considered a liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of Shares of Cumulative Preferred Stock
-------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series
of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class), to elect two of the authorized
number of members of the Board at the Corporation's next annual meeting of
stockholders and at each subsequent annual meeting of stockholders until
such arrearages have been paid or set apart for payment, at which time such
right shall terminate, except as herein or by law expressly provided,
subject to revesting in the event of each and every subsequent default of
the character above mentioned. Upon any termination of the right of the
holders of shares of Cumulative Preferred Stock as a class to vote for
directors as herein provided, the term of office of all directors then in
office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
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Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given in person or by proxy, either in
writing or at any meeting called for the purpose, shall be necessary to permit,
effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined in
paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that
would materially and adversely affect any power, preference, or special
right of the shares of
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Cumulative Preferred Stock or of the holders thereof; provided,
however, that any increase in the amount of authorized Common
Stock or authorized Preferred Stock or any increase or decrease
in the number of shares of any series of Preferred Stock or the
creation and issuance of other series of Common Stock or
Preferred Stock, in each case ranking on a parity with or junior
to the shares of Cumulative Preferred Stock with respect to the
payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such powers, preferences or
special rights.
(c) The foregoing voting provisions shall not apply if, at or
prior to the time when the act with respect to which such vote would
otherwise be required shall be effected, all outstanding shares of
Cumulative Preferred Stock shall have been redeemed or called for
redemption and sufficient funds shall have been deposited in trust to
effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the Cumulative
Preferred Stock shall not be redeemable prior to August 30, 2001, except as
stated below. Subject to the foregoing, on or after such date, shares of the
Cumulative Preferred Stock are redeemable at $200.00 per share together with an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation
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will select those to be redeemed by lot or a substantially equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for
cancellation, on the redemption date dividends shall cease to accrue on the
shares to be redeemed, and at the close of business on the redemption date the
holders of such shares shall cease to be stockholders with respect to such
shares and shall have no interest in or claims against the Corporation by virtue
thereof and shall have no voting or other rights with respect to such shares,
except the right to receive the moneys payable upon surrender (and endorsement,
if required by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding. Subject to applicable escheat laws, any
moneys so set aside by the Corporation and unclaimed at the end of two years
from the redemption date shall revert to the general funds of the Corporation,
after which reversion the holders of such shares so called for redemption shall
look only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
Notwithstanding the foregoing provisions, if the Dividends Received
Percentage is equal to or less than 40% and, as a result, the amount of
dividends on the Cumulative Preferred Stock payable on any dividend payment date
will be or is adjusted upwards as described in paragraph 2(b) hereof, the
Corporation, at its option, may redeem all, but not less than all, of the
outstanding shares of the Cumulative Preferred Stock (and the Depositary Shares)
(a "Dividends Received Deduction Redemption"); provided that within sixty days
of the date on which an amendment to the Code is enacted which reduces the
Dividends Received Percentage to 40% or less, the Corporation sends notice to
holders of the Cumulative Preferred Stock relating to any Dividends Received
Deduction Redemption of such redemption. A redemption of the Cumulative
Preferred Stock will take place on the date specified in the
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notice, which shall be not less than thirty nor more than sixty days from the
date such notice is sent to holders of the Cumulative Preferred Stock. A
Dividends Received Deduction Redemption shall be at the applicable redemption
price set forth in the following table, in each case plus accrued and unpaid
dividends (whether or not declared) thereon to but excluding the date fixed for
redemption, including any changes in dividends payable due to changes in the
Dividends Received Percentage, if any:
Redemption Price
----------------
Per
Depositary
Redemption Period Per Share Share
- ------------------ --------- ---------
May 31, 1997 to August 29, 1997..... $210.00 $52.50
August 30, 1997 to August 29, 1998.. 208.00 52.00
August 30, 1998 to August 29, 1999.. 206.00 51.50
August 30, 1999 to August 29, 2000.. 204.00 51.00
August 30, 2000 to August 29, 2001.. 202.00 50.50
On or after August 30, 2001......... 200.00 50.00
7. Authorization and Issuance of Other Securities. No consent of the
----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
-----------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both,
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if the holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, whether or
not the dividend rates, dividend payment dates, or redemption or liquidation
prices per share thereof be different from those of the Cumulative Preferred
Stock, if the holders of stock of such class or classes shall be entitled by the
terms thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of such stock and the
holders of shares of Cumulative Preferred Stock (the term "Parity Preferred
Stock" being used to refer to any stock on a parity with the shares of
Cumulative Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such class
shall be Common Stock or if the holders of the Cumulative Preferred Stock shall
be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of stock of such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per
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share, (iii) the Corporation's Series A Fixed/Adjustable Rate Preferred
Stock, with a liquidation value of $200.00 per share, (iv) if issued, the
Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of
$200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative
Preferred Stock, with a liquidation value of $200.00 per share, (vi) if
issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's
8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock,
with a liquidation value of $200.00 per share and (ix) if issued, the
Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of
$200.00 per share.
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B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
--------------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
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CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
SERIES A FIXED/ADJUSTABLE RATE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of
Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 1,725,000 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution
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<PAGE>
shall be the Series A Fixed/Adjustable Rate Cumulative Preferred Stock, par
value $0.01 per share, with a stated value of $200.00 per share (the "Series A
Fixed/Adjustable Rate Preferred Stock"). The stated value per share of Series A
Fixed/Adjustable Rate Preferred Stock shall not for any purpose be considered to
be a determination by the Board with respect to the capital and surplus of the
Corporation. The number of shares of Series A Fixed/Adjustable Rate Preferred
Stock shall be 1,725,000. The Series A Fixed/Adjustable Rate Preferred Stock is
issuable in whole shares only.
2. Dividends. (a) Holders of shares of Series A Fixed/Adjustable Rate
----------
Preferred Stock will be entitled to receive cash dividends, when, as and if
declared by the Board or the Committee (as hereinafter defined) out of assets of
the Corporation legally available for payment. Dividends on the Series A
Fixed/Adjustable Rate Preferred Stock, calculated as a percentage of the stated
value, will be payable quarterly on February 28, May 30, August 30 and November
30 (each a "dividend payment date"). From the date of issuance of the Series A
Fixed/Adjustable Rate Preferred Stock and continuing through November 30, 2001,
the rate of such dividend will be 5.91% per annum. For the purposes of this
Certificate of Designation, the "Committee" shall mean any committee of the
Board to whom the Board, pursuant to Section 141(c) of the General Corporation
Law of the State of Delaware, delegates authority to perform the functions of
the Board set forth in this Certificate of Designation.
After November 30, 2001, dividends on the Series A Fixed/Adjustable Rate
Preferred Stock will be payable quarterly on each dividend payment date at the
Applicable Rate (as defined in paragraph 3) from time to time in effect. The
Applicable Rate per annum for any dividend period beginning on or after November
30, 2001 will be equal to .37% plus the highest of the Treasury Bill Rate, the
Ten-Year Constant Maturity Rate and the Thirty-Year
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Constant Maturity Rate (each as defined in paragraph 3), as determined in
advance of such dividend period. The Applicable Rate per annum for any dividend
period beginning on or after November 30, 2001, will not be less then 6.41% nor
greater then 12.41% (without taking into account any adjustments set forth in
paragraph 2(b)).
Dividends on shares of the Series A Fixed/Adjustable Rate Preferred Stock
will be cumulative from the date of initial issuance of such shares of Series A
Fixed/Adjustable Rate Preferred Stock. Dividends will be payable, in arrears,
to holders of record as they appear on the stock books of the Corporation on
such record dates, not more than 60 days nor less than 10 days preceding the
payment dates thereof, as shall be fixed by the Board or the Committee. The
amount of dividends payable for the initial dividend period or any period
shorter than a full dividend period shall be calculated on the basis of a 360-
day year of twelve 30-day months. No dividends may be declared or paid or set
apart for payment on any Parity Preferred Stock (as defined in paragraph 10(b))
with regard to the payment of dividends unless there shall also be or have been
declared and paid or set apart for payment on the Series A Fixed/Adjustable Rate
Preferred Stock, like dividends for all dividend payment periods of the Series A
Fixed/Adjustable Rate Preferred Stock ending on or before the dividend payment
date of such Parity Preferred Stock ratably in proportion to the respective
amounts of dividends (x) accumulated and unpaid or payable on such Parity
Preferred Stock, on the one hand, and (y) accumulated and unpaid through the
dividend payment period or periods of the Series A Fixed/Adjustable Rate
Preferred Stock next preceding such dividend payment date, on the other hand.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Series A Fixed/Adjustable Rate Preferred Stock have been paid,
no dividends (other than in Common Stock of the Corporation) may be paid or
declared
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<PAGE>
and set aside for payment or other distribution made upon the Common Stock or on
any other stock of the Corporation ranking junior to or on a parity with the
Series A Fixed/Adjustable Rate Preferred Stock as to dividends, nor may any
Common Stock or any other stock of the Corporation ranking junior to or on a
parity with the Series A Fixed/Adjustable Rate Preferred Stock as to dividends
be redeemed, purchased or otherwise acquired for any consideration (or any
payment be made to or available for a sinking fund for the redemption of any
shares of such stock; provided, however, that any moneys theretofore deposited
in any sinking fund with respect to any preferred stock of the Corporation in
compliance with the provisions of such sinking fund may thereafter be applied to
the purchase or redemption of such preferred stock in accordance with the terms
of such sinking fund, regardless of whether at the time of such application full
cumulative dividends upon shares of the Series A Fixed/Adjustable Rate Preferred
Stock outstanding to the last dividend payment date shall have been paid or
declared and set apart for payment) by the Corporation; provided that any such
junior or parity Preferred Stock or Common Stock may be converted into or
exchanged for stock of the Corporation ranking junior to the Series A
Fixed/Adjustable Rate Preferred Stock as to dividends.
(b) If one or more amendments to the Internal Revenue Code of 1986, as
amended (the "Code"), are enacted that reduce the percentage of the dividends
received deduction as specified in Section 243(a)(1) of the Code or any
successor provision (the "Dividends Received Percentage") to below 70%, the
amount of each dividend payable per share of the Series A Fixed/Adjustable Rate
Preferred Stock for dividend payments made on or after the date of enactment of
such change will be adjusted by multiplying the amount of the dividend payable
determined as described above (before adjustment) by a factor, which will be the
number determined in accordance with the following
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<PAGE>
formula (the "DRD Formula"), and rounding the result to the nearest cent:
1 - (.35 (1 - .70))
-------------------
1 - (.35 (1 - DRP))
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the Code,
other than a change in the percentage of the dividends received deduction set
forth in Section 243(a)(1) of the Code or any successor provision, will give
rise to an adjustment. Notwithstanding the foregoing provisions, in the event
that, with respect to any such amendment, the Corporation will receive either an
unqualified opinion of nationally recognized independent tax counsel selected by
the Corporation or a private letter ruling or similar form of authorization from
the Internal Revenue Service to the effect that such an amendment would not
apply to dividends payable on the Series A Fixed/Adjustable Rate Preferred
Stock, then any such amendment will not result in the adjustment provided for
pursuant to the DRD Formula. The opinion referenced in the previous sentence
will be based upon a specific exception in the legislation amending the DRP or
upon a published pronouncement of the Internal Revenue Service addressing such
legislation. Unless the context otherwise requires, references to dividends in
this Certificate of Designation will mean dividends as adjusted by the DRD
Formula. The Corporation's calculation of the dividends payable, as so adjusted
and as certified accurate as to calculation and reasonable as to method by the
independent certified public accountants then regularly engaged by the
Corporation, will be final and not subject to review absent manifest error.
If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on a dividend
payment date has been declared, the amount of dividend payable on such dividend
payment date
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will not be increased. Instead, an amount, equal to the excess of (x) the
product of the dividends paid by the Corporation on such dividend payment date
and the DRD Formula (where the DRP used in the DRD Formula would be equal to the
reduced Dividends Received Percentage) over (y) the dividends paid by the
Corporation on such dividend payment date, will be payable on the next
succeeding dividend payment date to holders of record in addition to any other
amounts payable on such date.
In addition, if prior to May 31, 1997, an amendment to the Code is enacted
that reduces the Dividends Received Percentage to below 70% and such reduction
retroactively applies to a dividend payment date of the Series A
Fixed/Adjustable Rate Cumulative Preferred Stock, no par value, with a stated
value of $200.00 per share ("Morgan Stanley Series A Fixed/Adjustable Rate
Preferred Stock") of Morgan Stanley Group Inc. ("Morgan Stanley") as to which
Morgan Stanley previously paid dividends on the Morgan Stanley Series A
Fixed/Adjustable Rate Preferred Stock (each an "Affected Dividend Payment
Date"), holders of the Series A Fixed/Adjustable Rate Preferred Stock shall be
entitled to receive when, as and if declared by the Board out of assets of the
corporation legally available for payment, additional dividends (the "Additional
Dividends") on the next succeeding dividend payment date (or if such amendment
is enacted after the dividend payable on such dividend payment date has been
declared and on or before such dividend is paid, on the second succeeding
dividend payment date following the date of enactment) payable on such
succeeding dividend payment date to holders of record in an amount equal to the
excess of (x) the product of the dividends paid by Morgan Stanley on each
Affected Dividend Payment Date and the DRD Formula (where the DRP used in the
DRD Formula would be equal to the reduced Dividends Received Percentage applied
to each Affected Dividend Payment Date) over (y) the dividends paid by Morgan
Stanley on each Affected Dividend Payment Date.
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Additional Dividends will not be paid in respect of the enactment of
any amendment to the Code on or after May 31, 1997 which retroactively reduces
the Dividends Received Percentage to below 70%, or if prior to May 31, 1997,
such amendment would not result in an adjustment due to the Corporation having
received either an opinion of counsel or tax ruling referred to in the third
preceding paragraph. The Corporation will only make one payment of Additional
Dividends.
In the event that the amount of dividends payable per share of the Series A
Fixed/Adjustable Rate Preferred Stock will be adjusted pursuant to the DRD
Formula and/or Additional Dividends are to be paid, the Corporation will cause
notice of each such adjustment and, if applicable, any Additional Dividends, to
be sent to the holders of record as they appear on the stock books of the
Corporation on such record date, not more than 60 days nor less than 10 days
preceding the payment date thereof as shall be fixed by the Board or the
Committee.
In the event that the Dividends Received Percentage is reduced to 50% or
less, the Corporation may, at its option, redeem the Series A Fixed/Adjustable
Rate Preferred Stock, in whole but not in part, as described in paragraph 7
hereof.
3. Applicable Rate. Except as provided above in paragraph 2, the
----------------
"Applicable Rate" per annum for any dividend period beginning on or after
November 30, 2001 will be equal to .37% plus the Effective Rate (as defined
herein), but not less than 6.41% nor greater than 12.41% (without taking into
account any adjustments as described in paragraph 2(b)). The "Effective Rate"
for any dividend period beginning on or after November 30, 2001 will be equal to
the highest of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate and
the Thirty-Year Constant Maturity Rate (each as defined herein) for such
dividend period. If the Corporation determines in good faith that for any
reason: (i) any one of the Treasury Bill Rate, the
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<PAGE>
Ten-Year Constant Maturity Rate or the Thirty-Year Constant Maturity Rate cannot
be determined for any dividend period beginning on or after November 30, 2001,
then the Effective Rate for such dividend period will be equal to the higher of
whichever two of such rates can be so determined; (ii) only one of the Treasury
Bill Rate, the Ten-Year Constant Maturity Rate or the Thirty-Year Constant
Maturity Rate can be determined for any dividend period beginning on or after
November 30, 2001, then the Effective Rate for such dividend period will be
equal to whichever such rate can be so determined; or (iii) none of the Treasury
Bill Rate, the Ten-Year Constant Maturity Rate or the Thirty-Year Constant
Maturity Rate can be determined for any dividend period beginning on or after
November 30, 2001, then the Effective Rate for the preceding dividend period
will be continued for such dividend period.
The "Treasury Bill Rate" for each dividend period will be the arithmetic
average of the two most recent weekly per annum market discount rates (or the
one weekly per annum market discount rate, if only one such rate is published
during the relevant Calendar Period (as defined herein) for three-month U.S.
Treasury bills, as published weekly by the Federal Reserve Board (as defined
herein) during the Calendar Period immediately preceding the tenth calendar day
preceding the dividend period for which the dividend rate on the Series A
Fixed/Adjustable Rate Preferred Stock is being determined.
The "Ten-Year Constant Maturity Rate" for each dividend period will be the
arithmetic average of the two most recent weekly per annum Ten-Year Average
Yields (as defined herein) (or the one weekly per annum Ten-Year Average Yield,
if only one such yield is published during the relevant Calendar Period), as
published weekly by the Federal Reserve Board during the Calendar Period
immediately preceding the tenth calendar day preceding the dividend period for
which the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is
being determined.
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The "Thirty-Year Constant Maturity Rate" for each dividend period will be
the arithmetic average of the two most recent weekly per annum Thirty-Year
Average Yields (as defined herein) the one weekly per annum Thirty-Year Average
Yield, if only one such yield is published during the relevant Calendar Period),
as published weekly by the Federal Reserve Board during the Calendar Period
immediately preceding the tenth calendar day preceding the dividend period for
which the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is
being determined.
If the Federal Reserve Board does not publish a weekly per annum market
discount rate, Ten-Year Average Yield or Thirty-Year Average Yield during any
applicable Calendar Period, then the Treasury Bill Rate, Ten-Year Constant
Maturity Rate or Thirty-Year Constant Maturity Rate, as the case may be, for
such dividend period will be the arithmetic average of the two most recent
weekly per annum market discount rates for three-month U.S. Treasury bills, Ten-
Year Average Yields or Thirty-Year Average Yields, as the case may be (or the
one weekly per annum rate, if only one such rate is published during the
relevant Calendar Period), as published weekly during such Calendar Period by
any Federal Reserve Bank or by any U.S. Government department or agency selected
by the Corporation. If any such rate is not published by the Federal Reserve
Board or by any Federal Reserve Bank or by any U.S. Government department or
agency during such Calendar Period, then the Treasury Bill Rate, Ten-Year
Constant Maturity Rate or Thirty-Year Constant Maturity Rate for such dividend
period will be the arithmetic average of the two most recent weekly per annum
(i) in the case of the Treasury Bill Rate, market discount rates (or the one
weekly per annum market discount rate, if only one such rate is published during
the relevant Calendar Period) for all of the U.S. Treasury bills then having
remaining maturities of not less than 80 nor more than 100 days, and (ii) in the
case of the Ten-Year Constant Maturity Rate, average yields to maturity (or the
one weekly per annum average yield to
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<PAGE>
maturity, if only one such yield is published during the relevant Calendar
Period) for all of the actively traded marketable U.S. Treasury fixed interest
rate securities (other then Special Securities (as defined herein)) then having
remaining maturities of not less than eight nor more than twelve years, and
(iii) in the case of the Thirty-Year Constant Maturity Rate, average yields to
maturity (or the one weekly per annum average yield to maturity, if only one
such yield is published during the relevant Calendar Period) for all of the
actively traded marketable U.S. Treasury fixed interest rate securities (other
than Special Securities) then having remaining maturities of not less than
twenty-eight nor more than thirty years, in each case as published during such
Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board
does not publish such rates, by any Federal Reserve Bank or by any U.S.
Government department or agency selected by the Corporation. If the Corporation
determines in good faith that for any reason (i) no such U.S. Treasury bill
rates are published as provided above during such Calendar Period or (ii) the
Corporation cannot determine the Treasury Bill Rate for any dividend period;
then the Treasury Bill Rate for such dividend period will be the arithmetic
average of the per annum market discount rates based upon the closing bids
during such Calendar Period for each of the issues of marketable non-interest-
bearing U.S. Treasury securities with a remaining maturity of not less than 80
nor more than 100 days from the date of each such quotation, as chosen and
quoted daily for each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least three
recognized dealers in U.S. Government securities selected by the Corporation.
If the Corporation determines in good faith that for any reason the Corporation
cannot determine the Ten-Year Constant Maturity Rate or Thirty-Year Constant
Maturity Rate for any dividend period as provided above, then the applicable
rate for such dividend period will be the arithmetic average of the per annum
average yields to maturity based upon the closing
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bids during such Calendar Period for each of the issues of actively traded
marketable U.S. Treasury fixed interest rate securities (other then Special
Securities) with a final maturity date (i) in the case of the Ten-Year Constant
Maturity Rate, not less than eight nor more then twelve years from the date of
each such quotation, and (ii) in the case of the Thirty-Year Constant Maturity
Rate, no less than twenty-eight nor more than thirty years from the date of each
such quotation, in each case as chosen and quoted daily for each business day in
New York City (or less frequently if daily quotations are not generally
available) to the Corporation by at least three recognized dealers in the United
States.
The Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the Thirty-
Year Constant Maturity Rate will each be rounded to the nearest five hundredths
of a percent, with .025% being rounded upward.
The Applicable Rate with respect to each dividend period beginning on or
after November 30, 2001 will be calculated as promptly as practicable by the
Corporation according to the appropriate method described above. The
Corporation will cause notice of each Applicable Rate to be given to the holders
of Series A Fixed/Adjustable Rate Preferred Stock when payment is made of the
dividend for the immediately preceding dividend period.
As used in this paragraph 3, the term "Calendar Period" means a period of
fourteen calendar days; the term "Federal Reserve Board" means the Board of
Governors of the Federal Reserve System; the term "Special Securities" means
securities which can, at the option of the holder, be surrendered at face value
in payment of any Federal estate tax or which provide tax benefits to the holder
and are priced to reflect such tax benefits or which were originally issued at a
deep or substantial discount; the term "Ten-Year Average Yield" means the
average yield to maturity for actively traded marketable U.S.
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Treasury fixed interest rate securities (adjusted to constant maturities of ten
years); and the term "Thirty-Year Average Yield" means the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of thirty years).
4. Liquidation Preference. The shares of Series A Fixed/Adjustable Rate
-----------------------
Preferred Stock shall rank, as to liquidation, dissolution or winding up of the
Corporation, prior to the shares of Common Stock and any other class of stock of
the Corporation ranking junior to the Series A Fixed/Adjustable Rate Preferred
Stock as to rights upon liquidation, dissolution or winding up of the
Corporation, so that in the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Series
A Fixed/Adjustable Rate Preferred Stock shall be entitled to receive out of the
assets of the Corporation available for distribution to its stockholders,
whether from capital, surplus or earnings, before any distribution is made to
holders of shares of Common Stock or any other such junior stock, an amount
equal to $200.00 per share (the "Liquidation Preference" of a share of Series A
Fixed/Adjustable Rate Preferred Stock) plus an amount equal to all dividends
(whether or not earned or declared) accrued and accumulated and unpaid on the
shares of Series A Fixed/Adjustable Rate Preferred Stock to the date of final
distribution. The holders of the Series A Fixed/Adjustable Rate Preferred Stock
will not be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Series A Fixed/Adjustable Rate Preferred Stock as to rights upon liquidation,
dissolution or winding up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. After payment of the full amount of
the Liquidation Preference and such dividends, the holders of shares of Series A
Fixed/Adjustable Rate Preferred Stock will not be entitled to any further
participation in any distribution of
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<PAGE>
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
5. Conversion. The Series A Fixed/Adjustable Rate Preferred Stock is not
-----------
convertible into shares of any other class or series of stock of the
Corporation.
6. Voting Rights. The holders of shares of Series A Fixed/Adjustable Rate
--------------
Preferred Stock shall have no voting rights whatsoever, except for any voting
rights to which they may be entitled under the laws of the State of Delaware,
and except as follows:
(a) Whenever, at any time or times, dividends payable on the
shares of Series A Fixed/Adjustable Rate Preferred Stock or on any
Parity Preferred Stock with respect to payment of dividends, shall be in
arrears for an aggregate number of days equal to six calendar quarters
or more, whether or not consecutive, the holders of the outstanding
shares of Series A Fixed/Adjustable Rate Preferred Stock shall have the
right, with holders of shares of any one or more other class or series
of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class), to
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<PAGE>
elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent
annual meeting of stockholders until such arrearages have been paid or
set apart for payment, at which time such right shall terminate, except
as herein or by law expressly provided, subject to revesting in the
event of each and every subsequent default of the character above
mentioned. Upon any termination of the right of the holders of shares of
Series A Fixed/Adjustable Rate Preferred Stock as a class to vote for
directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Series A Fixed/Adjustable
Rate Preferred Stock shall terminate immediately.
Any director who shall have been so elected pursuant to this
paragraph may be removed at any time, either with or without cause. Any
vacancy thereby created may be filled only by the affirmative vote of
the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock
voting separately as a class (together with the holders of shares of any
other class or series of stock upon which like voting rights have been
conferred and are exercisable). If the office of any director elected by
the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock
voting as a class becomes vacant for any reason other than removal from
office as aforesaid, the remaining director elected pursuant to this
paragraph may choose a successor who shall hold office for the unexpired
term in respect of which such vacancy occurred. At elections for such
directors, each holder of shares of Series A Fixed/Adjustable Rate
Preferred Stock shall be entitled to one vote for each share held (the
holders of shares of any other class or series of Preferred Stock having
like voting rights being entitled to such number of votes, if any, for
each share
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<PAGE>
of such stock held as may be granted to them).
(b) So long as any shares of Series A Fixed/Adjustable Rate Preferred
Stock remain outstanding, the consent of the holders of at least two-thirds of
the shares of Series A Fixed/Adjustable Rate Preferred Stock outstanding at the
time and all other classes or series of stock upon which like voting rights have
been conferred and are exercisable (voting together as a class) given in person
or by proxy, either in writing or at any meeting called for the purpose, shall
be necessary to permit, effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined in
paragraph 10(a) hereof) to the shares of the Series A Fixed/Adjustable
Rate Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate
of Incorporation (including this resolution or any provision hereof)
that would materially and adversely affect any power, preference, or
special right of the shares of Series A Fixed/Adjustable Rate Preferred
Stock or of the holders thereof; provided, however, that any increase in
the amount of authorized Common Stock or authorized Preferred Stock or
any increase or decrease in the number of shares of any series of
Preferred Stock or the creation and issuance of other series of Common
Stock or Preferred Stock, in each case ranking on a parity with or
junior to the shares of Series A Fixed/Adjustable Rate Preferred Stock
with respect to the
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<PAGE>
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and
adversely affect such powers, preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to
the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of Series A
Fixed/Adjustable Rate Preferred Stock shall have been redeemed or called
for redemption and sufficient funds shall have been deposited in trust to
effect such redemption.
7. Redemption. The shares of the Series A Fixed/Adjustable Rate Preferred
-----------
Stock may be redeemed at the option of the Corporation, as a whole, or from time
to time in part, at any time, upon not less than 30 days' prior notice mailed to
the holders of the shares to be redeemed at their addresses as shown on the
stock books of the Corporation; provided, however, that shares of the Series A
Fixed/Adjustable Rate Preferred Stock shall not be redeemable prior to November
30, 2001, except as stated below. Subject to the foregoing, on or after such
date, shares of the Series A Fixed/Adjustable Rate Preferred Stock are
redeemable at $200.00 per share together with an amount equal to all dividends
(whether or not earned or declared) accrued and accumulated and unpaid to, but
excluding, the date fixed for redemption.
If full cumulative dividends on the Series A Fixed/Adjustable Rate
Preferred Stock have not been paid, the Series A Fixed/Adjustable Rate Preferred
Stock may not be redeemed in part and the Corporation may not purchase or
acquire any shares of the Series A Fixed/Adjustable Rate Preferred Stock
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of the Series A Fixed/Adjustable Rate Preferred Stock. If fewer
than all the
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<PAGE>
outstanding shares of Series A Fixed/Adjustable Rate Preferred Stock are to be
redeemed, the Corporation will select those to be redeemed by lot or a
substantially equivalent method.
If a notice of redemption has been given pursuant to this paragraph 7 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Series A Fixed/Adjustable Rate Preferred Stock so called for redemption,
then, notwithstanding that any certificates for such shares have not been
surrendered for cancellation, on the redemption date dividends shall cease to
accrue on the shares to be redeemed, and at the close of business on the
redemption date the holders of such shares shall cease to be stockholders with
respect to such shares and shall have no interest in or claims against the
Corporation by virtue thereof and shall have no voting or other rights with
respect to such shares, except the right to receive the moneys payable upon
surrender (and endorsement, if required by the Corporation) of their
certificates, and the shares evidenced thereby shall no longer be outstanding.
Subject to applicable escheat laws, any moneys so set aside by the Corporation
and unclaimed at the end of two years from the redemption date shall revert to
the general funds of the Corporation, after which reversion the holders of such
shares so called for redemption shall look only to the general funds of the
Corporation for the payment of the amounts payable upon such redemption. Any
interest accrued on funds so deposited shall be paid to the Corporation from
time to time.
Notwithstanding the foregoing provisions, if the Dividends Received
Percentage is equal to or less than 50% and, as a result, the amount of
dividends on the Series A Fixed/Adjustable Rate Preferred Stock payable on any
dividend payment date will be or is adjusted upwards as described in paragraph
2(b) hereof, the Corporation, at its
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<PAGE>
option, may redeem all, but not less than all, of the outstanding shares of the
Series A Fixed/Adjustable Rate Preferred Stock (the Depositary Shares) (a
"Dividends Received Deduction Redemption") provided that within sixty days of
the date on which an amendment to the Code is enacted which reduces the
Dividends Received Percentage to 50% or less, the Corporation sends notice to
holders of the Series A Fixed/Adjustable Rate Preferred Stock of such
redemption. A Dividends Received Deduction Redemption, in accordance with this
paragraph, will take place on the date specified in the notice, which shall be
not less than thirty nor more then sixty days from the date such notice is sent
to holders of the Series A Fixed/Adjustable Rate Preferred Stock. A Dividends
Received Deduction Redemption shall be at the applicable redemption price set
forth in the following table, in each case plus accrued and unpaid dividends
(whether or not declared) thereon to but excluding the date fixed for
redemption, including any changes in dividends payable due to changes in the
Dividends Received Percentage and Additional Dividends, if any:
<TABLE>
<CAPTION>
Redeemable Price
----------------------
Per
Depositary
Redemption Period Per Share Share
- ----------------- --------- -----------
<S> <C> <C>
May 31, 1997 to November 29, 1997....... $210.00 $52.50
November 30, 1997 to November 29, 1998.. 208.00 52.00
November 30, 1998 to November 29, 1999.. 206.00 51.50
November 30, 1999 to November 29, 2000.. 204.00 51.00
November 30, 2000 to November 29, 2001.. 202.00 50.50
On or after November 30, 2001........... 200.00 50.00
</TABLE>
8. Authorization and Issuance of Other Securities. No consent of the holders
-----------------------------------------------
of the Series A Fixed/Adjustable Rate Preferred Stock shall be required for (a)
the creation of any indebtedness of any kind of the Corporation,
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<PAGE>
(b) the creation, or increase or decrease in the amount, of any class or series
of stock of the Corporation not ranking prior as to dividends or upon
liquidation, dissolution or winding up to the Series A Fixed/Adjustable Rate
Preferred Stock or (c) any increase or decrease in the amount of authorized
Common Stock or any increase, decrease or change in the par value thereof or in
any other terms thereof.
9. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Series A Fixed/Adjustable
Rate Preferred Stock (but not below the number of shares thereof then
outstanding) and in other respects to amend this resolution within the
limitations provided by law, this resolution and the Certificate of
Incorporation.
10. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Series A Fixed/Adjustable Rate Preferred
Stock, either as to dividends or upon liquidation, dissolution or winding up,
or both, if the holders of stock of such class or classes shall be entitled by
the terms thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Series A Fixed/Adjustable Rate
Preferred Stock;
(b) on a parity with shares of the Series A Fixed/Adjustable Rate
Preferred Stock, either as to dividends or upon liquidation, dissolution or
winding up, or both, whether or not the dividend rates, dividend payment
dates, or redemption or liquidation prices per share thereof be
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<PAGE>
different from those of the Series A Fixed/Adjustable Rate Preferred Stock, if
the holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of such stock and the
holders of shares of Series A Fixed/Adjustable Rate Preferred Stock (the term
"Parity Preferred Stock" being used to refer to any stock on a parity with the
shares of Series A Fixed/Adjustable Preferred Stock, either as to dividends or
upon liquidation, dissolution or winding up, or both, as the context may
require); and
(c) junior to shares of the Series A Fixed/Adjustable Rate Preferred
Stock, either as to dividends or upon liquidation, dissolution or winding up,
or both, if such class shall be Common Stock or if the holders of the Series A
Fixed/Adjustable Rate Preferred Stock shall be entitled to the receipt of
dividends or of amounts distributable upon liquidation, dissolution or winding
up, as the case may be, in preference or priority to the holders of stock of
such class or classes.
The Series A Fixed/Adjustable Rate Preferred Stock shall rank prior, as to
dividends and upon liquidation, dissolution or winding up, to the Common Stock
and the Corporation's Series A Junior Participating Preferred Stock, and on a
parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a
liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative
Preferred Stock, with a liquidation value of $200.00 per share, (iii) the
Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of
$200.00 per share, (iv) if issued, the Corporation's 7.82% Cumulative
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<PAGE>
Preferred Stock, with a liquidation value of $200.00 per share, (v) if
issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vi) if issued, the
Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value
of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share and (ix) if issued,
the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation
value of $200.00 per share.
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<PAGE>
B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
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<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
8.03% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
___________________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
___________________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 670,000 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
-----------------------------------------
series of the Preferred Stock authorized by this resolution shall be the 8.03%
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<PAGE>
Cumulative Preferred Stock, par value $0.01 per share, with a stated value of
$200.00 per share (the "Cumulative Preferred Stock"). The stated value per
share of the Cumulative Preferred Stock shall not for any purpose be considered
to be a determination by the Board with respect to the capital and surplus of
the Corporation. The number of shares of the Cumulative Preferred Stock shall
be 670,000. The Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. (a) Holders of shares of the Cumulative Preferred Stock
---------
will be entitled to receive, when, as and if declared by the Board or the
Committee (as hereinafter defined) out of assets of the Corporation legally
available for payment cash dividends at the rate of 8.03% per annum. Dividends
on the Cumulative Preferred Stock will be payable quarterly on February 28, May
30, August 30 and November 30 of each year (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of the Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to
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<PAGE>
perform the functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
(b) If one or more amendments to the Internal Revenue Code of 1986, as
amended (the "Code"), are enacted that reduce the percentage of the dividends
received deduction as specified in Section 243(a)(1) of the Code or any
successor provision (the "Dividends Received Percentage") to below 70%, the
amount of each dividend payable per share of the Cumulative Preferred Stock for
dividend payments made on or after the date of enactment of such change, and so
long as the Dividends Received Percentage remains below 70%, will be adjusted by
multiplying the amount of the dividend payable determined as described above
(before adjustment) by a factor, which will be the number determined in
accordance with the following formula
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<PAGE>
(the "DRD Formula"), and rounding the result to the nearest cent:
1 - (.35 (1 - .70))
-------------------
1- (.35 (1 - DRP))
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the Code,
other than a change in the percentage of the dividends received deduction set
forth in Section 243(a)(1) of the Code or any successor provision, will give
rise to an adjustment. Notwithstanding the foregoing provisions, in the event
that, with respect to any such amendment, the Corporation will receive either an
unqualified opinion of nationally recognized independent tax counsel selected by
the Corporation or a private letter ruling or similar form of authorization from
the Internal Revenue Service to the effect that such an amendment would not
apply to dividends payable on the Cumulative Preferred Stock, then any such
amendment will not result in the adjustment provided for pursuant to the DRD
Formula. The opinion referenced in the previous sentence will be based upon a
specific exception in the legislation amending the DRP or upon a published
pronouncement of the Internal Revenue Service addressing such legislation.
Unless the context otherwise requires, references to dividends in this
Certificate of Designation will mean dividends as adjusted by the DRD Formula.
The Corporation's calculation of the dividends payable, as so adjusted and as
certified accurate as to calculation and reasonable as to method by the
independent certified public accountants then regularly engaged by the
Corporation, will be final and not subject to review absent manifest error.
If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on a dividend
payment date has been declared and on or before such dividend is paid, the
amount of dividend payable on such dividend payment date will not be increased.
Instead, an amount, equal to the excess of (x) the product of the dividends paid
by the Corporation on such dividend payment date and the DRD Formula (where the
DRP used in the DRD Formula would be equal to the reduced Dividends Received
Percentage) over (y) the dividends paid by the Corporation on such dividend
payment date, will be payable on the next succeeding dividend payment date to
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<PAGE>
holders of record on the record date for such next succeeding dividend payment
in addition to any other amounts payable on such date.
In the event that the amount of dividends payable per share of the
Cumulative Preferred Stock will be adjusted pursuant to the DRD Formula, the
Corporation will cause notice of each such adjustment to be sent to the holders
of record as they appear on the stock books of the Corporation on such record
date, not more than 60 days nor less than 10 days preceding the payment date
thereof as shall be fixed by the Board or the Committee.
In the event that the Dividends Received Percentage is reduced to 50% or
less, the Corporation may, at its option, redeem the Cumulative Preferred Stock,
in whole but not in part, as described in paragraph 6 hereof.
3. Liquidation Preference. The shares of the Cumulative Preferred Stock
----------------------
shall rank, as to liquidation, dissolution or winding up of the Corporation,
prior to the shares of Common Stock and any other class of stock of the
Corporation ranking junior to the Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding up of the Corporation, so that in the event
of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be
entitled to receive out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
before any distribution is made to holders of shares of Common Stock or any
other such junior stock, an amount equal to $200.00 per share (the "Liquidation
Preference" of a share of the Cumulative Preferred Stock) plus an amount equal
to all dividends (whether or not earned or declared) accrued and accumulated and
unpaid on the shares of the Cumulative Preferred Stock to the date of final
distribution. The holders of the Cumulative Preferred Stock will not be
entitled to receive the Liquidation Preference until the liquidation preference
of any other class of stock of the Corporation ranking senior to the Cumulative
Preferred Stock as to rights upon liquidation, dissolution or winding up shall
have been paid (or a sum set aside therefor sufficient to provide for payment)
in full. After payment of the full amount of the Liquidation Preference and
such dividends, the
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<PAGE>
holders of shares of the Cumulative Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Corporation. If,
upon any liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation, or proceeds thereof, distributable among the holders of
shares of Parity Preferred Stock shall be insufficient to pay in full the
preferential amount aforesaid, then such assets, or the proceeds thereof, shall
be distributable among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all amounts payable thereon
were paid in full. For the purposes hereof, neither a consolidation or merger
of the Corporation with or into any other corporation, nor a merger of any other
corporation with or into the Corporation, nor a sale or transfer of all or any
part of the Corporation's assets for cash or securities shall be considered a
liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of the Cumulative Preferred Stock
-------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of the Cumulative Preferred Stock shall
have the right, with holders of shares of any one or more other class or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together a class), to elect two of the authorized
number of members of the Board at the Corporation's next annual meeting of
stockholders and at each subsequent annual meeting of stockholders until
such arrearages have been paid or set apart for payment, at which time such
right shall terminate, except as herein or by law expressly provided,
subject to revesting in the
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<PAGE>
event of each and every subsequent default of the character above
mentioned. Upon any termination of the right of the holders of shares of
the Cumulative Preferred Stock as a class to vote for directors as herein
provided, the term of office of all directors then in office elected by the
holders of shares of the Cumulative Preferred Stock shall terminate
immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares
of the Cumulative Preferred Stock voting separately as a class (together
with the holders of shares of any other class or series of stock upon which
like voting rights have been conferred and are exercisable). If the office
of any director elected by the holders of shares of the Cumulative
Preferred Stock voting as a class becomes vacant for any reason other than
removal from office as aforesaid, the remaining director elected pursuant
to this paragraph may choose a successor who shall hold office for the
unexpired term in respect of which such vacancy occurred. At elections for
such directors, each holder of shares of the Cumulative Preferred Stock
shall be entitled to one vote for each share held (the holders of shares of
any other class or series of preferred stock having like voting rights
being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of the Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the
shares of the Cumulative Preferred Stock outstanding at the time and all
other classes or series of stock upon which like voting rights have been
conferred and are exercisable (voting together as a class) given in person
or by proxy, either in writing or at any meeting called for the purpose,
shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined
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<PAGE>
in paragraph 9(a) hereof) to the shares of the Cumulative Preferred
Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate
of Incorporation (including this resolution or any provision hereof)
that would materially and adversely affect any power, preference, or
special right of the shares of the Cumulative Preferred Stock or of the
holders thereof; provided, however, that any increase in the amount of
authorized Common Stock or authorized Preferred Stock or any increase
or decrease in the number of shares of any series of Preferred Stock or
the creation and issuance of other series of Common Stock or Preferred
Stock, in each case ranking on a parity with or junior to the shares of
the Cumulative Preferred Stock with respect to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding
up, shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to
the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of the Cumulative
Preferred Stock shall have been redeemed or called for redemption and
sufficient funds shall have been deposited in trust to effect such
redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the Cumulative
Preferred Stock shall not be redeemable prior to February 28, 2007, except as
stated below. Subject to the foregoing, on or after such date, shares of the
Cumulative Preferred Stock are redeemable at the option of the Corporation, in
whole or in part, upon not less than 30 days' notice at the redemption prices
set forth below, plus accrued and accumulated but unpaid dividends to but
excluding the date fixed for
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redemption, if redeemed during the twelve-month period beginning on February 28
of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price Per Share
- ---- --------------------------
<S> <C>
2007................... $205.354
2008................... 204.282
2009................... 203.212
2010................... 202.142
2011................... 201.070
On or after 2012....... 200.000
</TABLE>
If full cumulative dividends on the Cumulative Preferred Stock have
not been paid, the Cumulative Preferred Stock may not be redeemed in part and
the Corporation may not purchase or acquire any share of the Cumulative
Preferred Stock otherwise than pursuant to a purchase or exchange offer made on
the same terms to all holders of the Cumulative Preferred Stock. If fewer than
all the outstanding shares of the Cumulative Preferred Stock are to be redeemed,
the Corporation will select those to be redeemed by lot or a substantially
equivalent method.
Notwithstanding the foregoing provisions, if the Dividends Received
Percentage is equal to or less than 50% and, as a result, the amount of
dividends on the Cumulative Preferred Stock payable on any dividend payment date
will be or is adjusted upwards as described in paragraph 2(b) hereof, the
Corporation, at its option, may redeem all, but not less than all, of the
outstanding shares of the Cumulative Preferred Stock (a "Dividends Received
Deduction Redemption"); provided that within sixty days of the date of the date
on which an amendment to the Code is enacted which reduces the Dividends
Received Percentage to 50% or less and the date on which notice of issuance of
the Cumulative Preferred Stock is given, the Corporation sends notice to holders
of the Cumulative Preferred Stock of such redemption. A Dividends Received
Deduction Redemption, in accordance with this paragraph, will take place on the
date specified in the notice, which shall be not less than thirty nor more than
sixty days from the date such notice is sent to holders of the Cumulative
Preferred Stock. A Dividends Received Deduction Redemption shall be at the
applicable redemption price set forth in the following table, in each case plus
accrued and accumulated but unpaid dividends thereon to but excluding the date
fixed for redemption, including any changes in
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<PAGE>
dividends payable due to changes in the Dividends Received Percentage and
Additional Dividends, if any:
<TABLE>
<CAPTION>
Redemption period Redemption price per share
- ----------------- --------------------------
<S> <C>
February 28, 1998 to February 27, 1999 $210.000
February 28, 1999 to February 27, 2000 208.889
February 28, 2000 to February 27, 2001 207.778
February 28, 2001 to February 27, 2002 206.667
February 28, 2002 to February 27, 2003 205.556
February 28, 2003 to February 27, 2004 204.444
February 28, 2004 to February 27, 2005 203.333
February 28, 2005 to February 27, 2006 202.222
February 28, 2006 to February 27, 2007 201.111
</TABLE>
If a Dividends Received Deduction Redemption occurs on or after February 28,
2007, the redemption prices shall be as set forth in the first paragraph of this
paragraph 6.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of the Cumulative Preferred Stock so called for redemption, then,
notwithstanding that any certificates for such shares have not been surrendered
for cancellation, on the redemption date dividends shall cease to accrue on the
shares to be redeemed, and at the close of business on the redemption date the
holders of such shares shall cease to be stockholders with respect to such
shares and shall have no interest in or claims against the Corporation by virtue
thereof and shall have no voting or other rights with respect to such shares,
except the right to receive the moneys payable upon surrender (and endorsement,
if required by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding. Subject to applicable escheat laws, any
moneys so set aside by the Corporation and unclaimed at the end of two years
from the redemption date shall revert to the general funds of the Corporation,
after which reversion the holders of such shares so called for redemption shall
look only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
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<PAGE>
7. Authorization and Issuance of Other Securities. No consent of the
----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves
-----------------------
the right by subsequent amendment of this resolution from time to time to
increase or decrease the number of shares that constitute the Cumulative
Preferred Stock (but not below the number of shares thereof then outstanding)
and in other respects to amend this resolution within the limitations provided
by law, this resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both,
whether or not the dividend rates, dividend payment dates, or redemption or
liquidation prices per share thereof be different from those of the
Cumulative Preferred Stock, if the holders of stock of such class or
classes shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributed upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
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<PAGE>
liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of the
Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to
refer to any stock on a parity with the shares of the Cumulative Preferred
Stock, either as to dividends or upon liquidation, dissolution or winding
up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may
be, in preference or priority to the holders of stock of such class or
classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and
upon liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
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<PAGE>
B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
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<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
of
DEAN WITTER, DISCOVER & CO.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
The undersigned officer of Dean Witter, Discover & Co., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Amended and Restated Certificate of Incorporation of the said Corporation, the
said Board of Directors on April 21, 1995 adopted the following resolution
creating a series of 220,000 shares of Preferred Stock designated as Series A
Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Amended and
Restated Certificate of Incorporation, a series of Preferred Stock of the
Corporation be and it hereby is created, and that the designation and amount
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "SERIES A JUNIOR PARTICIPATING PREFERRED STOCK" and the number of
shares constituting such series shall be 220,000.
Section 2. Dividends and Distributions.
---------------------------
(A) The holders of shares of Series A Junior Participating Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
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<PAGE>
Directors out of funds legally available for the purposes, quarterly
dividends payable in cash on the last day of March, June, September and
December in each year (each such date being referred to herein as a
"QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00 or
(b) subject to the provision for adjustment hereinafter set forth, 1,000
times the aggregate per share amount of all cash dividends, and 1,000 times
the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, par value
$0.01 per share, of the Corporation (the "COMMON STOCK") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Junior Participating Preferred
Stock. In the event the Corporation shall at any time after April 21, 1995
(the "RIGHTS DECLARATION DATE") (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii subdivide the outstanding Common
Stock, or (ii combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of shares of
Series A Junior Participating Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A
Junior Participating Preferred Stock as provided in Paragraph (A) above
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$0.01 per share on the Series A Junior Participating Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of
Series A Junior Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Junior Participating Preferred Stock, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue form the
date of issue of such
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<PAGE>
shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares
of Series A Junior Participating Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Junior Participating Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares
at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to
the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
-------------
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Junior Participating Preferred Stock shall entitle the holder
thereof to 1,000 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the number of votes per share to which holders of shares of
Series A Junior Participating Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares
of Series A Junior Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "DEFAULT PERIOD") which shall extend until such
time when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Junior Participating
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<PAGE>
Preferred Stock then outstanding shall have been declared and paid or set apart
for payment. During each default period, all holders of Preferred Stock
(including holders of the Series A Junior participating Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly dividends thereon,
voting as a class, irrespective of series, shall have the right to elect two (2)
directors.
(ii) During any default period, such voting right of the holders of Series
A Junior Participating Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of ten percent (10%) in number of shares of Preferred Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
directors or, if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting does
not amount to the required number, the holders of the Preferred Stock shall have
the right to make such increase in the number of directors as shall be necessary
to permit the election by them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect directors in any
default period and during the continuance of such period, the number of
directors shall not be increased or decreased except by vote of the holders of
Preferred Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Junior
---- -----
Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect directors, the
Board of Directors may order, or any stockholder or stockholders owning in the
aggregate not less than ten percent (10%) of the total number of shares of
Preferred Stock outstanding, irrespective of series, may request, the calling of
special meeting of the holders of Preferred Stock, which meeting shall thereupon
be called by the President, a Vice-President or the Secretary of the
Corporation. Notice of such meeting and of any annual meeting at which holders
of Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii)
shall be given to each holder of record of Preferred Stock by mailing a copy of
such notice to him or her at his or her last address as the same appears on the
books of the Corporation. Such
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<PAGE>
meeting shall be called for a time not earlier than 20 days and not later than
60 days after such order or request or in default of the calling of such meeting
within 60 days after such order or request, such meeting may be called on
similar notice by any stockholder or stockholders owning in the aggregate not
less than ten percent (10%) of the total number of shares of Preferred Stock
outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such
special meeting shall be called during the period within 60 days immediately
preceding the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other classes
of stock of the Corporation if applicable, shall continue to be entitled to
elect the whole number of directors until the holders of Preferred Stock shall
have exercised their right to elect two (2) directors voting as a class, after
the exercise of which right (x) the directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in Paragraph
(C)(ii) of this Section 3) be filled by vote of a majority of the remaining
directors theretofore elected by the holders of the class of stock which elected
the director whose office shall have become vacant. References in this
Paragraph (C) to directors elected by the holders of a particular class of stock
shall include directors elected by such directors to fill vacancies as provided
in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right of
the holders of Preferred Stock as a class to elect directors shall cease, (y)
the term of any directors elected by the holders of Preferred Stock as a class
shall terminate, and (z) the number of directors shall be such number as may be
provided for in the certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3
(such number being subject, however, to change thereafter in any manner provided
by law or in the certificate of incorporation or by-laws). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining directors.
(D) Except as set forth herein, holders of Series A Junior Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
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<PAGE>
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Junior Participating Preferred
Stock, except dividends paid ratably on the Series A Junior Participating
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Junior Participating Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of any
stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series a Junior Participating
Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series
A Junior Participating Preferred Stock, or any shares of stock ranking on a
parity with the Series A Junior Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
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<PAGE>
Corporation unless the Corporation could, under Paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Participating
-----------------
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding up. (A) Upon any
--------------------------------------
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received an amount equal to 1,000 times the Exercise Price, plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment (the "Series A Liquidation
Preference"). Following the payment of the full amount of he Series A
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Common Stock shall have received an amount per
share (the "Common Adjustment") equal to the quotient obtained by dividing (i)
the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as
set forth in subparagraph (C) below to reflect such events as stock splits,
stock dividends and recapitalizations with respect to the Common Stock) (such
number in clause (ii), the "Adjustment Number"). following the payment of the
full amount of the Series A Liquidation Preference and the Common Adjustment in
respect of all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not
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<PAGE>
sufficient assets available to permit payment in full of the Common Adjustment,
then such remaining assets shall be distributed ratably to the holders of Common
Stock.
(C) In the event the Corporation shall at any time after the rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, Etc. In case the Corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Junior Participating
-------------
Preferred Stock shall not be redeemable.
Section 9. Amendment. The Amended and Restated Certificate of
---------
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the powers, preferences or special rights
of the Series A Junior Participating Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of a majority or more of
the outstanding
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shares of Series A Junior Participating Preferred Stock, voting separately as a
class.
Section 10. Fractional Shares. Series A Junior Participating Preferred
-----------------
Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holders fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this 25th day of
April, 1995.
DEAN WITTER, DISCOVER & CO.
/s/ Ronald T. Carman
------------------------------------------------
Name: Ronald T. Carman
Title: Senior vice President and
Associate General Counsel
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CERTIFICATE OF INCREASE
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
DEAN WITTER, DISCOVER & CO.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
Dean Witter, Discover & Co. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with Section 103 thereof, does hereby certify:
1. Pursuant to a Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock filed in the office of the
Secretary of State of Delaware on April 26, 1995, the Board of Directors of the
Corporation created a series of 220,000 shares of Series A Junior Participating
Preferred Stock, and as of the date hereof no shares of such series have been
issued.
2. The Board of Directors, on April 18, 1997, adopted the following
resolution authorizing an increase in the authorized number of shares of Series
A Junior Participating Preferred Stock from 220,000 to 450,000:
RESOLVED, that the number of shares constituting the series of the
Corporation's Series A Junior Participating Preferred Stock be increased to
450,000.
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3. This Certificate of Increase and the increase in the authorized
number of shares of Series A Junior Participating Preferred Stock provided for
herein shall not become effective until, and shall become effective at,
12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate of Increase this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
---------------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
157
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(HEREINAFTER CALLED THE "CORPORATION")
May 31, 1997
ARTICLE 1
OFFICES AND RECORDS
SECTION 1.01. Delaware Office. The principal office of the Corporation in
the State of Delaware shall be located in the City of Wilmington, County of
New Castle.
SECTION 1.02. Other Offices. The Corporation may have such other offices,
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.
ARTICLE 2
STOCKHOLDERS
SECTION 2.01. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held at such date, place and time as may be fixed by
resolution of the Board of Directors.
SECTION 2.02. Special Meeting. Subject to the rights of the holders of any
series of preferred stock of the Corporation (the "Preferred Stock") or any
other series or class of stock as set forth in the Amended and Restated
Certificate of Incorporation, special meetings of the stockholders may be
called at any time only by the Secretary at the direction of the Board of
Directors pursuant to a resolution adopted by the Board of Directors.
SECTION 2.03. Place of Meeting. The Board of Directors may designate the
place of meeting for any meeting of the stockholders. If no designation is
made by the Board of Directors, the place of meeting shall be the principal
office of the Corporation, which will be 1585 Broadway, New York, New York.
SECTION 2.04. Notice of Meeting. Written or printed notice, stating the
place, day and hour of the meeting and, in the case of special meetings, the
purpose or purposes for which such special meeting is called, shall be
prepared and delivered by the Corporation not less than ten days nor more than
sixty days before the date of the meeting, either personally, or by mail, to
each stockholder of record entitled to vote at such meeting. Such further
notice shall be given as may be required by law. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Any
previously scheduled meeting of the stockholders may be postponed, and (unless
the Amended and Restated Certificate of Incorporation otherwise provides) any
special meeting of the stockholders may be canceled, by resolution of the
Board of Directors upon public notice given prior to the time previously
scheduled for such meeting of stockholders.
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SECTION 2.05. Quorum and Adjournment. Except as otherwise provided by law or
by the Amended and Restated Certificate of Incorporation, the holders of a
majority of the voting power of the outstanding shares of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders, except that when specified business is to be voted on by a class
or series voting as a class, the holders of a majority of the voting power of
the shares of such class or series shall constitute a quorum for the
transaction of such business. The Chairman of the Board or the holders of a
majority of the voting power of the shares of Voting Stock so represented may
adjourn the meeting from time to time, whether or not there is such a quorum
(or, in the case of specified business to be voted on by a class or series,
the Chairman of the Board or the holders of a majority of the voting power of
the shares of such class or series so represented may adjourn the meeting with
respect to such specified business). No notice of the time and place of
adjourned meetings need be given except as required by law. The stockholders
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave
less than a quorum.
SECTION 2.06. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy as may be permitted by law; provided, that no proxy shall be
voted after three years from its date, unless the proxy provides for a longer
period. Any proxy to be used at a meeting of stockholders must be filed with
the Secretary of the Corporation or his representative at or before the time
of the meeting.
SECTION 2.07. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (A) pursuant to the
Corporation's notice of meeting delivered pursuant to Section 2.04 of these
Amended and Restated Bylaws, (B) by or at the direction of the Board of
Directors or (C) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complied with the notice procedures set forth in clauses
(ii) and (iii) of this Section 2.07(a) and who was a stockholder of record at
the time such notice is delivered to the Secretary of the Corporation.
(ii) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (C) of paragraph (a) (i) of
this Bylaw, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation and, in the case of business other than
nominations, such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not less
than ninety days nor more than one hundred and twenty days prior to the first
anniversary of the preceding year's annual meeting; provided however, that
with respect to the annual meeting to be held in 1998, the anniversary date
shall be deemed to be April 2, 1998; provided further, that in the event that
the date of the annual meeting is advanced by more than thirty days, or
delayed by more than ninety days, from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the one hundred
and twentieth day prior to such annual meeting and not later than the close of
business on the later of the ninetieth day prior to such annual meeting or the
tenth day following the day on which public announcement of the date of such
meeting is first made. In no event shall the public announcement of an
adjournment or postponement of an annual meeting commence a new time period
for the giving of a stockholder's notice as described in this Section 2.07(a).
Such stockholder's notice shall set forth (A) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or
is other-wise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-
11 thereunder, including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected; (B) as
to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf
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the proposal is made; and (C) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made
(1) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (2) the class and number
of shares of the Corporation which are owned beneficially and of record by
such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of clause (ii) of this
Section 2.07(a) to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation is increased and there
is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the
Corporation at least one hundred days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required by this Bylaw
shall also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary
at the principal executive offices of the Corporation not later than the close
of business on the tenth day following the day on which such public
announcement is first made by the Corporation.
(b) Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting of stockholders
as shall have been brought before the meeting pursuant to the Corporation's
notice of meeting pursuant to Section 2.04 of these Amended and Restated
Bylaws. Nominations of persons for election to the Board of Directors may be
made at a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (i) by or at the direction of
the Board of Directors or (ii) by any stockholder of the Corporation who is
entitled to vote at the meeting, who complies with the notice procedures set
forth in this Bylaw and who is a stockholder of record at the time such notice
is delivered to the Secretary of the Corporation. In the event the Corporation
calls a special meeting of stockholders for the purpose of electing one or
more directors to the Board of Directors, any such stockholder may nominate
such number of persons for election to such position(s) as are specified in
the Corporation's Notice of Meeting, if the stockholder's notice as required
by clause (ii) of Section 2.07(a) of these Amended and Restated Bylaws shall
be delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the one hundred and twentieth day prior to such
special meeting and not later than the close of business on the later of the
ninetieth day prior to such special meeting or the tenth day following the day
on which public announcement is first made of the date of the special meeting
and of the nominees proposed by the Board of Directors to be elected at such
meeting. In no event shall the public announcement of an adjournment or
postponement of a special meeting commence a new time period for the giving of
a stockholder's notice as described above.
(c) General
(i) Only persons who are nominated in accordance with the procedures set
forth in this Bylaw shall be eligible to be elected as directors at a meeting
of stockholders and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Bylaw. Except as otherwise provided by law,
the Amended and Restated Certificate of Incorporation or these Amended and
Restated Bylaws, the Chairman of the Board shall have the power and duty to
determine whether a nomination or any business proposed to be brought before
the meeting was made in accordance with the procedures set forth in this Bylaw
and, if any proposed nomination or business is not in compliance with this
Bylaw, to declare that such defective proposal or nomination shall be
disregarded.
(ii) For purposes of this Bylaw, "public announcement" shall mean disclosure
in a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Bylaw, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
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SECTION 2.08. Procedure For Election of Directors; Voting. The election of
directors submitted to stockholders at any meeting shall be decided by a
plurality of the votes cast thereon, except as otherwise set forth in the
Amended and Restated Certificate of Incorporation with respect to the right of
the holders of any series of Preferred Stock or any other series or class of
stock to elect additional directors under specified circumstances. Except as
otherwise provided by law, the Amended and Restated Certificate of
Incorporation or these Amended and Restated Bylaws, all matters other than the
election of directors submitted to the stockholders at any meeting shall be
decided by the affirmative vote of a majority of the voting power of the
shares present in person or represented by proxy at the meeting and entitled
to vote thereon, and where a separate vote by class is required, a majority of
the voting power of the shares of that class present in person or represented
by proxy at the meeting and entitled to vote thereon.
The vote on any matter, including the election of directors, shall be by
written ballot. Each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, and shall state the number of shares voted.
SECTION 2.09. Inspectors of Elections; Opening and Closing the Polls.
(a) The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may not be directors, officers or
employees of the Corporation, to act at the meeting and make a written report
thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act, or if all inspectors or alternates who have been appointed
are unable to act, at a meeting of stockholders, the Chairman of the Board
shall appoint one or more inspectors to act at the meeting. Each inspector,
before discharging his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to
the best of his or her ability. The inspectors shall have the duties
prescribed by the General Corporation Law of the State of Delaware.
(b) The Chairman of the Board shall fix and announce at the meeting the date
and time of the opening and the closing of the polls for each matter upon
which the stockholders will vote at the meeting.
ARTICLE 3
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors. In
addition to the powers and authorities by these Amended and Restated Bylaws
expressly conferred upon them, the Board of Directors may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Amended and Restated Certificate of Incorporation or by these
Amended and Restated Bylaws required to be exercised or done by the
stockholders.
SECTION 3.02. Number, Tenure and Qualifications. Subject to Section 3.12 of
these Amended and Restated Bylaws and to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth
in the Amended and Restated Certificate of Incorporation, to elect directors
under specified circumstances, the number of directors shall be fixed from
time to time exclusively pursuant to a resolution adopted by the Board of
Directors, but shall consist of not less than three nor more than fourteen
directors. However, no decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. The
directors, other than those who may be elected by the holders of any series of
Preferred Stock, or any other series or class of stock as set forth in the
Amended and Restated Certificate of Incorporation, shall be divided into such
classes and hold office for such terms as set forth in, and may be removed
only in accordance with, the Amended and Restated Certificate of
Incorporation.
Each director shall be required to become a stockholder of the Corporation
within 60 days after the date such director is first elected to the Board of
Directors.
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SECTION 3.03. Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw immediately after, and at
the same place as, each annual meeting of stockholders. The Board of Directors
may, by resolution, provide the time and place for the holding of additional
regular meetings without other notice than such resolution. Unless otherwise
determined by the Board of Directors, the Secretary of the Corporation shall
act as secretary at all regular meetings of the Board of Directors and in the
Secretary's absence a temporary secretary shall be appointed by the chairman
of the meeting.
SECTION 3.04. Special Meetings. Special meetings of the Board of Directors
shall be called at the request of the Chairman of the Board and the President,
acting together, or a majority of the Board of Directors. The person or
persons authorized to call special meetings of the Board of Directors may fix
the place and time of the meetings. Unless otherwise determined by the Board
of Directors, the Secretary of the Corporation shall act as secretary at all
special meetings of the Board of Directors and in the Secretary's absence a
temporary secretary shall be appointed by the chairman of the meeting.
SECTION 3.05. Notice. Notice of any special meeting shall be mailed to each
director at his business or residence not later than three days before the day
on which such meeting is to be held or shall be sent to either of such places
by telegraph or facsimile or other electronic transmission, or be communicated
to each director personally or by telephone, not later than the day before
such day of meeting. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board of Directors need be specified
in the notice of such meeting, except for amendments to these Amended and
Restated Bylaws as provided pursuant to Section 8.01 hereof. A meeting may be
held at any time without notice if all the directors are present (except as
otherwise provided by law) or if those present waive notice of the meeting in
accordance with Section 6.04 hereof, either before or after such meeting.
SECTION 3.06. Action Without Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may be
taken without a meeting if a written consent thereto is signed by all members
of the Board or of such committee, as the case may be, and such written
consent is filed with the records of the proceedings of the Board or such
committee.
SECTION 3.07. Conference Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.08. Quorum. At all meetings of the Board of Directors or any
committee, a majority of the entire Board of Directors (as defined in Section
3.09(a)) or the entire committee (assuming no vacancies), as the case may be,
shall constitute a quorum for the transaction of business and the act of a
majority of the directors or members, as the case may be, present at any
meeting at which there is a quorum shall be the act of the Board of Directors
or such committee, as the case may be, except as otherwise provided in the
Delaware General Corporation Law, the Amended and Restated Certificate of
Incorporation or these Amended and Restated Bylaws. If a quorum shall not be
present at any meeting of the Board of Directors or any committee, a majority
of the directors or members, as the case may be, present thereat may adjourn
the meeting from time to time without further notice other than announcement
at the meeting. If permitted by applicable law, the directors or members, as
the case may be, present at a duly authorized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough directors
to leave less than a quorum.
SECTION 3.09. Committees. (a) The Corporation shall have four standing
committees: the executive committee, the nominating and directors committee,
the audit committee and the compensation committee. The executive committee
shall have those powers and authority as are delegated to it from time to time
pursuant to a resolution passed by a three-quarters vote of the total number
of directors specified in the resolution pursuant to Section 3.02 of these
Amended and Restated Bylaws which the Corporation would have if there were no
vacancies (the "entire Board of Directors").
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(b) The nominating and directors committee shall have the following
exclusive powers and authority: (i) evaluating and recommending director
candidates to the Board of Directors, (ii) assessing Board of Directors
performance not less frequently than every three years, (iii) recommending
director compensation and benefits philosophy for the Corporation, (iv)
reviewing individual director performance as issues arise and (v) periodically
reviewing the Corporation's corporate governance profile. None of the members
of the nominating and directors committee shall be a member of the executive
committee or an officer or full-time employee of the Corporation or of any
subsidiary or affiliate of the Corporation.
(c) The audit committee shall have the following powers and authority: (i)
employing independent public accountants to audit the books of account,
accounting procedures, and financial statements of the Corporation and to
perform such other duties from time to time as the audit committee may
prescribe, (ii) receiving the reports and comments of the Corporation's
internal auditors and of the independent public accountants employed by the
committee and to take such action with respect thereto as may seem
appropriate, (iii) requesting the Corporation's consolidated subsidiaries and
affiliated companies to employ independent public accountants to audit their
respective books of account, accounting procedures, and financial statements,
(iv) requesting the independent public accountants to furnish to the
compensation committee the certifications required under any present or future
stock option, incentive compensation or employee benefit plan of the
Corporation, (v) reviewing the adequacy of internal financial controls, (vi)
approving the accounting principles employed in financial reporting, (vii)
approving the appointment or removal of the Corporation's general auditor, and
(viii) reviewing the accounting principles employed in financial reporting.
None of the members of the audit committee shall be a member of the executive
committee or an officer or full-time employee of the Corporation or of any
subsidiary or affiliate of the Corporation.
(d) The compensation committee shall have the following powers and
authority: (i) determining and fixing the compensation for all senior officers
of the Corporation and those of its Subsidiaries (as defined in Section
6.07(f)) that the compensation committee shall from time to time consider
appropriate, as well as all employees of the Corporation and its Subsidiaries
compensated at a rate in excess of such amount per annum as may be fixed or
determined from time to time by the Board of Directors, (ii) performing the
duties of the committees of the Board of Directors provided for in any present
or future stock option, incentive compensation or employee benefit plan of the
Corporation or, if the compensation committee shall so determine, any such
plan of any Subsidiary and (iii) reviewing the operations of and policies
pertaining to any present or future stock option, incentive compensation or
employee benefit plan of the Corporation or any Subsidiary that the
compensation committee shall from time to time consider appropriate. None of
the members of the compensation committee shall be a member of the executive
committee or an officer or full-time employee of the Corporation or of any
subsidiary or affiliate of the Corporation.
(e) In addition, the Board of Directors may, by resolution passed by a
three-quarters vote of the entire Board of Directors, designate one or more
additional committees, with each such committee consisting of one or more
directors of the Corporation and having such powers and authority as the Board
of Directors shall designate by such resolutions.
(f) Any modification to the powers and authority of any committee shall
require the adoption of a resolution by a three-quarters vote of the entire
Board of Directors.
(g) All acts done by any committee within the scope of its powers and
authority pursuant to these Amended and Restated Bylaws and the resolutions
adopted by the Board of Directors in accordance with the terms hereof shall be
deemed to be, and may be certified as being, done or conferred under authority
of the Board of Directors. The Secretary or any Assistant Secretary is
empowered to certify that any resolution duly adopted by any such committee is
binding upon the Corporation and to execute and deliver such certifications
from time to time as may be necessary or proper to the conduct of the business
of the Corporation.
(h) Regular meetings of committees shall be held at such times as may be
determined by resolution of the Board of Directors or the committee in
question and no notice shall be required for any regular meeting other than
such resolution. A special meeting of any committee shall be called by
resolution of the Board of Directors, or by the Secretary or an Assistant
Secretary upon the request of the chairman or a majority of the members of
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any committee. Notice of special meetings shall be given to each member of the
committee in the same manner as that provided for in Section 3.05 of these
Amended and Restated Bylaws.
SECTION 3.10. Committee Members. (a) Each member of any committee of the
Board of Directors shall hold office until such member's successor is elected
and has qualified, unless such member sooner dies, resigns or is removed. The
number of directors which shall constitute any committee shall be determined
by resolution adopted by a three-quarters vote of the entire Board of
Directors.
(b) The Board of Directors may remove a director from a committee or change
the chairmanship of a committee only by resolution adopted by a three-quarters
vote of the entire Board of Directors.
(c) The Board of Directors may designate one or more directors as alternate
members of any committee to fill any vacancy on a committee and to fill a
vacant chairmanship of a committee, occurring as a result of a member or
chairman leaving the committee, whether through death, resignation, removal or
otherwise; provided, that any such designation may only be amended by a three-
quarters vote of the entire Board of Directors.
SECTION 3.11. Committee Secretary. The Board of Directors may elect a
secretary of any such committee. If the Board of Directors does not elect such
a secretary, the committee shall do so. The secretary of any committee need
not be a member of the committee, but shall be selected from a member of the
staff of the office of the Secretary of the Corporation, unless otherwise
provided by the Board of Directors or the committee, as applicable.
SECTION 3.12. Certain Modifications. Except as otherwise provided in the
Amended and Restated Certificate of Incorporation, any action by the Board of
Directors to change the number of directors comprising the Board or comprising
any class of directors to other than an even number of directors shall require
a three-quarters vote of the entire Board of Directors.
SECTION 3.13. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid
compensation as director or chairman of any committee and for attendance at
each meeting of the Board of Directors. Members of special or standing
committees may be allowed like compensation and payment of expenses for
attending committee meetings.
ARTICLE 4
OFFICERS
SECTION 4.01. General. The officers of the Corporation shall be elected by
the Board of Directors and shall consist of: a Chairman of the Board and Chief
Executive Officer; a President and Chief Operating Officer; a Chief Financial
Officer; a Chief Strategic and Administrative Officer; a Chief Legal Officer;
one or more Senior Executive Vice Presidents; one or more Executive Vice
Presidents; one or more Senior Vice Presidents; one or more First Vice
Presidents; one or more Vice Presidents; a Secretary; one or more Assistant
Secretaries; a Treasurer; one or more Assistant Treasurers; a Controller; and
such other officers as in the judgment of the Board of Directors may be
necessary or desirable. All officers chosen by the Board of Directors shall
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article 4. Such officers shall also
have powers and duties as from time to time may be conferred by the Board of
Directors or any committee thereof. Any number of offices may be held by the
same person, unless otherwise prohibited by law, the Amended and Restated
Certificate of Incorporation or these Amended and Restated Bylaws. The
officers of the Corporation need not be stockholders or directors of the
Corporation.
SECTION 4.02. Election and Term of Office. Subject to Section 4.08 of these
Amended and Restated Bylaws, the elected officers of the Corporation shall be
elected annually by the Board of Directors at the regular meeting of the Board
of Directors held after each annual meeting of the stockholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as convenient. Subject to Section
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4.08 of these Amended and Restated Bylaws, each officer shall hold office
until his successor shall have been duly elected and shall have qualified or
until his death or until he shall resign or be removed.
SECTION 4.03. Chairman of the Board and Chief Executive Officer. The
Chairman of the Board shall be a member of the Board of Directors and shall be
an officer of the Corporation. The Chairman of the Board shall be the Chief
Executive Officer of the Corporation and shall supervise, coordinate and
manage the Corporation's business and activities and supervise, coordinate and
manage its operating expenses and capital allocation, shall have general
authority to exercise all the powers necessary for the Chief Executive Officer
of the Corporation and shall perform such other duties and have such other
powers as may be prescribed by the Board of Directors or these Amended and
Restated Bylaws, all in accordance with basic policies as established by and
subject to the oversight of the Board of Directors. The Chairman of the Board,
if present, shall preside at all meetings of the Board of Directors.
SECTION 4.04. President and Chief Operating Officer. The President and Chief
Operating Officer shall be a member of the Board of Directors and an officer
of the Corporation. The President and Chief Operating Officer shall supervise,
coordinate and manage the Corporation's business and activities and supervise,
coordinate and manage its operating expenses and capital allocation, shall
have general authority to exercise all the powers necessary for the President
and Chief Operating Officer of the Corporation and shall perform such other
duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors and the Chairman and Chief Executive Officer. In the absence or
disability of the Chairman of the Board and Chief Executive Officer, the
duties of the Chairman of the Board shall be performed and the Chairman of the
Board's authority may be exercised by the President and Chief Operating
Officer, and in the event the President and Chief Operating Officer is absent
or disabled, such duties shall be performed and such authority may be
exercised by a director designated for this purpose by the Board of Directors.
SECTION 4.05. Chief Financial Officer. The Chief Financial Officer shall
have responsibility for the financial affairs of the Corporation and shall
exercise supervisory responsibility for the performance of the duties of the
Treasurer and the Controller. The Chief Financial Officer shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and
Chief Operating Officer.
SECTION 4.06. Chief Strategic and Administrative Officer. The Chief
Strategic and Administrative Officer shall have the responsibility for the
business strategy and strategic planning for the Corporation and shall have
the responsibility for making recommendations regarding the capital allocation
of the Corporation. The Chief Strategic and Administrative Officer shall
perform such other duties and have such other powers as may be prescribed by
the Board of Directors or these Amended and Restated Bylaws, all in accordance
with basic policies as established by and subject to the oversight of the
Board of Directors, the Chairman and Chief Executive Officer and the President
and Chief Operating Officer.
SECTION 4.07. Chief Legal Officer. The Chief Legal Officer shall have
responsibility for the legal affairs of the Corporation and for the
performance of the duties of the Secretary. The Chief Legal Officer shall
perform such other duties and have such other powers as may be prescribed by
the Board of Directors or these Amended and Restated Bylaws, all in accordance
with basic policies as established by and subject to the oversight of the
Board of Directors, the Chairman and Chief Executive Officer and the President
and Chief Operating Officer.
SECTION 4.08. Certain Actions. Notwithstanding anything to the contrary
contained in these Amended and Restated Bylaws, the removal of the current
Chairman and Chief Executive Officer or the current President and Chief
Operating Officer as of May 31, 1997, or any modification to either of their
respective roles, duties or authority shall require a three-quarters vote of the
entire Board of Directors.
8
<PAGE>
SECTION 4.09. Vacancies. A newly created office and a vacancy in any office
because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the terms at any meeting of the Board
of Directors.
ARTICLE 5
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.01. Stock Certificates and Transfers. (a) The interest of each
stockholder of the Corporation shall be evidenced by certificates for shares
of stock in such form as the appropriate officers of the Corporation may from
time to time prescribe; provided that the Board of Directors may provide by
resolution or resolutions that all or some of all classes or series of the
stock of the Corporation shall be represented by uncertificated shares.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates and upon request every
holder of uncertificated shares shall be entitled to have a certificate signed
by, or in the name of the Corporation by the Chairman of the Board of
Directors, or the President or any other authorized officer and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary of the Corporation representing the number of shares registered in
certificate form. Except as otherwise expressly provided by law, the rights
and obligations of the holders of uncertificated stock and the rights and
obligations of the holders of certificates representing stock of the same
class and series shall be identical.
(b) The certificates of stock shall be signed, countersigned and registered
in such manner as the Board of Directors may by resolution prescribe, which
resolution may permit all or any of the signatures on such certificates to be
in facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate has ceased to
be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
(c) The shares of the stock of the Corporation represented by certificates
shall be transferred on the books of the Corporation by the holder thereof in
person or by his attorney, upon surrender for cancellation of certificates for
the same number of shares, with an assignment and power of transfer endorsed
thereon or attached thereto, duly executed, with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require. Upon receipt of proper transfer instructions from the registered
owner of uncertificated shares such uncertificated shares shall be canceled
and issuance of new equivalent uncertificated shares or certificated shares
shall be made to the person entitled thereto and the transaction shall be
recorded upon the books of the Corporation. Within a reasonable time after the
issuance or transfer of uncertificated stock, the Corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to the Delaware
General Corporation Law or, unless otherwise provided by the Delaware General
Corporation Law, a statement that the Corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
SECTION 5.02. Lost, Stolen or Destroyed Certificates. No certificate for
shares or uncertificated shares of stock in the Corporation shall be issued in
place of any certificate alleged to have been lost, destroyed or stolen,
except on production of such evidence of such loss, destruction or theft and
on delivery to the Corporation of a bond of indemnity in such amount, upon
such terms and secured by such surety, as the Board of Directors or its
designee may in its or his discretion require.
9
<PAGE>
ARTICLE 6
MISCELLANEOUS PROVISIONS
SECTION 6.01. Fiscal Year. The fiscal year of the Corporation shall be as
specified by the Board of Directors.
SECTION 6.02. Dividends. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in
the manner and upon the terms and conditions provided by law and its Amended
and Restated Certificate of Incorporation.
SECTION 6.03. Seal. The corporate seal shall have thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.
SECTION 6.04. Waiver of Notice. Whenever any notice is required to be given
to any stockholder or director of the Corporation under the provisions of the
General Corporation Law of the State of Delaware, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or
after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders or any meeting of the Board of
Directors or committee thereof need be specified in any waiver of notice of
such meeting.
SECTION 6.05. Audits. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the audit committee, and it shall be
the duty of the audit committee to cause such audit to be made annually.
SECTION 6.06. Resignations. Any director or any officer, whether elected or
appointed, may resign at any time upon notice of such resignation to the
Corporation.
SECTION 6.07. Indemnification and Insurance.
(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any manner in any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she or a person of whom he or she is the legal representative is or was a
director or officer of the Corporation or a director or elected officer of a
Subsidiary, shall be indemnified and held harmless by the Corporation to the
fullest extent permitted from time to time by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended (but, if
permitted by applicable law, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide
prior to such amendment) or any other applicable laws as presently or
hereafter in effect, and such indemnification shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of
his or her heirs, executors and administrators; provided however, that the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of Directors
or is a proceeding to enforce such person's claim to indemnification pursuant
to the rights granted by this Bylaw. The Corporation shall pay the expenses
incurred by such person in defending any such proceeding in advance of its
final disposition upon receipt (unless the Corporation upon authorization of
the Board of Directors waives such requirement to the extent permitted by
applicable law) of an undertaking by or on behalf of such person to repay such
amount if it shall ultimately be determined that such person is not entitled
to be indemnified by the Corporation as authorized in this Bylaw or otherwise.
(b) The indemnification and the advancement of expenses incurred in
defending a proceeding prior to its final disposition provided by, or granted
pursuant to this Bylaw shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
Amended and Restated Certificate of Incorporation, other provision of these
Amended and Restated Bylaws, agreement, vote of stockholders or
10
<PAGE>
Disinterested Directors or otherwise. No repeal, modification or amendment of,
or adoption of any provision inconsistent with, this Section 6.07, nor to the
fullest extent permitted by applicable law, any modification of law, shall
adversely affect any right or protection of any person granted pursuant hereto
existing at, or with respect to any events that occurred prior to, the time of
such repeal, amendment, adoption or modification.
(c) The Corporation may maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, partner, member,
employee or agent of the Corporation or a Subsidiary or of another
corporation, partnership, limited liability company, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of the State of
Delaware.
(d) The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and rights to be paid by
the Corporation the expenses incurred in defending any proceeding in advance
of its final disposition, to any person who is or was an employee or agent
(other than a director or officer) of the Corporation or a Subsidiary and to
any person who is or was serving at the request of the Corporation or a
Subsidiary as a director, officer, partner, member, employee or agent of
another corporation, partnership, limited liability company, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans maintained or sponsored by the Corporation or a Subsidiary, to the
fullest extent of the provisions of this Bylaw with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
(e) If any provision or provisions of this Bylaw shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the validity,
the legality and enforceability of the remaining provisions of this Bylaw
(including, without limitation, each portion of any paragraph or clause of
this Bylaw containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (2)
to the fullest extent possible, the provisions of this Bylaw (including,
without limitation, each such portion of any paragraph of this Bylaw
containing any such provision held to be invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal or unenforceable.
(f) For purposes of these Amended and Restated Bylaws:
(1) "Disinterested Director" means a director of the Corporation who is
not and was not a party to the proceeding or matter in respect of which
indemnification is sought by the claimant.
(2) "Subsidiary" means a corporation, a majority of the capital stock of
which is owned directly or indirectly by the Corporation, other than
directors' qualifying shares.
(g) Any notice, request, or other communication required or permitted to be
given to the Corporation under this Bylaw shall be in writing and either
delivered in person or sent by telecopy, telex, telegram, overnight mail or
courier service, or certified or registered mail, postage prepaid, return
receipt requested, to the Secretary of the Corporation and shall be effective
only upon receipt by the Secretary.
ARTICLE 7
CONTRACTS, PROXIES, ETC.
SECTION 7.01. Contracts. Except as otherwise required by law, the Amended
and Restated Certificate of Incorporation or these Amended and Restated
Bylaws, any contracts or other instruments may be executed and delivered in
the name and on the behalf of the Corporation by such officer or officers of
the Corporation as the Board of Directors may from time to time direct. Such
authority may be general or confined to specific instances as the Board may
determine. Subject to the control and direction of the Board of Directors, the
Chairman of the Board, the President, the Chief Financial Officer, the Chief
Strategic and Administrative Officer, the Chief Legal Officer and the
Treasurer may enter into, execute, deliver and amend bonds, promissory notes,
contracts, agreements, deeds,
11
<PAGE>
leases, guarantees, loans, commitments, obligations, liabilities and other
instruments to be made or executed for or on behalf of the Corporation.
Subject to any restrictions imposed by the Board of Directors, such officers
of the Corporation may delegate such powers to others under his or her
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise
of such delegated power.
SECTION 7.02. Proxies. Unless otherwise provided by resolution adopted by
the Board of Directors, the Chairman of the Board or the President may from
time to time appoint an attorney or attorneys or agent or agents of the
Corporation, in the name and behalf of the Corporation, to cast the votes
which the Corporation may be entitled to cast as the holder of stock or other
securities in any other corporation or entity, any of whose stock or other
securities may be held by the Corporation, at meetings of the holders of the
stock or other securities of such other corporation or entity, or to consent
in writing, in the name of the Corporation as such holder, to any action by
such other corporation or entity, and may instruct the person or persons so
appointed as to the manner of casting such vote or giving such consent, and
may execute or cause to be executed in the name and on behalf of the
Corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the
premises.
ARTICLE 8
AMENDMENTS
SECTION 8.01. Amendments. These Amended and Restated Bylaws may be altered,
amended or repealed, in whole or in part, or new Amended and Restated Bylaws
may be adopted by the stockholders or by the Board of Directors at any meeting
thereof; provided however, that notice of such alteration, amendment, repeal
or adoption of new Amended and Restated Bylaws is contained in the notice of
such meeting of stockholders or in the notice of such meeting of the Board of
Directors and, in the latter case, such notice is given not less than twenty-
four hours prior to the meeting. Unless a higher percentage is required by the
Amended and Restated Certificate of Incorporation as to any matter which is
the subject of these Amended and Restated Bylaws, all such amendments must be
approved by either the holders of eighty percent (80%) of the Voting Stock or
by a majority of the Board of Directors; provided further, notwithstanding the
foregoing, the Board of Directors may alter, amend or repeal, or adopt new
Amended and Restated Bylaws in conflict with, (i) any provision of these
Amended and Restated Bylaws which requires a three-quarters vote of the entire
Board of Directors for action to be taken thereunder, (ii) subsection (c) of
Section 3.10 of these Amended and Restated Bylaws and (iii) this proviso to
this Section 8.01 of these Amended and Restated Bylaws only by a resolution
adopted by a three-quarters vote of the entire board of Directors until
December 31, 2000; provided further, that, notwithstanding the foregoing, the
Board of Directors may alter, amend or repeal, or adopt new Amended and
Restated Bylaws in conflict with, (i) Section 4.08 of these Amended and
Restated Bylaws and (ii) this further proviso to this Section 8.01 of these
Amended and Restated Bylaws only by a resolution adopted by a three-quarters
vote of the entire Board of Directors.
12
<PAGE>
Exhibit 15.1
To the Directors and Shareholders of Morgan Stanley,
Dean Witter, Discover & Co.:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the supplemental
unaudited interim consolidated financial information of Morgan Stanley, Dean
Witter, Discover & Co. and subsidiaries as of first fiscal quarter end 1997 and
for the first fiscal quarter 1997 and 1996, as indicated in our report dated May
31, 1997 (which makes reference to the review of Morgan Stanley Group Inc. and
subsidiaries by other auditors); because we did not perform an audit, we
expressed no opinion on that information. We are aware that our report, which
is included in this Current Report on Form 8-K filed on June 2, 1997, is
incorporated by reference in the following Registration Statements:
Filed on Form S-3:
Registration Statement No. 33-57202
Registration Statement No. 33-60734
Registration Statement No. 33-89748
Registration Statement No. 33-92172
Registration Statement No. 333-7947
Registration Statement No. 333-22409
Filed on Form S-4:
Registration Statement No. 333-25003
Filed on Form S-8:
Registration Statement No. 33-62374
Registration Statement No. 33-63024
Registration Statement No. 33-63026
Registration Statement No. 33-78038
Registration Statement No. 33-79516
Registration Statement No. 33-82240
Registration Statement No. 33-82242
Registration Statement No. 33-82244
Registration Statement No. 333-4212
Registration Statement No. 333-28141
We are also aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
New York, New York
June 2, 1997
<PAGE>
EXHIBIT 15.2
The Stockholders and
Board of Directors of
Morgan Stanley Group Inc.
We are aware of the incorporation by reference in the Registration Statements
(Form S-4 No. 333-25003, Form S-3 No. 33-92172, Form S-3 No. 33-57202, Form S-3
No. 33-60734, Form S-3 No. 33-89748, Form S-3 No. 333-7947, Form S-3 No.
333-22409, Form S-8 No. 333-28141, Form S-8 No. 33-62374, Form S-8 No. 33-63024,
Form S-8 No. 33-63026, Form S-8 No. 33-78038, Form S-8 No. 33-79516, Form S-8
No. 33-82240, Form S-8 No. 33-82242, Form S-8 No. 33-82244 and Form S-8 No.
333-4212) of Morgan Stanley, Dean Witter, Discover & Co. of our report dated
March 27, 1997 included in the Current Report on Form 8-K to be filed on June 2,
1997, relating to the unaudited condensed consolidated interim financial
statements of Morgan Stanley Group Inc. which are included in its Form 10-Q for
the quarter ended February 28, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
New York, New York
June 2, 1997
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Morgan Stanley, Dean Witter, Discover & Co. (the "Registrant") of
our report dated May 31, 1997, with respect to the supplemental consolidated
financial statements of the Registrant for fiscal year 1996 (which makes
reference to the audit of Morgan Stanley Group Inc. and subsidiaries by other
auditors), appearing in this Current Report on Form 8-K of the Registrant to be
filed on June 2, 1997:
Filed on Form S-3:
Registration Statement No. 33-57202
Registration Statement No. 33-60734
Registration Statement No. 33-89748
Registration Statement No. 33-92172
Registration Statement No. 333-7947
Registration Statement No. 333-22409
Filed on Form S-4:
Registration Statement No. 333-25003
Filed on Form S-8:
Registration Statement No. 33-62374
Registration Statement No. 33-63024
Registration Statement No. 33-63026
Registration Statement No. 33-78038
Registration Statement No. 33-79516
Registration Statement No. 33-82240
Registration Statement No. 33-82242
Registration Statement No. 33-82244
Registration Statement No. 333-4212
Registration Statement No. 333-28141
/s/ Deloitte & Touche LLP
New York, New York
June 2, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23.2
We consent to the incorporation by reference in the Registration Statements
(Form S-4 No. 333-25003, Form S-3 No. 33-92172, Form S-3 No. 33-57202, Form S-3
No. 33-60734, Form S-3 No. 33-89748, Form S-3 No. 333-7947, Form S-3 No.
333-22409, Form S-8 No. 333-28141, Form S-8 No. 33-62374, Form S-8 No.
33-63024 , Form S-8 No. 33-63026, Form S-8 No. 33-78038, Form S-8 No. 33-79516,
Form S-8 No. 33-82240, Form S-8 No. 33-82242, Form S-8 No. 33-82244 and Form S-8
No. 333-4212) of Morgan Stanley, Dean Witter, Discover & Co. of our reports with
respect to the consolidated financial statements and financial statement
schedule of Morgan Stanley Group Inc. dated January 7, 1997 included and
incorporated by reference in its Annual Report on Form 10-K for the fiscal year
ended November 30, 1996 and dated May 27, 1997 included in this Current Report
on Form 8-K of Morgan Stanley, Dean Witter, Discover & Co. to be filed on June
2, 1997.
/s/ Ernst & Young LLP
New York, New York
June 2, 1997
<PAGE>
EXHIBIT 99.1
- ----------------- 200 Varick Street, New York, NY 10014
DOREMUS NEWSROOM T:212.366.3100 F:212.366.3105
- -----------------
NEW YORK . LONDON . SAN FRANCISCO . FRANKFURT . CHICAGO . MILAN . HONG KONG
Contacts: Jeanmarie McFadden Timothy Lee
Morgan Stanley Dean Witter
(212) 761-4059 (212) 392-8709
Jon Diat
Morgan Stanley
(212) 761-6403
For Immediate Release
---------------------
DEAN WITTER DISCOVER, MORGAN STANLEY HOLDERS
OVERWHELMINGLY APPROVE THEIR MERGER PLAN
NEW YORK, May 28--Dean Witter, Discover & Co. and Morgan Stanley Group
Inc. confirmed that at separate meetings today, their respective stockholders
approved the merger of the two companies.
At Dean Witter Discover's meeting, the merger was approved by holders
representing approximately 87 percent of the outstanding common stock, or
approximately 98 percent of the votes cast, and, at Morgan Stanley's meeting, by
the holders representing approximately 83 percent of the shares entitled to
vote, or approximately 99 percent of the votes cast.
Dean Witter Discover stockholders also approved an equity-based employee
compensation plan, as well as elected Directors and ratified the appointment of
Deloitte & Touche LLP as Dean Witter Discover's auditor for 1997.
The merger has been structured as a merger of equals, with Morgan
Stanley to merge with and into Dean Witter Discover, and the combined company to
be named Morgan Stanley, Dean Witter, Discover & Co. In the merger, each
outstanding share of Morgan Stanley common stock will be converted into the
right to receive 1.65 shares of Morgan Stanley, Dean Witter, Discover & Co.
common stock.
It is anticipated that the merger will be completed by the end of May.
May 28, 1997
(0158)
<PAGE>
EXHIBIT 99.2
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
1585 BROADWAY NEW YORK, NEW YORK 10036
FOR IMMEDIATE RELEASE
---------------------
Contact: Elaine La Roche
(212) 761-4929
MORGAN STANLEY AND DEAN WITTER, DISCOVER COMPLETE MERGER
TO CREATE THE PREEMINENT GLOBAL FINANCIAL SERVICES FIRM
New York, June 2, 1997 -- Dean Witter, Discover & Co. (formerly NYSE:DWD) and
Morgan Stanley Group Inc. (formerly NYSE:MS) announced today the completion of
their merger on May 31, 1997. The new company is called Morgan Stanley, Dean
Witter, Discover & Co. and its stock begins to trade today on the New York Stock
Exchange under the "MWD" symbol. The merger was approved by the shareholders of
both companies on May 28, 1997.
The Morgan Stanley, Dean Witter, Discover & Co. merger creates the preeminent
global financial services firm with a market capitalization of $21 billion and
leading market positions in its three primary businesses -- securities, asset
management, and credit services. The company has over 45,000 employees and 409
offices in 22 countries worldwide (371 retail branch offices). In total assets
under management, the company manages over $270 billion, which is in the top
five globally and more than any other securities firm. The firm is the #1
credit card issuer with 39 million customers and #2 in credit card sales volume
at $54 billion last year. The company is ranked #1 in announced global merger
and acquisition activity* and was the top underwriter for U.S. equities in
1996.* It also has the #2 equity research team as ranked by Institutional
Investor magazine for 1996.
Philip J. Purcell, Chairman and Chief Executive Officer and John J. Mack,
President and Chief Operating Officer of MSDWD said jointly: "The combination of
these three powerful and distinctive brands will create a global powerhouse with
unmatched origination and distribution skills and a unique balance between
institutional and individual investor capabilities. We have already started to
reap the benefits within many areas of the combined company, including
investment banking and equity research, as well as institutional sales and
trading. We are extremely enthusiastic as we move forward to create the firm
that will clearly be a global leader as we enter the 21st century."
Richard B. Fisher, Chairman of the new Board's Executive Committee, said "This
new company promises extraordinary new opportunities for clients and employees
that will ultimately translate to added value for shareholders."
*Full credit to each manager. Source: Securities Data Co.
<PAGE>
PAGE TWO
In the new company, Peter Karches is President and Chief Operating Officer of
Morgan Stanley & Co. Incorporated, the institutional investment bank. James
Higgins is the President and Chief Operating Officer of Dean Witter Securities,
the individual investor securities business. James Allwin is President and
Chief Operating Officer of Morgan Stanley Institutional Investment Management
which includes: Morgan Stanley Asset Management, of which Barton Biggs remains
Chairman; Miller Anderson & Sherrerd; Merchant Banking; Morgan Stanley Services;
and the private equity businesses. Richard DeMartini is the President and Chief
Operating Officer of the Retail Asset Management Group, which includes
InterCapital, Van Kampen American Capital and Morgan Stanley retail mutual fund
families. Thomas Butler is the President and Chief Operating Officer of
Discover Brands, the credit card businesses.
In recognition of how critical the asset management business has become in this
environment, Phil Purcell and John Mack have asked Philip N. Duff to become
President and Chief Executive Officer of Van Kampen American Capital and have
asked Mitchell M. Merin to become President and Chief Strategic Officer of
InterCapital. They said jointly: "We are confident that Phil and Mitch's
combination of solid management experience, depth of knowledge in asset
gathering and financial services, will enable us to continue to build and
strengthen our retail fee-based businesses which are vital to our global
strategy and future." Don G. Powell will become Chairman of Van Kampen American
Capital. Charles A. Fiumefreddo will continue as Chairman of InterCapital.
Robert G. Scott will become Chief Financial Officer of the new company.
Additionally, Thomas C. Schneider is the Chief Strategic and Administrative
Officer and a member of the Board of Directors of the new company. Christine A.
Edwards is the Chief Legal Officer.
The Board of Directors of Morgan Stanley, Dean Witter, Discover & Co. are:
Philip J. Purcell, John J. Mack, Richard B. Fisher, Thomas C. Schneider, Robert
P. Bauman, Edward A. Brennan, Daniel B. Burke, C. Robert Kidder, Miles L. Marsh,
Michael A. Miles, Allen E. Murray, Paul J. Rizzo, Clarence B. Rogers, Jr., and
Laura D'Andrea Tyson.
The corporate headquarters for Morgan Stanley, Dean Witter, Discover & Co. is
located at 1585 Broadway, New York, NY, 10036.
###
<PAGE>
EXHIBIT 99.3
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT FISCAL YEAR END
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 6,544 $ 3,936
Cash and securities deposited with clearing organizations
or segregated under federal and other regulations
(including securities at fair value of $3,759 at fiscal
year end 1996 and $2,217 at fiscal year end 1995)....... 5,209 3,265
Financial instruments owned:
U.S. government and agency securities................... 12,032 13,503
Other sovereign government obligations.................. 19,473 13,792
Corporate and other debt................................ 16,899 11,489
Corporate equities...................................... 12,662 13,212
Derivative contracts.................................... 11,220 8,043
Physical commodities.................................... 375 410
Securities purchased under agreements to resell.......... 64,021 49,458
Securities borrowed...................................... 43,546 29,427
Receivables:
Consumer loans (net of allowances of $815 at fiscal
year end 1996 and $722 at fiscal year end 1995)........ 22,373 20,835
Customers, net.......................................... 8,600 6,002
Brokers, dealers and clearing organizations............. 5,421 1,475
Fees, interest and other................................ 2,870 2,320
Office facilities, at cost (less accumulated depreciation
and amortization of $1,060 at fiscal year end 1996 and
$843 at fiscal year end 1995)........................... 1,681 1,627
Other assets............................................. 5,934 3,167
--------- ---------
Total assets............................................. $ 238,860 $ 181,961
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper and other short-term borrowings......... $ 26,326 $ 18,029
Deposits................................................. 7,213 6,191
Financial instruments sold, not yet purchased:
U.S. government and agency securities................... 11,395 7,453
Other sovereign government obligations.................. 6,513 8,972
Corporate and other debt................................ 1,176 1,194
Corporate equities...................................... 8,900 3,598
Derivative contracts.................................... 9,982 7,537
Physical commodities.................................... 476 71
Securities sold under agreements to repurchase........... 86,863 64,551
Securities loaned........................................ 12,907 11,875
Payables:
Customers............................................... 22,062 17,001
Brokers, dealers and clearing organizations............. 1,820 1,974
Interest and dividends.................................. 1,678 1,188
Other liabilities and accrued expenses................... 6,340 5,087
Long-term borrowings..................................... 22,642 16,367
--------- ---------
226,293 171,088
--------- ---------
Capital Units............................................ 865 865
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock......................................... 1,223 818
Common stock(1) ($0.01 par value, 1,490,000,000 shares
authorized, 611,314,509 and 610,657,854 shares issued,
572,682,876 and 593,760,860 shares outstanding at fis-
cal year end 1996 and 1995)............................ 6 6
Paid-in capital(1) ..................................... 4,007 3,607
Retained earnings....................................... 7,477 5,981
Cumulative translation adjustments...................... (11) (9)
--------- ---------
Subtotal............................................ 12,702 10,403
Note receivable related to sale of preferred stock to
ESOP................................................... (78) (89)
Common stock held in treasury, at cost(1) ($0.01 par
value, 38,631,633 and 16,896,994 shares at fiscal year
end 1996 and 1995)..................................... (1,005) (361)
Stock compensation related adjustments.................. 83 55
--------- ---------
Total shareholders' equity.......................... 11,702 10,008
--------- ---------
Total liabilities and shareholders' equity............... $ 238,860 $ 181,961
========= =========
</TABLE>
- --------
(1)Amounts have been restated to reflect the Company's two-for-one stock
splits.
See Notes to the Supplemental Consolidated Financial Statements.
1
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Investment banking........................ $ 2,190 $ 1,556 $ 1,102
Principal transactions
Trading................................. 2,659 1,685 1,614
Investments............................. 86 121 154
Commissions............................... 1,776 1,533 1,323
Merchant and cardmember fees.............. 1,506 1,135 940
Servicing fees............................ 819 697 586
Interest and dividends.................... 11,288 10,530 8,715
Asset management and administration....... 1,732 1,377 1,317
Other..................................... 116 98 106
----------- ----------- -----------
Total revenues.......................... 22,172 18,732 15,857
Interest expense.......................... 8,934 8,190 6,697
Provision for consumer loan losses........ 1,221 731 537
----------- ----------- -----------
Net revenues............................ 12,017 9,811 8,623
----------- ----------- -----------
Expenses excluding interest
Compensation and benefits................. 5,071 4,005 3,535
Occupancy and equipment................... 493 454 421
Brokerage, clearing and exchange fees..... 317 289 276
Information processing and
communications........................... 996 889 767
Business development...................... 1,027 874 773
Professional services..................... 334 252 255
Other..................................... 662 697 634
Relocation charge......................... -- 59 --
----------- ----------- -----------
Total expenses excluding interest....... 8,900 7,519 6,661
----------- ----------- -----------
Income before income taxes................ 3,117 2,292 1,962
Provision for income taxes................ 1,137 827 705
----------- ----------- -----------
Net income................................ $ 1,980 $ 1,465 $ 1,257
=========== =========== ===========
Preferred stock dividend requirements..... $ 66 $ 65 $ 65
=========== =========== ===========
Earnings applicable to common shares(1)... $ 1,914 $ 1,400 $ 1,192
=========== =========== ===========
Earnings per common share(2)
Primary................................... $ 3.22 $ 2.30 $ 1.96
=========== =========== ===========
Fully diluted............................. $ 3.14 $ 2.25 $ 1.93
=========== =========== ===========
Average common shares outstanding(2)
Primary................................... 594,478,535 608,246,433 606,721,462
=========== =========== ===========
Fully diluted............................. 611,012,101 622,098,868 619,308,527
=========== =========== ===========
</TABLE>
- --------
(1) Amounts shown are used to calculate primary earnings per common share.
(2) Per share and share data have been restated to reflect the Company's two-
for-one stock splits.
See Notes to the Supplemental Consolidated Financial Statements.
2
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NOTE RECEIVABLE COMMON STOCK
CUMULATIVE RELATED TO SALE HELD IN
PREFERRED COMMON PAID-IN RETAINED TRANSLATION OF PREFERRED TREASURY,
STOCK STOCK(1) CAPITAL(1) EARNINGS ADJUSTMENTS STOCK TO ESOP AT COST OTHER TOTAL
--------- -------- ---------- -------- ----------- --------------- ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT FISCAL YEAR
END 1993............... $ 820 $ 6 $ 3,203 $3,738 $ (9) $(116) $ (229) $(3) $ 7,410
Net income............ -- -- -- 1,257 -- -- -- -- 1,257
Dividends to common
shareholders......... -- -- -- (237) -- -- -- -- (237)
Conversion of ESOP
Preferred Stock...... (1) -- 1 -- -- -- -- -- --
Issuance of common
stock................ -- -- 30 -- -- -- 7 -- 37
Repurchases of common
stock................ -- -- -- -- -- -- (326) -- (326)
Compensation payable
in common stock...... -- -- 150 -- -- -- 238 39 427
ESOP shares allocated,
at cost.............. -- -- -- -- -- 7 -- -- 7
Translation adjust-
ments................ -- -- -- -- 6 -- -- -- 6
------ --- ------- ------ ---- ----- ------- --- -------
BALANCE AT FISCAL YEAR
END 1994............... 819 6 3,384 4,758 (3) (109) (310) 36 8,581
Net income............ -- -- -- 1,465 -- -- -- -- 1,465
Dividends to common
shareholders......... -- -- -- (242) -- -- -- -- (242)
Conversion of ESOP
Preferred Stock...... (1) -- 1 -- -- -- -- -- --
Issuance of common
stock................ -- -- 73 -- -- -- 90 -- 163
Repurchases of common
stock................ -- -- -- -- -- -- (267) -- (267)
Compensation payable
in common stock...... -- -- 149 -- -- -- 126 19 294
ESOP shares allocated,
at cost.............. -- -- -- -- -- 20 -- -- 20
Translation adjust-
ments................ -- -- -- -- (6) -- -- -- (6)
------ --- ------- ------ ---- ----- ------- --- -------
BALANCE AT FISCAL YEAR
END 1995............... 818 6 3,607 5,981 (9) (89) (361) 55 10,008
Net income............ -- -- -- 1,980 -- -- -- -- 1,980
Dividends to common
shareholders......... -- -- -- (323) -- -- -- -- (323)
Issuance of common
stock in connection
with MAS acquisition. -- -- 9 -- -- -- 74 -- 83
Redemption of 9.36%
Cumulative Preferred
Stock................ (138) -- -- -- -- -- -- -- (138)
Issuance of 7-3/4% Cu-
mulative Preferred
Stock................ 200 -- (3) -- -- -- -- -- 197
Issuance of Series A
Fixed/Adjustable Rate
Cumulative Preferred
Stock................ 345 -- (2) -- -- -- -- -- 343
Conversion of ESOP
Preferred Stock...... (2) -- 2 -- -- -- -- -- --
Issuance of common
stock................ -- -- 97 -- -- -- 133 -- 230
Repurchases of common
stock................ -- -- -- -- -- -- (1,133) -- (1,133)
Retirement of treasury
stock................ -- -- (4) (161) -- -- 165 -- --
Compensation payable
in common stock...... -- -- 301 -- -- -- 117 28 446
ESOP shares allocated,
at cost.............. -- -- -- -- -- 11 -- -- 11
Translation adjust-
ments................ -- -- -- -- (2) -- -- -- (2)
------ --- ------- ------ ---- ----- ------- --- -------
BALANCE AT FISCAL YEAR
END 1996............... $1,223 $ 6 $ 4,007 $7,477 $(11) $ (78) $(1,005) $83 $11,702
====== === ======= ====== ==== ===== ======= === =======
</TABLE>
- -------
(1)Amounts have been restated to reflect the Company's two-for-one stock
splits.
See Notes to the Supplemental Consolidated Financial Statements.
3
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 1,980 $1,465 $ 1,257
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Non-cash charges included in net income:
Deferred income taxes.......................... (426) (212) (294)
Compensation payable in common or preferred
stock......................................... 513 353 432
Depreciation and amortization.................. 251 201 165
Relocation charge.............................. -- 59 --
Provision for losses on credit receivables..... 1,221 731 537
Changes in assets and liabilities:
Cash and securities deposited with clearing
organizations
or segregated under federal and other
regulations................................... (1,943) 519 (1,468)
Financial instruments owned, net of financial
instruments
sold, not yet purchased....................... (2,536) (9,846) 7,800
Securities borrowed, net of securities loaned.. (13,087) 2,489 (935)
Amounts due from asset securitizations......... (216) (231) 270
Receivables and other assets................... (8,018) 612 2,349
Payables and other liabilities................. 6,910 2,484 4,109
------- ------ -------
Net cash (used for) provided by operating activities (15,351) (1,376) 14,222
------- ------ -------
Cash flows from investing activities
Net payments for:
Property, equipment and leasehold improvements... (152) (403) (369)
Purchase of Miller Anderson & Sherrerd, LLP, net
of cash acquired................................ (200) -- --
Purchase of Van Kampen American Capital, Inc.,
net of cash acquired............................ (986) -- --
Net principal disbursed on consumer loans........ (7,532) (7,429) (6,166)
Purchases of consumer loans...................... (51) (307) (86)
Sales of consumer loans.......................... 4,824 1,827 1,970
Other investing activities....................... (40) (116) (119)
------- ------ -------
Net cash used for investing activities............... (4,137) (6,428) (4,770)
------- ------ -------
Cash flows from financing activities
Net proceeds (payments) related to short-term
borrowings........................................ 8,106 5,833 (1,956)
Securities sold under agreements to repurchase, net
of securities
purchased under agreements to resell.............. 7,748 (1,384) (12,608)
Proceeds from
Deposits......................................... 1,022 982 321
Issuance of cumulative preferred stock........... 540 -- --
Issuance of common stock......................... 156 122 37
Issuance of long-term borrowings................. 8,745 4,311 5,953
Issuance of Capital Units........................ -- 513 230
Payments for
Repayments of long-term borrowings............... (2,637) (1,604) (1,307)
Redemption of cumulative preferred stock......... (138) -- --
Repurchases of common stock...................... (1,133) (267) (326)
Cash dividends................................... (313) (235) (233)
------- ------ -------
Net cash provided by (used for) financing activities. 22,096 8,271 (9,889)
------- ------ -------
Net increase (decrease) in cash and cash equivalents. 2,608 467 (437)
Cash and cash equivalents, at beginning of period.... 3,936 3,469 3,906
------- ------ -------
Cash and cash equivalents, at end of period.......... $ 6,544 $3,936 $ 3,469
======= ====== =======
</TABLE>
See Notes to the Supplemental Consolidated Financial Statements.
4
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. INTRODUCTION AND BASIS OF PRESENTATION
The Merger
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the
"Merger"). At that time, Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. (the "Company"). In conjunction
with the Merger, each share of Morgan Stanley common stock then outstanding
was converted into the right to receive 1.65 shares of the Company's common
stock (the "Exchange Ratio"), and each share of Morgan Stanley preferred stock
was converted into the right to receive one share of a corresponding series of
preferred stock of the Company. The Merger was treated as a tax free exchange.
The Company
The Company's supplemental consolidated financial statements include the
accounts of Morgan Stanley, Dean Witter Discover and their U.S. and
international subsidiaries, including Morgan Stanley & Co. Incorporated
("MS&Co."), Morgan Stanley & Co. International Limited ("MSIL"), Morgan
Stanley Japan Limited ("MSJL"), Dean Witter Reynolds Inc. ("DWR"), Dean Witter
InterCapital Inc. ("ICAP"), and NOVUS Credit Services Inc.
The Company, through its subsidiaries, provides a wide range of financial
securities services on a global basis and credit services nationally. Its
securities 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. The
Company's credit services businesses include the operation of the NOVUS(R)
Network, a proprietary network of merchant and cash access locations, and the
issuance of proprietary general purpose credit cards. The Company's services
are provided to a large and diversified group of clients and customers,
including corporations, governments, financial institutions and individual
investors.
Basis of Financial Information
The supplemental consolidated financial statements give retroactive effect
to the merger of Dean Witter Discover and Morgan Stanley in a transaction
accounted for as a pooling of interests. The pooling of interests method of
accounting requires the restatement of all periods presented as if Dean Witter
Discover and Morgan Stanley had always been combined. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of the Company and its subsidiaries after financial statements
covering the date of consummation of the business combination are issued. The
supplemental consolidated statement of changes in shareholders' equity
reflects the accounts of the Company as if the additional preferred and common
stock had been issued during all the periods presented. The supplemental
consolidated financial statements, including the notes thereto, should be read
in conjunction with the historical consolidated financial statements of Dean
Witter Discover and Morgan Stanley, included in their Annual Reports on Form
10-K for the fiscal years ended December 31, 1996 and November 30, 1996,
respectively.
Prior to the consummation of the merger, Dean Witter Discover's fiscal year
ended on December 31 and Morgan Stanley's fiscal year ended on November 30. In
recording the pooling of interests combination, Dean Witter Discover's
financial statements for the fiscal years ended December 31, 1996, 1995 and
1994 were
5
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
combined with Morgan Stanley's financial statements for the fiscal years ended
November 30, 1996, 1995 and 1994 (on a combined basis, "fiscal year 1996,"
"fiscal year 1995," and "fiscal year 1994," respectively).
The supplemental 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, consumer loan loss levels, 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 supplemental consolidated financial statements are prudent
and reasonable. Actual results could differ from these estimates.
Certain reclassifications have been made to prior year amounts to conform to
the current presentation. All material intercompany balances and transactions
have been eliminated. The supplemental consolidated financial statements are
hereinafter referred to as "consolidated financial statements" or
"statements."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Statements of Cash Flows
For purposes of these statements, cash and cash equivalents consist of cash
and highly liquid investments not held for resale with maturities, when
purchased, of three months or less.
In connection with the purchase of Miller Anderson & Sherrerd, LLP ("MAS"),
the Company issued approximately $66 million of notes payable, as well as 3.3
million shares of common stock having a fair value on the date of acquisition
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
16).
Consumer Loans
Consumer loans, which consist primarily of credit card, real estate-secured
and other consumer installment loans, are reported at their principal amounts
outstanding, less applicable allowances and unearned finance charges. Interest
on consumer loans is credited to income as earned.
Interest is accrued on credit card loans until the date of charge-off, which
generally occurs at the end of the month during which an account becomes 180
days past due, except in the case of bankruptcies and fraudulent transactions,
which are charged off earlier. The interest portion of charged off credit card
loans is written off against interest revenue. Origination costs related to
the issuance of credit cards are charged to earnings over periods not
exceeding twelve months.
Interest generally is not accrued on real estate-secured loans which are
delinquent by six monthly payments and other consumer installment loans which
are delinquent by four or more monthly payments. Origination fees, net of
certain direct loan origination costs, are deferred and amortized over the
estimated life of the loans using the interest method. Any unamortized net
origination fees and costs on real estate-secured and other consumer
installment loans fully repaid are recognized as income in the period such
loans are repaid.
Allowance for Consumer Loan Losses
The allowance for consumer loan losses is a significant estimate that is
regularly evaluated by management for adequacy on a portfolio by portfolio
basis and is established through a charge to the provision for loan losses.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio,
6
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
overall portfolio quality, review of specific problem loans and current
economic conditions that may affect the borrower's ability to pay.
The Company uses the results of these evaluations to provide an allowance
for loan losses. The exposure for credit losses for owned loans is influenced
by the performance of the portfolio and other factors discussed above, with
the Company absorbing all related losses. The exposure for credit losses for
securitized loans is represented by the Company retaining a contingent risk
based on the amount of credit enhancement provided.
Management believes that its estimates have been historically prudent in
light of the need to allow the market for asset securitizations, in particular
those backed by credit card receivables, to mature, and in light of the
uncertainty of accounting standards for asset securitizations. In fiscal 1996,
the Company revised its estimate of the allowance for losses for loans
intended to be securitized. This revision was based on the Company's
experience with credit losses related to securitized loans in a mature asset
securitization market and the recent issuance of Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", by the Financial
Accounting Standards Board ("FASB"), which eliminated the uncertainty
surrounding the appropriate accounting treatment for asset securitization
transactions. The Company intends to maintain existing loan loss allowances
for securitizations outstanding until the related loans are liquidated.
Securitization of Consumer Loans
The Company periodically sells consumer loans through asset securitizations
and continues to service these loans. The revenues derived from servicing
these loans are recorded in the consolidated statements of income as servicing
fees over the term of the securitized loans rather than at the time the loans
are sold. The effects of recording these revenues over the term of the
securitized loans rather than at the time the loans were sold have not been
material.
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 statements of income as interest revenue 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 statements of
financial condition on a net-by-counterparty basis consistent with FASB
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts."
Equity securities purchased in connection with merchant banking and other
principal investment activities 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.
7
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 has entered into various contracts as hedges against specific
assets, liabilities or anticipated transactions. These contracts include
interest rate swap, foreign exchange forward, foreign currency exchange, cost
of funds and interest rate cap agreements. The Company uses interest rate and
currency swaps to manage the interest rate and currency exposure arising from
certain borrowings and to match the refinancing characteristics of consumer
loans with the borrowings that fund these loans. For contracts that are
designated as hedges of the Company's assets and liabilities, gains and losses
are deferred and recognized as adjustments to interest revenue or expense over
the remaining life of the underlying assets or liabilities. For contracts that
are hedges of asset securitizations, gains and losses are recognized as
adjustments to servicing fees. 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 shareholders' 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.
Securities Transactions
Clients' securities transactions are recorded on a settlement date basis
with related commission revenues and expenses recorded on trade date.
Securities are recorded at fair value, with gains and losses reflected in
income. 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 statements 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.
Office Facilities
Office facilities are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of buildings and improvements are
provided principally by the straight-line method, while
8
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
depreciation and amortization of furniture, fixtures and equipment is provided
by both straight-line and accelerated methods. Property and equipment are
depreciated over the estimated useful lives of the related assets, while
leasehold improvements are amortized over the lesser of the economic useful
life of the asset or, where applicable, the remaining term of the lease.
Income Taxes
Income tax expense is provided for using the asset and liability method,
under which deferred tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income tax bases of
assets and liabilities, using currently enacted tax rates.
Earnings Per Share
The calculations of earnings per common share are based on the weighted
average number of common shares and share equivalents outstanding and gives
effect to preferred stock dividend requirements. All per share and share
amounts reflect stock splits enacted by Dean Witter Discover and Morgan
Stanley prior to the Merger, as well as the additional shares issued to Morgan
Stanley shareholders pursuant to the Exchange Ratio.
Cardmember Rewards
The liability for cardmember rewards expense, included in other liabilities
and accrued expenses, is accrued at the time that qualified cardmember
transactions occur and is calculated on an individual cardmember basis.
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.
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 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 shareholders' equity. Gains
or losses resulting from foreign currency transactions are included in net
income.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized on a straight-line basis
over periods from 5 to 40 years, generally not exceeding 25 years, and are
periodically evaluated for impairment. At fiscal year end 1996, goodwill of
approximately $1.5 billion is included in the Company's consolidated
statements of financial condition as a component of Other Assets. (See Note
16.)
Other Accounting Pronouncements
Beginning with the fiscal year 1996, the Company adopted SFAS Nos. 121 and
122. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of",
9
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
generally requires that long-lived assets be reported at the lower of their
carrying cost or net realizable value. SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of SFAS No. 65", requires that rights to
service mortgage loans for others, however acquired, be recorded as separate
assets when the mortgage loans are sold and the servicing rights are retained.
This statement also requires that capitalized mortgage servicing rights be
assessed for impairment based on the fair value of those rights. The adoption
of these statements was not material to the Company's financial position or
results of operations.
The FASB has issued SFAS No. 125, effective for transfers of financial
assets made after December 31, 1996, except for transfers of certain financial
assets for which the effective date has been delayed for one year. SFAS No.
125 provides financial reporting standards for the derecognition and
recognition of financial assets, including the distinction between transfers
of financial assets which should be recorded as sales and those which should
be recorded as secured borrowings. SFAS No. 125 supersedes and incorporates
the essential provisions of SFAS No. 122. The Company believes that the effect
of the adoption of SFAS No. 125 will not be material to its financial position
or results of operations.
3. CONSUMER LOANS
Consumer loans were as follows.
<TABLE>
<CAPTION>
AT FISCAL YEAR
END
---------------
1996 1995
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Credit card..................................................... $22,062 $20,440
Real estate-secured and other consumer installment.............. 1,204 1,233
------- -------
23,266 21,673
Less
Unearned finance charges and unamortized discounts and fees... 78 116
Allowance for loan losses..................................... 815 722
------- -------
Consumer loans, net........................................... $22,373 $20,835
======= =======
</TABLE>
Activity in the allowance for consumer loan losses was as follows.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------
1996 1995 1994
------ ---- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Balance beginning of period................................. $ 722 $566 $437
Additions
Provision for loan losses................................. 1,221 731 537
Purchase of loan portfolios............................... 4 31 4
------ ---- ----
Total additions......................................... 1,225 762 541
------ ---- ----
Deductions
Charge-offs............................................... 1,189 717 471
Recoveries................................................ (156) (121) (89)
------ ---- ----
Net charge-offs......................................... 1,033 596 382
------ ---- ----
Other(1).................................................... (99) (10) (30)
------ ---- ----
Balance end of period....................................... $ 815 $722 $566
====== ==== ====
</TABLE>
- --------
(1) Primarily reflects net transfers related to asset securitizations.
10
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest accrued on loans subsequently charged off, recorded as a reduction
of interest revenue, was $181 million, $115 million and $70 million in fiscal
1996, 1995 and 1994.
At fiscal year end 1996 and 1995, $5,789 million and $7,000 million of the
Company's consumer loans had minimum contractual maturities of less than one
year. Because of the uncertainty regarding consumer loan repayment patterns,
which historically have been higher than contractually required minimum
payments, and variable rate loan pricing utilized by the Company, this amount
may not necessarily be indicative of the Company's consumer loan repricing
schedule.
At fiscal year end 1996 and 1995, the Company had commitments to extend
credit in the amounts of $156.6 billion and $133.3 billion. Commitments to
extend credit arise from agreements to extend to customers unused lines of
credit on certain credit cards and home equity lines of credit issued by the
Company, provided there is no violation of conditions established in the
related agreement. These commitments, substantially all of which the Company
can terminate at any time and which do not necessarily represent future cash
requirements, are periodically reviewed based on account usage and customer
creditworthiness.
The Company received proceeds from asset securitizations of $4,528 million,
$1,827 million, and $1,970 million in fiscal 1996, 1995 and 1994. The
uncollected balances of consumer loans sold through asset securitizations were
$13,385 million and $10,220 million at fiscal year end 1996 and 1995. The
allowance for loan losses related to securitized loans, included in other
liabilities and accrued expenses, was $447 million and $342 million at fiscal
year end 1996 and 1995.
The Company uses interest rate exchange agreements to hedge the risk from
changes in interest rates on servicing fee revenues (which are derived from
loans sold through asset securitizations). Gain and losses from these
agreements are recognized as adjustments to servicing fees. At fiscal year end
1996 and 1995, notional amounts of these interest rate exchange agreements
outstanding were $2,919 million and $2,575 million with fair values of $(32)
million and $28 million. Under these interest rate exchange agreements the
Company primarily pays floating rates and receives fixed rates.
In connection with certain asset securitizations, the Company has written
interest rate cap agreements with notional amounts of $240 million and strike
rates of 11%. Any settlement payments made under these agreements will
generally be passed back to the Company through an adjustment of servicing
fees, although this is subject to the risk of counterparty nonperformance. At
fiscal year end 1996 and 1995, the fair values of these agreements were not
material. No payments have been made by the Company under these agreements,
which expire in 1997.
The estimated fair value of the Company's consumer loans approximated
carrying value at fiscal year end 1996 and 1995. The Company's consumer loan
portfolio, including securitized loans, is geographically diverse, with a
distribution approximating that of the population of the United States.
4. DEPOSITS
Deposits were as follows.
<TABLE>
<CAPTION>
AT FISCAL
YEAR END
---------------------
1996 1995
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Demand, passbook and money market accounts............... $ 1,716 $ 1,552
Consumer certificate accounts............................ 1,354 1,222
$100,000 minimum certificate accounts.................... 4,143 3,417
---------- ----------
Total.................................................. $ 7,213 $ 6,191
========== ==========
</TABLE>
11
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average interest rates of interest-bearing deposits outstanding
during fiscal 1996 and 1995 were 6.3% and 6.6%.
At fiscal year end 1996 and 1995, the notional amounts of interest rate
exchange agreements that hedged deposits outstanding were $495 million and $20
million and had fair values of $5 million and $0.4 million. Under these
interest rate exchange agreements the Company primarily pays fixed rates and
receives floating rates. At fiscal year end 1996, the weighted average
interest rate of the Company's deposits including the effect of interest rate
exchange agreements was 6.2%.
At fiscal year end 1996, certificate accounts maturing over the next five
years were as follows (dollars in millions).
<TABLE>
<S> <C>
1997..................................................................... $1,411
1998..................................................................... 1,721
1999..................................................................... 879
2000..................................................................... 425
2001..................................................................... 688
</TABLE>
The estimated fair value of the Company's deposits, using current rates for
deposits with similar maturities, approximated carrying value at fiscal year
end 1996 and 1995.
5. SHORT-TERM BORROWINGS
At fiscal year end 1996 and 1995, commercial paper in the amount of $18,890
million and $13,101 million, with weighted average interest rates of 5.4% and
5.9%, was outstanding.
At fiscal year end 1996 and 1995, the notional amounts of interest rate
contracts that hedged commercial paper outstanding were $808 million and
$1,032 million and had fair values of $(7) million and $(14) million. These
interest rate contracts converted the commercial paper to fixed rates. These
contracts had no material effect on the weighted average interest rates of
commercial paper.
At fiscal year end 1996 and 1995, other short-term borrowings of $7,436
million and $4,928 million were outstanding. These borrowings included bank
loans, federal funds, proceeds from revolving credit agreements and bank
notes.
The Company maintains a senior revolving credit agreement with a group of
banks to support general liquidity needs, including the issuance of commercial
paper (the "Morgan Stanley Facility"). Under the terms of the credit
agreement, the banks are committed to provide up to $2.5 billion. At fiscal
year end 1996, $365 million was outstanding under the Morgan Stanley Facility
which was repaid in full subsequent to fiscal year end 1996. The Company has
assumed the Morgan Stanley Facility as part of the Merger.
The Company also maintains a second senior revolving credit agreement with a
group of banks to support general liquidity needs, including the issuance of
commercial paper (the "DWD Facility"). Under the terms of the credit
agreement, the banks are committed to provide up to $4.0 billion. As of fiscal
year end 1996, the Company has never borrowed from the DWD Facility. In April
1997, DWD renewed this facility which expires in April of 1998.
The Morgan Stanley Facility and the DWD Facility both contain covenants that
require the Company to maintain minimum net worth requirements and specified
financial ratios. The Company believes that the covenant restrictions will not
impair the Company's ability to pay its current level of dividends. Prior to
the closing of the Merger, the Morgan Stanley Facility and the DWD Facility
were amended to conform such facilities to insure that they remain effective
subsequent to the closing of the Merger and to accommodate the Company's post-
Merger business activities and financing needs. After the consummation of the
Merger, the Company expects that a new credit facility of the Company will
replace the Morgan Stanley Facility and the DWD Facility.
12
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Riverwoods Funding Corporation ("RFC"), an entity included in the
consolidated financial statements of the Company, maintains a senior bank
credit facility to support the issuance of asset-backed commercial paper. In
fiscal 1996, RFC renewed this facility and increased its amount to $2.1
billion from $1.75 billion. RFC currently plans to renew or replace this
facility prior to its expiration in October 1997. Under the terms of the
asset-backed commercial paper program, certain assets of RFC were subject to a
lien in the amount of $2.2 billion at fiscal year end 1996. RFC has never
borrowed from its senior bank credit facility.
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 (the "MS&Co. Facility"). As part of the MS&Co.
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. The credit agreement
contains restrictive covenants which require, among other things, that MS&Co.
maintain specified levels of consolidated shareholders' equity and Net
Capital, as defined. In January 1997, the MS&Co. Facility was renewed and the
amount of the commitment of the credit agreement was increased to $1.5
billion. At fiscal year end 1996, no borrowings were outstanding under the
MS&Co. 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 (the "MSIL
Facility"). Such banks are committed to provide up to an aggregate of $1.25
billion available in 12 major currencies. 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, the MSIL Facility was renewed, and the amount of
the commitment was increased to $1.55 billion. At fiscal year end 1996, no
borrowings were outstanding under the MSIL Facility.
The Company anticipates that it will utilize the Morgan Stanley Facility,
the DWD Facility, the MS&Co. Facility or the MSIL Facility for short-term
funding from time to time. RFC anticipates that it will utilize its facility
for short-term funding from time to time.
6. LONG-TERM BORROWINGS
Maturities And Terms
Long-term borrowings at fiscal year end consist of the following:
<TABLE>
<CAPTION>
NON-U.S.
U.S. DOLLAR DOLLAR(1) AT FISCAL YEAR END
----------------------- ---------------- --------------------
INDEX/
FIXED FLOATING EQUITY FIXED FLOATING 1996 1995
RATE RATE LINKED RATE RATE TOTAL TOTAL
------ -------- ------ ------ -------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Due in fiscal 1996...... $ -- $ -- $ -- $ -- $ -- $ -- $ 2,596
Due in fiscal 1997...... 628 2,473 497 96 363 4,057 3,467
Due in fiscal 1998...... 1,124 3,140 566 506 280 5,616 2,400
Due in fiscal 1999...... 789 1,353 319 206 551 3,218 1,183
Due in fiscal 2000...... 683 909 22 28 44 1,686 1,580
Due in fiscal 2001...... 1,385 659 68 57 57 2,226 824
Thereafter.............. 4,580 410 116 707 26 5,839 4,317
------ ------ ------ ------ ------ --------- ---------
Total................. $9,189 $8,944 $1,588 $1,600 $1,321 $ 22,642 $ 16,367
====== ====== ====== ====== ====== ========= =========
Weighted average
interest at fiscal
year-end............. 7.2% 5.7% n/a 5.4% 3.5% 6.2% 6.6%
====== ====== ====== ====== ====== ========= =========
</TABLE>
- --------
(1)Weighted average coupon was calculated utilizing non-U.S. dollar interest
rates.
13
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Medium-Term Notes
Included in the table above are medium-term notes of $13,272 million and
$6,022 million at fiscal year end 1996 and 1995. 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 Borrowings
U.S. dollar index/equity linked borrowings 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 fiscal year end 1996 and 1995.
Other Borrowings
U.S. dollar contractual floating rate borrowings bear interest based on a
variety of money market indices, including LIBOR and Federal Funds rates. Non-
U.S. dollar contractual floating rate borrowings bear interest based on Euro
floating rates.
Included in the Company's long-term borrowings are subordinated notes of
$1,325 million and $1,298 million at fiscal year end 1996 and 1995. 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 borrowings are 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., a registered U.S. broker-dealer subsidiary of the
Company, 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 portion of the Company's fixed rate long-term borrowings is used to fund
highly liquid marketable securities, short-term receivables arising from
securities transactions and consumer loans. The Company uses interest rate
swaps to more closely match the duration of these borrowings 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 borrowings into
floating rate obligations. In addition, for non-U.S. dollar currency
borrowings that are not used to fund assets in the same currency, the Company
has entered into currency swaps which effectively convert the
14
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
borrowings 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>
AT FISCAL YEAR END
----------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Net reduction in interest expense from swaps for the
fiscal year........................................... $29 $20 $113
Weighted average coupon of long-term borrowings at
fiscal
year-end(1)........................................... 6.2% 6.6% 6.6%
Effective average borrowing rate for long-term
borrowings after swaps at fiscal
year-end(1)........................................... 6.1% 6.4% 6.2%
</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 at
fiscal year end 1996. Swaps utilized to hedge the Company's structured
borrowings are presented at their redemption values:
<TABLE>
<CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR(1) AT FISCAL YEAR END
------------------------ -------------------- ---------------------
RECEIVE RECEIVE RECEIVE RECEIVE
FIXED FLOATING INDEX/ FIXED FLOATING
PAY PAY EQUITY PAY PAY
FLOATING FLOATING LINKED FLOATING FLOATING(2) 1996 TOTAL 1995 TOTAL
-------- -------- ------ -------- ----------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturing in fiscal 1996. $ -- $ -- $ -- $ -- $ -- $ -- $1,106
Maturing in fiscal 1997. 628 300 497 96 357 1,878 1,338
Maturing in fiscal 1998. 943 175 566 506 221 2,411 1,510
Maturing in fiscal 1999. 492 375 319 206 276 1,668 799
Maturing in fiscal 2000. 285 -- 22 28 44 379 280
Maturing in fiscal 2001. 924 5 68 57 39 1,093 133
Thereafter.............. 1,937 -- 116 707 -- 2,760 2,189
------ ----- ------ ------ ----- ------- ------
Total.................. $5,209 $ 855 $1,588 $1,600 $ 937 $10,189 $7,355
====== ===== ====== ====== ===== ======= ======
Weighted average at fis-
cal year-end(3)
Receive rate........... 6.8% 5.7% n/a 5.2% 3.5%
Pay rate............... 5.6% 5.9% n/a 5.1% 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
borrowings 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.
15
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As noted above, the Company uses interest rate and currency swaps to modify
the terms of its existing borrowings. 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 YEAR
---------------
1996 1995
------- ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Notional value at beginning of period......................... $ 7,355 $6,167
Additions..................................................... 4,137 1,960
Matured....................................................... (1,068) (670)
Terminated.................................................... (157) (108)
Effect of foreign currency translation on non-U.S. dollar
notional values and changes in redemption values on (78) 6
structured borrowings........................................ ------- ------
Notional value at fiscal year-end............................. $10,189 $7,355
======= ======
Unrecognized gain at fiscal year-end.......................... $ 139 $ 269
======= ======
</TABLE>
Purchased interest rate cap agreements, which effectively establish a
maximum interest rate on certain of the Company's floating rate financings,
are derivative financial instruments which, by their nature, have no off-
balance sheet risk of loss due to unfavorable interest rate movements. The
Company pays an initial premium, which is recorded on the balance sheet and
amortized to interest expense over the term of the cap agreement. Benefits
received are recorded as a reduction of interest expense. The Company had
outstanding purchased interest rate cap agreements with notional amounts of
$40 million and $415 million at fiscal year end 1996 and 1995, of which $40
million were in effect at fiscal year end 1996 and 1995.
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 at fiscal year
end 1996 and 1995, and unrecognized gains of approximately $14 million and $45
million as of fiscal year end 1996 and 1995, 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 borrowings approximated
carrying value based on rates available to the Company at year end for
borrowings with similar terms and maturities.
Cash paid for interest for the Company's borrowings and deposits
approximated interest expense in fiscal 1996, 1995 and 1994.
7. COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases covering office space and
equipment. At fiscal year end 1996, future minimum rental commitments under
such leases (net of subleases, principally on office rentals) were as follows
(dollars in millions).
<TABLE>
<S> <C>
1997..................................................................... $ 289
1998..................................................................... 255
1999..................................................................... 215
2000..................................................................... 194
2001..................................................................... 180
Thereafter............................................................... 792
------
Total.................................................................. $1,925
======
</TABLE>
16
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Occupancy lease agreements, in addition to base rentals, generally provide
for rent and operating expense escalations resulting from increased
assessments for real estate taxes and other charges. Total rent expense, net
of sublease rental income, was $264 million, $271 million and $253 million in
fiscal 1996, 1995 and 1994.
The Company has an agreement with Advantis, a joint venture between Sears
and IBM, under which the Company receives information processing, data
networking and related services. Under the terms of the agreement, the Company
has an aggregate minimum annual commitment of $166 million subject to annual
cost of living adjustments.
During fiscal 1995, the Company recognized a pretax charge of $59 million
($39 million after tax, which reduced primary and fully diluted earnings per
share by $0.06). The charge was in connection with the relocation of the
majority of Morgan Stanley's New York City employees from 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, as well as 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.
In the normal course of business, the Company has been named as a defendant
in various lawsuits and has been involved in certain investigations and
proceedings. Some of these matters involve claims for substantial amounts.
Although the ultimate outcome of these matters cannot be ascertained at this
time, it is the opinion of management, after consultation with outside
counsel, that the resolution of such matters will not have a material adverse
effect on the consolidated financial condition of the Company, but may be
material to the Company's operating results for any particular period,
depending upon the level of the Company's income for such period.
The Company had approximately $3.4 billion of letters of credit outstanding
at fiscal year end 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 statements of financial
condition.
The Company also has commitments to fund certain fixed assets and other less
liquid investments, including at fiscal year end 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.
8. TRADING ACTIVITIES
Trading Revenues
The Company's trading activities include providing securities brokerage,
derivatives dealing, and underwriting services to clients. While trading
activities are generated by client order flow, the Company also takes
proprietary positions based on expectations of future market movements and
conditions. The Company's trading strategies rely on the integrated management
of its client-driven and proprietary transactions, along with the hedging and
financing of these positions.
17
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
principal trading are summarized below by trading division:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Equities............................................ $1,181 $ 728 $ 592
Fixed Income........................................ 1,172 710 769
Foreign Exchange.................................... 169 177 151
Commodities......................................... 137 70 102
------ ------ ------
Total principal trading revenues.................... $2,659 $1,685 $1,614
====== ====== ======
</TABLE>
Interest revenue and expense are integral components of trading activities.
In assessing the profitability of trading activities, the Company views net
interest and principal trading revenues in the aggregate.
The Company's trading portfolios 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 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.
18
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
19
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
The following discussions of risk management, market risk, credit risk,
concentration risk and customer activities relates to the Company's securities
businesses.
Securities 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 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
20
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
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.
Securities 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.
21
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Securities 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.
Securities 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 13% of
the Company's total assets at fiscal year end 1996. In addition, substantially
all of the collateral held by the Company for resale agreements or bonds
borrowed, which together represented approximately 30% of the Company's total
assets at fiscal year end 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.
Securities 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
22
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 fiscal year
end 1996 and 1995, as well as the average fair value of those assets and
liabilities for fiscal year 1996 and 1995, are presented in the table which
follows. Fair value represents the cost of replacing these instruments and is
further described in Note 2. 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
statements 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 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 AVERAGE
FISCAL YEAR-END FAIR VALUES(3) FAIR VALUES(3)(4)
GROSS NOTIONAL/ ----------------------- ---------------------
CONTRACT AMOUNT(1)(2) ASSETS LIABILITIES ASSETS LIABILITIES
---------------------- ---------- ------------ --------- -----------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
----------- ---------- ----- ---- ------ ----- ---- ---- ----- -----
(DOLLARS IN BILLIONS, AT
FISCAL YEAR-END)
<C> <C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 622 $ 401 Interest rate and cur-
rency swaps and options
(including caps, floors
and swap op-
tions)................. $ 4.9 $3.8 $ 5.0 $ 3.8 $4.2 $3.7 $ 3.8 $ 3.6
362 260 Foreign exchange forward
and futures contracts
and options..... 2.2 1.9 2.0 1.9 1.6 1.9 1.6 2.1
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 se-
curities contracts
(including futures
contracts and op-
tions)................. 0.2 0.1 0.2 0.4 0.2 0.4 0.4 0.5
61 57 Equity securities con-
tracts (including eq-
uity swaps, futures
contracts, and warrants
and options)..... 2.3 1.4 1.5 0.8 1.6 1.4 1.1 0.9
63 47 Commodity forwards,
futures, options and
swaps.................. 1.4 0.7 1.2 0.5 1.3 1.1 0.7 1.0
----------- --------- ----- ---- ------ ----- ---- ---- ----- -----
$ 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 fiscal year end 1996, and $139 billion and
$100 billion, respectively, at fiscal year end 1995.
(3) These amounts represent carrying value (exclusive of collateral) at fiscal
year end 1996 and 1995, respectively, and do not include receivables or
payables related to exchange traded futures contracts.
(4) Amounts are calculated using a monthly average.
23
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 fiscal year end 1996
will not have a material effect on the Company's financial condition.
The remaining maturities of the Company's swaps and other derivative
products at fiscal year end 1996 and 1995 are summarized in the following
table, showing notional values by year of expected maturity:
<TABLE>
<CAPTION>
LESS THAN 1 TO 3 3 TO 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
--------- ------ ------ --------- ------
(DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
AT FISCAL YEAR END 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%
==== ==== ==== ==== ======
AT FISCAL YEAR END 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>
24
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The credit quality of the Company's trading-related derivatives at fiscal
year end 1996 and 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>
COLLATERALIZED OTHER NON-
NON-INVESTMENT INVESTMENT
AAA AA A BBB GRADE GRADE TOTAL
------ ------ ------ ------ -------------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
AT FISCAL YEAR END 1996
Interest rate and cur-
rency 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 securi-
ties forward contracts,
swaps and options...... 66 65 64 19 -- 5 219
Other fixed income secu-
rities contracts (in-
cluding options)....... 53 52 41 22 6 31 205
Equity securities con-
tracts (including eq-
uity swaps, warrants
and options)........... 1,074 274 408 60 426 43 2,285
Commodity forwards, op-
tions 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%
====== ====== ====== ====== ==== ==== =======
AT FISCAL YEAR END 1995
Interest rate and cur-
rency 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 securi-
ties forward contracts,
swaps and options...... 23 31 36 7 12 14 123
Other fixed income secu-
rities contracts (in-
cluding options)....... 25 33 33 42 -- 4 137
Equity securities con-
tracts (including eq-
uity swaps, warrants
and options)........... 612 98 232 143 178 159 1,422
Commodity forwards, op-
tions 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 fiscal year
end 1996 and fiscal year end 1995, respectively.
25
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. PREFERRED STOCK AND CAPITAL UNITS
Preferred stock is composed of the following issues:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
AT BALANCE AT
FISCAL YEAR END FISCAL YEAR END
------------------- ----------------------
1996 1995 1996 1995
--------- --------- ----------- ----------
(DOLLARS IN MILLIONS)
<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 Cumu-
lative 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 outstanding preferred stock ranks in parity with all other
outstanding preferred stock of the Company.
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 fiscal year end 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. In addition, the Company announced that it had called for
redemption, on May 30, 1997, all 750,000 shares of its 8- 3/4% Cumulative
Preferred Stock at a redemption price of $200 per share.
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 fiscal year end 1996 and 1995.
Subsequent to fiscal year end 1996, the Company and MS plc issued 8.03%
Capital Units in the aggregate amount of $134 million which mature in 2017.
The estimated fair value of the Capital Units was $866 million and $872
million at fiscal year end 1996 and fiscal year end 1995, respectively.
26
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMON STOCK AND SHAREHOLDERS' EQUITY
In conjunction with the Merger, the Company increased the number of
authorized common shares to 1,750 million and changed the number of authorized
preferred shares to 30 million.
During the fiscal year 1996, the Company repurchased or acquired shares of
its common stock at an aggregate cost of $1,133 million and an average cost
per share of $26.96. Prior to the consummation of the Merger, both Morgan
Stanley and Dean Witter Discover rescinded their respective outstanding share
repurchase authorizations. At the time of the Merger, Morgan Stanley common
stock which had been held in treasury was retired.
DWR, a registered broker-dealer and a registered futures commission
merchant, is subject to the uniform net capital rule under the Securities
Exchange Act of 1934. Under the alternative method permitted by this Rule, the
required net capital, as defined, shall not be less than the greater of (a)
one million dollars, (b) 2% of aggregate debit balances arising from client
transactions pursuant to the Securities Exchange Act of 1934 Rule 15c3-3, or
(c) 4% of the funds required to be segregated pursuant to the Commodity
Exchange Act. The New York Stock Exchange, Inc. may also require a member
organization to reduce its business if its net capital is less than the
greater of (a) 4% of aggregate debit balances or (b) 6% of the funds required
to be segregated and may prohibit a member organization from expanding its
business and declaring cash dividends if its net capital is less than the
greater of (a) 5% of aggregate debit balances or (b) 7% of the funds required
to be segregated. At fiscal year end 1996, DWR's net capital was $589 million
and net capital in excess of the minimum required was $475 million. DWR's net
capital was 19.7% of aggregate debit balances and 20.6% of funds required to
be segregated.
MS&Co. is a registered broker-dealer and a registered futures commission
merchant and, accordingly, is subject to the minimum net capital requirements
discussed above. MS&Co. has consistently operated in excess of these
requirements with aggregate net capital, as defined, totaling $1,357 million
at fiscal year end 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.
Under regulatory net capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other regulatory capital guidelines, FDIC
insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital,
as defined, to total assets ("leverage ratio") and (b) 8% combined Tier 1 and
Tier 2 capital, as defined, to risk weighted assets ("risk-weighted capital
ratio"). At fiscal year end 1996, the leverage ratio and risk-weighed capital
ratio of each of the Company's FDIC insured financial institutions exceeded
these and all other regulatory minimums.
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. 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.
The regulatory capital requirements referred to above, and certain covenants
contained in various agreements governing indebtedness of the Company, may
restrict the Company's ability to withdraw capital from its subsidiaries. At
fiscal year end 1996, approximately $4.0 billion of net assets of consolidated
subsidiaries may be restricted as to the payment of cash dividends and
advances to the Company.
27
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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>
AT FISCAL YEAR END
----------------------
1996 1995
---------- ----------
(DOLLARS IN MILLIONS)
<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 re-
alized 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.
11. 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 companies and provide for internal ownership in order to align the
interests of employees with the long-term interests of the Company's
shareholders.
The Company's employee compensation plans currently consist of the
continuation of Dean Witter Discover's and Morgan Stanley's respective plans
that were in effect prior to the Merger. Accordingly, the following
information summarizes the Dean Witter Discover and Morgan Stanley predecessor
plans.
DEAN WITTER DISCOVER PREDECESSOR PLANS
Equity-Based Employee Incentive Awards
The Company is authorized to issue up to 38.2 million shares of its common
stock in connection with awards under several Dean Witter Discover equity-
based employee incentive plans.
28
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity under these Dean Witter Discover plans was as follows
(share data in millions).
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1996 1995 1994
-------------- -------------- --------------
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of the year.................... 27.7 $15.00 16.6 $12.53 17.7 $12.44
Granted......................... 0.1 25.96 13.1 17.65 0.1 19.23
Exercised....................... (2.0) 13.58 (1.8) 11.39 (1.0) 11.36
Forfeited....................... (0.4) 17.49 (0.2) 15.43 (0.2) 12.27
---- ------ ---- ------ ---- ------
Options outstanding at year end. 25.4 $15.10 27.7 $15.00 16.6 $12.53
==== ====== ==== ====== ==== ======
Eligible for exercise at year
end............................ 17.0 $13.82 11.2 $12.36 8.5 $11.90
==== ====== ==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
AT FISCAL YEAR END
-------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ---------------------------
AVERAGE
REMAINING AVERAGE AVERAGE
NUMBER LIFE OPTION NUMBER OPTION
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
------------------------ ----------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
$8.00 to $12.99............. 3.4 5 $10.11 3.4 $10.11
$13.00 to $19.99............ 21.7 7 15.78 13.5 14.69
$20.00 to $27.99............ 0.3 9 24.52 0.1 24.49
</TABLE>
At fiscal year end 1996, 12.5 million shares were available for future grant
under these Dean Witter Discover plans.
These Dean Witter Discover plans are "non-compensatory" under APB No. 25,
and, accordingly, no charge to earnings has been recorded.
Employee Stock Purchase Plan
Under the Dean Witter Discover Employee Stock Purchase Plan, employees may
purchase shares of the Company's common stock at not less than 85% of the fair
value on the date of purchase. The Company is authorized to issue up to 2.2
million shares of common stock under this plan. Employees of the Company
purchased 1 million shares of common stock in each of fiscal years 1996 and
1995.
The discount to fair value was $2 million for fiscal 1996 and $1 million for
fiscal 1995. The plan is "non-compensatory" under APB No. 25, and,
accordingly, no charge to earnings has been recorded for the amount of the
discount to fair value.
Deferred Compensation Awards
The Company is authorized to issue up to 16.3 million shares of its common
stock under the terms of its Dean Witter Discover deferred compensation plans.
These plans provide for the deferral of a portion of certain employees'
compensation with payment made in the form of shares of the Company's common
stock. In fiscal 1996 and 1995, the Company recorded compensation expense of
$87 million and $57 million and unearned compensation of $8 million and $6
million in connection with the award of approximately 3.0 million and 2.4
29
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million shares of common stock under these plans in fiscal 1996 and 1995.
These shares were issued in fiscal 1997 and 1996, and are held in custodial or
trust accounts pending employee eligibility to receive the shares. Unearned
compensation is recognized over the related plan vesting periods.
Non-Employee Director Awards
The Company sponsors stock plans for non-employee directors under which 0.4
million shares of the Company's common stock have been authorized for issuance
in the form of option grants, stock awards or deferred compensation. The fair
value of awards granted under this plan is charged to expense over the vesting
period of the related grant. The effect of these grants on results of
operations was not material.
401(k) Plan
Employees of Dean Witter Discover are eligible to participate in the Dean
Witter Discover 401(k) plan upon meeting certain eligibility requirements. The
Company matches a portion of each participant's contribution based upon the
performance of the Company. The Company's contributions to the Dean Witter
Discover 401(k) plan were $42 million, $37 million and $34 million in fiscal
1996, 1995 and 1994.
Employees Equity Accumulation Plan
The Dean Witter Discover shareholders approved the Dean Witter Discover &
Co. Employees' Equity Accumulation Plan on May 28, 1997. This plan is intended
to align key employees' interest with shareholders' through equity-based
compensation and to permit the granting of awards that will constitute
performance-based compensation for certain executive officers. Under this
plan, the Company will issue an aggregate of not more than 30 million shares
of common stock.
MORGAN STANLEY PREDECESSOR PLANS
Equity Incentive Compensation Plan
Stock units representing Morgan Stanley's 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, $178 million and $171 million for
fiscal 1996, fiscal 1995 and fiscal 1994. 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 Morgan
Stanley 1988 Equity Incentive Compensation Plan. On April 3, 1996, Morgan
Stanley shareholders approved the Morgan Stanley 1995 Equity Incentive
Compensation Plan, and Stock Unit awards are now granted under this plan only.
For purposes of this footnote, the term "EICP" shall refer collectively to the
Morgan Stanley 1988 Equity Incentive Compensation Plan and the Morgan Stanley
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 shareholder, 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.
30
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 3, 1996, the Company's shareholders approved the reservation of
144,319,699 million shares of common stock for awards under the Morgan Stanley
EICP (including stock options). At fiscal year end 1996, approximately
130,350,000 million shares reserved for future awards under the Morgan Stanley
EICP remain (net of fiscal 1996 awards).
Stock Option Awards
Prior to fiscal 1989, stock options had been awarded pursuant to the Morgan
Stanley'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 Morgan Stanley EICP. Options awarded under the Morgan Stanley
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 or 10
years (depending on the year awarded) from grant.
The following table sets forth activity relating to the Morgan Stanley stock
option awards:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995 FISCAL 1994
------------------- ------------------- -------------------
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.... 35,364,648 $14.04 22,380,923 $ 9.17 22,194,787 $ 7.82
Granted............... 7,445,581 30.19 18,813,412 18.07 1,999,800 22.98
Exercised............. (7,068,518) 8.30 (5,524,794) 7.72 (1,695,689) 6.86
Forfeited............. (801,686) 23.12 (304,893) 19.10 (117,975) 22.62
---------- ------ ---------- ------ ---------- ------
Options outstanding at
end of period.......... 34,940,025 18.44 35,364,648 14.04 22,380,923 9.17
---------- ------ ---------- ------ ---------- ------
Options exercisable at
end of period.......... 19,347,082 $13.82 24,825,488 $12.39 19,426,130 $ 7.88
========== ====== ========== ====== ========== ======
</TABLE>
The following table presents information relating to Morgan Stanley stock
options outstanding at fiscal year end 1996.
<TABLE>
<CAPTION>
AVERAGE
REMAINING
NUMBER NUMBER LIFE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE (YEARS)
- ------------------------ ----------- ----------- ---------
<S> <C> <C> <C>
$ 6.00-$12.99................................. 7,918,690 7,918,690 1.1
$13.00-$19.99................................. 17,977,661 11,393,966 8.2
$20.00-$26.99................................. 1,918,254 34,426 4.6
$27.00-$33.99................................. 6,855,310 -- 6.1
$34.00-$40.99................................. 270,110 -- 8.7
---------- ---------- ---
Total....................................... 34,940,025 19,347,082 6.0
========== ========== ===
</TABLE>
Capital Accumulation Plan
Under the Morgan Stanley 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, 1995 and 1994 was
approximately $7 million, $12 million and $14 million, respectively, all of
which relate to vested units.
31
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Carried Interest Plans
Under the Morgan Stanley 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, 1995 and 1994 related to these plans
aggregated $0.2 million, $14 million and $25 million, respectively.
Real Estate Fund Plans
On September 26, 1995, the Morgan Stanley 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 Morgan
Stanley U.S. employees. The following summarizes these plans:
Profit Sharing Plan
The Company sponsors a qualified non-contributory profit sharing plan
covering substantially all Morgan Stanley's 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
Morgan Stanley Employee Stock Ownership Plan, which increased in fiscal 1995)
was $30 million, $14 million and $23 million, respectively.
Employee Stock Ownership Plan
The Company has 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 3.7 million preferred shares
outstanding at fiscal year end 1996, is held by the ESOP trust and is
convertible into 3.3 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 Morgan Stanley. 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 shareholders' 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 3.3 shares of the Company's common stock. If
the fair value of such 3.3 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, $13 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.
32
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma Effect of SFAS No. 123
Had the Company elected to recognize compensation cost pursuant to SFAS No.
123 for the Morgan Stanley and the Dean Witter Discover stock option plans and
the Dean Witter Discover Employee Stock Purchase Plan, net income would have
been reduced by $60 million and $111 million for fiscal year 1996 and 1995.
Primary and fully diluted earnings per common share would have been reduced by
$0.10 and $0.18 for fiscal year 1996 and 1995.
The weighted average fair value at date of grant for Morgan Stanley options
granted during fiscal 1996 and 1995 was $9.08 and $7.57 per option,
respectively. The fair value of Morgan Stanley options at date of grant was
estimated using the Black-Scholes option pricing model utilizing the following
weighted average assumptions.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------
1996 1995
---- ----
<S> <C> <C> <C>
Risk-free interest rate....................................... 5.5% 7.3%
Expected option life in years................................. 5.3 9.5
Expected stock price volatility............................... 27.5% 28.5%
Expected dividend yield....................................... 1.6% 2.0%
</TABLE>
The weighted average fair value at date of grant for Dean Witter Discover
options granted during fiscal 1996 and 1995 was $6.68 and $5.46 per option,
respectively. The fair value of Dean Witter Discover options at date of grant
was estimated using a binomial option pricing model utilizing the following
weighted average assumptions.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------
1996 1995
---- ----
<S> <C> <C> <C>
Risk-free interest rate....................................... 5.3% 7.7%
Expected option life in years................................. 5.5 5.5
Expected stock price volatility............................... 22.2% 22.2%
Expected dividend yield....................................... 1.7% 1.8%
</TABLE>
12. 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 pension plan that is qualified
under Section 401(a) of the Internal Revenue Code (the "Qualified Plan").
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.
33
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The following tables present information for the Dean Witter Discover
predecessor pension plans and Morgan Stanley predecessor pension plans on an
aggregate basis.
Pension expense includes the following components:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------
1996 1995 1994
----- ----- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
U.S. Plans
Service cost, benefits earned during the period........... $ 48 $ 35 $ 42
Interest cost on projected benefit obligation............. 58 50 47
Return on plan assets..................................... (111) (103) (15)
Difference between actual and expected return on assets... 20 20 (12)
Net amortization.......................................... 35 30 (23)
----- ----- ----
Total U.S. Plans............................................ 50 32 39
U.K. Plan
Service cost, benefits earned during the period........... 6 7 6
Interest cost on projected benefit obligation............. 3 3 2
Return on plan assets..................................... (4) (5) (2)
Difference between actual and expected return on assets... 1 2 (1)
----- ----- ----
Total U.K. Plan............................................. 6 7 5
Other international plans................................... 6 6 5
----- ----- ----
Total pension expense....................................... $ 62 $ 45 $ 49
===== ===== ====
</TABLE>
The following table provides the assumptions used in determining the
projected benefit obligation for the U.S. Plans and the U.K. Plan:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED 1996 ENDED 1995
-------------------- ---------------------
U.S.
PLANS U.K. PLAN U.S. PLANS U.K. PLAN
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Weighted average discount rate....... 7.50-7.75% 9.00% 7.25-7.50% 9.00%
Rate of increase in future compensa-
tion levels......................... 5.00% 7.00% 5.00% 7.00%
Expected long-term rate of return on
plan assets......................... 9.00% 9.00% 9.00% 9.00%
</TABLE>
34
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status of the U.S. Plans and the
U.K. Plan.
<TABLE>
<CAPTION>
AT FISCAL YEAR END 1996 AT FISCAL YEAR END 1995
-------------------------------- --------------------------------
U.S. PLANS U.S. PLANS
---------------------- ----------------------
QUALIFIED SUPPLEMENTAL U.K. PLAN QUALIFIED SUPPLEMENTAL U.K. PLAN
--------- ------------ --------- --------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value
of vested benefit
obligation............. $(592) $(38) $(59) $(561) $(33) $(31)
===== ==== ==== ===== ==== ====
Accumulated benefit
obligation............. $(636) $(59) $(61) $(600) $(54) $(31)
Effect of future salary
increases.............. (140) (19) -- (129) (18) (8)
----- ---- ---- ----- ---- ----
Projected benefit
obligation............. (776) (78) (61) (729) (72) (39)
Plan assets at fair
market value (primarily
listed stocks and
bonds)................. 785 -- 58 671 -- 43
----- ---- ---- ----- ---- ----
Projected benefit
obligation less than or
(in excess of) plan
assets................. 9 (78) (3) (58) (72) 4
Unrecognized net (gain)
or loss................ (15) 13 -- 50 12 (13)
Unrecognized prior
service cost........... 5 (4) -- 5 (4) --
Unrecognized net (asset)
obligation at January
1, 1987 net of
amortization........... -- 5 -- (2) 6 --
----- ---- ---- ----- ---- ----
Prepaid (accrued)
pension cost at fiscal
year-end............... $ (1) $(64) $ (3) $ (5) $(58) $(9)
===== ==== ==== ===== ==== ====
</TABLE>
Postretirement Benefits
The Company has unfunded postretirement benefit plans that provide medical
and life insurance for eligible retirees, employees and dependents. At fiscal
year end 1996 and 1995, the Company's obligation for these benefits was $67
million and $61 million.
Postemployment Benefits
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 for benefits provided to former or
inactive employees after employment but before retirement. These benefits were
not material to the consolidated financial statements in fiscal 1996, 1995 and
1994.
35
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1996 1995 1994
------ ----- ----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Current
U.S. federal............................................ $1,096 $ 730 $697
U.S state and local..................................... 290 205 222
Non-U.S................................................. 177 104 80
------ ----- ----
1,563 1,039 999
------ ----- ----
Deferred
U.S. federal............................................ (326) (120) (218)
U.S. state and local.................................... (74) (54) (88)
Non-U.S. ............................................... (26) (38) 12
------ ----- ----
(426) (212) (294)
------ ----- ----
Provision for income taxes................................ $1,137 $ 827 $705
====== ===== ====
The following table reconciles the provision to the U.S. federal statutory
income tax rate:
<CAPTION>
FISCAL YEAR
-------------------
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...................................... 4.6 4.2 4.1
Lower tax rates applicable to non-U.S. earnings........... (1.7) (2.9) (2.6)
Reduced tax rate applied to dividends..................... (0.1) (0.2) (0.2)
Other..................................................... (1.3) -- (0.4)
------ ----- ----
Effective income tax rate................................. 36.5% 36.1% 35.9%
====== ===== ====
</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, "Accounting for Income Taxes," 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 at fiscal year end 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
AT FISCAL
YEAR END
-------------
1996 1995
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Deferred tax assets
Employee compensation and benefit plans........................ $1,027 $ 793
Loan loss allowance............................................ 438 367
Other valuation and liability allowances....................... 283 280
Other.......................................................... 105 108
------ ------
Total deferred tax assets........................................ 1,853 1,548
------ ------
Deferred tax liabilities
Prepaid commissions............................................ 199 126
Valuation of inventory, investments and receivables............ 42 245
Other.......................................................... 160 138
------ ------
Total deferred tax liabilities................................... 401 509
------ ------
Net deferred tax assets.......................................... $1,452 $1,039
====== ======
</TABLE>
36
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. GEOGRAPHIC AREA DATA
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
1996 1995 1994 1996 1995 1994
------- ------- ------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
International
Europe................ $ 5,616 $ 4,551 $ 3,909 $ 1,429 $ 1,079 $ 852
Asia.................. 768 748 600 700 626 498
------- ------- ------- -------- -------- --------
Total............... 6,384 5,299 4,509 2,129 1,705 1,350
North America........... 24,236 18,110 14,317 10,187 8,374 7,584
Eliminations.......... (8,448) (4,677) (2,969) (299) (268) (311)
------- ------- ------- -------- -------- --------
Total............... $22,172 $18,732 $15,857 $ 12,017 $ 9,811 $ 8,623
======= ======= ======= ======== ======== ========
<CAPTION>
INCOME BEFORE TAXES IDENTIFIABLE ASSETS
------------------------- ----------------------------
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
1996 1995 1994 1996 1995 1994
------- ------- ------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
International
Europe................ $ 328 $ 237 $ 91 $113,734 $ 85,393 $ 71,774
Asia.................. 161 158 144 21,561 17,363 15,313
------- ------- ------- -------- -------- --------
Total............... 489 395 235 135,295 102,756 87,087
North America........... 2,628 1,897 1,727 242,510 178,009 160,732
Eliminations.......... -- -- -- (138,945) (98,804) (88,342)
------- ------- ------- -------- -------- --------
Total............... $ 3,117 $ 2,292 $ 1,962 $238,860 $181,961 $159,477
======= ======= ======= ======== ======== ========
</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.
15. SEGMENT INFORMATION
The Company is in the business of providing financial services, and operates
in two business segments--Securities and Credit Services. Securities engages
in delivering a broad range of financial products and services, including
asset management, to individual and institutional investors. Credit Services
is engaged in the issuance and servicing of general purpose credit cards,
consumer lending and electronic transaction processing services.
The following table presents certain information regarding these business
segments.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Total revenues
Securities........................................ $ 17,010 $ 14,398 $ 12,397
Credit Services................................... 5,162 4,334 3,460
Income before income taxes
Securities........................................ 2,403 1,571 1,290
Credit Services................................... 714 721 672
Identifiable assets at end of period(1)
Securities........................................ 212,769 158,104 141,576
Credit Services................................... 26,091 23,857 17,901
</TABLE>
- --------
(1) Corporate assets have been fully allocated to the Company's business
segments.
37
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. 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.
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 business would have increased the Company's
assets under administration at fiscal year end 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.
38
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1996
----------------------------------------------------
FISCAL QUARTER
----------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE
DATA) --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Investment banking.... $ 464 $ 599 $ 477 $ 650
Principal transac-
tions:
Trading............. 823 679 534 623
Investments......... (7) 38 29 26
Commissions........... 455 463 412 446
Merchant and
cardmember fees...... 320 346 379 461
Servicing fees........ 200 192 223 204
Interest and divi-
dends................ 2,794 2,809 3,038 2,647
Asset management and
administration....... 397 429 427 479
Other................. 28 34 20 34
------------ ------------ ------------ ------------
Total revenues....... 5,474 5,589 5,539 5,570
Interest expense...... 2,250 2,245 2,419 2,020
Provision for consumer
loan losses.......... 225 272 304 420
------------ ------------ ------------ ------------
Net revenues.......... 2,999 3,072 2,816 3,130
------------ ------------ ------------ ------------
Expenses excluding in-
terest
Compensation and bene-
fits................. 1,275 1,303 1,171 1,322
Occupancy and equip-
ment................. 119 120 122 132
Brokerage, clearing
and exchange fees.... 77 79 76 85
Information processing
and
communications....... 232 239 249 276
Business development.. 229 243 247 308
Professional services. 60 80 85 109
Other................. 167 164 158 173
------------ ------------ ------------ ------------
Total expenses ex-
cluding interest.... 2,159 2,228 2,108 2,405
------------ ------------ ------------ ------------
Income before income
taxes.................. 840 844 708 725
Provision for income
taxes.................. 322 304 250 261
------------ ------------ ------------ ------------
Net income.............. $ 518 $ 540 $ 458 $ 464
============ ============ ============ ============
Earnings applicable to
common shares(1)....... $ 502 $ 523 $ 443 $ 446
============ ============ ============ ============
Per common share(2)
Primary earnings(3)... $ 0.83 $ 0.87 $ 0.75 $ 0.76
Fully diluted earn-
ings(3).............. $ 0.81 $ 0.86 $ 0.73 $ 0.74
Dividends to common
shareholders......... $ 0.11 $ 0.11 $ 0.11 $ 0.11
Book value............ $ 15.86 $ 16.42 $ 16.93 $ 18.43
Average common and
equivalent shares(2)
Primary............... 606,585,943 600,219,450 591,882,036 587,117,776
Fully diluted......... 620,807,404 612,616,954 604,879,722 601,438,805
Stock price range....... $22.50-29.00 $25.56-31.06 $24.13-28.88 $27.56-34.38
</TABLE>
- --------
(1) Amounts shown are used to calculate primary earnings per share.
(2) Per share and share data have been restated to reflect the Company's two-
for-one stock splits.
(3) Summation of the quarters' earnings per common share may not equal the
annual amounts due to the averaging effect of the number of shares and share
equivalents throughout the year.
39
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. QUARTERLY RESULTS (UNAUDITED)--CONTINUED
<TABLE>
<CAPTION>
1995
----------------------------------------------------
FISCAL QUARTER
----------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE
DATA) --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Investment banking.... $ 282 $ 322 $ 400 $ 552
Principal transac-
tions:
Trading............. 323 559 474 329
Investments......... 19 (6) 69 39
Commissions........... 345 379 396 413
Merchant and
cardmember fees...... 240 265 286 344
Servicing fees........ 172 174 188 163
Interest and divi-
dends................ 2,617 2,555 2,743 2,615
Asset management
and administration... 337 339 348 353
Other................. 30 27 17 24
------------ ------------ ------------ ------------
Total revenues....... 4,365 4,614 4,921 4,832
Interest expense...... 2,085 2,040 2,126 1,939
Provision for consumer
loan losses.......... 118 136 190 287
------------ ------------ ------------ ------------
Net revenues.......... 2,162 2,438 2,605 2,606
------------ ------------ ------------ ------------
Expenses excluding in-
terest
Compensation and bene-
fits................. 850 965 1,086 1,104
Occupancy and equip-
ment................. 110 110 116 118
Brokerage, clearing
and exchange fees.... 67 76 75 71
Information processing
and
communications....... 203 224 219 243
Business development.. 191 193 234 256
Professional services. 67 63 56 66
Other................. 182 171 165 179
Relocation charge..... 59 -- -- --
------------ ------------ ------------ ------------
Total expenses
excluding interest.. 1,729 1,802 1,951 2,037
------------ ------------ ------------ ------------
Income before income
taxes.................. 433 636 654 569
Provision for income
taxes.................. 164 233 226 204
------------ ------------ ------------ ------------
Net income.............. $ 269 $ 403 $ 428 $ 365
============ ============ ============ ============
Earnings applicable to
common shares(1)....... $ 253 $ 387 $ 411 $ 349
============ ============ ============ ============
Per common share(2)
Primary earnings(3)... $ 0.42 $ 0.63 $ 0.67 $ 0.57
Fully diluted earn-
ings(3).............. $ 0.41 $ 0.62 $ 0.66 $ 0.56
Dividends to common
shareholders......... $ 0.08 $ 0.08 $ 0.08 $ 0.08
Book value............ $ 13.68 $ 14.28 $ 14.87 $ 15.63
Average common and
equivalent shares(2)
Primary............... 601,430,183 610,745,761 612,454,663 613,132,181
Fully diluted......... 615,207,907 624,500,649 627,069,025 625,554,424
Stock price range....... $16.75-21.69 $20.00-24.38 $23.19-29.13 $23.25-28.06
</TABLE>
- --------
(1) Amounts shown are used to calculate primary earnings per share.
(2) Per share and share data have been restated to reflect the Company's two-
for-one stock splits.
(3) Summation of the quarters' earnings per common share may not equal the
annual amounts due to the averaging effect of the number of shares and share
equivalents throughout the year.
40
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
FIVE YEAR SUMMARY OF FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Investment banking.............. $ 2,190 $ 1,556 $ 1,102 $ 1,642 $ 1,233
Principal transactions:
Trading....................... 2,659 1,685 1,614 1,778 1,556
Investments................... 86 121 154 157 98
Commissions..................... 1,776 1,533 1,323 1,284 1,022
Merchant and cardmember fees.... 1,506 1,135 940 771 641
Servicing fees.................. 819 697 586 533 413
Interest and dividends.......... 11,288 10,530 8,715 7,336 6,755
Asset management and administra-
tion........................... 1,732 1,377 1,317 1,074 879
Other........................... 116 98 106 77 81
-------- -------- -------- -------- --------
Total revenues................ 22,172 18,732 15,857 14,652 12,678
Interest expense................ 8,934 8,190 6,697 5,620 5,346
Provision for consumer loan loss-
es............................... 1,221 731 537 443 472
-------- -------- -------- -------- --------
Net revenues.................. 12,017 9,811 8,623 8,589 6,860
-------- -------- -------- -------- --------
Expenses excluding interest
Compensation and benefits....... 5,071 4,005 3,535 3,687 2,972
Other........................... 3,829 3,455 3,126 2,727 2,374
Relocation charge............... -- 59 -- -- --
-------- -------- -------- -------- --------
Total expenses excluding in-
terest....................... 8,900 7,519 6,661 6,414 5,346
-------- -------- -------- -------- --------
Gain on sale of subsidiary stock.. -- -- -- -- 32
-------- -------- -------- -------- --------
Income before income taxes........ 3,117 2,292 1,962 2,175 1,546
Provision for income taxes........ 1,137 827 705 803 586
-------- -------- -------- -------- --------
Net income before cumulative
effect of accounting change...... 1,980 1,465 1,257 1,372 960
Cumulative effect of accounting
change........................... -- -- -- -- 37
-------- -------- -------- -------- --------
Net income........................ $ 1,980 $ 1,465 $ 1,257 $ 1,372 $ 923
======== ======== ======== ======== ========
Earnings applicable to common
shares(1)........................ $ 1,914 $ 1,400 $ 1,192 $ 1,317 $ 873
======== ======== ======== ======== ========
PER SHARE DATA:(2)(3)
Earnings per common share
Primary......................... $ 3.22 $ 2.30 $ 1.96 $ 2.24 $ --
Fully diluted................... 3.14 2.25 1.93 2.20 --
Book value per common share....... 18.43 15.63 13.38 11.43 --
Dividends per common share........ 0.44 0.32 0.25 0.15 --
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER OPER-
ATING DATA:
Total assets................. $238,860 $181,961 $159,477 $161,519 $137,503
Consumer loans............... 23,188 21,556 16,174 12,148 9,795
Total capital(4)............. 31,152 24,644 20,933 15,112 9,014
Long-term borrowings(4)...... 19,450 14,636 12,352 7,702 3,156
Shareholders' equity......... 11,702 10,008 8,581 7,410 5,858
Return on average sharehold-
ers' equity(5).............. 20.0% 16.4% 15.8% 21.7% 17.5%
</TABLE>
- --------
(1) Amounts shown are used to calculate primary earnings per common share.
(2) Per share data have been restated to reflect the Company's two-for-one
stock splits.
(3) Prior to 1993, Dean Witter Discover was not a public company and
therefore, per share data was not meaningful.
(4) These amounts exclude the current portion of long-term borrowings and
include Capital Units.
(5) Return on average shareholders' equity for 1992 excludes the effects of a
$37 million charge for the cumulative effect of a change in the method of
accounting for postretirement benefits other than pensions, a non-
recurring gain of $32 million from the initial public offering of SPS
Transaction Services, Inc. common stock and a $133 million capital
contribution from Sears, Roebuck and Co. on December 31, 1992.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The Company
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the
"Merger"). At that time Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. (the "Company"). In conjunction
with the Merger, each share of Morgan Stanley common stock then outstanding
was converted into the right to receive 1.65 shares of the Company's common
stock (the "Exchange Ratio"), and each share of Morgan Stanley preferred stock
was converted into the right to receive one share of a corresponding series of
preferred stock of the Company. The Merger was treated as a tax free exchange.
The Company is a preeminent global financial services firm that maintains
leading market positions in each of its business segments--securities, which
includes asset management, and credit services. The Company combines three
well recognized brands in the financial services industry: Discover(R) Card,
Morgan Stanley and Dean Witter. The Company combines Morgan Stanley's global
strengths in investment banking, including the origination of quality
underwritten public offerings, mergers and acquisitions and other financial
advisory services, institutional sales and trading and global asset management
with Dean Witter Discover's strengths in providing investment and asset
management services to its customers and in providing quality consumer credit
products to its customers, primarily through its Discover Card brand. At
fiscal year end 1996, the Company had the third largest account executive
sales organization in the United States, with approximately 9,100 professional
account executives and 371 branches, and one of the largest global asset
management operations with total assets under management and administration of
$271 billion. In addition, based on its approximately 39 million general
purpose credit card accounts at fiscal year end 1996, the Company is the
nation's largest credit card issuer as measured by number of accounts and
cardmembers.
Basis of Financial Information
The supplemental consolidated financial statements give retroactive effect
to the merger of Dean Witter Discover and Morgan Stanley in a transaction
accounted for as a pooling of interests. The pooling of interests method of
accounting requires the restatement of all periods presented as if Dean Witter
Discover and Morgan Stanley had always been combined. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of the Company and its subsidiaries after financial statements
covering the date of consummation of the business combination are issued. The
supplemental consolidated statement of changes in shareholders' equity
reflects the accounts of the Company as if the additional preferred and common
stock had been issued during all the periods presented. The supplemental
consolidated financial statements, including the notes thereto, should be read
in conjunction with the historical consolidated financial statements of Dean
Witter Discover and Morgan Stanley, included in their Annual Reports on Form
10-K for the fiscal years ended December 31, 1996 and November 30, 1996,
respectively.
Prior to the consummation of the merger, Dean Witter Discover's fiscal year
ended on December 31 and Morgan Stanley's fiscal year ended on November 30. In
recording the pooling of interests combination, Dean Witter Discover's
financial statements for the fiscal years ended December 31, 1996, 1995 and
1994 were combined with Morgan Stanley's financial statements for the fiscal
years ended November 30, 1996, 1995 and 1994 (on a combined basis, "fiscal
year 1996," "fiscal year 1995," and "fiscal year 1994," respectively).
Certain reclassifications have been made to prior year amounts to conform to
the current presentation. All material intercompany balances and transactions
have been eliminated.
3
<PAGE>
RESULTS OF OPERATIONS
The Company's results of operations may be materially affected by market
fluctuations and by economic factors. The Company's securities 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, which, among
other things, affects the flow of investment dollars into mutual funds, and
the size, number and timing of transactions or assignments (including
realization of returns from the Company's principal and merchant banking
investments). In the Company's credit services business, changes in economic
variables may substantially affect consumer loan growth and credit quality. 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, mutual fund
groups 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 and retail
securities firms 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. Competitive factors also affect
the Company's success in attracting and retaining clients and assets through
its ability to meet investors' saving and investment needs through consistency
of investment performance and accessibility to financial products and advice.
In the credit services industry, competition centers on merchant acceptance of
credit cards, credit card account acquisition and customer utilization of
credit cards. Merchant acceptance is based on both competitive transaction
pricing and the volume of credit cards in circulation. Credit card account
acquisition and customer utilization are driven by the offering of credit
cards with competitive and appealing features such as no annual fees, low
introductory interest rates and other customized features targeting specific
consumer groups.
As a result of the above economic and competitive factors, 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. 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 activities,
emphasizing fee-based assets that are designed to generate a continuing stream
of revenues, managing risks, evaluating credit product pricing and monitoring
costs will continue to affect the overall financial results of the Company. 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.
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. These acquisitions, along
with the Merger, combine the well-developed distribution and customer
servicing strengths of Dean Witter InterCapital Inc. ("ICAP") and VKAC with
the well-regarded investment performance record of Morgan Stanley Asset
Management and MAS. In
4
<PAGE>
addition, in April 1997, the Company announced the acquisition of Barclays
PLC's institutional global custody business, which will also strengthen the
Company's global franchise, particularly in Europe, and increase fee-based
revenues.
The favorable market and economic conditions which characterized fiscal 1995
continued throughout fiscal 1996, contributing to higher industry wide
securities revenues and to record levels of earnings and net revenues for the
Company's securities business. The Company's performance in fiscal 1996
reflected the balanced mix of its global securities business coupled with
these favorable market conditions. All of the Company's core businesses
generated record earnings. In addition, the Company's securities business
ended the fiscal year with record levels of account executives, customer
accounts and assets, and assets under management and administration.
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 kept the Federal Reserve from altering interest rates from
January, 1996 through fiscal year end 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 relatively weak throughout the year,
reflecting a lackluster economic outlook, as wells 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.
In fiscal 1996, consumer demand and retail sales continued to increase,
favorably impacting credit card transaction volume and consumer loan growth.
In fiscal 1996, the Company continued to invest in growth through the
expansion of its NOVUS Network and by increasing its marketing and
solicitation activities. The NOVUS Network is the third largest credit card
network in the United States and consists of merchant and cash access
locations that accept the Discover Card and other cards that carry the NOVUS
logo. In fiscal 1996, the Company launched its first NOVUS affinity credit
card program--the National Alliance for Species SurvivalSM Card. Credit
Services ended the year with record levels of NOVUS Network merchant
locations, general purpose credit card accounts and transaction volume, and
consumer loans.
The Company achieved net income of $1,980 million in fiscal 1996, a 35%
increase from fiscal 1995. In fiscal 1995, net income increased 17% to $1,465
million. Primary earnings per common shares increased 40% to $3.22 in fiscal
1996 and 17% to $2.30 in fiscal 1995. Fully diluted earnings per common share
increased 40% to $3.14 in fiscal 1996 and 17% to $2.25 in fiscal 1995. The
Company's return on average shareholders' equity was 20% in fiscal 1996 and
16% in fiscal 1995 and fiscal 1994.
The remainder of Management's Discussion and Analysis is presented on a
business segment basis. Substantially all of the operating revenues and
operating expenses of the Company can be directly attributed to its two
business segments, securities, which includes asset management, and credit
services. Certain reclassifications have been made to prior period amounts to
conform to the current presentation.
5
<PAGE>
SECURITIES STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Revenues
Investment banking..................... $ 2,190 $ 1,556 $ 1,102 $ 1,642 $1,233
Principal transactions:
Trading............................... 2,659 1,685 1,614 1,778 1,556
Investments........................... 86 121 154 157 98
Commissions............................ 1,776 1,533 1,323 1,284 1,022
Interest and dividends................. 8,460 8,031 6,782 5,862 5,189
Asset management and administration.... 1,732 1,377 1,317 1,074 879
Other.................................. 107 95 105 75 70
------- ------- ------- ------- ------
Total revenues........................ 17,010 14,398 12,397 11,872 10,047
Interest expense........................ 7,845 7,205 6,014 5,079 4,646
------- ------- ------- ------- ------
Net revenues.......................... 9,165 7,193 6,383 6,793 5,401
------- ------- ------- ------- ------
Expenses excluding interest
Compensation and benefits.............. 4,566 3,566 3,161 3,361 2,677
Occupancy and equipment................ 429 403 374 347 342
Brokerage, clearing and exchange fees.. 317 289 276 230 198
Information processing and communica-
tions................................. 509 470 426 366 334
Business development................... 290 229 259 214 181
Professional services.................. 280 203 204 160 130
Other.................................. 371 403 393 450 355
Relocation charge...................... -- 59 -- -- --
------- ------- ------- ------- ------
Total expenses excluding interest..... 6,762 5,622 5,093 5,128 4,217
------- ------- ------- ------- ------
Income before income taxes and cumula-
tive effect of
accounting change...................... 2,403 1,571 1,290 1,665 1,184
Provision for income taxes.............. 872 553 448 613 463
------- ------- ------- ------- ------
Income before cumulative effect of ac-
counting change........................ 1,531 1,018 842 1,052 721
Cumulative effect of accounting change,
net of income
taxes.................................. -- -- -- -- 30
------- ------- ------- ------- ------
Net income............................ $ 1,531 $ 1,018 $ 842 $ 1,052 $ 691
======= ======= ======= ======= ======
Preferred stock dividend requirements... $ 66 $ 65 $ 65 $ 55 $ 50
======= ======= ======= ======= ======
Earnings applicable to common shares.... $ 1,465 $ 953 $ 777 $ 997 $ 641
======= ======= ======= ======= ======
</TABLE>
SECURITIES
Securities provides a wide range of financial products, services and
investment advice to individual and institutional investors. Securities
business activities are conducted in the United States and in 19 other
countries and include investment banking, research, institutional sales and
trading and global asset management, and investment and asset management
products and services for individual clients. At fiscal year end 1996, the
Company served the needs of over 3.2 million individual and institutional
clients with assets of $478 billion. The Company had the third largest account
executive sales organizations in the United States with approximately 9,100
professional account executives and 371 branches at fiscal year end 1996. With
well-recognized brand names, including those associated with ICAP, VKAC,
Morgan Stanley Asset Management and MAS, the Company has one of the largest
global asset management operations with total assets under management and
administration of $271 billion at fiscal year end 1996.
6
<PAGE>
Securities achieved record net revenues and net income of $9,165 million and
$1,531 million in fiscal 1996, increases of 27% and 50%, respectively, from
fiscal 1995. In fiscal 1995, Securities net revenues and net income increased
13% and 21%, respectively, from fiscal 1994. The Company's fiscal 1996 and
1995 levels of net revenues and net income in its securities businesses
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 in both years 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 growth in net income in both
years was impacted by favorable business environments, the Company's focus on
accumulating client assets and building fee-based assets under management and
administration.
INVESTMENT BANKING
Investment banking revenues are derived from the underwriting of securities
offerings and fees from advisory services. Investment banking revenues were as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Debt underwriting revenues........................... $ 620 $ 431 $ 300
Equity underwriting revenues......................... 722 503 432
Advisory fees from merger, acquisition and
restructuring transactions.......................... 848 622 370
------ ------ ------
Total investment banking revenues.................. $2,190 $1,556 $1,102
====== ====== ======
</TABLE>
Investment banking revenues attained record levels in fiscal 1996 due to
increased revenues from merger, acquisition and restructuring transactions, as
well as increased levels of equity and debt underwriting activities.
Investment banking revenues increased in fiscal 1995 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.
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 in fiscal 1996 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. Advisory fees increased in fiscal 1995, benefiting from an active
worldwide market and the broad range of strategic advisory services provided to
clients in many of the year's most active industry sectors, including banking
and financial services, media, telecommunications, health care and technology.
Equity underwriting revenues increased in fiscal 1996, 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. Equity underwriting revenues in fiscal 1995
were positively affected by favorable market conditions in both the U.S. and
Europe, which included continued strong demand for initial public offerings,
increased corporate restructuring, diminished concerns about inflation and
lower interest rates. The Company increased its market share for worldwide
equity underwriting in fiscal 1995 and lead-managed a number of innovative and
notable transactions.
In fiscal 1996, revenues from debt financing activity were positively
affected by a relatively stable interest rate environment as the Federal
Reserve Board maintained short-term interest rates at a constant level
subsequent
7
<PAGE>
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 revenues increased in fiscal 1995,
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 1995 as economic growth and inflation remained stable.
PRINCIPAL TRANSACTIONS
Principal transactions include revenues from customers' purchases and sales
of securities in which the Company acts as principal, and gains and losses on
securities held for resale. Principal trading revenues were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Equities............................................. $1,181 $ 728 $ 592
Fixed income......................................... 1,172 710 769
Foreign exchange..................................... 169 177 151
Commodities.......................................... 137 70 102
------ ------ ------
Total principal trading revenues................... $2,659 $1,685 $1,614
====== ====== ======
</TABLE>
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.
Equity trading revenues in fiscal 1995 increased reflecting 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 in fiscal 1996, primarily due to
higher revenues from high-yield, emerging market, 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.
Fixed income trading revenues increased in fiscal 1995. The Company's global
corporate, emerging market and high-yield activities produced substantially
higher revenue levels in fiscal 1995 as conditions stabilized globally,
specifically in Mexico and the emerging markets.
Revenues from foreign exchange trading in fiscal 1996 were affected by
decreased volatility, driven by the narrowing of inflation rates around the
world and the approaching European monetary union. Revenues from foreign
exchange trading improved in fiscal 1995, primarily attributable to periods of
increased volatility in the first half of fiscal 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 fiscal 1995.
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
8
<PAGE>
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. Revenues from commodities trading declined in fiscal 1995, resulting
from difficult market conditions in most energy-related products.
Principal transaction investment revenues aggregating $86 million were
recognized in fiscal 1996 as compared with $121 million in fiscal 1995. The
lower levels 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. Principal investment revenues
of $154 million in fiscal 1994 included revenues related to the increase in
the carrying value of the Company's merchant banking investment in Southern
Pacific Corporation and several real estate investments.
COMMISSIONS
Commission revenues increased in fiscal 1996, primarily reflecting increased
market participation by investors resulting from favorable market conditions
and a strong primary calendar, particularly in the U.S., and an increase in
sales of mutual fund and insurance products. In addition, commission revenues
improved as institutional investors purchased more foreign and emerging market
issuances. Commission revenues increased in fiscal 1995 primarily reflecting
higher levels of activity as market participation by investors increased.
Additionally, increased primary equity activities in fiscal 1995 contributed
toward higher volumes in secondary markets.
NET INTEREST
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, customer margin loans 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. Net interest revenues increased in
fiscal 1995, primarily attributable to higher net interest income from margin
lending, partially offset by lower net interest revenues due to the continuing
effect of a flat yield curve in the U.S. 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.
ASSET MANAGEMENT AND ADMINISTRATION
Asset management and administration revenues include fees for asset
management services, including fees for investment management and for
promoting and distributing mutual funds ("12b-1 fees"), other administrative
fees and non-interest revenues earned from correspondent clearing and custody
services. Fund management fees arise from investment management services the
Company provides to registered investment companies (the "funds") pursuant to
various contractual arrangements. The Company receives management fees based
upon each fund's average daily net assets. The Company receives 12b-1 fees for
services it provides in promoting and distributing certain open-ended funds.
These fees are based on the lesser of average daily fund asset balances or
average daily aggregate net fund sales and are affected by changes in the
overall level and mix of assets under management and administration.
9
<PAGE>
Asset management and administration revenues were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Asset management and administration revenues....... $ 1,732 $ 1,377 $ 1,317
======= ======= =======
(DOLLARS IN BILLIONS)
Customer assets under management or supervision $ 271 $ 144 $ 123
(at fiscal year-end).............................. ======= ======= =======
Customer assets under administration $ 144 $ 111 $ 90
(at fiscal year-end).............................. ======= ======= =======
</TABLE>
In fiscal 1996, asset management and administration revenues increased
reflecting growth in both asset management activities, including the
acquisition of MAS, and global clearing and custody services resulting from
the Company's continuing strategic emphasis on these businesses, as well as
higher revenues from 12b-1 fees. The increase in fiscal 1995 asset management
and administration revenues reflected higher levels of customer assets under
management and administration.
As of fiscal year end 1996, assets under management or supervision had
increased significantly, reflecting the addition of $40 billion of assets from
MAS and $61 billion of assets from VKAC during the year. The increase in
assets under management in both fiscal 1996 and fiscal 1995 reflected
appreciation in the value of customer portfolios, particularly in equity
funds, as well as continued growth in international and emerging market funds.
At fiscal year end 1996, approximately $120 billion of assets under management
were invested in
mutual funds primarily offered to individual customers and approximately $112
billion of assets under management (including approximately $36 billion
invested in international related products) were invested in products
primarily offered to institutional clients, composed of approximately $35
billion in institutional mutual funds and approximately $77 billion in
separate accounts, pooled vehicles and other arrangements. The remaining
amounts primarily include assets in fiduciary accounts, unit investment trusts
and the Company's Investment Consulting Services accounts. Among mutual funds
primarily offered to individual customers, at fiscal year end 1996,
approximately 43% of the Company's assets under management were invested in
equity securities, 36% in fixed income securities and 21% in short-term
investments. Among products primarily offered to institutional clients, at
fiscal year end 1996, 50% consisted of equity products, 43% consisted of fixed
income products and 7% consisted of balanced products.
Customer assets under administration also increased in fiscal 1996 and
fiscal 1995, reflecting in both years additional assets placed under custody
with the Company, as well as appreciation in the value of customer portfolios.
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 previously 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 fiscal year end 1996, to approximately $394
billion on a pro forma basis (assuming that 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.
10
<PAGE>
EXPENSES EXCLUDING INTEREST
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Compensation and benefits............................ $4,566 $3,566 $3,161
Occupancy and equipment.............................. 429 403 374
Brokerage, clearing and exchange fees................ 317 289 276
Information processing and communications ........... 509 470 426
Business development................................. 290 229 259
Professional services................................ 280 203 204
Other................................................ 371 403 393
Relocation charge.................................... -- 59 --
------ ------ ------
Total expenses excluding interest.................. $6,762 $5,622 $5,093
====== ====== ======
</TABLE>
Fiscal 1996's total non-interest expenses increased significantly from prior
year levels. Total non-interest expenses increased $1,140 million over fiscal
1995 expenses. Within that category, employee compensation and benefits
expense increased $1,000 million, reflecting increased levels of incentive
compensation based on record fiscal 1996 revenues and earnings, 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, and
higher costs related to training new account executives. Other non-interest
costs increased $199 million (excluding the $59 million relocation charge
discussed below) over fiscal 1995 expenses, including $48 million of operating
costs related to MAS and VKAC. Occupancy and equipment expenses increased over
fiscal 1995 expenses, principally reflecting costs associated with the
relocation of Morgan Stanley's New York offices, new leased office space in
Tokyo, and the occupancy costs of MAS and VKAC. Brokerage, clearing and
exchange fees increased over fiscal 1995 expenses, reflecting increased trade
volumes, both in the U.S. and in Europe, and the continued growth in the
international component of the Company's sales and trading activities.
Information processing and communications costs increased in fiscal 1996 due
to continued emphasis on technology initiatives. Business development and
professional services expenses increased in fiscal 1996, 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 decreased in fiscal 1996, which primarily reflects
a reduction in litigation expenses partially offset by the amortization of
goodwill related to the acquisitions of MAS and VKAC.
Fiscal 1995's total non-interest expenses increased $529 million from fiscal
1994. Within that category, employee compensation and benefits expense
increased $405 million, reflecting increased levels of incentive compensation
based on higher revenues and earnings as well as the impact of salaries and
benefits relating to additional personnel hired during 1994. Other non-
interest expenses increased $65 million (excluding the $59 million relocation
charge discussed below). Occupancy and equipment expenses increased,
reflecting costs associated with the relocation of Morgan Stanley's New York
offices. Brokerage, clearing and exchange fees increased, reflecting increased
trade volumes, business mix changes and the growth in international sales and
trading. Information processing and communications expenses increased due to
the expansion of the Company's global business activities and increased
spending on information technology equipment. Business development expense
decreased in fiscal 1995, reflecting significantly lower recruiting and travel
costs directly related to the Company's cost-containment initiatives. Fiscal
1995 expenses include a pretax relocation charge of $59 million relating to
the decision to vacate much of Morgan Stanley's 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 relocation charge
also includes similar charges relating to Morgan Stanley's move of its Tokyo
office to newly leased space.
CREDIT SERVICES
Credit Services focuses on the delivery of financial products to consumers
through its four business units: NOVUS Services, Prime Option Services, SPS
and NOVUS Financial.
11
<PAGE>
Credit Services is the largest single issuer of general purpose credit cards
in the United States as measured by number of accounts and cardmembers.
Consumers use general purpose credit cards to purchase goods and services and
obtain cash advances. Credit Services proprietary general purpose credit cards
are issued by NOVUS Services, which operates the NOVUS Network. These include
the Discover Card, the Private Issue(R) Card, the BRAVOSM Card and an affinity
program card. The Prime OptionSM MasterCard(R) is a co-branded general purpose
credit card issued by NationsBank of Delaware, N.A., and serviced by Prime
Option Services. SPS is a 74% owned, publicly held subsidiary. SPS services
include electronic transaction processing, consumer private label credit card
program administration, commercial accounts receivable processing and call
center teleservices. NOVUS Financial is a consumer finance business which
emphasizes real estate-secured lending. NOVUS Financial originates loans
through the DWR account executive sales organization, Allstate insurance
agents, other third-party sales forces and direct response marketing.
CREDIT SERVICES STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1996 1995 1994 1993 1992
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Merchant and cardmember fees................... $1,506 $1,135 $ 940 $ 771 $ 641
Servicing fees................................. 819 697 586 533 413
Other.......................................... 9 3 1 2 11
------ ------ ----- ----- -----
Total non-interest revenues................... 2,334 1,835 1,527 1,306 1,065
------ ------ ----- ----- -----
Interest revenue............................... 2,828 2,499 1,933 1,474 1,566
Interest expense............................... 1,089 985 683 541 700
------ ------ ----- ----- -----
Net interest income........................... 1,739 1,514 1,250 933 866
Provision for consumer loan losses............. 1,221 731 537 443 472
------ ------ ----- ----- -----
Net credit income............................. 518 783 713 490 394
------ ------ ----- ----- -----
Net operating revenues........................ 2,852 2,618 2,240 1,796 1,459
------ ------ ----- ----- -----
Employee compensation and benefits............. 505 439 374 326 295
Marketing and business development............. 736 645 514 378 317
Information processing and communications...... 487 419 341 304 257
Facilities and equipment....................... 64 51 47 38 39
Other.......................................... 346 343 292 240 221
------ ------ ----- ----- -----
Total non-interest expenses................... 2,138 1,897 1,568 1,286 1,129
------ ------ ----- ----- -----
Gain on sale of subsidiary stock............... -- -- -- -- 32
------ ------ ----- ----- -----
Income before income taxes and cumulative
effect of accounting change................... 714 721 672 510 362
Provision for income taxes..................... 265 274 257 190 123
------ ------ ----- ----- -----
Income before cumulative effect of accounting
change........................................ 449 447 415 320 239
Cumulative effect of accounting change, net of
income taxes.................................. -- -- -- -- 7
------ ------ ----- ----- -----
Net income..................................... $ 449 $ 447 $ 415 $ 320 $ 232
====== ====== ===== ===== =====
</TABLE>
In fiscal 1996, Credit Services net income of $449 million remained level
compared to fiscal 1995. Credit Services net income increased 8% in fiscal
1995 to $447 million. In fiscal 1996, the effects of higher levels of general
purpose credit card accounts, transaction volume and loans, and increased
credit card fee revenues were offset by a higher rate of credit losses. The
increase in fiscal 1995 was primarily due to higher levels of general purpose
credit card accounts, transaction volume and loans, partially offset by
increased investments in growth and a higher rate of credit losses.
12
<PAGE>
Credit Services statistical data was as follows (dollars in billions).
<TABLE>
<CAPTION>
AT FISCAL YEAR END
-----------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Consumer loans
Owned..................................... $23.2 $21.6 $16.2 $12.1 $ 9.8
Managed................................... 36.6 31.8 26.1 21.2 18.5
General Purpose Credit Card transaction vol-
ume........................................ 53.6 47.5 40.1 32.8 27.5
</TABLE>
MERCHANT AND CARDMEMBER FEES
Merchant and cardmember fees include revenues from fees charged to merchants
on credit card sales, late payment fees, credit insurance fees, overlimit
fees, cash advance fees, transaction processing services and the
administration of credit card programs.
Merchant and cardmember fees increased 33% in fiscal 1996 and 21% in fiscal
1995. The increase in fiscal 1996 was due to higher revenues from overlimit
fees, merchant fees, late payment fees and credit insurance fees. The increase
in fiscal 1995 was due to higher revenues from merchant fees, credit insurance
fees and late payment fees, partially offset by the absence of fees from
Income Tax Refund Anticipation Loans. Overlimit fees were implemented in March
1996 and the amount of the fee was increased in the fourth quarter of fiscal
1996. In both years, the increases in merchant fee revenues were due to
continued growth in general purpose credit card transaction volume. The
increase in late payment fee revenues in fiscal 1996 was due to an increase in
the amount of the late payment fee charged, an increase in the incidence of
late payments and a tightening, in the fourth quarter of fiscal 1996, of late
payment fee terms. The increased incidence of late payments was attributable
to a higher level of delinquent accounts and an increase in active credit card
accounts. The increase in late payment fee revenues in fiscal 1995 was due to
an increase in the incidence of late payments due to an increased number of
active credit card accounts and a higher incidence of delinquent accounts. In
both years, the increases in credit insurance fees were due to higher
enrollments and favorable loss experience rebates.
SERVICING FEES
Servicing fees are revenues derived from consumer loans which have been sold
through asset securitizations. Cash flows from the interest yield and
cardmember fees generated by securitized loans are used to pay investors in
these loans a predetermined fixed or floating rate of return on their
investment, to reimburse the investors for losses of principal through charged
off loans and to pay the Company a fee for servicing the loans. Any excess
cash flows remaining are paid to the Company. The servicing fees and excess
net cash flows paid to the Company are reported as servicing fees in the
consolidated statements of income. The sale of consumer loans through asset
securitizations therefore has the effect of converting portions of net credit
income and fee income to servicing fees.
The table below presents the components of servicing fees (dollars in
millions).
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Merchant and cardmember fees............ $ 307 $ 137 $ 109 $ 97 $ 69
Interest revenue........................ 2,055 1,695 1,385 1,457 1,233
Interest expense........................ (809) (708) (573) (641) (571)
Provision for loan losses............... (734) (427) (335) (380) (318)
------ ------ ------ ------ ------
Servicing fees.......................... $ 819 $ 697 $ 586 $ 533 $ 413
====== ====== ====== ====== ======
</TABLE>
Servicing fees are affected by the level of securitized loans, the spread
between the interest yield on the securitized loans and the yield paid to the
investors, the rate of credit losses on securitized loans and the level of
cardmember fees earned from securitized loans. Servicing fees also include the
effects of interest rate contracts entered into by the Company as part of its
interest rate risk management program. Servicing fees increased 18% in fiscal
1996 and 19% in fiscal 1995. The increases in both years were due to higher
net interest cash flows and
13
<PAGE>
cardmember fees from securitized loans partially offset by increased credit
losses from securitized loans. The increased net interest cash flows were due
to higher average levels of securitized loans. As discussed under merchant and
cardmember fees, the higher cardmember fees were due to increased late payment
fees and in fiscal 1996, overlimit fees. The increases in credit losses were
due to a higher rate of credit losses on securitized loans and an increase in
the average level of securitized loans. The higher rate of credit losses was
consistent with the industry-wide trend of increasing credit loss rates as
discussed under provision for loan losses.
NET INTEREST INCOME
Net interest income is equal to the difference between interest revenue
derived from Credit Services consumer loan and short-term investment assets
and interest expense incurred to finance those assets. Credit Services assets,
primarily consumer loans, earn interest revenue at both fixed rates and market
indexed variable rates. The Company incurs interest expense at fixed and
floating rates to finance Credit Services assets. Interest expense also
includes the effects of interest rate contracts entered into by the Company as
part of its interest rate risk management program. This program is designed to
reduce the volatility of earnings resulting from changes in interest rates and
is accomplished primarily through matched financing which entails matching the
repricing schedules of consumer loans and the related financing.
The following tables present analyses of Credit Services average balance
sheets and interest rates in fiscal 1996, fiscal 1995 and fiscal 1994, and
changes in net interest income during those years.
CREDIT SERVICES AVERAGE BALANCE SHEET ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE INTEREST BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ----- -------- ------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
General purpose credit
card loans............. $17,083 13.99% $2,391 $14,691 14.75% $2,167 $11,914 14.81% $1,764
Other consumer loans.... 2,834 12.72 360 2,319 12.08 280 1,131 11.71 132
Investment securities... 234 5.38 13 195 5.85 11 196 4.56 9
Other................... 1,149 5.59 64 667 6.02 41 578 4.78 28
------- ----- ------ ------- ----- ------ ------- ----- ------
Total interest
earning assets...... 21,300 13.28 2,828 17,872 13.98 2,499 13,819 13.99 1,933
Allowance for loan
losses................. (682) (610) (472)
Non-interest earning 1,380 1,250 994
assets................. ------- ------- -------
Total assets......... $21,998 $18,512 $14,341
======= ======= =======
LIABILITIES & SHAREHOLDER'S EQUITY
Interest bearing
liabilities:
Interest bearing
deposits
Savings................ $ 1,021 4.58% $ 47 $ 1,050 4.71% $ 49 $ 1,182 3.92% $ 46
Brokered............... 3,418 6.93 237 3,222 7.21 232 3,067 7.30 224
Other time............. 1,921 6.05 116 1,278 6.41 82 770 5.46 42
------- ----- ------ ------- ----- ------ ------- ----- ------
Total interest
bearing deposits.... 6,360 6.29 400 5,550 6.55 363 5,019 6.22 312
Other borrowings........ 11,282 6.11 689 9,262 6.71 622 6,377 5.82 371
------- ----- ------ ------- ----- ------ ------- ----- ------
Total interest
bearing liabilities. 17,642 6.18 1,089 14,812 6.65 985 11,396 5.99 683
Shareholder's
equity/other 4,356 3,700 2,945
liabilities............ ------- ------- -------
Total liabilities &
shareholder's $21,998 $18,512 $14,341
equity.............. ======= ======= =======
Net interest income..... $1,739 $1,514 $1,250
====== ====== ======
Net interest margin(1).. 8.16% 8.47% 9.05%
====== ====== ======
Interest rate spread(2). 7.10% 7.33% 8.00%
===== ===== =====
</TABLE>
- --------
(1) Net interest margin represents net interest income as a percentage of
total interest earning assets.
(2) Interest rate spread represents the difference between the rate on total
interest earning assets and the rate on total interest bearing
liabilities.
14
<PAGE>
CREDIT SERVICES RATE/VOLUME ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------
1996 VS 1995 1995 VS 1994
-------------------- -------------------
INCREASE/(DECREASE) DUE TO CHANGES IN:
-----------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
INTEREST REVENUE
General purpose credit card loans...... $354 $ (130) $224 $412 $ (9) $403
Other consumer loans................... 62 18 80 139 9 148
Investment securities.................. 2 (1) 1 -- 3 3
Other.................................. 29 (5) 24 4 8 12
---- ----
Total interest revenue.............. 478 (149) 329 568 (2) 566
---- ----
INTEREST EXPENSE
Interest bearing deposits
Savings............................... (2) (1) (3) (5) 8 3
Brokered.............................. 14 (9) 5 11 (3) 8
Other time............................ 41 (7) 34 28 12 40
---- ----
Total interest bearing deposits..... 53 (16) 36 33 18 51
Other borrowings....................... 135 (68) 68 172 79 251
---- ----
Total interest expense.............. 187 (83) 104 205 97 302
---- ----
Net interest income.................... $291 $ (66) $225 $363 $ (99) $264
==== ====== ==== ==== ===== ====
</TABLE>
Net interest income increased 15% in fiscal 1996 and 21% in fiscal 1995. The
increases in both years were due to higher average levels of consumer loans
outstanding partially offset by a shift in the mix of general purpose credit
card loans from fixed rate loans to lower yielding variable rate loans and the
effect of higher charge-offs on interest revenue. In both years, the effects
of changes in market interest rates on the Company's variable rate consumer
loans were substantially offset by comparable changes in the Company's cost of
funds for the related financing. Variable rate consumer loans were
approximately 57%, 46% and 41% of the Company's consumer loan portfolio at
fiscal year end 1996, 1995 and 1994. The Company believes that the effect of
changes in market interest rates on net interest income were mitigated due to
its liquidity and interest rate risk policies.
The supplemental table below provides average managed loan balance and rate
information which takes into account both owned and securitized loans.
SUPPLEMENTAL CREDIT SERVICES AVERAGE MANAGED LOAN INFORMATION (DOLLARS IN
MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Consumer loans.................... $32,777 14.66% $27,305 15.17% $21,781 15.07%
General purpose credit card loans. 29,021 14.81 23,970 15.41 19,555 15.30
Total interest earning assets..... 34,160 14.29 28,167 14.89 22,555 14.71
Total interest bearing liabili-
ties............................. 30,502 6.22 25,107 6.75 20,132 6.24
Consumer loan interest rate
spread........................... 8.44 8.42 8.83
Interest rate spread.............. 8.07 8.14 8.47
Net interest margin............... 8.73 8.88 9.14
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount necessary to establish the
allowance for loan losses at a level that the Company believes is adequate to
absorb estimated losses in its consumer loan portfolio at the balance sheet
date. The Company's allowance for loan losses is regularly evaluated by
management for adequacy on a portfolio by portfolio basis and was $815
million, $722 million and $566 million at fiscal year end 1996, 1995 and 1994.
15
<PAGE>
The provision for loan losses is affected by net charge-offs, loan volume
and changes in the amount of consumer loans estimated to be uncollectable. The
provision for loan losses increased 67% in fiscal 1996 and 36% in fiscal 1995.
The increase in fiscal 1996 was primarily due to higher net charge-offs which
resulted from an increase in the percentage of consumer loans charged off and
a higher level of consumer loans outstanding. The effect of an increase in the
Company's estimate of the allowance for loan losses, primarily in the fourth
quarter of fiscal 1996, was partially offset by a lower provision for losses
for consumer loans intended to be securitized. (See Note 2 to the consolidated
financial statements, "Summary of Significant Accounting Policies.") The
increase in fiscal 1995 was due to a higher level of consumer loans
outstanding and an increase in net charge-off rates partially offset by a
reduction in the allowance for loan losses for one of the Company's owned loan
portfolios in the fourth quarter of fiscal 1995. The increases in both years
in the Company's net charge-off rate were consistent with the industry-wide
trend of increasing credit loss rates that the Company believes is related, in
part, to increased consumer debt levels and bankruptcy rates. The Company
believes this trend may continue and the Company may experience a higher net
charge-off rate in fiscal 1997. In fiscal 1996, the Company took steps to
reduce the impact of this trend, including raising credit quality standards
for new accounts, selectively reducing credit limits and increasing collection
activity. The Company believes these credit quality improvements had a minimal
impact in fiscal 1996, but believes they may have an increased effect in
fiscal 1997. The Company's expectations about future charge-off rates and
credit quality improvements are subject to uncertainties that could cause
actual results to differ materially from what has been projected above.
Factors that influence the level and direction of consumer loan delinquencies
and charge-offs include changes in consumer loan payment patterns, bankruptcy
trends, the seasoning of the Company's loan portfolio, interest rate movements
and their impact on consumer behavior, and the rate and magnitude of changes
in the Company's consumer loan portfolio, including the overall mix of
accounts, products and loan balances within the portfolio.
Consumer loans are considered delinquent when interest or principal payments
become 30 days past due. Consumer loans are charged off when they become 180
days past due, except in the case of bankruptcies and fraudulent transactions
which are charged off earlier. Loan delinquencies and charge-offs are
primarily affected by changes in economic conditions and may vary throughout
the year due to seasonal consumer spending and payment behaviors. The Company
believes the increases in consumer loan delinquency rates in fiscal 1996 and
1995 were related to the industry-wide credit conditions discussed previously.
The following table presents delinquency and net charge-off rates with
supplemental managed loan information.
CREDIT SERVICES ASSET QUALITY (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
OWNED MANAGED OWNED MANAGED OWNED MANAGED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans at period
end.................... $23,188 $36,573 $21,557 $31,776 $16,174 $26,051
Consumer loans contrac-
tually past due as a
percentage of period
end consumer loans
30 to 89 days......... 4.25% 4.29% 4.03% 4.05% 3.21% 3.26%
90 to 179 days........ 2.81% 2.77% 2.10% 2.09% 1.44% 1.47%
Net charge-offs as a
percentage of
average consumer loans. 5.19% 5.40% 3.50% 3.75% 2.92% 3.30%
</TABLE>
NON-INTEREST EXPENSES
Total non-interest expenses increased 13% to $2.1 billion in fiscal 1996 and
21% to $1.9 billion in fiscal 1995.
Employee compensation and benefits expense increased 15% in fiscal 1996 and
17% in fiscal 1995. The increases in both years were due to costs associated
with processing increased credit card transaction volume and servicing
additional NOVUS Network merchants and active credit card accounts.
16
<PAGE>
Marketing and business development expense increased 14% in fiscal 1996 and
25% in fiscal 1995. The increase in fiscal 1996 was due to higher cardmember
rewards expense and increased costs associated with the growth of new and
existing credit card brands. The increase in fiscal 1995 was due to higher
mailing and promotional costs associated with the launch of new credit card
brands, higher cardmember rewards expense and continued investment in the
growth of existing credit card products. In both years cardmember rewards
expense, which includes the Cashback Bonus(R) award, increased due to
continued growth in credit card transaction volume and increased cardmember
qualification for higher award levels.
Information processing and communications expense increased 16% in fiscal
1996 and 23% in fiscal 1995. The increases in both years were due to higher
costs associated with processing increased transaction volume, servicing
additional NOVUS Network merchants and active credit card accounts and the
development of the systems supporting the multi-card strategy.
Facilities and equipment expense increased 25% in fiscal 1996 and 8% in
fiscal 1995. In fiscal 1996, the Company opened several new facilities to
accommodate the growth of its NOVUS Network and its multi-card strategy.
Other non-interest expenses remained level in fiscal 1996 and increased 17%
in fiscal 1995. These expenses include fraud losses, professional fees, credit
inquiry fees and other administrative costs. The increase in fiscal 1995 was
due to higher credit card fraud losses. In fiscal 1995, the Company began
implementing several measures designed to reduce fraud losses. Since the
Company began implementing these measures, fraud losses as a percentage of
transaction volume has declined.
SEASONAL FACTORS
The credit card lending activities of Credit Services are affected by
seasonal patterns of retail purchasing. A substantial percentage of credit
card loan growth occurs in the fourth quarter, followed by a flattening or
decline of consumer loans in the subsequent first quarter. Merchant fees
increase in the fourth quarter, reflecting higher sales activity.
Additionally, higher cardmember rewards expense is accrued in the fourth
quarter, reflecting seasonal growth in retail sales volume.
LIQUIDITY AND CAPITAL RESOURCES
THE BALANCE SHEET
The Company's total assets increased from $182.0 billion at fiscal year end
1995 to $238.9 billion at fiscal year end 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.
FUNDING AND CAPITAL POLICIES
The Company's senior management and 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
17
<PAGE>
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, consumer
loans 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.
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's liquidity policies emphasize diversification of funding
sources. The Company also 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 Notes 5 and 6 to the consolidated financial
statements.) Maturities of both short-term and long-term financings are
designed to minimize exposure to refinancing risk in any one period.
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 consumer loans receivable 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 the overall availability of credit. The
Company therefore maintains a surplus of unused short-term funding sources at
all times to withstand any unforeseen contraction in credit capacity. In
addition, the Company attempts to maintain cash and unhypothecated marketable
securities equal to at least 110% of its outstanding short-term unsecured
borrowings. 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 secured borrowing capacity on a
global basis. In support of this strategy, Morgan Stanley & Co. Incorporated
("MS&Co."), one of the Company's U.S. broker-dealer subsidiaries, 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.
18
<PAGE>
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, consumer loans and illiquid assets and therefore maintains a
long-term debt-to-capitalization ratio at a level appropriate for the current
composition of its balance sheet. In general, fixed assets are financed with
fixed rate long-term debt, and securities 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. Both fixed
rate and variable rate long-term debt (in addition to sources of funds
accessed directly by the Company's Credit Services businesses) are used to
finance the Company's consumer loan portfolio. Consumer loan financing is
targeted to match the repricing characteristics of the loans financed. The
Company uses derivative products (primarily interest rate and currency swaps)
to assist in asset and liability management, reduce borrowing costs and hedge
consumer loan interest rate spreads. (See Note 6 to the consolidated financial
statements.)
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 does not expect that the Merger will have a material impact on the
Company's cost and availability of financing or business activities.
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.
PRINCIPAL SOURCES OF FUNDING
The Company funds its balance sheet on a global basis. The Company's funding
for its Securities segment is raised through diverse sources. These sources
include the Company's capital, including equity and long-term debt; medium-
term notes; internally generated funds; repurchase agreements; U.S., Canadian,
Euro and French commercial paper; letters of credit; unsecured bond borrows;
German Schuldschein loans; securities lending; buy/sell agreements; municipal
reinvestments; master notes; deposits; short-term bank notes; Fed Funds and
committed and uncommitted lines of credit. Repurchase transactions and a
portion of the Company's bank borrowings and securities lending are made on a
collateralized basis and therefore provide a more stable source of funding
than short-term unsecured borrowings.
The funding sources utilized for the Company's Credit Services segment
include asset securitizations, medium-term notes, long-term borrowings,
deposits, asset-backed commercial paper, Fed Funds and short-term bank notes.
The Company sells consumer loans through asset securitizations using several
transaction structures. Riverwoods Funding Corporation ("RFC"), an entity
included in the consolidated financial statements of the Company, issues
asset-backed commercial paper.
The Company's bank subsidiaries solicit deposits from consumers and purchase
federal funds. Interest bearing deposits are classified by type as savings,
brokered and other time deposits. Savings deposits consist primarily of money
market deposits and certificate of deposit accounts sold directly to
cardmembers and savings deposits from DWR clients. Brokered deposits consist
primarily of certificates of deposit issued by the Company's bank
subsidiaries, which are sold through the DWR account executive sales
organization and a
19
<PAGE>
syndicate of firms managed by DWR. Other time deposits include institutional
certificates of deposit. The Company, through Greenwood Trust Company, an
indirect subsidiary of the Company, sells notes under a short-term bank note
program.
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 Company maintains a senior revolving credit agreement with a group of
banks to support general liquidity needs, including the issuance of commercial
paper (the "Morgan Stanley Facility"). Under the terms of the credit
agreement, the banks are committed to provide up to $2.5 billion. At fiscal
year end 1996, $365 million was outstanding under the Morgan Stanley Facility
which was repaid in full subsequent to fiscal year end 1996. The Company has
assumed the Morgan Stanley Facility as part of the Merger.
The Company also maintains a second senior revolving credit agreement with a
group of banks to support general liquidity needs, including the issuance of
commercial paper (the "DWD Facility"). Under the terms of the credit
agreement, the banks are committed to provide up to $4.0 billion. As of fiscal
year end 1996, the Company has never borrowed from the DWD Facility. In April
1997, DWD renewed this facility which expires in April of 1998.
The Morgan Stanley Facility and the DWD Facility both contain covenants that
require the Company to maintain minimum net worth requirements and specified
financial ratios. The Company believes that the covenant restrictions will not
impair the Company's ability to pay its current level of dividends. Prior to
the closing of the Merger, the Morgan Stanley Facility and the DWD Facility
were amended to conform such facilities to insure that they remain effective
subsequent to the closing of the Merger and to accommodate the Company's post-
Merger business activities and financing needs. After the consummation of the
Merger, the Company expects that a new credit facility of the Company will
replace the Morgan Stanley Facility and the DWD Facility.
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 (the "MS&Co. Facility"). As part of the MS&Co.
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. The credit agreement
contains restrictive covenants which require, among other things, that MS&Co.
maintain specified levels of consolidated shareholders' equity and Net
Capital, as defined. In January 1997, the MS&Co. Facility was renewed and the
amount of the commitment of the credit agreement was increased to $1.5
billion. At fiscal year end 1996, no borrowings were outstanding under the
MS&Co. 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 (the "MSIL
Facility"). Such banks are committed to provide up to an aggregate of $1.25
billion available in 12 major currencies. 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, the MSIL Facility was renewed, and the amount of
the commitment was increased to $1.55 billion. At fiscal year end 1996, no
borrowings were outstanding under the MSIL Facility.
RFC maintains a senior bank credit facility to support the issuance of
asset-backed commercial paper. In fiscal 1996, RFC renewed this facility and
increased its amount to $2.1 billion from $1.75 billion. RFC currently plans
to renew or replace this facility prior to its expiration in October 1997.
Under the terms of the asset-backed commercial paper program, certain assets
of RFC were subject to a lien in the amount of $2.2 billion at fiscal year end
1996. RFC has never borrowed from its senior bank credit facility.
The Company anticipates that it will utilize the Morgan Stanley Facility,
the DWD Facility, the MS&Co. Facility or the MSIL Facility for short-term
funding from time to time. RFC anticipates that it will utilize its facility
for short-term funding from time to time. (See Note 5 to the consolidated
financial statements.)
20
<PAGE>
FISCAL 1996 AND SUBSEQUENT ACTIVITY
During fiscal year 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 $6,508 million to $31,152 million at fiscal year end 1996. The
additions to capital included net issuances of senior notes and subordinated
debt aggregating $6,108 million.
Subsequent to fiscal year end 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.
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 fiscal year end 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. In addition, the Company announced that it had
called for redemption on May 30, 1997, all 750,000 shares of its 8-3/4%
Cumulative Preferred Stock at a redemption price of $200 per share.
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 fiscal 1996, the Company repurchased shares of its common stock at an
aggregate cost of $1,133 million and an average cost per share of $26.96.
Prior to the consummation of the Merger, both Morgan Stanley and Dean Witter
Discover rescinded any outstanding share repurchase authorizations.
At fiscal year end 1996, certain assets of the Company, such as real
property, equipment and leasehold improvements of $1.7 billion, and goodwill
and other intangible assets of $1.5 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 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 fiscal year end 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 fiscal
year end 1996 traded in markets that the Company believed were experiencing
lower levels of liquidity approximated $1,544 million.
21
<PAGE>
In addition, at fiscal year end 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 fiscal year end 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).
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 fiscal year end 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.
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 6 and 8, respectively, to the consolidated financial
statements. See also "Derivative Financial Instruments" herein.
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.
REGULATORY CAPITAL REQUIREMENTS
DWR, a registered broker dealer and a registered futures commission
merchant, is subject to the minimum net capital requirements of the Securities
and Exchange Commission ("SEC"). 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 SEC 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. DWR, MS&Co., MSIL and MSJL have
consistently operated in excess of their respective regulatory requirements
(see Note 10 to the consolidated financial statements).
22
<PAGE>
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, on
the value of financial instruments and the markets for consumer credit
services, it may adversely affect the Company's financial position and
profitability.
A 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 8 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 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.
The total notional value of derivative trading contracts outstanding at
fiscal year end 1996 was $1,317 billion (as compared with $985 billion at
fiscal year end 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 fiscal
year end 1996 was $11.2 billion. Approximately $9.0 billion of that credit
risk exposure was with counterparties rated single-A or better (see Note 8 to
the consolidated financial statements).
23
<PAGE>
The Company also uses derivative products (primarily interest rate, currency
and equity swaps) to assist in asset and liability management, reduce
borrowing costs and hedge consumer loan interest rate spreads. (See Notes 5
and 6 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.
The following discussion of risk management relates to the Company's
securities businesses.
SECURITIES 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 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
24
<PAGE>
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. 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.
25
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
SUPPLEMENTAL CONDENSED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT FISCAL YEAR
END
----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS:
Cash and interest-bearing equivalents........................ $ 12 $ 61
Financial instruments owned.................................. 700 543
Advances to subsidiaries..................................... 53,821 38,869
Investment in subsidiaries, at equity........................ 10,343 8,001
Other assets................................................. 988 625
------- -------
Total assets........................................... $65,864 $48,099
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings........................................ $20,458 $14,004
Payables to subsidiaries..................................... 12,001 8,366
Other liabilities and accrued expenses....................... 720 701
Long-term borrowings......................................... 20,983 15,020
------- -------
54,162 38,091
------- -------
Commitments and contingencies
Shareholders' equity:
Preferred stock............................................ 1,223 818
Common stock(1) ($0.01 par value, 1,490,000,000 shares au-
thorized, 611,314,509 and 610,657,854 shares issued,
572,682,876 and 593,760,860 shares outstanding at fiscal
year end 1996 and 1995)................................... 6 6
Paid-in capital(1) ........................................ 4,007 3,607
Retained earnings.......................................... 7,477 5,981
Cumulative translation adjustments......................... (11) (9)
------- -------
Subtotal................................................. 12,702 10,403
Note receivable related to sale of preferred stock to ESOP. (78) (89)
Common stock held in treasury, at cost(1) ($0.01 par value,
38,631,633 and 16,896,994 shares at fiscal year end 1996
and 1995)................................................. (1,005) (361)
Stock compensation related adjustments..................... 83 55
------- -------
Total shareholders' equity............................... 11,702 10,008
------- -------
Total liabilities and shareholders' equity............. $65,864 $48,099
======= =======
</TABLE>
- --------
(1)Amounts have been restated to reflect the Company's two-for-one stock
splits.
See Notes to the Supplemental Condensed Financial Information.
1
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
SUPPLEMENTAL CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
REVENUES:
Interest and dividends.................................. $4,166 $3,090 $2,195
Principal transactions.................................. (64) 30 (17)
Fiduciary fees.......................................... 21 17 13
Other................................................... 5 3 14
------ ------ ------
Total revenue......................................... 4,128 3,140 2,205
Interest expense........................................ 3,624 2,345 1,494
Expense excluding interest.............................. 5 14 18
------ ------ ------
Income before income tax provision and equity in earn-
ings of subsidiaries................................... 499 781 693
Income tax provision.................................... 24 26 39
------ ------ ------
Income before equity in earnings of subsidiaries........ 475 755 654
------ ------ ------
Equity in earnings of subsidiaries, net of tax.......... 1,505 710 603
------ ------ ------
Net income.............................................. $1,980 $1,465 $1,257
====== ====== ======
Preferred stock dividend requirements................... $ 66 $ 65 $ 65
====== ====== ======
Earnings applicable to common shares.................... $1,914 $1,400 $1,192
====== ====== ======
</TABLE>
See Notes to the Supplemental Condensed Financial Information.
2
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
SUPPLEMENTAL CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 1,980 $ 1,465 $ 1,257
Adjustments to reconcile net income to net cash
used for operating activities:
Non-cash charges (credits) included in net
income:
Deferred income taxes....................... (62) (17) 8
Compensation payable in common or preferred
stock...................................... 513 353 432
Equity in subsidiaries' earnings, net of
dividend................................... 1,191 574 972
(Increase) decrease in assets:
Financial instruments owned................. (157) 99 31
Other assets................................ (336) (596) 115
Increase in liabilities:
Payables to subsidiaries.................... 3,635 7,089 680
Other liabilities and accrued expenses, net
of deferred liabilities.................... 175 321 20
-------- -------- -------
Net cash provided by operating activities....... 6,939 9,288 3,515
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances to subsidiaries, at
equity......................................... (17,216) (15,724) (5,242)
Purchase of Miller Anderson, net of cash
acquired....................................... (200) -- --
Purchase of Van Kampen, net of cash acquired.... (986) -- --
-------- -------- -------
Net cash used for investing activities.......... (18,402) (15,724) (5,242)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to short-term borrowings... 6,369 4,666 (1,683)
Proceeds from:
Issuance of common stock...................... 156 121 37
Issuance of 7- 3/4% Cumulative Preferred
Stock........................................ 197 -- --
Issuance of Series A Fixed/Adjustable Rate
Cumulative Preferred Stock................... 343 -- --
Issuance of long-term borrowings.............. 8,561 3,749 5,303
Payments for:
Repurchase of common stock.................... (1,133) (267) (326)
Repayments of long-term borrowings............ (2,629) (1,603) (1,307)
Redemption of 9.36% Cumulative Preferred
Stock........................................ (137) -- --
Cash dividends................................ (313) (235) (233)
-------- -------- -------
Net cash provided by financing activities....... 11,414 6,431 1,791
-------- -------- -------
Net increase (decrease) in cash and interest-
bearing equivalents.............................. (49) (5) 64
Cash and interest-bearing equivalents, at
beginning of year................................ 61 66 2
-------- -------- -------
Cash and interest-bearing equivalents, at end of
year............................................. $ 12 $ 61 $ 66
======== ======== =======
</TABLE>
See Notes to the Supplemental Condensed Financial Information.
3
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
NOTES TO SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION
1. INTRODUCTION AND BASIS OF PRESENTATION
The Merger
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged with
and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the "Merger").
At that time, Dean Witter Discover changed its corporate name to Morgan
Stanley, Dean Witter, Discover & Co. (the "Company"). In conjunction with the
Merger, each share of Morgan Stanley common stock then outstanding was
converted into the right to receive 1.65 shares of the Company's common stock
(the "Exchange Ratio"), and each share of Morgan Stanley preferred stock was
converted into the right to receive one share of a corresponding series of
preferred stock of the Company. The Merger was treated as a tax free exchange.
Basis of Financial Information
The supplemental condensed financial statements of Morgan Stanley, Dean
Witter, Discover & Co. (the "Parent Company financial statements") give
retroactive effect to the merger of Dean Witter Discover and Morgan Stanley in
a transaction accounted for as a pooling of interests. The pooling of interests
method of accounting requires the restatement of all periods presented as if
Dean Witter Discover and Morgan Stanley had always been combined. Generally
accepted accounting principles proscribe giving effect to a consummated
business combination accounted for by the pooling of interests method in
financial statements that do not include the date of consummation. The Parent
Company financial statements do not extend through the date of consummation.
However, they will become the historical condensed financial statements of
Morgan Stanley, Dean Witter, Discover & Co. (the "Parent Company") after
financial statements covering the date of consummation of the business
combination are issued. The Parent Company financial statements, including the
notes thereto, should be read in conjunction with historical condensed
financial statements of Dean Witter Discover (Parent Company Only) and Morgan
Stanley (Parent Company Only), included in their Annual Reports on Form 10-K
for the fiscal years ended December 31, 1996 and November 30, 1996,
respectively, and should also be read in conjunction with the supplemental
consolidated financial statements of the Company and notes thereto found
elsewhere in this Current Report on Form 8-K.
Prior to the consummation of the Merger, Dean Witter Discover's fiscal year
ended on December 31 and Morgan Stanley's fiscal year ended on November 30. In
recording the pooling of interests combination, Dean Witter Discover's
financial statements for the fiscal years ended December 31, 1996, 1995 and
1994 were combined with Morgan Stanley's financial statements for the fiscal
years ended November 30, 1996, 1995 and 1994 (on a combined basis, "fiscal year
1996", "fiscal year 1995" and "fiscal year 1994", respectively.)
Certain reclassifications have been made to prior years amounts to conform to
the current presentation.
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Morgan Stanley, Dean Witter, Discover & Co.
We have audited the accompanying supplemental consolidated statements of
financial condition of Morgan Stanley, Dean Witter, Discover & Co. and
subsidiaries at fiscal year end 1996 and 1995, and the related supplemental
consolidated statements of income, cash flows and changes in shareholders'
equity for fiscal year 1996, 1995 and 1994. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. We did not audit the consolidated
statement of financial condition of Morgan Stanley Group Inc. and subsidiaries
as of November 30, 1996 and 1995, or the related statements of income, cash
flows and changes in shareholders' equity for the years ended November 30,
1996, 1995 and 1994, which statements reflect total assets of $196,446 million
and $143,753 million as of November 30, 1996 and 1995, respectively, and total
revenues of $13,144 million, $10,797 million and $9,255 million for the years
ended November 30, 1996, 1995 and 1994, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Morgan Stanley
Group Inc. and subsidiaries for such periods, is based solely on the report of
such other auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Dean Witter, Discover & Co. and Morgan Stanley Group Inc.,
which has been accounted for as a pooling of interests as described in Note 1
to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of Morgan Stanley, Dean Witter, Discover & Co. and subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, based on our audits and the report of the other auditors,
the accompanying supplemental consolidated financial statements present
fairly, in all material respects, the consolidated financial position of
Morgan Stanley, Dean Witter, Discover & Co. and subsidiaries at fiscal year
end 1996 and 1995, and the consolidated results of their operations and their
cash flows for fiscal year 1996, 1995 and 1994, in conformity with generally
accepted accounting principles applicable after financial statements are
issued for a period which includes the date of consummation of the business
combination.
Our audits also included the supplemental financial statement schedules
relating to Morgan Stanley, Dean Witter, Discover & Co. (Parent Company Only).
These supplemental financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, based on our audits and the report of the other
auditors, such supplemental financial statement schedules, when considered in
relation to the supplemental consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
herein.
/s/ Deloitte & Touche LLP
New York, New York
May 31, 1997
<PAGE>
Report of Independent Auditors
The Stockholders and
Board of Directors of
Morgan Stanley Group Inc.
We have audited the Consolidated Statement of Financial Condition of Morgan
Stanley Group Inc. as of November 30, 1996 and 1995 and the related
Consolidated Statements of Income, Cash Flows and Changes in Stockholders'
Equity for each of the three years in the period ended November 30, 1996 (not
presented separately herein). Our audits also included the schedule of parent
company stand alone financial statements of Morgan Stanley Group Inc. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 1995, and the consolidated results
of operations and cash flows for each of the three years in the period ended
November 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
May 27, 1997
<PAGE>
EXHIBIT 11
Morgan Stanley, Dean Witter, Discover & Co.
Computation of Earnings Per Share
(In millions, except share and per share data)
<TABLE>
<CAPTION>
First Fiscal Quarter Fiscal Year
---------------------------- --------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Primary:
Common Stock and common stock equivalents:
Average common shares outstanding 580,026,373 589,038,824 581,090,678 594,028,529 594,443,781
Average common shares issuable
under employee benefit plans 20,550,891 17,547,119 13,387,857 14,217,904 12,277,681
----------- ----------- ----------- ----------- -----------
Total average common and common
equivalent shares outstanding /(1)/ 600,577,264 606,585,943 594,478,535 608,246,433 606,721,462
=========== =========== =========== =========== ===========
Earnings:
Net income $592 $519 $1,980 $1,465 $1,257
Less: Preferred stock dividend
requirements 19 16 66 65 65
----------- ----------- ----------- ----------- -----------
Earnings applicable to common shares $573 $503 $1,914 $1,400 $1,192
=========== =========== =========== =========== ===========
Primary earnings per share /(1)/ $0.95 $0.83 $3.22 $2.30 $1.96
=========== =========== =========== =========== ===========
Fully diluted:
Common stock and common stock equivalents:
Average common shares outstanding 580,026,373 589,038,824 581,090,678 594,028,529 594,443,781
Average common shares issuable
under employee benefit plans 21,080,066 19,377,913 17,609,204 15,588,911 12,283,047
Common shares issuable upon conversion
of ESOP preferred stock 12,195,627 12,390,667 12,312,219 12,481,428 12,581,699
----------- ----------- ----------- ----------- -----------
Total average common and common
equivalent shares outstanding /(1)/ 613,302,066 620,807,404 611,012,101 622,098,868 619,308,527
=========== =========== =========== =========== ===========
Earnings:
Net income $592 $519 $1,980 $1,465 $1,257
Less: Preferred stock dividend
requirements 18 15 62 62 62
----------- ----------- ----------- ----------- -----------
Earnings applicable to common shares $574 $504 $1,918 $1,403 $1,195
=========== =========== =========== =========== ===========
Fully diluted earnings per share /(1)/ $0.94 $0.81 $3.14 $2.25 $1.93
=========== =========== =========== =========== ===========
</TABLE>
/(1)/ Historical share and per share amounts have been restated to reflect the
Company's two-for-one stock splits.
<PAGE>
EXHIBIT 12
MORGAN STANLEY, DEAN WITTER DISCOVER & CO.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
First Fiscal Quarter Fiscal Year
---------------------- -----------------------------------
1997 1996 1996 1995 1994
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings
Income before income taxes $ 964 $ 840 $ 3,117 $ 2,292 $ 1,962
Interest expense 2,697 2,250 8,934 8,190 6,697
Interest factor in rent expense 24 24 92 95 90
------- ------- -------- -------- --------
Total earnings $ 3,685 $ 3,114 $ 12,143 $ 10,577 $ 8,749
======= ======= ======== ======== ========
1. Ratio of earnings to fixed charges:
Fixed charges
Interest expense 2,697 2,250 8,934 8,190 6,697
Interest factor in rent expense 24 24 92 95 90
------- ------- -------- -------- --------
Total fixed charges $ 2,721 $ 2,274 $ 9,026 $ 8,285 $ 6,787
======= ======= ======== ======== ========
Ratio of earnings to fixed charges: 1.4 1.4 1.3 1.3 1.3
======= ======= ======== ======== ========
2. Ratio of earnings to fixed charges and preferred
stock dividends
Interest expense 2,697 2,250 8,934 8,190 6,697
Interest factor in rent expense 24 24 92 95 90
Preferred stock dividends 31 26 101 95 94
------- ------- -------- -------- --------
Total fixed charges $ 2,752 $ 2,300 $ 9,127 $ 8,380 $ 6,881
======= ======= ======== ======== ========
Ratio of earnings to fixed charges and preferred 1.3 1.4 1.3 1.3 1.3
stock dividends ======= ======= ======== ======== ========
</TABLE>
"Earnings" consist of income before income taxes and fixed charges. "Fixed
charges" consist of interest costs, including interest on deposits, and that
portion of rent expense estimated to be representative of the interest factor.
<PAGE>
EXHIBIT 99.4
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT FIRST AT FISCAL
FISCAL QUARTER YEAR END
END 1997 1996
-------------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 5,673 $ 6,544
Cash and securities deposited with clearing organiza-
tions or segregated under federal and other regula-
tions
(including securities at fair value of $2,373 at
first fiscal quarter end 1997 and $3,759 at fiscal
year end 1996)...................................... 3,641 5,209
Financial instruments owned:
U.S. government and agency securities............... 16,118 12,032
Other sovereign government obligations.............. 18,205 19,473
Corporate and other debt............................ 19,284 16,899
Corporate equities.................................. 14,282 12,662
Derivative contracts................................ 12,818 11,220
Physical commodities................................ 287 375
Securities purchased under agreements to resell...... 73,926 64,021
Securities borrowed.................................. 55,125 43,546
Receivables:
Consumer loans (net of allowances of $819 at first
fiscal quarter end 1997 and $815 at fiscal year
end 1996).......................................... 21,148 22,373
Customers, net...................................... 13,249 8,600
Brokers, dealers and clearing organizations......... 1,995 5,421
Fees, interest and other............................ 3,352 2,870
Office facilities, at cost (less accumulated depreci-
ation and amortization of $1,121 at first fiscal
quarter end 1997 and $1,060 at fiscal year end
1996)............................................... 1,655 1,681
Other assets......................................... 6,274 5,934
-------- --------
Total assets......................................... $267,032 $238,860
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper and other short-term borrowings..... $ 26,622 $ 26,326
Deposits............................................. 7,138 7,213
Financial instruments sold, not yet purchased:
U.S. government and agency securities............... 15,615 11,395
Other sovereign government obligations.............. 8,355 6,513
Corporate and other debt............................ 1,299 1,176
Corporate equities.................................. 8,777 8,900
Derivative contracts................................ 11,006 9,982
Physical commodities................................ 36 476
Securities sold under agreements to repurchase....... 99,898 86,863
Securities loaned.................................... 15,287 12,907
Payables:
Customers........................................... 24,216 22,062
Brokers, dealers and clearing organizations......... 4,113 1,820
Interest and dividends.............................. 1,392 1,678
Other liabilities and accrued expenses............... 6,163 6,340
Long-term borrowings................................. 24,160 22,642
-------- --------
254,077 226,293
-------- --------
Capital Units........................................ 999 865
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock..................................... 1,027 1,223
Common stock(1) ($0.01 par value, 1,490,000,000
shares authorized, 612,278,459 and 611,314,509
shares issued, 585,549,370 and 572,682,876 shares
outstanding at first fiscal quarter end 1997 and
at fiscal year end 1996)........................... 6 6
Paid-in capital(1).................................. 3,766 4,007
Retained earnings................................... 7,971 7,477
Cumulative translation adjustments.................. (14) (11)
-------- --------
Subtotal.......................................... 12,756 12,702
Note receivable related to sale of preferred stock
to ESOP............................................ (76) (78)
Common stock held in treasury, at cost(1) ($0.01
par value, 26,729,089 and 38,631,633 shares at
first fiscal quarter end 1997 and at fiscal year
end 1996).......................................... (716) (1,005)
Stock compensation related adjustments.............. (8) 83
-------- --------
Total shareholders' equity........................ 11,956 11,702
-------- --------
Total liabilities and shareholders' equity........... $267,032 $238,860
======== ========
</TABLE>
- --------
(1) Historical amounts have been restated to reflect the Company's two-for-one
stock splits.
See Notes to the Supplemental Consolidated Financial Statements.
1
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
-------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues
Investment banking.................................. $ 521 $ 464
Principal transactions
Trading........................................... 869 823
Investments....................................... 56 (7)
Commissions......................................... 488 455
Merchant and cardmember fees........................ 405 320
Servicing fees...................................... 209 200
Interest and dividends.............................. 3,354 2,794
Asset management and administration................. 590 397
Other............................................... 28 28
------------ ------------
Total revenues.................................... 6,520 5,474
Interest expense.................................... 2,697 2,250
Provision for consumer loan losses.................. 376 225
------------ ------------
Net revenues...................................... 3,447 2,999
------------ ------------
Expenses excluding interest
Compensation and benefits........................... 1,495 1,275
Occupancy and equipment............................. 126 119
Brokerage, clearing and exchange fees............... 96 77
Information processing and communications........... 259 232
Business development................................ 246 229
Professional services............................... 89 60
Other............................................... 172 167
------------ ------------
Total expenses excluding interest................. 2,483 2,159
------------ ------------
Income before income taxes.......................... 964 840
Provision for income taxes.......................... 372 321
------------ ------------
Net income.......................................... $ 592 $ 519
============ ============
Preferred stock dividend requirements............... $ 19 $ 16
============ ============
Earnings applicable to common shares(1)............. $ 573 $ 503
============ ============
Earnings per common share(2)
Primary............................................. $ 0.95 $ 0.83
============ ============
Fully diluted....................................... $ 0.94 $ 0.81
============ ============
Average common shares outstanding(2)
Primary............................................. 600,577,264 606,585,943
============ ============
Fully diluted....................................... 613,302,066 620,807,404
============ ============
</TABLE>
- --------
(1) Amounts shown are used to calculate primary earnings per common share.
(2) Historical share and per share amounts have been restated to reflect the
Company's two-for-one stock splits.
See Notes to the Supplemental Consolidated Financial Statements.
2
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST FISCAL
QUARTER
---------------------
1997 1996
------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................. $ 592 $ 519
Adjustments to reconcile net income to net cash used
for
operating activities:
Non-cash charges included in net income.............. 441 267
Changes in assets and liabilities:
Cash and securities deposited with clearing
organizations
or segregated under federal and other regulations. 1,567 (493)
Financial instruments owned, net of financial
instruments
sold, not yet purchased........................... (1,688) 4,874
Securities borrowed, net of securities loaned...... (9,199) (4,487)
Receivables and other assets....................... (2,259) (6,228)
Payables and other liabilities..................... 4,065 (351)
------- -------
Net cash used for operating activities................... (6,481) (5,899)
------- -------
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 principal received (disbursed) on consumer loans. 850 (273)
Purchases of consumer loans.......................... -- (5)
Sales of consumer loans.............................. -- 2,768
Other investing activities........................... (31) (38)
------- -------
Net cash provided by investing activities................ 803 2,205
------- -------
Cash flows from financing activities
Net proceeds (payments) related to short-term
borrowings............................................ 169 (3,063)
Securities sold under agreements to repurchase, net of
securities
purchased under agreements to resell.................. 3,130 3,270
Proceeds from
Issuance of common stock............................. 35 55
Issuance of long-term borrowings..................... 3,434 4,206
Issuance of Capital Units............................ 134 --
Payments for
Repurchases of common stock.......................... (89) (501)
Repayments of long-term borrowings................... (1,724) (335)
Redemption of cumulative preferred stock............. (195) --
Cash dividends....................................... (87) (76)
------- -------
Net cash provided by financing activities................ 4,807 3,556
------- -------
Net decrease in cash and cash equivalents................ (871) (138)
Cash and cash equivalents, at beginning of period........ 6,544 3,936
------- -------
Cash and cash equivalents, at end of period.............. $ 5,673 $ 3,798
======= =======
</TABLE>
See Notes to the Supplemental Consolidated Financial Statements.
3
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. INTRODUCTION AND BASIS OF PRESENTATION
The Merger
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover and Co. ("Dean Witter Discover") (the
"Merger"). At that time Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. (the "Company"). In conjunction
with the Merger, each share of Morgan Stanley common stock then outstanding
was converted into the right to receive 1.65 shares of the Company's common
stock (the "Exchange Ratio"), and each share of Morgan Stanley preferred stock
was converted into the right to receive one share of a corresponding series of
preferred stock of the Company. The Merger was treated as a tax free exchange.
The Company
The Company's supplemental consolidated financial statements include the
accounts of Morgan Stanley, Dean Witter Discover and their U.S. and
international subsidiaries, including Morgan Stanley & Co. Incorporated
("MS&Co."), Morgan Stanley & Co. International Limited ("MSIL"), Morgan
Stanley Japan Limited ("MSJL"), Dean Witter Reynolds Inc. ("DWR"), Dean Witter
InterCapital Inc. ("ICAP"), and NOVUS Credit Services Inc.
The Company, through its subsidiaries, provides a wide range of financial
securities services on a global basis and credit services nationally. Its
securities 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. The
Company's credit services businesses include the operation of the NOVUS(R)
Network, a proprietary network of merchant and cash access locations, and the
issuance of proprietary general purpose credit cards. The Company's services
are provided to a large and diversified group of clients and customers,
including corporations, governments, financial institutions and individual
investors.
Basis of Financial Information
The supplemental consolidated financial statements give retroactive effect
to the merger of Dean Witter Discover and Morgan Stanley in a transaction
accounted for as a pooling of interests. The pooling of interests method of
accounting requires the restatement of all periods presented as if Dean Witter
Discover and Morgan Stanley had always been combined. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of the Company and its subsidiaries after financial statements
covering the date of consummation of the business combination are issued. The
supplemental consolidated statement of changes in shareholders' equity
reflects the accounts of the Company as if the additional preferred and common
stock had been issued during all the periods presented. The supplemental
consolidated financial statements, including the notes thereto, should be read
in conjunction with the historical consolidated financial statements of Dean
Witter Discover and Morgan Stanley, included in their Annual Reports on Form
10-K for the fiscal years ended December 31, 1996 and November 30, 1996,
respectively.
Prior to the consummation of the merger, Dean Witter Discover's fiscal year
ended on December 31 and Morgan Stanley's fiscal year ended on November 30. In
recording the pooling of interests combination, Dean Witter Discover's
financial statements for the first fiscal quarters ended March 31, 1997 and
1996 and for the
4
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
fiscal year ended December 31, 1996 were combined with Morgan Stanley's
financial statements for the first fiscal quarters ended February 28, 1997 and
February 29, 1996 and for the fiscal year ended November 30, 1996 (on a
combined basis, "first fiscal quarter 1997," "first fiscal quarter 1996," and
"fiscal year 1996," respectively).
The supplemental 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, consumer loan loss levels, 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 supplemental consolidated financial statements are prudent
and reasonable. Actual results could differ from these estimates.
Certain reclassifications have been made to prior year amounts to conform to
the current presentation. All material intercompany balances and transactions
have been eliminated. The supplemental consolidated financial statements are
hereinafter referred to as "consolidated financial statements" or
"statements."
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
1996 included elsewhere in this Current Report on Form 8-K filed by the
Company under the Securities Exchange Act of 1934 on June 2, 1997. The results
of operations for interim periods are not necessarily indicative of results
for the entire year.
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 statements of income as interest revenue 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 consolidated statements 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."
Equity securities purchased in connection with merchant banking and other
principal investment activities 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.
5
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The Company has entered into various contracts as hedges against specific
assets, liabilities or anticipated transactions. These contracts include
interest rate swap, foreign exchange forward, foreign currency exchange, cost
of funds and interest rate cap agreements. The Company uses interest rate and
currency swaps to manage the interest rate and currency exposure arising from
certain borrowings and to match the refinancing characteristics of consumer
loans with the borrowings that fund these loans. For contracts that are
designated as hedges of the Company's assets and liabilities, gains and losses
are deferred and recognized as adjustments to interest revenue or expense over
the remaining life of the underlying assets or liabilities. For contracts that
are hedges of asset securitizations, gains and losses are recognized as
adjustments to servicing fees. 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 shareholders' 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.
Earnings Per Share
The calculations of earnings per common share are based on the weighted
average number of common shares and share equivalents outstanding and gives
effect to preferred stock dividend requirements. All per share and share
amounts reflect stock splits enacted by Dean Witter Discover and Morgan
Stanley prior to the Merger, as well as the additional shares issued to Morgan
Stanley shareholders pursuant to the Exchange Ratio.
Accounting Pronouncements
As of January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which is effective for
transfers of financial assets made after December 31, 1996, except for certain
financial assets for which the effective date has been delayed for one year.
SFAS No. 125 provides financial reporting standards for the derecognition and
recognition of financial assets, including the distinction between transfers
of financial assets which should be recorded as sales and those which should
be recorded as secured borrowings. The adoption of SFAS No. 125 had no
material effect on the Company's financial position or results of operations.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share" ("EPS"), effective for periods ending after December 15, 1997, with
restatement required for all prior periods. SFAS No. 128 replaces the current
EPS categories of primary and fully diluted with "basic", which reflects no
dilution from common stock equivalents, and "diluted", which reflects dilution
from common stock equivalents based on the average price per share of the
Company's common stock during the period. The adoption of SFAS No. 128 would
not have had, and is not expected to have, a material effect on the Company's
EPS calculation.
6
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. CONSUMER LOANS
Consumer loans, classified as to type, were as follows (in millions).
<TABLE>
<CAPTION>
AT
AT FIRST FISCAL FISCAL
QUARTER YEAR
END 1997 END 1996
--------------- --------
<S> <C> <C> <C>
Credit card...................................... $20,803 $22,062
Real estate-secured and other consumer
installment..................................... 1,234 1,204
------- -------
Total............................................ 22,037 23,266
Less
Unearned finance charges and unamortized loan
discounts and fees............................ 70 78
Allowance for loan losses...................... 819 815
------- -------
Consumer loans, net.............................. $21,148 $22,373
======= =======
Activity in the allowance for consumer loan losses was as follows (in
millions).
<CAPTION>
FIRST FISCAL QUARTER END
------------------------
1997 1996
--------------- --------
<S> <C> <C> <C>
Balance, beginning of period..................... $815 $722
Provision for loan losses........................ 376 225
Less deductions
Charge-offs.................................... 418 250
Recoveries..................................... (40) (33)
------- -------
Net charge-offs.............................. 378 217
------- -------
Other(1)......................................... 6 (66)
------- -------
Balance, end of period........................... $819 $664
======= =======
</TABLE>
- --------
(1) Primarily reflects net transfers related to asset securitizations.
Interest accrued on loans subsequently charged-off, recorded as a reduction
of interest revenue, was $80 million and $42 million in the first fiscal
quarters of 1997 and 1996.
The Company received proceeds from asset securitizations of $2,620 million
in the first fiscal quarter of 1996. The uncollected balances of consumer
loans sold through securitizations were $13,258 million and $13,385 million at
first fiscal quarter end 1997 and fiscal year end 1996. The allowance for loan
losses related to securitized loans, included in other liabilities and accrued
expenses, was $443 million and $447 million at first fiscal quarter end 1997
and fiscal year end 1996.
3. LONG-TERM BORROWINGS
Long-term borrowings at first fiscal quarter end 1997 scheduled to mature
within one year aggregated $4,306 million.
During the first fiscal quarter ended 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 first fiscal quarter end 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 fiscal years ending are as follows: 1997,
$12 million; 1998, $64 million; 1999, $652 million; 2000,
7
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$567 million; 2001, $21 million; and thereafter, $2,108 million. In the first
fiscal quarter of 1997 senior long-term notes in the amount of $1,724 million
matured.
4. PREFERRED STOCK AND CAPITAL UNITS
Preferred stock is composed of the following issues:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
AT BALANCE AT
FISCAL PERIOD END FISCAL PERIOD END
------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C>
ESOP Convertible Preferred Stock, liqui-
dation 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>
Each issue of outstanding preferred stock ranks in parity with all other
outstanding preferred stock of the Company.
During the first fiscal quarter of 1997, 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. In addition, the Company announced that it had called for
redemption, on May 30, 1997, all 750,000 shares of its 8- 3/4% Cumulative
Preferred Stock at a redemption price of $200 per share.
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 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 fiscal quarter of 1997, the Company and MS plc issued 8.03%
Capital Units in the aggregate amount of $134 million which mature in 2017.
5. COMMON STOCK AND SHAREHOLDERS' EQUITY
In conjunction with the Merger, the Company increased the number of
authorized common shares to 1,750 million and changed the number of authorized
preferred shares to 30 million.
During the first fiscal quarter of 1997, the Company repurchased or acquired
2.6 million shares of its common stock at an aggregate cost of $89 million and
an average cost per share of $34.50. Prior to the consummation of the Merger,
both Morgan Stanley and Dean Witter Discover rescinded their respective
outstanding share repurchase authorizations. At the time of the Merger, Morgan
Stanley common stock which had been held in treasury was retired.
8
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DWR, a registered broker-dealer and a registered futures commissions
merchant, is subject to the uniform net capital rule under the Securities
Exchange Act of 1934. Under the alternative method permitted by this Rule, the
required net capital, as defined, shall not be less than the greater of (a)
one million dollars, (b) 2% of aggregate debit balances arising from client
transactions pursuant to the Securities Exchange Act of 1934 Rule 15c3-3, or
(c) 4% of the funds required to be segregated pursuant to the Commodity
Exchange Act. The New York Stock Exchange, Inc. may also require a member
organization to reduce its business if its net capital is less than the
greater of (a) 4% of aggregate debit balances or (b) 6% of the funds required
to be segregated and may prohibit a member organization from expanding its
business and declaring cash dividends if its net capital is less than the
greater of (a) 5% of aggregate debit balances or (b) 7% of the funds required
to be segregated. At first fiscal quarter end 1997, DWR's net capital was $640
million and net capital in excess of the minimum required was $521 million.
DWR's net capital was 21.4% of aggregate debit balances and 21.5% of funds
required to be segregated.
MS&Co. is a registered broker-dealer and a registered futures commission
merchant and, accordingly, is subject to the minimum net capital requirements
discussed above. MS&Co. has consistently operated in excess of these
requirements with aggregate net capital, as defined, totaling $1,596 million
at fiscal first quarter end 1997, which exceeded the amount required by $1,255
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.
Under regulatory net capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other regulatory capital guidelines, FDIC
insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital,
as defined, to total assets ("leverage ratio") and (b) 8% combined Tier 1 and
Tier 2 capital, as defined, to risk weighted assets ("risk-weighted capital
ratio"). At fiscal first quarter end 1997, the leverage ratio and risk-weighed
capital ratio of each of the Company's FDIC insured financial institutions
exceeded these and all other regulatory minimums.
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.
6. ACQUISITIONS
In the first quarter of fiscal 1996, the Company completed its acquisition
of Miller, Anderson & Sherrerd, LLP ("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
VK/AC Holding, Inc., the parent 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. The Company's fiscal 1996 results include the results of VKAC since
October 31, 1996, the date of acquisition.
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 business would have increased
9
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company's assets under administration at first fiscal quarter end 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.
7. CONTINGENT LIABILITIES
In the normal course of business, the Company has been named as a defendant
in various lawsuits and has been involved in certain investigations and
proceedings. Some of these matters involve claims for substantial amounts.
Although the ultimate outcome of these matters cannot be ascertained at this
time, it is the opinion of management, after consultation with outside
counsel, that the resolution of such matters will not have a material adverse
effect on the consolidated financial condition of the Company, but may be
material to the Company's operating results for any particular period,
depending upon the level of the Company's income for such period.
8. 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 Investments", and Note 8 to the consolidated financial statements
for the fiscal year ended 1996, included in the Form 8-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 consolidated statements of financial
condition, which, as described in Note 1, are recorded at fair value,
representing the cost of replacing those instruments.
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.
10
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The credit quality of the Company's trading-related derivatives at first
fiscal quarter end 1997 and fiscal year end 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>
COLLATERALIZED OTHER NON-
NON-INVESTMENT INVESTMENT
AAA AA A BBB GRADE GRADE TOTAL
------ ------ ------ ------ -------------- ---------- -------
FIRST FISCAL QUARTER END
1997 (DOLLARS IN MILLIONS)
<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%
====== ====== ====== ====== ==== ==== =======
<CAPTION>
AT FISCAL YEAR END 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate and cur-
rency swaps and options
(including caps, floors
and swap options) and
other fixed income se-
curities 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 securi-
ties 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, op-
tions 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 the fiscal 1996 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Management" in the Form 8-K for
discussions of the Company's risk management policies and procedures.
The Company had approximately $3.0 billion of letters of credit outstanding
at first fiscal quarter end 1997 to satisfy various collateral requirements.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover and Co. ("Dean Witter Discover") (the
"Merger"). At that time Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. (the "Company"). In conjunction
with the Merger, each share of Morgan Stanley common stock then outstanding
was converted into the right to receive 1.65 shares of the Company's common
stock (the "Exchange Ratio"), and each share of Morgan Stanley preferred stock
was converted into the right to receive one share of a corresponding series of
preferred stock of the Company. The Merger was treated as a tax free exchange.
Basis of Financial Information
The supplemental consolidated financial statements give retroactive effect
to the Merger of Dean Witter Discover and Morgan Stanley in a transaction
accounted for as a pooling of interests. The pooling of interests method of
accounting requires the restatement of all periods presented as if Dean Witter
Discover and Morgan Stanley had always been combined. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of the Company and its subsidiaries after financial statements
covering the date of consummation of the business combination are issued. The
supplemental consolidated statement of changes in shareholders' equity
reflects the accounts of the Company as if the additional preferred and common
stock had been issued during all the periods presented. The supplemental
consolidated financial statements, including the notes thereto, should be read
in conjunction with the historical consolidated financial statements of Dean
Witter Discover and Morgan Stanley, included in their Annual Reports on Form
10-K for the fiscal years ended December 31, 1996 and November 30, 1996,
respectively.
Prior to the consummation of the merger, Dean Witter Discover's fiscal year
ended on December 31 and Morgan Stanley's fiscal year ended on November 30. In
recording the pooling of interests combination, Dean Witter Discover's
financial statements for the first fiscal quarter ended March 31, 1997 and
1996 and for the fiscal year ended December 31, 1996 were combined with Morgan
Stanley's financial statements for the first fiscal quarter ended February 28,
1997 and February 29, 1996 and for the fiscal year ended November 30, 1996 (on
a combined basis, "first fiscal quarter 1997," "first fiscal quarter 1996,"
and "fiscal year 1996," respectively).
RESULTS OF OPERATIONS
The Company's results of operations may be materially affected by market
fluctuations and by economic factors. The Company's securities 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, which, among
other things, affects the flow of investment dollars into mutual funds, and
the size, number and timing of transactions or assignments (including
realization of returns from the Company's principal and merchant banking
investments). In the Company's credit services business, changes in economic
variables may substantially affect consumer loan growth and credit quality. 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.
12
<PAGE>
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, mutual fund
groups 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 and retail
securities firms 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. Competitive factors also affect
the Company's success in attracting and retaining clients and assets by its
ability to meet investors' saving and investment needs through consistency of
investment performance and accessibility to financial products and advice. In
the credit services industry, competition centers on merchant acceptance of
credit cards, credit card account acquisition and customer utilization of
credit cards. Merchant acceptance is based on both competitive transaction
pricing and the volume of credit cards in circulation. Credit card account
acquisition and customer utilization are driven by the offering of credit
cards with competitive and appealing features such as no annual fees, low
introductory interest rates and other customized features targeting specific
consumer groups.
As a result of the above economic and competitive factors, 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. 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 activities,
emphasizing fee-based assets that are designed to generate a continuing stream
of revenues, managing risks, evaluating credit product pricing and monitoring
costs will continue to affect the overall financial results of the Company. 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 robust global financial markets experienced during fiscal 1995 and
fiscal 1996 continued through the first quarter of fiscal 1997, leading to
record revenues and earnings for the Company. The Company's operating results
have benefited from a combination of a healthy U.S. economy, continued high
levels of cash inflows into mutual funds, a relatively stable bond market, a
strong U.S. dollar, better than expected fourth quarter corporate earnings,
relatively stable levels of inflation and interest rates, despite the multi-
year economic growth and continued growth in consumer demand, and use of
credit as a payment mechanism, partially offset by the effects of continued
deterioration of consumer credit quality.
The Company's securities business, which includes asset management,
generated higher revenues than the comparable prior fiscal quarter, influenced
by strong activity in underwriting and merger and acquisition transactions and
the continuance of heightened investor trading activity in most markets. Asset
management and administration revenues also increased significantly as a
result of the Company's continuing strategic emphasis on these businesses.
Concerns over mounting inflationary pressures in the U.S. economy led the
Federal Reserve Board to raise short-term interest rates by .25% on March 25,
1997 and may lead to additional increases this year in an effort to forestall
higher levels of inflation. Higher interest rates domestically, coupled with
economic sluggishness and high rates of unemployment in Europe, may well lead
to less favorable market conditions in the future. The Company's financial
results for the remainder of fiscal 1997 will reflect whether favorable market
and economic conditions continue to persist, as well as the effectiveness of
the Company's efforts to manage costs and risk management processes.
In the fiscal first quarter of 1997, consumer demand and retail sales
increased over the comparable period of 1996, although at a slower rate than
the recent trend, resulting in growth in general purpose credit card
transaction volume and consumer loans from the first fiscal quarter of 1996.
In the first fiscal quarter of 1997, the Company continued to invest in future
growth by increasing Credit Services marketing and solicitation activities.
13
<PAGE>
The Company achieved net income of $592 million in the first fiscal quarter
of 1997, a 14% increase over the first fiscal quarter of 1996. Primary
earnings per common share was $0.95 in the first fiscal quarter of 1997
compared to $0.83 in the first fiscal quarter of 1996. Fully diluted earnings
per common share was $0.94 in the first fiscal quarter of 1997 compared to
$0.81 in the first fiscal quarter of 1996.
SECURITIES
STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
--------------------------
1997 1996
------ ------
<S> <C> <C> <C> <C> <C>
Revenues
Investment banking................................. $ 521 $ 464
Principal transactions:
Trading........................................... 869 823
Investments....................................... 56 (7)
Commissions........................................ 488 455
Interest and dividends............................. 2,565 2,119
Asset management and administration................ 590 397
Other.............................................. 26 22
------ ------
Total revenues.................................... 5,115 4,273
Interest expense.................................... 2,403 1,975
------ ------
Net revenues...................................... 2,712 2,298
------ ------
Expenses excluding interest
Compensation and benefits.......................... 1,355 1,151
Occupancy and equipment............................ 111 104
Brokerage, clearing and exchange fees.............. 96 77
Information processing and communications.......... 146 118
Business development............................... 89 65
Professional services.............................. 73 53
Other.............................................. 112 87
------ ------
Total expenses excluding interest................. 1,982 1,655
------ ------
Income before income taxes ......................... 730 643
Provision for income taxes.......................... 284 248
------ ------
Net income.......................................... $ 446 $ 395
====== ======
Preferred stock dividend requirements............... $ 19 $ 16
====== ======
Earnings applicable to common shares................ $ 427 $ 379
====== ======
</TABLE>
Securities provides a wide range of financial products, services and
investment advice to individual and institutional investors. Securities
business activities are conducted in the United States and in 19 other
countries and include investment banking, research, institutional sales and
trading and global asset management, and investment and asset management
products and services for individual clients. In the following discussion
amounts for the first fiscal quarter of 1996 are given in parentheses.
Securities net revenues and net income of $2,712 and $446 million in the
first quarter of fiscal 1997, represent increases of 18% and 13%,
respectively, from the first quarter of fiscal 1996, primarily reflecting
higher levels of asset management and administration revenues, investment
banking revenues and increased principal transaction trading and investment
revenues, partially offset by higher incentive-based compensation and non-
compensation expenses.
14
<PAGE>
Investment Banking
Investment banking revenues are derived from the underwriting of securities
offerings and fees from advisory services. Investment banking revenues
increased to $521 million ($464 million), primarily reflecting underwriting
revenues which continued to remain strong. Fixed income underwriting revenues
increased, primarily from investment grade debt securities as the issuance of
long-dated debt was favorably received by investors. Equity financing revenues
also increased despite slower underwriting volumes as many companies are
sufficiently capitalized, reducing the need for equity offerings. Revenues
from merger, acquisition and restructuring activities continued to be strong
as the market for these transactions continued at unprecedented levels and
global transaction volumes remained high. Merger and acquisition activity was
diversified across many industries, with the financial services, technology,
public utility and real estate sectors contributing the greatest level of
activity. Fees from real estate transactions declined in comparison to the
high level of revenues generated in the first quarter of fiscal 1996.
Principal Transactions
Principal transaction revenues, which include revenues from customers
purchases and sales of securities in which the Company acts as principal, and
gains and losses on securities held for resale, including derivatives, were
$869 million ($823 million). Fixed income trading revenues increased to record
levels, reflecting higher revenues from investment grade debt, securitized
debt and swaps trading, partially offset by lower revenues from government
debt trading. The quarter's results benefited from increased customer activity
as well as higher volatility in the global fixed income markets as a result of
uncertainty related to the Federal Reserve Board's taking measures to curb
inflationary pressures, as well as growing uncertainty regarding the
approaching European Monetary Union. Equity trading revenues were comparable
with prior year levels, as higher revenues from cash products were offset by
lower equity derivatives trading revenues. Equity cash products benefited from
the continued flow of funds into equity-related mutual funds, as well as
increased market share of customer business. Equity derivatives revenues were
impacted by increased competition and pressure on pricing levels. Trading
revenues from commodity products represented the second highest level recorded
by the Company, surpassed only by the comparable prior year quarter. Revenues
from energy-related products benefited from high volatility, primarily in
natural gas, heating oil and crude oil. This resulted from expectations of
colder temperatures and low inventory levels in the beginning of the quarter,
followed by unseasonably warm weather and replenished inventory levels towards
the end of the quarter. Foreign exchange trading revenues rose to record
quarterly levels, primarily resulting from a strengthening U.S. dollar driven
largely by stable interest rates and economic growth in the U.S., coupled with
weaker economies and lower interest rates in Germany and Japan. This led to
higher levels of market volatility and contributed to increased customer
trading volume.
Principal transaction investment gains aggregating $56 million were
recognized in the first quarter of fiscal 1997, primarily in connection with
increases in the carrying value of certain merchant banking investments and
real estate investment gains. This compares with losses of $7 million that
were recognized in the first quarter of fiscal 1996, which primarily resulted
from the writedown of certain merchant banking equity securities.
Commissions
Commission revenues increased to $488 million ($455 million), principally
reflecting higher levels of securities transactions driven by market
volatility, continued cash flows into the equity markets from investors and
higher revenues from insurance sales.
Net Interest
Net interest and dividend revenues increased to $162 million ($144 million).
Interest and dividend revenues rose to $2,565 million ($2,119 million), and
interest expense increased to $2,403 million ($1,975 million), principally
reflecting growth in interest-bearing assets and liabilities. 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. Interest and
15
<PAGE>
dividend revenues and expense should be viewed in the broader context of
principal trading and investment banking 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.
Asset Management and Administration
Asset management and administration revenues include fees for asset
management services, including fees for investment management and for
promoting and distributing mutual funds ("12b-1 fees"), other administrative
fees and non-interest revenues earned from correspondent clearing and custody
services. Fund management fees arise from investment management services the
Company provides to registered investment companies (the "funds") pursuant to
various contractual arrangements. The Company receives management fees based
upon each fund's average daily net assets. The Company receives 12b-1 fees for
services it provides in promoting and distributing certain open-ended funds.
These fees are based on the lesser of average daily fund asset balances or
average daily aggregate net fund sales and are affected by changes in the
overall level and mix of assets under management and administration.
Asset management and administration revenues increased significantly to $590
million ($397 million). The majority of this increase is attributable to
revenues from VKAC, which was acquired on October 31, 1996, and from MAS,
which was acquired on January 3, 1996. Also contributing to the increase were
higher 12b-1 fees and higher revenues from international equity and emerging
market products resulting from inflows of client assets and market
appreciation. Customer assets under management or supervision increased to
$279 billion ($186 billion), including $60 billion associated with the
acquisition of VKAC as well as continued inflows of new assets and
appreciation in the value of existing customer portfolios.
Customer assets under administration increased to $152 billion ($121
billion), primarily reflecting appreciation in the value of customer
portfolios and additional assets placed under custody with the Company,
including new customer accounts as well as additional assets from existing
customers.
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 involved 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 first fiscal quarter end 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.
Expenses Excluding Interest
Total expenses excluding interest increased to $1,982 million ($1,655
million). Within that total, compensation and benefits expense increased $204
million to $1,355 million ($1,151 million), principally reflecting increased
levels of incentive compensation based on higher levels of revenues and
earnings. Non-compensation expenses, excluding brokerage, clearing and
exchange fees, increased $104 million to $531 million. Approximately $39
million of this increase was attributable to the expenses of VKAC. Occupancy
and equipment expenses increased $7 million, primarily related to occupancy
costs of VKAC. Business development expenses increased $24 million, reflecting
increased travel and entertainment costs as the Company continues to develop
new business, as well as advertising costs associated with VKAC's retail
mutual funds. Professional services expenses increased $20 million, primarily
reflecting higher consulting and executive recruitment costs associated with
the Company's increased global business activities. Information processing and
communications expenses increased $28 million, primarily due to additional
expenses related to software development, information technology equipment,
the impact of increased rates for certain data services and additional
16
<PAGE>
employees hired during fiscal 1996. Other expenses increased $25 million,
which includes $15 million of goodwill amortization related to the
acquisitions of MAS and VKAC.
CREDIT SERVICES
STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Merchant and cardmember fees............................. $ 405 $ 320
Servicing fees........................................... 209 200
Other.................................................... 2 6
---------- ----------
Total non-interest revenues............................ 616 526
---------- ----------
Interest revenue......................................... 789 675
Interest expense......................................... 294 275
---------- ----------
Net interest income.................................... 495 400
Provision for consumer loan losses....................... 376 225
---------- ----------
Net credit income...................................... 119 175
---------- ----------
Net operating revenues................................. 735 701
---------- ----------
Employee compensation and benefits....................... 140 124
Marketing and business development....................... 157 164
Information processing and communications................ 113 114
Facilities and equipment................................. 15 15
Other.................................................... 76 87
---------- ----------
Total non-interest expenses............................ 501 504
---------- ----------
Income before income taxes............................... 234 197
Provision for income taxes............................... 88 73
---------- ----------
Net income............................................... $ 146 $ 124
========== ==========
</TABLE>
Credit Services net income increased 18% to $146 million in the first fiscal
quarter of 1997 from the first fiscal quarter of 1996. The increase resulted
from the effects of credit card fee and interest revenue enhancements made in
fiscal 1996 and higher average levels of consumer loans partially offset by
increased levels of credit losses.
Non-Interest Revenues. Total non-interest revenues increased 17% in the
first fiscal quarter of 1997 from the first fiscal quarter of 1996.
Merchant and cardmember fees include revenues from fees charged to merchants
on credit card sales, late payment fees, overlimit fees, insurance fees, cash
advance fees, the administration of credit card programs and transaction
processing services. Merchant and cardmember fees increased 26% in the first
fiscal quarter of 1997 from the first fiscal quarter of 1996. The increase was
due to higher overlimit, late payment and merchant fee revenues. Overlimit
fees were implemented in March 1996 and the amount of the fee was increased in
the fourth fiscal quarter of 1996. The increase in late payment fee revenues
was due to an increase in the amount of the late payment fee charged, an
increase in the incidence of late payments and a tightening, in the fourth
fiscal quarter of 1996, of late payment fee terms. The increased incidence of
late payments was attributable to a higher level of delinquent accounts and an
increase in active credit card accounts. The increase in merchant fee revenue
was due to growth in credit card transaction volume.
17
<PAGE>
Servicing fees are revenues derived from consumer loans that have been sold
to investors through asset securitizations. Cash flows from the interest yield
and cardmember fees generated by securitized loans are used to pay investors
in these loans a predetermined fixed or floating rate of return on their
investment, to reimburse the investors for losses to principal through charged
off loans and to pay the Company a fee for servicing the loans. Any excess net
cash flows remaining are paid to the Company. The servicing fees and excess
net cash flows paid to the Company are reported as servicing fees in the
consolidated statements of income. The sale of consumer loans through asset
securitizations therefore has the effect of converting portions of net credit
income and fee income to servicing fees.
The table below presents the components of servicing fees (dollars in
millions).
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Merchant and cardmember fees............................ $ 110 $ 47
Interest revenue........................................ 530 493
Interest expense........................................ (203) (189)
Provision for loan losses............................... (228) (151)
---------- ----------
Servicing fees.......................................... $ 209 $ 200
========== ==========
</TABLE>
Servicing fees increased 4% in the first fiscal quarter of 1997 from the
first fiscal quarter of 1996. This increase was due to higher cardmember fees,
as discussed previously, and a higher average level of securitized loans,
partially offset by a higher rate of credit losses on securitized loans.
Net Interest Income. Net interest income is equal to the difference between
interest revenue derived from Credit Services consumer loan and short-term
investment assets and interest expense incurred to finance those assets.
Credit Services assets, primarily consumer loans, earn interest revenue at
both fixed rates and market indexed variable rates. The Company incurs
interest expense at fixed and floating rates to finance Credit Services
assets. Interest expense also includes the effects of interest rate contracts
entered into by the Company as part of its interest rate risk management
program. This program is designed to reduce the volatility of earnings
resulting from changes in interest rates and is accomplished primarily through
matched financing, which entails matching the repricing schedules of consumer
loans and the related financing. Net interest income increased 24% in the
first fiscal quarter of 1997 from the first fiscal quarter of 1996 due to a
higher average level of consumer loans, a higher yield on consumer loans and a
decline in the interest rates, including the effect of interest rate
contracts, on the Company's borrowings. The higher yield on consumer loans was
due to a shift in the mix of consumer loans to higher yielding fixed rate
loans and the effect of interest revenue enhancements made in fiscal 1996,
partially offset by higher charge-offs of interest revenue.
18
<PAGE>
The following tables present analyses of Credit Services average balance
sheets and interest rates for the first fiscal quarter 1997 and 1996 and
changes in net interest income during those periods.
CREDIT SERVICES AVERAGE BALANCE SHEET ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
-------------------------------------------------
1997 1996
------------------------ ------------------------
AVERAGE AVERAGE
BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning
assets:
General purpose credit
card loans............ $19,184 14.12% $668 $16,648 13.68% $566
Other consumer loans... 3,104 13.18 101 2,950 12.22 90
Investment securities.. 220 5.28 3 329 5.37 4
Other.................. 1,295 5.59 17 1,083 5.52 15
------- ---- ------- ----
Total interest
earning assets...... 23,803 13.45 789 21,010 12.93 675
Allowance for loan
losses................ (919) (674)
Non-interest earning
assets................ 1,872 1,356
------- -------
Total assets......... $24,756 $21,692
======= =======
LIABILITIES & SHAREHOLDER'S
EQUITY
Interest bearing
liabilities:
Interest bearing
deposits
Savings............... $ 1,045 4.40% $ 11 $ 1,001 4.57% $ 11
Brokered.............. 3,748 6.73 62 3,157 7.12 56
Other time............ 2,203 6.07 33 1,822 6.16 28
------- ---- ------- ----
Total interest
bearing deposits.... 6,996 6.17 106 5,980 6.40 95
Other borrowings....... 12,856 5.92 188 11,563 6.26 180
------- ---- ------- ----
Total interest
bearing liabilities. 19,852 6.01 294 17,543 6.31 275
Shareholder's
equity/other
liabilities........... 4,904 4,149
------- -------
Total liabilities &
shareholder's
equity.............. $24,756 $21,692
======= =======
Net interest income.... $495 $400
==== ====
Net interest margin.... 8.44% 7.66%
Interest rate spread... 7.44% 6.62%
</TABLE>
19
<PAGE>
CREDIT SERVICES RATE/VOLUME ANALYSIS (IN MILLIONS)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
1997 VS 1996
-----------------------
INCREASE/(DECREASE)
DUE TO CHANGES IN
-----------------------
VOLUME RATE TOTAL
------- ------ ------
<S> <C> <C> <C>
INTEREST REVENUE
General purpose credit card loans..................... $ 82 $ 20 $ 102
Other consumer loans.................................. 4 7 11
Investment securities................................. (1) -- (1)
Other................................................. 2 -- 2
------
Total interest revenue.............................. 85 29 114
------
INTEREST EXPENSE
Interest bearing deposits
Savings.............................................. -- -- --
Brokered............................................. 10 (4) 6
Other time........................................... 6 (1) 5
------
Total interest bearing deposits..................... 16 (5) 11
Other borrowings...................................... 19 (11) 8
------
Total interest expense.............................. 34 (15) 19
------
Net interest income................................... $ 51 $ 44 $ 95
===== ====== ======
</TABLE>
The supplemental table below provides average managed loan balance and rate
information which takes into account both owned and securitized loans.
SUPPLEMENTAL CREDIT SERVICES AVERAGE MANAGED LOAN BALANCE SHEET INFORMATION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER
-----------------------------------------------------
1997 1996
-------------------------- --------------------------
AVG. BAL. RATE % INTEREST AVG. BAL. RATE % INTEREST
--------- ------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans............. $35,625 14.78% $1,299 $31,388 14.72% $1,149
General purpose credit card
loans..................... 31,677 14.85 1,160 27,456 14.89 1,016
Total interest earning
assets.................... 37,140 14.41 1,319 32,800 14.33 1,168
Total interest bearing
liabilities............... 33,189 6.08 497 29,334 6.36 464
Consumer loan interest rate
spread.................... 8.70 8.36
Interest rate spread....... 8.33 7.97
Net interest margin........ 8.97 8.64
</TABLE>
Provision for Loan Losses. The provision for loan losses is the amount
necessary to establish the allowance for loan losses at a level the Company
believes is adequate to absorb estimated losses in its consumer loan portfolio
at the balance sheet date. The Company's allowance for loan losses is
regularly evaluated by management for adequacy on a portfolio by portfolio
basis and was $819 million and $664 million at first fiscal quarter end 1997
and 1996. The provision for loan losses is affected by net charge-offs, loan
volume and changes in the amount of consumer loans estimated to be
uncollectable. The provision for loan losses increased 67% in the first fiscal
quarter of 1997 from the first fiscal quarter of 1996 due to an increase in
net charge-off rates. Net charge-offs as a percentage of average consumer
loans outstanding increased to 6.88% in the first fiscal quarter of 1997 from
4.44% in the first fiscal quarter of 1996. The increase in the Company's net
charge-off rate was consistent with the industry-wide trend of increasing
credit loss rates that the Company believes is related, in part, to increased
consumer debt levels and bankruptcy rates. The Company believes that the trend
may continue and the Company may experience a higher net charge-off rate for
the full fiscal year 1997 compared to fiscal
20
<PAGE>
1996. In fiscal 1996, the Company took steps to reduce the impact of this
trend, including raising credit quality standards for new accounts,
selectively reducing credit limits and increasing collection activity. The
Company believes these credit quality improvements had a minimal impact in
fiscal 1996, but believes they may have an increased effect in fiscal 1997.
The Company's expectations about future charge-off rates and credit quality
improvements are subject to uncertainties that could cause actual results to
differ materially from what has been projected above. Factors that influence
the level and direction of consumer loan delinquencies and charge-offs include
changes in consumer spending and payment behaviors, bankruptcy trends, the
seasoning of the Company's loan portfolio, interest rate movements and their
impact on consumer behavior, and the rate and magnitude of changes in the
Company's consumer loan portfolio, including the overall mix of accounts,
products and loan balances within the portfolio.
Consumer loans are considered delinquent when interest or principal payments
become 30 days past due. Consumer loans are charged off when they become 180
days past due, except in the case of bankruptcies and fraudulent transactions,
where loans are charged off earlier. Loan delinquencies and charge-offs are
primarily affected by changes in economic conditions and vary throughout the
year due to seasonal consumer spending and payment behaviors. The Company
believes the increase in consumer loan delinquency rates at first fiscal
quarter end 1997 from prior periods was related to the industry-wide credit
conditions discussed previously. The decline in the percentage of consumer
loans past due 30 to 89 days as of first fiscal quarter end 1997 from fiscal
year end 1996 was due to the effects of a program that allowed selected
cardmembers in good standing to defer payment one month. The following table
presents delinquency and net charge-off rates with supplemental managed loan
information.
CREDIT SERVICES ASSET QUALITY (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FIRST FISCAL QUARTER END FISCAL YEAR END
---------------------------------- ----------------
1997 1996 1996
---------------- ---------------- ----------------
OWNED MANAGED OWNED MANAGED OWNED MANAGED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans.......... $21,967 $35,225 $18,784 $31,046 $23,188 $36,573
Consumer loans
contractually past due
as a percentage of
consumer loans
30 to 89 days......... 3.61% 3.62% 3.66% 3.62% 4.25% 4.29%
90 to 179 days........ 2.93% 2.93% 2.39% 2.35% 2.81% 2.77%
Net charge-offs as a
percentage of average
consumer loans
(year-to-date)......... 6.88% 6.89% 4.44% 4.71% 5.19% 5.40%
</TABLE>
Non-Interest Expenses. Non-interest expenses remained level in the first
fiscal quarter of 1997 from the first fiscal quarter of 1996.
Employee compensation and benefits expense increased 12% in the first fiscal
quarter of 1997 from the first fiscal quarter of 1996 due to an increase in
the number of employees. Marketing and business development expense decreased
4% in the first fiscal quarter of 1997 from the first fiscal quarter of 1996.
The decrease was due to lower mailing and promotional costs partially offset
by an increase in Cardmember rewards expense. Cardmember rewards expense,
which includes the Cashback Bonus(R) Award, increased due to continued growth
in credit card transaction volume and increased cardmember qualification for
higher award levels.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $238.9 billion at fiscal year end
1996 to $267.0 billion at first fiscal quarter end 1997, primarily reflecting
growth in financial instruments owned, resale agreements, securities borrowed
and customer receivables. 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.
21
<PAGE>
The Company's senior management and 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. The primary goal of the Company's
funding and liquidity activities is to ensure the stability of the Company's
funding base and to provide adequate financing sources over a wide range of
potential credit ratings and market environments.
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 for its Securities segment is raised through diverse sources. These
include the Company's 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
re-investments; master notes; deposits; short-term bank notes; Fed Funds and
committed and uncommitted lines of credit. Repurchase transactions and a
portion of the Company's bank borrowings are made on a collateralized basis
and therefore provide a more stable source of funding than short-term
unsecured borrowings.
The funding sources utilized for the Company's Credit Services segment
include asset securitizations, medium-term notes, long-term borrowings,
deposits, asset-backed commercial paper, Fed Funds and short-term bank notes.
The Company sells consumer loans through asset securitizations using several
transaction structures. RFC, an entity included in the consolidated financial
statements of the Company, issues asset-backed commercial paper.
The Company's bank subsidiaries solicit deposits from consumers and purchase
federal funds. Interest bearing deposits are classified by type as savings,
brokered and other time deposits. Savings deposits consist primarily of money
market deposits and certificate of deposit accounts sold directly to
cardmembers and savings deposits from DWR clients. Brokered deposits consist
primarily of certificates of deposit issued by the Company's bank
subsidiaries, which are sold through the DWR account executive sales
organization and a syndicate of firms managed by DWR. Other time deposits
include institutional certificates of deposit. The Company, through Greenwood
Trust Company, an indirect subsidiary of the Company, sells notes under a
short-term bank note program.
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 the overall availability of credit.
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 have a significant impact on certain trading revenues,
particularly in those businesses where longer term counterparty
22
<PAGE>
performance is critical, such as over-the-counter derivative transactions. The
Company does not expect that the Merger will have a material impact on the
cost and availability of its financing or its business activities.
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 is often 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.
During the first quarter of fiscal 1997, the Company issued senior notes
aggregating $3,424 million, including non-U.S. dollar currency notes
aggregating $295 million. These notes have maturities from 1997 to 2012 and a
weighted average coupon interest rate of 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.
In the first quarter of fiscal 1997, 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. A 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 Cumulative
Preferred Stock.
In the first quarter of fiscal 1997, 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.
Subsequent to fiscal first quarter end, the Company announced that it had
called for redemption, on May 30, 1997, all 750,000 shares of its 8 -3/4%
Cumulative Preferred Stock at a redemption price of $200 per share.
The Company maintains a senior revolving credit agreement with a group of
banks to support general liquidity needs, including the issuance of commercial
paper (the "Morgan Stanley Facility"). Under the terms of the credit
agreement, the banks are committed to provide up to $2.5 billion. The Company
has assumed the Morgan Stanley Facility as part of the Merger.
The Company also maintains a second senior revolving credit agreement with a
group of banks to support general liquidity needs, including the issuance of
commercial paper (the "DWD Facility"). Under the terms of the credit
agreement, the banks are committed to provide up to $4.0 billion. As of first
fiscal quarter end 1997, the Company has never borrowed from the DWD Facility.
In April 1997, DWD renewed this facility which expires in April of 1998.
The Morgan Stanley Facility and the DWD Facility both contain covenants that
require the Company to maintain minimum net worth requirements and specified
financial ratios. The Company believes that the covenant restrictions will not
impair the Company's ability to pay its current level of dividends. Prior to
the closing of the Merger, the Morgan Stanley Facility and the DWD Facility
were amended to conform such facilities to insure that they remain effective
subsequent to the closing of the Merger and to accommodate the Company's post-
Merger business activities and financing needs. After the consummation of the
Merger, the Company expects that a new credit facility of the Company will
replace the Morgan Stanley Facility and the DWD Facility.
23
<PAGE>
The Company maintains a master collateral facility that enables Morgan
Stanley & Co. Incorporated ("MS&Co."), one of the Company's U.S. broker-dealer
subsidiaries, to pledge certain collateral to secure loan arrangements,
letters of credit and other financial accommodations (the "MS&Co. Facility").
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 $1.5 billion.
The Company also maintains a revolving committed financing facility that
enables Morgan Stanley & Co. International Limited ("MSIL"), the Company's
U.K. broker-dealer subsidiary, to secure committed funding from a syndicate of
banks by providing a broad range of collateral under repurchase agreements
(the "MSIL Facility"). Such banks are committed to provide up to an aggregate
of $1.55 billion available in 12 major currencies.
RFC also maintains a senior bank credit facility to support the issuance of
asset-backed commercial paper (the "RFC Facility"). In 1996, RFC renewed this
facility and increased its amount to $2.1 billion from $1.75 billion. Under
the terms of its asset-backed commercial paper program, certain assets of RFC
were subject to a lien in the amount of $2.2 billion at fiscal year end 1996.
RFC has never borrowed from the RFC Facility.
The Company anticipates that it will utilize the Morgan Stanley Facility,
the DWD Facility, the MS&Co. Facility or the MSIL Facility for short-term
funding from time to time. RFC anticipates that it will utilize its facility
for short-term funding from time to time.
Subsequent to first fiscal quarter end 1997, the Company filed a shelf
registration statement for up to $7 billion of additional debt securities,
warrants, preferred stock or purchase contracts or any combination thereof in
the form of units.
During the first fiscal quarter of 1997, the Company repurchased
approximately 2.6 million shares of its common stock at an aggregate cost of
approximately $89 million and an average cost per share of $34.50. Prior to
consummation of the Merger, both Morgan Stanley and Dean Witter Discover
rescinded their respective outstanding share repurchase authorizations.
At first fiscal quarter end 1997, certain assets of the Company, such as
real property, equipment and leasehold improvements of $1.7 billion, and
goodwill and other intangible assets of $1.4 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 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
first fiscal quarter end 1997, the aggregate carrying value of the Company's
equity investments in privately held companies (including direct investments
and partnership interests) was $101 million, and its aggregate investment in
publicly held companies was $285 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 first
fiscal quarter end 1997 traded in markets that the Company believed were
experiencing lower levels of liquidity than traditional mortgage-backed pass-
through securities approximated $1,761 million.
In addition, at first fiscal quarter end 1997, the aggregate value of high-
yield debt securities and emerging market loans and securitized instruments
held in inventory was $1,659 million (a substantial portion of which was
subordinated debt) with not more than 5%, 11% and 19% 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
24
<PAGE>
conditions. In addition, the market for non-investment grade securities and
emerging markets 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 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). At first fiscal
quarter end 1997, the Company had a loan of $225 million outstanding in
connection with its securitized debt underwriting activities. Subsequent to
this date, this $225 million loan was repaid. In addition, in connection with
its securitized debt and high yield underwriting activities, the Company
entered into four commitments to provide an aggregate of approximately $430
million in loans and had three loans outstanding in the aggregate amount of
approximately $275 million.
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 any non-investment grade securities of these
issuers that trade in the capital markets. As of first fiscal quarter end
1997, the aggregate value of senior secured loans and positions held by the
Company was $210 million, and aggregate senior secured loan commitments were
$26 million. Subsequent to this date, the Company entered into six senior
secured loan commitments in the aggregate amount of $280 million.
As of first fiscal quarter end 1997, financial instruments owned by the
Company included derivative products (generally in the form of futures,
forwards, 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) related to financial
instruments and commodities with an aggregate net replacement cost of $12.8
billion. The net replacement cost of all derivative products in a gain
position represents the Company's maximum exposure to derivatives related
credit risk. Derivative products may have both on- and off-balance sheet risk
implications, depending on the nature of the contract. 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. The
risks associated with the Company's derivative activities, including 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. The Company manages its credit exposure to derivative
products through various means, which include reviewing counterparty financial
soundness periodically; entering into master netting agreements and collateral
arrangements with counterparties in appropriate circumstances; and limiting
the duration of exposure.
25
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Shareholders of
Morgan Stanley, Dean Witter, Discover & Co.
We have reviewed the accompanying supplemental consolidated statement of
financial condition of Morgan Stanley, Dean Witter, Discover & Co. and
subsidiaries as of first fiscal quarter end 1997, and the related supplemental
consolidated statements of income and cash flows for the first fiscal quarter
1997 and 1996. These supplemental consolidated financial statements are the
responsibility of the management of Morgan Stanley, Dean Witter, Discover &
Co. We were furnished with the report of other accountants on their review of
the interim financial information of Morgan Stanley Group Inc. and
subsidiaries, which statements reflect total assets of $224,772 million at
February 28, 1997, and total revenues of $4,076 million and $3,308 million for
the three-month periods ended February 28, 1997 and February 29, 1996,
respectively.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Dean Witter, Discover & Co. and Morgan Stanley Group Inc.,
which has been accounted for as a pooling of interests as described in Note 1
to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. The supplemental
consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of Morgan Stanley, Dean Witter, Discover & Co. and subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
Based on our review and the report of other auditors, we are not aware of
any material modifications that should be made to such supplemental
consolidated financial statements for them to be in conformity with generally
accepted accounting principles applicable after financial statements are
issued for a period which includes the date of consummation of the business
combination.
We have previously audited, in accordance with generally accepted auditing
standards, the supplemental consolidated statement of financial condition of
Morgan Stanley, Dean Witter, Discover & Co. and subsidiaries as of fiscal year
1996 (presented herein), and the related supplemental consolidated statements
of income, cash flows and changes in shareholders' equity for the year then
ended (not presented herein); and in our report dated May 31, 1997, we
expressed an unqualified opinion on those supplemental consolidated financial
statements based on our audit and the report of other auditors.
/s/ Deloitte & Touche LLP
New York, New York
May 31, 1997
26
<PAGE>
Independent Accountants' Review Report
The Board of Directors
Morgan Stanley Group Inc.
We have reviewed the accompanying condensed consolidated statement of
financial condition of Morgan Stanley Group Inc. and subsidiaries as of
February 28, 1997 and the related condensed consolidated statements of income
for the three-month periods ended February 28, 1997 and February 29, 1996, and
the condensed consolidated statements of cash flows for the three-month
periods ended February 28, 1997 and February 29, 1996. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Morgan Stanley
Group Inc. as of November 30, 1996, and the related consolidated statements of
income, shareholders' equity, and cash flows for the fiscal year then ended
(not presented herein) and in our report dated January 7, 1997, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
statement of financial condition as of November 30, 1996, is fairly stated, in
all material respects, in relation to the consolidated statement of financial
condition from which it has been derived.
/s/ Ernst & Young LLP
New York, New York
March 27, 1997
27
