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COMMISSION FILE NUMBER 1-11758
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
DEAN WITTER, DISCOVER & CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-3145972
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-2222
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------------ -------------------------------------
Common Stock--$.01 par value New York Stock Exchange
Pacific Stock Exchange
Rights to Purchase Series A New York Stock Exchange
Junior Participating Pacific Stock Exchange
Preferred Stock
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of February 28, 1997, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $12,275,079,787.75. For
purposes of this information, the outstanding shares of Common Stock owned by
the directors and executive officers of the Company were deemed to be held by
affiliates, and the Dean Witter START Plan (Savings Today Affords Retirement
Tomorrow), the SPS Transaction Services, Inc. START Plan (Savings Today Affords
Retirement Tomorrow), the Dean Witter Reynolds Inc. Account Executive
Productivity Compensation Plan, the Dean Witter Reynolds Inc. Branch Manager
Compensation Plan and the Dean Witter, Discover & Co. Employee Stock Purchase
Plan were deemed to be non-affiliates.
APPLICABLE ONLY TO CORPORATE REGISTRANTS: Indicate the number of shares
outstanding of each of the Registrant's classes of common stock, as of the
latest practicable date.
321,595,672 shares of Common Stock, par value $.01 per share, as of
February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
1. Dean Witter, Discover & Co. 1996 Annual Report to Shareholders (for the
fiscal year ended December 31, 1996). Certain information contained in this
document is incorporated by reference in Parts I and II.
2. Joint Proxy Statement of Dean Witter, Discover & Co. and Morgan Stanley Group
Inc. in respect of 1997 Annual Meeting of Stockholders of Dean Witter,
Discover & Co. (to be filed within 120 days after December 31, 1996). Certain
information contained in this document is incorporated by reference in Part
III.
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PART I
ITEM 1. BUSINESS
GENERAL
Proposed Merger With Morgan Stanley Group Inc.
On February 5, 1997, Dean Witter, Discover & Co. (the "Company") and
Morgan Stanley Group Inc. ("Morgan Stanley") announced a definitive agreement to
merge. The combined company would be a preeminent global financial services firm
with a market capitalization of approximately $21 billion (as of the time of the
merger announcement) and with leading market positions in the securities, asset
management and credit services businesses. The new company would be named Morgan
Stanley, Dean Witter, Discover & Co.
The merger would combine the Company's leading franchises in providing
investment and asset management products and services and quality consumer
credit products to its customers with Morgan Stanley's leading franchises in the
origination of quality underwritten products, investment banking, research and
institutional sales and trading. Through a network of 28 principal offices in 19
countries, Morgan Stanley offers a wide range of financial services to sovereign
governments, corporations, institutions and individuals. A leader in investment
banking since its formation in 1935, Morgan Stanley ranked first in global
mergers and acquisition announced transactions in 1996 according to Securities
Data Corporation and held leading positions in debt and equity underwriting. In
asset management, the combination would result in a business that manages more
than $270 billion of assets on a pro forma basis.
Under the terms of the merger agreement unanimously approved by the
boards of directors of both companies, each of Morgan Stanley's common shares
will be exchanged for 1.65 of the Company's common shares. Morgan Stanley
preferred shares outstanding at the date of the merger will be exchanged for
preferred shares of the Company having substantially identical terms. The
transaction, which is expected to be completed in mid-1997, is intended to be a
tax-free exchange and accounted for as a pooling of interests and is subject to
customary closing conditions, including certain regulatory approvals and the
approvals of shareholders of both companies. Pursuant to the pooling of
interests method of accounting, prior to the time of closing each company will
formally rescind stock repurchase authorizations existing at that time.
Because the merger would occur subsequent to December 31, 1996, unless
otherwise stated, the information presented in this Annual Report on Form 10-K
does not give effect to its impact.
Background and Overview
The Company is a diversified financial services organization that provides a
broad range of nationally marketed credit and investment products, with a
primary focus on individual customers. The Company has two principal lines of
business: credit services and securities. Its credit services business ("Credit
Services") consists primarily of the issuance, marketing and servicing of
general purpose credit cards. Credit Services is the largest single domestic
issuer of general purpose credit cards as measured by number of accounts and
cardmembers. Discover(R) Card is the Company's most widely held proprietary
general purpose credit card and generated a majority of Credit Services'
revenues and net income in 1996. The Company's securities business
("Securities") is conducted primarily through its wholly owned subsidiaries,
Dean Witter Reynolds Inc. ("DWR") and Dean Witter InterCapital Inc.
("InterCapital"). DWR is a full-service securities firm that engages in a wide
variety of securities activities, with a particular focus on serving the
investment needs of its individual clients through over 9,000 account
executives. DWR is among the largest members of the New York Stock Exchange (the
"NYSE") and is a member of other major securities, futures and options
exchanges. InterCapital, with total assets of $90.0 billion under management and
administration as of December 31, 1996, is one of the largest asset management
operations in the United States.
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The Company traces its origins to Dean Witter & Co., organized in 1924. In
1978, Dean Witter & Co. Incorporated (the successor to Dean Witter & Co.) merged
with Reynolds Securities Inc., and in 1981 Dean Witter Reynolds Organization
Inc. was acquired by Sears, Roebuck and Co. ("Sears"). Until early 1993, the
Company was a wholly owned subsidiary of Sears. On March 1, 1993, the Company
completed an initial public offering of approximately 20% of its Common Stock.
On June 30, 1993, Sears divested the remaining Company shares it then owned in a
special dividend to its shareholders.
Information concerning revenues and net income for each of the Company's
business segments for the five years ended December 31, 1996, and concerning
identifiable assets for each business segment as of December 31, 1996, 1995 and
1994, is included, respectively, in Management's Discussion and Analysis on
pages 19 and 25, and in Note 14 of Notes to Consolidated Financial Statements on
page 45, of the Company's 1996 Annual Report to Shareholders and is incorporated
herein by reference.
Employees
As of December 31, 1996, the Company had 33,084 employees, of whom 14,450
were employed by Credit Services and 18,634 by Securities. None of the Company's
employees is covered by a collective bargaining agreement.
CREDIT SERVICES
OVERVIEW
Credit Services, which accounted for 52% and 47% of the Company's net income
in 1995 and 1996, respectively, focuses on the delivery of financial products to
consumers through its four business units. The business units are:
NOVUS Services: a nationwide credit card business involving the issuance of
proprietary general purpose credit cards bearing the NOVUS(R) logo and the
operation of the NOVUS Network, the Company's proprietary merchant and cash
access network (the "NOVUS Network"). NOVUS Services' credit cards, which
include the Discover Card, Private Issue(R) Card, BRAVO(R) Card and affinity
program cards, are accepted nationwide at NOVUS Network locations for purchases
and cash advances.
Prime Option Services: an organization that markets a co-branded
MasterCard(R) general purpose credit card under the brand name Prime Option(R).
SPS Transaction Services, Inc. ("SPS"): a 74% owned, publicly held
subsidiary of the Company. SPS provides technology-based outsourcing services.
SPS' primary services include electronic point-of-sale transaction processing,
consumer private label credit card program administration, commercial accounts
receivable processing and call center teleservices.
NOVUS Financial Corporation ("NOVUS Financial"): a consumer lending
organization that focuses primarily on real estate secured consumer lending.
Credit Services is the largest single issuer of general purpose credit cards
in the United States as measured by number of accounts and card holders (holders
of the Company's general purpose proprietary credit cards are referred to as
"cardmembers"). Consumers use the Company's general purpose credit cards to
purchase goods and services and to obtain cash advances.
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The table below sets forth the number of cardmembers, the number of
accounts, the number of active accounts, and the transaction dollar amounts for
the Company's general purpose credit cards, and the dollar amount of general
purpose credit card loans managed by the Company for or at the end of the
periods indicated:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cardmembers (millions)........................ 39.2 40.2 43.3 47.0 49.5
Number of accounts (millions)................. 27.7 29.3 32.6 36.1 38.9
Number of active accounts (millions)(1)....... 18.1 19.3 21.2 23.0 23.8
Transaction dollars (billions)(2)............. $27.5 $32.8 $40.1 $47.5 $53.6
Managed loans (billions)...................... $16.4 $19.0 $23.4 $27.8 $32.6
</TABLE>
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(1) Active accounts are those with a debit or credit balance during their last
monthly billing cycle for the period indicated.
(2) Includes purchases, cash advances, and balance transfers.
The table below sets forth total revenues of the Credit Services business
units for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
-------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C>
NOVUS Services............................................... $3,632.0 $4,259.9
SPS(1)....................................................... 464.4 568.7
Prime Option Services........................................ 125.1 219.9
NOVUS Financial.............................................. 125.5 128.3
</TABLE>
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(1) Includes revenues from private label credit card programs serviced by SPS
for an indirect wholly owned subsidiary of the Company.
NOVUS SERVICES
Overview
NOVUS Services offers an array of general purpose credit cards designed to
appeal to different market segments of consumers for use on the NOVUS Network.
The NOVUS Network is the third largest domestic credit card network and consists
of merchant and cash locations that accept card brands that carry the NOVUS
logo. The Company's strategy is to expand its business by increasing the use of
existing cards and by offering new cards through the NOVUS Network.
NOVUS Services issues several proprietary cards, each of which bears the
NOVUS logo indicating acceptance by the NOVUS Network. These cards include the
Discover Card, the Private Issue Card, the BRAVO Card and the National Alliance
For Species Survival SM Card, an affinity program card launched in September
1996 in conjunction with the American Zoo and Aquarium Association. In January
1997, NOVUS Services announced it had agreed to issue an affinity program card
in conjunction with the Smithsonian Institution. NOVUS Services plans to
continue to offer additional affinity program and co-branded cards in the
future.
NOVUS Services promotes its proprietary cards through the use of different
and distinctive features that are designed to appeal to different consumer
bases. The Discover Card is designed to appeal to the value-conscious consumer
with the Cashback Bonus(R) award, no annual fee structure and interest rates
indexed to the prime rate. The Private Issue Card offers consumers a choice of
three sets of terms, based on their specific interests, and four card designs,
three designed by celebrity artists. The BRAVO Card is a general purpose credit
card designed to appeal to consumers who tend to carry balances on their card.
NOVUS Services offers cardmembers various financial services, including a
revolving line of credit, availability of cash advances, credit insurance, and
card registration to protect against losses in connection with
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card theft or loss. Discover and Private Issue cardmembers are also offered
money market deposit accounts and time deposits.
NOVUS Services accrues revenues through finance charges on cardmembers'
revolving balances, the fees paid by merchants to the Company for transactions
effected through the NOVUS Network, transaction fees paid by cardmembers for
cash advances or late payments, overlimit fees, fees from providing product
enhancements to cardmembers (e.g., credit life insurance and card registration),
merchant fees for processing transactions for other credit and charge cards, and
proceeds from the sale of point-of-sale terminals and related equipment to
merchants.
NOVUS Services, as the issuer of cards for use on the NOVUS Network, is
distinguished from MasterCard and Visa card issuers in that it directly controls
the brand image, features, service level and pricing of its cards to both
cardmembers and merchants. MasterCard and Visa issuers compete directly with
each other using the same brands and sharing common processes. The ability to
control its product provides NOVUS Services with competitive advantages that are
not available to any single MasterCard or Visa issuer, including efficiencies in
operations, product positioning and marketing execution.
Cardmembers use cards issued by the Company bearing the NOVUS logo to
purchase goods and services at participating merchant locations and to obtain
cash advances at certain merchant and bank locations and at automated teller
machines or by means of checks drawn against their lines of credit. Cardmembers
receive account statements monthly and may elect to pay all or part of the
outstanding balance each month. The unpaid portion of the outstanding balance is
carried over to the next month, and finance charges are assessed on the
revolving balance. A late fee is charged if less than a stated minimum portion
of the outstanding balance is paid each month. Cardmembers are assessed other
fees if their credit card use violates the terms of the cardmember agreement.
Cardmember rewards, primarily the Cashback Bonus award, pursuant to which
the Company annually pays Discover cardmembers and Private Issue cardmembers
electing this feature a percentage of their purchase amounts ranging up to one
percent (up to two percent for the Private Issue Card), are based upon a
cardmember's level of annual purchases. The Cashback Bonus award is remitted to
cardmembers in the form of a check or as a credit to their accounts in the
anniversary month of the account opening.
Cardmembers enter into agreements governing the terms and conditions of
their accounts. Cardmember agreements for each type of card are generally
uniform from state to state. The Company's proprietary general purpose credit
cards (other than Discover Corporate Card) are issued by Greenwood Trust Company
("Greenwood Trust"). Because of certain banking law restrictions, such cards
(other than Discover Corporate Card) may be used only for personal and household
(as opposed to commercial) transactions. The Discover Corporate Card, which is
issued by a different subsidiary of the Company, is primarily for the use of
employees of the Company and formerly affiliated companies.
In 1996, the Company made an investment in Mondex USA Services Limited
Liability Company (in formation), announced to commercially develop and
implement the Mondex advanced electronic payment and "smart card" system in the
United States. The Company anticipates that the Mondex electronic payment system
will be able to be deployed over the Internet. With Mondex, the Company believes
that consumers will be able to store "electronic cash" onto a "smart card"
embedded with a microprocessor chip, which will then be usable to make small
dollar purchases at stores or over the Internet. The Company is one of seven
major U. S. organizations holding an ownership stake in Mondex USA. The Mondex
system is being piloted internationally and in the United States.
Merchants
The NOVUS Network has expanded rapidly since its nationwide introduction in
1986. During 1996, NOVUS Services enrolled approximately 425,000 merchant
outlets to the NOVUS Network, which consisted of over 2.0 million merchant
locations as of December 31, 1996. As of December 31, 1996, the NOVUS Network
also included over 119,000 cash access locations where cardmembers could obtain
cash advances.
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Acting as both the issuing and acquiring entity, NOVUS Services retains the
entire merchant fee paid to the NOVUS Network in a given transaction. Because of
its independence from the bankcard associations, NOVUS Services has greater
flexibility than MasterCard or Visa participants in dealing with merchants. The
Company believes that this gives the Company greater opportunities to provide
customized programs to merchants in such areas as processing arrangements and to
attract certain merchants by tailoring program terms to meet their specific
needs.
NOVUS Services employs its own national sales and support force to maintain
and increase its merchant base. In contrast, MasterCard's and Visa's marketing
efforts to merchants are generally indirect and rely largely on the unaffiliated
sales forces of participating acquiring banks and their agents. In addition, the
Company conducts telemarketing operations for the purpose of acquiring merchant
business and participates in sales and trade association meetings.
Marketing
The Company believes NOVUS Services has a distinct advantage over its
bankcard association credit card competitors because of its ability to direct
and deliver a consistent, nationwide message for each brand. Because the Company
manages all aspects of both the cardmember and merchant relationship, it can
determine and promote its advertising campaign and control the campaign's
content, timing and promotional features. The Company believes this ability
gives it an advantage over competitors, particularly those that issue bankcard
association credit cards, which control only one part of the overall
relationship.
This controlled marketing effort has several significant consequences:
--NOVUS Services can project a single, clear nationwide image to the
consumer for each proprietary card brand;
--NOVUS Services can continuously review card features to design and
introduce new cards to different market segments;
--NOVUS Services faces no marketing competition from competing issuers
using its brand names, unlike MasterCard and Visa issuers;
--NOVUS Services can conduct joint marketing promotions with NOVUS Network
merchants aimed at targeted cardmembers; and
--NOVUS Services can coordinate its media advertising, such as television,
in support of direct mail solicitations.
Credit
Cardmembers undergo credit reviews to establish that they meet standards of
ability and willingness to pay. "Take-one" applications are evaluated using
credit scoring systems (statistical evaluation models that assign point values
to information contained in applications). The Company's credit scoring systems
are based on credit scoring systems developed by scoring-model vendors and are
customized using the Company's criteria and historical data. Applications not
approved under the credit scoring systems may be reviewed and approved by the
Company's credit analysts.
Applicants receiving pre-approved solicitations must satisfy criteria
specified by NOVUS Services. All recipients of pre-approved solicitations have
been pre-screened through credit bureaus before mailing. Pre-screening is a
process by which an independent credit reporting agency identifies persons
satisfying creditworthiness criteria, in the form of point scoring models or
other screening factors, supplied by the Company that are intended to provide a
general indication, based on available information, of the willingness and
ability of such persons to pay their obligations.
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Each cardmember's credit line is reviewed at least annually, and may be
reviewed more frequently if requested by the cardmember or if the Company deems
more frequent review appropriate. Such reviews include scoring the cardmember's
payment behavior on the applicable card as well as reviewing the cardmember's
credit bureau record. Actions resulting from account review may include lowering
a cardmember's credit line or closing the account.
During 1996, the Company, including NOVUS Services, Prime Option and SPS,
experienced an increase in its net charge-off rate which 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. In
response to this environment and as part of its ongoing review of cardmember
credit quality, the Company implemented initiatives in 1996, including raising
credit quality standards for new accounts, selectively reducing credit limits
and increasing collection efforts. For additional information regarding credit
losses and the Company's response, see Management's Discussion and Analysis
incorporated by reference in Part II, Item 7 of this Report.
NOVUS Services maintains a separate operations center that handles all
charged-off accounts. The Company believes that this centralization improves the
handling of charged-off accounts, accounts of deceased cardmembers and
management of the relationship with outside attorneys and collection agencies.
Operations
The Company performs the functions required to service and operate its
proprietary cards' accounts either by itself or through processing agreements
that the Company has with third parties. These functions include new account
solicitation, application processing, new account fulfillment, transaction
authorization and processing, cardmember billing, payment processing, cardmember
service and collection of delinquent accounts. NOVUS Services maintains several
operations centers throughout the country. Additionally, NOVUS Services
operations are supported by systems at computer centers operated by an
unaffiliated communication services provider. The Company has contracted with
Sears' operations centers for much of the new account fulfillment and customer
billing functions and for certain remittance processing services. The Company's
operations center in Dover, Delaware is also responsible for remittance
processing services.
PRIME OPTION SERVICES
In 1994, the Company launched, together with NationsBank of Delaware, N.A.
("NationsBank"), a co-branded MasterCard program under the brand name "Prime
Option MasterCard." Issued by NationsBank under an agreement with MountainWest
Financial Corporation, an indirect wholly owned subsidiary of the Company
("MountainWest"), which participates in the marketing, funding and servicing of
the accounts, Prime Option MasterCard offers special value and flexibility to
consumers through targeted offers of features and pricing based on behavioral
and demographic characteristics. These offers provide most customers with no
annual fee, an annual percentage rate between prime plus 3.9% and prime plus
12.9% and other targeted features.
Prime Option offers cardmembers their choice of billing date and various
products and services, including a revolving credit line, availability of cash
balances, reduced rate balance transfers, credit insurance, card registration to
protect against losses in connection with card theft or loss, and both Company
and third party vendor home, automobile and dining products. Prime Option ranks
among the 25 largest MasterCard programs in the United States based on number of
cards.
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SPS TRANSACTION SERVICES, INC.
General
SPS is a 74% owned, publicly held subsidiary of the Company; it sold 25.7%
of its common stock in an initial public offering in 1992. SPS provides
technology-based outsourcing services. SPS' primary services include electronic
processing of point-of-sale transactions (primarily credit card transactions),
consumer private label credit card program administration, commercial accounts
receivable processing and call center teleservices.
Network Transaction Services
In its point-of-sale transaction processing business, SPS captures credit
and charge card transaction information electronically, transmits the
information utilizing the facilities of unaffiliated communication services
providers to the card issuer or other appropriate on-line processor for
authorization or verification, communicates the response to the merchants
electronically, stores the information for reporting purposes and submits
processed data to the appropriate settlement entity. The authorization process
is usually completed within seven seconds after the transaction data leaves the
merchant's premises. SPS typically markets these services directly to large
regional and national merchants and competes with other large networks and
merchant acquirers for this business.
Consumer Credit Card Services
SPS offers customized consumer private label credit card programs to its
clients. In some cases, SPS' wholly owned subsidiary, Hurley State Bank ("Hurley
Bank"), issues the credit card on behalf of the client and owns the receivables
generated through the use of the card. In programs that are managed but not
owned, SPS administers the programs but does not act as the card issuer or own
the receivables. In such cases, SPS generates revenues on a
fee-per-specified-services basis, on a per-account-administered basis or on some
combination thereof. Whether the portfolio is owned or managed, SPS offers its
clients a full range of credit card services. SPS maintains its own risk
management department, which oversees the development and validation of new
account approval models that are customized for individual merchant clients.
Commercial Accounts Processing Services
SPS offers billing and accounts receivable management systems for clients
with business customers. According to client preference, SPS provides monthly
revolving account statements or invoice-based billing. SPS generates revenues
from these services on a fee-per-specified-service basis, on a
per-account-administered basis or some combination thereof. For certain
commercial accounts programs administered by SPS, MountainWest is the owner of
loans associated with those programs.
Teleservices
SPS also markets call-center based teleservicing programs that focus on
business-to-consumer applications. These services are predominantly outsourcing
programs in which SPS provides its clients with operational and customer service
functions that SPS can more effectively provide with its existing systems
capabilities and inbound and outbound telecommunication resources. SPS services
a wide range of client teleservices programs including customer billing
inquiries, dispatch services, technical help-desk inquiries and catalog order
processing.
NOVUS FINANCIAL
NOVUS Financial is a consumer finance organization engaged in the business
of originating and servicing consumer loans, with a broad range of products
designed to meet the needs of its customer base. Most of its loans are secured
by mortgages on one-to-four family residential properties, and by automobiles,
boats and recreational vehicles.
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For distribution of its products, NOVUS Financial utilizes DWR account
executives, Allstate Insurance Company agents, and direct mail solicitations.
Mortgage loans originated through DWR account executive referrals increased to
$180.8 million in 1996 from $151.1 million in 1995, representing 38% of total
new loan origination in 1996.
COMPETITION
The Company's Credit Services business units compete in highly competitive
businesses. In particular, the Company's credit cards compete in a highly
competitive industry. The market includes other bank-issued credit cards (the
vast majority of which bear the MasterCard or Visa service mark) and charge
cards issued by travel and entertainment companies. The credit card industry has
experienced increased competitive use of advertising, targeted marketing and
pricing competition in interest rates, annual fees and rebates as new credit
card issuers seek to enter the market and established credit card issuers seek
to expand. More recently, issuers have increased their efforts to attract
balances from competing sources of credit via low-priced balance transfer
programs. In addition, banks have issued and aggressively marketed co-branded
credit cards, which offer certain benefits relating to the business of the
bank's co-branding partner. The Company's strategy is to develop proprietary
credit cards targeted to different market segments with features that are
designed to satisfy the needs of different consumers and to promote Prime Option
to compete in the Visa and MasterCard segments of the market. The Company
believes its proprietary merchant base enables it to promote its proprietary
card brand names on a national basis, thereby building customer acceptance and
use.
REGULATION
The Company conducts portions of its Credit Services businesses through
banking institutions. Greenwood Trust is a state bank chartered under the laws
of the State of Delaware. Hurley Bank is a state bank chartered under the laws
of the State of South Dakota. Bank of New Castle is a state bank chartered under
the laws of the State of Delaware. MountainWest is an industrial loan company
chartered under the laws of the State of Utah. Greenwood Trust, Hurley Bank,
Bank of New Castle and MountainWest (each a "Bank" and, collectively, the
"Banks") each have their deposits insured by the Federal Deposit Insurance
Corporation ("FDIC") and pay FDIC assessments. Each Bank is subject to
comprehensive regulations and periodic examinations by the state banking
commissioner of the state in which it is chartered and by the FDIC.
Generally, a company which controls a "bank," as defined in the Bank Holding
Company Act of 1956 (the "BHCA"), is required to register as a bank holding
company under that act and becomes subject to regulation and examination as a
bank holding company by the Federal Reserve Board. Greenwood Trust is a "bank"
as defined in the BHCA. However, because Greenwood Trust did not come within the
BHCA's definition of the term "bank" prior to the amendment of the BHCA by the
Competitive Equality Banking Act of 1987 ("CEBA"), under certain grandfathering
provisions of CEBA the Company is not treated as a bank holding company as long
as the Company and Greenwood Trust comply with certain restrictions set forth in
CEBA. Hurley Bank, Bank of New Castle and MountainWest are not "banks" under the
BHCA as long as each complies with certain other restrictions set forth in CEBA.
Under the BHCA, a bank holding company is generally prohibited from engaging in
any activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. Should Greenwood Trust fail to continue
to qualify for grandfather rights under CEBA or should any of the other Banks
fail to continue to be operated so as to maintain its exempt status as a
non-bank under the BHCA, the Company, in order to continue in those of its
present businesses that would not be permissible for a bank holding company
under the BHCA, could be required to divest control of those institutions or, in
the case of Greenwood Trust, to change its activities significantly.
The relationships among cardholders, credit card issuers and sellers of
merchandise in transactions financed by the extension of credit under credit
accounts are extensively regulated by federal and state consumer protection laws
and regulations. Under federal law, each of the Banks may charge interest at the
rate allowed by the law of the state in which it is located. The states where
the Banks are domiciled do not limit the amount of interest that may
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be charged on loans of the types offered by the Banks. As a result, each of the
Banks is permitted to export interest rates pursuant to federal law. The
application of federal and state bankruptcy and debtor relief laws affect the
Company to the extent such laws result in any loans being charged off as
uncollectible.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal bank regulatory agencies are required to take "prompt
corrective action" in respect of banks that do not meet minimum capital
requirements, and certain restrictions are imposed upon banks that meet certain
capital requirements but are not "well capitalized" for purposes of FDICIA. A
bank that is not well capitalized, as defined for purposes of FDICIA, is, among
other consequences, generally prohibited from accepting brokered deposits and
offering interest rates on any deposits significantly higher than the prevailing
rate in its normal market area or nationally (depending upon where the deposits
are solicited). Greenwood Trust, MountainWest and Hurley Bank currently use
brokered deposits as a funding source. If Greenwood Trust, MountainWest or
Hurley Bank were unable to use brokered deposits as a funding source, the
funding costs of the institution, particularly those of Greenwood Trust, would
likely increase.
Certain acquisitions of the Company's common stock may be subject to
regulatory approval and notice. In addition, Greenwood Trust would no longer
qualify for grandfather rights under CEBA if direct or indirect control of
Greenwood Trust were transferred to a third party. In that event, the third
party would either have to operate as a bank holding company under the BHCA or
significantly modify the activities of Greenwood Trust.
In 1996, CEBA was amended so that Greenwood Trust is no longer subject to
the limitation, previously imposed by CEBA, that Greenwood Trust's average
assets grow no more than 7% per year. The Company believes that elimination of
the restriction should enhance the Company's future flexibility.
SECURITIES
OVERVIEW
The Company's Securities business traces its origins to Dean Witter & Co.,
founded in 1924. In 1978, Dean Witter & Co. Incorporated merged with Reynolds
Securities Inc.
Securities business activities, which accounted for 48% and 53% of the
Company's net income in 1995 and 1996, respectively, are conducted by DWR,
InterCapital and other direct and indirect subsidiaries of the Company. DWR has
the third largest account executive sales organization in the domestic
securities industry, with over 9,000 account executives located in over 370
branch offices serving the investment needs of over 3.2 million individual and
institutional clients. DWR is among the largest members of the NYSE and is a
member of all other major securities, futures and options exchanges. The
Company's asset management subsidiary, InterCapital, is one of the largest asset
management operations in the United States with total assets of $90.0 billion
under management and administration as of December 31, 1996.
The Company's goal is to be recognized as the market leader among securities
firms focused on the individual investor. To achieve this goal, the Company has
implemented a strategy that focuses on serving the investment needs of
individual clients through its professional account executive sales
organization. In implementing this strategy, the Company emphasizes proprietary
products, through which it believes it can better monitor and manage the quality
and performance of the investment and savings products owned by its clients.
This strategy has resulted in significant growth in the amount of assets under
management and administration, an important source of continuing revenues.
ORGANIZATION
The Company's securities business, for management purposes, is organized
into two units: Dean Witter Financial and Dean Witter Capital. Dean Witter
Financial consists of sales, trading, research and various support activities.
By combining the distribution and trading functions in Dean Witter Financial,
DWR manages its trading
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<PAGE>
and inventory activities primarily to satisfy client needs. Dean Witter Capital
consists of product origination, asset management, investment banking and
fiduciary services and is responsible for establishing standards of product
quality.
BROKERAGE ACTIVITIES
The Company's account executive sales organization offers its clients a
broad range of securities and savings products that are supported by DWR's
underwriting, research, execution and operational capabilities.
The table below sets forth for the periods indicated the contribution of the
various products as a percentage of the sum of (i) total agency commissions and
(ii) the portion of principal and certain investment banking transactions
allocated to the account executive sales organization and (iii) amounts advanced
to the account executive sales organization in connection with sales of shares
of mutual funds paying 12b-1 fees, based upon the commission that would have
been earned on the sale of similar shares having a front-end load, and all other
products.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Equities.............................. 39.8% 38.4% 38.8% 46.7% 43.3%
Mutual funds.......................... 34.4 36.5 29.2 23.4 28.4
Fixed income.......................... 13.0 9.8 13.6 12.6 9.8
ICS .................................. 2.5 3.5 5.1 5.0 5.1
Insurance............................. 3.1 4.8 5.2 4.8 5.0
Other products........................ 7.2 7.0 8.0 7.5 8.4
----- ----- ----- ----- -----
Total............................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
EQUITY SECURITIES
The Company provides execution, trading and research services to its
individual and institutional clients on listed equity securities,
over-the-counter equity securities, options and American Depository Receipts
("ADRs"). The Company acts as a market maker in many equity securities traded on
NASDAQ and in a number of ADRs. The Company acts as a specialist in many
securities listed on regional securities exchanges. The Company's equity
research department provides market and quantitative research, economic analysis
and commentary, makes recommendations with regard to broad industry categories
and equity securities of individual companies and furnishes information to
individual and institutional investors and corporate clients.
FIXED INCOME SECURITIES
The Company provides trading and execution services to individual and
institutional clients for a broad range of fixed income securities, including
U.S. government obligations, mortgage- and asset-backed securities, corporate
bonds, preferred stocks, municipal securities and certificates of deposit. The
Company is a primary dealer in U.S. government securities.
The Company's fixed income trading activity focuses primarily on
establishing and maintaining inventory based upon actual and anticipated orders
from its clients, rather than risk-oriented proprietary trading.
FUTURES
The Company provides execution and clearing services for its individual and
institutional clients trading futures contracts on U.S. exchanges and, through
DWR's affiliates or clearing brokers, on other major exchanges
11
<PAGE>
throughout the world. DWR also engages in foreign exchange currency
transactions, including spot transactions, options and forward contracts,
through the unregulated over-the-counter interbank market.
INVESTMENT CONSULTING SERVICES
The Company provides investment consulting services ("ICS") that assist
clients in analyzing their investment objectives and in selecting investment
advisory services offered by unaffiliated investment advisers. ICS also provides
clients with quarterly performance reports. Through ICS, DWR clients can obtain
professional money management services that are not typically available to
individual investors. Such combined services are commonly referred to as "wrap
accounts." Total ICS assets as of December 31, 1996 amounted to $10.4 billion,
an increase of $1.5 billion over year-end 1995.
INSURANCE SERVICES
The Company, through its wholly owned, indirect insurance agency
subsidiaries, acts as a national general agency for leading insurance carriers
to meet the insurance and annuity needs of individual investors. The Company
receives commissions with respect to the sale of such products. The Company
maintains a strategic alliance with Allstate Life Insurance Company ("Allstate
Life") pursuant to which the Company and Northbrook Life Insurance Company, a
wholly owned subsidiary of Allstate Life, manufacture, market and distribute
proprietary insurance products. The insurance products are sold exclusively by
DWR's account executives. The Company has a separate agreement with ITT Hartford
Life Insurance Companies to manufacture, market and distribute proprietary
products through DWR account executives.
MANAGED FUTURES
The Company's wholly owned subsidiary, Demeter Management Corporation
("Demeter"), acts as general partner of 23 commodity pools (including a family
of open-ended partnerships) organized as limited partnerships whose limited
partners are individual and institutional investors. These commodity pools trade
futures and forward contracts on organized futures exchanges and in the
interbank foreign exchange market. Demeter retains and monitors commodity
trading advisers registered under the Commodity Exchange Act to manage the
assets of these partnerships. As of December 31, 1996, commodity pools operated
by Demeter had approximately $1.1 billion under management.
In addition, another wholly owned subsidiary, Dean Witter Futures & Currency
Management Inc. ("DWFCM"), is registered as a commodity trading adviser and
manages discretionary commodity futures trading accounts of individual and
institutional investors and commodity pools, including six of the pools of which
Demeter is general partner. As of December 31, 1996, DWFCM managed total assets
of approximately $382 million.
FINANCIAL INSTITUTIONS GROUP
The Company's Financial Institutions Group offers comprehensive securities
products and services to banks across the country. The services include
investment products, technological support, branch network workstations, and
operations and processing systems. Securities currently provides such services
to NationsSecurities, an affiliate of NationsBank Corp., and Banc One Securities
Corporation, an affiliate of Banc One Corporation.
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<PAGE>
INVESTMENT BANKING
The Company provides financial advice to, and raises capital for, a broad
range of corporate clients, most of which are in industry areas that have been
selected by the Company for joint banking and research coverage. Revenues are
derived from underwriting corporate securities, advisory services in connection
with mergers and acquisitions, private placements of securities, corporate
restructurings and real estate activities.
The Company manages and participates in public underwritings of common
stock, preferred stock, convertible securities, asset-backed securities and
other fixed income securities.
The Company provides advisory services to corporate clients on a wide range
of financial matters, including mergers and acquisitions, divestitures,
leveraged buy-outs, financial restructurings and recapitalizations and
valuations. The Company's mergers and acquisitions services involve the
identification of opportunities, financial analysis, strategic advice, delivery
of fairness opinions and continuing assistance, including obtaining financing,
in the final execution of a transaction. The Company acts as placement agent for
issuers that offer debt and equity securities to institutional investors in the
private markets. The Company generally does not commit capital to merchant
banking transactions.
Certain investment banking professionals are also involved in the research,
development and origination of investment products specifically oriented to the
individual investor. These efforts include new product development on behalf of
investment companies managed by InterCapital as well as origination and
distribution of non-traded limited partnerships, publicly-traded limited
partnerships and other retail-oriented products.
REAL ESTATE
Dean Witter Realty Inc. ("Realty"), a wholly owned subsidiary of the
Company, has been engaged principally in real estate asset management. During
the 1980's, the Company raised capital for both public and private limited
partnerships. Through the sale of interests in limited partnerships organized to
invest in real estate, Realty manages $1.5 billion of real estate (at cost)
consisting of office, retail, industrial, research and development, and
residential properties. Subsidiaries or affiliates of Realty act as general
partners of the partnerships that own the properties and provide investor
services for most of the partnerships. The Company's Liberty Street Management
Division serves as property manager for many of the properties owned by such
partnerships. In 1996, a Realty subsidiary co-sponsored, along with affiliates
of Hines Interests Limited Partnership and The TCW Group, Inc., Emerging Markets
Real Estate Partners I, L.P., a limited partnership offering institutional
investors the opportunity to capitalize on direct real estate investments in
emerging market countries around the world.
NET INTEREST REVENUES
The Company derives net interest revenues primarily from the financing of
client margin loans less the cost of financing such loans.
The Company's daily trading inventory positions in United States government
and agency securities are financed largely through the use of repurchase
agreements. The Company also acts as an intermediary between borrowers and
lenders of short-term funds utilizing repurchase and reverse repurchase
agreements. The Company may earn interest revenues as a result of such
activities.
Customer securities transactions are effected on either a cash or margin
basis. In margin transactions, the Company extends credit to the customer
collateralized by securities and cash in the customer's account for a portion of
the purchase price, and receives revenues from interest charged on such
extensions of credit.
During 1996, clients' interest-bearing debit balances averaged approximately
$2.5 billion as compared to an average of approximately $2.3 billion in 1995.
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<PAGE>
ASSET MANAGEMENT
The Company, through InterCapital, is one of the largest investment advisers
in the country in terms of assets under management. The Company is committed to
asset gathering and growing assets under management. The key element of this
strategy is the Company's marketing, primarily through DWR's account executive
sales organization, of a family of proprietary mutual funds focused on product
diversification and quality. The Company believes that by emphasizing
proprietary mutual funds, it can better monitor and manage the quality and
performance of the investment and savings products owned by its clients.
Investment management and administration fees generated by the Company's
asset management business accounted for approximately 12.4% and 13.3% of the
Company's securities business non-interest revenues in 1995 and 1996,
respectively. Such fees provide a relatively stable contribution to the
Company's revenues since they are based on the market value of assets under
management and administration and not on the volume of transactions. As of
December 31, 1996, the Company's total assets under management and
administration were $90.0 billion.
The following table shows the total assets under management and
administration for the past five years (in billions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1992 1993 1994 1995 1996
---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Equity funds....................................... $13.4 $20.6 $23.0 $29.9 $38.1
Fixed income funds................................. 26.5 33.1 24.1 25.4 24.1
Money market funds................................. 16.4 15.5 17.8 21.6 24.7
Investment management services..................... 2.7 2.0 2.0 2.6 3.1
----- ----- ----- ----- -----
Total assets under management and
administration(1)............................. $59.0 $71.2 $66.9 $79.5 $90.0
===== ===== ===== ===== =====
</TABLE>
(1) Assets under management and administration represent Dean Witter Funds
(defined below) and funds invested pursuant to InterCapital's Custom
Portfolio and Portfolio Advantage programs, with respect to which
InterCapital exercises investment discretion and, through DWSC (defined
below), renders administrative services. Assets under administration
represent Dean Witter Funds for which DWSC renders administrative services
but InterCapital is not the investment adviser, consisting of 14 funds
advised by Trust Company of the West and 3 other funds for which
InterCapital or DWSC provides sub-investment adviser, administrator or
sub-administrator services.
The term "Dean Witter Funds" means those registered investment companies for
which (i) InterCapital exercises investment discretion, (ii) Dean Witter
Services Company Inc. ("DWSC") renders administrative services or (iii)
InterCapital exercises investment discretion and DWSC renders administrative
services. Fund management fees arise from investment management and
administration services that InterCapital and DWSC provide to the Dean Witter
Funds pursuant to various contractual arrangements. The Company receives
management fees based upon each fund's average daily or weekly net assets. The
following table shows the components of fund management fees for the period
ending on the dates indicated (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1992 1993 1994 1995 1996
----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Equity funds................................. $ 59.5 $ 90.1 $128.5 $147.5 $197.0
Fixed income funds........................... 98.5 129.7 126.0 110.9 113.5
Money market funds........................... 59.6 55.6 57.8 65.6 76.1
----- ------ ------ ------ ------
Total fund management fees............... $217.6 $275.4 $312.3 $324.0 $386.6
====== ====== ====== ====== ======
</TABLE>
Shares of Dean Witter Funds that are open-end investment companies are
distributed by Dean Witter Distributors Inc., a wholly owned subsidiary of the
Company and a registered broker-dealer ("Distributors"), which has entered into
selected dealer agreements with DWR, NationsSecurities and Banc One Securities
Corporation. Distribution expenses of DWR and its affiliates include the payment
of commissions and incentive compensation to account executives for sales of the
Dean Witter Funds' shares, the costs of preparing, printing and distributing
advertising or promotional materials and the costs of printing and distributing
prospectuses and supplements thereto used in
14
<PAGE>
connection with the offering and sale of the Dean Witter Funds' shares. DWR and
its affiliates are compensated for their distribution related expenses through
front-end sales charges, contingent deferred sales charges and fees authorized
pursuant to the provisions of Rule 12b-1 under the Investment Company Act of
1940.
FIDUCIARY SERVICES
Dean Witter Trust Company, a wholly-owned subsidiary of the Company
("DWTC"), offers trust and other fiduciary services to both individual and
corporate clients, including trustee services for personal trusts in many states
and trust services for tax-qualified retirement plans. DWTC also provides
transfer agent and dividend disbursing services for the Company, the Dean Witter
Funds and certain other entities. In August 1996, the Company established Dean
Witter Trust FSB, a federal savings bank, through which the Company plans to
market enhanced trust and other fiduciary services for both personal trusts and
retirement plan trusts nationwide through the Company's account executives.
OPERATIONS AND INFORMATION PROCESSING
The Company executes and clears all of its transactions (delivery of
securities sold, receipt of securities purchased and transfer of related funds)
through its own facilities and through memberships in various clearing
corporations. In order to minimize the risks of systems failures, the Company
maintains redundant processing systems.
COMPETITION
The Company encounters intense competition in all aspects of the securities
business and competes directly with other securities firms, a significant number
of which have substantially greater capital and other resources and some of
which offer a wider range of financial services. In addition to competition from
firms currently in the securities business, the Company faces increasing
competition from other sources such as commercial banks, insurance companies and
mutual fund groups. The Company believes that the principal factors affecting
competition in the securities industry are the quality and ability of
professional personnel, the relative prices of services and products offered and
investment performance. The Company and its competitors also employ advertising
and direct solicitation of potential customers as methods of increasing
business, and many of the Company's competitors engage in more extensive
advertising programs than does the Company. The Company and its competitors also
furnish investment research publications in an effort to attract potential and
retain existing clients. The Company also competes with several major securities
firms to attract and retain account executives and other investment
professionals.
The investment management industry is highly competitive, with approximately
6,300 open-end management investment companies holding over $3.5 trillion in
assets as of December 31, 1996. Competition in the sale of mutual funds is
affected by a number of factors including investment objectives and performance,
advertising and sales promotion efforts, the level of fees, distribution
channels and the types and quality of services offered. In addition to fund
products offered by other broker-dealers, the Dean Witter Funds are in
competition with funds sold directly by investment management firms and
insurance companies, as well as with other investment alternatives sold by such
companies and by banks and other financial institutions.
REGULATION
The Company's activities in the securities and commodities industries
generally are subject to extensive regulation in the United States under both
federal and state laws. Various regulatory bodies are charged with safeguarding
the integrity of the financial markets and with protecting the interests of
investors. The Company, through DWR and other subsidiaries, is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC"), in all 50
states, the District of Columbia and the Commonwealth of Puerto Rico and as an
investment adviser with the SEC and in all states in which registration as an
investment advisor is required.
15
<PAGE>
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales and trading practices, use and safekeeping
of customers' funds and securities, capital structure, recordkeeping and the
supervision of officers and employees. The SEC, other governmental authorities,
including state securities commissions, and self-regulatory organizations may
institute administrative proceedings, which may result in censure, fine, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or member, its officers or employees or in other similar
consequences. Occasionally, the Company's subsidiaries have been subject to
routine investigations and proceedings and fines have been imposed for minor
infractions of various regulations relating to their activities as a
broker-dealer, none of which, to date, has had a material adverse effect on the
Company or its business. Broker-dealers are also subject to regulation by state
securities administrators in those states in which they conduct business.
DWR is registered with the Commodities Futures Trading Commission ("CFTC")
as a futures commission merchant and, as such, its activities in the futures and
futures options markets are subject to regulation by the CFTC. DWR is also a
member of, and is subject to the rules of, various domestic commodity exchanges.
DWR's futures and options-on-futures business is also regulated by the National
Futures Association ("NFA"), a not-for-profit membership corporation which has
been designated a registered futures association by the CFTC and of which DWR is
a member. In addition, certain of the Company's subsidiaries are registered with
the CFTC as commodity pool operators and are also members of the NFA.
The Company's broker-dealer subsidiaries, including DWR, are members of the
Securities Investor Protection Corporation ("SIPC"), which provides, in the
event of the liquidation of a broker-dealer, protection for customers' accounts
held by the firm of up to $500,000 for each customer, subject to a limitation of
$100,000 for claims for cash balances. Margin lending by certain subsidiaries is
regulated by rules of the Federal Reserve Board as to the amount they may lend
in connection with certain purchases of securities by customers, and such
subsidiaries are also required by NYSE rules to impose maintenance requirements
on the amount of securities contained in margin accounts.
As registered investment advisers, InterCapital and DWR are subject to
regulation in various aspects of their businesses, such as transactions with or
on behalf of clients, disclosure, advertising, cash payments for solicitation
activities and the terms of their advisory contracts, including certain
restrictions as to performance-based fees. In addition, certain additional
requirements are imposed with respect to advisory activities on behalf of
investment companies, including requirements as to the terms of advisory
contracts and as to shareholder and director approval of such contracts, and the
imposition of a fiduciary duty with respect to the receipt of advisory fees and
other compensation by the investment adviser and its affiliates.
The Company conducts a portion of its Securities business through
banking institutions. DWTC is a trust company chartered under the laws of the
State of New Jersey, and is subject to comprehensive regulation and periodic
examination by the New Jersey Department of Banking and Insurance. DWTC is also
a registered transfer agent, subject to regulation in such capacity by the SEC.
Dean Witter Trust FSB is subject to comprehensive regulation and periodic
examination by the federal Office of Thrift Supervision ("OTS") and by the FDIC.
Dean Witter Trust FSB has its deposits insured by the FDIC and pays FDIC
assessments to the Savings Association Insurance Fund.
As a result of its ownership of Dean Witter Trust FSB, the Company is
registered with the OTS as a unitary savings and loan holding company ("USLHC")
and subject to regulation and examination as a USLHC by the OTS. USLHCs are
exempt from the material restrictions imposed upon the activities of savings and
loan holding companies that are not USLHCs. Savings and loan holding companies
other than USLHCs are generally prohibited from engaging in activities other
than conducting business as a savings association, managing or controlling
savings associations, providing services to subsidiaries or engaging in
activities permissible for bank holding companies (as to the regulation of bank
holding companies, see CREDIT SERVICES - Regulation, on page 9). Should the
Company fail to continue to qualify as a USLHC, the Company, in order to
continue in those of its present businesses that would not be permissible for a
savings and loan holding company, could be required
16
<PAGE>
to divest control of Dean Witter Trust FSB. Certain acquisitions of the
Company's common stock may be subject to regulatory approval and notice.
The Company's securities business is also subject to regulation by various
foreign governments and regulatory bodies. The Company engages in trading
activities in the commodity futures and equity markets through its United
Kingdom subsidiary, Dean Witter International Ltd., which is regulated by The
Securities and Futures Authority and is a member of the London International
Financial Futures and Options Exchange and the International Petroleum Exchange.
RECENT DEVELOPMENT - DWD ELECTRONIC FINANCIAL SERVICES
In 1996, the Company announced the formation of a new business, DWD
Electronic Financial Services ("EFS"), to focus on the growing number of
customers interested in personal computer based financial services, including
banking and securities transactions on the Internet. EFS' principal activities
currently include serving securities customers through the Company's
wholly-owned subsidiary, Lombard Brokerage, Inc. ("Lombard"). In January 1997,
the Company acquired Lombard, a San Francisco-based technology company that
offers financial services nationwide primarily via its site on the Internet.
Lombard offers research information and discount trading services, principally
to individual investors, both on-line and over the telephone, and is an example
of the Company's efforts to satisfy the demand for securities services outside
the traditional full-service brokerage channel. EFS plans to invest in the
growth of Lombard and is studying expanding its product offerings to include
banking products, among other areas.
ITEM 2. PROPERTIES
The Company's and Securities' executive offices are located at Two World
Trade Center, New York, New York, and occupy 864,000 square feet under a lease
expiring on May 31, 2006. The Company owns a 600,000 square foot building in
Riverwoods, Illinois that houses Credit Services' executive offices, and an
adjacent undeveloped 29 acre parcel.
The Company's subsidiaries have offices, operations centers and warehouse
facilities located throughout the United States. Certain of the Company's
subsidiaries maintain offices in foreign countries. Except for several
facilities owned by Credit Services, the Company's properties are leased on
terms and for durations which are reflective of commercial standards in the
communities where these offices and other properties are located.
The Company believes that its properties are adequate and suitable for its
business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in numerous legal and
arbitration proceedings. With respect to those actions that have not yet been
resolved, the Company and its subsidiaries are vigorously contesting their
alleged liabilities and have asserted denials and defenses they believe to be
meritorious. Although the ultimate outcome of these actions cannot be
ascertained at this time, the Company believes that the resolution of these
actions will not have a material adverse effect on its consolidated financial
condition, 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 actions to which the Company is a party include, among others, the
following.
Late Payment Fee Litigation
On June 3, 1996, the United States Supreme Court issued a decision
holding that state laws limiting late charges are preempted with respect to
national banks by federal law, and the Court remanded for reconsideration
lower-court decisions that had held that such state laws were not similarly
preempted with respect to other federally insured banks. In light of these
rulings, all of the outstanding legal and administrative proceedings
challenging, on the basis of state law limitations that were asserted to apply
notwithstanding federal law,
17
<PAGE>
Greenwood Trust's imposition of late fees and other incidental charges on
Discover cardmembers were resolved in 1996 in Greenwood Trust's favor. No such
proceedings are currently pending.
Department of Justice Antitrust Investigation
Twenty-four market makers, including DWR, resolved an investigation by
the U.S. Department of Justice of possible anti-competitive activities in the
over-the-counter securities market by agreeing, without trial or adjudication,
to the entry of an Order and Stipulation filed in the United States District
Court for the Southern District of New York on July 17, 1996. The Order and
Stipulation requires certain ongoing undertakings including the appointment of
an antitrust compliance officer to monitor trading practices and assure
continued compliance with the antitrust laws. The Order and Stipulation is
awaiting court approval.
Market Makers Antitrust Litigation
A consolidated class action (the "NASDAQ Action") entitled In re NASDAQ
Market Makers Antitrust Litigation was commenced on December 16, 1994 in the
United States District Court for the Southern District of New York against DWR
and 32 other broker-dealers alleging that NASDAQ market makers conspired to fix
the "spread" in certain NASDAQ securities. On August 3, 1995 the court dismissed
the complaint and an amended consolidated complaint was subsequently filed
alleging the same cause of action. The amended complaint seeks, among other
things, treble damages in an unspecified amount. DWR answered the amended
complaint denying the allegations of wrongdoing. Plaintiff's motion for class
certification was granted on November 27, 1996. On December 10, 1996, four
institutional investors filed a new complaint making the same allegations made
in the consolidated class action amended complaint; this action was
automatically consolidated with the pending action. On December 18, 1996, the
plaintiffs sought clarification of the court's class certification decision.
TCW/DW North American Government Income Trust Litigation
Several purported class action lawsuits, which have been consolidated
for pretrial purposes (together, the "TNORA Action"), were instituted in January
1995 in the United States District Court for the Southern District of New York
against the TCW/DW North American Government Income Trust, DWR, some of the
Trust's trustees and officers, its underwriter and distributor, the Trust's
unaffiliated Adviser, the Trust's Manager, and other defendants, by certain
shareholders of the Trust. The consolidated amended complaint asserts claims
under the Securities Act of 1933 and generally alleges that the defendants made
inadequate and misleading disclosures in the prospectuses for the Trust, in
particular as such disclosures related to the nature and risks of the Trust's
investments in mortgage-backed securities and Mexican securities. The plaintiffs
also challenge certain fees paid by the Trust as excessive. Damages are sought
in an unspecified amount. All defendants moved to dismiss the consolidated
amended complaint. Although on May 8, 1996 the motions to dismiss were denied,
upon reconsideration on August 28, 1996 the court dismissed several of the
plaintiffs' claims and clarified its earlier opinion denying the defendants'
motion to dismiss. In addition, on August 28, 1996, the court granted the
plaintiffs' motion for class certification. On December 4, 1996, in light of a
new decision by the United States Court of Appeals for the Second Circuit,
defendants filed a new motion for reconsideration of the court's decision
denying the defendants' motion to dismiss.
Term Trust Class Actions
A putative class action, Lonnie Sheppard, et al. v. TCW/DW Term Trust
2000, et al., was commenced on July 22, 1994 in the United States District Court
for the Southern District of New York. Plaintiffs purported to represent
certain purchasers of TCW/DW Term Trusts 2000 and 2003. The defendants included
the Trusts, the trustees of the Trusts, TCW Funds Management, Inc. and its
chairman, DWR, Distributors and InterCapital. Plaintiffs alleged violations of
Sections 11, 12(2) and 15 of the Securities Act of 1933 and sought unspecified
compensatory and punitive damages. Defendants' motion to dismiss was granted
with prejudice on August 16, 1996 and no appeal was taken. Another putative
class action, Thomas D. Keeley, et al. v. DWR et al., (the "Keeley Action") was
commenced in the Superior Court of California for Orange County on October 27,
1994 and later consolidated with three similar class actions. Defendants are the
Company, DWR, Distributors, InterCapital, DWSC, TCW Management Co., Trust
Company of the West, TCW Asset Management Co., Inc., TCW Funds Management, Inc.
and eight individuals, including two DWR employees. Plaintiffs allege breach of
fiduciary duty, unjust enrichment, fraud, deceit and violation of the California
Corporation Code in the marketing and selling of the TCW/DW Term Trusts 2000,
2002 and 2003. Plaintiffs seek unspecified compensatory and punitive damages.
Defendants filed an answer to the first amended class complaint denying all
wrongdoing on December 6, 1995, and motions for judgment on the pleadings on
March 13, 1997.
Litigation Regarding Proposed Merger
On February 12, 1997, certain stockholders of the Company filed a putative
class action suit (the "Brody Action") in the Court of Chancery of the State of
Delaware in and for New Castle County against the Company and certain of its
directors. The complaint alleges certain breaches of fiduciary duty to the
Company's stockholders by the Company and the named directors in connection with
entering into the Agreement and Plan of Merger between the Company and Morgan
Stanley dated as of February 4, 1997, and seeks a variety of equitable relief.
The defendants have not yet responded to the complaint, but intend to vigorously
defend the Brody Action.
18
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers of the Company as of January 17, 1997.
<TABLE>
<CAPTION>
NAME AND AGE PRESENT TITLE AND PRINCIPAL OCCUPATION SINCE 1990
- ------------ ------------------------------------------------------------------
<S> <C>
Philip J. Purcell, 53...... Chairman, Chief Executive Officer and Director of the Company since
1986. Mr. Purcell is also Chairman and a Director of SPS. Mr. Purcell
is a trustee or director of 85 registered investment companies for
which InterCapital serves as investment manager or investment adviser.
Thomas R. Butler, 54....... Executive Vice President and President, NOVUS Services, since
July 1990. Mr. Butler is also a Director of SPS. Mr. Butler
served as a Director of the Company until February 1993.
Richard M. DeMartini, 44... Executive Vice President and President, Dean Witter Capital
since 1989. Mr. DeMartini served as a Director of the Company
until February 1993. Mr. DeMartini is a trustee or director of
14 registered investment companies for which InterCapital
serves as investment manager.
Christine A. Edwards, 44... Executive Vice President, General Counsel and Secretary of the
Company since January 1991. Mrs. Edwards served as a Director
of the Company until February 1993.
James F. Higgins, 48....... Executive Vice President and President, Dean Witter Financial
since 1989. Mr. Higgins served as a Director of the Company
until February 1993.
Mitchell M. Merin, 43...... Executive Vice President and Chief Administrative Officer since
October 1994. Director of Taxable Fixed Income and Futures of
DWR from July 1990 until September 1994. Executive Vice
President from July 1990 until July 1993. Mr. Merin is also a
Director of SPS.
Stephen R. Miller, 52.... Executive Vice President and President and Chief Operating
Officer, DWD Electronic Financial Services since 1997.
Previously, for more than five years Mr. Miller served as Senior
Executive Vice President and Pacific Regional Director of DWR and
director of DWR.
Thomas C. Schneider, 59.... Executive Vice President and Chief Financial Officer of the
Company since 1987. Mr. Schneider is also a Director of SPS.
Mr. Schneider served as a Director of the Company until
February 1993.
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is contained on pages 46 and 47 of the
1996 Annual Report to Shareholders (the "Annual Report") and is incorporated by
reference herein.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is contained on page 17 of the Annual
Report under the caption "Five-Year Summary of Financial Information" and is
incorporated by reference herein.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required by this item is contained on pages 18 through 29 of
the Annual Report under the caption "Management's Discussion and Analysis" and
is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained on page 30 under the
caption "Independent Auditor's Report" and on pages 31 through 45 of the Annual
Report and is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Information required by Part III is incorporated by reference from the
sections of the Company's definitive 1997 proxy statement involving the election
of directors (to be filed within 120 days after December 31, 1996) having the
following headings: "PROPOSAL NO. 2 - ELECTION OF DIRECTORS," "EXECUTIVE
COMPENSATION" (excluding the information under the subheadings "Compensation
Committee's Report on Executive Compensation" and "Stock Performance Graph"),
"BENEFICIAL OWNERSHIP OF DEAN WITTER DISCOVER COMMON STOCK" AND "CERTAIN
TRANSACTIONS."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS
The financial statements required to be filed hereunder are listed on page
S-1 hereof.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required to be filed hereunder are listed
on page S-1 hereof.
3. EXHIBITS
An exhibit index has been filed as part of this report on page E-1 hereto
and is incorporated herein by reference.
(b) A Current Report on Form 8-K, dated October 23, 1996, was filed with the
Securities and Exchange Commission in connection with the announcement of
the Company's third quarter financial results.
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THE 31ST DAY OF
MARCH, 1997.
DEAN WITTER, DISCOVER & CO.
(Registrant)
By /S/ PHILIP J. PURCELL
-----------------------------
PHILIP J. PURCELL
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES INDICATED ON THE 31ST DAY OF MARCH, 1997.
SIGNATURES TITLE
/S/ PHILIP J. PURCELL Chairman of the Board, Chief Executive
- ------------------------------ Officer and Director (Principal
PHILIP J. PURCELL Executive Officer)
/S/ THOMAS C. SCHNEIDER Executive Vice President and Chief
- ------------------------------ Financial Officer (Principal Financial
THOMAS C. SCHNEIDER Officer)
/S/ ROBERT P. SEASS Senior Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
ROBERT P. SEASS
/S/ NANCY KASSEBAUM BAKER Director
- ------------------------------
NANCY KASSEBAUM BAKER
/S/ EDWARD A. BRENNAN Director
- ------------------------------
EDWARD A. BRENNAN
/S/ ALFRED C. DECRANE, JR. Director
- ------------------------------
ALFRED C. DECRANE, JR.
/S/ ROBERT M. GARDINER Director
- ------------------------------
ROBERT M. GARDINER
/S/ C. ROBERT KIDDER Director
- ------------------------------
C. ROBERT KIDDER
/S/ MILES L. MARSH Director
- ------------------------------
MILES L. MARSH
/S/ MICHAEL A. MILES Director
- ------------------------------
MICHAEL A. MILES
/S/ SYBIL C. MOBLEY Director
- ------------------------------
SYBIL C. MOBLEY
/S/ CLARENCE B. ROGERS, JR. Director
- ------------------------------
CLARENCE B. ROGERS, JR.
21
<PAGE>
DEAN WITTER, DISCOVER & CO.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS. The following Consolidated Financial Statements
of Dean Witter, Discover & Co., Notes to Consolidated Financial Statements and
Independent Auditors' Report are incorporated by reference herein from the
Company's 1996 Annual Report to Shareholders:
<TABLE>
<CAPTION>
ANNUAL REPORT
DESCRIPTION PAGE(S)
----------- -------
<S> <C>
Independent Auditors' Report................................................... 30
Consolidated Statements of Income.............................................. 31
Consolidated Balance Sheets.................................................... 32
Consolidated Statements of Changes in Shareholders' Equity..................... 33
Consolidated Statements of Cash Flows.......................................... 34
Notes to Consolidated Financial Statements..................................... 35-45
Quarterly Information (unaudited).............................................. 46
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES. The following Financial Statement
Schedules are filed with this Form 10-K on the pages indicated:
<TABLE>
<CAPTION>
DESCRIPTION PAGE(S)
----------- -------
<S> <C>
Schedule III--Condensed Financial Statements of Dean Witter, Discover & Co.
(Parent Company Only)........................................................ S-2 - S-5
Schedule VIII--Valuation and Qualifying Accounts................................ S-6
Independent Auditors' Report................................................... S-7
</TABLE>
All other Financial Statements Schedules have been omitted since the information
is not applicable, is not required or is included in the Consolidated Financial
Statements or Notes to Consolidated Financial Statements listed under section
(a) above.
S-1
<PAGE>
SCHEDULE III
DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1996 1995 1994
------ ----- ------
<S> <C> <C> <C>
Revenue
Dividends received from subsidiaries........................... $ 415.5 $ 685.9 $ 593.4
Interest from subsidiaries..................................... 713.6 649.7 390.7
Other.......................................................... 2.6 2.8 13.6
------- ------- ------
Total revenues............................................. 1,131.7 1,338.4 997.7
------- ------- ------
Expense
Interest....................................................... 621.7 546.4 335.3
Other.......................................................... 3.8 3.9 4.9
------- ------- ------
Total expenses............................................. 625.5 550.3 340.2
------- ------- ------
Income before income tax expense and equity in undistributed net
earnings of subsidiaries........................................... 506.2 788.1 657.5
Income tax expense................................................. 32.1 35.8 23.2
Income before equity in undistributed net earnings of subsidiaries. 474.1 752.3 634.3
Equity in undistributed net earnings of subsidiaries............... 477.3 104.1 106.6
------- ------- ------
Net income......................................................... $ 951.4 $ 856.4 $ 740.9
======== ======= =======
</TABLE>
See notes to condensed financial statements.
S-2
<PAGE>
SCHEDULE III
DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL POSITION
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash $ 11.8 $ 3.2
Investments in and advances to subsidiaries..................... 17,307.9 15,468.3
Other assets.................................................... 24.2 35.2
--------- ---------
Total assets............................................ $17,343.9 $15,506.7
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Commercial paper............................................ $ 3,511.6 $ 3,444.9
Other short-term borrowings................................. 410.0 385.0
Other liabilities and accrued expenses...................... 113.7 110.7
Long-term borrowings........................................ 8,144.2 6,732.4
--------- ---------
Total liabilities....................................... 12,179.5 10,673.0
--------- ---------
Shareholders' equity............................................ 5,164.4 4,833.7
--------- ---------
Total liabilities and shareholders' equity.............. $17,343.9 $15,506.7
========= =========
</TABLE>
See notes to condensed financial statements.
S-3
<PAGE>
SCHEDULE III
DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities
Net income.................................................. $ 951.4 $ 856.4 $ 740.9
Adjustments to reconcile net income to net cash flows
provided by
operating activities:
Equity in undistributed earnings of subsidiaries........ (477.3) (104.1) (106.6)
Employee compensation settled through the issuance of
common stock........................................... 87.1 57.2 37.0
Decrease in other assets................................ 1.3 4.0 24.5
Increase in other liabilities and accrued expenses...... 97.4 107.7 94.3
--------- --------- ---------
Net cash provided by operating activities................... 659.9 921.2 790.1
--------- --------- ---------
Net cash flows used in investing activities--investments in and
advances to subsidiaries....................................... (1,362.3) (3,502.7) (2,404.0)
--------- --------- ---------
Cash flows provided by (used in) financing activities
Proceeds from issuance of common stock...................... 44.1 40.6 17.7
Net proceeds from (repayment of) commercial paper........... (18.7) 1,347.0 (306.0)
Net increase (decrease) in other short-term borrowings...... 25.0 (15.0) (75.0)
Dividends paid.............................................. (134.0) (102.3) (81.1)
Proceeds from issuance of long-term borrowings, net......... 1,420.1 1,433.5 2,142.1
Purchase of treasury stock.................................. (625.5) (121.2) (82.0)
--------- --------- ---------
Net cash provided by financing activities................... 711.0 2,582.6 1,615.7
--------- --------- ---------
Increase in cash................................................ 8.6 1.1 1.8
Cash, beginning of the period................................... 3.2 2.1 0.3
--------- --------- ---------
Cash, end of the period......................................... $ 11.8 $ 3.2 $ 2.1
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest...................................... $ 598.1 $ 533.9 $ 321.2
========= ========= =========
Cash paid for income taxes.................................. $ 20.6 $ 35.7 $ 20.3
========= ========= =========
</TABLE>
See notes to condensed financial statements.
S-4
<PAGE>
SCHEDULE III
DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. INTRODUCTION AND BASIS OF PRESENTATION
The condensed financial statements of Dean Witter, Discover & Co. (the
"Parent Company") should be read in conjunction with the consolidated financial
statements of Dean Witter, Discover & Co. and subsidiaries (the "Company") and
notes thereto found in pages 31- 45 of the Company's 1996 Annual Report to
Shareholders (the "Annual Report") and incorporated by reference.
2. DIVIDENDS RECEIVED FROM SUBSIDIARIES
The Company received cash dividends from its consolidated subsidiaries
totaling $415.5 million, $685.9 million and $593.4 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
3. DIVIDENDS PAID
For 1996 and 1995, the Company paid quarterly dividends to common
shareholders in the amounts of $0.11 and $0.08 per share, respectively. In
January 1997, the Company increased its quarterly dividend to $0.14 per share,
effective for the first quarter of 1997.
4. STOCK SPLIT
The Company declared a two-for-one split of its common stock, which was
effected in the form of a stock dividend, effective January 14, 1997. All prior
period per share and share outstanding data has been restated to reflect this
split.
S-5
<PAGE>
SCHEDULE VIII
DEAN WITTER, DISCOVER & CO.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
DESCRIPTION 1996 1995 1994
----------- ------ ------ -----
<S> <C> <C> <C>
Allowance for doubtful accounts--securities clients:
Balance, beginning of period....................................... $16.2 $11.7 $10.1
Additions--provision for losses..................................... 11.7 13.2 11.4
Deductions--write-offs, net......................................... 12.6 8.7 9.8
----- ----- -----
Balance, end of period............................................. $15.3 $16.2 $11.7
===== ===== =====
</TABLE>
S-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Dean Witter, Discover & Co.:
We have audited the consolidated financial statements of Dean Witter,
Discover & Co. and subsidiaries as of December 31, 1996 and December 31, 1995,
and for each of the three years in the period ended December 31, 1996 and have
issued our report thereon dated February 21, 1997; such consolidated financial
statements and report are included in your 1996 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included Schedules III
and VIII listed in the Index to Financial Statements and Financial Statement
Schedules. These 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, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
February 21, 1997
S-7
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 1-11758
DEAN WITTER, DISCOVER & CO.
================================================================================
<PAGE>
INDEX
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
2.1* Agreement and Plan of Merger between Dean Witter,
Discover & Co. and Morgan Stanley Group Inc., dated
as of February 4, 1997. Filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated
February 4, 1997 and incorporated herein by
reference.
3.1* Amended and Restated Certificate of Incorporation.
Filed as Exhibit 3.1 to the Registrant's
Registration Statement No. 33-56104 on Form S-1 and
incorporated herein by reference.
3.2* Certificate of Designation of the Registrant relating
to the Registrant's Series A Junior Participating
Preferred Stock. Filed as Exhibit 3(b) to the
Registrant's Registration Statement No. 33-92172 on
Form S-3 and incorporated herein by reference.
3.3* Certificate of Amendment to Amended and Restated
Certificate of Incorporation of the Registrant as
filed with the Secretary of State of the State of
Delaware on May 24, 1995. Filed as Exhibit 3(c) to
the Registrant's Registration Statement No. 33-
92172 on Form S-3 and incorporated herein by
reference.
3.4* Amended and Restated By-Laws. Filed as Exhibit 3 to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 and
incorporated herein by reference.
4.1* Specimen certificate representing the Common Stock.
Filed as Exhibit 4 to the Registrant's Registration
Statement No. 33-56104 on Form S-1 and incorporated
herein by reference.
4.2* Rights Agreement, dated as of April 25, 1995, between
Registrant and Chemical Bank, as Rights Agent,
which includes as Exhibit B thereto the Form of
Rights Certificate. Filed as Exhibit 1 to the
Registrant's Registration Statement on Form 8-A
dated April 25, 1995 and incorporated herein by
reference.
4.3* Amendment, dated as of February 4, 1997, to the
Rights Agreement, dated as of April 25, 1995, as
amended, between Dean Witter, Discover & Co. and
the Chase Manhattan Bank, as successor to Chemical
Bank (as Rights Agent). Filed as Exhibit 4.2 to the
Registrant's Current Report on Form 8-K dated
February 4, 1997 and incorporated herein by
reference.
4.4* Indenture, dated as of February 24, 1993, between
Dean Witter, Discover & Co. and The First National
Bank of Chicago, as Trustee. Filed as Exhibit 4 to
the Registrant's Registration Statement No. 33-
57202 on Form S-3 and incorporated herein by
reference.
4.5* Form of Dean Witter, Discover & Co.'s Medium-Term
Note Series I (Fixed Rate). Filed as Exhibit 4.1 to
the Registrant's Current Report on Form 8-K dated
November 18, 1993 and incorporated herein by
reference.
4.6* Form of Dean Witter, Discover & Co.'s Medium-Term
Note Series I (Floating Rate). Filed as Exhibit 4.2
to the Registrant's Current Report on Form 8-K
dated November 18, 1993 and incorporated herein by
reference.
4.7* Form of Dean Witter, Discover & Co.'s 6-1/2% Notes
due November 1, 2005. Filed as Exhibit 4 to the
Registrant's Current Report on Form 8-K dated
November 2, 1993 and incorporated herein by
reference.
4.8* Form of Dean Witter, Discover & Co.'s 6-3/4%
Debentures due October 15, 2013. Filed as Exhibit 4
to the Registrant's Current Report on Form 8-K
dated October 21, 1993 and incorporated herein by
reference.
i
<PAGE>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
4.9* Form of Dean Witter, Discover & Co.'s 6-1/4% Notes
due March 15, 2000. Filed as Exhibit 4 to the
Registrant's Current Report on Form 8-K dated March
9, 1993 and incorporated herein by reference.
4.10* Form of Dean Witter, Discover & Co.'s 6% Notes due
March 1, 1998. Filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated
February 25, 1993 and incorporated herein by
reference.
4.11* Form of Dean Witter, Discover & Co.'s 6-7/8% Notes
due March 1, 2003. Filed as Exhibit 4.2 to the
Registrant's Current Report on Form 8-K dated
February 25, 1993 and incorporated herein by
reference.
4.12* Form of Dean Witter, Discover & Co.'s LIBOR Floating
Rate Notes due March 1, 2000. Filed as Exhibit 4 to
the Registrant's Current Report on Form 8-K dated
February 22, 1995 and incorporated herein by
reference.
4.13* Form of Dean Witter, Discover & Co.'s 6.75% Notes
due August 15, 2000. Filed as Exhibit 4 to the
Registrant's Current Report on Form 8-K dated
August 16, 1995 and incorporated herein by
reference.
4.14* Form of Dean Witter, Discover & Co.'s 6.75%
Debentures due January 1, 2016. Filed as Exhibit
4 to the Registrant's Current Report on Form 8-K
dated January 4, 1996 and incorporated herein by
reference.
4.15* Form of Dean Witter, Discover & Co.'s 6.30% Notes
due January 15, 2006. Filed as Exhibit 4 to the
Registrant's Current Report on Form 8-K dated
January 18, 1996 and incorporated herein by
reference.
10.1* Guaranty of Lease dated March 19, 1992, by the
Registrant in favor of Harborside Exchange Place
Limited Partnership and Plaza II and III Urban
Renewal Associates L.P. Filed as Exhibit 10.1 to
the Registrant's Registration Statement No. 33-
56104 on Form S-1 and incorporated herein by
reference.
10.2* Lease Agreement, dated March 19, 1979, between the
Port Authority of New York and New Jersey and Dean
Witter Reynolds Inc. Filed as Exhibit 10.2 to the
Registrant's Registration Statement No. 33-56104 on
Form S-l and incorporated herein by reference.
10.3* Master Separation Agreement between the Registrant
and Sears, Roebuck and Co. Filed as Exhibit 10.3 to
the Registrant's Registration Statement No. 33-
56104 on Form S-1 and incorporated herein by
reference.
10.4 Amended Agreement for Systems Operations Services,
dated as of January 1, 1996, by and between the
Registrant and Advantis, a New York general
partnership. (Portions of this Exhibit have been
omitted pursuant to a request for confidential
treatment of such omitted information under Rule
24b-2)
10.5* Form of Pooling and Servicing Agreement used in
connection with the securitization of Discover Card
receivables. Filed as Exhibit 10.6 to the
Registrant's Registration Statement No. 33-56104 on
Form S-1 and incorporated herein by reference.
10.6* Pooling and Servicing Agreement between Greenwood
Trust Company as Master Servicer, Servicer and
Seller and Continental Bank, National Association,
as Trustee, dated as of October 1, 1993. Filed as
Exhibit 4.1 to the Discover Card Master Trust I
Registration Statement No. 33-71502 on Form S-1 and
incorporated herein by reference.
ii
<PAGE>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
10.7* First Amendment to Pooling and Servicing Agreement,
dated as of August 15, 1994, between Greenwood
Trust Company, as Master Servicer, Servicer and
Seller and Bank of America Illinois (formerly,
Continental Bank, National Association) as Trustee.
Filed as Exhibit 4.4 to the Discover Card Master
Trust I Current Report on Form 8-K dated August 1,
1995 and incorporated herein by reference.
10.8* Second Amendment to Pooling and Servicing Agreement,
dated as of February 29, 1996, between Greenwood
Trust Company as Master Servicer, Servicer and
Seller and First Bank National Association
(successor trustee to Bank of America Illinois,
formerly Continental Bank, National Association) as
Trustee. Filed as Exhibit 4.4 to the Discover Card
Master Trust I Current Report on Form 8-K dated
April 30, 1996 and incorporated herein by
reference.
10.9+ Dean Witter START Plan (Saving Today Affords Retirement
Tomorrow) (amended and restated as of January 1, 1997).
10.10*+ Dean Witter Financial Services Group Inc. Capital
Accumulation Plan (currently known as the Dean
Witter, Discover & Co. Capital Accumulation Plan),
Amended and Restated as of December 31, 1991. Filed
as Exhibit 10.24 to the Registrant's Registration
Statement No. 33-56104 on Form S-1 and incorporated
herein by reference.
10.11*+ First Amendment to the Dean Witter, Discover & Co.
Capital Accumulation Plan (adopted November 10,
1993). Filed as Exhibit 10.31 to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by
reference.
10.12*+ Dean Witter Reynolds Inc. Supplemental Pension Plan
(formerly known as the Dean Witter Reynolds
Financial Services Inc. Supplemental Pension Plan
for Executives), Amended and Restated as of
December 14, 1993. Filed as Exhibit 10.32 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated
herein by reference.
10.13*+ Dean Witter, Discover & Co. Omnibus Equity Incentive
Plan. Filed as Exhibit 4.1 to the Registrant's
Registration Statement No. 33-63024 on Form S-8 and
incorporated herein by reference.
10.14*+ Dean Witter, Discover & Co. Employees Replacement
Stock Plan. Filed as Exhibit 4.2 to the
Registrant's Registration Statement No. 33-63024 on
Form S-8 and incorporated herein by reference.
10.15*+ First Amendment to Dean Witter, Discover & Co.
Employees Replacement Stock Plan (adopted June 18,
1993). Filed as Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated November 18, 1993
and incorporated herein by reference.
10.16*+ Dean Witter, Discover & Co. 1993 Stock Plan for
Non-Employee Directors. Filed as Exhibit 4.3 to the
Registrant's Registration Statement No. 33-63024 on
Form S-8 and incorporated herein by reference.
10.17*+ Amendment to the Dean Witter, Discover & Co. 1993
Stock Plan for Non-Employee Directors. Filed as
Exhibit 10.37 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
10.18*+ Sears Consumer Financial Corporation Supplemental
Retirement Income Plan (currently known as the
NOVUS Credit Services Inc. Supplemental Retirement
Income Plan), effective as of January 1, 1989.
Filed as Exhibit 10.36 to the Registrant's
Registration Statement No. 33-56104 on Form S-1 and
incorporated herein by reference.
iii
<PAGE>
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
10.19*+ First Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (adopted
December 8, 1992). Filed as Exhibit 10.41 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated
herein by reference.
10.20*+ Second Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (adopted June
15, 1993). Filed as Exhibit 10.42 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated
herein by reference.
10.21*+ Third Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (adopted
February 13, 1995). Filed as Exhibit 10.27 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated
herein by reference.
10.22*+ Dean Witter, Discover & Co. Transferred Executives
Pension Supplement, Amended and Restated as of
January 1, 1995. Filed as Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 and incorporated
herein by reference.
10.23* Tax Sharing Agreement between the Registrant and
Sears, Roebuck and Co. Filed as Exhibit 10.40 to
the Registrant's Registration Statement No. 33-
56104 on Form S-1 and incorporated herein by
reference.
10.24* Lease Agreement, dated July 8, 1985, by and between
Fund for Regional Development acting by and through
The Port Authority of New York and New Jersey and
Dean Witter Reynolds Inc. Filed as Exhibit 10.41 to
the Registrant's Registration Statement No. 33-
56104 on Form S-l and incorporated herein by
reference.
10.25*+ Employee Benefits Allocation Agreement between the
Registrant and Sears, Roebuck and Co. Filed as
Exhibit 10.44 to the Registrant's Registration
Statement No. 33-56104 on Form S-1 and incorporated
herein by reference.
10.26*+ Dean Witter, Discover & Co. 1994 Omnibus Equity Plan.
Filed as Exhibit 10.52 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1993 and incorporated herein by reference.
10.27*+ Dean Witter, Discover & Co. Tax Deferred Equity
Participation Plan (amended and restated October
21, 1994). Filed as Exhibit 4.1 to the Post-
Effective Amendment No. 1 to the Registrant's
Registration Statement No. 33-82240 on Form S-8 and
incorporated herein by reference.
10.28*+ Dean Witter, Discover & Co. 1994 Formula Compensation
Plan, as amended. Filed as Exhibit 10.40 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated
herein by reference.
10.29*+ Dean Witter, Discover & Co. Employee Stock Purchase
Plan (amended and restated as of January 1, 1996).
Filed as Exhibit 10.42 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995 and incorporated herein by reference.
10.30* $3.25 billion Credit Agreement, dated May 5, 1995,
among the Registrant, Morgan Guaranty Trust Company
of New York, as documentation agent, Chemical Bank,
as administrative agent, and the other banks named
therein. Filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995 and incorporated herein by
reference.
10.31* $4.0 billion Credit Agreement, dated April 19, 1996,
between Dean Witter, Discover & Co. and Morgan
Guaranty Trust Company of New York, Chemical Bank
and other banks named therein. Filed as Exhibit
10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996 and
incorporated herein by reference.
iv
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Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
10.32*+ Key Executive Employment Plan, as amended April
19, 1996. Filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996 and incorporated herein by
reference.
10.33*+ Dean Witter, Discover & Co. Directors' Equity Capital
Accumulation Plan. Filed as Exhibit 10.45 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated
herein by reference.
10.34+ Dean Witter, Discover & Co. Employees Equity
Accumulation Plan.
10.35* Stock Option Agreement, dated as of February 4, 1997,
between Dean Witter, Discover & Co., as issuer, and
Morgan Stanley Group Inc., as grantee. Filed as
Exhibit 10.1 to the Registrant's Current Report on
Form 8-K dated February 4, 1997 and incorporated
herein by reference.
10.36* Stock Option Agreement, dated as of February 4, 1997,
between Morgan Stanley Group Inc., as issuer, and
Dean Witter, Discover & Co., as grantee. Filed as
Exhibit 10.2 to the Registrant's Current Report on
Form 8-K dated February 4, 1997 and incorporated
herein by reference.
11 Statement Re: Computation of Earnings Per Common Share.
12 Statement Re: Computation of Ratio of Earnings to Fixed
Charges.
13 1996 Annual Report to Shareholders. Except for those
portions expressly incorporated by reference
herein, the 1996 Annual Report is furnished for the
information of the Commission and is not deemed
"filed" as part of this Annual Report on Form 10-K.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
- ----------------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
v
<PAGE>
EXHIBIT 10.4
(Certain confidential portions of this Exhibit have been omitted,
as indicated by an [*] on the margin or in the text, and
filed with the Commission.)
ADVANTIS / DEAN WITTER, DISCOVER & CO.
AMENDED AGREEMENT FOR SYSTEMS OPERATIONS SERVICES
- --------------------------------------------------------------------------------
This Amended Agreement for Systems Operations Services ("Amended
Agreement"), dated as of January 1, 1996, is by and between Dean Witter,
Discover & Co., a Delaware corporation having a place of business at Two World
Trade Center, New York, NY 10006 ("DWD"), and Advantis, a New York general
partnership having its principal place of business at 231 North Martingale
Road, Schaumburg, Illinois, 60173-2254 ("Advantis"). DWD and Advantis
(collectively, the "Parties" and each, a "Party") agree that the following
terms and conditions will apply to services provided by Advantis under this
Amended Agreement.
TABLE OF CONTENTS
Background and Objectives.................................................. 4
Definitions, Documents and Term............................................ 5
Advantis Responsibilities.................................................. 10
DWD Responsibilities....................................................... 20
Charges and Expenses....................................................... 21
Invoicing and Payment...................................................... 25
[ * ]............................................................[ * ]
Confidentiality/Data Security.............................................. 28
Termination................................................................ 30
- -----------------------------
[*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
<PAGE>
Liability.................................................................. 34
Warranty................................................................... 35
Indemnities................................................................ 38
Insurance and Risk of Loss................................................. 43
Publicity.................................................................. 43
Dispute Resolution......................................................... 44
General.................................................................... 45
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LIST OF EXHIBITS
Exhibit 1 Data Network
Exhibit 2 Information Processing Systems and Services (IPSS)
Exhibit 3 Voice Network
Exhibit 4 Charging Methodology
Exhibit 5 Performance Standards
Exhibit 6 Advantis Software, DWD Software and Supported Software; Proprietary
Products
Exhibit 7 Special Services Agreements
3
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1. BACKGROUND AND OBJECTIVES
DWD and Advantis desire to amend and restate the Master Agreement for
Systems Operations Services between the Parties dated as of November 30, 1992
(the "Master Agreement"). This amended and restated document does not
terminate that Master Agreement, but only conforms the terms and conditions to
the revised business arrangement. The rights and responsibilities of the
Parties from and after the Amended Agreement Commencement Date shall be defined
solely by this Amended Agreement; the rights and responsibilities of the
Parties prior to the Amended Agreement Commencement Date shall be defined
solely by the Master Agreement. Under this Amended Agreement, Advantis will
continue to perform those Services it provided to DWD under the Master
Agreement prior to the Amended Agreement Commencement Date in a manner
consistent with prior practice between the Parties and with at least the same
levels of quality as Advantis performed under the Master Agreement prior to the
Amended Agreement Commencement Date. The charges for all activities necessary
for Advantis to meet this commitment are included in the Annual Service
Charges, in the Voice Services charges set forth in Exhibit 3, or are
separately indicated as an additional charge under this Amended Agreement
(e.g., are covered by an ARC/RRC, Direct Charge, SSA or Advantis tariff
amount). It is the Parties' intent that any activities or functions that were
performed by Advantis at no additional or separate charge to DWD prior to the
Amended Agreement Commencement Date under the Master Agreement will continue to
be performed by Advantis under this Amended Agreement at no additional or
separate charge to DWD. The Parties acknowledge and agree that the Direct
Charge items set forth in Exhibit 7 may not be a complete listing of all
special bid types of services being provided to DWD by Advantis as of the
Amended Agreement Commencement Date, and that there may be some services
currently provided by Advantis to DWD for which no formal documentation exists,
and thus reference to which is not included in Exhibit 7. The Parties shall
work together to formalize in writing all such special bid service arrangements
as soon after the Amended Agreement Commencement Date as possible, but no later
than ninety (90) days after the Amended Agreement Commencement Date; however,
in the interim, Advantis shall continue to provide such services to DWD
according to the business arrangements (same scope of service for same charge)
existing just immediately prior to the Amended Agreement Commencement Date,
unless the Parties mutually agree otherwise. Except as stated in the prior two
sentences, any charges for Services to be charged to DWD by Advantis under this
Amended Agreement must be expressly stated.
a) This Amended Agreement shall serve as the basic terms and
conditions for Services performed by Advantis for DWD.
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b) In the event of any inconsistency or conflict in the provisions of
the respective documents applicable to the provision of the
Services, the order of precedence shall be:
1) this Amended Agreement; and
2) the Exhibits attached to this Amended Agreement.
2. DEFINITIONS, DOCUMENTS AND TERM
2.1 GENERAL DEFINITIONS
As used in this Amended Agreement, the following terms shall have the
meanings set forth below.
a) "Additional Resource Charge" or "ARC" means the charge for
additional utilization of Resource Units above the applicable
Monthly Baseline and associated Deadband, if any, for a specific
Individual Service Element.
b) "Affiliate" means, with respect to a Person, any other Person at
any time Controlling, Controlled by or under common Control with,
such Person.
c) "Annual Revenue Commitment" shall have the meaning set forth in
Exhibit 4.
d) "Annual Service Charge" or "ASC" means the annual fixed charge to
DWD for each Contract Year of the Term for Advantis' providing to
DWD the Data Network and IPSS Services. There are two separate
Annual Service Charges: the Data Network Annual Service Charge and
the IPSS Annual Service Charge.
e) "Applications Software" means those programs and programming,
including all supporting documentation and media, that perform
specific user-related data processing and telecommunication tasks,
and which are being run, as of the Commencement Date, by Advantis,
and which will be run by Advantis on and after the Commencement
Date. Applications Software does not include DWD Software.
f) "Audit Notice" shall have the meaning set forth in Section 12.7
(a).
g) "Baseline" means the specific quantity and level of Resource Units
of a particular Individual Service Element which is being provided
to DWD by Advantis and which is included in an Annual Service
Charge.
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h) "Baseline Adjustment" means a change made to a specific Baseline
for an Individual Service Element.
i) "Claim" shall have the meaning set forth in Section 12.6 (a).
j) "Commencement Date" means January 1, 1996.
k) "Confidential Information" shall have the meaning set forth in
Section 8.1.
l) "Control" means the legal, beneficial or equitable ownership,
directly or indirectly, of more than 50% of the aggregate of all
voting equity interests in such entity.
m) "Cost of Living Adjustment" or "COLA" and "COLA Index" shall have
the meanings set forth in Section 5.2.
n) "Data Center" means the Equipment and Software to be located at an
Advantis location. "Data Center" does not include any DWD
Equipment or DWD Software.
o) "Data Network" means all Equipment, associated attachments,
features and accessories, Software, lines and cabling, including
communication controllers, multiplexors, lines and modems/DSUs used
to connect and transmit data. The Data Network does not include
DWD Equipment or DWD Software.
p) "DWD Equipment" means machines and equipment that are owned or
leased by DWD and for which DWD, rather than Advantis, retains
financial and administrative responsibility.
q) "DWD Locations" means those DWD locations to which Services are
provided.
r) "DWD Software" means the software and programs owned or licensed by
DWD for which DWD, rather than Advantis, retains financial and
administrative responsibility. Subject to Section 7(a), DWD
Software is identified in Exhibit 6.
s) "End Users" means those individuals within DWD who are users of
Services.
t) "End User Equipment" means all workstations, terminals, LAN
servers, printers and associated peripheral equipment located at
DWD Locations.
6
<PAGE>
u) "Equipment" means any machine, its features, conversions, upgrades,
elements, licensed internal code, or accessories, or any
combination of them provided by Advantis hereunder (including End
User Equipment) owned or leased by Advantis and used to provide the
Services to DWD. The term "Equipment" includes Advantis and
non-Advantis equipment provided by Advantis. The term does not
include DWD Equipment, as defined above.
v) "Force Majeure Event" shall have the meaning set forth in Section
16.4 (a).
w) "Hazardous Materials" shall have the meaning set forth in Section
11.2 (b).
x) "Include" and its derivatives shall mean including without
limitation. This term is as defined, whether or not capitalized in
this Amended Agreement.
y) "Indemnified Party" and "Indemnifying Party" shall have the
respective meanings set forth in Section 12.6 (a).
z) "Indemnifiable Taxes" shall have the meaning set forth in Section
12.7 (b).
aa) "Individual Service Element(s)" or "ISE(s)" means a specific type
of Service within a Service Category, such as CPU Prime A or 56KB.
ab) "Initial Pricing Period" means, for each Service Category, the
period from the Commencement Date through December 31, 1999 for
which prices are effective.
ac) "Losses" means all losses, liabilities, damages and claims
(including taxes), and all related costs and expenses (including
any and all reasonable attorneys' fees and reasonable costs of
investigation, litigation, settlement, judgment, interest and
penalties).
ad) "Out-of-Pocket Costs" shall mean reasonable and actual
out-of-pocket expenses incurred by Advantis for equipment,
materials, supplies, or other Services provided to DWD under this
Amended Agreement, but not including Advantis' overhead costs (or
allocations thereof), administrative expenses or other mark-ups.
ae) "Party" or "Parties" shall have the meaning given in the preamble
to this Amended Agreement.
af) "Performance Standards" means the service levels and performance
responsibilities under which the Services
7
<PAGE>
will be provided. The Performance Standards will be described and
listed in the attached Exhibit 5.
ag) "Person" means any firm, company, corporation, unincorporated
association, partnership, trust, joint venture, governmental
authority or other entity, or a division of any of the foregoing,
or any individual, and shall include any successor (by merger or
otherwise) of such entity.
ah) "Reduced Resource Credit" or "RRC" means the credit for reduced
utilization of Resource Units below the applicable Monthly Baseline
and associated Deadband, if any, for a specific Individual Service
Element.
ai) "Required Consents" means any consents or approvals required for
the licensing or transfer to Advantis of the right to use or access
any applicable facilities, space, equipment, software or third
party services.
aj) "Resource Unit" or "RU" means, for each Individual Service Element,
a particular unit of resource used to measure Services provided by
Advantis pursuant to a particular Baseline.
ak) "Services" shall have the meaning set forth in Section 3.1 of this
Amended Agreement.
al) "Service Category" means one of the three categories of Services
set forth in this Amended Agreement: Voice, Data Network, or
Information Processing Systems and Services ("IPSS").
am) "Software" means either of or both Applications Software and
Systems Software, as applicable.
an) "Special Services Amendment" or "SSA" means agreements entered into
between Advantis and DWD which are in response to specific DWD
requirements for which the standard Advantis Services are not
applicable. Exhibit 7 includes those agreements executed under the
1992 Master Agreement and which continue under this Agreement,
unless otherwise mutually agreed.
ao) "Supported Software" means Software other than DWD Software, for
which Advantis has financial, administrative, operational, and
maintenance obligations as set forth in Section 3.7. Subject to
Section 7(a), Supported Software includes the Software so
identified in Exhibit 6.
8
<PAGE>
ap) "Systems Software" means those programs and programming, including
all supporting documentation and media, that perform tasks basic to
the functioning of the data processing and telecommunication
equipment and which are required to operate the Applications
Software or otherwise support the provision of Services by
Advantis. Systems Software does not include DWD Software.
aq) "Tax Claim" shall have the meaning set forth in Section 12.7 (b).
ar) "Tax Indemnified Party" and "Tax Indemnifying Party" shall have the
respective meanings set forth in Section 12.7 (a).
as) "Term" shall have the meaning set forth in Section 2.4.
at) "Termination Assistance" shall have the meaning set forth in
Section 9.3 (a).
au) "Voice Services" means those voice-related Services generally
described in Exhibit 3.
2.2 [INTENTIONALLY OMITTED.]
2.3 ASSOCIATED CONTRACT DOCUMENTS
This Amended Agreement includes Exhibits 1 through 7 which will be
updated by Advantis and DWD as necessary or appropriate during the Term in
compliance with the amendment process set forth in Section 16.3. In the
context of this Amended Agreement, as of the Commencement Date, Schedules A
through E of the Master Agreement are superseded and no longer in force.
2.4 TERM
The term of this Amended Agreement will begin as of 12:01 a.m. on the
Commencement Date and will end as of 12:00 midnight on December 31st 2002 (the
"Term"), unless earlier terminated or extended, in whole or in part, in
accordance with this Amended Agreement.
2.5 RENEWAL AND EXPIRATION
a) Advantis agrees to notify DWD in writing whether it desires to
renew this Amended Agreement and of the proposed prices and terms
to govern such renewal not less than 18 months prior to the
expiration of the Term. If Advantis so notifies DWD that it
desires to renew this Amended Agreement, DWD agrees to inform
Advantis in writing whether it desires to renew not
9
<PAGE>
less than 12 months prior to the expiration of the Term. Failure
by either Advantis or DWD to provide notice at the time specified
above shall be deemed to be notice of intent not to renew this
Amended Agreement. If either DWD or Advantis does not wish to
renew this Amended Agreement, it shall expire at the end of the
Term. If both Advantis and DWD desire to renew this Amended
Agreement but are unable to agree upon renewal prices, terms and
conditions no later than six months prior to the expiration of the
Term, DWD may elect to extend this Amended Agreement for one year
at the prices, terms and conditions in effect during the last year
of the Term. If Advantis and DWD are unable to reach agreement on
renewal during such extension period, if any, this Amended
Agreement will expire at the end of such extension period.
b) In the event of a failure to renew this Amended Agreement as
described in paragraph (a) above, if DWD elects to solicit bids or
proposals from competitive providers for the performance of any or
all of the Services, DWD agrees to provide Advantis with the same
proposal requirements and information, access to facilities and
pertinent personnel and other notices and materials as provided to
other potential vendors, and treat Advantis as it treats the other
potential vendors in the proposal or bidding process.
2.6 REQUIRED CONSENTS
DWD shall be responsible for obtaining any and all Required Consents
necessary to enable Advantis to use DWD Software and DWD Equipment. DWD shall
bear the costs, if any, of obtaining all of its Required Consents described
above. In the event that any Required Consent is not obtained, then unless and
until such Required Consents are obtained, Advantis and DWD shall cooperate
with each other in achieving a reasonable alternative arrangement for DWD to
continue to process its work with minimum interference to its business
operations.
3. ADVANTIS RESPONSIBILITIES
3.1 GENERAL
a) Advantis will provide those services listed in this Section 3,
those described in Exhibits 1 through 3 and 7 (SSAs), and those
implied or necessary to deliver such services, unless specifically
excluded from the Advantis responsibilities (each such service a
"Service" and in sum, the "Services"). The Parties anticipate and
expect that technology will evolve and advance over the Term and
that this will require
10
<PAGE>
evaluation and, if warranted based on the evaluation, testing and
piloting of technologies, methodologies and tools that are
different from those in use as of the Commencement Date. As
applicable to the Services and consistent with industry practice,
Advantis shall be responsible for such tasks and will offer,
subject to the mutual agreement of the Parties with respect to
scope, quality and price, such technologies, methodologies and
tools to DWD. Exhibits 1 through 3 and 7 are not meant to be an
exclusive listing of the services Advantis may provide or is
capable of providing, and the Exhibits will be amended as new
services are offered by Advantis and accepted by DWD.
b) As of the Commencement Date, Advantis will provide the Services to
DWD, DWD's Affiliates, and to the clients of all such entities who
receive Services; provided that (i) DWD shall remain Advantis' sole
point of contact with respect to the Services, except that for
specific technical issues Advantis may work directly with the
appropriate technical liaison within an Affiliate of DWD as
designated by DWD, (ii) DWD shall remain responsible for payment of
all such Services as though provided to DWD itself, and (iii) DWD
shall be solely responsible for the fulfillment of all obligations,
terms, and conditions under this Amended Agreement. For purposes
of this Amended Agreement, references to DWD in its capacity as a
beneficiary or recipient of services are to be read as references
to DWD and the entities referenced in this Section 3.1 (b), and
Services provided to such entities will be deemed to be Services
provided to DWD.
3.2 INFORMATION PROCESSING SYSTEMS AND SERVICES
Advantis will provide the following as requested by DWD:
a) Processing Services;
b) DASD Storage Services;
c) Tape Storage Services;
d) Printing Services;
e) Microfiche Services
f) Help Desk Support Services;
g) Distributed Processing Services;
h) Contingency (disaster recovery) Services;
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<PAGE>
i) Application Support Services;
j) Information Processing Services (charged as Direct Charges);
k) Consulting and Project Management Services; and
l) Any other commercially available IPSS Service which Advantis offers
on or after the Commencement Date.
3.3 DATA NETWORK SERVICES AND VOICE SERVICES
Advantis will provide the following as requested by DWD:
a) Private Line Services;
b) Switched Access and Usage Services;
c) Transaction Usage Services;
d) On-Premises Services;
e) Network Services (charged as Direct Charges);
f) Voice Services;
g) Video Conferencing Services;
h) Voice Consulting and Optimizations Services; and
i) Any other commercially available Data Network Services or Voice
Services which Advantis offers on or after the Commencement Date.
3.4 STANDARDS
Advantis agrees that its performance of the Services for DWD will meet or
exceed each of the applicable Performance Standards. Within 120 days of the
Commencement Date, the Parties will review the existing Performance Standards,
Service Level Agreements and Service Level Objectives, including those set
forth in Exhibit 5, revise them in a manner mutually agreed to by the Parties,
and document such agreement as a revised Exhibit 5 to the Amended Agreement
("Amended Agreement Performance Standards" or "AAPS"). The AAPS will
specifically define a broad range of service levels, a more limited set of
business-oriented critical service levels, and the measurement methodologies
associated with the service levels and critical service levels. If Advantis
breaches a service level it will: (a) report such failure, (b) determine the
root cause of the problem, and (c) take such action as necessary to promptly
bring its performance back into conformance with the service level. The critical
service levels agreed to by the Parties will have a specified "lower limit"
(that will be set below related service levels) and a specified "higher limit"
(that will be set above related service levels). [*]
- -----------------------------
[*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
12
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3.5 MANAGEMENT AND CONTROL
a) Advantis, with the cooperation and assistance of DWD, will
establish operating processes and procedures relating to the
performance of the Services. Such processes and procedures will
include change control procedures, scheduling for projects and
other operational matters relating to the Data Center, Data Network
and Voice Services. Advantis will furnish a written description of
these processes and procedures to DWD for its review and comment,
and any reasonable comments or suggestions of DWD will be
incorporated therein.
b) Within 180 days after the Commencement Date, Advantis and DWD will
agree upon an appropriate set of periodic Services-related reports
to be provided by Advantis. In the absence of such agreement,
Advantis will provide DWD with the same periodic Services-related
reports that Advantis was providing to DWD prior to the
Commencement Date.
c) Within 60 days after the Commencement Date, Advantis and DWD will
mutually agree upon an appropriate set of periodic meetings to be
held between representatives of DWD and Advantis.
d) In the absence of agreement as to such processes, procedures,
reports and periodic meetings as contemplated by this Section 3.5,
such functions shall be performed in the manner followed by the
Parties prior to the Commencement Date.
3.6 EQUIPMENT
Advantis will provide the Services using the Equipment. Additional or
replacement Equipment, including upgrades, will be added by Advantis to the
Data Center and Data Network as necessary to perform the Services in accordance
with the Performance Standards. For purposes of assigning financial
responsibility for the Equipment, and for no other purposes, the Parties agree
as follows:
a) Other than with respect to DWD Equipment, financial responsibility
for (i) acquisition, lease, and ownership costs for Equipment,
including: current and future Equipment, upgrades, enhancements,
growth and technology refreshments ("Equipment Capital" costs); and
(ii) all costs and expenses related to operational support,
including: installation, support, hardware maintenance, disaster
recovery of the Equipment, service levels, and moves, adds and
changes ("Equipment
13
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Operational Support" costs) shall be borne by Advantis and will be
recovered by Advantis through the pricing provisions set forth in
the Exhibits.
b) Other than with respect to DWD Equipment, Advantis shall be
administratively and operationally responsible for the Equipment
used to provide the Services, including provisioning, staging,
configuring, installing, operating, maintaining, upgrading, and
enhancing the Equipment, all as set forth in more detail in
Exhibits 1 through 3 and 7.
3.7 SOFTWARE
a) SUPPORTED SOFTWARE. Advantis will be financially responsible
for (i) acquisition and ownership costs for Supported Software,
including: current and future packages, new releases, growth and
technology refreshment ("Software Capital" costs); and (ii) all
costs and expenses related to operational support, including:
installation, support, Software maintenance, and service levels
("Software Operational Support" costs). Advantis will:
1) operate, maintain and enhance as necessary to perform in
accordance with the Performance Standards, all Supported
Software in the Data Center and Data Network;
2) apply preventive maintenance and program temporary fixes to
correct defects in the Supported Software running in the Data
Center and Data Network;
3) provide or obtain new versions and releases, upgrades,
replacements or additional Supported Software as necessary in
order to perform the Services in accordance with the
Performance Standards; and
4) operate all Applications Software in the Data Center and Data
Network.
b) DWD SOFTWARE. DWD will be financially responsible for the
Software Operational Support and Software Capital costs for DWD
Software, including: current and future packages, new releases,
support, software maintenance, service levels, growth and
technology refreshment.
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3.8 AUDITS
a) Advantis will assist DWD in meeting its audit and regulatory
requirements, including providing access to the Data Center
locations sufficient to enable DWD and its auditors and examiners
to conduct appropriate audits and examinations of the operations of
Advantis to verify:
1) the accuracy of the application of Advantis' charges to DWD;
and
2) that Services are being provided in accordance with this
Amended Agreement.
Such access will require a minimum 72-hour notice to Advantis and
will be provided at reasonable hours, provided that any audit does
not interfere with Advantis' ability to perform (i) the Services in
accordance with this Amended Agreement or (ii) services for any of
its other customers, or compromise any reasonable security
processes or procedures or the integrity of any information or
data. DWD will make every reasonable effort to coordinate and
reach agreement with Advantis regarding the timing and scope of any
such audit, and also limit the number, scope and duration of such
audits, and otherwise attempt to minimize any disruption to
Advantis' business caused by such audit(s). Further, the initial
request for an audit will be directed only to the Advantis Business
Controls Department for consideration and processing. Upon
request, Advantis will notify DWD of the appropriate individual(s)
within such department who will act as the liaison for audit
requests.
b) Advantis will provide access only to information reasonably
necessary to perform the audit. In the event Advantis believes
that a request from DWD, its auditors or examiners would involve
the disclosure of Confidential Information, DWD agrees that its
auditors and examiners will be required to execute an appropriate
confidentiality agreement before receiving such Confidential
Information. In no event shall Advantis allow DWD, its auditors or
examiners access to (i) other Advantis customers' proprietary data
or information, or (ii) Advantis' proprietary data and systems
(other than the proprietary data and systems described in (a) (1)
and (2) above as they specifically relate to DWD). Advantis will
also provide reasonable assistance to DWD's employees, auditors, or
examiners in testing DWD's data files and programs, including
installing and running audit software. Following any
15
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such audit, DWD shall conduct or request its auditors and examiners
to conduct an exit conference with Advantis to obtain factual
concurrence with any issues identified in the audit. Advantis and
DWD shall meet to review each audit report promptly after the
issuance thereof and to mutually agree upon the appropriate manner,
if any, in which to respond to the changes suggested by the audit
report.
c) In connection with such audits, in the event DWD requests Advantis
to make changes or take other actions necessary in order to
maintain compliance with applicable laws or regulations (other than
those changes or actions required due to a breach of Advantis'
obligations, in which event the costs associated with such change
shall be Advantis' responsibility), Advantis agrees to make any
reasonable changes and take other reasonable actions which are
necessary in order to maintain compliance with applicable laws or
regulations. DWD may submit additional findings or recommendations
to Advantis for its consideration and Advantis shall consider such
findings.
d) If an audit or examination reveals that Advantis' invoices are not
correct, and:
1) If the aggregate invoice amount in error is a net credit to
DWD equal to or less than [ * ] Advantis shall promptly
pay that net credit amount to DWD, without interest, and DWD
shall pay the cost of the audit.
2) If the aggregate invoice amount in error is a net credit to
DWD of more than [ * ], Advantis shall promptly pay that
net credit amount, without interest, and shall further
reimburse the reasonable cost of the audit to DWD.
3) If the aggregate invoice amount in error is a net credit to
Advantis equal to or less than [ * ], DWD shall pay the
cost of the audit without any further obligation to pay the
amount of such credit to Advantis.
4) If the aggregate invoice amount in error is a net credit to
Advantis of more than [ * ], DWD shall promptly pay to
Advantis, without interest, that
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net credit amount less the reasonable cost of the audit.
3.9 DISCLAIMER OF RESPONSIBILITIES
Unless otherwise agreed to in writing, Advantis shall have no obligation
to:
a) provide data, data entry, or database management or coordinate such
activities with its systems design and production functions;
b) designate or document application information requirements,
including report design or content, frequency of reports, or
accessibility to information;
c) provide or perform upgrades, replacements, acquisitions or
maintenance of DWD Equipment;
d) operate the DWD Equipment necessary for Services required to be
provided by Advantis;
e) provide or perform new revisions, releases, upgrades, enhancements
or maintenance for DWD Software;
f) provide End User office support including clerical and
administrative tasks, such as courier and internal distribution;
g) provide support to End Users for questions and problems related to
Applications Software;
h) provide personnel or equipment to ensure the physical security of
DWD Locations;
i) be responsible for the creation or administration of user access
and password management or security programs;
j) provide any preprinted and paper forms or supplies required by End
Users;
k) be responsible for any mail, messenger, postage, courier or print
distribution services;
l) be responsible for storage, retrieval, distribution or filing of
any microfilm/microfiche output;
m) provide move, add and change service support for End User Equipment
not otherwise supported under the "on-premises services"; or
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n) be responsible for DWD activities or functions as described in this
Amended Agreement.
3.10 [*]
4. DWD RESPONSIBILITIES
4.1 PROJECT EXECUTIVE
Each Party agrees to designate, prior to the Commencement Date, an
authorized individual to whom all communications may be addressed and who will
have the authority to act for and bind that Party and its subcontractors in
connection with all aspects of this Amended Agreement. In addition, each Party
will designate, prior to the Commencement Date, a Project Executive to have
overall responsibilities with respect to this Amended Agreement. A Party may
change either of the designated individuals by giving the other Party written
notice.
4.2 APPLICATIONS SOFTWARE
During the Term, DWD will be responsible for selecting or defining its
requirements for its Applications Software and DWD Software.
4.3 FACILITIES AND SUPPORT SERVICES
The Parties acknowledge that permanent leasing of space on DWD Locations
for Advantis employees and node license arrangements shall be subject to
separate agreements. In addition, DWD agrees to provide, at no charge to
Advantis, the use of its DWD Locations and such additional space as may be
reasonably necessary for the performance of the Services. This includes
reasonable office space, storage space, and all reasonable and customary office
support services, employee-type services, such as parking privileges and
cafeteria services, office supplies and furniture. DWD agrees that if it
decides to relocate a current DWD Location it will provide comparable space,
facilities and resources in the new DWD Location, under the same terms and
conditions of this Amended Agreement. It is understood that Advantis' use of
the DWD Locations does not constitute or create a leasehold interest. In the
event, however, Advantis needs to place Equipment on DWD Locations in order to
provide specific Services under this Amended Agreement, DWD will allow Advantis
to do so and use reasonable care to protect such Equipment.
4.4 BIDDING OF FRAME RELAY SERVICES
If DWD elects to solicit bids or proposals from competitive providers for
the performance of frame relay services (beyond the ongoing, current efforts),
DWD agrees to provide Advantis with
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the same proposal requirements and information, access to facilities and
pertinent personnel and other notices and materials as provided to other
potential vendors, and treat Advantis as it treats the other potential vendors
in the proposal or bidding process.
5. CHARGES AND EXPENSES
5.1 SERVICES CHARGES
a) DWD agrees to pay the charges for the Services specified in the
applicable Exhibits together with the amounts described in this
Section 5. The Charging Methodology shall be set forth in Exhibits
1,2,3 and 4.
b) Where an Affiliate of DWD (e.g., SPS Transactions Services, Inc.)
has a separate contractual relationship with Advantis, that
Affiliate may at its option receive Services and pricing for such
Services pursuant to this Amended Agreement. Nothing in this
Amended Agreement shall otherwise change or affect the terms of
such other agreements, including that any termination of this
Amended Agreement shall have no effect on the separate contractual
relationship between Advantis and such Affiliate of DWD, and that
the termination of such separate contractual relationship shall
have no effect on this Amended Agreement.
5.2 COST OF LIVING ADJUSTMENT
a) The Parties intend that commencing January 1, 1997, certain
identified charges listed in the Exhibits ("Identified Charges")
will increase if inflation, measured from January 1, 1993, exceeds
4% per year, compounded annually. These Identified Charges include
protection against inflation at a rate of 4% per year, compounded
annually (the "COLA Index"). The COLA Index for each year of the
Term shall be provided in Exhibit 4. DWD agrees to pay Advantis a
Cost of Living Adjustment ("COLA") beginning 12 months after the
Commencement Date if actual cumulative inflation exceeds the
inflation covered by the COLA Index as set forth in Exhibit 4.
Advantis and DWD agree to use the Consumer Price Index, as
published by the Bureau of Labor Statistics, U.S. Department of
Labor, For All Urban Consumers, U.S. City Average, All Items,
1982-84=100 ("CPI-U") for purposes of calculating actual inflation.
The COLA will be calculated using the COLA Factor specified below.
This COLA shall be applied on a prospective basis, i.e., the
identified charges payable by DWD will be surcharged by the Factor
as determined below, if such Factor is in excess of
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zero. The COLA Factor will be determined as soon as practicable
after the end of each calendar year. If applicable, Advantis will
invoice DWD for COLA beginning with Services rendered on or after
January 1, 1997 in accordance with Section 6.1. The COLA Factor is
equal to:
((Actual Inflation - Protected Inflation) / Prior Year's Protected
Inflation) x .50, where:
Actual Inflation = CPI-U for the December preceding the
year for which COLA is being
calculated; and
Protected Inflation = the Base Year Index multiplied by the
COLA Index for the December preceding
the year for which COLA is being
calculated.
Prior Year's
Protected Inflation = the Base Year Index multiplied by the
COLA Index for the December preceding
the year for which the Protected
Inflation is being calculated.
Base Year Index = CPI-U for December, 1992.
b) In the event the Bureau of Labor Statistics stops publishing the
CPI-U or substantially changes its content and format, Advantis and
DWD will substitute another comparable index published at least
annually by a mutually agreeable source. If the Bureau of Labor
Statistics merely redefines the base year for the CPI-U from
1982-84 to another year, Advantis and DWD will continue to use the
CPI-U, but will convert the COLA Index to the new base year by
using an appropriate conversion formula.
c) [*]
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5.3 TAXES
a) Advantis shall be responsible and pay for:
(i) any sales, use, personal or other taxes based upon or
measured by Advantis' cost in acquiring or providing
equipment, materials, supplies or services (including
Equipment and Software) furnished or used by Advantis in
performing or furnishing the Services; and
(ii) taxes, assessments and other levies on its net income and
real and personal property.
b) DWD shall be responsible and pay for any sales, use, excise or
services-related tax levied or assessed on (i) the provision of the
Services by Advantis to DWD or (ii) the use of Data Network lines
or circuits by Advantis for the benefit of DWD.
c) DWD shall also be responsible and pay for:
(i) taxes, assessments and other levies on its net income and
real property, and
(ii) all personal property or use taxes due on or with respect to
DWD Equipment and DWD Software.
d) The Parties agree to reasonably cooperate with each other to more
accurately determine each Party's tax liability and to minimize
such liability to the extent legally permissible.
e) Advantis and DWD shall provide and make available to the other any
resale certificates, information regarding out of state sales or
use of equipment, materials or services, and other exemption
certificates or other information reasonably requested by either
Advantis or DWD. In addition, Advantis will provide to DWD such
documentation as DWD may reasonably request to establish that
Advantis is registered to collect any
tax described in Section 5.3 (b) above which Advantis seeks to
collect from DWD.
f) When the Parties mutually agree, invoices for Services rendered by
Advantis to DWD shall segregate the charges for:
(i) taxable Services;
(ii) non-taxable Services; and
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(iii) items for which Advantis functions merely as a paying agent
for DWD in receiving goods, supplies or services (including
leasing and licensing arrangements) that are nontaxable or
have previously been subject to tax.
[*]
5.4 OTHER EXPENSES AND CHARGES
DWD will be financially responsible for all costs and expenses associated
with its responsibilities specified in Section 4, and for all costs and
expenses necessitated by compliance with Section 3.8 (c).
6. INVOICING AND PAYMENT
6.1 MONTHLY SERVICES CHARGE INVOICES
Advantis will invoice DWD on a monthly basis. The invoices will state
for DWD the monthly charge applicable (including the basis for that charge) and
applicable taxes (as set forth in Section 5.3(b)) by tax jurisdiction.
6.2 OTHER CHARGES
Any amount due under this Amended Agreement for which a time for payment
is not otherwise specified will be due and payable no later than seven (7)
business days from receipt of the invoice.
6.3 INVOICE PAYMENT
a) DWD will pay its invoices by wire funds transfer or other
electronic means acceptable to Advantis to an account specified by
Advantis no later than seven (7) business days from receipt of an
invoice. If payment is not received by the seventh day after the
receipt of the invoice, Advantis will promptly notify DWD in
writing of such nonpayment on or about such seventh day; provided
however, that Advantis' failure to give such notice does not affect
the payment obligations of DWD in any way.
b) [Intentionally omitted.]
c) In the event that any payments are not received by Advantis within
five days following the due date, such payment shall include
interest at the rate of 1% per
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month on the amount of such arrears accruing from the original due
date until the date of payment.
d) In the event that DWD challenges any invoice, DWD will pay the
entire invoiced amount (absent manifest error, in which event DWD
will promptly notify Advantis of such error), and shall pursue
resolution of such disputed invoice pursuant to the dispute
resolution process set forth in Section 15. In the event DWD is
successful in challenging the disputed invoice, Advantis will
provide DWD with a credit against the charges otherwise payable to
Advantis. Such credit shall include interest at the rate of 1% per
month accruing from the original due date until the date the credit
is applied.
6.4 PRORATION
All periodic charges under this Amended Agreement are to be computed on a
calendar month basis, and will be prorated for any partial month, unless
specifically stated otherwise in this Amended Agreement.
6.5 CREDITS
Except as otherwise set forth in this Amended Agreement, with respect to
any amount to be paid or reimbursed to DWD by Advantis, Advantis may, at its
option, pay that amount to DWD by giving it a credit against the charges
otherwise payable to Advantis hereunder the next time an amount is due and
payable by DWD. In the event such credit to DWD from Advantis exceeds the
charges payable by DWD to Advantis over a three-month period, then Advantis
shall apply such credits to the charges to DWD over a period not to exceed
three months, with any excess being paid to DWD at the end of such three-month
period.
[*]
8. CONFIDENTIALITY/DATA SECURITY
8.1 CONFIDENTIAL INFORMATION
Each Party acknowledges that the other Party possesses and will continue
to possess information that has been created, discovered, or developed by that
Party or provided to it by a third party, or in which property rights have been
assigned or otherwise conveyed to it, which information has commercial value in
its business and is not in the public domain. Except as
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otherwise specifically provided by the Parties, "Confidential Information"
shall mean:
a) all information and documents marked confidential, restricted, or
proprietary by either Party; or
b) DWD's customer lists, DWD information, account information, and
information regarding business planning and operations of DWD and
its administrative, financial or marketing activities.
8.2 OBLIGATIONS
a) Each Party will use the same care to prevent disclosing to third
parties the Confidential Information of the other as it employs to
avoid disclosure, publication or dissemination of its own
information of a similar nature. Notwithstanding the foregoing, a
Party may disclose such information to subcontractors involved in
providing Services under this Agreement where:
1) such disclosure is necessary to permit the subcontractor to
perform its duties hereunder; and
2) that Party assumes full responsibility for the acts or
omissions of its subcontractor, no less than if the acts or
omissions were those of such Party.
b) Without limiting the generality of the foregoing, no Party will:
1) make any use of the Confidential Information of the other
except as contemplated by this Amended Agreement;
2) acquire any right in or assert any lien against the
Confidential Information of the other; or
3) refuse to promptly return, provide a copy of or destroy such
Confidential Information upon the request of the other Party.
c) Nothing in this Amended Agreement shall be construed so as to
restrict a Party from using any data processing or network
management ideas, concepts, know-how and techniques retained in the
unaided memories of such Party's personnel or subcontractors,
without limitation, in the development, manufacturing and marketing
of products and services, provided that such products or services
do not breach that Party's obligations of confidentiality or
infringe on the other
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Party's patent, copyright, trademark, trade secret or other
proprietary rights.
8.3 EXCLUSIONS
Notwithstanding the foregoing, this Section 8 will not apply to any
Confidential Information of a Party which the other Party can demonstrate was:
a) at the time of disclosure to it, in the public domain;
b) after disclosure to it, published or has otherwise become part of
the public domain through no fault of its own;
c) in the possession of it at the time of disclosure to it without any
obligation of it to maintain such confidentiality;
d) received after disclosure to it from a third party who had a lawful
right to disclose such information to it; or
e) independently developed by it without reference to Confidential
Information of the other Party.
Further, either Party may disclose Confidential Information of the other to the
extent required by law or order of a court or governmental agency; provided,
however, that such Party must give the other Party prompt notice and make a
reasonable effort to obtain a protective order or otherwise protect the
confidentiality of such information, all at its own cost and expense. It is
understood that the receipt of Confidential Information under this Amended
Agreement will not limit or restrict assignment or reassignment of employees of
the Parties within or among the respective Parties.
8.4 LOSS OF CONFIDENTIAL INFORMATION
In the event of any disclosure or loss of Confidential Information, the
Party which has lost or disclosed such Confidential Information will promptly
notify the other Party.
8.5 LIMITATION
Neither Advantis nor DWD will be responsible for corruption, loss or
mistransmission of data or for the security of data while such data is being
transmitted via public telecommunications facilities.
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9. TERMINATION
9.1 TERMINATION FOR CAUSE
a) In the event of a material breach of this Amended Agreement by DWD,
Advantis may terminate this Amended Agreement upon written notice
to DWD in accordance with Section 9.1 (c). In the event Advantis
terminates this Amended Agreement as set forth in this Section 9.1
(a), the Termination Charge(s) as set forth in Exhibit 4 of this
Amended Agreement shall be paid to Advantis.
b) In the event of a material breach of this Amended Agreement by
Advantis, DWD may terminate this Amended Agreement upon written
notice to Advantis, in accordance with Section 9.1 (c), without
obligation to pay the Termination Charge(s) set forth in Exhibit 4.
c) The written notice provided in (a) and (b) above will specifically
describe such material breach. The recipient of such notice shall
have 20 days to cure the breach unless it would be unreasonable to
cure such breach within 20 days, in which event, the breaching
Party shall be given an additional 20 days to cure such breach. In
the event the material breach is not cured within the period
specified above, the nonbreaching Party may terminate this Amended
Agreement, as provided for in Section 9.1 (a) and (b) above, which
termination shall be in writing, as of a date specified in such
notice of termination. The terminating Party shall have all rights
and remedies generally afforded by law or equity, subject to the
limitations expressed in this Amended Agreement.
9.2[*] TERMINATION FOR SPECIAL CIRCUMSTANCES
a) [*]
b) [Intentionally Omitted.]
c) [Intentionally Omitted.]
d) Any Termination Charge paid by DWD for a partial termination will
decrease the Baseline and revenue commitment levels set forth in
Exhibits 1, 2, 3, and 4, as applicable, for DWD for such year on a
pro-rata basis. Additionally, in the event DWD terminates any
Services and pays any Termination Charge (or that Termination
Charge is paid by another provider), Advantis shall adjust the
relevant pricing provisions set forth in the applicable Exhibits
for DWD to reflect the loss of the revenue commitment of those
Services,
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in order to maintain the current price levels for Services to DWD.
e) [*]
9.3 TERMINATION ASSISTANCE
a) With respect to the expiration or termination (in whole or in part)
of this Amended Agreement, Advantis will cooperate with DWD to
assist with the orderly transfer of the Services, functions and
operations provided by Advantis hereunder to another provider or to
DWD itself. Prior to termination or expiration of this Amended
Agreement, DWD may request Advantis to perform, and if so requested
Advantis shall perform (but may require advance payment in the
event of a termination by Advantis due to a failure by DWD to pay
amounts due and payable under this Amended Agreement) reasonable
services in connection with migrating the work of DWD to another
provider or to DWD itself ("Termination Assistance"). Termination
Assistance shall be provided until the effective date of
termination or expiration with respect to the Services. Upon
termination, DWD will allow Advantis access to DWD Locations to
remove Equipment, Software and other Advantis assets. Upon
termination, Advantis will return to DWD any DWD Software or DWD
Equipment that Advantis possesses.
b) [*]
10. LIABILITY
10.1 GENERAL INTENT
The liability of DWD, Advantis, and each of their subcontractors to the
other Party and their exclusive remedies are set forth in this Section 10 and
Section 12. Subject to the specific provisions of this Section, it is the
intent of DWD and Advantis that the breaching Party will be liable for any
damages incurred by the nonbreaching Party as a result of the breaching Party's
failure to perform its obligations in the manner required by this Amended
Agreement.
10.2 DAMAGES
a) The liability of DWD and Advantis for actual, direct damages
resulting from the breaching Party's performance or nonperformance
under this Amended Agreement, regardless of the form of action, and
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whether in contract, tort (including, without limitation,
negligence), warranty or other legal or equitable grounds, will be
limited for each event which is the subject matter of the cause of
action[*]
b) In no event will DWD or Advantis have any liability whether based
on contract, tort (including, without limitation, negligence),
warranty or any other legal or equitable grounds, for any loss of
interest, profit or revenue by the other Party or for any
consequential, indirect, incidental, special, punitive or exemplary
damages suffered by the other Party arising from or related to this
Amended Agreement, even if such Party has been advised of the
possibility of such losses or damages; provided, however, that this
clause will not prevent DWD or Advantis from recovering amounts
owed under this Amended Agreement.
c) Notwithstanding anything to the contrary contained herein, the
limitations set forth in this Section 10.2 will not apply to:
1) any failure by DWD to pay any amounts due and owing Advantis
pursuant to the terms of this Amended Agreement;
2) losses for bodily injury or damage to real property or
tangible personal property, as described in Section 12.3;
3) either Party's obligation to indemnify the other for patent
and copyright infringement Losses and Losses relating to tax
liabilities, as provided in Sections 12.1 and 12.7
respectively; or
4) intentional misappropriations of Confidential Information.
d) In no event will Advantis or its subcontractors be liable for
damages if and to the extent caused by the failure of DWD to
perform its responsibilities, nor shall DWD be liable for damages
if and to the extent caused by any failure of Advantis or its
subcontractors to perform their responsibilities.
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10.3 NONRECOURSE
Notwithstanding anything to the contrary contained in this Amended
Agreement, no partner of Advantis shall have any duties, obligations or
liabilities under or in respect of this Amended Agreement as a result of its
status as a partner of Advantis, nor shall any direct or indirect owner of any
such partner have any duties, obligations or liabilities as a result of its
direct or indirect beneficial ownership; it being understood and agreed that
all duties, obligations and liabilities of Advantis are expressly nonrecourse
to the partners of Advantis and their respective direct and indirect beneficial
owners.
11. WARRANTY
11.1 WORK STANDARDS
Advantis represents and warrants that all Services performed by Advantis
for DWD will be in a workmanlike manner in accordance with industry standards
and practices applicable to the performance of such Services.
11.2 ENVIRONMENTAL
a) In the event that Hazardous Materials are discovered at any DWD
Location during the term of this Amended Agreement, Advantis may
cease the performance of that portion of the Services affected by
such discovery if, in the reasonable judgment of Advantis,
Advantis' ability to perform such portion of the Services safely
and properly is substantially adversely impacted by the presence of
such Hazardous Materials. Advantis shall not be responsible for
remedying any violation of federal, state or local law with respect
to the presence of such Hazardous Materials to be remedied, it
being understood that matters relating to the investigation,
detection, abatement and remediation of any Hazardous Materials
discovered at any DWD Location are not within the scope of this
Amended Agreement and that Advantis shall not be liable or
responsible for any expense incurred by DWD in this connection,
unless investigation reveals that the presence of the Hazardous
Materials was caused by the conduct of an Advantis employee,
invitee, or subcontractor or that Hazardous Materials were
knowingly and willfully disturbed by an Advantis employee, invitee
or subcontractor. In such event, the limitations of this paragraph
will not apply.
b) For purposes of this Section, "Hazardous Materials" means:
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1) any "hazardous substance" as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of
1980, as amended from time to time (42 U.S.C. 9601 et seq.)
and the regulations promulgated thereunder;
2) any asbestos or asbestos-containing materials;
3) petroleum, crude oil or any fraction thereof, natural gas or
synthetic gas used for fuel; and
4) any additional substances or materials which at such time are
classified or considered to be hazardous or toxic under the
laws of the state wherein the facilities are located.
11.3 NONINFRINGEMENT
The Parties represent and warrant that they will perform their
responsibilities under this Amended Agreement in a manner that does not
infringe, or constitute an infringement or misappropriation of, any patent,
trade secret, copyright or other proprietary right of any third party.
11.4 COMPLIANCE WITH OBLIGATIONS
DWD represents and warrants that its entry into this Amended
Agreement does not violate or constitute a breach of any of its
contractual obligations with third parties. Advantis represents
and warrants that its entry into this Amended Agreement does not
violate or constitute a breach of any of its contractual
obligations with third parties.
11.5 SOFTWARE
Advantis will ensure that Advantis-owned Proprietary Products,
Advantis-owned derivative works thereof, or other Software
created by Advantis will continue to function in accordance with
Advantis' intended use of such software and such software's
specifications prior to, during, and after the year 2000;
provided, however, to the extent that any such specified
software fails to meet this obligation, Advantis shall timely
replace it with other software of equivalent or better
functionality at no additional cost to DWD. Further, Advantis
shall work with its third party Supported Software licensors to
assist them in ensuring that their respective Supported Software
is year 2000 compatible. Where Advantis believes that any third
party Supported Software will not be year 2000 compatible or
interoperable with Supported Software or Equipment, Advantis
will notify DWD and work with DWD to identify alternative third
party software, as needed. Advantis will pass through to DWD
any third party Supported Software warranties related to such
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Software which it has the right to pass through. Upon DWD's
reasonable request, Advantis will notify DWD of the year 2000
compatibility status of any specified Supported Software
utilized by Advantis in its performance hereunder.
11.6 DISCLAIMER
a) Advantis shall not be responsible for the inaccuracy of any advice,
report, date or other product delivered to DWD, which is
attributable to data and/or software provided by DWD. Such
products are delivered "AS IS", and Advantis shall not be liable
for any inaccuracy thereof.
b) Subject to the obligations of Advantis contained in this Amended
Agreement including the Performance Standards, Advantis does not
assure uninterrupted or error-free operation of the Equipment.
c) EXCEPT AS PROVIDED IN THIS AMENDED AGREEMENT, THERE ARE NO OTHER
EXPRESS WARRANTIES AND THERE ARE NO IMPLIED WARRANTIES, INCLUDING,
BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
11.7 AUTHORIZATION AND ENFORCEABILITY
DWD and Advantis each hereby respectively represent, as to
itself, that:
a) it has all requisite power and authority to enter into this Amended
Agreement and to carry out the transactions contemplated hereby;
and
b) the execution, delivery and performance of this Amended Agreement
and the consummation of the transactions contemplated hereby have
been duly authorized by all requisite corporate action on its part.
11.8 REGULATORY AND CORPORATE PROCEEDINGS
Each Party agrees to obtain all necessary regulatory approvals applicable
to its business, obtain any necessary permits, and comply with any regulatory
requirement applicable to the performance of the Services.
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12. INDEMNITIES
12.1 INDEMNITY BY ADVANTIS
Advantis agrees to indemnify, defend and hold DWD, its
Affiliates and their respective officers, directors, employees,
agents, successors and assigns harmless, in accordance with the
procedures described in Section 12.6 from and against any and
all Losses arising from or in connection with:
a) any claims of infringement made against DWD of any Canadian or
United States patent, or any copyright, trademark, service mark,
trade name or similar proprietary rights conferred by contract or
by common law or by any law of Canada or any Canadian Providence,
the United States, or any state of the United States, alleged to
have occurred because of Equipment, systems, Software, products or
other resources or items provided to DWD by Advantis; provided,
however, that Advantis will have no obligation with respect to any
Losses to the extent the same arise out of or in connection with
the modification of Software or Equipment by DWD or DWD's
combination, operation or use with devices, data or programs not
furnished by Advantis or its subcontractors;
b) any amounts, including but not limited to, taxes, interest and
penalties that are obligations of Advantis pursuant to Section 5.3
and that either (i) are assessed against DWD, or (ii) DWD elects to
pay pursuant to Section 5.3 (h); and
c) the inaccuracy or untruthfulness of any representation or warranty
made by Advantis under this Amended Agreement.
12.2 INDEMNITY BY DWD
DWD agrees to indemnify, defend and hold Advantis, its
Affiliates and their respective officers, directors, employees,
agents, successors and assigns harmless, in accordance with the
procedures described in Section 12.6 from and against any and
all Losses arising from or in connection with:
a) any claims of infringement made against Advantis of any Canadian or
United States patent, or any copyright, trademark, service mark,
trade name or similar proprietary rights conferred by contract or
by common law or by any law of Canada or any Canadian Providence,
the United States, or any state of the United States, alleged to
have occurred because of equipment, systems, programs, products or
other resources or items provided
32
<PAGE>
to Advantis by DWD; provided, however, that DWD will have no
obligation with respect to any Losses to the extent the same arise
out of or in connection with the modification of a program or
equipment by Advantis or any Advantis Affiliate, or Advantis' or
Advantis Affiliates' combination, operation or use with devices,
data or programs not furnished by DWD or any of its subcontractors;
b) any amounts, including but not limited to, taxes, interest and
penalties that are obligations of DWD pursuant to Section 5.3 and
that either (i) are assessed against Advantis or any Advantis
Affiliate, or (ii) Advantis or any Advantis Affiliate elects to pay
pursuant to Section 5.3 (h). Notwithstanding the foregoing, if
Advantis has determined pursuant to Section 5.3 (g) that a
potential tax of the type described in Section 5.3 (b) should not
be collected from DWD, then any penalties and interest with respect
to such tax shall not be indemnified hereunder; and
c) the inaccuracy or untruthfulness of any representation or warranty
made by DWD under this Amended Agreement.
12.3 CROSS INDEMNITY AND CONTRIBUTION
Each Party agrees to contribute to the amount paid or payable by the
other Party for any and all Losses for which such Party is legally liable and
in proportion to such Party's comparative fault in causing such Losses, arising
in favor of any person, corporation or other entity, including the Parties
hereto and their employees, contractors and agents, on account of personal
injuries, death, or damage to tangible personal or real property in any way
incident to, or in connection with or arising out of:
a) the Services provided by Advantis hereunder;
b) the presence of such Party, its employees, contractors or agents on
the premises of any other Party; or
c) the act or omission of such Party, its employees, contractors or
agents.
12.4 SUBROGATION
In the event that an Indemnifying Party shall be obligated to indemnify
an Indemnified Party pursuant to Sections 12.1, 12.2
or 12.3, the Indemnifying Party shall, upon payment of such indemnity in full,
be subrogated to all rights of the Indemnified Party with respect to all the
claims and defenses to which such indemnification relates.
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12.5 EXCLUSIVE REMEDY
The indemnification rights of each Indemnified Party pursuant to Sections
12.1, 12.2 or 12.3 shall be the exclusive remedy of such Indemnified Party with
respect to the claims to which such indemnification relates.
12.6 GENERAL INDEMNIFICATION PROCEDURES
a) If any civil, criminal, administrative or investigative action or
proceeding (any of the above being a "Claim") is commenced against
either Party entitled to indemnification under Sections 12.1 (a),
12.1 (c), 12.2 (a), 12.2 (c) or 12.3 (an "Indemnified Party")
written notice thereof shall be given to the Party that is
obligated to provide indemnification under such Sections (the
"Indemnification Party") as promptly as practicable. After such
notice, if the Indemnifying Party shall acknowledge in writing to
such Indemnified Party that this Amended Agreement applied with
respect to such Claim (such acknowledgment not to be deemed an
acknowledgment of liability by such Indemnifying Party), then the
Indemnifying Party shall be entitled, if it so elects, in a written
notice delivered to the Indemnified Party not fewer than 10 days
prior to the date on which the first response to such Claim is due,
to take control of the defense and investigation of such Claim and
to employ and engage attorneys of its sole choice to handle and
defend the same, at the Indemnifying Party's sole cost and expense.
The Indemnified Party shall cooperate in all reasonable respects
with the Indemnifying Party and its attorneys in the investigation,
trial and defense of such Claim and any appeal arising therefrom;
provided, however, that the Indemnified Party may, at its own cost
and expense, participate, through its attorneys or otherwise, in
such investigation, trial and defense of such Claim and any appeal
arising therefrom. No settlement of a Claim that involves a remedy
other than the payment of money by the Indemnifying Party shall be
entered into without the consent of the Indemnified Party, which
consent will not be unreasonably withheld.
b) After notice by the Indemnifying Party to the Indemnified Party of
its election to assume full control of the defense of any such
Claim, the Indemnifying Party shall not be liable to the
Indemnified Party for any legal expenses incurred thereafter by
such Indemnified Party in connection with the defense of that
Claim. If the Indemnifying Party does not assume full control over
the defense of a Claim subject to such defense as provided in this
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Section 12.6, the Indemnifying Party may participate in such
defense, at its sole cost and expense, and the Indemnified Party
shall have the right to defend the Claim in such manner as it may
deem appropriate, at the cost and expense of the Indemnifying
Party.
[*]
13. INSURANCE AND RISK OF LOSS
13.1 INSURANCE
When this Amended Agreement requires performance by employees or subcontractors
of Advantis or DWD on the other Party's premises, the performing Party shall
carry and maintain Worker's Compensation and Employer's Liability Insurance
covering its employees or subcontractors engaged in such performances in amounts
not less than required by law in the application location. Self insurance is
permissible, if permitted by law.
13.2 RISK OF LOSS
DWD is responsible for risk of loss of, or damage to, DWD Equipment,
unless due to the negligence or willful misconduct of Advantis, in which case
Advantis shall be responsible. Advantis is responsible for risk of loss of, or
damage to, Equipment, unless due to the negligence or willful misconduct of DWD,
in which case DWD shall be responsible.
14. PUBLICITY
Each Party will submit to the other Party all advertising, written sales
promotion, press releases and other publicity matters relating to this Amended
Agreement in which such other Party's name or mark is mentioned or language from
which the connection of said name or mark may be inferred or implied, and will
not publish or use such advertising, sales promotion, press releases, or
publicity matters without prior approval of such other Party. However, either
Party may include the other Party's name and a factual description of the work
performed under this Amended Agreement on Employee Bulletin Boards, in its list
of references and in the experience section of proposals to third parties, in
internal business planning documents and in its Annual Report to Stockholders,
and whenever required by reason of legal, accounting or regulatory requirements.
15. DISPUTE RESOLUTION
15.1 DISPUTE RESOLUTION
- -----------------------------
[*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
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a) Any dispute between the Parties with respect to this Amended
Agreement or with respect to the performance by Advantis or by DWD
hereunder shall be resolved as specified in this Section 15.1.
1) Upon the written request of either Party, each Party will
appoint a designated representative who does not devote
substantially all of his or her time to performance under the
Amended Agreement, whose task it will be to meet for the
purpose of endeavoring to resolve such dispute.
2) The designated representative shall meet within 7 days after
notification of dispute and as often as necessary to gather
and furnish to the others all information with respect to the
matter in issue which is appropriate and germane in
connection with its resolution.
3) Such representative shall discuss the problem and negotiate
in good faith in an effort to resolve the dispute without the
necessity of any formal proceeding relating thereto.
4) During the course of such negotiation, all reasonable
requests made by one Party to the other Party for
nonprivileged information reasonably related to this Amended
Agreement and for which the disclosing Party is not prevented
from disclosing pursuant to an obligation of confidentiality
and non-disclosure will be honored in order that both Parties
may be fully advised of the other's positions.
5) The specific format for such discussions will be left to the
discretion of the designated representatives but may include
the preparation of agreed upon statements of fact or written
statements of position furnished to the other Party.
b) If the designated representatives cannot resolve the dispute within
30 days, then the dispute shall be escalated to the Chief Executive
Officer of DWD and the Chief Executive Officer of Advantis, or
their respective designees, for their review and resolution.
Formal proceedings for the judicial resolution of any such dispute
may not be commenced until the earlier of:
1) the designated representatives concluding in good faith that
amicable resolution through continued
36
<PAGE>
negotiation of the matter in issue does not appear likely; or
2) 60 days after the initial request to negotiate such dispute;
or
3) 30 days before the statute of limitations governing any cause
of action relating to such dispute would expire.
15.2 CONTINUED PERFORMANCE
Except where clearly prevented by the area in dispute, each Party agrees
to continue performing its respective obligations
under this Amended Agreement while the dispute is being resolved
unless and until such obligations are terminated or expire in
accordance with the provisions hereof.
16. GENERAL
16.1 CONTROL OF SERVICES
a) This Amended Agreement shall not be construed as constituting
either Party as partner of the other Party or to create any other
form of legal association that would impose liability upon one
Party for the act or failure to act of the other or as providing
either Party with the right, power or authority (express or
implied) to create any duty or obligation of the other Party.
b) Each Party shall be responsible for the management, direction and
control of its employees and such employees shall not be employees
of the other Party.
c) The Services will be under the control, management and supervision
of Advantis.
16.2 RIGHT TO PERFORM SERVICES FOR OTHERS
Each Party recognizes that Advantis personnel providing Services to DWD
under this Amended Agreement may perform similar services for others and this
Amended Agreement shall not prevent Advantis from using the personnel and
Equipment provided to DWD under this Amended Agreement for such purposes,
unless otherwise expressly agreed by the Parties. Advantis may perform its
obligations through its subsidiaries, Affiliates or through the use of
Advantis-selected independent contractors; provided, however, that Advantis
shall not be relieved of its obligations under this Amended Agreement by use of
such subsidiaries, Affiliates or subcontractors.
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16.3 AMENDMENTS AND REVISIONS
Changes or modifications to this Amended Agreement and Exhibits may be
made only by a written amendment or revision signed by both Advantis and DWD.
Any terms and conditions varying from this Amended Agreement and Exhibits
on any order or written notification from Advantis and DWD are void.
16.4 FORCE MAJEURE
a) No Party shall be liable for any default or delay in the
performance of its obligations hereunder:
1) if and to the extent such default or delay is caused,
directly or indirectly, by fire, flood, earthquake, elements
of nature or acts of God, acts of war, terrorism, riots,
civil disorders, rebellions or revolutions in the United
States, strikes, lockouts, or labor difficulties, or any
other similar cause beyond the reasonable control of such
Party; and
2) provided such default or delay could not have been prevented
by reasonable precautions and cannot reasonably be
circumvented by the nonperforming Party through the use of
alternate sources, work-around plans or other means
(individually, each such default or delay being a "Force
Majeure Event").
b) In such event, the nonperforming Party will be excused from any
further performance or observance of the obligation(s) so affected
for as long as such circumstances prevail and such Party continues
to use commercially reasonable efforts to recommence performance or
observance whenever and to whatever extent possible without delay.
The Party so delayed in its performance will immediately notify the
other Party by telephone (to be confirmed in writing within five
days of the inception of such delay) and describe at a reasonable
level of detail the circumstances causing such delay. Such Party
will then provide a plan to address the delay in performance within
twenty-four hours after the telephone notification, and will meet
with the other Party impacted by the delay to review the plan. Any
difference in opinion regarding the plan shall immediately be
reviewed with the Chief Executive Officers of Advantis and DWD for
immediate resolution.
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c) If any Force Majeure Event substantially prevents, hinders, or
delays performance of the Services necessary for the performance of
DWD's critical functions for more than 30 consecutive days, then at
DWD's option:
1) DWD may procure such Services from an alternate source and
Advantis will be liable for [ * ] of the payment for such
Services in excess of Advantis' charges under this Amended
Agreement for up to 180 days, and if such Force Majeure is
continuing thereafter, at DWD's option, DWD may exercise its
rights pursuant to (2) below, or
2) this Amended Agreement will terminate (in whole or in part)
as of a date specified by DWD in a written notice of
termination to Advantis and DWD will pay the Termination
Charge. Any Termination Charge paid by DWD for a termination
in part of this Amended Agreement will decrease the revenue
commitment level as set forth in Exhibit 4 for DWD for such
year on a pro-rata basis and, each year after payment of the
Termination Charge, by an amount equal to the pro-rata
portion of revenue attributable to the terminated Services
for each such year. Additionally, in the event DWD
terminates any Services (in whole or in part) and pays any
Termination Charge, Advantis shall adjust the relevant
pricing provisions set forth in the applicable Exhibits for
DWD to reflect the loss of the usage in order to maintain the
current price levels for Services to DWD.
d) In the event of a Force Majeure Event, if DWD elects to procure
Services from an alternate source provider, then Advantis shall use
reasonable efforts to cause Integrated Systems Solutions
Corporation to provide such Services. In the event the Force
Majeure Event continues for more than 5 days, to the extent that
use of the Services is made impossible by the Force Majeure Event,
DWD may, upon written notice to Advantis, suspend its obligation to
procure Services from Advantis hereunder retroactively from the
time of the initiation of the Force Majeure Event until the Force
Majeure Event is remedied. During the period that DWD's obligation
to procure Service is suspended, the revenue commitment level set
forth in Exhibit 4 for DWD shall be suspended for that portion of
the Services that Advantis is unable to provide due to the Force
- -----------------------------
[*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
39
<PAGE>
Majeure Event until such force Majeure Event is remedied. Advantis
shall also adjust the relevant pricing provisions set forth in the
applicable Exhibits for DWD to reflect the suspension of the usage
during such suspended period in order to maintain the current price
levels for Services to DWD. If such Force Majeure Event is
remedied during the 180-day period, then, if DWD has not yet
terminated this Amended Agreement pursuant to Section 16.4 (c) (2)
above, DWD shall, as soon as practicable, terminate any Services it
is procuring from the alternate source provider and resume
procuring Services from Advantis. Upon resuming Services with
Advantis, the Term of the Amended Agreement shall be extended by an
amount of time equal to the amount of time Advantis was unable to
provide such Services to DWD due to the Force Majeure Event. In
addition, DWD shall be obligated to Advantis during such extended
Term for that portion of the revenue commitment suspended due to
the Force Majeure Event. Upon resuming Services with Advantis, the
relevant pricing provisions for the balance of the calendar year
shall be adjusted to maintain the current price levels to DWD. If
the Term is extended pursuant to this Section 16.4 (e), the
relevant pricing provisions for such extended term shall be fixed
to maintain, during such Term, the prices that would otherwise have
been paid during the period of suspended service.
16.5 NONPERFORMANCE
To the extent any nonperformance by either Party of its
nonmonetary obligations under this Amended Agreement results
from or is caused by the other Party's failure to perform its
obligations under this Amended Agreement, such nonperformance
shall be excused.
16.6 REMARKETING
DWD may not remarket all or any portion of the Services
provided under this Amended Agreement without the prior written
consent of Advantis. It is understood that the phrase 'remarketing
of services' does not include either (i) the provision of Services
pursuant to Section 3.1 (b) or (ii) the adding of material and
substantial value to any of the Services by DWD and the subsequent
resale of these value-added services to customers of DWD to the
extent the resale of such value-added services constitute a part of
the core business of DWD.
16.7 WAIVER
No waiver of any breach of any provision of this Amended
Agreement shall constitute a waiver of any prior, concurrent or
40
<PAGE>
subsequent breach of the same or any other provisions hereof.
16.8 SEVERABILITY
If any provision of this Amended Agreement shall be held to be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby, and
such provision shall be deemed to be restated to reflect the original
intentions of the Parties as nearly as possible in accordance with applicable
law(s).
16.9 LIMITATIONS PERIOD
No Party may bring an action, regardless of form, arising out of this
Amended Agreement more than two years after the later of the date the cause of
action arose or the date such cause of action was or should have been
discovered.
16.10 COUNTERPARTS
This Amended Agreement may be executed in duplicate counterparts. Each
such counterpart shall be an original and both together shall constitute but
one and the same document.
16.11 GOVERNING LAW
This Amended Agreement shall be governed by the laws of the State of
Illinois as such laws are applied to contracts which are entered into and
performed entirely within the State of
Illinois.
16.12 BINDING NATURE. ASSIGNMENT AND FEES PAYABLE UPON CHANGE IN CONTROL
a) DWD (the "Assigning Entity") shall have the right, upon thirty (30)
days' prior written notice, to assign this Amended Agreement (the
"Assigned Agreement") to: (1) an Affiliate of the Assigning Entity,
or (2) to a successor or another entity into which DWD may be
merged, (x) so long as such successor or other entity has net
assets equal to or greater than the Assigning Entity on the
effective date of the assignment or is not engaged in the business
of developing manufacturing, selling or leasing information
processing hardware and has, together with all Affiliates thereof,
annual revenues for the most recently completed fiscal year in
excess of $1 billion, or (y) if such assignment does not materially
impair Advantis' ability to conduct its business in substantially
the same manner it had enjoyed prior to the proposed assignment.
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<PAGE>
b) Should Advantis, in its reasonable discretion, determine that an
assignment does not meet the requirements of Section 16.12 (a)
above, Advantis shall either consent to such assignment or escalate
the matter to the Advantis Board. Upon such escalation, Advantis
may, upon majority vote of the Advantis Board in favor of
termination, give twelve (12) months' written notice, effective
upon such assignment, of termination of the Assigned Agreement,
without any obligation of the Assigning Entity to pay the
Termination Charge. If Advantis does not advise the Assigning
Entity, within thirty (30) days of receipt of notice from the
Assigning Entity of the proposed assignment, that the Advantis
Board has voted to terminate the Assigned Agreement, then Advantis
shall be deemed to have consented to such proposed assignment and
to have waived its right to terminate the Amended Agreement with
such Assigning Entity upon such Assignment.
c) With respect to any proposed assignment of this Amended Agreement
by DWD that is not permitted under Section 16.12 (a) above, the
Assigning Party shall first obtain Advantis' prior written consent
to such proposed assignment, such consent not to be unreasonably
withheld or delayed. If Advantis withholds its consent to such
proposed assignment, the matter will be escalated to the Advantis
Board for consent to the proposed assignment. If the Advantis
Board determines not to consent to the assignment, such consent not
to be unreasonably withheld, the Assigning Entity shall be
precluded from such proposed assignment.
d) A change in Control of DWD shall be deemed the assignment by DWD of
this Amended Agreement to the Person who, after such change in
Control, would Control DWD. If DWD seeks the consent of Advantis
in advance for such change of Control, Sections 16.12 (a) and (b)
above shall apply as if such change of Control were a merger of DWD
into such Person. If DWD does not seek the consent of Advantis in
advance for such change of Control, or such Person does not meet
the requirements of Section 16.12 (a), Advantis may upon a majority
vote of the Advantis Board in favor of termination, give twelve
(12) months' written notice of termination of the Amended
Agreement, without any obligation of DWD to pay the Termination
Charge.
e) Advantis shall have the right to assign this Amended Agreement to
any Affiliate of Advantis provided that DWD is given thirty (30)
days' prior written notice of such proposed assignment and the
entity to which this
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Amended Agreement is to be assigned is capable of assuming, and
agrees to assume, all of the obligations of Advantis under the
Assigned Agreement.
f) In addition to the rights specified in Section 16.12 (e) above,
Advantis shall have the right, upon thirty (30) days' prior written
notice to DWD, to assign this Amended Agreement in connection with
the acquisition of Control of Advantis by any entity, or the
transfer of substantially all of the assets of Advantis to any
entity ("Advantis Successor") so long as (1) the Advantis Successor
assumes all the obligations of Advantis under this Amended
Agreement, (2) the Advantis Successor has a net worth equal to or
greater than Advantis on the effective date of the assignment, and
(3) the assignment to the Advantis Successor will not have a
negative effect on the proprietary information or Confidential
Information of DWD and (4) such assignment to the Advantis
Successor will not materially impair DWD's ability to conduct its
business in substantially the same manner it had enjoyed prior to
the proposed assignment.
g) For any proposed assignment of the Amended Agreement by Advantis
which is not covered by Section 16.12 (e) and (f) above, Advantis
must first obtain DWD's consent prior to the effective date of such
assignment, such consent not to be unreasonably withheld. If DWD
reasonably withholds its assignment, Advantis will be precluded
from such assignments.
h) Any attempted assignment that does not comply with the terms of
this Section 16.12 shall be null and void. It is understood by DWD
that Advantis may condition its consent to an assignment or change
in Control requested by DWD, if granted, as it deems necessary or
appropriate, including, without limitation, imposing conditions
requiring changes in the charges payable by DWD under this Amended
Agreement after an assignment due to increased costs or expenses
incurred by Advantis as a result of such assignment or change of
Control.
16.13 NOTICES
a) Under this Amended Agreement whenever one Party is required or
permitted to give notice to the other, such notice will be deemed
given when (i) delivered in hand; (ii) received after being mailed
by United States mail, registered or certified mail, return receipt
requested, postage prepaid or (iii) received after delivery by an
express courier with a reliable system for tracking deliveries.
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b) Notification will be addressed as follows:
In the case of Advantis: In the case of DWD:
Advantis Dean Witter, Discover & Co.
231 North Martingale Road Two World Trade Center
Schaumburg, Illinois 60173-2254 New York, New York 10006
Attention: General Counsel Attention: General Counsel
Either Party hereto may from time to time change its address for
notification purposes by giving the other Party prior written
notice of the new address and the date upon which it will become
effective.
16.14 NO THIRD PARTY BENEFICIARIES
Except as specified in Section 12 with respect to Persons entitled to
indemnification, the Parties do not intend, nor will any clause be interpreted,
to create for any third party any obligations to or benefits from either
Advantis or DWD. This does not affect or limit the obligations of or benefits
to any entity receiving Services pursuant to Section 3.1 (b).
16.15 HEADINGS
All headings herein and the table of contents are not to be considered in
the construction or interpretation of any provision of this Amended Agreement.
This Amended Agreement was drafted with the joint participation of DWD and
Advantis and shall be construed neither against nor in favor of either, but
rather in accordance with the fair meaning thereof. In the event of any
apparent conflicts or inconsistencies between this Amended Agreement and any
Exhibits or other Attachments to this Amended Agreement, to the extent possible
such provisions shall be interpreted so as to make them consistent, and if such
is not possible, the provisions of this Amended Agreement shall prevail.
16.16 NON-EXCLUSIVITY
Subject to DWD's obligation to meet its respective revenue commitment
obligations and subject to DWD's obligation to pay any Termination Charge as
set forth in this Amended Agreement, nothing herein shall prohibit DWD from
procuring information processing, data networking and voice services from other
providers or providing such services for itself.
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDED AGREEMENT, UNDERSTAND
IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS, FURTHER THE PARTIES AGREE
THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES
RELATING TO THIS SUBJECT SHALL CONSIST OF (1) THIS AMENDED AGREEMENT, AND (2)
THE EXHIBITS, INCLUDING THOSE MADE EFFECTIVE BY THE PARTIES IN THE FUTURE. THIS
AMENDED RESTATEMENT OF THE MASTER AGREEMENT SUPERSEDES ALL PROPOSALS OR THE
PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE
PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDED AGREEMENT.
Accepted by: Accepted by:
ADVANTIS DEAN WITTER, DISCOVER & CO.
By: By:
- ---------------------------------- -----------------------------------
Name: Name:
- ---------------------------------- -----------------------------------
Title: Title:
- ---------------------------------- -----------------------------------
Date: Date:
- ---------------------------------- -----------------------------------
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EXHIBIT 10.9
________________________________________________________________________________
DEAN WITTER START PLAN
(Saving Today Affords Retirement Tomorrow)
Amended and Restated Effective as of January 1, 1997
(Execution Copy)
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. INTRODUCTION.................................................. 1
------------
SECTION 2. PARTICIPATION................................................. 2
-------------
SECTION 3. PERIOD OF SERVICE............................................. 4
-----------------
SECTION 4. COMPANY CONTRIBUTIONS......................................... 9
---------------------
SECTION 5. EMPLOYEE CONTRIBUTIONS........................................ 12
----------------------
SECTION 6. INVESTMENT OF EMPLOYEE CONTRIBUTIONS.......................... 21
------------------------------------
SECTION 7. TRUST FUND.................................................... 23
----------
SECTION 8. ACCOUNTS...................................................... 27
--------
SECTION 9. ROLLOVER AND QUALIFIED PLAN TRANSFER
-------------------------------------
CONTRIBUTIONS................................................. 29
-------------
SECTION 10. PLAN BENEFITS................................................. 31
-------------
SECTION 11. DISTRIBUTION OF PLAN BENEFITS................................. 33
-----------------------------
SECTION 12. WITHDRAWALS AND LOANS......................................... 36
----------------------
SECTION 13. INCORPORATION OF CERTAIN CODE
-----------------------------
REQUIREMENTS BY REFERENCE..................................... 45
--------------------------
SECTION 14. FIDUCIARY RESPONSIBILITIES AND PLAN
-----------------------------------
ADMINISTRATION................................................ 47
--------------
SECTION 15. FUNDING POLICY AND METHOD..................................... 49
-------------------------
SECTION 16. CLAIMS PROCEDURE.............................................. 49
----------------
SECTION 17. REVIEW PROCEDURE.............................................. 50
----------------
SECTION 18. EXPENSES OF PLAN AND TRUST.................................... 52
--------------------------
i
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SECTION 19. AMENDMENT AND TERMINATION..................................... 53
-------------------------
SECTION 20. MISCELLANEOUS................................................. 55
-------------
SECTION 21. DEFINITIONS................................................... 57
-----------
SECTION 22. EXECUTION..................................................... 73
---------
SUPPLEMENT A. SPECIAL CONTRIBUTION..................................... A-1
--------------------
SUPPLEMENT B. PAYROLL-BASED
-------------
EMPLOYEE STOCK OWNERSHIP PLAN............................ B-1
-----------------------------
SUPPLEMENT C. TOP-HEAVY PROVISIONS..................................... C-1
--------------------
SUPPLEMENT D. PARTICIPANTS RESIDING IN PUERTO RICO..................... D-1
------------------------------------
SUPPLEMENT E. 1993 MATCHING CONTRIBUTIONS FOR CREDIT
--------------------------------------
SERVICES EMPLOYEES....................................... E-1
------------------
ii
<PAGE>
DEAN WITTER START PLAN
(SAVING TODAY AFFORDS RETIREMENT TOMORROW)
------------------------------------------
AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1997
SECTION 1. INTRODUCTION
------------
The Dean Witter START Plan (Saving Today Affords Retirement Tomorrow)
(the "Plan") was originally established as the Dean Witter Stock Accumulation
Plan, effective September 1, 1971. The Plan has subsequently been amended and
restated several times, including an amendment and restatement to reflect the
fact that, on December 31, 1981, DWRO (the parent company of Dean Witter
Reynolds Inc.) was merged into a wholly-owned subsidiary of Sears, Roebuck and
Co., and all outstanding shares of DWRO common stock were converted into shares
of common stock of Sears. Effective January 1, 1984, the Plan was renamed the
Dean Witter Reynolds Inc. Employee Retirement Investment Plan. Effective January
1, 1987, the Plan was amended and restated to comply with certain requirements
of the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of
1988 and other applicable changes in the law. Thereafter, the Plan was amended
on fourteen occasions starting with the First Amendment dated March 21, 1990 and
continuing through the Fourteenth Amendment adopted on April 11, 1994. Effective
June 1, 1994, the Plan was renamed as the Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow). Effective July 1, 1994, the Plan was again amended
and restated, incorporating into a single document all amendments made since the
amendment and restatement of January 1, 1987. The Plan was amended on April 20,
1995, effective as of June 30, 1995. The Plan was again amended and restated as
of January 1, 1996 and January 1, 1997. This document sets forth the terms of
the Plan as of January 1, 1997.
<PAGE>
The Plan is subject to further amendment in accordance with Section 19,
including amendments required to meet applicable rules and regulations of the
Internal Revenue Service or the United States Department of Labor. Capitalized
terms used in the text of the Plan are defined in Section 21 in alphabetical
order. The Plan is intended to be a profit-sharing plan for purposes of Code
section 401(a)(27).
SECTION 2. PARTICIPATION
-------------
(a) Commencement of Participation.
-----------------------------
Effective January 1, 1996, subject to Section 2(b):
(i) an Immediately Eligible Employee may elect to become a Participant
in the Plan on any Entry Date coincident with or following such Employee's
Employment Commencement Date;
(ii) an Eligible Employee may elect to become a Participant in the
Plan on any Entry Date coincident with or following the date on which such
Employee becomes an Eligible Employee. If an individual is not employed as an
Eligible Employee on the first Entry Date on or after such individual has become
an Eligible Employee, such individual may elect to become a Participant as of
any Entry Date following the date on which such individual next becomes an
Eligible Employee or an Immediately Eligible Employee. If an Employee who severs
employment is an Immediately Eligible Employee or an Eligible Employee on such
Employee's Severance Date and such Employee is later rehired, such Employee
shall be deemed an Immediately Eligible Employee as of such Employee's
Reemployment Commencement Date, regardless of the employee status into which
such Employee has been rehired, and may elect to commence or resume
participation immediately upon such rehire or upon any Entry Date thereafter.
2
<PAGE>
Effective July 1, 1994, an Eligible Employee may elect to become a
Participant in the Plan on the Entry Date coincident with or next following the
Eligible Employee's Employment Commencement Date. Notwithstanding anything to
the contrary contained herein, Eligible Employees whose Employment Commencement
Dates precede July 1, 1994 may elect to become Participants as of July 1, 1994
or any Entry Date thereafter.
Effective January 1, 1987, an Eligible Employee shall become a
Participant in the Plan on the Entry Date coincident with or next following the
earlier of (i) the date he or she completes two years of continuous full-time
employment with one or more members of the Affiliated Group or (ii) the date the
Eligible Employee has attained age 21 and completed one Year of Service. If an
individual is not employed as an Eligible Employee on the first Entry Date after
meeting the age and service requirements, such individual shall become a
Participant on the next date such individual becomes an Eligible Employee. If a
Participant terminates employment and is later rehired as an Eligible Employee,
such Participant shall resume participation in the Plan immediately upon such
rehire.
Notwithstanding anything to the contrary herein, an Eligible Employee
who commenced employment with the Company prior to January 1, 1987 will
automatically become a Participant in the Plan on the first day of the month
following the month in which falls the earliest of (i) the date the Eligible
Employee completes two years of continuous full-time employment with one or more
members of the Affiliated Group regardless of age, (ii) the date the Eligible
Employee has attained age 21 and completed three continuous months of employment
with one or more members of the Affiliated Group or (iii) the date the Eligible
Employee has attained age 21 and completed one Year of Service. An Employee who
commenced employment with the Company Prior to January 1, 1987 but who was not
an Eligible Employee on the first day of the month described in the preceding
sentence, but who becomes an Eligible Employee after having satisfied the
requirements of such preceding sentence, shall
3
<PAGE>
automatically become a Participant in the Plan on the first day of the month
following the month in which such Employee becomes an Eligible Employee.
(b) Enrollment Process. Notwithstanding the foregoing, no Immediately
-------------------
Eligible Employee or Eligible Employee shall become a Participant in the Plan
until such Employee has completed the enrollment process established by the Plan
Administrator.
(c) Termination of Participation. A Participant's participation shall
----------------------------
terminate on the date no amount is payable to the Participant hereunder.
SECTION 3. PERIOD OF SERVICE
-----------------
An Employee's service shall be determined under the following rules:
(a) Definitions. For purposes of this Section 3 the following terms
-----------
have the following
meanings unless the context clearly indicates a different meaning:
"Affiliated Group" means Affiliated Group as defined in Section 21 and
----------------
any other entity required to be aggregated with any Participating Company
pursuant to section 414(o) of the Code and the regulations thereunder.
"Employment Commencement Date" means the date on which an Employee
----------------------------
first is credited with an Hour of Service.
"Hour of Service" means each hour for which an Employee is paid or
---------------
entitled to payment for the performance of duties for the Company or for any
member of the Affiliated Group.
"One Year Break" means a Period of Severance of twelve consecutive
--------------
months.
"Period of Service" means a period beginning on an Employee's
-----------------
Employment Commencement Date or Reemployment Commencement Date and ending on the
Employee's Severance Date. An Employee's Period of Service also includes any
other period which constitutes a "Period of Service" under written rules or
regulations adopted from time to time by the Plan Administrator.
4
<PAGE>
"Period of Severance" means each period from an Employee's Severance
-------------------
Date to the Employee's next Reemployment Commencement Date.
"Reemployment Commencement Date" means the date on which an Employee
------------------------------
first is credited with an Hour of Service after a Severance Date.
"Severance Date" means the earlier of the date on which an Employee
--------------
quits, retires, is discharged or dies; or the first anniversary of the first
date of a period in which an Employee remains continuously absent from service
with an Employer (with or without pay) for any reason other than quit,
retirement, discharge or death. Notwithstanding the foregoing, an Employee
shall not have a Severance Date when the Employee:
(i) Takes a leave of absence without pay approved by the appropriate
member of the Affiliated Group. In the case of an approved leave of absence
without pay for a period in excess of twelve months, the Employee shall be
deemed to have a Severance Date as of the end of such twelve-month period if the
Employee fails to abide by the terms and conditions of such leave, which may
include a requirement to return to active employment.
(ii) Enters the military service of the United States, provided the
Employee returns to active employment with any member of the Affiliated Group
within the time the Employee's reemployment rights are protected under
applicable law. If the Employee does not so return, the Employee shall be
deemed to have a Severance Date as of the date of entry into military service.
(iii) Is unable to work due to disability or sickness.
(iv) Is on jury duty, a leave of absence with pay, an approved
vacation or a holiday.
(v) Is absent from work for maternity or paternity reasons. For
purposes of this paragraph (v), an absence from work for maternity or paternity
reasons means an absence;
5
<PAGE>
(1) by reason of the pregnancy of the individual,
(2) by reason of a birth of a child of the individual,
(3) by reason of the placement of a child with the
individual in connection with the adoption of such child by such individual, or
(4) for purposes of caring for such child for a period
beginning immediately following such birth or placement. If the Employee does
not return to employment with a member of the Affiliated Group before the second
anniversary of the beginning of such absence the Employee shall have a Severance
Date on such second anniversary.
Notwithstanding the foregoing, if an Employee quits, is discharged,
dies or retires while on leave, vacation, holiday or jury duty, or while
disabled or sick, the Employee shall have a Severance Date on the earlier of the
date of such quit, discharge, death or retirement, or twelve months after the
commencement of such leave, vacation, holiday, jury duty, disability or
sickness. An Employee shall be deemed to have been discharged as of the earlier
of the date the Employee received oral or written notice of discharge or the
date a written notice of discharge is deposited in the United States mail (on a
registered or certified basis) to the Employee's last known address.
"Year of Service" means a Period (or Periods) of Service, whether or
---------------
not consecutive, equal to twelve months.
(b) Service of Rehired Employees
----------------------------
(i) An Employee's Period of Service shall include any period following
the Employee's Severance Date and prior to the Employee's first Reemployment
Commencement Date following such Severance Date if such Reemployment
Commencement Date occurs no later than twelve months after such Severance Date.
6
<PAGE>
(ii) For participation purposes only, an Employee's Period of Service
shall not include any period prior to a One Year Break unless the Employee
completes a Year of Service after returning to employment.
(iii) For vesting purposes only, an Employee's Period of Service shall
not include any period prior to a One Year Break unless the Employee completes
an Hour of Service after returning to employment.
(c) Service with Reynolds. In the case of any individual who was an
---------------------
employee of Reynolds Securities International Inc. or any subsidiary thereof at
any time prior to the merger of Reynolds Securities International Inc. with Dean
Witter Organization Inc., Years of Service for periods prior to January 3, 1978
shall be determined by applying the rules of this Section 3 to that period of
employment. The Years of Service so determined shall be added to such
individual's Years of Service determined under this Plan, computed as though the
individual's Employment Commencement Date was the later of January 1, 1978 or
the date such individual was first credited with an Hour of Service.
(d) Service with Sears or its Subsidiaries.
--------------------------------------
(i) If an individual was employed by Sears or any subsidiary thereof
prior to December 31, 1981, and is treated by any member of the Affiliated Group
as having been continuously employed by a member of the Affiliated Group since
December 31, 1981, such individual's Years of Service shall be determined by
applying the rules of this Section 3 to the entire period of such employment
before and after December 31, 1981. If such an individual is not so treated,
such individual's Years of Service shall be determined by applying the rules of
this Section 3 only to the period of such employment after December 31, 1981.
(ii) If, prior to the Spin-off, a Participant transferred employment
to Sears or any subsidiary of Sears, other than DWD or a subsidiary of DWD and
was employed by Sears or a
7
<PAGE>
subsidiary of Sears on the Spin-off date and remained continuously employed by
Sears or any subsidiary of Sears after the Spin-off date, then, for purposes of
vesting in Company Matching Contributions, such transferred Participant's Period
of Service shall include service with Sears or a subsidiary of Sears after the
Spin-off but not more than the lesser of such transferred Participant's service
with Sears or a subsidiary of Sears or the service necessary for such
transferred Participant to fully vest in his or her Matching Contribution
Account, such post-Spin-off service to be determined in accordance with this
Section 3.
(e) Aggregation of Periods of Service. Subject to Section 3(b), all
---------------------------------
of an Employee's Periods of Service determined pursuant to this Section 3 shall
be aggregated on the basis of complete months, whether or not such Periods of
Service are consecutive, except that if an Employee's Period of Service
commences on other than the first day of a calendar month and ends on other than
the last day of a calendar month, the days in such months shall be aggregated
and one additional month of service shall be credited if the number of such days
is at least 30 but less than 60, and two additional months shall be credited if
the number of such days equals 60.
(f) Transferred Employees. If a Participant transfers employment to
---------------------
SPS Transaction Services, Inc. (or any of its subsidiaries) ("SPS") or
NationsSecurities, A Dean Witter/NationsBank Company ("Nations") such
transferred Participant's Period of Service shall include service with SPS or
Nations but not more than the lesser of such transferred Participant's service
with SPS or Nations or the service necessary for such transferred Participant to
fully vest in the Matching Contribution Account, such post-transfer service to
be determined in accordance with this Section 3.
(g) Service with SPS. In the case of any individual who was an
-----------------
employee of SPS and who either transfers employment to a member of the
Affiliated Group or severs employment with SPS and is rehired as an Employee by
a member of the Affiliated Group within 12 months of such
8
<PAGE>
severance, such Employee's Service used to determine a Year of Service under
this Section 3 shall include service with SPS determined by applying the rules
set forth in this Section 3 to such Employee's employment by SPS as if such
employment was employment by a member of the Affiliated Group.
SECTION 4. COMPANY CONTRIBUTIONS.
---------------------
(a) Amount. For each Plan Year, the Participating Companies shall
------
make Matching Contributions to the Trust Fund equal to the amount required to be
allocated as Matching Contributions under Section 4(b)(i) and may, in their sole
and absolute discretion, make additional Matching, Qualified Non-Elective or
Qualified Matching Contributions. All Company Contributions shall be made in
cash.
(b) Allocation.
----------
(i) Basic Matching Contributions. Matching Contributions and
----------------------------
forfeitures, if any, for each Plan Year shall be allocated to each Participant
who was either an Employee as of the last day of the Plan Year or ceased to be
an Employee during the Plan Year as a result of such Participant's death Total
and Permanent Disability, Retirement or Release.
(1) For Plan Years beginning before January 1, 1991, the amount
required to be allocated by this section shall be equal to 50 percent of the
first $2,000, and 20 percent of the remaining amount, of Basic Contributions for
each Plan Year made by the Participant.
(2) For Plan Years beginning after December 31, 1990 and before
January 1, 1993, the amounts required to be allocated under this section shall
be an amount equal to at least 24.9% but not more than 116.2% of the first
$2,000, and at least 9.9% but not more than 46.2% of the remaining amount, of
Basic Contributions for each Plan Year made by the Participant, said
9
<PAGE>
percentages to be determined relative to the amount of Pretax Income for the
fiscal year in which the Plan Year ends, as follows:
(A) In advance of each Plan Year, the Company shall determine the
levels of Pretax Income, expressed as a series of ranges, to be used for
purposes of this Section 4(b)(i) and the percentages to be used to calculate
Matching Contributions based upon the range into which the amount of Pretax
Income for the year falls.
(B) For purposes of this Section 4(b)(i) only, "Pretax Income" means
revenues, less expenses, exclusive of Company matching contributions under the
Plan and before the provision for payment of Federal, state and local income
taxes, attributable to securities activities of Dean Witter Financial Services
Group as certified by the Company's independent public accountants.
(3) For Plan Years beginning after December 31, 1992, the amount
required to be allocated under this section shall be an amount equal to at least
24.9% but not more than 116.2% of the first $2,000, and at least 9.9% but not
more than 46.2% of the remaining amount, of Basic Pretax Contributions for each
Plan Year made by the Participant, said percentages to be determined relative to
the amount of Pretax Income for the fiscal year in which the Plan Year ends of
the Business Segment in which the Participant was an Employee on the last day of
the Plan Year or on such Participant's last day of employment immediately
preceding the Participant's death, Total and Permanent Disability, Retirement or
Release. The amount required to be allocated for each Plan Year shall be
determined as follows:
(A) For each Plan Year commencing after December 31, 1992, the Company
shall determine one or more Business Segments for which Matching Contributions
shall be calculated. For each such Business Segment, the Company shall determine
the levels of Pretax Income, expressed as a series of ranges, to be used for
purposes of this Section 4(b)(i)(3) and the
10
<PAGE>
percentages to be used to calculate Matching Contributions based upon the range
into which the amount of Pretax Income for the year falls.
(B) For purposes of this Section 4(b)(i)(3) only, "Pretax Income"
means revenues, less expenses, exclusive of Company Matching Contributions under
the Plan and before the provision for accounting adjustments, extraordinary
items and the payment of Federal, state and local income taxes, attributable to
the consolidated activities of each Business Segment as audited by the Company's
independent public accountants.
(C) For purposes of this Section 4(b)(i)(3) only, "Business Segment"
shall mean Dean Witter, Discover & Co., in whole or in part, and any subsidiary,
group of subsidiaries, divisions, departments, units, business activity or group
of business activities of Dean Witter, Discover & Co. as determined by the
Company for each Plan Year.
(ii) Additional Company Contributions. The Company may, in its sole
--------------------------------
discretion, make Matching Contributions in excess of the amount required to be
allocated under Section 4(b)(i), Qualified Matching Contributions ("QMACs") or
Qualified Non-Elective Contributions ("QNECs"). Any such Matching Contributions
or any QMACs may be made with respect to any or all Participants as determined
by the Company. Any such Matching Contributions or any QMACs shall be allocated
in proportion to each such Participant's Basic Contribution for the Plan Year.
QNECs may be made with respect to any or all Immediately Eligible Employees or
Eligible Employees, as determined by the Company, and shall be allocated in a
manner to be determined by the Company.
(c) Payment of Company Contributions. The portion of the Company
--------------------------------
Contribution to be made by each Participating Company for each Plan Year shall
be determined by the Company and shall be paid to the Trustee at such time or
times as the Participating Company shall determine, but in
11
<PAGE>
any event before the date for filing such Participating Company's Federal income
tax return for the Plan Year, including any extensions of such date.
SECTION 5. EMPLOYEE CONTRIBUTIONS.
----------------------
(a) Basic and Supplemental Contributions.
------------------------------------
(i) Pretax Contributions. Each Participant who is an Eligible
----------------------
Employee may make Basic Contributions to the Plan equal to any whole percentage
from 1% to 6%, of the Participant's Earnings for the appropriate Plan Year.
Except to the extent provided in Section 5(b) below, each Participant's Basic
Contributions shall constitute Basic Pretax Contributions. A Participant who
is not a Highly Compensated Employee and who is making Basic Pretax
Contributions equal to 6% of Earnings may also elect to make Supplemental Pre-
tax Contributions to the Plan equal to any whole percentage, from 1% to 6%, of
Earnings.
(ii) After-Tax Contributions. A Participant who is not a Highly
------------------------
Compensated Employee may make After-Tax Contributions to the Plan equal to any
whole percentage from 1% to 10% of the Participant's Earnings regardless of
whether the Participant is making any Pretax Contributions. However, in no
event shall the aggregate amount of a Participant's Pretax and After-Tax
Contributions exceed 17% of the Participant's Earnings.
(b) Basic After-Tax Adjustment Contributions. In order that the Plan
----------------------------------------
may comply with the requirements of sections 401(k) and 415 of the Code and the
regulations thereunder, at any time during the Plan Year the Plan Administrator
(at its sole discretion) may reduce the rate at which any Participant who is a
Highly Compensated Employee may contribute Basic Pretax Contributions, or
discontinue all such contributions, for the remainder of such Plan Year. Such a
reduction or discontinuance may be applied selectively to individual
Participants or to particular classes of Participants, as the Plan Administrator
may determine. Any Participant whose Basic Pretax
12
<PAGE>
Contributions are reduced or discontinued under this Section 5(b) shall make
Basic After-Tax Adjustment Contributions to the Plan during the remainder of the
Plan Year equal to the percentage of the Participant's Earnings that the Plan
Administrator has determined cannot be made as Basic Pretax Contributions;
provided, that in order that the Plan may comply with the requirements of
section 401(m) of the Code and the regulations thereunder, at any time during
the Plan Year the Plan Administrator (at its sole discretion) may reduce the
rate at which a Participant may contribute Basic After-Tax Adjustment
Contributions, or discontinue all such contributions, for the remainder of such
Plan Year. Any reduction or discontinuance of Basic Pretax or Basic After-Tax
Adjustment Contributions made pursuant to this Section 5(b) shall automatically
cease to apply upon the close of the Plan Year in which it is made, or on such
earlier date in such Plan Year as the Plan Administrator may determine.
(c) Changing the Rate and Suspension of Employee Contributions. As of
----------------------------------------------------------
the beginning of any Quarter, a Participant may elect to change the
Participant's rate of Basic Pretax Contributions, any Supplemental Pretax
Contributions and/or After-Tax Contributions to any other rate that is within
the limitations described in Section 5(a) provided, however, that the Plan
Administrator shall have the discretion to permit Participants to make one or
more additional elections, provided, further, that the right to make such
additional elections is made available to all Participants on a
nondiscriminatory basis. If a Participant elects to reduce the Participant's
rate of Basic Pretax Contributions to a rate that is below 6%, any Supplemental
Pretax Contributions being made by the Participant shall automatically cease on
the effective date of such election. If a Participant is making Basic After-Tax
Adjustment Contributions, and elects to reduce the rate of such Basic
Contributions, and if, as a result of such election, the Plan Administrator
determines that it is no longer necessary for the Participant to make some or
all of such Basic After-Tax Adjustment Contributions, the appropriate amount of
the Participant's Basic After-Tax Adjustment Contributions shall automatically
cease, effective as of the
13
<PAGE>
effective date of the Participant's election to change the Participant's rate of
Basic Contributions. As of any pay period, the Participant may elect to
discontinue all After-Tax Contributions, Supplemental Pretax Contributions
and/or Basic Pretax Contributions, provided however, that an election to
discontinue Basic Pretax Contributions shall automatically cause discontinuance
of any Supplemental Pretax Contributions.
(d) Maximum Amount of Elective Deferrals. Notwithstanding anything to
------------------------------------
the contrary herein, the amount of Elective Deferrals made with respect to any
individual during a calendar year under the Plan and all other plans, contracts
or arrangements of any member of the Affiliated Group may not exceed the amount
of the limitation in effect under section 402(g)(1) of the Code for taxable
years beginning in such calendar year. Such limit shall not apply to any such
Elective Deferrals made which are amounts attributable to service performed by
such Participant prior to January 1, 1987.
(e) Distribution of Excess Elective Deferrals. A Participant may
-----------------------------------------
assign to the Plan any Excess Elective Deferrals made during a taxable year of
the Participant by notifying the Plan Administrator on or before March 1
following the close of such taxable year of the amount of the Excess Elective
Deferrals to be assigned to the Plan. Notwithstanding any other provision of the
Plan, Excess Elective Deferrals, plus any income and minus any loss allocable
thereto, shall be distributed no later than April 15 following such taxable year
to any Participant to whose account Excess Elective Deferrals were assigned for
the preceding year and who claims Excess Elective Deferrals for such taxable
year. The amount of Excess Elective Deferrals that may be distributed with
respect to a Participant for a taxable year shall be reduced by any Excess
Contributions previously distributed under Subsection 5(g)(1) or re-
characterized under Subsection 5(g)(2) with respect to the Participant for the
Plan Year beginning with or within the Participant's taxable year for which such
Excess Elective Deferrals have been made.
14
<PAGE>
(f) Actual Deferral Percentage Test
-------------------------------
(1) Elective Deferrals hereunder shall not exceed the limits set forth
in section 401(k)(3) of the Code. For purposes of applying such limits, section
401(k)(3) of the Code and the regulations thereunder are incorporated herein by
reference and are hereinafter referred to as the "ADP test."
(2) All or part of the Qualified Matching Contributions and Qualified
Non-Elective Contributions made with respect to any or all Eligible Employees
may be treated as Elective Deferrals for purposes of the ADP test provided that
each of the following requirements is met:
(i) the amount of nonelective contributions, including the Qualified
Non-Elective Contributions treated as Elective Deferrals for purposes of the ADP
test, satisfies the requirements of Code section 401(a)(4);
(ii) the amount of nonelective contributions, excluding those
Qualified Non-Elective Contributions treated as Elective Deferrals for purposes
of the ADP test and those Qualified Non-Elective Contributions treated as
Matching Contributions for purposes of the ACP test (described in Section 5(h)
below), satisfies the requirements of Code section 401(a)(4);
(iii) all such Qualified Non-Elective Contributions and Qualified
Matching Contributions are nonforfeitable when made and subject to the same
distribution restrictions that apply to Elective Deferrals, without regard to
whether such Qualified Non-Elective Contributions or Qualified Matching
Contributions are actually taken into account as Elective Deferrals;
(iv) all such Qualified Non-Elective Contributions and Qualified
Matching Contributions are allocated to the accounts of Eligible Employees as of
a date within the Plan Year (pursuant to Regulations section 1.401(k)-
(b)(4)(i)(A)) as if such contributions were Elective Deferrals; and,
15
<PAGE>
(v) for Plan Years beginning after December 31, 1988, if the Plan uses
the provisions of this Subsection 5(f)(2) for purposes of the ADP test, then,
for purposes of Code section 410(b) (other than the average benefit percentage
test), the Plan may be aggregated with other plans of the Affiliated Group to
which qualified nonelective contributions and qualified matching contributions
are made. If the Plan Year is changed to satisfy the section 410(b) requirement
that aggregated plans have the same plan year, this Subsection 5(f)(2) may apply
during the resulting short plan year only if the Qualified Non-Elective
Contributions and Qualified Matching Contributions during the short plan year
satisfy Regulations section 1.401(k)-1(b)(4)(i) as if such contributions were
Elective Deferrals and such aggregated plans could otherwise be aggregated for
purposes of section 410(b).
(g) Distribution of Excess Contributions.
-------------------------------------
(1) Notwithstanding any other provision of the Plan, Excess
Contributions, plus any income and minus any loss allocable thereto, shall be
distributed no later than the last day of any Plan Year beginning after December
31, 1987 to Participants to whose accounts Basic Pretax, Qualified Matching and
Qualified Non-Elective Contributions were allocated for the preceding Plan Year.
The Excess Contributions shall be adjusted for income or loss up to the date of
distribution. The income or loss allocable to Excess Contributions shall be
determined by multiplying the income or loss allocable to the Participant's
Basic Pretax, Supplemental Pretax, Qualified Matching and Qualified Non-
Elective Contributions for the Plan Year by a fraction, the numerator of which
is the Excess Contribution on behalf of the Participant for the preceding Plan
Year and the denominator of which is the sum of the Participant's account
balances attributable to Basic Pretax, Supplemental Pretax, Qualified Matching
and Qualified Non-Elective Contributions on the last day of the preceding Plan
Year. Amounts distributed under this Section 5(g) shall be made from the
Participant's Basic Pretax,
16
<PAGE>
Qualified Matching and Qualified Non-Elective Contribution Accounts in
proportion to the Participant's Basic Pretax, Qualified Matching and Qualified
Non-Elective Contributions for the Plan Year.
(2) A Participant may treat Excess Contributions as an amount
distributed to the Participant and then contributed by the Participant to the
Plan as Basic After-Tax Adjustment Contributions. Such re-characterized amounts
will remain nonforfeitable and subject to the same distribution requirements as
Supplemental Pretax Contributions. Amounts may not be re-characterized by a
Highly Compensated Employee to the extent that such amount in combination with
other Basic After-Tax Adjustment and Matching Contributions made with respect to
that Employee would exceed the limits under Section 5(h). Re-characterization
must occur no later than two and one-half months after the last day of the Plan
Year in which the Excess Contributions arose and is deemed to occur no earlier
than the date the last Highly Compensated Employee is informed in writing of the
amount which may be re-characterized and the consequences thereof.
(3) The amount of Excess Contributions to be distributed under
Subsection 5(g)(l) or re-characterized under Subsection 5(g)(2) shall be reduced
by Excess Elective Deferrals previously distributed under Section 5(e) for the
Participant's taxable year ending with or within the Plan Year for which such
Excess Contributions have been made.
(h) Actual Contributions Percentage Test
-------------------------------------
(1) Matching Contributions and Basic After-tax Adjustment
Contributions hereunder shall not exceed the limits set forth in section
401(m)(2) of the Code. For purposes of applying such limits, section 401(m)(2)
of the Code and the regulations thereunder are incorporated herein by reference
and are hereinafter referred to as the "ACP test."
(2) Contributions made by or on behalf of Highly Compensated Employees
shall not exceed the limits imposed upon multiple use of the alternative
limitation by section 401(m)(9) of
17
<PAGE>
the Code. For this purpose, Code section 401(m)(9) and Regulations section
401(m)-2(b) are incorporated herein by reference. If one or more Highly
Compensated Employees' Contributions exceed the multiple use limit, then the
Actual Contribution Ratio ("ACR") of Highly Compensated Employees shall be
reduced (starting with such Highly Compensated Employee whose ACR is the
highest) so that the limit is not exceeded. The amount of any such reduction
shall be treated as an Excess Aggregate Contribution. The Actual Deferral Ratio
("ADR") and ACR of Highly Compensated Employees shall be determined hereunder
after any adjustments required to pass the tests described in Subsections
5(f)(l) and 5(h)(l). Multiple use shall not occur if the ADP and ACP of Highly
Compensated Employees is not greater than 125 percent of the ADP and ACP of non-
Highly Compensated Employees.
(3) All or part of the Qualified Non-Elective Contributions and
Elective Deferrals made with respect to any or all Eligible Employees may be
treated as Matching Contributions for purposes of the ACP test provided that
each of the following requirements is met:
(i) the amount of nonelective contributions, including the Qualified
Non-Elective Contributions treated as Matching Contributions for purposes of the
ACP test, satisfies the requirements of Code section 401(a)(4);
(ii) the amount of nonelective contributions, excluding those
Qualified Non-Elective Contributions treated as Matching Contributions for
purposes of the ACP test and those Qualified Non-Elective Contributions treated
as Elective Deferrals under Regulations section 1.401(k)-1(b)(5) for purposes of
the ADP test satisfies the requirements of Code section 401(a)(4);
(iii) all Elective Deferrals whether or not treated as
Matching Contributions hereunder, satisfy the ADP test.
(iv) the Qualified Non-Elective Contributions are allocated to the
Accounts of Eligible Employees as of a date within the Plan Year (pursuant to
Regulations Section 1.401(k)-
18
<PAGE>
1(b)(4)(i)(A)), and the Elective Deferrals satisfy Regulations section 1.401(k)-
1(b)(4)(i) for the Plan Year; and,
(v) for Plan Years beginning after December 31, 1988, if the Plan uses
the provisions of this Subsection 5(h)(3) for purposes of the ACP test, then for
purposes of Code section 410(b) (other than the average benefit percentage
test), the Plan may be aggregated with other plans of the Affiliated Group to
which qualified nonelective contributions and elective contributions are made.
If the Plan Year is changed to satisfy the section 410(b) requirement that
aggregated plans have the same plan year, this Subsection 5(h)(3) may apply
during the resulting short plan year only if Elective Deferrals during the short
plan year satisfy Regulations section 1.401(k)-1(b)(4) with respect to the short
plan year and Qualified Non-Elective contributions satisfy Regulations section
1.401(k)-1(b)(4)(i)(A) with respect to the short plan year as if such
contributions were Elective Deferrals.
(4) Participating Companies may, in their sole discretion, satisfy the
ACP test either by making additional Qualified Non-Elective Contributions,
Matching Contributions or Qualified Matching Contributions pursuant to Section
4(b)(ii) or by distributing Excess Aggregate Contributions pursuant to Section
5(i). The determination of Excess Aggregate Contributions shall be made after
first determining the Excess Elective Deferrals and then determining the Excess
Contributions for the Plan Year.
(i) Distribution of Excess Aggregate Contributions
----------------------------------------------
(1) Notwithstanding any other provision of this Plan, Excess Aggregate
Contributions made on behalf of Highly Compensated Employees plus any income or
minus any loss allocable thereto shall be forfeited, if forfeitable, or, if not
forfeitable, distributed not later than the last day of each Plan Year beginning
after December 31, 1987 on the basis of the respective portions of such Excess
Aggregate Contributions attributable to the Accounts of each Highly Compensated
19
<PAGE>
Employee whose Contributions for a Plan Year must be reduced under Section 5(h)
to enable the Plan to satisfy the ACP test.
(2) The income or loss allocable to a Highly Compensated Employee's
Excess Aggregate Contributions shall be determined by multiplying such income or
loss by a fraction, the numerator of which is the Excess Aggregate Contributions
on behalf of the Highly Compensated Employee for the preceding Plan Year and the
denominator of which is the sum of the Highly Compensated Employee's Account
balances attributable to Contributions taken into account for purposes of the
ACP test on the last day of the preceding plan year.
(3) Excess Aggregate Contributions shall be distributed from the
Highly Compensated Employee's Basic After-Tax Adjustment Account and forfeited,
if otherwise forfeitable under the terms of the plan or, if not forfeitable,
distributed from the Highly Compensated Employee's Matching Contribution Account
in proportion to the Highly Compensated Employee's Basic After-Tax Adjustment
and Matching Contributions for the Plan Year.
(j) Salary Reduction and Tax Status of Pretax Contributions. For
-------------------------------------------------------
Federal tax purposes (and, wherever permitted, for state and local tax
purposes), Basic Pretax Contributions and Supplemental Pretax Contributions
shall be deemed to be Company Contributions to the Plan, and a Participant's
election to make such contributions shall constitute an election to have the
amount of his or her compensation that otherwise would have been reported as
taxable compensation on Form W-2 (or its equivalent) reduced by the amount of
such contributions.
(k) Administrative Procedures. The Plan Administrator may require
-------------------------
Participants to complete such process as may be established by the Plan
Administrator before any election under this Section 5 may take effect.
SECTION 6. INVESTMENT OF EMPLOYEE CONTRIBUTIONS
------------------------------------
20
<PAGE>
(a) Initial Selection of Investment of Employee Contributions. A
---------------------------------------------------------
Participant shall, in a manner prescribed by the Plan Administrator, direct the
investment of said Participant's Employee Contributions in the Dean Witter
Discover Stock Fund, one or more other Investment Funds designated by the
Company pursuant to Section 7(c)(ii) of the Plan, or any combination thereof;
provided, however, that the Participant's Employee Contributions shall be
invested in not more than five Investment Funds and the portion invested in any
Investment Fund shall be a whole number multiple of 10%, but shall not exceed
100%, of such contributions.
(b) Changing Investment Directions for Future Contributions. A
-------------------------------------------------------
Participant may elect to change the Investment Fund in which said Participant's
future Employee Contributions will be invested, or the percentage of such
contributions that will be invested in any Investment Fund. A Participant shall
only be allowed to make one election pursuant to this Section 6(b) for each
quarterly record provided to the Participant by the Plan Administrator,
provided, however, that the Plan Administrator shall have the discretion to
permit Participants to make one or more additional elections, provided, further,
that the right to make such additional elections is made available to all
Participants on a nondiscriminatory basis.
(c) Fund Balance Transfers. A Participant may elect to transfer all
----------------------
or any portion of said Participant's Employee Contribution Accounts between two
or more funds established pursuant to Section 7(c) (a "Fund Balance Transfer" or
"FBT") subject to the conditions set forth herein. A Participant shall only be
allowed to make one FBT for each quarterly statement provided to the Participant
by the Plan Administrator, provided, however, that the Plan Administrator shall
have the discretion to permit Participants to make one or more additional FBTs,
provided, further, that the right to make such additional FBTs is made available
to all Participants on a nondiscriminatory basis. When making an FBT, a
Participant shall specify the Investment Fund (or Funds) from which the transfer
is
21
<PAGE>
to be made and further specify the number of whole shares or the percentage of
shares (up to 100%) in the particular Fund to be transferred. Transfers may be
made from an Investment Fund to up to five other Investment Funds in increments
of 10% of the total amount to be transferred. A Participant may also elect to
transfer a specified number of whole shares or a percentage of shares (up to
100%) from the Sears, Allstate or SPS Stock Funds to up to five Investment Funds
in increments of 10% of the total amount to be transferred at any time at which
an election to transfer may be made under this Section 6(c). In transferring
assets between or among Funds, or from the Sears, Allstate or SPS Stock Funds,
the Plan Administrator shall deduct the amount(s) to be transferred from the
Participant's Employee Contribution Accounts in the following order:
(1) Supplemental After-Tax;
(2) Basic After-Tax;
(3) Basic After-Tax Adjustment;
(4) Supplemental Pretax; and,
(5) Basic Pretax.
A Participant who has terminated employment may not make any transfers
between or among Investment Funds or from the Sears, Allstate or SPS Stock Funds
unless the Participant's distribution is deferred under Section 11(c).
(d) Administrative Procedures. The Plan Administrator may require
-------------------------
Participants to complete such process as may be established by the Plan
Administrator before any election under this Section 6 may take effect.
SECTION 7. TRUST FUND
----------
22
<PAGE>
(a) General. All Company and Employee Contributions, and the income
-------
and gains attributable thereto (adjusted to reflect losses) shall be held and
invested by the Trustee as part of the Trust Fund in accordance with the terms
of the Plan and the Trust Agreement.
(b) Investment of Trust Fund. All Company Contributions shall be
------------------------
invested entirely in the Dean Witter Discover Stock Fund; all Dean Witter
Discover Stock, Sears Stock, SPS stock or Allstate Stock included in Rollover or
Qualified Plan Transfer Contributions, or cash in lieu of fractional shares of
Stock, shall be invested in the Dean Witter Discover Stock Fund, the Sears Stock
Fund, the SPS Stock Fund or the Allstate Stock Fund, as appropriate; and, all
other contributions shall be invested in such Investment Funds as the Company
shall specify in accordance with the investment directions of the appropriate
Participant.
(c) Investment Funds. The Trust Fund shall be composed of the Dean
----------------
Witter Discover Stock Fund, the Sears Stock Fund, the SPS Stock Fund, the
Allstate Stock Fund and such other Investment Funds as shall be designated by
the Company pursuant to Section 7(c)(ii).
(i) The Dean Witter Discover Stock Fund. The Dean Witter Discover
-----------------------------------
Stock Fund shall be invested and reinvested exclusively in Common Stock, except
that pending investments in Common Stock, amounts held in the Dean Witter
Discover Stock Fund may be invested and reinvested temporarily in interest-
bearing short-term investments, including (without limitation) savings accounts,
certificates of deposit, money market instruments, United States treasury bills
and such group annuity contracts, insurance company pooled separate accounts,
bank common or collective trust funds, mutual funds and other pooled investment
funds as the Trustee deems suitable for temporary investments of the Dean Witter
Discover Stock Fund. The Dean Witter Discover Stock Fund shall consist of all
Dean Witter Discover Stock Fund investments held by the Trustee and all cash
held by the Trustee which is derived from dividends, interest or other income
from Dean Witter Discover Stock Fund investments,
23
<PAGE>
from Matching, Qualified Non-elective and Qualified Matching Contributions, from
any Basic, Supplemental Pretax, Rollover and Qualified Plan Transfer
Contributions directed by the Participants to be invested in the Dean Witter
Discover Stock Fund, and from the proceeds of the sale or redemption of Dean
Witter Discover Stock Fund investments. Any such cash held by the Trustee shall
be invested as provided in this Section 7(c)(i).
(ii) Other Investment Funds. The Company, acting through its Board of
----------------------
Directors, shall designate other Investment Funds into which Participants may
direct the investment of their Employee Contributions and may, from time to
time, designate one or more additional Investment Funds or remove the
designation of one or more Investment Funds. The number of Investment Funds
designated hereunder shall be, at all times, at least three. The Investment
Funds designated hereunder may include, but are not limited to, registered
investment companies for which the Company or an affiliate of the Company acts
as investment adviser, administrator or transfer agent.
(iii) The Sears Stock Fund. The Sears Stock Fund shall be invested
--------------------
and reinvested exclusively in Sears Common Shares except that pending
investments in Sears Common Shares, amounts held in the Sears Stock Fund may be
invested and reinvested temporarily in interest-bearing short-term investments,
including (without limitation) savings accounts, certificates of deposit, money
market instruments, United States treasury bills and such group annuity
contracts, insurance company pooled separate accounts, bank common or collective
trust funds, mutual funds and other pooled investment funds as the Trustee deems
suitable for temporary investments of the Sears Stock Fund. The Sears Stock
Fund shall consist of all Sears Stock Fund investments held by the Trustee and
all cash held by the Trustee which is derived from dividends, interest or other
income from Sears Stock Fund investments, from Matching Qualified Non-elective
and Qualified Matching Contributions, from any Basic, Supplemental Pretax,
Rollover and Qualified Plan Transfer Contributions directed by the
24
<PAGE>
Participants to be invested in the Sears Stock Fund, and from the proceeds of
the sale or redemption of Sears Stock Fund investments. Any such cash held by
the Trustee shall be invested as provided in this Section 7(c)(iii).
(iv) The Allstate Stock Fund. The Allstate Stock Fund shall be
------------------------
invested and reinvested exclusively in Allstate Stock except that, pending
investment in Allstate Stock, amounts held in the Allstate Stock Fund may be
invested and reinvested temporarily in interest-bearing short-term investments,
including (without limitation): savings accounts, certificates of deposit, money
market instruments, United States treasury bills and such group annuity
contracts, insurance company pooled separate accounts, bank common or collective
trust funds, mutual funds and other pooled investment funds as the Trustee deems
suitable for temporary investments of the Allstate Stock Fund. The Allstate
Stock Fund shall consist of all Allstate Stock Fund investments held by the
Trustee and all cash held by the Trustee which is derived from dividends,
interest or other income from Allstate Stock Fund investments and from Rollover
or Qualified Plan Transfer Contributions consisting of Allstate Stock or cash in
lieu of fractional shares of Allstate Stock and from the proceeds of the sale or
redemption of Allstate Stock Fund investments. Any such cash held by the Trustee
shall be invested as provided in this Section 7(c)(iv).
(v) The SPS Stock Fund. The SPS Stock Fund shall be invested and
------------------
reinvested exclusively in SPS Stock, except that, pending investments in SPS
Stock, amounts held in the SPS Stock Fund may be invested and reinvested
temporarily in interest-bearing short-term investments, including (without
limitation), savings accounts, certificates of deposit, money market
instruments, United States treasury bills and such group annuity contracts,
insurance company pooled separate accounts, bank common or collective trust
funds, mutual funds and other pooled investment funds as the Trustee deems
suitable for temporary investments of the SPS Stock Fund. The SPS Stock Fund
shall consist of all SPS
25
<PAGE>
Stock Fund investments held by the Trustee and all cash held by the Trustee
which is derived from dividends, interest or other income from SPS Stock Fund
investments, from any Rollover Contribution paid to the Trustee in the form of
SPS Stock and cash in lieu of a fractional share of SPS Stock, and from the
proceeds or the sale or redemption of SPS Stock Fund investments. Any such cash
held by the Trustee shall be invested as provided in this Section 7(c)(v).
(d) Stock Purchases. The Trustee shall have the exclusive authority
---------------
to determine the time, manner and amounts in which Stock will be purchased,
including (without limitation) the price to be paid for Stock purchased and the
broker, dealer or private seller through or from which a purchase of Stock is to
be made. Notwithstanding the foregoing, the Trustee is authorized, upon the
request of the trustee or trustees of The Savings and Profit Sharing Fund of
Sears Employees (the "Profit Sharing Fund"), the Sears, Roebuck and Co. Employee
Stock Ownership Trust (the "ESOP"), the successor of either such trust or any
other trust maintained by Sears or any subsidiary of Sears as part of a plan
qualified under Code section 401(a), and in a manner and on such terms and
conditions as in the opinion of the Trustee, are consistent with applicable
fiduciary requirements and applicable federal and state securities laws to (A)
exchange shares of Sears Common Shares held by the Plan in Matching Contribution
Accounts and, (B) to the extent directed by Participants, exchange shares of
Sears Common Shares held in the Trust Fund and allocated to any other Accounts
for (I) shares of Common Stock held in participants' tax credit employee stock
ownership accounts (the "PAYSOP") in the Profit Sharing Fund and in the
unallocated suspense account of the ESOP or any successor plans and related
trusts and/or (II) shares of Common Stock allocated to any other accounts of
participants in the Profit Sharing Fund, the ESOP or any successor plans and
related trusts (other than PAYSOP accounts).
(e) Voting and Tendering of Stock in Accounts. In accordance with
------------------------------------------
procedures established by the Plan Administrator, each Participant may instruct
the Trustee as to how the Stock credited to the
26
<PAGE>
Participant's Accounts shall be voted or tendered. The Trustee shall hold all
such instructions in confidence. The Trustee shall vote or tender all Stock for
which proper instructions have been received in accordance with such
instructions and shall vote or tender all Stock as to which no proper
instructions are received in proportion to Stock for which proper instructions
have been received.
SECTION 8. ACCOUNTS
--------
(a) Separate Accounts. The following separate Accounts shall, as
-----------------
applicable, be maintained for a Participant under the Plan, reflecting the
contributions indicated and the income and gains attributable thereto (adjusted
to reflect losses):
(i) A Basic Pretax Account for any Basic Pretax
Contributions.
(ii) A Basic After-Tax Adjustment Account for any Basic After-
Tax Adjustment and any Basic Employee Contributions made prior to January l,
1984.
(iii) A Basic After-Tax Account for any Employee After-Tax
Contributions made on or after July 1, 1994.
(iv) A Supplemental Pretax Account for any Supplemental Pretax
Contributions, any Rollover Contributions made prior to January 1, 1989, and any
Qualified Plan Transfer Contributions credited to such Account as provided under
Section 9(b).
(v) A Supplemental After-Tax Account for any Supplemental
After-Tax Contributions made to the Plan for Plan Years commencing prior to
January 1, 1987, any Qualified Plan Transfer Contributions credited to such
Account as provided under Section 9(b), any Voluntary Employee Contributions
made prior to January 1, 1984, any amount that a Participant elected to transfer
to the Plan from a plan qualified under section 401(a) of the Code prior to
January 1, 1984, any Rollover Contributions made on or after January 1, 1989,
and any amount that a Participant properly
27
<PAGE>
elected to transfer to the Plan from the Participant's Company Contribution or
Employee Contribution Account under the terminated Dean Witter Reynolds Inc.
Profit Sharing Plan.
(vi) A Matching Contribution Account for any Matching
Contributions and forfeitures, and any Qualified Plan Transfer Contributions
credited to such Account as provided under Section 9(b).
(vii) A Qualified Company Contribution Account for any
Qualified Matching or Qualified Non-Elective Contributions.
(viii) Such other Accounts ("Section 8(a)(viii) Accounts") as
the Plan Administrator may deem necessary and sufficient to hold all or a
portion of a Participant's Qualified Plan Transfer Contributions for the purpose
of segregating such Qualified Plan Transfer Contributions as to which benefits,
rights and features within the meaning of Section 411(d)(6) of the Code and
regulations promulgated thereunder (other than such benefits, rights and
features provided by the Plan), must be maintained. For purposes of the fund
balance transfer rules set forth in Section 6(c) and the withdrawal rules set
forth in Section 12, Section 8(a)(viii) Accounts shall be treated as
Supplemental Pretax or Supplemental After-tax Accounts, as appropriate,
depending upon whether such Accounts consist of employee after-tax contributions
(and the earnings thereon) or employee pretax contributions (and the earnings
thereon). A Section 8(a)(viii) Account holding employer contributions (and the
earnings thereon) shall be treated for purposes of Section 12 as a Supplemental
Pretax or a Matching Contribution Account, depending on whether such
contributions (and the earnings thereon) are eligible to be withdrawn by a
Participant who has not terminated employment with the Affiliated Group.
(b) Reevaluation of Accounts. Each of a Participant's Accounts shall
------------------------
be revalued at each Valuation Date. By this revaluation, the balance in each of
the Participant's Accounts will be increased or decreased by such Participant's
proportionate share of any realized investment income, gains and
28
<PAGE>
losses of the appropriate Investment Fund, the Sears Stock Fund or the Allstate
Stock Fund and by any increase or decrease in the fair market value of the
assets of such Investment Fund, the Sears Stock Fund or the Allstate Stock Fund
which has occurred since the immediately preceding Valuation Date.
SECTION 9. ROLLOVER AND QUALIFIED PLAN TRANSFER CONTRIBUTIONS
-------------------------------------------------------------
(a) Rollover Contributions. With the prior written consent of the
----------------------
Plan Administrator, an Employee may contribute Rollover Contributions; provided,
that any such contribution may be made only if the contribution is paid entirely
in the form of (i) cash, (ii) check, (iii) if a distribution of Stock was
received by the Participant from a plan maintained by SPS or the Affiliated
Group and qualified under section 401(a) of the Code, such Stock, or (iv) by the
direct transfer, in accordance with Code section 401(a)(31), of a note
evidencing a participant loan under the SPS Transaction Services, Inc. START
Plan in accordance with Section 12(h).
(b) Qualified Plan Transfer Contribution. With the prior written
------------------------------------
consent of the Plan Administrator, and under such terms and conditions as the
Plan Administrator may, in its sole discretion, determine on a nondiscriminatory
basis, all or any portion of the assets held for the benefit of a Participant
under a plan maintained by any member of the Affiliated Group, Sears or Allstate
that satisfies the requirements of section 401(a) of the Code, may be
transferred directly from the trustee of such plan to the Trustee of this Plan
as a Qualified Plan Transfer Contribution. Any Qualified Plan Transfer
Contributions shall be credited to the appropriate Account, as determined by the
Plan Administrator, and shall be subject to any applicable requirements of the
Code including but not limited to section 411(d)(6) and the regulations
promulgated thereunder. Any portion of a Qualified Plan Transfer Contribution
that consists of Stock, or
29
<PAGE>
cash in lieu of fractional shares of Stock, shall be invested in the Dean Witter
Discover Stock Fund, the Sears Stock Fund or the Allstate Stock Fund, as
appropriate. Any portion of a Qualified Plan Transfer Contribution that does not
consist of Stock, or cash in lieu of fractional shares of Stock, shall be
invested as the Participant shall elect in accordance with the provisions of
Section 6 applicable to Employee Contributions, provided, however, that in the
absence of such an election, the non-Stock portion of a Qualified Plan Transfer
Contribution shall be invested by the Trustee in a money market fund designated
as an Investment Fund under the Plan. In the event that the Plan, as a result of
accepting a Qualified Plan Transfer Contribution, becomes the direct or indirect
transferee of benefits held on or after January 1, 1985 by a defined benefit
plan or a defined contribution plan subject to the requirements of sections
401(a)(ll) and 417 of the Code, the Plan shall separately account for such
benefits and shall apply the requirements of sections 401(a)(ll) and 417 of the
Code and the regulations thereunder to the distribution of such benefits.
SECTION 10. PLAN BENEFITS
-------------
(a) Amount of Benefit. Participant's Plan Benefit shall be 100% of
-----------------
the Participant's Accounts if the Participant attains Normal Retirement Age
while employed by any member of the Affiliated Group or if the Participant
terminates employment as a result of death, Total and Permanent Disability,
Retirement or Release. If a Participant terminates employment for any other
reason, the Participant's Plan Benefit shall be (i) 100% of the Participant's
Accounts other than the Matching Contribution Account and (ii) the vested
portion of the Participant's Matching Contribution Account, as determined under
(i), (ii), (iii) or (iv) below.
(i) Participants Who Were Employees Before January 1, 1989. The
------------------------------------------------------
vested portion of the Matching Contribution Account of any Participant who was
an Employee before January 1, 1989 shall be the difference between 100% of the
Matching Contribution Account and the portion of such Account that is
attributable to Matching Contributions and forfeitures allocated with respect to
the three Plan Years ended immediately prior to the Plan Year in which the
Participant terminates employment.
30
<PAGE>
(ii) Participants With At Least One Hour of Service on or after
----------------------------------------------------------
January 1, 1989. The vested portion of the Matching Contribution Account of any
- ---------------
Participant who has at least one Hour of Service in any Plan Year commencing on
or after January 1, 1989 shall be determined based on his Years of Service as
follows:
Years of Service Vested Percentage
---------------- -----------------
Less than 5 0%
5 or more 100%
(iii) Participants to Whom Both (i) and (ii) Apply. The vested
---------------------------------------------
portion of the Matching Contribution Account of any Participant to whom both (i)
and (ii) apply shall be the greater of the amount determined under (i) or (ii).
(iv) Credit Services Employees. The vested portion of the Matching
-------------------------
Contribution Account of a Credit Services Employee employed as a Credit Services
Employee on the date of the Spin-off shall be 100% of such Credit Services
Employee's Matching Contribution Account.
(b) Forfeitures. The non-vested portion of the Matching Contribution
-----------
Account of any Participant who was an Employee before January 1, 1989 but did
not have at least one Hour of Service on or after January 1, 1989 shall be
forfeited in accordance with the rules applicable under the Plan immediately
prior to this amendment and restatement. The non-vested portion of the Matching
Contribution Account of any other Participant shall be forfeited as of the last
day of the Plan Year in which such Participant terminates employment; provided,
that if the Participant shall subsequently be credited with one Year of Service
before incurring five consecutive One Year Breaks, the amount so forfeited shall
be restored without adjustment for income, gains or losses; and provided, that
such restoration shall be made out of forfeitures arising in the Plan Year in
which the restoration occurs and,
31
<PAGE>
to the extent necessary, out of a special Company contribution which shall be
made for that purpose. The foregoing forfeiture provisions shall only apply to
the extent permitted by applicable law.
(c) Payee's Location Not Ascertainable for 60 Months. In the event
------------------------------------------------
any Plan Benefit has been due and payable under the Plan for a period of more
than 60 months and cannot be paid because the location of the payee cannot be
ascertained, the entire amount of such Plan Benefit shall be forfeited;
provided, that in the event the location of such payee is ascertained, the Plan
Benefit forfeited shall be restored, without adjustments for income, gains or
losses and shall be paid to such payee in a single lump sum payment; and
provided, that such restoration shall be made out of forfeitures arising in the
Plan Year in which the restoration occurs and, to the extent necessary, out of a
special Company contribution which shall be made for that purpose.
SECTION 11. DISTRIBUTION OF PLAN BENEFITS.
-----------------------------
(a) Form of Distribution. Each Participant's Plan Benefit shall be
--------------------
distributed in the form of a lump sum consisting of: (i) a certificate or
certificates for whole shares of Stock representing the portions of a
Participant's Accounts that are invested in the Dean Witter Discover Stock Fund,
Sears Stock Fund, SPS Stock Fund or Allstate Stock Fund and (ii) a check for any
fractional share of Stock and uninvested cash in the portions of a Participant's
Accounts that are invested in the Dean Witter Discover Stock Fund, Sears Stock
Fund, SPS Stock Fund or Allstate Stock Fund and for the entire value of the
portions of the Participant's Accounts that are invested in all other
Investment Funds.
(b) Time of Distribution. Subject to Section 11(c), a Participant's
--------------------
Plan Benefit shall be distributed approximately 90 days after the earlier of (i)
the end of the Quarter in which the Participant terminates employment or (ii) if
the Participant transfers employment from a member of the Affiliated Group to a
subsidiary of DWD (other than a member of the Affiliated Group), including but
not limited
32
<PAGE>
to SPS, the later of the date of such transfer or the date the Participant
becomes 100% vested in the Participant's Matching Contribution Account. Any
allocation of contributions and forfeitures made subsequent to the distribution
of a Participant's Account in a lump sum shall be paid as soon as practicable
after the date of such allocation.
(c) Right to Deferred Distribution. If a Participant whose vested
------------------------------
Accounts exceed $3,500 in value on the date the Participant terminates
employment does not consent to the distribution of the Participant's Plan
Benefit under Section 11(b), then payment of the Participant's Plan Benefit
shall, subject to Section 13(a), be deferred to such date as the Participant
shall elect. A Participant who elects to defer a distribution shall have a
single opportunity to change the date so elected to an earlier or later date. If
no consent is given and no election to defer is made, such Participant's Plan
Benefit shall be distributed as of the Valuation Date coincident with or next
following the date the Participant attains Normal Retirement Age.
Notwithstanding anything to the contrary herein, the distribution of a
Participant's Plan Benefit shall begin not later the 60th day after the close of
the Plan Year in which the latest of the following events occurs:
(i) The Participant attains Normal Retirement Age.
(ii) The 10th anniversary of the date on which the Participant
commenced participation in the Plan.
(iii) The termination of the Participant's employment with the
Affiliated Group.
(iv) The date specified by the Participant in an election made
pursuant to this Section 11(c).
If a distribution is one to which Code sections 401(a)(11) and 417 do
not apply, such distribution may commence less than thirty (30) days after the
notice required under section 1.411(a)-11(c) of the Income Tax Regulations is
given, provided that:
33
<PAGE>
(x) the Plan Administrator clearly informs the Participant that the
Participant has a right to a period of at least thirty (30) days after receiving
the notice to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option), and
(y) the Participant, after receiving the notice, affirmatively
elects a distribution.
Accounts pending distribution shall continue to share in the
investment experience of the Trust Fund until the Valuation Date as of which
distributed.
(d) Death of Participant. If a Participant dies prior to receiving
--------------------
the Participant's entire Plan Benefit, the remaining portion of the
Participant's Plan Benefit shall be paid to the Participant's surviving spouse,
but if there is no surviving spouse, or, if the surviving spouse consents in a
manner conforming to a qualified election under the Retirement Equity Act of
1984, as amended, then to the Participant's Beneficiary. Upon the death of a
Participant, the Participant's surviving spouse, if any, shall be entitled to
make such elections or decisions as the Participant was authorized to make under
this Section 11, and any provision as to deferrals and elections shall be made
with reference to the date of death of the Participant (instead of the date he
or she terminated employment). Notwithstanding the foregoing, if prior to being
notified of the death of a Participant the Plan Administrator has made a
distribution or instructed the Trustee to make a distribution to any such
Participant, the provisions of this Section 11(d) shall not be applicable and
such distribution shall be considered to have been made in accordance with the
other provisions of this Section 11.
(e) Designation of Beneficiary. Any designation of a Beneficiary
--------------------------
shall be made in writing and filed with the Plan Administrator. A Beneficiary
designation may be revoked by the Participant at any time without notice to or
consent of any previously designated Beneficiary; provided, that any new
designation of Beneficiary must comply with any applicable spousal consent
requirement. If no Beneficiary is designated, or the designated Beneficiary
does not survive the Participant and no
34
<PAGE>
alternative Beneficiary is designated, the Beneficiary shall be the
Participant's surviving spouse, or, if none, the Participant's estate. If the
designated Beneficiary cannot be located by the Plan Administrator for a period
of one year following death, despite mailing to such Beneficiary's last known
address, and the Beneficiary has not made written claim within such period to
the Plan Administrator, the Beneficiary shall be treated as having predeceased
the Participant.
(f) Administrative Procedures. The Plan Administrator may require
-------------------------
Participants to complete such process as may be established by the Plan
Administrator before any election under this Section 11 may take effect;
provided, that such process shall conform to applicable rules under the Code and
that the Plan Administrator shall provide the Participant and the Participant's
surviving spouse or Beneficiary such information, within such time periods, as
it is required to under the Code and applicable law.
(g) Optional Direct Rollover of Eligible Rollover Distributions.
------------------------------------------------------------
Effective for distributions made after December 31, 1992, a Participant who
receives a distribution described in Section 11(a) or a withdrawal described in
Section 12 may direct the Plan Administrator to directly rollover all or any
portion of the distribution or withdrawal to an individual retirement plan
described in Code sections 408(a) or 408(b) or to another employer's qualified
plan described in Code sections 401(a)(31)(D) and 402(c)(8)(B) provided such
plan agrees to accept the direct rollover contribution. This election shall not
be applicable to any distribution which represents the minimum amount required
to be distributed under Section 13(a). The election described herein shall be
available with respect to any distribution or withdrawal made to or by a spouse
of a Participant following the death of the Participant or pursuant to a
qualified domestic relations order (as defined in section 414(p) of the Code) if
the election described herein would have been available to the Participant had
the Participant been the recipient of the distribution or withdrawal. The Plan
Administrator may, in its sole discretion, adopt such
35
<PAGE>
administrative rules as may be permitted by Code section 401(a)(31) or
regulations promulgated thereunder which limit or restrict the applicability of
this Section 11(g) to all or a portion of certain distributions or withdrawals.
SECTION 12. WITHDRAWALS AND LOANS
---------------------
(a) General Rule. Subject to the following provisions of this
------------
Section 12, a Participant who is an Employee may make a withdrawal of all or any
portion of the balance of any or all of his or her Employee Accounts; a
Participant may not withdraw any portion of his or her Company Accounts.
(b) Limitations of Withdrawals. Withdrawals shall be subject to the
--------------------------
following limitations:
(i) To make a withdrawal, a Participant must complete such
process as may be established by the Plan Administrator.
(ii) A Participant may not make more than one withdrawal for any
quarterly record.
(iii) A Participant may not make a withdrawal from the
Participant's Basic Pretax or Supplemental Pretax Account except (A) after
attaining age 59-1/2 or (B) upon suffering a hardship, as provided in Section
12(g).
(c) Suspension of Contributions. If a Participant makes a withdrawal
---------------------------
from the Participant's Basic Pretax Account or Supplemental Pretax Account,
the Participant shall not be permitted to make any Employee Contributions for
the three months beginning on the first day of the first payroll period
following the date the withdrawal request is processed by the Plan
Administrator, and, in addition, a Participant who makes a hardship withdrawal
as provided in Section 12(g) may not make elective or employee contributions to
the extent and for the period provided in Section 12(g). Unless otherwise
directed by the Participant, Employee Contributions suspended due to a
withdrawal
36
<PAGE>
or hardship withdrawal shall automatically recommence at the end of the
suspension period at the same rate and be invested in the same manner as the
Participant's Employee Contributions immediately prior to the suspension,
subject to the limitations described in Section 12(g)(ii).
(d) Source and Amount of Withdrawal. In making a withdrawal or
-------------------------------
hardship withdrawal under this Section 12, a Participant shall specify the
Investment Fund (or Funds) from which the withdrawal or hardship withdrawal is
to be made and the amount (a specified number of whole shares or the entire
balance in a particular Investment Fund as of the Valuation Date of the Quarter
preceding the Quarter in which the withdrawal or hardship withdrawal is made) in
accordance with such procedures as the Plan Administrator shall provide. In the
case of a withdrawal, in withdrawing assets from an Investment Fund (or Funds)
the Plan Administrator shall withdraw assets from the Participant's Employee
Contribution Accounts in the following order:
(1) Supplemental After-Tax;
(2) Basic After-Tax;
(3) Basic After-Tax Adjustment;
(4) Supplemental Pretax; and,
(5) Basic Pretax.
In the case of a hardship withdrawal, the Plan Administrator shall,
after determining that the Participant has both taken any loan permitted under
Section 12(g) and withdrawn all available assets from Employee After-Tax
Accounts, withdraw assets from an Investment Fund (or Funds) first from the
Participant's Supplemental Pretax Account and then from the Participant's Basic
Pretax Account.
(e) Time of Payment of Withdrawals. Withdrawals of amounts described
------------------------------
in Section 12(d) will normally be paid approximately eight weeks after the Plan
Administrator receives a Participant's request for a withdrawal.
37
<PAGE>
(f) Form of Payment of Withdrawals. All withdrawals from Employee
------------------------------
Accounts that are invested in the Dean Witter Discover Stock Fund, Sears Stock
Fund, SPS Stock Fund and/or Allstate Stock Fund shall be paid in the form of (i)
one or more certificates for whole shares of Stock and (ii) a check for any
fractional shares and any amount that was not invested in Stock on the relevant
Valuation Date. Withdrawals designated to be made from the portions of a
Participant's Employee Accounts invested in Investment Funds other than the Dean
Witter Discover Stock Fund, Sears Stock Fund, SPS Stock Fund or Allstate Stock
Fund shall be paid in the form of a check.
(g) Hardship. For hardship withdrawals prior to January 1, 1989, the
--------
rules of the Plan then in effect shall apply. Effective January 1, 1989:
(i) Hardship withdrawals hereunder may only be made from:
(A) Basic and Supplemental Pretax Contributions,
(B) income allocable to Basic and Supplemental Pretax
Contributions credited to the Participant's Basic and Supplemental Pretax
Contribution Accounts as of December 31, 1988, and
(C) amounts attributable to Rollover Contributions made
prior to January 1, 1989, including any income allocable thereto.
(ii) (A) A distribution will be considered to be necessary to
satisfy an immediate and heavy financial need of a Participant only if the
Participant has obtained all distributions, other than hardship distributions,
and all nontaxable loans available under all plans maintained by any member of
the Affiliated Group, and the distribution is not in excess of the amount of the
immediate and heavy financial need;
(B) upon a hardship withdrawal, the Participant may not make
elective contributions or employee contributions under any qualified or
unqualified plans of deferred
38
<PAGE>
compensation maintained by the Affiliated Group for twelve months after the
receipt of the hardship distribution, and the Participant may not make elective
contributions under any such plan for the Participant's taxable year immediately
following the taxable year of the hardship distribution in excess of the
applicable limits set forth under section 402(g) of the Code for such taxable
year less the amount of such Participant's elective contributions for the
taxable year of the hardship distribution.
(iii) For purposes of this Section 12(g), the term "hardship" shall
mean immediate and heavy financial needs of the Participant where such
Participant lacks other reasonably available financial resources, arising out of
any one or more of the following:
(A) expenses for medical care described in Code section 213(d)
previously incurred by the Participant, the Participant's spouse, or any
dependents of the Participant (as defined in Code section 152) or necessary for
these persons to obtain medical care described in Code section 213(d);
(B) costs directly related to the purchase of a principal
residence for the Participant (excluding mortgage payments);
(C) payment of tuition and related educational fees for the
next twelve (12) months of post-secondary education for the Participant,
Participant's spouse, children or dependents (as defined in Code section 152);
(D) payments necessary to prevent the eviction of the
Participant from the Participant's principal residence or foreclosure on the
mortgage on that residence;
(E) any amounts necessary to pay any federal, state or local
income taxes or penalties reasonably anticipated to result from a hardship
withdrawal under this Section 12(g); or,
39
<PAGE>
(F) such other instances of deemed immediate and heavy
financial needs together with such additional methods for the hardship
withdrawal to be deemed necessary to satisfy such needs as the Commissioner of
Internal Revenue shall provide through the publication of revenue rulings,
notices and other documents of general applicability.
(h) Loans
-----
(i) Availability of Loans. A Participant may elect, in such form
---------------------
and manner as the Plan Administrator may prescribe, to borrow from the Trust
solely for the purposes listed under clause (vii) of this Section 12(h), an
amount in cash not to exceed the amount permitted under clause (ii) of this
Section 12(h). A Participant taking a loan under this Section 12(h) shall be
ineligible to take another loan under this Section 12(h) until the expiration of
twelve (12) full calendar months following the date of such loan. A Participant
shall not be eligible to have more than one loan under this Section 12(h)
outstanding at any time.
(ii) Limitations on Loans. Each loan under this Section 12(h)
--------------------
shall be limited to an amount not to exceed (when added to the outstanding
balance of all other loans made to the Participant by any plan maintained by the
Affiliated Group) the lesser of:
(A) $50,000 reduced by the excess, if any, of the highest
outstanding balance of loans from any such plan to the Participant during the
one-year period ending on the day before the date on which the loan is made,
over the outstanding balance of loans from any such plan to the Participant on
the date on which the loan is made, and
(B) one-half of the vested balance of the Participant's
Accounts as of the most recent Valuation Date.
Notwithstanding the foregoing, no loan shall be granted under this
Section 12(h) in an amount less than $1,000.
40
<PAGE>
(iii) Sources of Loan Proceeds and Designation of Payments. Loans made
-----------------------------------------------------
pursuant to this Section 12(h) and payments thereof, shall be appropriately
charged and credited against the Participant's Supplemental After-Tax, Basic
After-Tax, Basic After-Tax Adjustment, Supplemental Pretax, Basic Pretax and
Matching Contribution Account in that order, or from such Account(s) or in such
order as the Plan Administrator may, in its discretion, permit Participants to
designate on a nondiscriminatory basis. Prior to the disbursement of the
proceeds of a loan, an amount equal to the loan amount shall be transferred from
the Participant's Accounts in the Investment Funds in which it is invested in
proportion to the loan amount to a special loan fund (consisting solely of the
Participant's loans) established for the purpose of disbursing the loan to the
Participant. Any such transfer shall be disregarded for purposes of any transfer
limitations under Section 6.
(iv) Loans Evidenced by Note and Secured by Interest in Account. A
----------------------------------------------------------
loan granted pursuant to this Section 12(h) shall be evidenced by such documents
as the Plan Administrator shall designate including a note which shall bear a
reasonable rate of interest as determined by the Plan Administrator from time to
time in a nondiscriminatory manner and which otherwise shall conform to the
repayment terms set forth in this Section 12(h). A loan made to a Participant
pursuant to this Section 12(h) shall be secured by an interest in the
Participant's Accounts and/or by such other interests as the Plan Administrator
may determine to constitute adequate security. The occurrence of an event of
default under the loan note shall entitle the Trustee of the Plan to reduce the
balance of the Participant's Accounts up to the amount of the Plan's security
interest therein. The loan note shall be an asset solely of the borrowing
Participant's Accounts and interest on the loan shall be credited to the
Participant's Accounts.
(v) Loan Repayment Terms. A loan made pursuant to this Section 12(h)
--------------------
shall be repaid over a period not to exceed five years from the date of the
loan, unless the Participant certifies
41
<PAGE>
in writing to the Plan Administrator that the loan proceeds are to be used
solely to acquire a dwelling unit which is to be used, within a reasonable
period of time, as the Participant's principal residence, in which case, the
loan shall be repaid over a period not to exceed fifteen years from the date of
such loan. Such repayment shall be made in level installments of principal and
interest which the Participant shall authorize to be repaid by payroll
deductions or by such other method as is determined by the Plan Administrator on
a uniform and nondiscriminatory basis. Loan repayments (principal and interest)
will be proportionately credited among the Participant's Accounts from which the
loan proceeds were transferred pursuant to (iii) above and reinvested in
Investment Funds based on the Participant's then-current directions with respect
to the investment of contributions. The entire outstanding amount of the loan
may be prepaid without penalty at any time. The note shall provide that in all
events the outstanding principal and interest due thereon shall be repaid not
later than the date of the Participant's termination of employment or such other
date as the Plan Administrator shall specify. In the event of default,
foreclosure on the note and attachment of security will not occur until a
distributable event occurs under the Plan.
(vi) Loans Available on Nondiscriminatory Basis. All loans made
------------------------------------------
pursuant to this Section 12(h), shall be made available to all Participants on a
reasonably equivalent, nondiscriminatory basis.
(vii) Circumstances Under Which Loans are Permitted. The Plan
----------------------------------------------
Administrator may approve a loan under this Section 12(h) for the purpose of
satisfying one or more "hardships" described in Section 12(g)(iii) or for the
purposes of satisfying an immediate or heavy financial need of the Participant
caused by or resulting from an accident, illness, death, educational, housing or
shelter requirements or other economic adversity that the Plan Administrator
determines to be a financial
42
<PAGE>
hardship. The Plan Administrator may reasonably rely on the written
representations of the Participant in determining whether a loan is requested
for a purpose permitted under this clause (vii).
(viii) Other Provisions Relating to Loans. To the extent required by
-----------------------------------
ERISA section 408 or Code section 4975, notwithstanding the preceding provisions
of this Section 12(h), loans may be made to a Participant who is, at the time of
the loan, both a former employee and a "party in interest" as defined in section
3(14) of ERISA with respect to the Plan. In the case of any such loan, the
preceding provisions of this Section 12(h) dealing with payment by payroll
deduction and acceleration on termination of employment shall not apply. Loans
shall not be made available to highly compensated employees (as defined in Code
section 414(q) in an amount greater than the amount made available to other
employees.
(ix) Transfers to SPS. Unless the Plan Administrator specifies
----------------
otherwise in the applicable loan documents, the following rules shall apply in
cases where a Participant terminates employment with the Affiliated Group due to
a transfer to SPS Transaction Services, Inc. or an affiliate thereof. If such a
Participant has an outstanding loan under this Plan, the Participant may elect
to have the note evidencing such loan directly transferred to the SPS
Transaction Services, Inc. START Plan (the "SPS START Plan") in accordance with
Code section 401(a)(31) and this Section 12(h). In such a case, the outstanding
principal and interest due on the note evidencing such loan shall not, by reason
of such termination of employment, become immediately payable and the transfer
of such note to the SPS START Plan shall not be an event of default under such
note.
(x) Transfers from SPS. Unless the Plan Administrator specifies
------------------
otherwise in the applicable loan documents, the following rules shall apply in
cases where a Participant becomes an employee of a Participating Company by
reason of the Participant's transfer of employment from SPS Transaction
Services, Inc. or an affiliate thereof. If such a Participant has an outstanding
loan under the
43
<PAGE>
SPS START Plan, the Participant may elect a direct transfer to this Plan in
accordance with Section 9(a) of the note evidencing the outstanding amount of
such loan. The electing Participant must acknowledge that (i) the Trustee of
this Plan shall be treated as the payee of the note evidencing such loan, (ii)
all other terms of the note, including the repayment schedule and interest rate,
shall continue to apply to the note and (iii) the loan shall be treated as a
loan granted under this Plan.
(xi) Suspension of Loan Repayments during Military Service. Loan
-----------------------------------------------------
repayments will be suspended under this Plan as permitted under Section
414(u)(4) of the Code.
SECTION 13. INCORPORATION OF CERTAIN CODE
REQUIREMENTS BY REFERENCE.
-----------------------------
(a) Incorporation of Section 401(a)(9). Anything in the Plan to the
----------------------------------
contrary notwithstanding, distributions under this Plan shall meet the
requirements of section 401(a)(9) of the Code, which requirements are
incorporated herein by reference; provided, that distributions with respect to
Participants who attained age 70-1/2 during 1988 shall begin (and be calculated
as if they were required to begin) as of April 1, 1989.
Effective January 1, 1997, a Participant who attains age 70 1/2 after
December 31, 1995 and who is an Employee as of April 1 of the year following the
year in which the Participant attains age 70 1/2, may elect, on or after such
April 1, to begin receiving distributions under the Plan as if such
Participant's required beginning date under Code section 401(a)(9) were such
April 1 or such later date. Any such elections shall be irrevocable to the
extent permitted by law.
(b) Incorporation Of Section 415 Limitations. The limitations on
----------------------------------------
allocations and contributions of section 415 of the Code are incorporated herein
by reference. For purposes of applying those limitations the following rules
shall apply:
44
<PAGE>
(i) Definitions. For purposes of this Section 13, compensation
-----------
shall be determined on the basis of compensation actually paid and includible in
gross income during the year; the limitation year shall be the Plan Year: and
excess amount shall mean the difference between a Participant's annual additions
and the maximum permissible amount of such annual additions.
(ii) Disposition of Excess Amounts. If there is an excess
-----------------------------
amount, the excess will be disposed of as follows:
(A) The Plan Administrator shall remove the excess amount
from the Participant's Accounts, together with any gains attributable to such
excess amount. The Plan Administrator shall cause the Trustee to hold such
excess amount in a suspense account until the next limitation year at which time
such excess amount shall be allocated to all Participants in the Plan who become
entitled to a Matching Contribution for the next limitation year. The
reallocated excess amount shall be used to reduce Company contributions for the
next limitation year (and each succeeding limitation year until the suspense
account is exhausted). Excess amounts held in the suspense account shall be held
in cash and invested in such cash equivalents or short-term investment fund as
the Trustee shall determine. Investment earnings, gains or losses shall be
allocated to the suspense account.
(B) Notwithstanding the foregoing, the Plan Administrator
may determine to dispose of any excess amount by distributing Elective Deferrals
and/or returning After-Tax Contributions, together with any gains attributable
to such contributions, to the Participant, to the extent that such distribution
or return would reduce the excess amount in the Participant's Account or by any
other method permitted by any applicable rule or regulation.
(iii) Coordination With Another Defined Contribution Plan. If,
---------------------------------------------------
in addition to this Plan, the Participant is covered under another qualified
defined contribution plan or a welfare benefit
45
<PAGE>
fund, as defined in section 419(e) of the Code, maintained by the employer
during any limitation year and a Participant's annual additions under this Plan
and such other plans would result in an excess amount for a limitation year, the
excess amount will be deemed to consist of the annual additions last allocated,
except that annual additions attributable to a welfare benefit fund will be
deemed to have been allocated first regardless of the actual allocation date.
If an excess amount was allocated to a Participant on an allocation date of this
Plan which coincides with an allocation date of another plan, the excess amount
attributed to this Plan will be the product of
(A) the total excess amount allocated as of such date, times
(B) the ratio of (i) the annual additions allocated to the
Participant for the limitation year as of such date under this Plan to (ii) the
total annual additions allocated to the Participant for the limitation year as
of such date under this and all the other qualified defined contribution plans.
Any excess amount attributed to this Plan will be disposed of in the manner
described in Section 13 (b)(ii).
(iv) Coordination with a Qualified Defined Benefit Plan. If the
--------------------------------------------------
employer maintains, or at any time maintained, a qualified defined benefit plan
covering any Participant in this Plan, benefits under the defined benefit plan
shall be reduced to the extent necessary to comply with section 415(e) of the
Code.
(c) Military Service. Notwithstanding any provision of this Plan to
-----------------
the contrary, contributions, benefits and service credit with respect to
qualified military service will be provided in accordance with Section 414(u) of
the Code.
SECTION 14. FIDUCIARY RESPONSIBILITIES AND PLAN ADMINISTRATION.
----------------------------------------------------
(a) Named Fiduciary/Plan Administrator. The Company is the named
----------------------------------
fiduciary which has the authority to control and manage the operation and
administration of the Plan, and is the "plan
46
<PAGE>
sponsor" as that term is used in ERISA. The Company, as Plan Administrator,
shall make such rules, regulations, interpretations and computations, and shall
take such other action to administer the Plan, as it may deem appropriate. In
administering the Plan, the Company shall act in a non-discriminatory manner to
the extent required by section 401 and related sections of the Code and shall at
all times discharge its duties with respect to the Plan in accordance with the
standards, set forth in section 404(a)(1) of ERISA.
(b) Named Fiduciary/Management of Plan Assets. The Company is the
-----------------------------------------
named fiduciary with respect to the control and management of the assets of the
Plan only to the extent of having the duty to (i) appoint one or more trustees
to hold the assets of the Plan in trust and to enter into a trust agreement with
each such trustee with respect to the assets held in trust hereunder, (ii)
establish a funding policy and method as provided in Section 15, and (iii)
designate investments that meet the requirements for the Investment Funds as
provided in Section 7(c). Each trustee appointed under clause (i) above shall
have the exclusive authority and discretion to manage and control the assets of
the Plan which it holds in trust.
(c) Service in Several Fiduciary Capacities. Nothing herein shall
---------------------------------------
prohibit any person or group of persons from serving in more than one fiduciary
capacity with respect to the Plan (including service both as plan administrator
and trustee).
(d) Duties and Responsibilities of the Plan Administrator. The
-----------------------------------------------------
responsibilities of the Company under the Plan shall be carried out on its
behalf by its directors, officers, employees and agents, none of whom shall be
fiduciaries unless appointed to the Hearing Panel. The Company may engage the
services of such persons or organizations to render advice or perform services
with respect to its responsibilities under the Plan as it shall determine to be
necessary or appropriate. Such persons
47
<PAGE>
or organizations may include (but shall not be limited to) actuaries, attorneys,
accountants and consultants.
(e) Delegation of Fiduciary Responsibilities. In lieu of carrying out
----------------------------------------
any of its fiduciary responsibilities under the Plan, the Company may delegate
its fiduciary responsibilities (except "trustee responsibilities" as defined in
section 405(c)(3) of ERISA) to any person or persons pursuant to a written
contract with such other person which specifies the fiduciary responsibilities
so delegated.
SECTION 15. FUNDING POLICY AND METHOD.
-------------------------
From time to time, the Plan Administrator shall establish a funding
policy and method for the Plan which is consistent with the objectives of the
Plan, with its short-term and long-term financial needs and with the
requirements of ERISA. The funding policy and method, as established and
amended from time to time, shall be communicated in writing to the Trustee in
order that the Trustee may coordinate the investment policies for the Trust Fund
with such funding policy and method.
SECTION 16. CLAIMS PROCEDURE.
----------------
(a) Claims and Inquiries. All claims for benefits and all inquiries
--------------------
concerning the Plan shall be submitted to the Plan Administrator addressed as
follows: "Dean Witter Reynolds Inc., Plan Administrator under the Dean Witter
START Plan, 5 World Trade Center, 6th Floor, New York, New York 10048."
Claims for benefits must be in writing on the form(s) prescribed by the Plan
Administrator and must be signed by the person or persons indicated on such
form(s).
(b) Denial of Claims. In the event any claim for benefits is denied,
----------------
in whole or in part, the Plan Administrator shall notify the claimant of such
denial in writing and shall advise the claimant of his or her right to a review
thereof. Such written notice shall set forth, in a manner calculated to be
understood by the claimant, the specific reason or reasons for the denial,
specific reference(s) to the pertinent Plan provision(s) upon which the denial
is based, a description of any additional information
48
<PAGE>
or material that is necessary for the claimant to perfect his or her claim for
benefits, an explanation of why such information or material is necessary and an
explanation of the Plan's review procedure. Such written notice shall be
furnished to the claimant within 90 days after the Plan Administrator receives
the claim, unless special circumstances require an extension of time for
processing the claim. In no event shall such an extension exceed a period of 90
days from the end of the initial 90-day period. If such an extension is
required, written notice thereof shall be furnished to the claimant before the
end of the initial 90-day period. Such notice shall indicate the special
circumstances requiring an extension of time and the date by which the Plan
Administrator expects to render a decision. If written notice of the denial of
the claim for benefits is not furnished within the time specified in this
Section 16(b), the claim shall be deemed denied and the claimant shall be
permitted to appeal such denial in accordance with the review procedure
described in Section 17 below.
SECTION 17. REVIEW PROCEDURE.
----------------
(a) The Hearing Panel. The Company shall appoint a "Hearing Panel,"
-----------------
which shall consist of three or more individuals who may (but need not) be
Employees of the Company. The Hearing Panel may adopt such rules and
procedures, consistent with ERISA and the Plan, as it deems necessary or
appropriate in carrying out its responsibilities under this Section 17.
(b) Appeals from Claim Denials. Any person whose claim for benefits
--------------------------
is denied, in whole or in part, or such person's duly authorized representative,
may appeal from such denial by submitting a request for review of the claim to
the Hearing Panel within six months after receiving the written notice of denial
from the Plan Administrator (or in the case of a deemed denial, within six
months after the claim is deemed denied). The Plan Administrator shall give the
claimant (or the claimant's representative) an opportunity to review pertinent
documents (except legally privileged materials) and to submit issues and
comments in writing. A request for review shall be in writing and
49
<PAGE>
shall be addressed as follows: "Hearing Panel under the Dean Witter START Plan,
5 World Trade Center, 6th Floor, New York, New York 10048." The request for
review shall set forth all of the grounds on which it is based, all facts in
support thereof and any other matters which the claimant deems pertinent. The
Hearing Panel may require the claimant (or the claimant's representative) to
submit such additional facts, documents or other material as it deems necessary
or appropriate in making its review.
(c) Decision on Review. The Hearing Panel shall act upon a request
------------------
for review within 60 days after receipt thereof, unless special circumstances
require an extension of time for processing, in which event a decision shall be
rendered not more than 120 days after the receipt of the request for review. If
such an extension is required, written notice thereof shall be furnished to the
claimant (or his or her representative) before the end of the initial 60-day
period. The Hearing Panel shall give written notice of its decision to the
claimant (or the claimant's representative) and to the Plan Administrator. In
the event that the Hearing Panel confirms the denial of the claim for benefits
in whole or in part, such notice shall set forth, in a manner calculated to be
understood by the claimant, the specific reason or reasons for the denial and
specific reference(s) to the pertinent Plan provision(s) upon which such denial
is based. If written notice of the Hearing Panel's decision is not given to the
claimant (or the claimant's representative) within the time prescribed in this
Section 17(c), the claim shall be deemed denied on review.
(d) Exhaustion of Administrative Remedies. No legal or equitable
-------------------------------------
action for benefits under the Plan shall be brought unless and until the
claimant (i) has submitted a written claim for benefits in accordance with
Section 16(a), (ii) has been notified that the claim has been denied (or the
claim is deemed denied as provided in Section 16(b) above), (iii) has filed a
written request for a review of the claim in accordance with Section 17(b) above
and (iv) has been notified in writing that the
50
<PAGE>
Hearing Panel has affirmed the denial of the claim (or the claim is deemed
denied on review as provided in Section 17(c) above).
(e) The Hearing Panel shall be the "named fiduciary", as defined under
Section 402 (a)(1) of ERISA, and shall have the authority to act with respect to
any appeal from the denial of a claim for benefits under the Plan. The Hearing
Panel, in its capacity as named fiduciary, shall have the discretionary
authority to interpret and construe the terms of the Plan and to determine
eligibility for and entitlement to Plan benefits in accordance with the terms of
the Plan. Any reasonable construction or interpretation of the Plan's terms or
determination made by the Hearing Panel as to eligibility or entitlement,
adopted in good faith, shall be final and binding upon the Company, all
Participating Companies, Employees, Participants, and their spouses,
beneficiaries, heirs, successors and assigns.
SECTION 18. EXPENSES OF PLAN AND TRUST.
--------------------------
The reasonable expenses of administering the Plan and the Trust Fund
shall be charged to and paid out of the Trust Fund, unless they are paid by the
Company. The expenses of administering the Plan shall include, without
limitation, the compensation of the Trustee, the expenses (such as brokerage
fees and stock transfer taxes) incurred by the Trustee in the performance of its
duties hereunder, all real or personal property taxes, income taxes (if any) and
other taxes of any kind whatsoever that may be levied or assessed under existing
or future laws upon or in respect of the Trust, the Trust Fund or any property
in the Trust Fund, and all other proper charges and disbursements of the
Trustee. Legal fees and related legal expenses arising out of legal services
rendered to the Trustee (whether or not rendered in connection with judicial or
administrative proceedings, and whether or not incurred prior to the termination
of the Trust Agreement) shall be considered to be reasonable expenses of
administering the Plan and Trust Fund only to the extent (a) they are reasonable
in amount, and (b) the payment of such fees and expenses out of the Trust Fund
is permitted by applicable law.
51
<PAGE>
SECTION 19. AMENDMENT AND TERMINATION.
-------------------------
(a) Amendment of Plan. The Company reserves the right to make from
------------------
time to time any amendment or amendments to all or any part of the Plan,
including amendments which are retroactive in effect. Such amendment or
amendments may be effected by action of the Company's Board of Directors. Also,
the Company's Board of Directors has specifically authorized the Compensation
Committee of the Company's Board of Directors to take such actions.
Notwithstanding the foregoing:
(i) no amendment shall have the effect of vesting in the
Participating Companies any interest in any property of the Trust; and,
(ii) no amendment shall have any retroactive effect so as to
deprive any Participant or Beneficiary of any amount credited to the
Participant's or Beneficiary's Accounts, except as provided in Section 19(c) or
as otherwise permitted by law.
(b) Termination of Plan. The Plan is intended to be permanent, but the
-------------------
Company reserves the right to terminate the Plan, in whole or in part, at any
time. Such termination may be effected by action of the Company's Board of
Directors. Also, the Company's Board of Directors has specifically authorized
the Compensation Committee of the Company's Board of Directors to take such
action. No such action shall have the effect of:
(i) vesting in the Participating Companies any interest in any
property of the Trust; or,
(ii) retroactively depriving any Participant or Beneficiary of
any amount credited to the Participant's or Beneficiary's Accounts, except as
provided in Section 19(c) or as otherwise permitted by law.
(c) Amendment Required for Qualification. All provisions of this
------------------------------------
Plan, and all benefits and rights granted hereunder, are subject to any
amendments, modifications or alterations which are
52
<PAGE>
necessary from time to time to qualify the Plan under section 401(a) or 501(a)
of the Code to continue the Plan as so qualified, or to comply with any other
provision of law. Accordingly, notwithstanding Section 19(a) or any other
provision of this Plan, the Company may amend, modify or alter the Plan, with or
without retroactive effect, in any respect or manner necessary to qualify the
Plan under section 401(a) of the Code.
(d) No Reversion of Funds. No part of the Trust Fund shall revert to
---------------------
any Participating Company nor be used for or diverted to purposes other than the
exclusive purpose of providing benefits to Participants and Beneficiaries who
have an interest in the Plan and defraying the reasonable expenses of
administering the Plan; provided, that funds may be returned to Participating
Companies under the following circumstances:
(i) Any contribution made as a result of a mistake of fact may be
refunded to the appropriate Participating Company, providing such refund occurs
within one year after the date of such contribution;
(ii) All employer contributions are expressly conditioned on their
deductibility under section 404 of the Code, and any employer contribution shall
be returned to the appropriate Participating Company, upon its written request,
to the extent that the contribution is disallowed as a deduction, within one
year after such disallowance;
(iii) In the event that the Commissioner of Internal Revenue
determines that the Plan is not initially qualified under the Code, any
contribution made incident to that initial qualification must be returned to the
appropriate Participating Company within one year after the date the initial
qualification is denied, but only if the application for the qualification is
made by the time prescribed by law for filing the Company's return for the
taxable year in which the Plan is adopted, or such later date as the Secretary
of the Treasury may prescribe;
53
<PAGE>
(iv) Amounts held unallocated pursuant to Sections 13(b)(ii) and (iii)
upon termination of the Plan shall be returned to the appropriate Participating
Company.
(e) Full Vesting Upon Termination. Upon termination, partial
-----------------------------
termination or the complete discontinuance of Company Contributions to the Plan
(the "terminating events") the account balance of each affected Participant
shall be 100% vested and nonforfeitable. In the event a terminating event
occurs, no part of the Trust Fund shall revert to any Participating Company or
be used for or diverted to purposes other than providing benefits to
Participants and Beneficiaries and defraying the reasonable expenses of
administering the Plan and the Trust Fund. Upon the occurrence of a terminating
event the Trust shall continue until the Trust Fund has been distributed as
provided in Section 11 subject to section 403(d)(1) of ERISA provided, however,
that in the event of a partial termination the Trust shall continue with respect
to unaffected Participants and Beneficiaries notwithstanding any distributions
made as a result of the partial termination to affected Participants and
Beneficiaries.
SECTION 20. MISCELLANEOUS
-------------
(a) Inalienability of Rights. The interest and property rights of any
------------------------
person in the Plan, in the Trust Fund or in any distribution to be made under
the Plan shall not be subject to option nor be assignable, either by voluntary
or involuntary assignment or by operation of law, including (without limitation)
bankruptcy, garnishment, attachment or other creditor's process, and any act in
violation hereof shall be void. Notwithstanding the foregoing, the creation,
assignment or recognition of a right to all or any portion of a Participant's
Plan Benefit made pursuant to a state domestic relations order shall not
constitute a violation of this Section 20(a), provided that such order is
determined to be a "qualified domestic relations order" (as defined in section
414(p) of the Code) under written procedures adopted by the Plan Administrator.
54
<PAGE>
(b) Plan Mergers. The Plan shall not merge or consolidate with, nor
------------
transfer assets or liabilities to, any other plan unless each Participant would
receive a Plan Benefit immediately after the merger, consolidation or transfer
(if the Plan then terminated) which is equal to or greater than the Plan Benefit
such Participant would have been entitled to receive immediately before the
merger, consolidation or transfer (if the Plan had then terminated).
(c) Payments to and from the Plan. All Employee and Company
-----------------------------
Contributions shall be paid to the Trustee for investment and reinvestment as
part of the Trust Fund pursuant to the Trust Agreement. All benefits and
withdrawals payable under the Plan shall be paid out of the Trust Fund by the
Trustee pursuant to the directions of the Plan Administrator and the terms of
the Trust Agreement.
(d) No Right in Trust Fund or to Employment. No person shall have any
---------------------------------------
rights in or to the Trust Fund, or any part thereof, or under the Plan, except
as, and only to the extent, expressly provided for in the Plan. The
establishment of the Plan, the granting of benefits and any action of any member
of the Affiliated Group or any other person shall not be held or construed to
confer upon any person any right to be continued as an Employee nor to confer
any right or interest in the Trust Fund other than as provided herein. No
provision of the Plan shall restrict the right of any member of the Affiliated
Group to discharge any Employee at any time, with or without cause.
(e) Competency to Handle Benefits. If, in the opinion of the Plan
-----------------------------
Administrator, any person becomes unable to handle properly any property
distributable to such person under the Plan, the Plan Administrator may make any
reasonable arrangement for distribution on such person's behalf as it deems
appropriate.
(f) Governing Law. This Plan shall be construed in accordance with
-------------
ERISA and, to the extent permissible under ERISA, the laws of the State of New
York.
55
<PAGE>
SECTION 21. DEFINITIONS
-----------
When used herein, the following terms shall have the following
meanings unless the context clearly indicates a different meaning:
"Accounts" means any or all of the Accounts maintained for a
--------
Participant pursuant to Section 8.
"Affiliated Group" means any trade or business (including any
----------------
Participating Company), whether or not incorporated, which, at the time of
reference controls, is controlled by or under common control with a
Participating Company, within the meaning of sections 414(b) or 414(c) of the
Code, or is a member of an affiliated service group which includes a
Participating Company, within the meaning of section 414(m) of the Code. To the
extent required by law, all employees of all corporations which are members of a
controlled group of corporations (as defined in section 414(b) of the Code) and
all employees of all trades and businesses (whether or not incorporated) which
are under common control (as defined in section 414(c) of the Code) will be
treated as employed by a single employer.
"Allstate" means The Allstate Corporation, an Illinois corporation.
--------
"Allstate Stock" means the common stock of Allstate, par value $.01
--------------
per share.
"Allstate Stock Fund" means the separate part of the Trust Fund that
-------------------
is invested as provided in Section 7(c)(iv).
"Basic Accounts" means (to the extent applicable) the Basic Pretax
--------------
Account and the Basic After-Tax Adjustment Account of a Participant.
"Basic After-Tax Adjustment Account" means the account maintained for
----------------------------------
a Participant pursuant to Section 8(a)(ii).
"Basic After-Tax Adjustment Contributions" means the contributions so
----------------------------------------
described in Section 5.
56
<PAGE>
"Basic Contributions" means Basic Pretax Contributions and Basic
-------------------
After-Tax Adjustment Contributions.
"Basic Pretax Account" means the account maintained for a Participant
---------------------
pursuant to Section 8(a)(i).
"Basic Pretax Contributions" means the contributions so described in
---------------------------
Section 5.
"Beneficiary" means the person or persons (which may include one or
-----------
more trusts) designated by a Participant pursuant to section 11(e).
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time.
"Company" means Dean Witter Reynolds Inc., a Delaware corporation.
-------
"Company Accounts" means (to the extent applicable) the Matching
----------------
Contribution Account and the Qualified Company Contribution Account.
"Common Stock" means the common stock of Dean Witter, Discover & Co.,
--------------
a Delaware corporation, par value $.01 per share.
"Credit Services Employee" means an Employee who is either:
--------------------------
(a) a United States or Puerto Rico Employee employed by NOVUS Credit
Services Inc. ("NCSI") or any subsidiary of NCSI which is both a member of the
Affiliated Group and a Participating Company;
(b) an Employee employed by any other member of the Affiliated Group
whose services are primarily rendered to NCSI or a subsidiary of NCSI; or
(c) an Employee, or classification of Employees, who has been
designated in writing by the Plan Administrator as a Credit Services Employee.
"Dean Witter Discover Stock Fund" means that part of the Trust Fund
-------------------------------
invested as provided in Section 7(c)(i).
57
<PAGE>
"Determination Year" means a Plan Year.
------------------
"DWD" means Dean Witter, Discover & Co. (the successor of Dean Witter
---
Financial Services Inc., the successor of Dean Witter Reynolds Organization
Inc.), a Delaware corporation, and, where appropriate, also means the
predecessor corporations as they existed prior to the 1981 merger with, and the
1993 Spin-off from, Sears.
"Earnings" means the sum of:
----------
(i) cash compensation paid as salary (including but not
limited to overtime, double time, shift premiums, supplemental earnings,
additional earnings, LA trip pay, weekend, holiday and vacation pay and any
retroactive pay), commission (including but not limited to sales commissions,
trails, deferred payouts, referral fees, finders fees, futures overrides,
residuals and retroactive commissions), bonus (including but not limited to
annual incentive bonuses, long term incentive payouts, results sharing, gain
sharing and payouts of deferred cash bonuses) or a cash award (including but not
limited to contests, incentive and performance awards);
(ii) any amounts contributed to the Plan as Basic Pretax or
Supplemental Pretax Contributions; and
(iii) any employee contributions to a plan maintained by any
member of the Affiliated Group which is intended to meet the requirements of
Code section 125.
Notwithstanding anything contained herein to the contrary, the term
"Earnings" shall exclude:
(i) any Earnings paid to an Employee for any period prior to
the date such Employee becomes a Participant or for any period during which such
Employee is not an Immediately Eligible Employee or an Eligible Employee;
58
<PAGE>
(ii) any non-cash compensation (including but not limited to
merchandise, trips, goods and services);
(iii) imputed income (including but not limited to group term
life insurance premiums, forgiven loans, employee discounts and the personal use
of Company vehicles, equipment, facilities or services);
(iv) cash payments made to or on behalf of an Employee for an
employment related expense (including but not limited to relocation expenses,
club dues, preventive care or other medical expense reimbursements);
(v) benefits paid under any plan, or pursuant to any payroll
practice, maintained by any member of the Affiliated Group on account of or
following the Retirement, Disability or death of an Employee, a spouse of an
Employee or a dependent of an Employee (except that "Earnings" shall include
payments of salary or commission earned by such Employee prior to but paid after
such Employee's Retirement, Disability or death); and
(vi) compensation recognized by an Employee on account of the
granting, exercise, vesting or delivery of an award under any equity-based
compensation plan maintained by any member of the Affiliated Group (including
dividends and other earnings paid as a result of such awards, payments of cash
pursuant to an award determined by the value or performance of a security and
payments of cash in lieu of fractional shares).
Notwithstanding any other provision of the Plan to the contrary, for
Plan Years beginning on or after January 1, 1994, the annual compensation of
each Participant taken into account under the Plan shall not exceed $150,000 or
such other amount required by Code section 401(a)(17), as adjusted by the
Commissioner of Internal Revenue for increases in the cost-of-living in
accordance with Code section 401(a)(17).
59
<PAGE>
In determining the compensation of a Participant for purposes of this
limitation the rules of section 414(g)(6) of the Code shall apply, except that
in applying such rules the term "family" shall include only the spouse of the
Participant and the lineal descendants of the Participant who have not attained
age 19 before the close of the Plan Year. Notwithstanding the foregoing, for
purposes of determining whether an individual is a Highly Compensated Employee
or a member of the Top Paid Group, Earnings shall be determined without regard
to the limits imposed by Code section 401(a)(17).
"Elective Deferrals" means elective deferrals within the meaning of
------------------
section 402(g)(2) of the Code.
"Eligible Employee" means (i) any Employee of a Participating Company
-----------------
and (ii) any Employee of a member of the Affiliated Group who has been
designated in writing by the Plan Administrator as an Eligible Employee;
provided, in either case, that such Employee shall have both attained age 21 and
completed at least one Year of Service. An Employee shall not be an Eligible
Employee with respect to any period;
(A) during which the Employee accrues benefits (whether or not
vested) with respect to compensation that constitutes Earnings hereunder under
any funded retirement plan to which contributions have been made by any member
of the Affiliated Group (other than this Plan, the Dean Witter Reynolds Inc.
Pension Plan or Federal Social Security),
(B) during which the Employee is covered by a collective
bargaining agreement with respect to which a member of the Affiliated Group is a
party, except to the extent that such agreement provides that Employees covered
thereby shall be considered to be Eligible Employees as to such period, or
(C) during which the Employee is an Employee solely by reason
of the application of section 414(n) or (o) of the Code, or
60
<PAGE>
(D) during which the Employee is a nonresident alien (within
the meaning of Code section 7701(b)(1)(B)) who received no earned income from
sources within the United States (within the meaning of Code section 861(a)(3)).
An individual's status as an Eligible Employee or an Immediately Eligible
Employee shall be determined by the Plan Administrator and, such determination
shall be conclusive and binding upon all persons.
"Employee" means any individual employed by any member of the
--------
Affiliated Group or any other employer required to be aggregated with any member
of the Affiliated Group under sections 414(b), (c), (m) or (o) of the Code. The
term Employee shall also include any Leased Employee deemed to be an employee of
any such employer as provided in section 414(n) or (o) of the Code.
"Employee Accounts" means (to the extent applicable) the Basic
-----------------
Accounts and the Supplemental Accounts.
"Entry Date" means:
------------
(a) with respect to an Immediately Eligible Employee, either the
first practicable pay date following such Employee's Employment Commencement
Date or any pay date thereafter; or
(b) with respect to an Eligible Employee, either the first
practicable pay date following such Employee's completion of the age and service
requirements set forth in Section 2(a) or any pay date thereafter.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Excess Aggregate Contributions" means the amount by which
------------------------------
Contributions made by or on behalf of Highly Compensated Employees exceed the
limits described in Code section 401(m)(2).
61
<PAGE>
The amount of Excess Aggregate Contributions shall be determined by first
reducing the Actual Contribution Ratio ("ACR"), as defined by section 401(m)(3)
of the Code and regulations thereunder, of the Highly Compensated Employee with
the highest ACR to the extent necessary to satisfy the ACP test described in
Section 5(h) or cause such ratio to equal the ACR of the Highly Compensated
Employee with the next highest ACR and, second, repeating this process until the
ACP test is satisfied. The amount of Excess Aggregate Contributions for a Highly
Compensated Employee is then equal to the total of the Highly Compensated
Employee's Contributions taken into account for purposes of the ACP test minus
the product of the Highly Compensated Employee's reduced ACR as determined above
and the Highly Compensated Employee's Earnings. In the case of a Highly
Compensated Employee whose ACR is determined under the family aggregation rules,
the determination of the amount of Excess Aggregate Contributions shall be made
by allocating the Excess Aggregate Contributions determined under the "leveling"
method described herein among the Family Members in proportion to the
Contributions of each Family Member taken into account for purposes of the ACP
test.
"Excess Contributions" means the amount by which Contributions made by
---------------------
or on behalf of Highly Compensated Employees exceed the limits described in Code
section 401(k)(3). The amount of Excess Contributions shall be determined by
first reducing the Actual Deferral Ratio ("ADR") as defined by section
401(k)(3)(B) of the Code and regulations thereunder of the Highly Compensated
Employee with the highest ADR to the amount necessary to satisfy the ADP test
described in Section 5(f) or cause such ratio to equal the ADR of the Highly
Compensated Employee with the next highest ADR and, second, repeating this
process until the ADP test is satisfied. The amount of Excess Contributions for
a Highly Compensated Employee is then equal to the total of Elective Deferrals
and other Contributions taken into account for the ADP test minus the product of
the Highly Compensated Employee's reduced ADR as determined above and the Highly
Compensated Employee's Earnings. In
62
<PAGE>
the case of a Highly Compensated Employee whose ADR is determined under the
family aggregation rules, the determination of the amount of Excess
Contributions shall be made by allocating the Excess Contributions determined
under the "leveling" method described herein among the Family Members in
proportion to the Contributions of each Family Member taken into account for
purposes of the ADP test.
"Excess Elective Deferrals" means those Elective Deferrals that are
-------------------------
includible in a Participant's gross income under section 402(g) of the Code to
the extent such Participant's Elective Deferrals for a taxable year exceed the
dollar limitation under such Code section.
"Family Member" means a spouse, lineal ascendant, lineal descendent or
--------------
spouse of a lineal ascendant or lineal descendent of a Highly Compensated
Employee.
"Five Percent Owner" means any person who owns (or is considered as
------------------
owning within the meaning of Code Section 318) more than five percent of the
outstanding stock of an Affiliated Group member or stock possessing more than
five percent of the total combined voting power of all stock of an Affiliated
Group member or, in the case of an unincorporated business, any person who owns
more than five percent of the capital or profits interest in an Affiliated Group
member. In determining percentage of ownership hereunder, Affiliated Group
members that would otherwise be aggregated under Code sections 414(b), (c), (m)
and (o) shall be treated as separate employers.
"Highly Compensated Active Employee" means any individual who is an
----------------------------------
Employee during the Determination Year and who, during the Look-back Year:
(1) received Earnings in excess of $75,000 (as adjusted
pursuant to section 415(d) of the Code);
(2) received Earnings in excess of $50,000 (as adjusted
pursuant to section 415(d) of the Code) and was a member of the Top Paid Group;
or
63
<PAGE>
(3) was an officer of any member of the Affiliated
Group and received Earnings greater than 50 percent of the dollar limitation in
effect under section 415(b)(l)(A) of the Code provided that the number of
Employees classified as officers hereunder shall not exceed the lesser of (i)
50 or (ii) the greater of 3 or 10 percent of all Employees and further provided
that if no officer satisfies the compensation requirement set forth herein
during either the Look-back Year or the Determination Year the highest paid
officer for such year shall be a Highly Compensated Active Employee.
In determining who is a Highly Compensated Active Employee, the
Company may elect to substitute $50,000 for $75,000 in l above and not apply 2
above provided that the Affiliated Group maintains significant business
activities in at least two significantly separate geographic areas and meets
such other requirements as the Secretary of the Treasury may prescribe.
The term "Highly Compensated Active Employee" shall also include:
(4) An Employee who is both (i) described in 1, 2 or 3
above if the term "Determination Year" is substituted for the term "Look-back
Year" and (ii) one of the 100 Employees who received the most earnings during
the Determination Year;
(5) An Employee who is a Five Percent Owner at any time
during the Determination Year or the Look-back Year; or
(6) An Employee who during a Determination Year or a
Look-back Year is a Family Member of either (i) a Five Percent Owner who is an
active or former employee or (ii) a Highly Compensated Active Employee who is
one of the ten employees who received the most Earnings during such year
provided, however, that the Family Member and the Five Percent Owner or top ten
highly compensated employee shall be treated as a single Highly Compensated
Active Employee
64
<PAGE>
whose earnings, benefits and contributions is the sum of such compensation,
benefits and contributions of the Family Member and the Five Percent Owner or
top ten highly compensated employee.
"Highly Compensated Employee" means a Highly Compensated Active
---------------------------
Employee or a Highly Compensated Former Employee.
"Highly Compensated Former Employee" means a former Employee who
-----------------------------------
terminated employment prior to the Determination Year and was a Highly
Compensated Active Employee in the year of termination of employment or in any
Determination Year after attaining age 55. Notwithstanding the foregoing, an
Employee who terminated employment prior to 1987 will be treated as a Highly
Compensated Former Employee only if during the year (or year preceding the
termination) or any year after the Employee attains age 55 (or the last year
ending before the Employee's 55th birthday), the Employee either received
Earnings in excess of $50,000 (as adjusted pursuant to section 415(d) of the
Code) or was a Five Percent Owner. Highly Compensated Former Employees shall be
treated as Highly Compensated Employees. The method set forth in this section
for determining who is a Highly Compensated Former Employee shall be applied on
a uniform and consistent basis for all purposes for which the Code section
414(q) definition is applicable.
"Hour of Service" means an Hour of Service as defined in Section 3(a).
---------------
"Immediately Eligible Employee" means a full-time or flex full-time
-------------------------------
Credit Services Employee, a full-time Securities Employee, a part-time
Securities Employee regularly scheduled to perform at least 30 Hours of Service
a week or such other Employee, or classification of Employees, who have been so
designated by the Plan Administrator.
"Investment Funds" means the Dean Witter Discover Stock Fund and such
----------------
other Investment Funds as are designated under Section 7(c)(iii) but shall not
include the Sears Stock Fund or the Allstate Stock Fund.
65
<PAGE>
"Leased Employee" means any person (other than an employee of the
---------------
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with section
414(n)(6) of the Code) on a substantially full time basis for a period of at
least one year, and such services are of a type historically performed by
employees in the business field of the recipient employer. Contributions or
benefits provided a leased employee by the leasing organization which are
attributable to services performed for the recipient employer shall be treated
as provided by the recipient employer. A leased employee shall not be
considered an employee of the recipient if:
(i) such employee is covered by a money purchase pension
plan providing:
(1) a nonintegrated employer contribution rate of at
least 10 percent of compensation, as defined in section 415(c)(3) of the Code,
but including amounts contributed by the employer pursuant to a salary reduction
agreement which are excludable from the employee's gross income under sections
125, 402(a)(8), 402(h) or 403(b) of the Code,
(2) immediate participation, and (3) full and
immediate vesting; and
(ii) leased employees do not constitute more than 20 percent
of the recipient's nonhighly compensated workforce.
"Look-back Year" means the twelve month period immediately preceding a
---------------
determination year.
"Matching Contribution Account" means the account maintained for a
-----------------------------
Participant pursuant to section 8(a)(v).
66
<PAGE>
"Matching Contributions" means contributions to the Plan made by any
----------------------
Participating Company and allocated to a Participant's Account by reason of his
or her Basic Contributions that are subject to the vesting provisions set forth
in Section 10(a).
"One Year Break" means a One Year Break as defined in Section 3(a).
--------------
"Participant" means an individual so described in Section 2.
-----------
"Participating Company" means the Company and any member of the
---------------------
Affiliated Group that has been designated in writing as a Participating Company
by the Company and has accepted such designation in writing.
"Period of Service" means the period as defined in Section 3(a).
-----------------
"Period of Severance" means a Period of Severance as defined in
-------------------
Section 3(a).
"Plan" means the Dean Witter START Plan (Saving Today Affords
----
Retirement Tomorrow), including Supplements A, B, C, D and E, as amended from
time to time.
"Plan Administrator" means Dean Witter Reynolds Inc., a Delaware
------------------
corporation.
"Plan Benefit" means the amount so described in Section 10.
------------
"Plan Year" means the twelve-month period ending December 31.
---------
"Qualified Company Contribution Account" means the Account maintained
--------------------------------------
for a Participant pursuant to Section 8(a)(vi).
"Qualified Matching Contributions" means contributions to the Plan
--------------------------------
made by any Participating Company and allocated to a Participant's Account by
reason of his or her Basic Contributions that are nonforfeitable when made.
"Qualified Non-Elective Contributions" means contributions (other than
------------------------------------
Matching Contributions or Qualified Matching Contributions) made by any
Participating Company on behalf of any or all Immediately Eligible Employees or
Eligible Employees that are nonforfeitable when made.
67
<PAGE>
"Qualified Plan Transfer Contributions" means the contributions so
-------------------------------------
described in Section 9(b).
"Quarter" means a calendar quarter ending March 31, June 30, September
-------
30, or December 31.
"Release" means any termination of an Employee's employment which is
-------
initiated by a member of the Affiliated Group by reason of its decision to close
permanently a branch office or other facility, or to reduce permanently the
number of Employees which it employs due to substantial change in economic
conditions.
"Retirement" means termination of an Employee's employment with the
----------
Affiliated Group upon or after the date he would be eligible to retire
immediately under the Dean Witter Reynolds Inc. Pension Plan.
"Rollover Contributions" means contributions to the Plan made by a
----------------------
Participant which qualify for rollover treatment under section 402(a)(5),
403(a)(4) or 408(d)(3)(A)(ii) of the Code.
"Sears" means Sears, Roebuck and Co., a New York corporation.
-----
"Sears Common Shares" means the common stock, par value $.075, of
-------------------
Sears.
"Sears Stock Fund" means that part of the Trust Fund invested as
----------------
provided in Section 7(c)(ii).
"Securities Employee" means:
--------------------
(a) a United States or Puerto Rico Employee employed by Dean
Witter Reynolds Inc., Dean Witter Realty Inc., Dean Witter InterCapital Inc.,
Dean Witter Distributors Inc., Dean Witter Trust Company or any of their direct
or indirect subsidiaries which subsidiaries are members of the Affiliated Group;
68
<PAGE>
(b) an Employee of Dean Witter, Discover & Co. or any of its
directly or indirectly owned subsidiaries, other than NCSI and its subsidiaries,
which subsidiaries are members of the Affiliated Group and which Employee is
engaged primarily in securities-related activities; or
(c) an Employee, or classification of Employees, who has been
designated in writing by the Plan Administrator as a Securities Employee.
"Spin-off" means the distribution by Sears of all of the shares of
--------
Common Stock owned by Sears, to the shareholders of Sears.
"SPS Stock" means the common stock of SPS Transaction Services, Inc.,
----------
par value $.01 per share.
"SPS Stock Fund" means the separate part of the Trust Fund that is
--------------
invested as provided in Section 7(c)(v).
"Stock" means Common Stock, Sears Common Shares, SPS Stock, Allstate
-----
Stock or any combination thereof.
"Supplemental Accounts" means (to the extent applicable) the
---------------------
Supplemental After-Tax Account and the Supplemental Pretax Account of a
Participant.
"Supplemental After-Tax Account" means the Account maintained for a
------------------------------
Participant pursuant to Section 8(a)(iv).
"Supplemental Pretax Contributions" means the Contributions so
----------------------------------
described in Section 5.
"Supplemental Pretax Account" means the account maintained for a
----------------------------
Participant pursuant to Section 8(a)(iii).
"Termination of Employment" and similar references mean an Employee's
-------------------------
ceasing to be employed by any member of the Affiliated Group (and, where
applicable, any other entity required to
69
<PAGE>
be aggregated with the Employer pursuant to Code section 414(o) and the
regulations thereunder) for any reason other than death. A transfer between
employment of members of the Affiliated Group (or, where applicable, such other
entity) shall not be a termination of employment.
"Top Paid Group" means the top twenty percent of employees who
--------------
performed services for the Affiliated Group during the applicable year ranked
according to the amount of Earnings received from the Affiliated Group during
such year. For purposes of this definition Leased Employees shall be considered
Employees unless such Leased Employees are covered by a plan described in Code
section 414(n)(5) and are not covered in any qualified plan maintained by the
Affiliated Group. Employees who are nonresident aliens and who received no
earned income within the meaning of Code section 911(d)(2) from the Affiliated
Group constituting United States source income within the meaning of Code
section 861(a)(3) shall not be treated as Employees. Additionally, for the
purpose of determining the number of active Employees in any year the following
additional Employees shall also be excluded; however, such Employees shall still
be considered for the purpose of identifying the particular Employees in the Top
Paid Group:
(1) Employees with less than six months of service;
(2) Employees who normally work less than 17 1/2 hours
per week;
(3) Employees who normally work less than six months
during a year;
(4) Employees who have not yet attained 21; and,
(5) except to the extent provided in regulations,
Employees who are included in a unit of employees covered by an agreement which
the Secretary of Labor finds to be a collective bargaining agreement between
employee representatives and any member of the Affiliated Group.
70
<PAGE>
"Total and Permanent Disability" (or "Totally and Permanently
------------------------------
Disabled") means that, due to a medically determinable physical or mental
impairment which is reasonably expected to last for a continuous period of not
less than twelve months or to result in death, the Employee is unable to perform
his or her regularly assigned job or another job for which the Employee will be
paid Earnings approximately equivalent to the Earnings paid with respect to such
regularly assigned job. The Plan Administrator shall determine whether a person
ceased to be an Employee by reason of Total and Permanent Disability based on
competent medical evidence and, subject to Section 17, such determination shall
be conclusive on all parties.
"Trust" means the trusts created by the Trust Agreement.
-----
"Trust Agreement" means any trust agreement entered into between the
---------------
Company and a Trustee, as amended from time to time.
"Trustee" means one or more persons appointed by the Company to act as
-------
a trustee under the Plan (provided each person so appointed accepts such
appointment pursuant to a Trust Agreement) and any successor trustee or trustees
appointed from time to time who so accept such appointment.
"Trust Fund" means the trust fund or trust funds established pursuant
----------
to the Trust Agreement to hold and reflect all assets of the Plan (and the
income, gains or losses attributable thereto).
"Valuation Date" means the last day of any Quarter on which the New
--------------
York Stock Exchange was open and Stock was traded and such other dates as the
Plan Administrator shall determine.
"Year of Service" means a Year of Service as defined in Section 3(g).
---------------
SECTION 22. EXECUTION
---------
71
<PAGE>
To record the amendment and restatement of the Plan to read as set
forth herein, the Company has caused its authorized officers to affix the
corporate name and seal hereto, effective as of January 1, 1997.
DEAN WITTER REYNOLDS INC.
By_____________________________________
72
<PAGE>
DEAN WITTER START PLAN
----------------------
(Saving Today Affords Retirement Tomorrow)
------------------------------------------
SUPPLEMENT A
------------
SPECIAL CONTRIBUTION
--------------------
1. Establishment and Purpose. This Supplement A is established,
-------------------------
effective as of October 16, 1981, to provide for the special contribution (the
"Special Contribution") to the Plan by DWRO which was authorized by the Board of
Directors of DWRO by resolution adopted October 8, 1981 (the "October 8
Resolution"). This Supplement A is a part of the Plan and, except as otherwise
provided herein, shall be construed and administered in accordance with the
terms of the Plan.
2. Amount and Time of Special Contribution. The amount of the
---------------------------------------
Special Contribution shall be determined in accordance with the October 8
Resolution and shall be paid to the Trustee as soon as reasonably practicable
after October 30, 1981.
3. Allocation. The Special Contribution shall be allocated, as of
----------
November 30, 1981, to the Company Contribution Accounts of Participants who
received (or are entitled to receive) an allocation of the Company Contribution
for the Plan Year ended August 31, 1981, and of Participants who made Employee
Contributions to the Plan during the month of September, 1981. The amount
allocated to each such Participant's Company Contribution Account shall be
determined by multiplying the entire Special Contribution by a fraction, the
numerator of which is the sum of (a) the amount of the Participant's Employee
Contributions to the Plan during the Plan Year ended August 31, 1981 and (b) the
amount of the Participant's Employee Contributions to the Plan during the month
of September 1981, minus the amount of any such Employee Contributions that the
Participant had withdrawn from
A-i
<PAGE>
the Plan (in accordance with Section 13 of the Plan) by October 6, 1981, and the
denominator of which is the sum of all such Employee Contributions made by all
such Participants during such periods, minus the total amount of all such
Employee Contributions so withdrawn.
4. Source of Special Contribution. The Special Contribution shall
------------------------------
be made out of the Net Income of DWRO for the Plan Year ending December 31,
1981, or, to the extent necessary, out of the retained earnings of DWRO as of
such date.
5. Treatment of Special Contribution. Except as otherwise provided
---------------------------------
above, for all purposes under the Plan (including the determination of vesting
under Section 11(b)), the Special Contribution provided under this Supplement
shall be treated as if it were a Company Contribution to the Plan for the Plan
Year ending December 31, 1981. The Special Contribution shall be held and
administered as part of the Trust Fund in accordance with the terms of the Plan
(including this Supplement A) and the Trust Agreement.
6. Definitions. All terms used in this Supplement A, other than
-----------
those defined herein, shall have the same meaning such terms have as used or
defined in the Plan.
A-ii
<PAGE>
DEAN WITTER START PLAN
----------------------
(Saving Today Affords Retirement Tomorrow)
------------------------------------------
SUPPLEMENT B
------------
PAYROLL-BASED EMPLOYEE STOCK OWNERSHIP PLAN
-------------------------------------------
The Payroll-Based Employee Stock Ownership Plan (the "PAYSOP") was
established effective January 1, 1983. Contributions to the PAYSOP were
discontinued effective January 1, 1987. The PAYSOP was terminated effective
December 31, 1991 and all assets held in the PAYSOP were distributed to
Participants and Beneficiaries on or about November 4, 1993.
B-i
<PAGE>
DEAN WITTER START PLAN
----------------------
(Saving Today Affords Retirement Tomorrow)
------------------------------------------
SUPPLEMENT C
------------
TOP-HEAVY PROVISIONS
--------------------
Section 1. Top-Heavy Provisions.
(1) Determination of Top-Heavy Status. Notwithstanding any other
---------------------------------
provision of the Plan to the contrary, the following provisions shall become
effective for any Plan Year after the Plan Year ending December 31, 1983 in
which the Plan is a Top-Heavy Plan.
(2) Minimum Allocations. Notwithstanding any other provision of the
-------------------
Plan to the contrary, for any Plan Year during which the Plan is a Top-Heavy
Plan, the Company contributions and allocable Forfeitures (and for any Plan Year
commencing on or after January 1, 1985, the Basic Pretax Contributions)
allocated on behalf of any Participant who is employed on the last day of the
Plan Year and who is not a Key Employee shall not be less than a percentage of
such Participant's Compensation equal to the lesser of (i) three percent, or
(ii) the largest percentage of Compensation (as limited by Section 1(e) of this
Supplement C) that is allocated to any Key Employee for that Plan Year of
Company contributions and allocable Forfeitures (and, for Plan Years beginning
on or after January 1, 1985, Basic Pretax Contributions). This minimum
allocation shall be determined without regard to any contributions made or
benefits available under the Social Security Act, and shall be made even though,
under other Plan provisions, the Participant would not be entitled to receive an
allocation or would have received a lesser allocation for the Plan Year because
of (i) the Participant's failure to complete a Year of Service, or (ii) the
Participant's failure to make mandatory Participant contributions
C-i
<PAGE>
to the Plan, or (iii) the Participant's receipt of Earnings in an amount less
than the minimum required by the Plan for a Participant to qualify for an
allocation of Company contributions or Forfeitures.
(3) Minimum Vesting. Notwithstanding any provision of Section 10 of
---------------
the Plan to the contrary, if a Participant (other than a Participant who did not
complete any Period of Service after the Plan became a Top-Heavy Plan)
terminates employment with the Affiliated Group while the Plan is a Top-Heavy
Plan, and after such Participant has completed three or more Years of Service,
such Participant shall be 100 percent vested in the balance of his or her
Company Contribution Account. If a Participant terminates employment with the
Affiliated Group while the Plan is a Top-Heavy Plan and before the Participant
has completed three Years of Service, such Participant's vested percentage in
his or her Company Contribution Account shall be a percentage determined in
accordance with Section 10 of the Plan.
(4) Effect of Change in Top-Heavy Status on Vesting. If the Plan is a
-----------------------------------------------
Top-Heavy Plan at any time and thereafter ceases to be a Top-Heavy Plan, each
Participant who is credited with three or more Years of Service as of December
31 of the last Plan Year in which the Plan is a Top-Heavy Plan shall thereafter
continue to be 100 percent vested in the balance of his or her Company
Contribution Account. Each Participant who is credited with fewer than three
Years of Service as of December 31 of the last Plan Year in which the Plan is a
Top-Heavy Plan shall have his or her vested percentage determined under Section
10 of the Plan (unless and until the Plan again becomes a Top-Heavy Plan)
provided that, as long as such Participant had an hour of Service after the
Plan became a Top-Heavy Plan, no decrease in a Participant's nonforfeitable
percentage may occur in the event the Plan's status as a Top-Heavy Plan alters
during any Plan Year.
(5) Impact of Top-Heavy or Super Top-Heavy Status on Maximum Benefits.
-----------------------------------------------------------------
For any Plan Year in which the Plan is a Top-Heavy Plan or Super Top-Heavy Plan,
the number "1.00" shall
C-ii
<PAGE>
be substituted for the number "1.25" wherever it appears in sections 415(e)(2)
and (3) of the Code; provided, however, that such substitution shall not have
the effect of reducing any benefit accrued under a defined benefit plan
maintained by any member of the Affiliated Group prior to the first day of the
Plan Year in which this provision becomes applicable.
Section 2. Plan Distributions.
------------------
Notwithstanding any other provision of the Plan to the contrary, the
distribution of the Plan Benefit of a Participant who is a five percent owner of
the Company (as defined in section 416(i) of the Code) shall be made no later
than April 1 of the Plan Year following the Plan Year in which he or she attains
age 70-1/2, whether or not he or she is still an Employee. In no event shall
any stock allocated to a Participant's PAYSOP Account (or cash attributable
hereto) that would otherwise be required to be distributed under the preceding
sentence be distributed prior to the earlier of: (a) the date he ceases to be
an Employee, or (b) the last day of the 84th month beginning after the month in
which such stock (or cash) was first allocated to the Participant's PAYSOP
Account.
Section 3. Definitions.
-----------
For purpose of this Supplement C, the following definitions shall
apply:
(a) "Aggregation Group" means a group of qualified plans consisting
-----------------
of:
Each Plan of the Affiliated Group in which a Key Employee participates, and
each other plan of any member of the Affiliated Group that enables any plan in
which a Key Employee participates to meet the requirements of sections 401(a)
(4) and 410 of the Code; or
All plans of the Affiliated Group included under (i), above, plus at the
election of the Company, one or more additional plans of the Affiliated Group
that satisfy the requirements of sec tions 401(a)(4) and 410 of the Code when
considered together with the plans included under (i) above.
C-iii
<PAGE>
(b) "Compensation" means the total compensation actually paid to the
------------
Participant by the Affiliated Group member that employs such Participant, as
reported on the Internal Revenue Service Form W-2 (or its equivalent) issued
with respect to such Participant.
(c) "Determination Date" means, for any Plan Year subsequent to the
------------------
first Plan Year, the last day of the preceding Plan Year, and for the first Plan
Year of the Plan, the last day of such year.
(d) "Key Employee" means any Employee or former Employee (and the
------------
beneficiaries of such Employee) who at any time during the Determination Period
was an officer of the Company or Participating Company if such individual's
average Compensation exceeds 50% of the dollar limitation under section
415(b)(1)(A) of the Code, an owner (or considered an owner under section 318 of
the Code) of one of the ten largest interests in the Company or Participating
Company if such individual's Compensation exceeds 100% of the dollar limitation
under section 415(c)(1)(A) of the Code, a 5% owner of the Company or
Participating Company, or a 1% owner of the Company or Participating Company who
has an Annual Compensation of more than $150,000. "Annual Compensation" means
Compensation as defined in section 415(c)(3) of the Code, but including amounts
contributed by the Company or Participating Company pursuant to a salary
reduction agreement which are excludable from the Employee's gross income under
sections 125, 402(a)(8), 402(h) or 403(b) of the Code. The "Determination
Period" is the Plan Year containing the Determination Date and the four
preceding Plan Years. The determination of who is a Key Employee will be made
in accordance with section 416(i) of the Code and the regulations thereunder.
(e) "Permissive Aggregation Group" means the Required Aggregation
----------------------------
Group of plans plus any other plan or plans of the Company or Participating
Company which, when considered as a
C-iv
<PAGE>
group with the Required Aggregation Group, would continue to satisfy the
requirements of sections 401(a)(4) and 410 of the Code.
(f) "Present Value" shall be computed only using the interest and
-------------
mortality rates specified by the Plan Administrator.
(g) "Required Aggregation Group" means (1) each qualified plan of the
--------------------------
Company or Participating Company in which at least one Key Employee participates
or participated at any time during the Determination Period (regardless of
whether the plan has terminated), and (2) any other qualified plan of the
Company or Participating Company which enables a plan described in (1) to meet
the requirements of sections 401(a)(4) and 410 of the Code.
(h) "Super Top-Heavy Plan" means a Top-Heavy Plan for which the Top-
--------------------
Heavy Ratio exceeds 90%.
(i) "Top-Heavy Plan" means, for any Plan Year beginning after December
--------------
31, 1983, the Plan if any of the following conditions exist:
(A) If the Top-Heavy Ratio for the Plan exceeds 60% and the Plan
is not part of any Required Aggregation Group or Permissive Aggregation Group of
plans;
(B) If the Plan is part of a Required Aggregation Group of plans
but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the
group of plans exceeds 60%; or
If the Plan is a part of a Required Aggregation Group and part of a Permissive
Aggregation Group of plans and the Top-Heavy Ratio for the Permissive
Aggregation Group exceeds 60%.
(j) "Top-Heavy Ratio" means as follows:
---------------
(A) If the Company or Participating Company maintains one or
more defined contribution plans (including any simplified employee pension
plans) and the Company or Participating Company has not maintained any defined
benefit plan which, during the five-year period ending on the
C-v
<PAGE>
Determination Date(s) has or has had Vested Benefits, the Top-Heavy Ratio for
the Plan alone or for the Required Aggregation Groups or Permissive Aggregation
Groups as appropriate is a fraction, the numerator of which is the sum of the
account balances of all Key Employees as of the Determination Date(s) (including
any part of any account balance distributed in the five-year period ending on
the Determination Date(s)), and the denominator of which is the sum of all
account balances (including any part of any account balance distributed in the
five-year period ending on the Determination Date(s)), both computed in
accordance with section 416 of the Code and the regulations thereunder. Both
the numerator and the denominator of the Top-Heavy Ratio are increased to
reflect any contribution not actually made as of the Determination Date, but
which is required to be taken into account on that date under section 416 of the
Code and the regulations thereunder.
(B) If the Company or Participating Company maintains one or
more defined contribution plans (including any simplified employee pension
plans) and the Company or Participating Company maintains or has maintained one
or more defined benefit plans which, during the five-year period ending on the
Determination Date(s) has or has had any Vested Benefits, the Top-Heavy Ratio
for any Required Aggregation Groups or Permissive Aggregation Groups as
appropriate is a fraction, the numerator of which is the sum of the account
balances under the aggregated defined contribution plan or plans for all Key
Employees, determined in accordance with (i) above, and the Present Value of
accrued benefits under the aggregated defined benefit plan or plans for all Key
Employees as of the Determination Date(s), and the denominator of which is the
sum of the account balances under the aggregated defined contribution plan or
plans for all Participants, determined in accordance with (i) above, and the
Present Value of accrued benefits under the defined benefit plan or plans for
all Participants as of the Determination Date(s), all determined in accordance
with section 416 of the Code and the regulations thereunder. The accrued
benefits under a defined benefit plan in both the numerator
C-vi
<PAGE>
and denominator of the Top-Heavy Ratio are increased for any distribution of an
accrued benefit made in the five-year period ending on the Determination Date.
(C) For purposes of (i) and (ii) above, the value of account
balances and the Present Value of accrued benefits will be determined as of the
most recent valuation date that falls within or ends with the twelve-month
period ending on the Determination Date, except as provided in section 416 of
the Code and the regulations thereunder for the first and second plan years of a
defined benefit plan. The account balances and accrued benefits of a
Participant (1) who is not a Key Employee but who was a Key Employee in a prior
year, or (2) who has not been credited with at least one hour of service with
any Company or Participating Company maintaining the Plan at any time during the
five-year period ending on the Determination Date will be disregarded. The
calculation of the Top-Heavy Ratio, and the extent to which distributions,
rollovers, and transfers are taken into account will be made in accordance with
section 416 of the Code and the regulations thereunder. Deductible Employee
contributions will not be taken into account for purposes of computing the Top-
Heavy Ratio. When aggregating plans the value of account balances and accrued
benefits will be calculated with reference to the Determination Dates that fall
within the same calendar year.
The accrued benefit of a Participant other than a Key Employee shall
be determined under (x) the method, if any, that uniformly applies for accrual
purposes under all defined benefit plans maintained by the Company or
Participating Company, or (y) if there is no such method, as if such benefit
accrued not more rapidly than the slowest accrual rate permitted under the
fractional rule of section 411(b)(1)(C) of the Code.
(k) "Valuation Date" means the date elected by the Company or
--------------
Participating Company as of which account balances or Vested Benefits are valued
for purposes of calculating the Top-Heavy Ratio, which is December 31 of each
year.
C-vii
<PAGE>
DEAN WITTER START PLAN
----------------------
(Saving Today Affords Retirement Tomorrow)
------------------------------------------
SUPPLEMENT D
------------
PARTICIPANTS RESIDING IN PUERTO RICO
------------------------------------
1. Establishment and Purpose. This Supplement D is established effective
-------------------------
July 1, 1990, to provide for the inclusion of Puerto Rico resident employees of
Dean Witter Reynolds, Inc. (in Puerto Rico) and of Dean Witter Puerto Rico, Inc.
in the Plan. Such participants will be subject to the provisions of the Plan to
which this Supplement D is attached, except as noted below in this Supplement D.
2. New Definitions. For the purposes of this Supplement, certain terms
---------------
are defined and added to Section 21 of the plan document to which this
Supplement is attached.
"Puerto Rico Code" means the Puerto Rico Income Tax Act of 1954, as
----------------
amended from time to time.
"Puerto Rico Highly Compensated Employee" means any Employee residing
---------------------------------------
in Puerto Rico who is "highly compensated" within the meaning of Section 165(e)
of the Puerto Rico Code.
"Puerto Rico Participant" means an individual described in Section 2
-----------------------
of the plan document and who is a resident of Puerto Rico.
3. Altered Definitions. For the purposes of this Supplement only,
-------------------
certain definitions contained in Section 21 of the plan document are altered as
follows:
(a) "Earnings" means the sum of: (i) total compensation paid to an
--------
Employee by any Participating Company which is subject to tax under the Code, or
any successor provision thereto (or which would be subject to tax thereunder if
the Employee were fully subject to income tax with respect to such
compensation). For an Employee who is a resident of Puerto Rico, "Earnings"
shall mean total
D-i
<PAGE>
compensation paid to the Employee by any Participating Company which is subject
to tax under the Puerto Rico Code, as amended. In either case, "Earnings"
excludes any such compensation paid to the Employee for any period prior to the
date he or she becomes a Participant or for any period during which he or she is
not an Eligible Employee; plus (ii) any amounts contributed to the Plan by such
Employee as Basic Pretax and Supplemental Pretax Contributions, plus (iii) for
any Plan Year commencing after December 31, 1988, compensation deferred under a
plan intended to qualify under section 125 of the Code. Effective January l,
1989, the annual total compensation of a Participant that may be taken into
account under the Plan as Earnings for any Plan Year shall not exceed $200,000,
as adjusted by the Secretary of the Treasury at the same time and in the same
manner as under section 415(d) of the Code. In determining the compensation of a
Participant for purposes of this limitation the rules of Section 414(g)(6) of
the Code shall apply, except that in applying such rules the term "family" shall
include only the spouse of the Participant and the lineal descendants of the
Participant who have not attained age 19 before the close of the Plan Year.
(b) "Elective Deferrals" means elective deferrals within the meaning
------------------
of Section 401(k) of the Code or within the meaning of Section 165(e) of the
Puerto Rico Code.
(c) "Employee" means any individual employed by any member of the
--------
Affiliated Group or any other employer required to be aggregated with any member
of the Affiliated Group under Sections 414(b), (c), (m) or (o) of the Code. The
term "Employee" shall also include any Leased Employee deemed to be an employee
of such employer as provided in Section 414(n) or (o) of the Code. The term
"Employee" shall also include any employee of Dean Witter Reynolds, Inc.
resident in Puerto Rico or any employee of Dean Witter Puerto Rico, Inc.
(d) "Excess Contributions" means excess contributions within the
--------------------
meaning of Section 401(k)(8)(B) of the Code or within the meaning of Section
165(e) of the Puerto Rico Code.
D-ii
<PAGE>
(e) "Excess Elective Deferrals" means those Elective Deferrals that
-------------------------
are incredible in the Participant's gross income under Section 401(k) of the
Code (or that are incredible in the Puerto Rico Participant's gross income under
Section 165(e) of the Puerto Rico Code) to the extent that such Participant's or
Puerto Rico Participant's Elective Deferrals for a taxable year exceed the
dollar limitation under such respective section.
(f) "Participant" means an individual so described in Section 2 of the
-----------
plan document. "Participant" shall include any such individual who resides in
Puerto Rico.
4. Revised Section 4(c) Payment of Company Contributions. For the
-----------------------------------------------------
purposes of this Supplement only, Section 4(c) will read as follows:
(c) Payment of Company Contributions. The portion of the Company
--------------------------------
contribution to be made by each Participating Company for each Plan Year shall
be determined by the Company and shall be paid to the Trustee at such time or
times as the Participating Company shall determine, but in any event before the
date for filing such Participating Company's Federal income tax return for the
Plan Year, including any extension of such date. In the case of the Company
Contribution made by a Participating Company in Puerto Rico on behalf of Puerto
Rico Participants, such a contribution shall be paid before the date for filing
such Participating Company's Puerto Rico income tax return for the Plan Year,
including any extensions of such date.
5. Revised Section 5 Employee Contributions. For the purposes of this
----------------------------------------
Supplement only, Section 5 of the plan document will read as follows:
SECTION 5: Employee Contributions.
----------------------
(a) Basic Contributions and Supplemental Pretax Contributions. Each
Participant who is an Eligible Employee may make Basic Contributions to the Plan
equal to 2%, 4% or 6% of his or her Earnings for the appropriate Plan Year.
Except to the extent provided in Section
D-iii
<PAGE>
5(b) below, each Participants Basic Contributions shall constitute Basic Pretax
Contributions. A Participant who is not a Highly Compensated Employee and who
is making Basic Pretax Contributions equal to 6% of his or her Earnings may
also elect to make Supplemental Pretax Contributions to the Plan equal to any
whole percentage, from 1% to 6% of his or her Earnings. However, for a Puerto
Rico Participant such Supplemental Pretax Contributions cannot exceed 4% of his
or her Earnings.
(b) Basic After-Tax Adjustment Contributions. In order that the Plan
----------------------------------------
may comply with the requirements of Sections 401(k) and 415 of the Code and the
regulations thereunder at any time during the Plan Year the Plan Administrator
(at its sole discretion) may reduce the rate at which any Participant who is a
Highly Compensated Employee may contribute Basic Pretax Contributions, or
discontinue all such contributions, for the remainder of such Plan Year. Also,
in order that the Plan may comply with the requirements of Section 165(e) of the
Puerto Rico Code, at any time during the Plan Year the Plan Administrator (at
its sole discretion) may reduce the rate at which any Puerto Rico Participant
who is a Puerto Rico Highly Compensated Employee may contribute Basic Pretax
Contributions or Supplemental Pretax Contributions, or discontinue all such
contributions, for the remainder of such Plan Year. Such a reduction or
discontinuance may be applied selectively to individual Participants or to
particular classes of Participants, as the Plan Administrator may determine.
Any Participant whose Basic Pretax Contributions are reduced or discontinued
under this Section 5(b) shall make Basic After-Tax Adjustment Contributions to
the Plan during the remainder of the Plan Year equal to the Percentage of the
Participants Earnings that the Plan Administrator has determined cannot be made
as Basic Pretax Contributions (or, if applicable, as Supplemental Pretax
Contributions); Provided, that in order that the Plan may comply with the
requirements of Section 401(m) of the Code and the regulations thereunder, at
any time during the Plan Year the Plan Administrator (at its sole discretion)
may reduce the rate at which a Participant may contribute Basic
D-iv
<PAGE>
After-Tax Adjustment Contributions, or discontinue all such contributions, for
the remainder of such Plan Year. Any reduction or discontinuance of Basic Pre-
Tax or Basic After-Tax Adjustment Contributions made pursuant to this Section
5(b) shall automatically cease to apply upon the close of the Plan Year in which
it is made, or on such earlier date in such Plan Year as the Plan Administrator
may determine.
(c) Changing the Rate and Suspension of Basic Contributions and/or
--------------------------------------------------------------
Supplemental Pretax Contributions. As of the beginning of any Quarter, a
- ---------------------------------
Participant may elect to change the rate of his or her Basic Pretax
Contributions and/or any Supplemental Pretax Contributions to any other rate
that is within the limitations described in Sections 5(a) and 5(b). If a
Participant elects to reduce the rate of his or her Basic Pretax Contributions
to a rate that is below 6%, any Supplemental Pretax Contributions being made by
the Participant shall automatically cease on the effective date of such
election. If a Participant is making Basic After-Tax Adjustment Contributions,
and he or she elects to reduce the rate of his or her Basic Contributions, and
if, as a result of such election, the Plan Administrator determines that it is
no longer necessary for the Participant to make some or all of such Basic After-
Tax Adjustment Contributions, the appropriate amount of the Participant's Basic
After-Tax Adjustment Contributions shall automatically cease, effective as of
the effective date of his or her election to change the rate of his or her Basic
Contributions. As of any pay period, the Participant may elect to discontinue
all Supplemental Pretax Contributions, or may discontinue his or her Basic Pre-
Tax Contributions and, as a consequence, shall discontinue any Supplemental Pre-
Tax Contributions.
(d) Maximum Amount of Elective Deferrals. Notwithstanding anything to
------------------------------------
the contrary herein, the amount of Elective Deferrals made with respect to any
individual during a calendar year under the Plan and all other plans, contracts
or arrangements of any member of the Affiliated
D-v
<PAGE>
Group may not exceed the amount of the limitation in effect under Section
402(g)(1) of the Code for taxable years beginning in such calendar year. Such
limit shall not apply to any such Elective Deferrals made which are amounts
attributable to service performed by such Participant prior to January 1, 1987.
In addition, for Puerto Rico Participants, all such Elective Deferrals made
during a calendar year may not exceed the amount of the limitation in effect
under Section 165(e) of the Puerto Rico Code.
(e) Distribution of Excess Elective Deferrals. A Participant may
-----------------------------------------
assign to the Plan any Excess Elective Deferrals made during a taxable year of
the Participant by notifying the Plan Administrator on or before March 1
following the close of such taxable year of the amount of the Excess Elective
Deferrals to be assigned to the Plan. Notwithstanding any other provision of
the Plan, Excess Elective Deferrals, plus any income and minus any loss
allocable thereto, shall be distributed no later than April 15 following such
taxable year to any Participant to whose account Excess Elective Deferrals were
assigned for the preceding year and who claims Excess Elective Deferrals for
such taxable year.
(f) Actual Deferral Percentage Test. Basic Pretax Contributions for
-------------------------------
Highly Compensated Employees hereunder shall not exceed the limits set forth in
Section 401(k)(3) of the Code. For purposes of applying such limits, Section
401(k)(3) of the Code and Treasury Regulation Section 1.401(k)-1(b) are
incorporated herein by reference. For Puerto Rico Participants, Basic Pretax
Contributions and Supplemental Pretax Contributions (if any), in total for
Puerto Rico Highly Compensated Employees shall not exceed the limits set forth
in Section 165(e)(3) of the Puerto Rico Code.
(g) Distribution of Excess Contributions.
------------------------------------
(1) Notwithstanding any other provision of the Plan, Excess
Contributions, plus any income and minus any loss allocable thereto, shall be
distributed no later than
D-vi
<PAGE>
the last day of any Plan Year beginning after December 31, 1987 to Participants
to whose accounts Basic Pretax, Qualified Matching and Qualified Non-Elective
Contributions were allocated for the preceding Plan Year. The Excess
Contributions shall be adjusted for income or loss up to the date of
distribution. The income or loss allocable to Excess Contributions shall be
determined by multiplying the income or loss allocable to the Participant's
Basic Pretax, Supplemental Pretax, Qualified Matching and Qualified
Non-Elective Contributions for the Plan Year by a fraction, the numerator of
which is the Excess Contribution on behalf of the Participant for the Preceding
Plan Year and the denominator of which is the sum of the Participants account
balances attributable to Basic Pretax, Supplemental Pretax, Qualified Matching
and Qualified Non-Elective Contributions on the last day of the preceding Plan
Year. Amounts distributed under this Section 5(g) shall be made from the
Participant's Basic Pretax, Qualified Matching and Qualified Non-Elective
Contribution Accounts in proportion to the Participant's Basic Pretax,
Qualified Matching and Qualified Non-Elective Contributions for the Plan Year.
(2) A Participant may treat his or her Excess Contributions
as an amount distributed to the Participant and then contributed by the
Participant to the Plan as Basic After-Tax Adjustment Contributions. Such re-
characterized amounts will remain nonforfeitable and subject to the same
distribution requirements as Supplemental Pretax Contributions. Amounts may not
be re-characterized by a Highly Compensated Employee or by a Puerto Rico Highly
Compensated Employee to the extent that such amount in combination with other
Basic After-Tax Adjustment and Matching Contributions made with respect to that
Employee would exceed the limits under Section 5(h). Re-characterization must
occur no later than two and one-half months after the last day of the Plan Year
in which the Excess Contributions arose and is deemed to occur no earlier than
the date the last Highly
D-vii
<PAGE>
Compensated Employee is informed in writing of the amount which may be
recharacterized and the consequences thereof.
(h) Actual Contributions Percentage Test.
-------------------------------------
(1) Matching Contributions and Basic After-Tax Adjustment
Contributions hereunder shall not exceed the limits set forth in section
401(m)(2) of the Code. For purposes of applying such limits, section 401(m)(2)
of the Code and the regulations thereunder are incorporated herein by reference
and are hereinafter referred to as the "ACP test."
(2) Contributions made by or on behalf of Highly Compensated
Employees shall not exceed the limits imposed upon multiple use of the
alternative limitation by section 401(m)(9) of the Code. For this purpose, Code
section 401(m)(9) and Regulations section 401(m)-2(b) are incorporated herein by
reference. If one or more Highly Compensated Employees' Contributions exceed the
multiple use limit, then the Actual Contribution Ratio ("ACR") of Highly
Compensated Employees shall be reduced (starting with such Highly Compensated
Employee whose ACR is the highest) so that the limit is not exceeded. The amount
of any such reduction shall be treated as an Excess Aggregate Contribution. The
Actual Deferral Ratio ("ADR") and ACR of Highly Compensated Employees shall be
determined hereunder after any adjustments required to pass the tests described
in Subsections 5(f)(l) and 5(h)(l). Multiple use shall not occur if the ADP and
ACP of Highly Compensated Employees is not greater than 125 percent of the ADP
and ACP of non-Highly Compensated Employees.
(3) All or part of the Qualified Non-Elective Contributions
and Elective Deferrals made with respect to any or all Eligible Employees may be
treated as Matching Contributions for purposes of the ACP test provided that
each of the following requirements is met:
D-viii
<PAGE>
(i) the amount of nonelective contributions, including the
Qualified Non-Elective Contributions treated as Matching Contributions for
purposes of the ACP test, satisfies the requirements of Code section 401(a)(4);
(ii) the amount of nonelective contributions, excluding those
Qualified Non-Elective Contributions treated as Matching Contributions for
purposes of the ACP test and those Qualified Non-Elective Contributions treated
as Elective Deferrals under Regulations section 1.401(k)-1(b)(5) for purposes of
the ADP test satisfies the requirements of Code section 401(a)(4);
(iii) all Elective Deferrals whether or not treated as
Matching Contributions hereunder, satisfy the ADP test.
(iv) the Qualified Non-Elective Contributions are allocated to
the Accounts of Eligible Employees as of a date within the Plan Year (pursuant
to Regulations section 1.401(k)-1(b)(4)(i)(A)), and the Elective Deferrals
satisfy Regulations section 1.401(k)-1(b)(4)(i) for the Plan Year; and,
(v) for Plan Years beginning after December 31, 1988, if the
Plan uses the provisions of this Subsection 5(h)(3) for purposes of the ACP
test, then for purposes of Code section 410(b) (other than the average benefit
percentage test), the Plan may be aggregated with other plans of the Affiliated
Group to which qualified non-elective contributions and elective contributions
are made. If the Plan Year is changed to satisfy the section 410(b) requirement
that aggregated plans have the same plan year, this Subsection 5(h)(3) may apply
during the resulting short plan year only if Elective Deferrals during the short
plan year satisfy Regulations section 1.401(k)-1(b)(4) with respect to the short
plan year and Qualified Non-Elective Contributions satisfy Regulations section
1.401(k)-1(b)(4)(i)(A) with respect to the short plan year as if such
contributions were Elective Deferrals.
D-ix
<PAGE>
(4) Participating Companies may, in their sole discretion, satisfy the
ACP test either by making additional Qualified Non-Elective Contributions,
Matching Contributions or Qualified Matching Contributions pursuant to Section
4(b)(ii) or by distributing Excess Aggregate Contributions pursuant to Section
5(i). The determination of Excess Aggregate Contributions shall be made after
first determining the Excess Elective Deferrals and then determining the Excess
Contributions for the Plan Year.
(i) Distribution of Excess Aggregate Contributions
----------------------------------------------
(1) Notwithstanding any other provision of this Plan, Excess
Aggregate Contributions made on behalf of Highly Compensated Employees plus any
income or minus any loss allocable thereto shall be forfeited, if forfeitable,
or, if not forfeitable, distributed not later than the last day of each Plan
Year beginning after December 31, 1987 on the basis of the respective portions
of such Excess Aggregate Contributions attributable to the Accounts of each
Highly Compensated Employee whose Contributions for a Plan Year must be reduced
under Section 5(h) to enable the Plan to satisfy the ACP test.
(2) The income or loss allocable to a Highly Compensated
Employee's Excess Aggregate Contributions shall be determined by multiplying
such income or loss by a fraction, the numerator of which is the Excess
Aggregate Contributions on behalf of the Highly Compensated Employee for the
preceding Plan Year and the denominator of which is the sum of the Highly
Compensated Employee's Account balances attributable to Contributions taken into
account for purposes of the ACP test on the last day of the preceding plan year.
(3) Excess Aggregate Contributions shall be distributed from
the Highly Compensated Employee's Basic After-Tax Adjustment Account and
forfeited, if otherwise forfeitable under the terms of the plan or, if not
forfeitable, distributed from the Highly Compensated Employee's
D-x
<PAGE>
Matching Contribution Account in proportion to the Highly Compensated Employee's
Basic After-Tax Adjustment and Matching Contributions for the Plan Year.
(j) Payroll Deductions. All Basic Contributions and Supplemental Pre-
------------------
Tax Contributions shall be made solely through periodic payroll deductions,
unless the Plan Administrator consents to another method of payment. All Basic
Contributions and Supplemental Pretax Contributions withheld during any
calendar month shall be paid to the Trustee not later than the last day of the
next following month and shall be credited to the appropriate Employee Accounts
as soon as practicable thereafter.
(k) Salary Reduction and Tax Status of Pretax Contributions. For
--------------------------------------------------------
Federal tax purposes and for Puerto Rico tax purposes, Basic Pretax
Contributions and Supplemental Pretax Contributions shall be deemed to be
Company Contributions to the Plan, and a Participant's election to make such
contributions shall constitute an election to have the amount of his or her
compensation that otherwise would have been reported as taxable compensation on
Form W-2 (or its equivalent in Puerto Rico) reduced by the amount of such
contributions.
(l) Administrative Procedures. The Plan Administrator may require
-------------------------
Participants to complete and file such forms, within such time periods as it
shall determine, before any election under this Section 5 may take effect.
6. Amendment and Termination of This Supplement.
--------------------------------------------
(a) Amendment Required for Qualification. All provisions of this
------------------------------------
Supplement, and all benefits and rights granted hereunder, are subject to any
amendments, modifications or alterations which are necessary from time to time
to qualify the Plan and Supplement under Section 401(a) or 501(a) of the Code or
under Section 165(a) of the Puerto Rico Code, to continue the Plan as so
qualified, or to comply with any other provision of law. Accordingly,
notwithstanding Section 19(a) of
D-xi
<PAGE>
the Plan or any other provision of this Plan, the Company may amend, modify or
alter the Plan, with or without retroactive effect, in any respect or manner
necessary to qualify the Plan and Supplement under Section 401(a) of the Code or
under Section 165(a) of the Puerto Rico Code.
(b) Reversion of Funds.
(i) All employer contributions are expressly conditioned on
their deductibility under Section 404 of the Code and Section 23(p) of the
Puerto Rico Code. Any employer contribution shall be returned to the appropriate
Participating Company, upon its written request, to the extent that the
contribution is disallowed as a deduction, within one year after such
disallowance;
(ii) In the event that, due solely to the inclusion of this
Supplement D, the Commissioner of Internal Revenue determines that the Plan
would cease to be qualified under the Code or the Secretary of the Puerto Rico
Treasury determines that the Plan is not initially qualified under the Puerto
Rico Code, any contributions made by or on behalf of a Puerto Rico Participant
must be returned to the appropriate Puerto Rico Participant and to the
appropriate Participating Company within one year after the date of such
determination. The return of contributions to a Participating Company is further
conditioned upon the Company's having made the application for the qualification
by the time prescribed by law for filing the Company's return for the taxable
year in which Supplement D is adopted, or such later dates as the Secretary of
the Treasury or the Secretary of the Puerto Rico Treasury may prescribe.
D-xii
<PAGE>
DEAN WITTER START PLAN
----------------------
(Saving Today Affords Retirement Tomorrow)
------------------------------------------
SUPPLEMENT E
-------------
1993 MATCHING CONTRIBUTIONS FOR CREDIT SERVICES EMPLOYEES
---------------------------------------------------------
1. Purpose. This Supplement E provides for the payment of a Basic
-------
Matching Contribution on behalf of each employee who, during 1993: (a) made
Basic Pretax Deposits to The Savings and Profit Sharing Fund of Sears Employees
(the "Sears Plan"); and (b) was either employed by a member of the Affiliated
Group on December 31, 1993 or terminated employment with the Affiliated Group
before December 31, 1993 as a result of death, Total and Permanent Disability,
Retirement or Release. Such employees are referred to in this Supplement E as
"Spun-off Employees."
2. Plan Participation Not Required. Notwithstanding any provision of the
--------------------------------
Plan to the contrary, Participating Companies shall make contributions on behalf
of Spun-off Employees pursuant to this Supplement E without regard to whether
said employees participate in, or make Basic Pretax Contributions to the Plan.
3. Definitions. For purposes of this Supplement E, the terms
------------
"Compensation" "Basic Pretax Deposits," "Basic Employer's Contribution" and
"Business Group Contribution" shall have the meanings given to such terms by the
Sears Plan.
4. Basic Matching Contribution. For the Plan Year ending December 31,
----------------------------
1993, Participating Companies shall make Matching Contributions to the Trust
Fund on behalf of Spun-off Employees equal to:
(a) the greater of:
E-i
<PAGE>
(i) the sum of the Basic Employer's Contribution and Business
Group Contribution, if any, calculated under the terms of the Sears Plan for
1993 (without regard to the Spun-off Employee's cessation of employment with
Sears or any of its subsidiaries, other than a member of the Affiliated Group)
as applied to each Spun-off Employee's Basic Pretax Deposits made from January
1, 1993 to June 30, 1993; or
(ii) the amount derived by multiplying the Spun-off Employee's
Basic Pretax Deposits under the Sears Plan by the percentage(s) used to
calculate 1993 Basic Matching Contributions under the Plan for the Business
Segment in which the Spun-off Employee is employed on December 31, 1993 or, if
earlier, such employee's last day of employment; and
(b) the Basic Matching Contribution, calculated under Section
4(b)(i)(3) for the Business Segment in which the Spun-off Employee is employed
on December 31, 1993 or, if earlier, such employee's last day of employment,
with respect to Basic Pretax Contributions, if any, made by the Spun-off
Employee to the Plan without regard to any amount paid under (a) above.
5. Additional Matching Contributions. In the event the Participating
----------------------------------
Companies determine, in their sole discretion, to make additional Matching,
Qualified Non-Elective or Qualified Matching Contributions under Section
4(b)(ii) for the Plan Year ending December 31, 1993, they shall make such
contributions for Spun-off Employees by taking into account the total of such
employees' Compensation and Earnings and the total of such employees' Basic Pre-
Tax Deposits under the Sears Plan and Basic Pretax Contributions under the
Plan, earned or made during 1993.
6. Effective Dates. This Supplement E shall be effective as of January
----------------
1, 1993 and shall apply only to Basic Matching Contributions and additional
Matching, Qualified Non-Elective or Qualified Matching Contributions, if any,
made by Participating Companies for the Plan Year ending December 31, 1993.
E-ii
<PAGE>
EXHIBIT 10.34
DEAN WITTER, DISCOVER & CO.
EMPLOYEES' EQUITY ACCUMULATION PLAN
SECTION 1 PURPOSE.
- -------------------
The purposes of the Dean Witter, Discover & Co. Employees' Equity
Accumulation Plan are to attract, retain and motivate key employees of the
Company and to align the interests of key employees with stockholders through
equity-based compensation and enhanced opportunities for ownership of Stock. It
is the further purpose of this Plan to permit the granting of Awards that will
constitute performance based compensation for certain executive officers, as
described in section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") and regulations promulgated thereunder.
SECTION 2 DEFINITIONS.
- -----------------------
2.1 "Act" shall mean the Securities Exchange Act of 1934, as amended, and any
------
successor thereto.
2.2 "Award" shall mean a grant of Stock or Cash, or the right to acquire Stock
-------
or Cash, under such terms and conditions as shall be determined by the Committee
consistent with the terms of the Plan.
2.3 "Award Certificate" shall mean a written document described in Section
-------------------
6.3, setting forth the terms and conditions of an Award made pursuant to the
Plan.
2.4 "Cash" shall mean United States currency.
------
2.5 "Cash Unit" shall mean a general, unsecured obligation of the Company to
-----------
pay Cash to a Participant pursuant to an Award recorded by the Company as a
bookkeeping entry.
2.6 "Board" shall mean the Board of Directors of DWD.
-------
2.7 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any
------
successor thereto.
2.8 "Committee" shall mean a committee of two or more directors of DWD, as
-----------
described in Section 3.1.
2.9 "Company" shall mean DWD and any corporation, trade or business which at
---------
the time of reference, directly or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with DWD.
2.10 "Consent" shall mean, with respect to the granting of any Award under the
---------
Plan, the acquisition, issuance or purchase of Stock or other rights hereunder
or the taking of any other action hereunder:
1
<PAGE>
(i) any and all listings, registrations or qualifications in respect
thereof upon any securities exchange or other self-regulatory organi-
zation or under any federal, state or local law, rule or regulation,
(ii) the expiration, elimination or satisfaction of any prohibitions,
restrictions or limitations under any federal, state or local law,
rule or regulation or the rules of any securities exchange or other
self-regulatory organization,
(iii) any and all written agreements and representations by the
Participant with respect to the disposition of Stock, or with respect
to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration
or qualification or to obtain an exemption from the requirement that
any such listing, qualification or registration be made, and
(iv) any and all consents, clearances and approvals in respect of the
granting of an Award, the acquisition, issuance or purchase of Stock
or other rights hereunder or the taking of any other action under the
Plan, by any governmental agencies or other regulatory bodies or any
parties to any loan agreements or other contractual obligations of the
Company.
2.11 "Disability" shall mean the termination of a Participant's employment
-------------
with the Company under circumstances (i) that entitle the Participant to
receive benefits under any long term disability plan sponsored by the Company,
or (ii) if the Participant does not participate in such a plan, are determined
by the Committee to have been caused by a physical or mental condition that
would have entitled the Participant (if the Participant had been eligible to
participate) to receive benefits under the DWD Long Term Disability Plan or any
successor thereto.
2.12 "DWD" shall mean Dean Witter, Discover & Co., a Delaware corporation, or
-----
any successor thereto.
2.13 "Executive Officer" shall mean an executive officer of DWD within the
-------------------
meaning of Rule 3b-7 promulgated under the Act.
2.14 "Fair Market Value" shall mean, with respect to a share of Stock, the
-------------------
fair market value thereof as determined by the Committee as follows:
(a) if Stock is listed for trading on the New York Stock Exchange, the
closing price, regular way, of the Stock as reported on the New York Stock
Exchange Composite Tape on the date of reference or, if no such reported sale of
the Stock shall have occurred on such date, on the next preceding date on which
there was such a reported sale; or
(b) if Stock is not so listed but is listed on another national
securities exchange or authorized for quotation on the National Association of
Securities Dealers Inc.'s NASDAQ National Market
2
<PAGE>
System ("NNM"), the closing price, regular way of the Stock on such date on such
exchange or NNM, as the case may be, on which the largest number of shares of
Stock have been traded in the aggregate on the preceding twenty trading days or,
if no such reported sale of the Stock shall have occurred on such date on such
exchange or NNM, as the case may be, on the preceding date on which there was
such a reported sale on such exchange or NNM, as the case may be; or
(c) if Stock is not listed for trading on a national securities
exchange or authorized for quotation on NNM, the average of the closing bid and
asked prices as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System or, if no such prices shall have been so reported for
such date, on the next preceding date for which such prices were so reported; or
(d) if no Fair Market Value may be determined from the foregoing, the
value of a share of Stock as determined in good faith by the Committee.
2.15 "Option" shall mean a right to acquire Stock.
--------
2.16 "Participant" shall mean an individual who has been granted an Award
-------------
under the Plan.
2.17 "Plan" shall mean the Dean Witter, Discover & Co. Employees' Equity
------
Accumulation Plan, as amended from time to time.
2.18 "Related Employment" shall mean the employment of an individual by an
--------------------
employer other than the Company, provided:
(a) such employment is undertaken by the individual at the request or
with the consent of the Company;
(b) immediately prior to undertaking such employment the individual
was an employee of the Company, or was engaged in Related Employment as defined
herein; and
(c) such employment is recognized by the Committee, in its discretion,
as Related Employment.
2.19 "Restricted Stock" shall mean an Award of Stock subject to conditions
-----------------
determined by the Committee pursuant to Section 8.
2.20 "Restricted Stock Unit" shall mean an Award of Stock Units subject to
----------------------
conditions determined by the Committee pursuant to Section 8.
2.21 "Retirement" shall mean the termination of employment with the Company
------------
under circumstances giving rise to an entitlement to a retirement benefit,
including a benefit payable by reason of Disability, under any employee pension
benefit plan maintained by the Company which plan is intended to be qualified
under Code section 401(a), provided, however, that, if the Participant has not
accrued a benefit under any such pension plan, the term "Retirement" shall have
the meaning given to such term under the Dean Witter Reynolds Inc. Pension Plan
or any successor thereto; provided further, that, notwithstanding the foregoing,
the transfer of an individual to Related Employment shall not be treated as a
termination of employment due to Retirement.
3
<PAGE>
2.22 "Rule 16b-3" shall mean Rule 16b-3 under the Act and any successor
-----------
provision thereto.
2.23 "SAR" shall mean a stock appreciation right as described in Section 7.3.
-----
2.24 "SEC" shall mean the U.S. Securities and Exchange Commission, or any
-----
United States federal governmental body that succeeds to its responsibilities.
2.25 "Section 162(m) Award" shall mean an Award described in Section 6.2.
----------------------
2.26 "Stock" shall mean the common stock of DWD, par value $.01 per share, and
-------
any stock into which such stock is transformed as a result of a corporate
reorganization or other transaction.
2.27 "Stock Unit" shall mean a general, unsecured obligation of the Company to
------------
deliver one share of Stock (or the value thereof) to a Participant pursuant to
an Award recorded by the Company as a bookkeeping entry.
SECTION 3 ADMINISTRATION.
- ---------------------------
3.1 The Plan shall be administered by the Committee. It is intended that the
directors appointed to serve on the Committee shall qualify (i) as "non-employee
directors" (within the meaning of Rule 16b-3), (ii) as "outside directors"
(within the meaning of Code section 162(m) and the regulations thereunder) and
(iii) under any similar statute or rule; in each case to the extent applicable.
The fact that a Committee member shall fail to qualify under any of these
requirements shall not invalidate any Award made by the Committee which Award is
otherwise validly made under the Plan.
3.2 The Committee shall have the authority:
(i) to exercise all of the powers granted to it under the Plan,
(ii) to construe, interpret and implement the Plan and any written
documents setting forth Awards under the Plan,
(iii) to prescribe, amend and rescind rules relating to the Plan,
(iv) to make any determination necessary or advisable in admini-
stering the Plan,
(v) to correct any defect, supply any omission and reconcile any
inconsistency in the Plan or in any Award made under the Plan.
(vi) to delegate any of its powers to DWD's chief executive
officer except with respect to any person subject to the provisions
of Section 16 of the Act, with respect to a Section 162(m) Award
or which by law may not be so delegated.
4
<PAGE>
3.3 The determination of the Committee on all matters relating to the Plan or
any Award made under the Plan shall be final, binding and conclusive for all
purposes and upon all persons interested herein.
3.4 No member of the Committee shall be liable, individually or jointly and
severally with any other Committee member, for any action, determination or
omission made in good faith with respect to the Plan or any Award hereunder. In
the performance of their duties hereunder, Committee members shall be entitled
to rely upon information and advice furnished: (a) by the Company and its
officers, directors, employees, accountants, counsel and consultants; (b) by
Participants and their heirs, assigns and representatives; and (c) by any other
party whose information or advice is determined by the Committee to be
reasonable and necessary for the administration of the Plan.
3.5 The members of the Committee shall be appointed by, and serve at the
pleasure of, the Board. Notwithstanding anything to the contrary contained
herein, the Board may, in its sole discretion, at any time and from time to
time, resolve to administer the Plan, in which case, the term Committee as used
herein shall be deemed to refer to the Board.
SECTION 4 SHARES AVAILABLE FOR AWARDS.
- ---------------------------------------
4.1 Subject to Section 10.4 (relating to adjustments upon changes in
capitalization), as of any date, the total number of shares of Stock with
respect to which Awards may be granted under the Plan, shall equal:
(a) 30,000,000 shares, of which not less than 15,000,000 shall be
treasury shares acquired by the Company in public markets or otherwise;
(b) reduced by the sum (without duplication) of:
(i) the number of shares of Stock subject to outstanding Awards;
(ii) the number of shares of Stock in respect of which Awards
have been exercised;
(iii) the number of shares of Stock issued without forfeiture or
similar restrictions or issued with forfeiture or similar restrictions
which have lapsed;
(c) increased by the sum of:
(i) shares of Stock subject to previously granted Awards that have
expired, terminated, been canceled or forfeited for any reason (other
than by reason of exercise or vesting);
(ii) shares of Stock delivered or withheld (or deliverable or
required to be withheld as a condition of exercise of an Award) in
payment of the exercise or purchase price of an Award granted
5
<PAGE>
under the Plan or under any other employee benefit plan of the
Company.
4.2 Without limiting the generality of the foregoing, the Committee may cancel
any Award under the Plan and issue a new Award in substitution therefor upon
such terms as the Committee may in its sole discretion determine, provided that
the substituted Award shall satisfy all applicable Plan requirements as of the
date such new Award is made. Notwithstanding the foregoing or any other
provision of the Plan, in no event shall an Option or SAR be granted in
substitution for a previously granted Option or SAR with the old Award being
canceled or surrendered as a condition of receiving the new Award, if the new
Award would have a lower Option exercise price or SAR appreciation base than the
Award it replaces. The foregoing is not intended to prevent equitable adjustment
of Awards upon the occurrence of certain events as herein provided, including
without limitation, adjustments pursuant to Section 10.4.
SECTION 5 PERSONS ELIGIBLE FOR AWARDS.
- --------------------------------------
Subject to Section 6.2(a), Awards under the Plan may be made to such
employees of the Company as the Committee shall from time to time, in its sole
discretion, select.
SECTION 6 TYPES OF AWARDS UNDER THE PLAN.
- -----------------------------------------
6.1 In General.
-----------
Awards may be made under the Plan in the form of:
(i) Options,
(ii) SARs,
(iii) Restricted Stock or Restricted Stock Units,
(iv) Other Stock-based Awards,
(v) Section 162(m) Awards; or
(vi) any other type of Award deemed by the Committee in its
discretion to be consistent with the purposes of the Plan, including
but not limited to Awards granted in connection with or in lieu of
awards or payments under any other employee benefit plan or
compensation arrangement of the Company (other than a plan
qualified under Code Section 401(a) or an excess benefit plan
related to a plan qualified under Section 401(a)) and Awards made
to eligible employees who are foreign nationals or are employed
outside the United States.
6
<PAGE>
6.2 Section 162(m) Awards.
----------------------
In the discretion of the Committee, any Award made under the Plan may
be designated a Section 162(m) Award. A Section 162(m) Award is an Award under
which all payments are intended to constitute qualified performance-based
compensation which, if recognized by persons with respect to whom the limits on
deductibility of Code section 162(m) apply (generally, DWD's chief executive
officer and four other highest-paid Executive Officers, hereafter referred to as
the "162(m) Covered Employees"), would be excluded from the Section 162(m) limit
on deductibility. Section 162(m) Awards shall consist of Awards that will vest,
become exercisable, cause the delivery of Stock, result in the payment of Cash
or serve as the basis for one or more other Awards under the Plan, upon the
attainment of one or more objective performance goals established by the
Committee at a time described in Section 6.2(c) below. An objective performance
goal shall be based upon one or more of the business criteria described in
Section 6.2(b) below. Section 162(m) Awards may also consist of Options and SARs
granted with a per share exercise price or appreciation base, as the case may
be, not less than the Fair Market Value of a share of Stock on the grant date
subject to the limit set forth in 7.8 below, whether or not the vesting or
exercisability of such Options and SARs is also subject to the attainment of one
or more performance goals. Notwithstanding anything to the contrary provided
herein, (i) an Award not designated a Section 162(m) Award may nevertheless be
intended to generate compensation deductible under Code section 162(m) and (ii)
unless an applicable Award Certificate otherwise provides, the failure of a
Section 162(m) Award to meet the requirements of Code section 162(m) shall not
invalidate such Award, provided it was otherwise properly granted under the
Plan.
(a) All Executive Officers and other members of the Company's senior
management group shall be eligible to receive Section 162(m) Awards under the
Plan.
(b) For purposes of Awards under this Section 6.2, performance goals
shall be based upon one or more of the following business criteria:
(i) earnings per share;
(ii) Stock price per share;
(iii) return on average equity, assets or investments;
(iv) pretax income;
(v) net revenue;
(vi) net income;
(vii) book value per share;
(viii) earnings available to Stockholders;
(ix) market share;
(x) operating income;
7
<PAGE>
(xi) cash flow;
(xii) number of credit cardholders or any group of cardholders
identified by geographic area, income, trade or occupation;
(xiii) number of merchants or any group of merchants identified by
geographic area, industry or trade, accepting the Company's
proprietary or general purpose credit cards or both;
(xiv) assets under management and administration; and
(xv) number or value of managed loans.
(c) The Committee shall, not later than 90 days after the start of the
period of service to which the performance goal(s) relate(s) (or, if such period
is less than a year, the first 25% of such period) and at a time when the
attainment of such goal(s) is substantially uncertain:
(i) identify the Executive Officers and/or any other senior
management employees who will receive Section 162(m)
Awards for such measuring period;
(ii) select one or more business criteria from among those listed
in Section 6.2(b) above upon which performance goal(s) will be
based;
(iii) determine the length of the measuring period;
(iv) determine the terms and conditions of the Awards underlying the
Section 162(m) Awards;
(v) establish the various objective thresholds and targets
that constitute the performance goals and the amounts that shall
be paid to each Participant on attainment of such performance
goals, which amounts may be denominated in Stock, Stock Units,
Cash or Cash Units; and
(vi) make such other determinations deemed by the Committee
to be necessary or advisable to ensure compliance with Code
Section 162(m) in connection with the granting of a Section 162(m)
Award.
(d) In making the determinations described in (c) above, the
Committee may specify that a Section 162(m ) Award will vest, become exercisable
or be paid if the applicable target is achieved for one performance goal, for
any one of a number of performance goals or for more than one performance goal.
The Committee may also provide that a Section 162(m) Award will vest, become
exercisable or be paid in full only upon the attainment of a specified
performance goal or goals or vest, become exercisable or be paid in varying
percentages or amounts based upon different levels of
8
<PAGE>
achievement of the applicable performance goal or goals. Performance goals can
be based on one or more business criteria that apply to the eligible employee, a
business segment or the Company as a whole. The Committee may establish
different performance goals for each Section 162(m) Award or may use the same
goals for more than one Award and may establish different objective thresholds
and targets for one or more eligible employees resulting in different payments
under each such Award.
(e) After the end of each measuring period, the Committee shall
certify, in writing, the performance results under each Section 162(m) Award
(other than Options or SARs granted with a per share exercise price or
appreciation base, as the case may be, not less than the Fair Market Value of a
share of Stock) made for such period and determine the amount of Stock, Stock
Units, Cash or Cash Units available to vest, become exercisable or be delivered
or paid under each such Award. The Committee may, in its sole discretion, cause
the delivery or payment of the amounts so determined, or reduce such amounts
based on such factors as may be determined by the Committee, including a
determination that such reduction is appropriate based upon:
(i) the pay practices of competitors;
(ii) the Company's or a business segment's (A) performance
relative to competitors, (B) performance with respect to strategic
business goals, (C) performance with respect to the business plan or
(D) achievement of market share goals; or
(iii) a Participant's individual performance.
With respect to any Participant granted a Section 162(m) Award who the
Committee determines is not or will not be a 162(m) Covered Employee in the
calendar year in which such Participant receives or is scheduled to receive
compensation under such Section 162(m) Award, the Committee may determine to
make an Award under the Plan or under any other plan or arrangement of the
Company in excess of, in addition to, or in lieu of such Section 162(m) Award.
(f) The Committee, in its sole discretion, may make Section 162(m)
Awards that are not valued, in whole or part, by reference to, or otherwise
based on, the Fair Market Value of Stock ("Cash-based Section 162(m) Awards").
Under the procedures and subject to the terms and conditions described in
Section 6.2(a)-(e), Cash-based Section 162(m) Awards shall be awarded in such
amounts and paid pursuant to such terms and conditions as shall be determined by
the Committee, including but not limited to such business criteria, performance-
based goals and other conditions as shall be intended to assure that payments
made under a Cash-based Section 162(m) Award shall be qualified performance-
based compensation within the meaning of Code section 162(m).
(g) Notwithstanding anything else contained herein, in any calendar
year the maximum number of shares of Stock (or the equivalent value thereof) a
Participant may be awarded under a Section 162(m) Award other than an Option,
SAR or Cash-based Section 162(m) Award, shall be 100,000 shares multiplied by
the number of years in the relevant measuring period but in no event more than
500,000 shares, subject to adjustment under Section 10.4. The maximum value a
Participant may receive, in any calendar year, under a Cash-based Section 162(m)
Award shall be $2,000,000 multiplied by the number of years in the relevant
measuring period but in no event more than
9
<PAGE>
$10,000,000. The maximum number of shares of Stock underlying Options or SARs
awarded to any individual under the Plan, including Options and SARs that are
Section 162(m) Awards, shall not exceed the limit set forth in Section 7.8.
6.3 Award Certificates. The terms and conditions of all Options, SARs and
-------------------
Section 162(m) Awards shall be set forth in Award Certificates. Other Awards
granted under the Plan shall be evidenced by Award Certificates to the extent
deemed necessary or desirable by the Committee. An Award Certificate shall be
executed by an officer of the Company authorized by the Committee. A copy of the
Award Certificate, if any, shall be delivered to the Participant as soon as
practicable after the grant of an Award. The Committee may, in its sole
discretion, require a Participant to execute and return a copy of the Award
Certificate to the Company as a condition of receiving payment on account of an
Award.
6.4 Awards may be granted alone or in conjunction with one or more other
Awards, provided that Options intended to qualify as incentive stock options
shall only be granted in compliance with Section 7.1 and applicable provisions
of the Code.
6.5 In granting an Award, including, without limitation, a Section 162(m)
Award, the Committee may provide that, irrespective of whether an Award is
denominated, in whole or in part, by reference to shares of Stock, an Award may
be paid at the election of the Committee or, if permitted by the Committee, the
Participant, in whole or in part, in Stock, Stock Units, Cash, Cash Units or
other Awards.
6.6 Awards under the Plan, including, without limitation, Section 162(m)
Awards, may, in the discretion of the Committee, be made in substitution, in
whole or in part, for Cash or other compensation that would otherwise become
payable to an eligible individual. An Award Certificate may provide that an
eligible individual may elect to receive one form of Award permitted under the
Plan in lieu of any other form of Award, or may elect to receive an Award under
the Plan in lieu of all or part of any compensation which otherwise might have
been paid to such eligible individual, provided however, that any such election
shall not require the Committee to make any Award to such eligible individual.
Any such substitute or elective Awards shall have terms and conditions
consistent with the provisions of the Plan applicable to such Award.
6.7 With respect to any dividend or distribution on shares of Stock
corresponding to an Award other than an Option or a SAR, the Committee may, in
its discretion, authorize current or deferred payments (payable in Cash or Stock
or a combination thereof) or appropriate adjustments to the outstanding Award to
reflect such dividend or distribution, including the reinvestment of dividends
into additional shares of Stock or Stock Units, provided, however, that non-Cash
(i.e., property) dividends received with respect to Stock or Stock Units shall
be subject to the same restrictions, vesting and earnout rules as the underlying
Award.
6.8 Deferred Compensation.
-----------------------
(a) Plan Awards. The Committee may, in an Award Certificate or by
------------
appropriate action at any time before an Award is vested, paid or exercised, or,
subject to the approval of the Committee, give Participants the opportunity to
defer the payment or settlement of the Award in accordance with
10
<PAGE>
procedures specified by the Committee. The Committee shall have the right at any
time to accelerate the payment or settlement of any Award granted under the
Plan, including, without limitation, any Award subject to a prior deferral
election, provided, however, that the amount payable on account of such Award
may be discounted to reflect the time value of the accelerated payment. The
Committee may provide that a Participant exercising an Option other than an
incentive stock option may defer the compensation to be received upon such
exercise provided that the Participant pays the exercise price by tendering
shares of Stock held by the Participant for at least 6 months or such other
period of time as may be determined by the Committee as necessary to avoid a
charge to the Company's earnings for financial statement purposes.
(b) Other Deferred Compensation. The Committee shall determine whether or not
----------------------------
an Award shall be made in conjunction with deferral of a Participant's salary,
bonus or other compensation, or any combination thereof and whether or not such
deferred amounts may be:
(i) forfeited to the Company or, in the case of Awards other
than Section 162(m) Awards, other Participants, or any combina-
tion thereof under certain circumstances (which may include but
need not be limited to, certain types of termination of employ-
met or performance of services for the Company); and/or
(ii) subject to increase or decrease in value based upon the
attainment of, or failure to attain, respectively, certain performance
measures.
6.9 Unfunded Status of Plan.
------------------------
The Plan is intended to constitute an "unfunded and unsecured" plan for
incentive compensation. With respect to any payments in either Cash, Stock that
is not Restricted Stock or other property, not yet made to a Participant by the
Company, nothing herein contained shall give any Participant any rights that are
greater than those of a general, unsecured creditor of the Company. In its sole
discretion, the Committee may set aside assets (in trust or otherwise) to assist
the Company in meeting its obligations under the Plan (either alone or in
conjunction with one or more other compensation plans); provided however, that
the existence of such trusts or other arrangements shall be consistent with the
unfunded status of the Plan.
SECTION 7 OPTIONS AND SARS.
- ---------------------------
7.1 Options.
--------
(a) Subject to Sections 7.8 and 7.9, the Committee may grant Options in such
amounts and subject to such conditions as the Committee shall from time to time
in its sole discretion determine, subject to the terms of the Plan. Such terms
and conditions may include, but shall not be limited to, restrictions on the
transferability and the forfeiture of Stock acquired by a Participant upon the
exercise of an Option. Unless the applicable Award Certificate provides
otherwise, no Option may be sold, assigned, transferred, pledged, hypothecated
or otherwise encumbered or disposed of by the Participant.
11
<PAGE>
(b) Each Award Certificate relating to an Option shall specify whether the
Option is a non-qualified stock option, is intended to be an incentive stock
option described in Code section 422 or is intended to be any other type of
option that may be described in the Code. No Option shall be treated as an
incentive stock or other tax-qualified option unless the Award Certificate
specifically states that the Award is intended to be an incentive stock option
or other tax-qualified option.
(c) In the case of incentive stock options, the terms and conditions of any
such grant shall be subject to and comply with the requirements of Code sections
421, 422 and 424, any regulations thereunder and any successors thereto,
including, but not limited to, the requirement that such Options be exercisable
during the participant's lifetime only by the Participant, that no such Option
shall be granted more than ten years after the date the Board adopts the Plan
nor exercisable more than ten years after the date of grant. In no event shall
incentive stock options be granted under the Plan in respect of more than
20,000,000 shares of Stock, subject to adjustment under Section 10.4. If an
Option is intended to be an incentive stock option and if, for any reason, such
option shall fail to so qualify as an incentive stock option, such option shall
be considered to be a nonqualified stock option appropriately granted under the
Plan, to the extent such option meets the Plan's requirements applicable to
nonqualified stock options.
7.2 Restoration Option Rights.
--------------------------
(a) Subject to Sections 7.8 and 7.9, the Committee may grant to a Participant,
as a feature of an Option (under this Plan) or separately in connection with an
option under any other plan of the Company (in either case, an "Original
Option") a right to acquire Stock (a "Restoration Option Right") pursuant to
which a Participant who pays the exercise price of the Original Option by
tendering shares of Stock shall automatically be granted an option (a
"Restoration Option") to acquire a number of shares of Stock equal to the sum
of: (i) the number of shares tendered by the Participant to pay the exercise
price; and (ii) the number of shares tendered by the Participant or, pursuant to
the Participant's exercise of a tax withholding right described in Section
10.3(b)(ii), withheld by the Company from the shares being acquired upon the
exercise of the Original Option to pay income or other taxes required to be
withheld from the Participant's compensation as a result of the exercise of the
Original Option.
(b) The Committee may grant Restoration Option Rights in connection with an
Original Option at the time the Original Option is granted or at any later time
on or before the date on which the Original Option is exercised.
(c) The Committee may, in its discretion, provide in an Award Certificate
that a Restoration Option shall not be granted or, if granted, shall not become
exercisable, unless the Fair Market Value of a share of Stock shall, on the date
of such grant or exercise, be equal to or exceed a minimum amount determined by
the Committee.
(d) The Restoration Option exercise price shall not be less than the Fair
Market Value of a share of Stock on the Original Option's exercise date.
Restoration Options shall be subject to the terms and provisions contained in
the Plan and such other terms, conditions and limitations as the Committee shall
determine from time to time regarding the exercisability, forfeiture, payment
provisions and other features of Restoration Options. All Restoration Options
shall expire not later
12
<PAGE>
than the expiration date of the Original Option with respect to which the
Restoration Option was granted.
7.3 SARs.
-----
(a) Related SARs. Subject to Sections 7.8 and 7.9, the Committee may grant a
------------
SAR in connection with all or any part of an Option granted under the Plan (a
"Related SAR"), either at the time the related Option is granted or any time
thereafter prior to the exercise, termination or cancellation of such Option,
and subject to such terms and conditions as the Committee shall from time to
time in its sole discretion determine, subject to the terms of the Plan. The
grantee of a Related SAR shall, subject to the terms of the Plan and the
applicable Award Certificate, have the right to surrender to the Company for
cancellation all or a portion of the related SAR granted under the Plan, but
only to the extent that such related Option is then exercisable, and to be paid
therefor an amount equal to the excess (if any) of :
(i) the aggregate Fair Market Value of the shares of Stock
subject to the related Option or portion thereof (determined as
of the date of exercise of such Related SAR), over
(ii) the aggregate exercise price of the related Option or
portion thereof.
(b) Unrelated SARs. Subject to Sections 7.8 and 7.9, the Committee may grant a
--------------
SAR that is not connected with an Option (an "Unrelated SAR") in such amount and
subject to such terms and conditions as the Committee shall from time to time in
its sole discretion determine, subject to the terms of the Plan. The grantee of
an Unrelated SAR shall, subject to the terms of the Plan and the applicable
Award Certificate, have the right to surrender to the Company for cancellation
all or a portion of such SAR, but only to the extent that such SAR is then
exercisable, and to be paid therefor an amount equal to the excess (if any) of:
(i) the aggregate Fair Market Value of the shares of Stock
underlying such SAR or portion thereof (determined as of the date
of exercise of such SAR) over,
(ii) the aggregate appreciation base of the shares of Stock underlying
such SAR or portion thereof.
(c) Payment due to a Participant upon exercise of a SAR shall be made in
Cash, Cash Units, Stock or Stock Units (Stock or Stock Units to be valued at the
Fair Market Value thereof as of the date of exercise), currently or deferred
under Section 6.8, as determined by the Committee in its sole discretion
consistent with the relevant Award Certificate and the Plan.
7.4 Exercise of Related SAR Reduces Shares Subject to Option.
--------------------------------------------------------
Upon any exercise of a Related SAR, or any portion thereof, the number of
shares of Stock subject to the related Option shall be reduced by the number of
shares of Stock in respect of which the Related SAR shall have been exercised.
13
<PAGE>
7.5 Exercisability of Options and SARs. Subject to the other provisions of the
-----------------------------------
Plan:
(a) Exercisability Determined by Award Certificate. Each Award Certificate
----------------------------------------------
shall set forth the period during which and the conditions subject to which the
Option or SAR evidenced thereby shall be exercisable, as determined by the
Committee in its discretion, provided, however, that no Option or SAR shall be
exercisable until twelve months following the grant date thereof, except in the
case of the Participant's death and excluding Restoration Options, and no Option
shall be exercisable until twelve months following a hardship distribution from
any plan of the Company subject to Treasury Regulations (S)1.401(k)-
1(d)(2)(iv)(B)(4) or any successor provision.
(b) Exercise of Related SAR. Unless the applicable Award Certificate
-----------------------
otherwise provides, a Related SAR shall be exercisable at any time during the
period that the related Option may be exercised.
(c) Partial Exercise Permitted. Unless the applicable Award Certificate
--------------------------
otherwise provides, an Option or SAR granted under the Plan may be exercised
from time to time as to all or part of the full number of shares as to which
such Option or SAR shall then be exercisable.
(d) Notice of Exercise; Exercise Date.
----------------------------------
(i) An Option or SAR shall be exercisable by the filing of a
written notice of exercise with the Company, on such form and
in such manner as the Committee shall in its sole discretion pre-
scribe, and, in the case of an Option, by payment in accordance
with Section 7.6.
(ii) Unless the applicable Award Certificate otherwise provides,
or the Committee in its sole discretion otherwise determines, the
date of exercise of an Option or SAR shall be the date the Company
receives such written notice of exercise and payment.
7.6 Payment of Option Price.
------------------------
(a) Tender Due Upon Notice of Exercise. Unless the applicable Award
----------------------------------
Certificate otherwise provides or the Committee in its sole discretion otherwise
determines, any written notice of exercise of an Option shall be accompanied by
payment of the full purchase price for the shares being purchased.
(b) Manner of Payment. Payment of the Option exercise price shall be made in
-----------------
any combination of the following:
(i) by certified or official bank check payable to the
Company (or the equivalent thereof acceptable to the
Committee);
(ii) by personal check (subject to collection), which may
14
<PAGE>
in the Committee's discretion be deemed conditional;
(iii) if and to the extent authorized by the Committee, by
delivery of previously acquired shares of Stock owned by
the Participant for such period of time as may be required
to avoid a charge to the Company's earnings for financial
statement purposes (as determined by the Committee)
having a Fair Market Value (determined as of the Option
exercise date) equal to the portion of the Option exercise
price being paid thereby, provided that the Committee may
require the Participant to furnish an opinion of counsel accept-
able to the Committee to the effect that such delivery would not
result in the Participant incurring any liability under Section 16
of the Act and does not require any Consent; and
(iv) if and to the extent authorized by the Committee, by delivery
to the Company of an assignment of a sufficient amount of the
proceeds from the sale of Stock acquired upon exercise to pay
for all of the Stock acquired upon exercise and an authorization to
the broker or selling agent to pay that amount to the Company,
which sale shall be made at the Participant's direction at the time
of exercise, provided that the Committee may require the Parti-
cipant to furnish an opinion of counsel acceptable to the Commit-
tee to the effect that such delivery would not result in the Parti-
cipant incurring any liability under Section 16 of the Act and does
not require any Consent.
(c) Issuance of Shares. As soon as practicable after receipt of full payment,
------------------
the Company shall, subject to the provisions of Section 10.2, deliver to the
Participant one or more certificates for the shares of Stock so purchased,
which certificates may bear such legends as the Company may deem appropriate
concerning restrictions on the disposition of the shares in accordance with the
terms of the relevant Award Certificate, the Plan and applicable securities
laws, rules and regulations or otherwise, provided, however, that in the event
compensation received as a result of an Option exercise is deferred pursuant to
Section 6.8, such delivery shall take place as soon as practicable following the
end of the relevant deferral period.
7.7 Proof of Beneficial Ownership. Wherever in this Plan or any Award
------------------------------
Certificate a Participant is permitted to pay the exercise price of an Award or
taxes relating to the exercise of an Award by delivering shares of Stock, the
Participant may, subject to procedures satisfactory to the Committee, satisfy
such delivery requirement by presenting proof of beneficial ownership of such
shares of Stock, in which case the Company shall treat the Award as exercised
without further payment and shall withhold such number of shares from the shares
acquired by the exercise of the Award (or if the Award is paid in Cash, Cash in
an amount equal to the Fair Market Value of such shares).
15
<PAGE>
7.8 Maximum Number of Shares Subject to Awards
------------------------------------------
Grants of Options and SARs to any Participant in any five consecutive calendar
years may not be made with respect to more than 3,000,000 shares of Stock,
subject to adjustment under Section 10.4.
7.9 Exercise Price and Expiration Date
----------------------------------
No Option or SAR shall be granted hereunder at an exercise or base
appreciation price, as the case may be, lower than 100% of the Fair Market Value
of a share of Stock on the grant date thereof and no Option or SAR granted
hereunder shall remain exercisable for more than 10 years after the grant date
thereof.
SECTION 8 RESTRICTED STOCK AND RESTRICTED STOCK UNIT AWARDS.
- --------------------------------------------------------------
8.1 Grant of Awards.
---------------
The Committee may grant Restricted Stock or Restricted Stock Unit Awards,
alone or in tandem with other Award made under the Plan or made under any other
plan or arrangement of the Company, in such amounts and subject to such terms
and conditions as the Committee shall from time to time in its sole discretion
determine and set forth in an Award Certificate; provided, however, that no
Award of Restricted Stock or Restricted Stock Units shall vest less than one
year after the grant date thereof; and provided further, that the total number
of shares of Stock with respect to which the aggregate number of shares covered
by Awards made to all Participants under Sections 8 and 9 of the Plan which may
vest shall not exceed 10,000,000, subject to adjustment under Section 10.4. The
vesting of a Restricted Stock or Restricted Stock Unit Award granted under the
Plan may be conditioned upon (i) the completion of a specified period of
employment with the Company, (ii) the attainment of specified performance goals
including but not limited to such performance goals as would qualify the
Restricted Stock or Restricted Stock Unit Award as a Section 162(m) Award under
Section 6.2, and/or (iii) such other criteria as the Committee may determine in
its sole discretion. The forfeiture of a Restricted Stock or Restricted Stock
Unit Award shall be governed by such terms and conditions as are set forth in
the Award Certificate.
8.2 Payment.
-------
Each Award Certificate with respect to a Restricted Stock or Restricted Stock
Unit Award shall set forth the amount (if any) to be paid by the Participant
with respect to such Award. If a Participant makes any payment to the Company
(other than for taxes) for a Restricted Stock or Restricted Stock Unit Award
which does not vest, a refund of such payment may be made to the Participant
following the forfeiture of such Award on such terms and conditions as the
Committee may determine. Any payment required to be made by a Participant shall
be made in a form described in Section 7.6(b).
8.3 Issuance of Shares.
------------------
The Committee may provide that one or more certificates or other evidence of
ownership representing Restricted Stock Awards shall be registered in the
Participant's name and bear an appropriate legend specifying that such shares
are not transferable and are subject to the terms and
16
<PAGE>
conditions of the Plan and the applicable Award Certificate, or that such
certificate or certificates shall be held in escrow by the Company on behalf of
the Participant until such shares vest or are forfeited, all on such terms and
conditions as the Committee may determine. Unless the applicable Award
Certificate otherwise provides, no share of Restricted Stock may be sold,
assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed
of by the Participant until such share has vested in accordance with the terms
of such Award. Subject to the provisions of Section 10.2, as soon as practicable
after any Restricted Stock Award becomes unrestricted the Company shall issue or
reissue to the Participant (or to the Participant's designated beneficiary in
the event of the Participant's death) one or more certificates for the Stock
represented by such Restricted Stock Award.
8.4 Participants' Rights Regarding Restricted Stock. Unless the applicable
-----------------------------------------------
Award Certificate otherwise provides: (i) a Participant may vote and receive
dividends on Restricted Stock awarded under the Plan; and (ii) any Stock
received as a distribution with respect to shares of Restricted Stock (or
credited to an Award of Restricted Stock Units) shall be subject to the same
restrictions as such shares of Restricted Stock (or Restricted Stock Units).
SECTION 9 OTHER STOCK-BASED AWARDS.
- ------------------------------------
9.1 The Committee may grant other Awards of Stock and Awards that are valued,
in whole or in part, by reference to, or are otherwise based on, the Fair Market
Value of Stock ("Other Stock-Based Awards") under such terms and conditions as
the Committee shall determine, provided, however, that that the total number of
shares of Stock with respect to which the aggregate of Awards under Sections 8
and 9 of the Plan may vest shall not exceed 10,000,000, subject to adjustment
under Section 10.4.
9.2 The Committee may grant Other Stock-Based Awards alone or in addition to
any other Awards made under the Plan or any other plan or arrangement of the
Company. Subject to the provisions of the Plan, the Committee shall have sole
and absolute discretion to determine to whom and when such Other Stock-Based
Awards will be made, the number of shares of Stock to be Awarded under (or
otherwise related to) such Other Stock-Based Awards and all other terms and
conditions of such Awards. The Committee shall determine whether Other Stock-
Based Awards shall be denominated in Stock, Stock Units, Cash, Cash Units or a
combination thereof, or settled on a deferred basis pursuant to Section 6.8. The
Committee may, in its discretion, impose such performance goals or other
conditions upon an Other Stock-Based Award as shall qualify it as a Section
162(m) Award under Section 6.2.
9.3 Unless the applicable Award Certificate otherwise provides, a Participant
may vote and receive dividends on Other Stock-Based Awards awarded under the
Plan.
17
<PAGE>
SECTION 10 MISCELLANEOUS.
- -------------------------
10.1 Amendment of the Plan; Modification of Awards.
----------------------------------------------
(a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue
----------------------
or terminate the Plan, or any portion thereof, at any time; provided that no
such amendment, alteration, suspension, discontinuation or termination shall be
made without shareholder approval to the extent such approval is necessary to
comply with any tax or regulatory requirement, including but not limited to any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Act, necessary to qualify Awards granted hereunder as performance
based compensation for purposes of Code section 162(m) or necessary to satisfy
listing or other requirements of any self-regulatory organization (provided that
the Company is subject to the requirements of Section 16 of the Act, Code
Section 162(m) or the jurisdiction of such self-regulatory organization, as the
case may be, as of the date of such action). No amendment to the Plan shall
impair any rights under an Award without the consent of the affected
Participant.
(b) Award Modifications. Subject to the terms and conditions of the Plan
-------------------
(including Section 10.1(a)), the Committee may amend outstanding Award
Certificates including, without limitation, any amendment which would:
(i) accelerate the time or times at which an Award may vest or
become exercisable; and/or
(ii) extend the scheduled termination or expiration date of the Award,
provided, however, that no modification having a material adverse
effect upon the interest of a Participant in an Award shall be made
without the consent of such Participant.
10.2 Consent Requirements.
--------------------
If the Committee shall at any time determine that any Consent is necessary or
desirable as a condition of, or in connection with, the granting of any Award
under the Plan, the acquisition, issuance or purchase of Stock or other rights
hereunder or the taking of any other action hereunder (each such action being
hereinafter referred to as a "Plan Action"), then such Plan Action shall not be
taken, in whole or in part, unless and until such Consent shall have been
effected or obtained to the full satisfaction of the Committee.
10.3 Withholding Taxes.
------------------
(a) Whenever under the Plan shares of Stock are to be delivered pursuant to an
Award, the Committee may require as a condition of delivery that the Participant
remit to the Company an amount sufficient to enable the Company to satisfy all
federal, state and other governmental withholding tax requirements related
thereto. Whenever Cash is to be paid under the Plan (whether upon the exercise
of a SAR or otherwise), the Company may, as a condition of its payment, deduct
therefrom, or from any salary or other payments due to the Participant, an
amount sufficient to enable the Company to satisfy all federal, state and other
governmental withholding tax requirements related thereto or to the delivery of
any shares of Stock under the Plan.
18
<PAGE>
(b) Without limiting the generality of the foregoing, if authorized by the
Committee:
(i) a Participant may elect to satisfy all or part of the
foregoing withholding requirements by delivery of unrestricted
shares of Stock owned by the Participant for such period of
time as may be required to avoid a charge to the Company's
earnings for financial statement purposes (as determined by the
Committee) having a Fair Market Value
(determined as of the date of such delivery by the Participant)
equal to all or part of the amount to be so withheld, provided
that the Committee may require, as a condition of accepting any
such delivery, the Participant to furnish an opinion of counsel
acceptable to the Committee to the effect that such delivery would
not result in the Participant incurring any liability under Section
16(b) of the Act and does not require any Consent; and
(ii) the Committee may, from time to time and upon such
terms and conditions as it may in its discretion determine, grant
rights ("tax withholding rights") under the Plan to have the
Company withhold from the receipt of proceeds on the settlement
or exercise of any Award a number of shares of Stock of sufficient
Fair Market Value to pay the amount of taxes the Company is
required to collect or withhold on the settlement or exercise
of the Award. Tax withholding rights shall be exercised simulta-
neously with the exercise or receipt of an Award, giving rise to a
tax withholding obligation. Shares of Stock withheld shall be
deemed to have been delivered to the Company on the exercise or
Award date, as appropriate.
10.4 Adjustments Upon Changes in Capitalization.
------------------------------------------
If and to the extent specified by the Committee, the number of shares of Stock
which may be issued pursuant to Awards under the Plan, the maximum number of
Options and/or unrelated SARs which may be granted to any one person in any
period, the maximum number of shares of Stock with respect to which the
aggregate of Awards made under Sections 8 and 9 may vest, the number of shares
of Stock that may be subject to incentive stock options, the number of shares of
Stock subject to Awards, the exercise price and appreciation base of Options and
SARs granted under the Plan, the maximum number of shares of Stock which may be
paid pursuant to a Section 162(m) Award, the amount payable by a Participant in
respect of an Award and any appropriate feature of any Other Stock-Based Award
shall be appropriately adjusted (as the Committee may determine) for any change
in the number of issued shares of Stock resulting from the subdivision or
combination of shares of Stock or other capital adjustments, or the payment of a
stock dividend after the effective date of the Plan, or other change in such
shares of Stock effected without receipt of consideration by the Company;
provided that any Awards covering fractional shares of Stock resulting from any
such adjustment shall be eliminated and provided further, that no Option granted
under the Plan shall be adjusted in a manner that causes such Option to fail to
continue to qualify as an "incentive stock option" within the meaning of Code
section 422 (and no
19
<PAGE>
Section 162(m) Award shall be adjusted pursuant to this Section 10.4 in a manner
that causes such Award to fail to meet the requirements of Code section 162(m)).
Adjustments under this Section shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
10.5 No Right of Employment or Continued Participation.
-------------------------------------------------
Nothing in the Plan or in any Award Certificate shall confer upon any person
the right to continue in the employment or other service of the Company or a
Subsidiary or affect any right which the Company may have to terminate the
employment or other service of such person. Nothing in the Plan shall confer
upon any person a claim or right to the grant of an Award.
10.6 No Rights as a Stockholder.
--------------------------
Except as otherwise provided in an applicable Award Certificate, no
Participant or other person shall have any of the rights of a stockholder of the
Company with respect to shares of Stock subject to an Award until the issuance
of a stock certificate to the Participant for such shares or, in the case of a
Restricted Stock Award granting dividend and/or voting rights to the
Participant, to the escrow agent, custodian or trustee designated to hold such
shares. Except as otherwise provided in an applicable Award Certificate or in
Section 10.4, or with respect to Restricted Stock, no adjustment shall be made
for dividends, distributions or other rights (whether ordinary or extraordinary,
and whether in Cash, securities or other property) for which the record date is
prior to the date such stock certificate is issued.
10.7 Nature of Payments.
-------------------
(a) Any and all Awards or payments hereunder shall be granted, issued,
delivered or paid, as the case may be, in consideration of services performed
for the Company by the Participant.
(b) All Awards and payments granted or made hereunder shall be considered
special incentive payments to the Participant. Except as specifically provided
in such plan or agreement, no Awards or payments shall be taken into account in
computing the Participant's salary or compensation for the purposes of
determining any benefits under any pension, retirement, life insurance or other
benefit plan of the Company or any agreement between the Company and the
Participant.
(c) By exercising or accepting payment of an Award under the Plan, the
Participant shall thereby waive any claim to continued exercise or vesting of an
Award or to damages or severance entitlement related to non-continuation of the
Award beyond the period provided herein or in the applicable Award Certificate,
notwithstanding any contrary provision in any written employment contract with
the Participant, whether any such contract is executed before or after the grant
date of the Award.
20
<PAGE>
10.8 Non-Uniform Determinations.
--------------------------
Except for adjustments pursuant to Section 10.4, the Committee's
determinations under the Plan need not be uniform and may be made by it
selectively among persons who receive, or are eligible to receive, Awards under
the Plan (whether or not such persons are similarly situated).
Without limiting the generality of the foregoing, the Committee shall be
entitled, among other things, to make non-uniform and selective determinations,
and to enter into non-uniform and selective Award Certificates, as to:
(a) the persons receiving Awards under the Plan, and
(b) the terms and provisions of Awards under the Plan.
10.9 Other Payments or Awards.
------------------------
Nothing contained in the Plan shall be deemed in any way to limit or restrict
the Company, or the Committee from making any Award or payment to any person
under any other plan, arrangement or understanding, whether now existing or
hereafter in effect.
10.10 Change in Control.
------------------
The Committee may, in its discretion, include in any Award Certificate a
provision pursuant to which the Award will become exercisable, vest, be paid,
have restrictions on the Stock underlying the Award removed, be canceled or
forfeited, be replaced or otherwise become subject to special vesting, exercise
and forfeiture rules upon the occurrence of a "change in control" (as defined by
the Committee from time to time).
10.11 Section Headings.
----------------
The section headings contained herein are for the purposes of convenience only
and are not intended to define or limit the contents of said sections.
10.12 Effective Date .
----------------
The Plan shall be deemed adopted and become effective upon the approval
thereof by the stockholders of DWD.
10.13 Governing Law.
-------------
The Plan shall be governed by the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such state.
10.14 Plan Expenses.
--------------
The expenses of the Plan shall be borne by the Company.
21
<PAGE>
10.15 Related Employment.
-------------------
The commencement of Related Employment by a Participant shall not be treated,
for purposes of the Plan and any Award hereunder, as a termination of
employment. The Retirement, Disability or death of an individual during a period
of Related Employment shall be treated, for purposes of the Plan and any Award
hereunder, as if such event had occurred while the individual was an employee of
the Company.
10.16 Arbitration.
------------
All claims and disputes between a Participant and the Company arising out of
the Plan or any Award granted hereunder shall be submitted to arbitration in
accordance with the then current arbitration policy of the Company. Notice of
demand for arbitration shall be given in writing to the other party and shall be
made within a reasonable time after the claim or dispute has arisen, but in no
event later than the end of the applicable limitation period under applicable
law. The Award rendered by the arbitrator shall be made in accordance with the
provisions of the Plan, shall be final and judgment may be entered upon it, in
accordance with applicable law in any court having jurisdiction thereof. The
provisions of this Section 10.16 shall be specifically enforceable under
applicable law in any court having jurisdiction thereof.
22
<PAGE>
Exhibit 11
DEAN WITTER, DISCOVER & CO.
COMPUTATION OF EARNINGS PER COMMON SHARE (1)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Net Income $740.9 $856.4 $951.4
====== ====== ======
Average common shares outstanding, excluding the dilutive
effects of stock options and unissued stock awards 341.0 340.3 328.7
====== ====== ======
Earnings per common share:
Primary dilution basis (2)
Earnings per common share $ 2.14 $ 2.44 $ 2.79
====== ====== ======
Average common shares outstanding 346.7 350.7 341.2
====== ====== ======
Full dilution basis (3)
Earnings per common share $ 2.14 $ 2.44 $ 2.77
====== ====== ======
Average common shares outstanding 346.7 350.9 343.3
====== ====== ======
</TABLE>
(1)Earnings per common share and shares outstanding data have been restated to
reflect the Company's two-for-one stock split.
(2)Earnings per common share on a primary dilution basis for the years ended
December 31, 1994, 1995 and 1996 was calculated using the weighted average
price per share of the Company's common stock during the period, and included
the dilutive effects of stock options and unissued stock awards under
deferred compensation plans.
(3)Earnings per common share on a full dilution basis for the years ended
December 31, 1994, 1995 and 1996 was calculated using the greater of the
period-end price per share of the Company's common stock or the weighted
average price per share of the Company's common stock during the period and
included the dilutive effects of stock options and unissued stock awards
under deferred compensation plans.
<PAGE>
Exhibit 12
DEAN WITTER, DISCOVER & CO.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1994 1995 1996
-------- ------- -------
<S> <C> <C>
Earnings
Income before income taxes $1,214.6 $1,395.9 $1,545.1
Interest expense 1,048.5 1,514.8 1,566.2
Interest factor in rent expense 49.5 51.0 54.2
-------- -------- --------
Total earnings $2,312.6 $2,961.7 $3,165.5
======== ======== ========
Fixed charges
Interest expense 1,048.5 1,514.8 1,566.2
Interest factor in rent expense 49.5 51.0 54.2
-------- -------- --------
Total fixed charges $1,098.0 $1,565.8 $1,620.4
======== ======== ========
Ratio of earnings to fixed charges 2.1 1.9 2.0
======== ======== ========
</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 the interest
factor.
<PAGE>
EXHIBIT 13
[LOGO] DEAN WITTER, DISCOVER & CO.
1996 ANNUAL REPORT
[GRAPHIC]
An Illustration of people walking up stairs to a new level
Winning at a New Level
DEAN WITTER, DISCOVER & CO. 1996 ANNUAL REPORT
<PAGE>
FINANCIAL HIGHLIGHTS
(dollars in millions, except per shares data)
1996 1995 1994
- ------------------------------------------------------------------------------
NET OPERATING REVENUES
Credit Services $ 2,851.5 $ 2,617.7 $ 2,240.1
Securities 3,378.6 3,058.2 2,765.6
- ------------------------------------------------------------------------------
Consolidated $ 6,230.1 $ 5,675.9 $ 5,005.7
- ------------------------------------------------------------------------------
NET INCOME
Credit Services $ 449.5 $ 446.9 $ 414.7
Securities 501.9 409.5 326.2
- ------------------------------------------------------------------------------
Consolidated $ 951.4 $ 856.4 $ 740.9
- ------------------------------------------------------------------------------
Earnings per common share(1)
Primary $ 2.79 $ 2.44 $ 2.14
Fully diluted 2.77 2.44 2.14
- ------------------------------------------------------------------------------
Total assets $42,413.6 $38,208.2 $31,859.4
Shareholder's equity $ 5,164.4 $ 4,833.7 4,108.0
- ------------------------------------------------------------------------------
Return on average shareholders' equity 19.0% 19.2% 19.5%
- ------------------------------------------------------------------------------
(1) Per share data has been restated to reflect the Company's two-for-one stock
split.
See accompanying consolidated financial statements and footnotes beginning on
page 31.
[GRAPH -- SEGMENT NET INCOME AS A % OF CONSOLIDATED]
1996 NET INCOME
$ millions % of total
---------- ----------
Credit Services $ 449.5 47%
Securities 501.9 53
------- ---
Consolidated $ 951.4 100%
======= ===
1996 NET OPERATING REVENUES
Credit Services $2,851.5 46%
Securities 3,378.6 54%
------- ---
Consolidated $6,230.1 100%
======= ===
CONTENTS
- --------------------------
Letter to Shareholders 1
Financial Review 16
Shareholder Information 47
Directors and Officers 48
<PAGE>
To Our Shareholders
March 1997
SOMETHING BIG and very exciting happened to this annual report on its way to
the printer. We had prepared a full and interesting account of 1996, which was
an excellent year for our company.
Then, about one month after we had closed the books on the year, we
announced a merger with Morgan Stanley with the stated objective of creating
the world's preeminent financial services company. An event of this magnitude,
with its great promise for shareholders, clients and employees, inevitably
tends to overshadow our very significant achievements for 1996. Perhaps that's
because, in this era of instant communication, the latter falls into the
category of old news. Markets and the media care more about the future.
We obviously welcome all the attention the merger announcement has
received. It has been widely and accurately reported that our combined company
will have a leading market position in three primary businesses -- securities,
asset management and credit services -- and will have opportunities for high
profitability and accelerated growth. And the market has reacted favorably to
the merger announcement.
Dean Witter Discover and our colleagues at Morgan Stanley believe the
combination of our two highly successful firms may be as close to an ideal
merger as there is. It is a combination based on powerful franchises and
complementary strengths. In the securities business, it combines Morgan
Stanley's strengths in product origination, investment banking and institutional
sales and trading with Dean Witter's strengths in providing investment and asset
management services to individual investors. In asset
Dean Witter Discover and
our colleagues at Morgan Stanley
believe the combination of our
two highly successful firms may
be as close to an ideal merger as
there is. It is a combination
based on powerful franchises
and complementary strengths.
- ----------------------------------
Dean Witter, Discover & Co. 1996
--------------------------------
1
<PAGE>
[PHOTO]
Philip J. Purcell
Chairman and Chief Executive Officer
[GRAPH]
management, the combination will result in a business that will manage more
than $270 billion -- the largest of any securities firm. In credit services,
the combined companies' financial resources and Morgan Stanley's global
presence create significant opportunities for expansion.
The draft that was on its way to the printer before the merger
announcement has been left almost entirely intact. It happens to be an excellent
prologue to what happened in early February 1997 as well as a prologue to the
future.
The theme in that draft, "Winning at a New Level," has now become even
more appropriate than it was before. In Morgan Stanley we have a partner that is
well-accustomed to winning. In 1996, it was number one in global mergers and
acquisitions, and a leader in underwriting initial public offerings and U.S.
equity and equity-related products. Merging with Morgan Stanley is like merging
with the Chicago Bulls.
In addition to the concept of winning, there are other themes in our
1996 report that now resonate more strongly as a result of the proposed
merger--themes such as the great value of brands and franchises, the need to
expand globally, the importance of a wide range of products for our account
executives, and the importance of size. In each of these areas, I believe it is
clear the merger puts us at an entirely new level.
We are excited about the future, and starting a year from now, I look
forward to reporting to shareholders on how the combined company is doing. In
the meantime, I am proud to give this report on the achievements of Dean Witter
Discover in 1996. These achievements helped pave the way for the merger
announcement.
Dean Witter, Discover & Co. 1996
- --------------------------------
2
<PAGE>
January 1997
1996 was another very good year for Dean Witter Discover and our
shareholders, with record earnings, record revenues, and a 41 percent gain in
our share price.
We began the year with a To Do List that I described in our last annual
report. This list gave us focus, and brought some significant results. We've
included a progress report on the To Do List in this year's report. As we look
ahead to this next year, our company-wide theme is "Winning at a New Level."
During the course of the year, we also encountered some new challenges,
particularly the phenomenon of rising credit card write-offs. Quite frankly, the
extent and timing of the write-off problem surprised us (as it did everyone else
in the industry). But I believe we have responded well. I will discuss the
challenge posed by write-offs at greater length below.
In 1996, we did more than just proceed on our agenda and capitalize on
the market. We also gave a great deal of thought to the future, and to our
position in the marketplace where competitive pressures are bringing rapid
consolidation.
We focused on two overriding long-term objectives -- building our brands
and gaining technological leadership in the financial services industry. We
already have considerable strength in each area, and if we can build on these
strengths, we believe we can gain significant competitive advantage. So we will
focus even more intently on these two priorities in 1997, and beyond. Both are
essential to winning at a new level.
[GRAPHIC]
We are playing from strength,
with growing businesses and
a large national customer base on
both the asset and credit side of
the balance sheet. Continued
growth, market leadership and
global expansion have become
strategic imperatives.
- ---------------------------------
Dean Witter, Discover & Co. 1996
--------------------------------
3
<PAGE>
CONSISTENT RESULTS
FOR SHAREHOLDERS
- ----------------
Let me begin with the financial results for the past year. You can only
win if you keep score, and one way of keeping score in business is through
consistent earnings growth. By this measure, there are few companies that can
match our record.
. We earned $951 million in 1996. It was our eighth straight year of earnings
growth -- $95 million higher than 1995 and an increase of 14 percent. We are now
close to $1 billion in annual earnings, an amount which seemed a distant dream
just four years ago at the time of our initial public offering.
. Earnings per share increased to $2.77 in 1996, 14 percent higher than $2.44 in
1995.
. Our company-wide return on equity was 19 percent, consistent with the goal we
set for ourselves four years ago. We have met that goal every year.
The result was a great year for Dean Witter Discover shareholders. At
the end of 1996, our stock price was $33 when adjusted for the January stock
split. The market value of each share was more than twice what it was when we
went public.
From the outset, the Dean Witter Discover Board of Directors has focused
on the interests of shareholders and rewarded their commitment. We declared our
first dividend, $.05 a share (adjusted for the stock split) in June of 1993
after our first quarter as a public company. Since then, we have paid a dividend
every quarter, and have increased the amount every year. In the first quarter of
1997, the dividend increased to $.14 a share. That's an increase of 180 percent
in less than four years.
THE CHANGING PLAYING FIELD
- --------------------------
On another front, 1996 was also a good year for us in Washington. We
made significant progress on the legislative/regulatory front, progress that
should benefit our company, our industry and our customers.
Two events were particularly noteworthy. The first was the lifting of
the Competitive Equality Banking Act of 1987 (CEBA) growth cap. For
Discover/(R)/ Card and our other NOVUS/(R)/ cards, this means we'll
[GRAPH]
Dean Witter, Discover & Co. 1996
- --------------------------------
4
<PAGE>
be able to compete and grow like most other companies, without the
legislativly-imposed red tape of having to move assets from one legal entity to
another. The second was the passage of securities litigation reform. This will
enable the people in our securities business to concentrate even more on serving
customers, putting their interests first (as we always have), without the
distraction of so many frivolous Federal lawsuits.
The slow but steady dismantling of the Depression-era regulatory
structure for financial services continued apace in 1996. The Federal Reserve's
decision to expand the Section 20 securities powers of bank holding companies is
likely to have a major impact. It will encourage commercial banks to expand
their securities business and perhaps undertake new acquisitions. This is a
trend that will continue, and the implications are plain: more intense
competition and further consolidation in financial services.
In November, there were reports of merger talks between Citicorp and
American Express. We clearly must be ready for dramatic changes in the
competitive landscape. This gives particular urgency to our goal of winning at a
new level. As competition intensifies, I believe we are playing from strength,
with growing businesses and a large national customer base on both the asset and
credit side of the customer's balance sheet. Continued growth and market
leadership have become strategic imperatives.
[GRAPHIC]
In our securities business, the first
global priority is to provide an
expanded array of investment
opportunities for our clients. This
will not only benefit clients, but
it will also make our account
executives even more productive.
- -------------------------------------
Dean Witter, Discover & Co. 1996
--------------------------------
5
<PAGE>
ESTABLISHED STRENGTHS
IN TWO MAJOR BUSINESSES
- -----------------------
1996 was another successful year for our securities customers and for
our securities business. Total client assets entrusted to us rose from $221
billion to $251 billion. Strong financial markets helped make it another solid
year for investors. When investors do well, it's good for us. In 1996, our
earnings for this part of the company reached a record $502 million.
We had a record-breaking year in our securities business pretty much
across the board. We added more than 500 new account executives to reach 9,080.
We increased the number of client accounts by a record-breaking 160,000 to give
us 3.25 million. And client assets under management reached an all-time high of
over $90 billion. Individual investors have become more important than ever
before, and the reach and quality of our distribution network, and our ability
to gather assets, are key competitive advantages.
Overall, we also had a good year in our credit services business,
although the results were more mixed than in our securities business. Revenues
continued to grow at a very strong pace, but earnings were only fair, mainly
because of credit card write-offs. Even so, we earned $450 million in credit
services, slightly ahead of 1995. When you take into account the effect of a
$540 million increase in write-off rates, our 1996
[PHOTO]
Richard M. Demartini, President and Chief Operating Officer, Dean Witter
Capital; James F. Higgins, President and Chief Operating Officer, Dean Witter
Financial; Thomas R. Butler, President and Chief Operating Officer, NOVUS
Services.
[GRAPH]
Dean Witter, Discover & Co. 1996
- --------------------------------
6
<PAGE>
credit services earnings represent a significant accomplishment. This is a
business we understand very well, and we believe it should continue to provide
strong, steady income.
We took a number of steps in response to the write-off problem,
including increased fees for late payments, over-limit fees and other repricing
actions. These moves had a positive impact on revenues, especially in the fourth
quarter, and we expect the impact to continue in 1997.
The major vital signs in our credit services business are healthy. This
past year we increased receivables from $27.8 billion to $32.6 billion. The
number of accounts increased to 39 million. And we enrolled 425,000 merchant
locations in 1996.
To Do List:
PROGRESS REPORT
- ---------------
In addition to record revenues and earnings, there were a number of more
specific achievements in 1996. The most important of these concerned the
progress we made on our To Do List. As I said in last year's report, some of
these items are more long-term than others. But we began to focus and proceed on
all of them in 1996 and we made some significant strides:
In two instances--international markets and electronic delivery of
products--we did more than just proceed. We took dramatic action with the Morgan
Stanley merger announcement and the purchase of Lombard Brokerage, Inc.
EXPAND INTO INTERNATIONAL
MARKETS A year ago I described participation in global markets as one of our
long-term goals. (Obviously, with the Morgan Stanley merger announcement we have
met this "long-term goal" virtually overnight.)
[GRAPHIC]
We had a good year in our
credit services business . . .
This is a business we understand
very well, and we believe it
should continue to provide
strong, steady income.
- ---------------------------------
Dean Witter, Discover & Co. 1996
--------------------------------
7
<PAGE>
[GRAPHIC]
The next frontier in financial
services is electronic distribution --
straight to customers via personal
computers, TVs or video phones.
This past year we have staked out a
strong presence on the new frontier,
with the Mondex USA initiative,
our new Website and
the Lombard acquisition.
- --------------------------------------
We have also been actively exploring other opportunities abroad,
particularly in our credit card business, and we are now one year closer to our
goal. We achieved an important regulatory victory in Europe when, along with
American Express, we were able to block a restrictive Visa bylaw that would have
kept Visa issuers from joining other credit card networks. The door is open to
us in Europe as well as other markets.
In our securities business, the first global priority is to provide an
expanded array of investment opportunities for our clients. This will not only
benefit clients, but it will also make our account executives even more
productive.
DELIVER PRODUCTS
ELECTRONICALLY Just before year end, we announced the
acquisition of Lombard Brokerage, Inc., one of the leading providers of
electronic securities transactions via its site on the Internet and a toll-free
number. Lombard has been named "the best on-line broker" by Barron's. This
acquisition gives us a significant stake in the emerging marketplace for
electronic commerce. Lombard is a pioneer in providing on-line trading and
research information.
We also proceeded on several other fronts in electronic commerce. We
announced in early December that we had become an owner of Mondex USA along with
six other major financial organizations. Mondex is an advanced electronic
payment and smart card system that will be deployable both on cards and over the
Internet. We also developed an attractive and user-friendly company-wide
Website. In addition, our Private Issue(R) Card's Website provides account
information to cardmembers in a secure environment, and our other cards will
soon do the same. We also continued to refine our advanced network of account
executive workstations.
Dean Witter, Discover & Co. 1996
- --------------------------------
8
<PAGE>
Once again, the key is to leverage our established franchises with new
technology and new delivery systems.
DEEPEN OUR COMMITMENT TO THE 401(K) BUSINESS We began 1996 with a very
careful and extensive study on just what it would take to become a major player
in this huge market. We set up a new group within our organization to build the
401(k) business, and we committed substantial resources. We don't expect the
effort to be profitable overnight. We are prepared to stay with our commitment
as long as it takes to make this business a winner. It is a natural -- and
vital -- extension of our commitment to individual investors.
[GRAPH]
EXPAND LOANS TO SECURITIES CLIENTS This past year first mortgage and home
equity loans made by our securities account executives increased by 20 percent.
But our goal is to grow this business much more rapidly, and in 1996 and early
1997 we took some significant steps to do so. We've also begun to look at other
types of loans that we might offer to our securities customers. At a time when
the lines separating historic distribution channels are blurring, we want to
make sure that we offer a full range of financial products to our customers.
LEVERAGE 36 MILLION CUSTOMER BASE Loans to securities clients is one way we
are leveraging our customer base. The acquisition of Lombard is an important
step forward in achieving this long-term goal. At year end we announced the
creation of a new business named DWD Electronic Financial Services, which
consolidates all of our investments in PC-based financial services products and
focuses on the growing market for customers who want to do banking and
securities transactions on the Internet.
As we move forward, the name of the game is to capitalize on the
extensive and valuable customer franchise that we have already built.
CREATE CO-BRANDED/AFFINITY NOVUS CARDS We're off to a very good start in
creating new co-branded and affinity cards. In September, in a joint program
with the American Zoo and Aquarium Association, we launched the National
Alliance For Species Survival(SM) Card. We call it the "zoo card" for short. We
also entered an agreement with Universal Studios (announced in March 1997) to
launch a new co-branded card and to make Discover Card and other NOVUS brands
the preferred cards of Universal Studios.
Dean Witter, Discover & Co. 1996
--------------------------------
9
<PAGE>
And we have also entered an agreement with the Smithsonian Institution to issue
the first affinity card for their members and supporters.
SERVE MORE SEGMENTS IN THE SECURITIES MARKETPLACE It's been full speed ahead
in our expansion into new securities channels. First, there was the Banc One
agreement, signed in February 1996, that I mentioned in last year's annual
report. We had earlier entered a similar agreement with NationsBank. We will
soon be launching new joint efforts to provide investment products and services
in the bank channel.
EMPHASIZE CLOSED-LOOP ADVANTAGE Our relationships with both cardmembers and
merchants give us an information advantage in our credit card business. It has
enabled us to target our marketing efforts more effectively. The "closed loop"
has now become even more important in our efforts to reach new market segments
while preserving credit quality.
GOING FORWARD:
BRANDS AND TECHNOLOGY
- ---------------------
Our To Do List has proven to be a valuable exercise. It has focused our
attention and brought results. We'll continue to proceed in each of the specific
areas on the list. It has also been valuable because it has forced us to go
beyond the list and think long and hard about the future.
We've asked ourselves, "What are the one or two fundamental issues that
cut across the list and capture everything we have to do?" We've identified two
such issues. The first is making our Discover, Dean Witter and NOVUS brands
preeminent in the marketplace. The second is
[GRAPHIC]
We're fortunate to have two great
established brands in Discover and
Dean Witter. Our number one priority
is to build and extend their magic in
the marketplace.
- -------------------------------------
[GRAPH]
Dean Witter, Discover & Co. 1996
- --------------------------------
10
<PAGE>
achieving unquestioned technological leadership in the financial services
industry.
Every Marketing 101 student knows there is something magic about brands.
For customers, brands come to represent promise, value and expectations. For a
business, a good brand becomes a non-depreciating asset, even more important
than products because it is the brand that establishes a standard over time. In
fact, in our Dean Witter securities business, where we "measure success one
investor at a time," you could say that we have more than three million
customized products (one for each customer), but one brand.
We're fortunate to have two great established brands in Discover and
Dean Witter. Our number one priority is to build and extend their magic in the
marketplace. That is the surest way to grow, to provide value, to gain market
leadership, and to achieve increased profitability in an environment that has
become intensely competitive.
Discover Card was the first "value card". In a marketplace now cluttered
with many new cards, it still stands for value, dependability and quality --
promises that have been kept for over ten years. Discover is the largest single
issuer of bank cards. It represents a huge investment on our part and on the
part of customers. We must do more to leverage this investment.
The investment in the Dean Witter name goes back even longer, starting
with the founding of Dean Witter & Co. in San Francisco more than 70 years ago.
As the firm grew, and expanded through acquisition, it came to stand for
integrity, service and sound advice for individual investors. In his last memo
to the firm in 1967, Dean Witter said, "The most valuable asset of an investment
firm is its good name." We will certainly continue to build on this good name.
It's part of the brand, and a vital link to our customers. If you look at the
securities industry today, it's no accident that the best firms, the surviving
firms, the firms that will be dominant players in the future, are those with
good names.
[GRAPH]
Dean Witter, Discover & Co. 1996
--------------------------------
11
<PAGE>
Our third major brand, the NOVUS Network, is much newer. We are still in
the process of establishing the NOVUS name in the marketplace. In some ways we
are still an upstart, a new and innovative network challenging the network
"duopoly" of Visa and MasterCard in the credit card market. We believe that
consumers as well as issuers will benefit if the two large credit card
associations no longer dominate the marketplace. So we will keep pushing for
more competition and more choice for consumers through our NOVUS Network.
Our second fundamental priority is technology. There is nothing new
about the importance of technology. Communication and information have always
been basic to financial services -- it goes back to the first ticker tape. Early
this century, Dean Witter & Co. began as a "wire house" that used communications
technology to create a national market for stocks and bonds. Today, Dean Witter
Discover has more than three million securities customers and 39 million credit
card customers throughout the country, and we serve them by using the latest
network computer technology.
The next frontier in financial services is electronic distribution --
straight to customers via personal computers, TVs, video phones, or other
devices. No one can predict the exact shape of this market. It proceeds by fits
and starts. Home banking was supposed to arrive five years ago, but has still
not fulfilled its promise. On-line investing faced great skepticism just a year
ago, but now there are already nearly two million on-line investors.
This past year we have staked out a strong presence on this new
frontier, with the Mondex USA initiative, our new Website and the Lombard
acquisition. We also put into place an advanced client/server operations system
for our credit card business that is the largest and most flexible in the
industry. It will enable us to grow and respond quickly to new opportunities.
There is much more to do, and we also recognize that the world is
changing so fast that you cannot always spell out an exact agenda. But we do
know that technology matters in our businesses, as never before. So we are
investing in technology, as never before.
You don't win in technology, or business, unless you are willing to take
risks -- not foolish risks, but the sort that come from playing at the top level
where you must fully commit yourself in order to win. When you play at that
level, you may lose some of the time, but in the end you will prevail.
[GRAPH]
Dean Witter, Discover & Co. 1996
- --------------------------------
12
<PAGE>
EXTENDING OUR STRATEGY
- ----------------------
Dean Witter Discover is a company that embraces change, but we also
believe in consistency, and we are not about to embark on a strategy du jour.
When you have eight straight years of record earnings there are some things you
don't want to change.
In our securities business, the strategy we developed in the mid-80s has
proven to be very sound.
. Focus on individual investors. The demand for financial services continues to
expand, and this gives us a rapidly growing customer base.
. Serve individual investors through professional account executives. Even with
the rise of the discounters, and now on-line trading, the need for advice and
service has remained a constant in the marketplace. In fact, "advice" has
recently been resurrected as one of the industry buzz words. That's not
surprising. In the long run, the only sure formula for success in the financial
services business is to make sure your customers are winners. This means
attending to their particular needs and goals, providing good service and
advice.
.Emphasize assets under management because mutual funds are a growth industry
and provide steady, fee-based income.
With this strategy, based on what we have built over the last ten years,
we expect consistent, continued growth in our traditional securities business.
We've had strong results for the past several years in investment banking. In
1996, our revenues from investment banking grew by 36 percent. We have also
built a strong equity research department. Last year we were once again a leader
among firms serving individual investors in surveys ranking the top analysts.
[PHOTO]
Mitchell M. Merin, Chief Administrative Officer;
Thomas C. Schneider, Chief Financial Officer;
Christine A. Edwards, General Counsel and Secretary.
Each is an Executive Vice President of Dean Witter, Discover & Co.
But we have also been adding some new things in order to spur further
growth. The most recent and most dramatic is our willingness to use capital to
make acquisitions. The addition of Lombard is an investment in technology, new
channels and future growth.
We're also adding new products and services. Our nationwide network of
account executives gives us a key competitive advantage. We must continue to
provide them with a full array of financial products for their clients. Our
initiative into insurance, with variable annuities offered through
Dean Witter, Discover & Co. 1996
--------------------------------
13
<PAGE>
alliances with Allstate and Hartford, has been extremely successful. This
year we'll be offering more no-load and low-load mutual funds. We'll also
expand our personal trust products and services to meet the needs of older
customers (including the oldest of the baby boomers). Last year we acquired
Union Federal Bank, which gives us trust powers in all 50 states. And as I
mentioned, we've now made a major commitment to the 401(k) market, and we're
actively pursuing ways to provide more international investment opportunities
for our clients.
Our strategy in credit services has also proven to be very sound. In
just ten years, we have established a major nationwide brand, with a customer
base of 39 million accounts, steady income from receivables, and profits of
close to a half a billion dollars last year. The fundamentals of this business
are still strong (revenue growth this past year was the highest in our history).
But we face three significant challenges.
The first is dealing with write-offs, or the problem of credit quality.
There are indications that the higher level of write-offs is not simply a short-
term, cyclical phase, but a new industry-wide plateau that will be with us for
the foreseeable future. If that is true, then the competitive advantage will go
to the companies that deal with the new, higher levels most effectively.
We have been helped over the short term by our ability to respond
quickly with new fees and repricing actions. But over the longer term, credit
quality is fundamentally a technology challenge. The winning companies will be
those that are able to put into place pricing based on the customer's credit
worthiness and available technology that is fair, fast and consistent. We are
determined to be second to none when it comes to credit quality decisions.
Our second challenge is merchant parity with Visa and MasterCard. Right
now, Discover and other NOVUS cards are accepted at outlets that account for
about 90 percent of total U.S. bankcard transactions.
[GRAPH]
Dean Witter, Discover & Co. 1996
- --------------------------------
14
<PAGE>
That's not bad for a relative newcomer competing against two powerful,
established associations. We've been expanding our merchant network every year,
but we won't be satisfied until we get close to 100 percent. That sort of parity
is essential in order for Discover Card, Private Issue, BRAVO/(R)/ and future
NOVUS cards to reach their full potential.
The third challenge is a global presence. As we get closer to merchant
parity in the U.S., the next and most promising opportunity is expansion abroad.
A top item on our 1997 agenda is to explore a number of possible alliances with
non-U.S. companies or with U.S. companies with global operations.
WINNING AT A NEW LEVEL
- ----------------------
As we look to the future, there is clearly no shortage of challenges or
opportunities. I can also report to shareholders that there is no shortage of
ability, imagination and commitment among the 33,000 employees of Dean Witter
Discover.
The most important task of management is, always, to pick the right
people. More important than strategy, more important than products, and more
important than markets, having good people is the surest way to win. Our people
are a diverse lot, from many different backgrounds and with many different
talents and skills, and they share the same high level of commitment to the
continued success of this enterprise. I am confident about our future.
Sincerely,
Philip J. Purcell
[GRAPHIC]
As we look to the future,
there is clearly no shortage of
challenges or opportunities. I can
also report to shareholders that
there is no shortage of ability,
commitment and imagination
among the 33,000 employees of
Dean Witter Discover.
- ----------------------------------
Dean Witter, Discover & Co. 1996
--------------------------------
15
<PAGE>
Financial Review
CONTENTS
Five Year Summary of Financial Information 17
Management's Discussion and Analysis 18
Management's Statement of
Financial Reporting Responsibility 30
Independent Auditors' Report 30
Consolidated Statements of Income 31
Consolidated Balance Sheets 32
Consolidated Statements of
Changes in Shareholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35
Quarterly Information 46
Dean Witter, Discover & Co. 1996
- --------------------------------
16
<PAGE>
FIVE-YEAR SUMMARY OF FINANCIAL INFORMATION
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Non-interest revenues $ 5,441.3 $ 4,615.4 $ 4,095.4 $ 3,912.4 $ 3,208.4
Interest revenue 3,587.3 3,319.0 2,507.2 1,909.2 1,975.1
Interest expense 1,566.2 1,514.8 1,048.5 815.3 965.8
Provision for losses on receivables 1,232.3 743.7 548.4 457.6 484.1
Net credit income 788.8 1,060.5 910.3 636.3 525.2
Net operating revenues 6,230.1 5,675.9 5,005.7 4,548.7 3,733.6
Non-interest expenses 4,685.0 4,280.0 3,791.1 3,552.5 3,062.8
Income before income taxes and cumulative
effect of accounting change 1,545.1 1,395.9 1,214.6 996.2 702.9
Income tax expense 593.7 539.5 473.7 392.6 263.8
Cumulative effect of accounting change,
net of income taxes -- -- -- -- 28.6
Net income 951.4 856.4 740.9 603.6 410.5
- -----------------------------------------------------------------------------------------------------------------
PER SHARE DATA(1)
Earnings per common share
Primary $ 2.79 $ 2.44 $ 2.14 $ 1.81 --
Fully diluted 2.77 2.44 2.14 1.81 --
Book value per common share 16.16 14.31 12.16 10.19 --
Dividends per common share 0.44 0.32 0.25 0.15 --
- -----------------------------------------------------------------------------------------------------------------
BALANCE SHEET AND OTHER OPERATING DATA
Consumer loans $23,188.2 $21,556.4 $16,174.1 $12,148.2 $ 9,794.5
Total assets 42,413.6 38,208.2 31,859.4 27,662.3 23,821.5
Short-term borrowings 5,865.0 6,325.5 4,049.6 3,260.7 5,665.1
Deposits 7,212.6 6,191.1 5,208.7 4,888.1 4,857.1
Long-term borrowings 8,144.2 6,732.4 5,292.6 3,140.3 --
Shareholders' equity 5,164.4 4,833.7 4,108.0 3,477.1 2,673.3
Return on average shareholders' equity(2) 19.0% 19.2% 19.5% 19.6% 17.6%
Supplemental information (in billions)
Managed consumer loans $ 36.6 $ 31.8 $ 26.1 $ 21.2 $ 18.5
Assets under management and administration 90.0 79.5 66.9 71.2 59.0
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying consolidated financial statements and notes beginning on page
31.
(1) Per share data has been restated to reflect the Company's two-for-one stock
split.
(2) Return on average shareholders' equity for 1992 excludes the effects of a
$28.6 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 $32.1 million from the initial public offering of SPS Transaction Services,
Inc. common stock and a $133.0 million capital contribution from Sears, Roebuck
and Co. on December 31, 1992.
Dean Witter, Discover & Co. 1996
--------------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Dean Witter, Discover & Co. and subsidiaries (collectively referred to as the
"Company") is a diversified financial services organization that provides a
broad range of nationally-marketed credit and investment products, with a
principal focus on individual customers. The Company has two lines of business:
Credit Services -- providing general purpose credit cards, transaction
processing services, private-label credit card services and real estate-secured
loans -- and Securities -- providing a variety of financial products, services
and investment advice.
The Company's business activities are affected by changes in economic
variables that directly impact the markets in which the Company operates and by
competitive factors. Changes in economic variables affect consumer loan growth,
credit quality and activity in securities markets, including the flow of
investment dollars into mutual funds. Competition in the credit services
industry 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. Competition in the securities industry,
which includes traditional securities firms as well as mutual fund groups, banks
and insurance companies, centers on the attraction and retention of clients and
their assets. Success in attracting and retaining clients and assets revolves
around the ability to meet investors' saving and investment needs through
consistency of investment performance and accessibility to financial products
and investment advice.
Changes in economic and competitive factors may cause earnings to vary from
year to year. The Company focuses on reducing the impact these changes have on
earnings by managing interest rate risk, emphasizing fee-based assets that are
designed to generate a continuing stream of revenues, evaluating credit product
pricing and controlling costs.
SUBSEQUENT EVENT
On February 5, 1997, the Company and Morgan Stanley Group Inc. ("Morgan
Stanley") announced a definitive agreement to merge. The combined company would
be a preeminent global financial services firm with a market capitalization of
approximately $21.0 billion (as of the merger announcement). The merger would
combine the Company's strengths in retail distribution, asset gathering and
credit services with Morgan Stanley's strengths in investment banking and
institutional sales and trading. The new company will be named Morgan Stanley,
Dean Witter, Discover & Co.
Under the terms of the merger agreement unanimously approved by the Boards
of Directors of both companies, each of Morgan Stanley's common shares will be
exchanged for 1.65 common shares of the Company. Morgan Stanley preferred shares
outstanding at the date of the merger will be exchanged for preferred shares of
the Company having substantially identical terms. The transaction, which is
expected to be completed in mid-1997, is intended to be a tax free exchange and
accounted for as a pooling of interests and is subject to customary closing
conditions, including certain regulatory approvals and the approval of
shareholders of both companies. Prior to the time of closing each company will
formally rescind its remaining stock repurchase authorizations. For certain
selected pro forma financial data giving effect to the merger, see Note 2 to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
The Company achieved record net income of $951.4 million in 1996, an 11%
increase from 1995. In 1995, net income increased 16% to $856.4 million. Primary
earnings per common share increased 14% to $2.79 in 1996 and 14% to $2.44 in
1995. Fully diluted earnings per common share increased 14% to $2.77 in 1996 and
14% to $2.44 in 1995.
In 1996, consumer demand and retail sales continued to increase, favorably
impacting credit card transaction volume and consumer loan growth. In 1996, the
Company continued to invest in growth through the expansion of its NOVUS(SM)
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(R) Card
and other cards that carry the NOVUS logo. In 1996, the Company launched its
first NOVUS affinity credit card -- the National Alliance for Species
Survival(SM) 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.
In 1996, securities equity market volumes and price indices increased to
record levels favorably affecting Securities revenues and the level of assets
under management and administration. Securities continued to focus on customer
account and asset growth, increasing the number of its account executives,
building assets
Dean Witter, Discover & Co. 1996
- --------------------------------
18
<PAGE>
under management and administration, and controlling costs. Securities ended the
year with record levels of account executives, customer accounts and assets, and
assets under management and administration.
Net operating revenues increased 10% to a record $6.2 billion in 1996 and
13% in 1995. The growth in both years reflected higher credit card transaction
volume and consumer loan balances and favorable securities market conditions
partially offset by higher credit losses. In 1996, consumer debt and personal
bankruptcies continued to increase, contributing to an industry-wide decline in
consumer credit quality which caused an increase in the rate of consumer loans
charged off.
Non-interest expenses increased 9% to $4.7 billion in 1996 and 13% in 1995.
The increases in both years reflected higher variable compensation expenses
related to increased Securities revenue and higher costs associated with
increases in the general purpose credit card portfolio and the NOVUS Network.
Non-interest expenses as a percentage of net operating revenues was 75.2% in
1996, 75.4% in 1995 and 75.7% in 1994.
The Company's return on average shareholders' equity was 19.0% in 1996,
19.2% in 1995 and 19.5% in 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. Certain reclassifications have been made to prior period amounts to
conform to the current presentation.
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.
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 BRAVO(SM) Card and an affinity
program card. The Prime Option(SM) 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 Dean Witter Reynolds Inc. account executive sales organization, Allstate
insurance agents, other third-party sales forces and direct response marketing.
<TABLE>
<CAPTION>
CREDIT SERVICES STATEMENTS OF INCOME (in millions)
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merchant and cardmember fees $1,506.2 $1,135.3 $ 940.0 $ 770.4 $ 641.1
Servicing fees 819.0 696.9 586.4 533.2 412.8
Other 8.8 2.6 0.8 2.3 11.1
- -------------------------------------------------------------------------------------------------------------------------
Total non-interest revenues 2,334.0 1,834.8 1,527.2 1,305.9 1,065.0
- -------------------------------------------------------------------------------------------------------------------------
Interest revenue 2,827.8 2,498.9 1,933.0 1,473.6 1,566.0
Interest expense 1,089.7 985.5 683.1 540.7 699.5
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 1,738.1 1,513.4 1,249.9 932.9 866.5
Provision for loan losses 1,220.6 730.5 537.0 443.0 472.1
- -------------------------------------------------------------------------------------------------------------------------
Net credit income 517.5 782.9 712.9 489.9 394.4
- -------------------------------------------------------------------------------------------------------------------------
Net operating revenues 2,851.5 2,617.7 2,240.1 1,795.8 1,459.4
- -------------------------------------------------------------------------------------------------------------------------
Employee compensation and benefits 505.4 438.6 374.0 326.5 295.3
Marketing and business development 736.5 645.3 514.5 377.8 317.9
Information processing and communications 487.2 419.0 340.6 303.9 257.5
Facilities and equipment 63.9 51.1 47.3 38.4 39.3
Other 344.1 342.8 292.0 238.9 219.7
- -------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,137.1 1,896.8 1,568.4 1,285.5 1,129.7
- -------------------------------------------------------------------------------------------------------------------------
Gain on sale of subsidiary stock -- -- -- -- 32.1
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 714.4 720.9 671.7 510.3 361.8
Income tax expense 264.9 274.0 257.0 190.6 122.4
- -------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 449.5 446.9 414.7 319.7 239.4
Cumulative effect of accounting change, net of income taxes -- -- -- -- 7.2
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 449.5 $ 446.9 $ 414.7 $ 319.7 $ 232.2
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Dean Witter, Discover & Co. 1996
--------------------------------
19
<PAGE>
In 1996, Credit Services net income of $449.5 million remained level compared to
1995. Credit Services net income increased 8% in 1995 to $446.9 million. In
1996, the effects of higher levels of general purpose credit card accounts,
transaction volume and loans, and increased credit card fee revenues were offset
by a higher rate of credit losses. The increase in 1995 was primarily due to
higher levels of general purpose credit card accounts, transaction volume and
loans, partially offset by increased investments in growth and a higher rate of
credit losses.
Merchant and Cardmember Fees
Merchant and cardmember fees include revenues from fees charged to merchants on
credit card sales, late payment fees, credit insurance fees, overlimit fees,
cash advance fees, transaction processing services and the administration of
credit card programs.
OWNED AND MANAGED
CONSUMER LOANS
(at December 31)
($ billions)
<TABLE>
<CAPTION>
Owned Managed
<S> <C> <C>
"92" $ 9.8 $18.5
"93" 12.1 21.2
"94" 16.2 26.1
"95" 21.6 31.8
"96" 23.2 36.6
</TABLE>
Merchant and cardmember fees increased 33% in 1996 and 21% in 1995. The
increase in 1996 was due to higher revenues from overlimit fees, merchant fees,
late payment fees and credit insurance fees. The increase in 1995 was due to
higher revenues from merchant fees, credit insurance fees and late payment fees,
partially offset by the absence of fees from Income Tax Refund Anticipation
Loans. Overlimit fees were implemented in March 1996 and the amount of the fee
was increased in the fourth quarter of 1996. In both years, the increases in
merchant fee revenues were due to continued growth in general purpose credit
card transaction volume. The increase in late payment fee revenues in 1996 was
due to an increase in the amount of the late payment fee charged, an increase in
the incidence of late payments and a tightening, in the fourth quarter of 1996,
of late payment fee terms. The increased incidence of late payments was
attributable to a higher level of delinquent accounts and an increase in active
credit card accounts. The increase in late payment fee revenues in 1995 was due
to an increase in the incidence of late payments due to an increased number of
active credit card accounts and a higher incidence of delinquent accounts. In
both years, the increases in credit insurance fees were due to higher
enrollments and favorable loss experience rebates.
GENERAL PURPOSE
CREDIT CARD
TRANSACTION VOLUME
($ billions)
<TABLE>
<CAPTION>
<S> <C>
"92" $27.5
"93" 32.8
"94" 40.1
"95" 47.5
"96" 53.6
</TABLE>
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.
<TABLE>
COMPONENTS OF SERVICING FEES (in millions)
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merchant and cardmember fees $ 307.4 $ 137.3 $ 109.6 $ 97.5 $ 68.8
Interest revenue 2,054.8 1,695.2 1,385.3 1,457.1 1,232.5
Interest expense (809.1) (708.6) (573.2) (641.2) (570.9)
Provision for loan losses (734.1) (427.0) (335.3) (380.2) (317.6)
- -----------------------------------------------------------------------------------------------
Servicing fees $ 819.0 $ 696.9 $ 586.4 $ 533.2 $ 412.8
- -----------------------------------------------------------------------------------------------
</TABLE>
Dean Witter, Discover & Co. 1996
- --------------------------------
20
<PAGE>
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 1996 and
19% in 1995. The increases in both years were due to higher net interest cash
flows and 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 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 1996, 1995 and 1994, and changes in net interest
income during those years.
<TABLE>
<CAPTION>
CREDIT SERVICES AVERAGE BALANCE SHEET ANALYSIS (dollars in millions)
YEAR ENDED DECEMBER 31, 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 $17,083.2 13.99% $2,390.6 $14,691.5 14.75% $2,167.2 $11,913.9 14.81% $1,764.0
Other consumer loans 2,834.1 12.72 360.4 2,318.6 12.08 280.1 1,131.2 11.71 132.5
Investment securities 234.0 5.38 12.6 194.8 5.85 11.4 196.2 4.56 8.9
Other 1,149.0 5.59 64.2 667.5 6.02 40.2 577.6 4.78 27.6
- -------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 21,300.3 13.28 2,827.8 17,872.4 13.98 2,498.9 13,818.9 13.99 1,933.0
Allowance for loan losses (682.2) (609.5) (471.6)
Non-interest earning assets 1,379.6 1,249.3 993.7
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $21,997.7 $18,512.2 $14,341.0
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDER'S EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings $ 1,021.0 4.58% $ 46.8 $ 1,050.0 4.71% $ 49.5 $ 1,182.2 3.92% $ 46.4
Brokered 3,418.1 6.93 236.9 3,221.6 7.21 232.2 3,067.3 7.30 223.8
Other time 1,921.4 6.05 116.2 1,278.1 6.41 82.0 769.0 5.46 42.0
- ---------------------------------------------------------------------------------------------------------------------------
Total interest
bearing deposits 6,360.5 6.29 399.9 5,549.7 6.55 363.7 5,018.5 6.22 312.2
Other borrowings 11,281.5 6.11 689.8 9,262.1 6.71 621.8 6,377.4 5.82 370.9
- ---------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 17,642.0 6.18 1,089.7 14,811.8 6.65 985.5 11,395.9 5.99 683.1
Shareholder's equity/
other liabilities 4,355.7 3,700.4 2,945.1
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $21,997.7 $18,512.2 $14,341.0
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $1,738.1 $1,513.4 $1,249.9
- ---------------------------------------------------------------------------------------------------------------------------
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.
Dean Witter, Discover & Co. 1996
--------------------------------
21
<PAGE>
<TABLE>
<CAPTION>
CREDIT SERVICES RATE/VOLUME ANALYSIS (in millions)
YEAR ENDED DECEMBER 31, 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 $ 353.1 $ (129.7) $ 223.4 $ 412.0 $ (8.8) $ 403.2
Other consumer loans 62.2 18.1 80.3 139.0 8.6 147.6
Investment securities 2.3 (1.1) 1.2 (0.1) 2.6 2.5
Other 29.0 (5.0) 24.0 4.3 8.3 12.6
- ----------------------------------------------------------------------------------------------------------
Total interest revenue 478.3 (149.4) 328.9 567.7 (1.8) 565.9
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing deposits
Savings (1.4) (1.3) (2.7) (5.2) 8.3 3.1
Brokered 14.3 (9.6) 4.7 11.3 (2.9) 8.4
Other time 41.3 (7.1) 34.2 27.7 12.3 40.0
- ----------------------------------------------------------------------------------------------------------
Total interest bearing deposits 52.8 (16.6) 36.2 33.1 18.4 51.5
Other borrowings 135.3 (67.3) 68.0 171.7 79.2 250.9
- ----------------------------------------------------------------------------------------------------------
Total interest expense 187.4 (83.2) 104.2 204.6 97.8 302.4
- ----------------------------------------------------------------------------------------------------------
Net interest income $ 290.9 $ (66.2) $ 224.7 $ 363.1 $ (99.6) $ 263.5
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income increased 15% in 1996 and 21% in 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 December 31, 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.
<TABLE>
<CAPTION>
SUPPLEMENTAL CREDIT SERVICES AVERAGE MANAGED LOAN INFORMATION (dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans $ 32,777.2 14.66% $ 27,304.9 15.17% $ 21,780.7 15.07%
General purpose credit card loans 29,020.6 14.81 23,969.7 15.41 19,554.8 15.30
Total interest earning assets 34,160.2 14.29 28,167.1 14.89 22,554.5 14.71
Total interest bearing liabilities 30,501.9 6.22 25,106.5 6.75 20,131.6 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>
Dean Witter, Discover & Co. 1996
- --------------------------------
22
<PAGE>
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 $815.3 million, $721.8
million and $565.7 million at December 31, 1996, 1995 and 1994. 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 1996 and 36% in 1995. The increase in 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 1996, was partially offset by a lower
provision for losses for consumer loans intended to be securitized. (See Note 3
to the Consolidated Financial Statements, "Significant Accounting Policies.")
The increase in 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 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 1997. In
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 1996, but believes they may have an
increased effect in 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 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.
<TABLE>
<CAPTION>
CREDIT SERVICES ASSET QUALITY (dollars in millions)
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
OWNED MANAGED OWNED MANAGED OWNED MANAGED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans at period end $23,188.2 $36,572.8 $21,556.4 $31,775.9 $16,174.1 $26,050.5
Consumer loans contractually 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>
Dean Witter, Discover & Co. 1996
--------------------------------
23
<PAGE>
Non-Interest Expenses
Total non-interest expenses increased 13% to $2.1 billion in 1996 and 21% to
$1.9 billion in 1995.
Employee compensation and benefits expense increased 15% in 1996 and 17% in
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.
Marketing and business development expense increased 14% in 1996 and 25% in
1995. The increase in 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 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 1996 and
23% in 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 1996 and 8% in 1995. In
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 1996 and increased 17% in
1995. These expenses include fraud losses, professional fees, credit inquiry
fees and other administrative costs. The increase in 1995 was due to higher
credit card fraud losses. In 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.
Dean Witter, Discover & Co. 1996
- --------------------------------
24
<PAGE>
SECURITIES
<TABLE>
<CAPTION>
SECURITIES STATEMENTS OF INCOME (in millions)
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commissions $ 1,163.1 $ 1,022.5 $ 874.3 $ 904.0 $ 721.9
Asset management and administration fees 1,149.8 1,006.8 973.0 838.0 679.2
Principal transactions 449.3 478.9 421.9 405.1 433.4
Investment banking 246.1 181.5 197.9 394.9 254.6
Other 99.0 90.9 101.1 64.5 54.3
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest revenues 3,107.3 2,780.6 2,568.2 2,606.5 2,143.4
- --------------------------------------------------------------------------------------------------------------------------
Interest revenue 759.5 820.1 574.2 435.6 409.1
Interest expense 476.5 529.3 365.4 274.6 266.3
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 283.0 290.8 208.8 161.0 142.8
- --------------------------------------------------------------------------------------------------------------------------
Provision for losses on receivables 11.7 13.2 11.4 14.6 12.0
- --------------------------------------------------------------------------------------------------------------------------
Net credit income 271.3 277.6 197.4 146.4 130.8
- --------------------------------------------------------------------------------------------------------------------------
Net operating revenues 3,378.6 3,058.2 2,765.6 2,752.9 2,274.2
- --------------------------------------------------------------------------------------------------------------------------
Employee compensation and benefits 1,702.8 1,543.0 1,390.2 1,377.4 1,168.8
Marketing and business development 120.3 89.8 92.7 92.6 79.3
Information processing and communications 280.5 268.5 256.1 242.0 215.4
Facilities and equipment 192.2 184.4 180.8 179.4 174.5
Other 252.1 297.5 302.9 375.6 295.1
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,547.9 2,383.2 2,222.7 2,267.0 1,933.1
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 830.7 675.0 542.9 485.9 341.1
Income tax expense 328.8 265.5 216.7 202.0 141.4
- --------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 501.9 409.5 326.2 283.9 199.7
Cumulative effect of accounting change, net of income taxes -- -- -- -- 21.4
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 501.9 $ 409.5 $ 326.2 $ 283.9 $ 178.3
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities provides a wide range of financial products, services and investment
advice, primarily to individual investors. Securities has the third largest
sales organization in the domestic securities industry with 9,080 account
executives in 371 branch offices, serving the investment needs of over three
million individual and institutional clients with assets of $251.2 billion at
December 31, 1996. Dean Witter Reynolds Inc. ("DWR"), the Company's primary
broker-dealer, is among the largest members of the NYSE and is a member of other
major securities, futures and options exchanges. Securities, through Dean Witter
InterCapital Inc., has one of the largest asset management operations with total
assets under management and administration of $90.0 billion at December 31,
1996.
Securities achieved record net income of $501.9 million in 1996, a 23%
increase from 1995. Securities net income increased 26% to $409.5 million in
1995. While the growth in net income in both years occurred in favorable
business environments, enhancing and supporting earnings growth was the
Company's focus on accumulating client assets, building fee-based assets under
management and administration and controlling costs.
Commissions
Commission revenues arise from agency transactions in listed and
over-the-counter ("OTC") equity securities, and sales of mutual funds, futures,
insurance products and options. Commission revenues increased 14% in 1996 and
17% in 1995. The increase in 1996 was due to higher revenues from OTC and listed
agency equity transactions, mutual fund sales and insurance products. The
increase in 1995 was due to higher revenues from listed agency and OTC equity
transactions. The increases in both years resulted from increased trading volume
in the equity markets.
Asset Management and Administration Fees
Asset management and administration fees include fund management fees,
distribution-related fees and other administrative fees. Asset management and
administration fees increased 14% in 1996 and 3% in 1995. The increase in 1996
was due to higher revenues from fund management, 12b-1 distribution and
Investment Consulting Services ("ICS") fees. The increase in 1995 was due to
higher revenues from fund management and ICS fees. Period-end assets under
management increased 13% to a record $90.0 billion in 1996 and
Dean Witter, Discover & Co. 1996
--------------------------------
25
<PAGE>
19% to $79.5 in 1995. Average assets under management and administration
increased 16% in 1996 and 3% in 1995. Components of assets under management and
administration were as follows.
ASSETS UNDER MANAGEMENT (in billions)
AND ADMINISTRATION(1)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Equity funds $38.1 $29.9 $23.0
Fixed income funds 24.1 25.4 24.1
Money market funds 24.7 21.6 17.8
Investment management services 3.1 2.6 2.0
- --------------------------------------------------------------
Total assets under management
and administration $90.0 $79.5 $66.9
- --------------------------------------------------------------
</TABLE>
(1) Excludes ICS assets of $10.4, $8.9 and $6.5 billion.
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. Fund management fees increased 19% in 1996 and
4% in 1995. Components of fund management fees were as follows.
FUND MANAGEMENT FEES (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Equity funds $197.0 $147.5 $128.5
Fixed income funds 113.5 110.9 126.0
Money market funds 76.1 65.6 57.8
- --------------------------------------------------------------
Total fund management fees $386.6 $324.0 $312.3
- --------------------------------------------------------------
</TABLE>
The Company receives 12b-1 distribution fees for services it provides in
promoting and distributing certain open-ended Dean Witter 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. 12b-1 distribution fees
increased 14% in 1996 and remained level in 1995.
ICS fees are derived from private portfolio management services arranged by
the Company for individual investors and are affected by changes in the level of
ICS assets. ICS fees increased 21% in 1996 and 6% in 1995.
Principal Transactions
Principal transactions include revenues from customers' purchases and sales of
securities in which the Company acts as a principal, and gains and losses on
securities held for resale. The Company holds securities for resale primarily to
facilitate customer trading requirements. Principal transaction revenues
decreased 6% in 1996 and increased 14% in 1995. The decrease in 1996 was due to
a decline in revenues primarily from fixed income securities transactions.
Increased customer interest in equity markets resulted in a decline in fixed
income activity. The increase in 1995 was due to higher revenues from OTC and
corporate securities which resulted from increased securities market trading
volumes.
Investment Banking
Investment banking revenues are derived from the underwriting of public
offerings of securities and fees from advisory services. Investment banking
revenues increased 36% in 1996 and declined 8% in 1995. The increase in 1996 was
attributable to higher advisory fees and increased underwriting activity. The
decrease in 1995 was the result of declines in both the number and size of
closed-end mutual fund underwritings.
Net Credit Income
Net credit income consists primarily of interest revenue from customer margin
loans less the cost of financing these loans and credit losses. Net credit
income is affected by the levels of margin loans, borrowings that finance these
loans and market interest rates. Net credit income remained level in 1996 and
increased 41% in 1995. The increase in 1995 was due to higher net interest
income from margin lending, clearing organization deposits and real
estate-related transactions. Average aggregate customer margin balances were
$2.5 billion, $2.3 billion and $2.4 billion in 1996, 1995 and 1994.
Non-Interest Expenses
Total non-interest expenses increased 7% in both 1996 and 1995. As a percentage
of net operating revenues, total non-interest expenses were 75.4% in 1996, 77.9%
in 1995, and 80.4% in 1994. Employee compensation and benefits expense increased
10% in 1996 and 11% in 1995. The increases in both years were due to higher
variable employee compensation expense resulting from increased revenues and
higher costs related to training new account executives. Employee compensation
and benefits expense as a percentage of net operating revenues was 50.4% in
1996, 50.5% in 1995 and 50.3% in 1994. Marketing and business development
expense increased 34% in 1996 and remained level in 1995. The increase in 1996
was due to higher promotional expenses associated with the Company's investments
in new business activities. Other non-interest expenses decreased 15% in 1996
and remained level in 1995. Other non-interest expenses include legal expenses
and other professional fees and other administrative costs. The decrease in 1996
was due to a reduction in legal expenses and other professional fees.
Dean Witter, Discover & Co. 1996
- --------------------------------
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Financing activities are managed centrally. Funding and capital plans are
developed and implemented for each business unit, consistent with its financial
objectives and in coordination with business unit management. The Company
pursues conservative liquidity, interest rate risk and capital policies for its
businesses.
The Company's liquidity policies are designed to provide funding for the
Company's current and future business requirements and to ensure access to
cost-effective funding in all business environments. This is accomplished
through the diversification of funding sources, extension of funding terms and
staggering of maturities. The Company's interest rate risk policies are designed
to reduce the volatility of earnings resulting from changes in market interest
rates. This is accomplished primarily through matched financing which entails
matching the repricing schedules of consumer loans and the related financing.
The Company's capital policies seek to maintain balance sheet ratios that the
Company believes are conservative relative to the risks of each business unit's
activities as well as regulatory and rating agency requirements.
The Company expects that its future funding and refinancing requirements
will be met through the traditional sources of funds available to the Company.
The Company believes its current sources of funding are sufficient to meet its
future growth plans and financing requirements.
CORPORATE FUNDING POLICIES AND ACTIVITIES
Liquidity
Diversification of funding sources is an important element of the Company's
liquidity policies. The Company accesses funding at the corporate level through
the issuance of commercial paper, short-term bank borrowings and senior
long-term notes, which include medium-term and underwritten notes. The Company's
debt securities are sold globally and are denominated in multiple currencies. In
1996, the Company filed a shelf registration for $2.0 billion of debt securities
with the Securities and Exchange Commission and increased its capacity to issue
debt securities under its Euro Medium-term Note Program by $2.0 billion. The
proceeds from the issuance of corporate level borrowings are loaned to Credit
Services and Securities at terms which substantially match the terms of the
public debt. The proceeds from the issuance of commercial paper and senior
long-term notes are loaned predominantly to Credit Services.
The Company's segments access financing sources which are specific to their
businesses. Credit Services obtains funding from the sale of consumer loans
through asset securitizations to both domestic and foreign investors, deposit
taking, the issuance of asset-backed commercial paper, the purchase of federal
funds and short-term bank notes. Securities funds its operations primarily
through the use of repurchase and securities lending agreements. Both Credit
Services and Securities utilize cash provided by operations to meet liquidity
needs.
The Company's credit ratings at December 31, 1996 and 1995 were as follows.
CORPORATE LEVEL DEBT RATINGS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ----------------------------------------------------------
SENIOR SENIOR
COMMERCIAL LONG-TERM COMMERCIAL LONG-TERM
PAPER NOTES PAPER NOTES
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Moody's P1 A2 P1 A2
S&P A1 A A1 A
Fitch F-1+ AA- F-1+ AA-
Duff & Phelps D1 A+ D1 A+
- ----------------------------------------------------------
</TABLE>
Subsequent to the announcement of the Company's definitive merger agreement with
Morgan Stanley, Moody's placed the Company's long-term borrowings on review for
possible upgrade. S&P placed the Company's long-term and short-term borrowings
on CreditWatch with positive implications.
At December 31, 1996 and 1995, $3,511.6 million and $3,444.9 million of
unsecured commercial paper issued at the corporate level was outstanding.
The Company maintains a senior bank credit facility to support general
liquidity needs, including the issuance of commercial paper at the corporate
level. In 1996, the Company renewed this facility and increased its amount to
$4.0 billion from $3.25 billion. The facility expires in April 1997 and contains
certain extension provisions. The Company currently plans to renew or replace
this facility prior to its expiration. This facility contains covenants that
require the Company to maintain minimum net worth requirements and specified
financial ratios. The Company believes that the covenant restrictions will not
impair its ability to pay its current level of dividends. As of December 31,
1996, the Company had never borrowed from its senior bank credit facility.
The Company issues senior long-term notes through underwritten public
offerings and continuous offerings of medium-term notes. Proceeds received from
the issuance of senior long-term notes were $2,687.5 million in 1996 and
$1,833.5 million in 1995.
Dean Witter, Discover & Co. 1996
--------------------------------
27
<PAGE>
At December 31, 1996, the maturity profiles of the Company's deposits,
senior long-term notes and asset securitizations were as follows.
<TABLE>
<CAPTION>
(in millions)
- ------------------------------------------------------------------
SENIOR ASSET
DEPOSITS NOTES SECURITIZATIONS
- ------------------------------------------------------------------
<S> <C> <C> <C>
Under 1 year $3,126.8 $1,073.1 $1,274.7
1-2 years 1,720.7 1,705.2 3,482.1
2-3 years 878.9 819.6 2,132.6
3-5 years 1,112.7 2,087.9 2,248.6
5-10 years 373.5 2,032.6 3,193.9
Over 10 years -- 440.0 1,052.7
- ------------------------------------------------------------------
</TABLE>
Senior long-term notes totaling $1,267.4 million matured in 1996 and were
replaced with new borrowings.
CAPITAL
The Company's shareholders' equity increased to $5,164.4 million at December 31,
1996 from $4,833.7 million at December 31, 1995. At December 31, 1996 and 1995,
$3,766.4 million and $3,129.8 million of the Company's shareholders' equity was
invested in the equity of its subsidiaries. The remainder of the Company's
shareholders' equity was advanced to its subsidiaries to finance their
operations. Certain of the Company's subsidiaries have regulatory and other
restrictions on the amount of net assets available for transfer to the Company
in the form of dividends or loans. The aggregate amount of these restrictions
was $1.7 billion at December 31, 1996. The Company believes that these
restrictions will not have a material effect on its ability to meet future
dividend or funding requirements.
For purposes of evaluating the financial performance of its segments, the
Company's shareholders' equity is allocated to its segments based on amounts the
Company believes the segments would require if they were stand-alone companies.
At December 31, 1996 and 1995, the Company's shareholders' equity was allocated
as follows: Credit Services, $2,938.6 million and $2,574.2 million; Securities,
$1,372.5 million and $1,366.4 million.
On December 16, 1996, the Company's Board of Directors declared a
two-for-one stock split, in the form of a dividend, payable to shareholders of
record on December 26, 1996 and distributable on January 14, 1997. The Company
paid quarterly dividends of $0.11 per common share for 1996. The Company raised
its quarterly dividend per common share to $0.14 effective for first quarter
1997 dividends.
The Company purchases shares of its common stock under a general repurchase
plan and for issuance in equity-based compensation plans. In 1996, the Company
purchased 23.1 million shares of common stock. Through January 31, 1997, the
Company had purchased an additional 0.6 million shares of its common stock at an
average price of $34.21 per share.
CREDIT SERVICES
LIQUIDITY
The Company seeks to reduce refinancing risk at Credit Services through the
application of liquidity policies that emphasize the diversification of funding
sources, extension of funding terms and staggering of funding maturities. Credit
Services relies upon asset securitizations, the issuance of asset-backed
commercial paper, corporate borrowings, deposit taking, the purchase of federal
funds, short-term bank notes, and cash generated by operations to fund its
business activities.
Asset Securitizations
The Company sells consumer loans through asset securitizations using several
transaction structures. At December 31, 1996 and 1995, outstanding asset
securitizations totaled $13,384.6 million and $10,219.5 million. The Company
received proceeds from asset securitizations of $4,527.5 million in 1996 and
$1,827.3 million in 1995.
Asset-Backed Commercial Paper
Credit Services, through Riverwoods Funding Corporation ("RFC"), an entity
included in the consolidated financial statements of the Company, issues
asset-backed commercial paper. At December 31, 1996 and 1995, $1,225.2 million
and $1,243.6 million of asset-backed commercial paper was outstanding.
RFC maintains a senior bank credit facility to support the issuance of
asset-backed commercial paper. In 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 its asset-backed commercial paper program, certain assets of RFC were subject
to a lien in the amount of $2.2 billion at December 31, 1996. RFC has never
borrowed from its senior bank credit facility.
Corporate Borrowings
Credit Services businesses borrow from the Company on terms that generally match
the terms of the underlying corporate borrowings issued by the Company. (See
"Corporate Funding Policies and Activities.")
Deposits and Federal Funds
The Company's bank subsidiaries solicit deposits from consumers and purchase
federal funds. Interest bearing
Dean Witter, Discover & Co. 1996
- --------------------------------
28
<PAGE>
deposits are classified by type as savings, brokered and other time. Savings
deposits consist primarily of money market deposit and certificate of deposit
accounts sold directly to cardmembers and savings deposits solicited 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.
Bank Notes
Credit Services, through Greenwood Trust Company, an indirect subsidiary of the
Company, sells notes under a short-term bank note program. These notes have
maturities of up to 270 days.
INTEREST RATE RISK
The Company's interest rate risk policies are designed to reduce the volatility
of earnings resulting from changes in interest rates. This is accomplished
primarily through matched financing. The Company is exposed to the risk that
changes in market interest rates will result in declines in net interest income
and servicing fees. Matched financing reduces this risk by matching the
repricing schedules of consumer loans and the related financing. When necessary,
the Company utilizes interest rate contracts to achieve its matched financing
objectives. Interest rate contracts include interest rate exchange agreements
and interest rate caps. Under interest rate exchange agreements, which include
interest rate swap and cost of funds agreements, the Company effectively
exchanges the interest payments on its financing with those of a counterparty.
Interest rate cap agreements effectively establish a maximum interest rate on
certain of the Company's floating rate financings. Interest rate swap and cap
agreements are entered into with institutions that are established dealers in
these instruments and that maintain certain minimum credit criteria established
by the Company. Cost of funds agreements are entered into as part of agreements
pursuant to which the Company provides private label credit card processing
services to certain of its merchant clients.
At December 31, 1996 and 1995, notional amounts of interest rate exchange
agreements outstanding were as follows.
<TABLE>
<CAPTION>
(in millions)
DECEMBER 31, 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Agreements that converted the
interest rate on financing:
From fixed to floating $5,021.3 $4,164.8
From floating to fixed 1,182.8 1,469.0
From floating to floating 275.0 425.0
- ------------------------------------------------------------
Total $6,479.1 $6,058.8
- ------------------------------------------------------------
</TABLE>
In addition to the interest rate exchange agreements described above, the
Company has entered into foreign currency exchange agreements on its foreign
denominated borrowings. These agreements hedge the Company's exposure to
currency fluctuations and primarily converted the repricing characteristics of
the related foreign denominated borrowings to floating US indexed rates. At
December 31, 1996 and 1995, $492.2 million and $59.1 million of these agreements
were outstanding.
At December 31, 1996 and 1995, the Company had $40.0 million and $415.0
million of interest rate cap agreements outstanding, of which $40.0 million were
in effect in both years.
CAPITAL
The Company endeavors to maintain, for all Credit Services businesses,
conservative capital positions based on regulatory and rating agency guidelines.
The Company's capital policies require the maintenance of capital at its
regulated banking subsidiaries at levels considered, for regulatory purposes,
"significantly" in excess of applicable minimum capital requirements. (See Note
11 to the Consolidated Financial Statements, "Regulatory Capital Requirements".)
SECURITIES
LIQUIDITY
The Company's liquidity goal for its Securities operations is to maintain access
to cost-effective financing in all market conditions. Historically, the
Company's broker-dealer operations have been self-funding. The Company believes
that these operations will continue to have the capacity to be self-funding.
Consistent with its historical practices, the principal sources relied upon
by the Company to fund its broker-dealer operations include repurchase and
securities lending agreements and bank borrowings. In 1996, the Company had
sufficient collateral to secure bank borrowings if the availability of unsecured
funds had required such action.
CAPITAL
The Company maintains a conservative capital position for Securities based on
regulatory and rating agency guidelines. (See Note 11 to the Consolidated
Financial Statements, "Regulatory Capital Requirements".)
Dean Witter, Discover & Co. 1996
--------------------------------
29
<PAGE>
MANAGEMENT'S STATEMENT OF FINANCIAL
REPORTING RESPONSIBILITY
The management of Dean Witter, Discover & Co. and its subsidiaries prepared the
accompanying consolidated financial statements and related footnotes and is
responsible for their integrity and objectivity. The consolidated financial
statements, which include amounts that are based on management's estimates and
judgments, were prepared in accordance with generally accepted accounting
principles. Management also prepared the other information in this annual report
and is responsible for its accuracy and consistency with the consolidated
financial statements.
Management maintains a system of internal controls over the preparation of
its consolidated financial statements. In management's opinion, these internal
controls provide reasonable assurance that assets are safeguarded and that
transactions are properly recorded and executed in accordance with management's
authorization. Judgments are required to assess and balance the relative cost
and expected benefits of these internal controls. To assure the effectiveness of
the system of internal controls, the organizational structure provides for
defined lines of responsibility and delegation of authority. Further, the
Company maintains an internal audit function that independently assesses the
effectiveness of internal controls and the Company's compliance with established
policies and procedures.
The Company's consolidated financial statements have been audited by
Deloitte & Touche LLP, independent auditors, and their report follows. They have
advised the Company that their audits were conducted in accordance with
generally accepted auditing standards and considered the Company's internal
accounting controls in determining the auditing procedures they deem necessary
to express an opinion on the consolidated financial statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets with the internal auditors, management and the independent
auditors to review their work and discuss the Company's financial controls and
audit and reporting practices. The independent auditors and the internal
auditors independently have full and free access to the Audit Committee, without
the presence of management, to discuss any matters that they feel require
attention.
/s/ Philip J. Purcell
Philip J. Purcell
Chairman and Chief Executive Officer
/s/ Thomas C. Schneider
Thomas C. Schneider
Executive Vice President and Chief Financial Officer
/s/ Robert P. Seass
Robert P. Seass
Senior Vice President and Controller
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Dean Witter, Discover & Co.:
We have audited the accompanying consolidated balance sheets of Dean Witter,
Discover & Co. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, cash flows and changes in
shareholders' equity for each of the three years in the period ended December
31, 1996. These financial statements, appearing on pages 31 through 45, are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the consolidated financial position of Dean
Witter, Discover & Co. and subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 21, 1997
Dean Witter, Discover & Co. 1996
30
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merchant and cardmember fees $ 1,506.2 $ 1,135.3 $ 940.0
Commissions 1,163.1 1,022.5 874.3
Asset management and administration fees 1,149.8 1,006.8 973.0
Servicing fees 819.0 696.9 586.4
Principal transactions 449.3 478.9 421.9
Investment banking 246.1 181.5 197.9
Other 107.8 93.5 101.9
-------------------------------------
Total non-interest revenues 5,441.3 4,615.4 4,095.4
-------------------------------------
Interest revenue 3,587.3 3,319.0 2,507.2
Interest expense 1,566.2 1,514.8 1,048.5
-------------------------------------
Net interest income 2,021.1 1,804.2 1,458.7
Provision for losses on receivables 1,232.3 743.7 548.4
-------------------------------------
Net credit income 788.8 1,060.5 910.3
-------------------------------------
Net operating revenues 6,230.1 5,675.9 5,005.7
-------------------------------------
Employee compensation and benefits 2,208.2 1,981.6 1,764.2
Marketing and business development 856.8 735.1 607.2
Information processing and communications 767.7 687.5 596.7
Facilities and equipment 256.1 235.5 228.1
Other 596.2 640.3 594.9
-------------------------------------
Total non-interest expenses 4,685.0 4,280.0 3,791.1
-------------------------------------
Income before income taxes 1,545.1 1,395.9 1,214.6
Income tax expense 593.7 539.5 473.7
-------------------------------------
Net income $ 951.4 $ 856.4 $ 740.9
=====================================================================================
Earnings per common share(1)
Primary $ 2.79 $ 2.44 $ 2.14
Fully diluted 2.77 2.44 2.14
- -------------------------------------------------------------------------------------
Average common shares outstanding(1)
Primary 341.2 350.7 346.7
Fully diluted 343.3 350.9 346.7
=====================================================================================
</TABLE>
(1) Per share and share data have been restated to reflect the Company's
two-for-one stock split.
See notes to the consolidated financial statements.
Dean Witter, Discover & Co. 1996
31
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,999.2 $ 1,464.5
Cash and securities segregated under federal and other regulations 2,044.5 1,926.4
Receivables
Consumer loans (net of allowances of $815.3 in 1996 and $721.8 in 1995) 22,372.9 20,834.6
Securities clients (net of allowances of $15.3 in 1996 and $16.2 in 1995) 2,839.1 2,588.8
Other 804.5 732.4
Amounts due from asset securitizations 869.2 653.4
Securities borrowed 3,866.3 2,358.2
Securities purchased under agreements to resell 3,563.6 3,571.9
Securities owned, at market value 1,913.6 1,848.8
Deferred income taxes 820.3 736.9
Office facilities, at cost (less accumulated depreciation
and amortization of $446.0 in 1996 and $380.5 in 1995) 379.7 341.0
Other assets 940.7 1,151.3
- --------------------------------------------------------------------------------------------------------------------
Total assets $42,413.6 $38,208.2
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Commercial paper $ 4,736.8 $ 4,688.5
Other short-term borrowings 1,128.2 1,637.0
Deposits 7,212.6 6,191.1
Payables
Securities clients 3,433.3 3,183.0
Drafts 616.1 485.5
Income taxes 156.8 99.3
Securities loaned 3,932.1 2,535.0
Securities sold under agreements to repurchase 3,566.6 3,813.4
Securities sold but not yet purchased, at market value 1,274.1 1,125.2
Other liabilities and accrued expenses 3,048.4 2,884.1
Long-term borrowings 8,144.2 6,732.4
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 37,249.2 33,374.5
- --------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred stock ($0.01 par value, 10.0 shares authorized, none issued) -- --
Common stock(1) ($0.01 par value, 500.0 shares authorized, 342.0
shares issued, 319.7 and 337.7 shares outstanding at
December 31, 1996 and 1995) 3.4 3.4
Paid-in capital(1) 2,702.5 2,716.6
Retained earnings 2,972.7 2,165.7
-------------------------
5,678.6 4,885.7
Common stock held in treasury, at cost(1) ($0.01 par value, 22.3 and 4.3 shares
at December 31, 1996 and 1995) (598.3) (106.8)
Stock compensation plans 141.8 85.1
Employee stock benefit trust (46.3) (21.5)
Unearned stock compensation (11.4) (8.8)
-------------------------
Total shareholders' equity 5,164.4 4,833.7
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $42,413.6 $38,208.2
====================================================================================================================
</TABLE>
(1) Amounts have been restated to reflect the Company's two-for-one stock split.
See notes to the consolidated financial statements.
Dean Witter, Discover & Co. 1996
32
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK(1) TREASURY STOCK
--------------- --------------
NUMBER PAID-IN RETAINED NUMBER
(in millions) OF SHARES AMOUNT CAPITAL(1) EARNINGS OF SHARES(1) AMOUNT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 341.2 $ 3.4 $ 2,713.6 $ 762.6 -- $ --
Net income 740.9
Dividends to common shareholders (85.2)
Purchase of treasury stock, at cost (4.6) (82.0)
Issuance of common stock
Employee stock purchase plan (0.8) 0.2 4.3
Stock option exercises 0.8 11.0 0.2 3.1
Restricted stock grants 0.5
Unearned stock compensation,
net of amortization
Stock compensation plans
Minimum pension liability adjustment
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 342.0 3.4 2,724.3 1,418.3 (4.2) (74.6)
Net income 856.4
Dividends to common shareholders (109.0)
Purchase of treasury stock, at cost (5.0) (121.2)
Issuance of common stock
Employee stock purchase plan (0.6) 0.8 15.3
Employee benefit plans 0.1 2.3 41.4
Stock option exercises (7.5) 1.8 33.2
Restricted stock grants 0.2
Unearned stock compensation,
net of amortization
Stock compensation plans 0.1 (0.9)
Employee stock benefit trust
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 342.0 3.4 2,716.6 2,165.7 (4.3) (106.8)
Net income 951.4
Dividends to common shareholders (144.4)
Purchase of treasury stock, at cost (23.1) (625.5)
Issuance of common stock
Employee stock purchase plan (2.4) 0.7 19.8
Employee benefit plans 2.4 59.0
Stock option exercises (14.7) 2.0 52.9
Restricted stock grants 2.6
Unearned stock compensation,
net of amortization 0.3 0.1
Stock compensation plans 0.1 2.2
Employee stock benefit trust
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 342.0 $3.4 $2,702.5 $2,972.7 (22.3) $(598.3)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
(in millions) OTHER EQUITY
- -------------------------------------------------------------------
<S> <C> <C>
BALANCE, JANUARY 1, 1994 $ (2.5) $ 3,477.1
Net income 740.9
Dividends to common shareholders (85.2)
Purchase of treasury stock, at cost (82.0)
Issuance of common stock
Employee stock purchase plan 3.5
Stock option exercises 14.1
Restricted stock grants 0.5
Unearned stock compensation,
net of amortization (4.4) (4.4)
Stock compensation plans 42.2 42.2
Minimum pension liability adjustment 1.3 1.3
- -------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 36.6 4,108.0
Net income 856.4
Dividends to common shareholders (109.0)
Purchase of treasury stock, at cost (121.2)
Issuance of common stock
Employee stock purchase plan 14.7
Employee benefit plans 41.5
Stock option exercises 25.7
Restricted stock grants 0.2
Unearned stock compensation,
net of amortization (3.2) (3.2)
Stock compensation plans 42.9 42.1
Employee stock benefit trust (21.5) (21.5)
- -------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 54.8 4,833.7
Net income 951.4
Dividends to common shareholders (144.4)
Purchase of treasury stock, at cost (625.5)
Issuance of common stock
Employee stock purchase plan 17.4
Employee benefit plans 59.0
Stock option exercises 38.2
Restricted stock grants 2.6
Unearned stock compensation,
net of amortization (2.6) (2.2)
Stock compensation plans 56.7 59.0
Employee stock benefit trust (24.8) (24.8)
- -------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 84.1 $5,164.4
===================================================================
</TABLE>
(1) Amounts have been restated to reflect the Company's two-for-one stock split.
See notes to the consolidated financial statements.
Dean Witter, Discover & Co. 1996
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 951.4 $ 856.4 $ 740.9
Adjustments to reconcile net income to net cash flows from
operating activities
Depreciation and amortization 83.3 70.0 58.8
Provision for losses on receivables 1,232.3 743.7 548.4
Employee compensation settled through the issuance of
common stock 87.1 57.2 37.0
Deferred income taxes (83.4) (93.4) (155.6)
Decrease (increase) in operating assets
Cash and securities segregated under federal and other regulations (118.1) (432.0) 227.9
Receivables
Securities clients (262.0) (22.2) 70.9
Other (72.1) (74.1) (111.4)
Securities borrowed (1,508.1) (6.6) (250.8)
Amounts due from asset securitizations (215.8) (231.4) 269.6
Matched securities purchased under agreements to resell, net (223.8) (27.1) 4.0
Securities owned and securities sold but not yet purchased, at
market value, net 84.1 (299.4) 1,023.3
Other assets 128.3 106.2 (32.4)
Increase (decrease) in operating liabilities
Payables
Securities clients 250.3 447.0 (40.9)
Drafts 130.6 10.5 2.9
Income taxes 57.5 (26.2) (89.5)
Securities loaned 1,397.1 (23.3) 165.0
Other liabilities and accrued expenses 289.7 421.5 408.3
------------------------------------------
Cash provided by operating activities 2,208.4 1,476.8 2,876.4
------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Net principal disbursed on consumer loans (7,531.7) (7,429.2) (6,166.3)
Purchases of consumer loans (51.3) (306.9) (85.8)
Sales of consumer loans 4,824.1 1,827.3 1,970.1
Other (39.8) (116.2) (118.7)
------------------------------------------
Cash used in investing activities (2,798.7) (6,025.0) (4,400.7)
------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of commercial paper, net (77.6) 2,061.9 194.0
Net increase (decrease) in other short-term borrowings (508.8) 36.4 343.1
Deposits, net 1,021.5 982.4 320.6
Proceeds from issuance of long-term borrowings, net 1,420.1 1,433.5 2,142.1
Securities sold under agreements to repurchase, net (14.8) 347.3 (826.3)
Dividends paid (134.0) (102.3) (81.1)
Proceeds from issuance of common stock 44.1 40.6 17.7
Purchase of treasury stock (625.5) (121.2) (82.0)
------------------------------------------
Cash provided by financing activities 1,125.0 4,678.6 2,028.1
------------------------------------------
Increase in cash and cash equivalents 534.7 130.4 503.8
Cash and cash equivalents, beginning of period 1,464.5 1,334.1 830.3
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,999.2 $1,464.5 $1,334.1
=======================================================================================================================
</TABLE>
See notes to the consolidated financial statements.
Dean Witter, Discover & Co. 1996
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTRODUCTION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dean Witter,
Discover & Co. and subsidiaries (the "Company"). The Company is a financial
services organization that provides a broad range of credit and investment
products, with a primary focus on individual customers. Through its wholly-owned
subsidiary NOVUS Credit Services Inc. ("NCSI"), the Company conducts its credit
services business, including the operation of the NOVUS(sm) Network, a
proprietary network of merchant and cash access locations, and the issuance of
proprietary general purpose credit cards. The Company's securities business is
conducted primarily through its wholly-owned subsidiaries Dean Witter Reynolds
Inc. ("DWR") and Dean Witter InterCapital Inc. All material intercompany
balances and transactions have been eliminated.
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
Actual results could differ from these estimates.
Certain reclassifications have been made to prior year amounts to conform to
the current presentation.
2. SUBSEQUENT EVENT
On February 5, 1997, the Company and Morgan Stanley Group Inc. ("Morgan
Stanley") announced a definitive agreement to merge. Under the terms of the
merger agreement unanimously approved by the Boards of Directors of both
companies, each of Morgan Stanley's common shares will be exchanged for 1.65
common shares of the Company. Morgan Stanley preferred shares outstanding at the
date of the merger will be exchanged for preferred shares of the Company having
substantially identical terms. The transaction, which is expected to be
completed in mid-1997, is intended to be a tax free exchange and accounted for
as a pooling of interests and is subject to customary closing conditions,
including certain regulatory approvals and the approval of shareholders of both
companies. Prior to the time of closing each company will formally rescind its
remaining stock repurchase authorizations.
The following table sets forth certain unaudited pro forma combined selected
financial data giving effect to the merger under the pooling of interests method
of accounting. The amounts presented have been prepared by combining the
Company's financial data for the years ended 1996, 1995 and 1994 with Morgan
Stanley's financial data for the fiscal year ended 1996 and the twelve months
ended November 30, 1995 and 1994. The pro forma combined primary and fully
diluted earnings per common share for the respective periods presented are based
on the combined weighted average number of common shares and share equivalents
of the Company and Morgan Stanley. The number of common shares and share
equivalents of Morgan Stanley is based on the exchange ratio of 1.65 shares of
the Company's common shares for each issued and outstanding share and share
equivalent of Morgan Stanley.
<TABLE>
<CAPTION>
(Unaudited, in millions,
except per share amounts) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Statement Data(1)
Net revenues $ 12,006 $ 9,798 $ 8,612
Income before income taxes 3,117 2,292 1,962
Net income 1,980 1,465 1,257
Primary earnings per share 3.22 2.30 1.96
Fully diluted earnings per share 3.14 2.25 1.93
- --------------------------------------------------------------------------------
Balance Sheet Data (at end of period)(2)
Total assets $238,860
Total liabilities 227,158
Total equity 11,702
================================================================================
</TABLE>
(1) The income statement data presented in this table exclude the effect of (i)
the positive effects of potential increased revenues or operating synergies
which may be achieved upon combining the resources of the companies (ii)
investment banking, legal and miscellaneous transaction costs of the merger,
which will be reflected as an expense in the period the merger is
consummated, and (iii) costs associated with the integration and
consolidation of the companies which are not presently estimable.
(2) Pro forma balances for 1996 represent the Company's balance sheet amounts at
December 31, 1996 combined with Morgan Stanley's balance sheet amounts at
November 30, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments not held
for resale with maturities, when purchased, of three months or less.
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.
Dean Witter, Discover & Co. 1996
35
<PAGE>
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, 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 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.
Amounts due from asset securitizations in the consolidated balance sheets
represent cash and receivables from third parties. These receivables include the
Company's share of cash collections on certain securitized credit card loans
which are held by third parties and paid to the Company during the month
subsequent to collection, credit enhancement reserve funds maintained with third
parties and advances made by the Company as the servicer of the securitized
loans.
SECURITIES TRANSACTIONS
Clients' securities transactions are recorded on a settlement date basis with
related commission revenues and expenses recorded on trade date. Principal
transactions are recorded on trade date. Securities are recorded at market, with
gains and losses reflected in income.
Securities transactions under agreements to resell and repurchase are
collateralized financing transactions and are carried at the contract amounts at
which the securities will be resold or reacquired, including accrued interest.
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed transactions require the
Company to deposit cash, or other collateral with the lender. With respect to
securities loaned the Company receives collateral in the form of cash or other
collateral in an amount generally in excess of the market value of securities
loaned.
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 depreciation and
amortization of furniture, fixtures and equipment is provided principally by
accelerated methods. Property and equipment are depreciated over the esti-
Dean Witter, Discover & Co. 1996
36
<PAGE>
mated useful lives of the related assets, while leasehold improvements are
amortized over the lesser of the economic useful life of the asset or the term
of the lease.
GOODWILL
Goodwill, which is included in other assets, is amortized on a straight-line
basis over periods not exceeding 40 years.
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 outstanding during the period, adjusted for the dilutive
effects of stock options and unissued stock awards under deferred compensation
plans.
STOCK SPLIT
Effective December 26, 1996, the Company declared a two-for-one stock split,
which was effected in the form of a dividend, distributable on January 14, 1997.
All prior period per share, share outstanding and shareholders' equity data has
been restated to reflect this split.
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.
INTEREST RATE CONTRACTS
The Company has entered into various interest rate contracts as hedges against
specific assets, liabilities or anticipated transactions. These contracts
include interest rate swap, foreign currency exchange, cost of funds and
interest rate cap agreements. 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 income 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.
EMPLOYEE STOCK PLANS
Employee stock plans are accounted for under the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
No. 25"). In accordance with the provisions of APB No. 25, no charge to earnings
is recorded for those stock-based benefits issued to employees which are deemed
"non-compensatory".
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which became effective January 1, 1996 and requires the
determination of the fair value, as defined, of stock options granted. The
Company has elected, as permitted, to provide only the pro forma disclosure of
the effect of SFAS No. 123 on earnings in Note 9 to the consolidated financial
statements.
OTHER ACCOUNTING PRONOUNCEMENTS
Effective January 1, 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", 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.
Dean Witter, Discover & Co. 1996
37
<PAGE>
4. CONSUMER LOANS
Consumer loans were as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Credit card $22,062.0 $20,440.4
Real estate-secured and
other consumer installment 1,203.8 1,233.1
- ------------------------------------------------------------
23,265.8 21,673.5
Less
Unearned finance charges and
unamortized discounts and fees 77.6 117.1
Allowance for loan losses 815.3 721.8
- ------------------------------------------------------------
Consumer loans, net $22,372.9 $20,834.6
============================================================
</TABLE>
Activity in the allowance for consumer loan losses was as follows.
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 721.8 $565.7 $436.8
Additions
Provision for loan losses 1,220.6 730.5 537.0
Purchase of loan portfolios 4.0 30.6 4.3
- ------------------------------------------------------------
Total additions 1,224.6 761.1 541.3
- ------------------------------------------------------------
Deductions
Charge-offs 1,189.2 716.8 470.6
Recoveries (156.2) (121.3) (89.1)
- ------------------------------------------------------------
Net charge-offs 1,033.0 595.5 381.5
- ------------------------------------------------------------
Other(1) (98.1) (9.5) (30.9)
- ------------------------------------------------------------
Balance, December 31 $ 815.3 $721.8 $565.7
- ------------------------------------------------------------
</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 $180.9 million, $114.8 million and $69.8 million in 1996,
1995 and 1994.
At December 31, 1996 and 1995, $5,788.6 million and $7,000.2 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 December 31, 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 $4,527.5
million, $1,827.3 million, and $1,970.1 million in 1996, 1995 and 1994. The
uncollected balances of consumer loans sold through asset securitizations were
$13,384.6 million and $10,219.5 million at December 31, 1996 and 1995. The
allowance for loan losses related to securitized loans, included in other
liabilities and accrued expenses, was $447.3 million and $341.7 million at
December 31, 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.
5. SECURITIES -- AT MARKET VALUE
Securities owned and securities sold but not yet purchased, at market value,
were as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Owned
U.S. government and agency obligations $ 950.4 $1,023.2
Corporate bonds 551.3 615.7
Municipal bonds 148.3 159.9
Other 263.6 50.0
- --------------------------------------------------------------
Total $1,913.6 $1,848.8
==============================================================
Sold but not yet purchased
U.S. government and agency obligations $1,198.8 $ 994.2
Corporate bonds 61.6 116.0
Other 13.7 15.0
- --------------------------------------------------------------
Total $1,274.1 $1,125.2
==============================================================
</TABLE>
Securities sold but not yet purchased represent obligations of the Company
to deliver specified securities at contracted prices, thereby creating a
liability to purchase the securities at prevailing market prices.
Dean Witter, Discover & Co. 1996
- --------------------------------
38
<PAGE>
6. BORROWINGS
SHORT-TERM BORROWINGS
Short-term borrowings and related interest rates were as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------
AMOUNT INTEREST AMOUNT INTEREST
OUTSTANDING RATE(1) OUTSTANDING RATE(1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper $4,736.8 5.52% $4,688.5 5.84%
Other
Federal funds
purchased 458.8 5.51 720.0 5.79
Bank borrowings 410.3 5.45 385.3 6.75
Bank notes 259.1 5.45 529.6 5.85
Note payable
to Tandy -- -- 2.1 6.49
- --------------------------------------------------------------------------------------
Total $5,865.0 5.51% $6,325.5 5.89%
======================================================================================
</TABLE>
(1) Interest rates are presented on a weighted average basis and exclude the
effects of interest rate contracts.
At December 31, 1996 and 1995, short-term borrowings were subject to interest
rate exchange agreements of $778.8 million and $1,002.3 million, and interest
rate cap agreements of $30.0 million and $405.0 million. The interest rate
exchange agreements, which consist of interest rate swap and cost of funds
agreements, primarily converted the related borrowings to fixed rates.At
December 31, 1996 and 1995, the weighted average interest rates on short-term
borrowings, including the effects of interest rate contracts, were 5.55% and
5.97%.
The Company maintains a senior bank credit facility to support general
liquidity needs, including the issuance of commercial paper at the corporate
level. In 1996, the Company renewed this facility and increased its amount to
$4.0 billion from $3.25 billion. The facility expires in April 1997 and contains
certain extension provisions. The Company currently plans to renew or replace
this facility prior to its expiration. This facility contains covenants that
require the Company to maintain minimum net worth requirements and specified
financial ratios. The Company believes that the covenant restrictions will not
impair its ability to pay its current level of dividends. As of December 31,
1996, the Company had never borrowed from its senior bank credit facility.
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 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 December 31, 1996. RFC has never borrowed from its senior bank credit
facility.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1996 and 1995, the weighted average interest rates on amounts
borrowed through repurchase agreements were 5.98% and 5.55%. Substantially all
of the Company's proprietary positions in U.S. government and agency obligations
are pledged as collateral in connection with repurchase agreements.
LONG-TERM BORROWINGS
Long-term borrowings, which consisted of senior long-term notes net of
unamortized discount, and related interest rates were as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------
AMOUNT INTEREST AMOUNT INTEREST
OUTSTANDING RATE(1) OUTSTANDING RATE(1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Floating rate notes $4,257.1 5.78% $3,275.5 6.05%
Fixed rate notes 3,409.1 6.59 3,398.0 6.44
Foreign
denominated 478.0 4.98 58.9 2.06
- --------------------------------------------------------------------------------------
Total $8,144.2 6.07% $6,732.4 6.21%
======================================================================================
</TABLE>
(1) Interest rates are presented on a weighted average basis and exclude the
effects of interest rate exchange agreements.
At December 31, 1996 and 1995, the use of interest rate exchange agreements
effectively converted $2,021.3 million and $2,071.3 million of fixed rate
borrowings to floating rates and in 1995, $75.0 million of floating rate
borrowings to fixed rates. At December 31, 1996 and 1995, $275.0 million and
$325.0 million of floating rate borrowings were converted to floating rates with
different repricing indices. At December 31, 1996 and 1995, the Company had
$492.2 million and $59.1 million of foreign currency exchange agreements which
effectively converted the related foreign denominated borrowing to floating US
indexed interest rates. At December 31, 1996 and 1995, the weighted average
interest rates on long-term borrowings, including the effects of interest rate
exchange agreements, were 6.02% and 6.28%.
At December 31, 1996, floating rate notes had a weighted average remaining
maturity of two years, fixed rate notes had a weighted average remaining
maturity of six years and foreign denominated notes had a weighted average
remaining maturity of five years.
Dean Witter, Discover & Co. 1996
--------------------------------
39
<PAGE>
At December 31, 1996, the principal amounts of long-term borrowings maturing
over the next five years were as follows.
<TABLE>
- ------------------------------------------------------------
<S> <C>
1997 $1,073.1
1998 1,705.2
1999 819.6
2000 1,510.0
2001 577.9
============================================================
</TABLE>
Cash paid for interest for the Company's borrowings and deposits was $2,130.2
million, $1,997.9 million and $1,288.8 million in 1996, 1995 and 1994.
7. DEPOSITS
Deposits were as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Demand, passbook, and money
market accounts $1,715.9 $1,552.0
Consumer certificate accounts 1,354.0 1,222.2
$100,000 minimum certificate accounts 4,142.7 3,416.9
- ------------------------------------------------------------
Total $7,212.6 $6,191.1
============================================================
</TABLE>
The weighted average interest rates of interest-bearing deposits outstanding
during 1996 and 1995 were 6.29% and 6.55%.
At December 31, 1996 and 1995, $495.0 million and $20.0 million of the
Company's deposits were converted to floating rates through the use of interest
rate exchange agreements. At December 31, 1996, the weighted average interest
rate of the Company's deposits including the effect of interest rate exchange
agreements was 6.23%.
At December 31, 1996, certificate accounts maturing over the next five years
were as follows.
<TABLE>
- ------------------------------------------------------------
<S> <C>
1997 $1,410.9
1998 1,720.7
1999 878.9
2000 424.5
2001 688.2
============================================================
</TABLE>
8. EMPLOYEE BENEFIT PLANS
PENSION PLANS
Substantially all employees of the Company are eligible to participate, after
meeting certain age and service requirements, in Company sponsored
non-contributory defined benefit pension plans. Pension benefits are based on
length of service and average annual compensation. The Company's policy is to
contribute an amount at or above that which is required under the Employee
Retirement Income Security Act.
Pension expense consisted of the following.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Service cost $38.3 $ 27.5 $ 35.0
Interest on projected benefit
obligation 43.2 37.1 35.7
Actual return on plan assets (76.0) (68.9) (12.7)
Net amortization and deferral 38.0 34.4 (19.9)
- --------------------------------------------------------------
Total $43.5 $ 30.1 $ 38.1
============================================================
</TABLE>
The expected long-term rate of return on plan assets was 9.0% in 1996, 1995 and
1994.
The funded status of these plans was as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $490.2 $470.5
Accumulated benefit obligation 523.3 497.5
===============================================================================
Projected benefit obligation $632.8 $595.9
Plan assets at fair value 566.3 478.7
- --------------------------------------------------------------------------------
Plan assets less than projected benefit
obligation 66.5 117.2
Unrecognized transitional obligation (10.8) (13.4)
Unrecognized net (loss) gain (15.1) (56.3)
Unrecognized prior service cost (2.4) (3.1)
Adjustment required to recognize
minimum liability 0.3 1.4
- --------------------------------------------------------------------------------
Accrued pension liability $ 38.5 $ 45.8
===============================================================================
</TABLE>
Assumptions used in calculating the projected benefit obligation were as
follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.50% 7.25% 8.50%
Rate of increase in compensation levels 5.00 5.00 5.00
================================================================================
</TABLE>
Dean Witter, Discover & Co. 1996
- --------------------------------
40
<PAGE>
OTHER PLANS
The Company has unfunded postretirement benefit plans that provide medical and
life insurance for eligible retirees, employees and dependents. At December 31,
1996 and 1995, the Company's obligation for these benefits was $36.0 million and
$32.9 million.
Employees of the Company are eligible to participate in the Company's 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 401(k) plan were $41.6 million,
$37.3 million and $34.3 million in 1996, 1995 and 1994.
9. STOCK PLANS
The Company maintains equity-based incentive plans under which various types of
stock awards are granted to officers, directors and key employees of the
Company.
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 equity-based employee incentive plans.
Stock option activity under these plans was as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION
SHARES PRICE SHARES PRICE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of the year 27.7 $15.00 16.6 $12.53
Granted 0.1 25.96 13.1 17.65
Exercised (2.0) 13.58 (1.8) 11.39
Forfeited (0.4) 17.49 (0.2) 15.43
Options outstanding at
Year end 25.4 15.10 27.7 15.00
- --------------------------------------------------------------------------------
Eligible for exercise at
year end 17.0 $13.82 11.2 $12.36
================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OPTIONS
DECEMBER 31, 1996 OUTSTANDING EXERCISABLE
- ------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING OPTION NUMBER OPTION
EXERCISE PRICES OUTSTANDING LIFE (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 December 31, 1996, 12.5 million shares were available for future grant under
these plans.
These plans are "non-compensatory" under APB No. 25, and, accordingly, no
charge to earnings has been recorded. On a pro forma basis, under SFAS No. 123,
if the fair value of options granted in 1996 and 1995 had been charged to
earnings, net income as recorded would have been reduced by $14.5 million in
both 1996 and 1995. Primary and fully diluted earnings per common share as
reported, would have been reduced by $0.04 in both 1996 and 1995.
The fair value of each option grant is estimated on the date of grant using
a binomial option-pricing model with the following weighted average assumptions
used for grants in 1996 and 1995: dividend yield of 1.72% and 1.82%; expected
volatility of 22.19%; risk-free interest rates of 5.31% and 7.74%; and expected
lives of 5.5 years.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, employees may purchase shares of the
Company's common stock at not less than 85% of the fair market value on the date
of purchase. The Company is authorized to issue up to 2.2 million shares of
common stock under this plan. In 1996 and 1995, employees of the Company
purchased 0.7 million and 0.8 million shares of common stock.
The discount to fair market value was $2.4 million for 1996 and $0.6 million
for 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
market value. On a pro forma basis, if the discount had been charged to
earnings, net income would have been reduced by $1.5 million and $0.4 million in
1996 and 1995.
DEFERRED COMPENSATION AWARDS
The Company is authorized to issue up to 16.3 million shares of its common stock
under the terms of its 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 1996 and 1995, the Company
recorded compensation expense of $87.1 million and $57.2 million and unearned
compensation of $7.7 million and $6.1 million in connection with the award of
approximately 3.0 million and 2.4 million shares of common stock under these
plans in 1996 and 1995. These shares were issued in 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.
Dean Witter, Discover & Co. 1996
--------------------------------
41
<PAGE>
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.
10. INCOME TAXES
Income tax expense (benefit) was as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $596.5 $537.5 $540.3
State and local 80.6 95.4 89.0
- --------------------------------------------------------------------------------
677.1 632.9 629.3
- --------------------------------------------------------------------------------
Deferred:
Federal (77.5) (75.0) (136.2)
State and local (5.9) (18.4) (19.4)
- --------------------------------------------------------------------------------
(83.4) (93.4) (155.6)
- --------------------------------------------------------------------------------
Total $593.7 $539.5 $473.7
================================================================================
</TABLE>
Deferred income taxes were as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Loan loss allowances $ 437.7 $ 366.7
Deferred compensation 248.7 207.8
Other valuation and liability allowances 282.6 279.9
Other deferred tax assets 91.9 87.2
- --------------------------------------------------------------------------------
1,060.9 941.6
- --------------------------------------------------------------------------------
Liabilities:
Prepaid commissions (143.3) (125.8)
Other deferred tax liabilities (97.3) (78.9)
- --------------------------------------------------------------------------------
(240.6) (204.7)
- --------------------------------------------------------------------------------
Total $ 820.3 $ 736.9
================================================================================
</TABLE>
A reconciliation from the statutory federal income tax rate to the effective tax
rate was as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of
federal benefit 3.3 3.5 3.5
Other 0.1 0.1 0.5
- ---------------------------------------------------------------
Effective tax rate 38.4% 38.6% 39.0%
===============================================================
</TABLE>
Prior to June 30, 1993, the Company was a subsidiary of Sears, Roebuck and Co.
("Sears"). The Company and Sears have an agreement under which the Company is
responsible for additional taxes arising as the result of amendment or audit
that are attributable to the business of the Company for any period during which
it was owned by Sears. Sears will reimburse the Company for any tax benefits
attributable to the business of the Company for the applicable periods.
Cash paid for income taxes was $598.6 million, $653.9 million and $719.0
million in 1996, 1995 and 1994.
11. 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 December 31, 1996, the leverage ratio and risk-weighted capital ratio of each
of the Company's FDIC insured financial institutions exceeded these and all
other regulatory minimums.
DWR, the Company's primary broker-dealer, is subject to the uniform net
capital rule 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 December 31, 1996, DWR's net capital was $588.8
million and net capital in excess of the minimum required was $474.5 million.
DWR's net capital was 19.7% of aggregate debit balances and 20.6% of funds
required to be segregated.
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
December 31, 1996, approximately $1.7 billion of net assets of consolidated
subsidiaries may be restricted as to the payment of cash dividends and advances
to the Company.
Dean Witter, Discover & Co. 1996
- --------------------------------
42
<PAGE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has non-cancelable operating leases covering office space and
equipment. At December 31, 1996, future minimum rental commitments under such
leases (net of subleases, principally on office rentals) were as follows.
<TABLE>
- ------------------------------------------------------------
<S> <C>
1997 $ 162.6
1998 143.5
1999 128.1
2000 115.4
2001 110.7
Thereafter 427.9
- ------------------------------------------------------------
Total $1,088.2
============================================================
</TABLE>
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 $162.6 million, $153.1 million and $148.5 million in 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 $166.0 million subject to annual
cost of living adjustments.
At December 31, 1996, the Company had outstanding letters of credit of
approximately $61.5 million which expire on various dates through June 30, 1997.
The letters of credit are written in favor of clearing associations to satisfy
margin requirements and with the trustee for various unit investment trust
underwritings. Annual fees of 0.25% are paid on the amounts of these letters of
credit.
In the normal course of business, the Company has been named as a defendant
in various lawsuits. Some of these lawsuits involve claims for substantial
amounts. Although the ultimate outcome of these suits cannot be ascertained at
this time, it is the opinion of management, after consultation with outside
counsel, that the resolution of such suits will not have a material adverse
effect on the consolidated financial condition of the Company, but may be
material to the Company's operating results for any particular period, depending
upon the level of the Company's income for such period.
13. FINANCIAL INSTRUMENTS
TRADING ACTIVITIES
Certain market and credit risks arise from the Company's securities brokerage
activities. These activities primarily facilitate clients' trading and financing
transactions in financial instruments, which may include derivatives.
The Company's client activities involve the execution, settlement and
financing of various client securities and commodities transactions. Client
securities activities are transacted on either a cash or margin basis, and
client commodity transactions are generally transacted on a margin basis subject
to individual exchange regulations. These transactions include the purchase and
sale of securities, the writing of options and the purchase and sale of
commodity futures and forward contracts. These activities may expose the Company
to off-balance sheet risk from clients that may fail to satisfy their
obligations, requiring the Company to purchase or sell financial instruments at
prevailing market prices. The Company believes that the settlement of these
transactions will not have a material effect on the Company's consolidated
financial statements.
The Company's exposure to credit risk associated with these transactions is
measured on an individual basis, as well as by groups that share similar
attributes. The Company services a diverse group of domestic and foreign
corporations, governments, and institutional and individual investors. Credit
risk may also be impacted by trading market volatility. The Company seeks to
control risks associated with its clients' activities by requiring clients to
maintain collateral in compliance with internal and regulatory guidelines. The
Company monitors required margin levels and establishes credit limits daily and,
pursuant to such guidelines, requires clients to deposit additional collateral,
or reduce positions, when necessary.
The Company's client financing and securities settlement activities may
require the Company to pledge client securities as collateral (1) in support of
various secured financing sources such as bank loans, securities loaned and
repurchase agreements and (2) to satisfy margin requirements on various
exchanges. In the event the counterparty is unable to meet its contractual
obligation to return the client securities pledged as collateral, the Company
may be exposed to the risk of acquiring the securities at prevailing market
prices in order to satisfy its client obligations. The Company controls this
risk by monitoring the market value of securities pledged on a daily basis and
by requiring adjustments of collateral levels in the event of excess market
exposure. Additionally, the Company establishes credit limits for such
activities and monitors compliance on a daily basis. At December 31, 1996, the
market value of client securities
Dean Witter, Discover & Co. 1996
--------------------------------
43
<PAGE>
pledged under these secured financing transactions approximated the amounts due.
The Company's derivative trading activities are generally limited to
facilitating client trading activity. The Company's derivative trading
activities primarily involve foreign currency forward contracts and foreign
currency options. All financial instruments are carried at market value. Gains
and losses from financial instruments are recorded in the consolidated
statements of income as principal transactions revenue. Market risk is generally
controlled by holding substantially offsetting purchase and sell positions. In
certain cases, the Company has entered into master netting agreements which
allow for net settlement of offsetting transactions with counterparties. The
table below presents the Company's trading derivatives. Where derivative
instruments are subject to netting arrangements, the amounts disclosed are
presented on a net settlement basis.
Foreign currency forward contracts represent obligations to purchase or sell
with the seller agreeing to make delivery at a specified future date and a
specified price. Foreign currency options provide the holder the right, but not
the obligation, to purchase or sell on a certain date and at a specified price.
The fair values of these instruments represent quoted market prices.
Principal transactions revenues include revenues from purchases and sales in
which the Company acts as a principal, as well as gains and losses on securities
held for resale. Revenues from fixed income principal trading activities were
$240.5 million, $261.6 million and $247.2 million in 1996, 1995 and 1994.
Revenues from equity securities principal trading activities were $208.8
million, $217.3 million and $174.7 million in 1996, 1995 and 1994. The net gains
or losses from derivative financial instruments in 1996, 1995 and 1994 were not
material.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
CONTRACT OR AVERAGE CONTRACT OR AVERAGE
NOTIONAL FAIR FAIR NOTIONAL FAIR FAIR
AMOUNT VALUE VALUE AMOUNT VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency forward contracts
Assets $6,298.4 $ 61.3 $ 64.5 $5,640.2 $ 62.7 $ 53.3
Liabilities 6,251.9 (61.1) (64.3) 5,584.2 (62.5) (53.3)
Foreign currency options
Assets 675.2 2.2 9.6 1,589.1 6.8 11.1
Liabilities 675.2 (2.2) (9.6) 1,589.1 (6.8) (11.1)
==============================================================================================================================
</TABLE>
OTHER THAN TRADING ACTIVITIES
The Company uses interest rate contracts, which consist of interest rate
exchange agreements and purchased interest rate cap agreements, 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, including the
interest rate risk inherent in servicing fees received by the Company from
consumer loans sold through asset securitizations. This is accomplished
primarily through matched financing, which entails matching the repricing
schedules of consumer loans and the related financing. The Company utilizes
interest rate contracts where asset and funding repricing characteristics are
not matched effectively. These contracts are entered into as hedges of interest
rate risk, and gains or losses from these contracts generally offset
counterbalancing gains or losses on hedged risk. The Company attempts to match
the recognition of the gains or losses in the periods in which the hedged risk
is realized. Thus, gains or losses may be recognized as part of periodic
settlements or, upon early termination of an interest rate contract, deferred
and amortized over the remaining period of the hedged risk to achieve the
appropriate matching. Interest rate contracts are subject to credit risk for
counterparty nonperformance. The fair value of these agreements is the estimated
amount that the Company would receive (or pay) to terminate the underlying
contract, taking into account current market conditions.
Interest rate exchange agreements, which include interest rate swap and cost
of funds agreements, are settled by reference to the difference between the base
interest rates being exchanged, multiplied by the notional amount of the
contract. These agreements subject the Company to market risk in excess of
amounts recorded in the consolidated balance sheets in the event of unfavorable
market interest rate movements. Interest rate swap agreements are derivative
financial instruments which are entered into with institutions that are
established dealers and that maintain certain minimum credit criteria
established by the Company. Cost of funds agreements are entered into as part of
agreements pursuant to which the Company provides private label credit card
processing services to certain of its merchant clients.
Dean Witter, Discover & Co. 1996
- --------------------------------
44
<PAGE>
Interest rate exchange agreements outstanding were as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swaps
Pay floating rate,
receive fixed rate $5,021.3 $(32.4) $4,164.8 $ 79.3
Pay fixed rate,
receive floating rate 669.0 (8.1) 837.7 (19.2)
Pay floating rate,
receive floating rate 275.0 (0.5) 425.0 (1.4)
Cost of funds agreements 513.8 1.6 631.3 0.9
========================================================================================
</TABLE>
In addition to the interest rate exchange agreements described above, the
Company has entered into foreign currency exchange agreements on its foreign
denominated borrowings. These agreements hedge the Company's exposure to
currency fluctuations and primarily converted the repricing characteristics of
the related foreign denominated borrowings to floating US indexed rates. At
December 31, 1996 and 1995, $492.2 million and $59.1 million of these agreements
were outstanding. At December 31, 1996 and 1995, the fair value of these
agreements were ($6.0) million and ($2.5) million.
Purchased interest rate cap agreements 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 interest rate cap agreements with notional
amounts of $40.0 million and $415.0 million at December 31, 1996 and 1995, of
which $40.0 million were in effect at December 31, 1996 and 1995. At December
31, 1996 and 1995, the fair values of these agreements were $0.3 million and
$0.9 million.
In connection with certain asset securitizations, the Company has written
interest rate cap agreements with notional amounts of $240.0 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 December 31, 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.
FAIR VALUE
The estimated fair value amounts of the Company's financial instruments have
been determined using available market information and appropriate valuation
methodologies. Considerable judgment is required to develop estimates of fair
value. Accordingly, the estimates are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
At December 31, 1996 and 1995, the carrying amounts of the Company's
financial assets and liabilities were reasonable estimates of fair value.
14. SEGMENT INFORMATION
The Company is in the business of providing financial services, and operates in
two distinct business segments -- Credit Services and Securities. Credit
Services is engaged in the issuance and servicing of general purpose credit
cards, consumer lending and electronic transaction processing services.
Securities engages in delivering a broad range of financial products and
services to individual and institutional investors.
The following table presents certain information regarding these business
segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues
Credit Services $ 5,161.8 $ 4,333.7 $ 3,460.2
Securities 3,866.8 3,600.7 3,142.4
Income before income taxes
Credit Services 714.4 720.9 671.7
Securities 830.7 675.0 542.9
Identifiable assets at
end of period(1)
Credit Services 26,091.2 23,857.5 17,901.4
Securities 16,322.4 14,350.7 13,958.0
================================================================================
</TABLE>
(1) Corporate assets have been fully allocated to the Company's business
segments.
Dean Witter, Discover & Co. 1996
--------------------------------
45
<PAGE>
QUARTERLY INFORMATION
(in millions, except per share data)
<TABLE>
<CAPTION>
(unaudited) QUARTER
- -----------------------------------------------------------------------------------------------
1996 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net operating revenues $1,547.5 $1,541.7 $1,526.0 $1,614.9
Income before income taxes 400.4 388.1 393.0 363.6
Net income 245.8 238.8 239.0 227.8
PER SHARE DATA (1)
Earnings per common share
Primary $ 0.71 $ 0.69 $ 0.71 $ 0.68
Fully Diluted 0.70 0.69 0.71 0.68
Average shares outstanding
Primary 348.3 344.2 337.7 334.3
Fully Diluted 349.6 344.3 338.4 334.9
Dividends declared per common share $ 0.11 $ 0.11 $ 0.11 $ 0.11
STOCK PRICE DATA(1)
High $ 29.00 $ 31.06 $ 28.88 $ 34.38
Low 22.50 25.56 24.13 27.56
Close 28.63 28.56 27.50 33.13
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
QUARTER
- -----------------------------------------------------------------------------------------------
1995 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net operating revenues $1,367.6 $1,424.9 $1,451.2 $1,432.2
Income before income taxes 362.3 385.3 355.7 292.6
Net income 222.1 237.5 218.7 178.1
PER SHARE DATA(1)
Earnings per common share
Primary $ 0.64 $ 0.68 $ 0.62 $ 0.51
Fully Diluted 0.64 0.68 0.62 0.51
Average shares outstanding
Primary 347.0 350.7 353.0 351.7
Fully Diluted 347.8 351.0 354.5 351.7
Dividends declared per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08
STOCK PRICE DATA(1)
High $ 21.69 $ 24.38 $ 29.13 $ 28.06
Low 16.75 20.00 23.19 23.25
Close 20.38 23.50 28.13 23.50
===============================================================================================
</TABLE>
(1) Per share and stock price data have been restated to reflect the Company's
two-for-one stock split.
Dean Witter, Discover & Co. 1996
--------------------------------
46
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDER INFORMATION
<S> <C>
Common Stock Share Purchase and Dividend Reinvestment
Ticker Symbol:DWD Plan & Shareholder Services
Dean Witter Trust Company is the Record Keeper for the
The common stock of Dean Witter, Discover & Co. Share Purchase and Dividend Reinvestment Plan and the
is listed on the New York Stock Exchange and on the Transfer Agent for the Company's common stock. For
Pacific Stock Exchange more information on the Plan or assistance with address
changes, dividend checks, registration changes, lost stock
Dividends certificates and share ownership, contact:
Effective March 1997, Dean Witter, Discover & Co.'s
Board of Directors increased the quarterly cash Dean Witter Trust Company
dividend to $0.14 per share of common stock. Harborside Financial Center, Plaza Two
Jersey City, NJ 07311-3977
As of December 31,1996, the Company had 197,149 800-622-2393
shareholders of record.
Annual Report on Form 10-K
Independent Auditors and Shareholder Inquiries
Deloitte & Touche LLP For general information about the Company and to
Two World Financial Center request copies of the Company's Annual Report on
New York, NY 10281 Form 10-K filed with the Securities and Exchange
212-436-2000 Commission contact:
Shareholder Helpline
800-733-2307
Investor Relations
Security analysts, portfolio managers and representa-
tives of financial institutions seeking information about
the Company are invited to contact:
Investor Relations
212-392-6171
</TABLE>
Dean Witter, Discover & Co. 1996
--------------------------------
47
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C>
Nancy Kassebaum Baker Miles L. Marsh
Former United States Senator Chairman and Chief Executive Officer
James River Corporation of Virginia
Edward A. Brennan
Retired Chairman and Chief Executive Officer Michael A. Miles
Sears, Roebuck and Co. Former Chairman and Chief Executive Officer
Phillip Morris Companies Inc.
Alfred C. DeCrane, Jr.
Retired Chairman and Chief Executive Officer Sybil C. Mobley
Texaco Inc. Dean, School of Business and Industry
Florida A&M University
Robert M. Gardiner
Senior Advisor Philip J. Purcell
Dean Witter, Discover & Co. Chairman and Chief Executive Officer
Dean Witter, Discover & Co.
C. Robert Kidder
Chairman and Chief Executive Officer Clarence B. Rogers, Jr.
Borden Inc. Chairman and Former Chief Executive Officer
Equifax, Inc.
<CAPTION>
EXECUTIVE OFFICERS
<S> <C>
Philip J. Purcell James F. Higgins
Chairman and Chief Executive Officer Executive Vice President and
President, Dean Witter Financial
Thomas R. Butler
Executive Vice President and Mitchell M. Merin
President, NOVUS Services Executive Vice President
Chief Administrative Officer
Richard M. DeMartini
Executive Vice President and Stephen R. Miller
President, Dean Witter Capital Executive Vice President and President
and Chief Operating Officer,
Christine A. Edwards DWD Electronic Financial Services
Executive Vice President
General Counsel and Secretary Thomas C. Schneider
Executive Vice President
Chief Financial Officer
</TABLE>
Dean Witter, Discover & Co. 1996
--------------------------------
48
<PAGE>
DEAN WITTER, DISCOVER & CO.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TELEPHONE 212-392-2222
[LOGO] DEAN WITTER, DISCOVER & CO.
<PAGE>
EXHIBIT 21
DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Bank of New Castle Delaware
Bay One Technologies, Inc. California
Cameron Leasing Corporation Delaware
Civic Center Leasing Corporation Delaware
Cook Street Credit Company Colorado
Cool Springs Inc. Massachusetts
Dean Witter Advisers Inc. Delaware
Dean Witter Alliance Capital Corporation Delaware
Dean Witter Asset Corporation Delaware
Dean Witter Aviation Capital Inc. Delaware
Dean Witter Capital Advisers Inc. Delaware
Dean Witter Capital Corporation Delaware
Dean Witter Capital Markets United Kingdom
International Ltd. (U.K.)
Dean Witter, Discover & Co. Delaware
Dean Witter Distributors Inc. Delaware
Dean Witter Equipment Corporation Delaware
Dean Witter Futures and Currency Delaware
Management Inc.
Dean Witter Futures Limited United Kingdom
Dean Witter Global Realty Inc. Delaware
Dean Witter Holding Corporation Delaware
Dean Witter InterCapital Inc. Delaware
Dean Witter International Ltd. United Kingdom
Dean Witter Leasing Corporation Delaware
Dean Witter Realty Advisors Inc. Delaware
Dean Witter Realty Credit Corporation Delaware
Dean Witter Realty Fourth Income Delaware
Properties Inc.
Dean Witter Realty Growth Properties Delaware
Inc.
Dean Witter Realty Inc. Delaware
Dean Witter Realty Income Associates I Delaware
Inc.
Dean Witter Realty Income Associates II Delaware
Inc.
Dean Witter Realty Income Properties I Delaware
Inc.
Dean Witter Realty Income Properties II Delaware
Inc.
Dean Witter Realty Income Properties Delaware
III Inc.
Dean Witter Realty Securitization Inc. Delaware
Dean Witter Realty Yield Plus Assignor Delaware
Inc.
</TABLE>
<PAGE>
DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Dean Witter Realty Yield Plus Inc. Delaware
Dean Witter Realty Yield Plus II Inc. Delaware
Dean Witter Reynolds (Geneva) S.A. Switzerland
Dean Witter Reynolds GmbH Germany
Dean Witter Reynolds (Hong Kong) Limited Hong Kong
Dean Witter Reynolds Inc. Delaware
Dean Witter Reynolds Insurance Agency Indiana
(Indiana) Inc.
Dean Witter Reynolds Insurance Agency Massachusetts
(Massachusetts) Inc.
Dean Witter Reynolds Insurance Agency Ohio
(Ohio) Inc.
Dean Witter Reynolds Insurance Agency Oklahoma
(Oklahoma) Inc.
Dean Witter Reynolds Insurance Agency Texas
(Texas) Inc.
Dean Witter Reynolds Insurance Services Alabama
(Alabama) Inc.
Dean Witter Reynolds Insurance Services Arizona
(Arizona) Inc.
Dean Witter Reynolds Insurance Services Arkansas
(Arkansas) Inc.
Dean Witter Reynolds Insurance Services Illinois
(Illinois) Inc.
Dean Witter Reynolds Insurance Services Delaware
Inc.
Dean Witter Reynolds Insurance Puerto Rico
Services, Inc. (Puerto Rico)
Dean Witter Reynolds Insurance Services Maine
(Maine) Inc.
Dean Witter Reynolds Insurance Services Montana
(Montana) Inc.
Dean Witter Reynolds Insurance Services New Hampshire
(New Hampshire) Inc.
Dean Witter Reynolds Insurance Services South Dakota
(South Dakota) Inc.
Dean Witter Reynolds Insurance Services Wyoming
(Wyoming) Inc.
Dean Witter Reynolds International, Inc. Panama
Dean Witter Reynolds International Delaware
Incorporated
Dean Witter Reynolds International, S.A. France
Dean Witter Reynolds (Italy) Inc. Delaware
Dean Witter Reynolds (Lausanne) S.A. Switzerland
Dean Witter Reynolds Limited United Kingdom
Dean Witter Reynolds (Lugano) S.A. Switzerland
Dean Witter Reynolds Partners Inc. Delaware
Dean Witter Reynolds S.p.A. Italy
Dean Witter Reynolds Venture Equities Delaware
Inc.
Dean Witter Services Company Inc. Delaware
Dean Witter Trust Company New Jersey
Dean Witter Trust FSB Federal Charter
Dean Witter Venture Inc. Delaware
Dean Witter Venture Management Inc. Delaware
</TABLE>
<PAGE>
DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Demeter Management Corporation Delaware
Discover Card Bank Limited Gibraltar
Discover Services Corporation Delaware
Discover Receivables Financing Group Delaware
Inc.
Discover Receivables Financing Delaware
Corporation
DW Arboretum Plaza Inc. Delaware
DW Administrators Inc. Delaware
DW Bennington Property Inc. Delaware
DW Chesterbrook Investors Inc. Delaware
DWD Electronic Financial Services Inc. Delaware
DW Duportail Investors Inc. Delaware
DW Greycoat Inc. Delaware
DW Morris Drive Incorporated Delaware
DW 1200 Incorporated Delaware
DW Reston Technology Park Inc. Delaware
DWR Partnership Administrators Inc. Delaware
DWR Special Advisors Inc. Delaware
DWR Special Partners Inc. Delaware
DW Tech Park II Inc. Delaware
DW Window Coverings Holding, Inc. Delaware
DWR Wind Technologies Inc. Delaware
GF Braker Inc. Delaware
Green Orchard Inc. Massachusetts
Greenwood Trust Company Delaware
Hurley State Bank South Dakota
Lee Leasing Corporation Delaware
Lewiston Leasing Corporation Delaware
Lombard Brokerage, Inc. California
Lombard Insurance Services, Inc. California
LLJV Funding Corporation Delaware
LS Atlanta Associates Inc. Delaware
LS Bayport, Inc. Delaware
</TABLE>
<PAGE>
DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
LS Lake, Inc. Delaware
LS Richmond Mall Inc. Delaware
MedCash, Inc. Delaware
MedLink Technologies, Inc. Delaware
Mountain Receivables Corp. Delaware
MountainWest Financial Corporation Utah
NOVUS Credit Services Inc. Delaware
NOVUS Consumer Discount Company Pennsylvania
NOVUS Development Corporation Delaware
NOVUS Financial Corporation Delaware
NOVUS Financial Corporation of Iowa Iowa
NOVUS Financial Corporation of Minnesota Minnesota
NOVUS Financial Corporation of Tennessee Tennessee
NOVUS Financial Corporation of Washington
Washington
NOVUS Services (Canada), Inc. Canada
NOVUS Services, Inc. Delaware
One Water Corporation Massachusetts
Quality Asset Management Inc. Delaware
Realty Management Services Inc. Delaware
Reynolds Securities Inc. Delaware
Ruf Corporation Kansas
Sartell Leasing Corporation Delaware
SBA/DW/CB Temp Inc. Delaware
SBA/DWR, Inc. Delaware
SCFC Receivables Corp. Delaware
SCFC Receivables Financing Corporation Delaware
SPS Commercial Services, Inc. Delaware
SPS Newco, Inc. Delaware
SPS Payment Systems, Inc. Delaware
SPS Receivables Financing Corporation Delaware
SPS Transaction Services, Inc. Delaware
Tempo-GP, Inc. Delaware
Tempo-LP, Inc. Delaware
Utah Receivables Financing Corporation Delaware
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Dean Witter, Discover & Co. of our reports dated February 21,
1997, included in and incorporated by reference in this Annual Report on Form
10-K of Dean Witter, Discover & Co. for the year ended December 31, 1996:
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-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
/s/ Deloitte & Touche LLP
New York, New York
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,999
<SECURITIES> 0
<RECEIVABLES> 26,847
<ALLOWANCES> 831
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 826
<DEPRECIATION> 446
<TOTAL-ASSETS> 42,414
<CURRENT-LIABILITIES> 0
<BONDS> 8,144
0
0
<COMMON> 0
<OTHER-SE> 5,164
<TOTAL-LIABILITY-AND-EQUITY> 42,414
<SALES> 0
<TOTAL-REVENUES> 9,029
<CGS> 0
<TOTAL-COSTS> 4,685
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,232
<INTEREST-EXPENSE> 1,566
<INCOME-PRETAX> 1,545
<INCOME-TAX> 594
<INCOME-CONTINUING> 951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 951
<EPS-PRIMARY> 2.79
<EPS-DILUTED> 2.77
<FN>
EPS data has been restated to reflect the Company's two-for-one stock split.
</FN>
</TABLE>
