<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11758
MORGAN STANLEY DEAN WITTER & CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 36-3145972
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1585 BROADWAY 10036
NEW YORK, NY (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 761-4000
----------------
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 [_]
As of June 30, 1998 there were 585,695,343 shares of Registrant's Common
Stock, par value $.01 per share, outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MAY 31, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition--May 31, 1998
(unaudited) and November 30, 1997 ................................... 1
Condensed Consolidated Statements of Income (unaudited)--Three and Six
Months Ended May 31, 1998 and 1997 .................................. 2
Condensed Consolidated Statements of Cash Flows (unaudited)--Six
Months Ended May 31, 1998 and 1997 .................................. 3
Notes to Condensed Consolidated Financial Statements (unaudited) ..... 4
Independent Accountants' Reports ..................................... 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 34
Item 4. Submission of Matters to a Vote of Security Holders ............ 34
Item 5. Other Information .............................................. 34
Item 6. Exhibits and Reports on Form 8-K ............................... 35
</TABLE>
i
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................... $ 9,271 $ 8,255
Cash and securities deposited with clearing organiza-
tions or segregated under federal and other regula-
tions (including securities at fair value of $4,613
at May 31, 1998 and $4,655 at November 30, 1997) .. 7,807 6,890
Financial instruments owned:
U.S. government and agency securities .............. 18,617 12,901
Other sovereign government obligations ............. 18,003 22,900
Corporate and other debt ........................... 30,186 24,499
Corporate equities ................................. 14,955 10,329
Derivative contracts ............................... 21,226 17,146
Physical commodities ............................... 290 242
Securities purchased under agreements to resell ..... 93,431 84,516
Receivable for securities provided as collater-
al(2) .............................................. 19,569 --
Securities borrowed ................................. 88,414 55,266
Receivables:
Consumer loans (net of allowances of $824 at May 31,
1998 and $884 at November 30, 1997) ............... 17,089 20,033
Customers, net ..................................... 15,552 12,259
Brokers, dealers and clearing organizations ........ 13,989 13,263
Fees, interest and other ........................... 3,021 4,705
Office facilities, at cost (less accumulated depreci-
ation and amortization of $1,376 at May 31, 1998 and
$1,279 at November 30, 1997) ....................... 1,760 1,705
Other assets ........................................ 7,485 7,378
-------- --------
Total assets ........................................ $380,665 $302,287
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper and other short-term borrowings .... $ 28,159 $ 22,614
Deposits ............................................ 9,133 8,993
Financial instruments sold, not yet purchased:
U.S. government and agency securities .............. 16,370 11,563
Other sovereign government obligations ............. 16,799 12,095
Corporate and other debt ........................... 2,357 1,699
Corporate equities ................................. 22,745 13,305
Derivative contracts ............................... 19,196 15,599
Physical commodities ............................... 563 68
Securities sold under agreements to repurchase ...... 114,628 111,680
Obligation to return securities received as collater-
al(2) .............................................. 17,208 --
Securities loaned ................................... 24,032 14,141
Payables:
Customers .......................................... 37,928 25,086
Brokers, dealers and clearing organizations ........ 18,202 16,097
Interest and dividends ............................. 969 970
Other liabilities and accrued expenses .............. 8,798 8,630
Long-term borrowings ................................ 28,354 24,792
-------- --------
365,441 287,332
-------- --------
Capital Units ....................................... 999 999
-------- --------
Preferred Securities Issued by Subsidiaries ......... 400 --
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock .................................... 875 876
Common stock(1) ($0.01 par value, 1,750,000,000
shares authorized, 605,842,952 and 602,829,994
shares issued, 587,672,561 and 594,708,971 shares
outstanding at May 31, 1998 and at November 30,
1997) ............................................. 6 6
Paid-in capital(1) ................................. 3,818 3,952
Retained earnings .................................. 10,607 9,330
Cumulative translation adjustments ................. (16) (9)
-------- --------
Subtotal ........................................... 15,290 14,155
Note receivable related to sale of preferred stock
to ESOP ........................................... (68) (68)
Common stock held in treasury, at cost(1) ($0.01 par
value, 18,170,391 and 8,121,023 shares at May 31,
1998 and at November 30, 1997) .................... (1,389) (250)
Stock compensation related adjustments ............. (8) 119
-------- --------
Total shareholders' equity ......................... 13,825 13,956
-------- --------
Total liabilities and shareholders' equity .......... $380,665 $302,287
======== ========
</TABLE>
- --------
(1) Historical amounts have been restated to reflect the Company's two-for-one
stock split.
(2) These amounts relate to the Company's adoption of SFAS No. 127.
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Investment banking ............ $ 988 $ 581 $ 1,788 $ 1,103
Principal transactions:
Trading ..................... 1,091 722 1,994 1,591
Investments ................. 101 136 173 192
Commissions ................... 611 484 1,158 974
Fees:
Asset management,
distribution and
administration ............. 741 610 1,417 1,197
Merchant and cardmember ..... 404 424 832 860
Servicing ................... 232 186 403 386
Interest and dividends ........ 4,213 3,197 8,146 6,566
Other ......................... 47 36 102 67
----------- ----------- ----------- -----------
Total revenues .............. 8,428 6,376 16,013 12,936
Interest expense .............. 3,554 2,478 6,699 5,187
Provision for consumer loan
losses ....................... 275 378 680 755
----------- ----------- ----------- -----------
Net revenues ................ 4,599 3,520 8,634 6,994
----------- ----------- ----------- -----------
Non-interest expenses:
Compensation and benefits ... 2,017 1,505 3,805 2,995
Occupancy and equipment ..... 143 127 283 255
Brokerage, clearing and ex-
change fees ................ 132 113 251 208
Information processing and
communications ............. 275 267 542 537
Marketing and business devel-
opment ..................... 286 274 580 562
Professional services ....... 156 99 284 192
Other ....................... 190 178 356 360
Merger related costs ........ -- 74 -- 74
----------- ----------- ----------- -----------
Total non-interest ex-
penses ................... 3,199 2,637 6,101 5,183
----------- ----------- ----------- -----------
Income before income taxes .... 1,400 883 2,533 1,811
Provision for income taxes .... 546 356 988 713
----------- ----------- ----------- -----------
Net income .................... $ 854 $ 527 $ 1,545 $ 1,098
=========== =========== =========== ===========
Preferred stock dividend re-
quirements ................... $ 14 $ 18 $ 29 $ 37
=========== =========== =========== ===========
Earnings applicable to common
shares(1) .................... $ 840 $ 509 $ 1,516 $ 1,061
=========== =========== =========== ===========
Earnings per common share(2)
Basic ....................... $ 1.44 $ 0.88 $ 2.60 $ 1.84
=========== =========== =========== ===========
Diluted ..................... $ 1.37 $ 0.84 $ 2.47 $ 1.75
=========== =========== =========== ===========
Average common shares outstand-
ing(2)
Basic ....................... 581,326,618 577,985,371 583,502,306 575,301,529
=========== =========== =========== ===========
Diluted ..................... 612,625,354 610,430,898 614,179,415 607,771,801
=========== =========== =========== ===========
</TABLE>
- --------
(1) Amounts shown are used to calculate basic earnings per common share.
(2) Historical share and per share amounts have been restated to reflect the
Company's two-for-one stock split.
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MAY 31,
------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income............................................... $ 1,545 $ 1,098
Adjustments to reconcile net income to net cash used for
operating activities:
Non-cash charges included in net income................ 963 782
Changes in assets and liabilities:
Cash and securities deposited with clearing
organizations or segregated under federal and other
regulations......................................... (917) (978)
Financial instruments owned, net of financial
instruments sold, not yet purchased................. 5,943 5,659
Securities borrowed, net of securities loaned........ (23,257) (11,596)
Receivables and other assets......................... (2,661) (4,822)
Payables and other liabilities....................... 15,120 9,524
-------- --------
Net cash used for operating activities..................... (3,264) (333)
-------- --------
Cash flows from investing activities
Net (payments for) proceeds from:
Office facilities...................................... (193) (52)
Net principal received (disbursed) on consumer loans... 106 (1,773)
Sales of consumer loans................................ 2,203 --
Other investing activities............................. -- (29)
-------- --------
Net cash provided by (used for) investing activities....... 2,116 (1,854)
-------- --------
Cash flows from financing activities
Net proceeds related to short-term borrowings............ 5,489 85
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell......... (5,967) (2,547)
Proceeds from:
Deposits............................................... 140 695
Issuance of common stock............................... 136 62
Issuance of long-term borrowings....................... 7,902 5,612
Issuance of Capital Units.............................. -- 134
Preferred Securities Issued by Subsidiaries............ 400 --
Payments for:
Repurchases of common stock............................ (1,487) (124)
Repayments of long-term borrowings..................... (4,184) (2,261)
Redemption of cumulative preferred stock............... -- (345)
Cash dividends......................................... (265) (179)
-------- --------
Net cash provided by financing activities.................. 2,164 1,132
-------- --------
Elimination of Dean Witter, Discover & Co.'s net cash
activity for the month of December 1996................... -- (1,158)
-------- --------
Net increase (decrease) in cash and cash equivalents....... 1,016 (2,213)
Cash and cash equivalents, at beginning of period.......... 8,255 6,544
-------- --------
Cash and cash equivalents, at end of period................ $ 9,271 $ 4,331
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTRODUCTION AND BASIS OF PRESENTATION
The Merger
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the
"Merger"). At that time, Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"). In conjunction with the
Merger, MSDWD issued 260,861,078 shares of its common stock, as each share of
Morgan Stanley common stock then outstanding was converted into 1.65 shares of
MSDWD's common stock (the "Exchange Ratio"). In addition, each share of Morgan
Stanley preferred stock was converted into one share of a corresponding series
of preferred stock of MSDWD. The Merger was treated as a tax-free exchange.
On March 24, 1998, MSDWD changed its corporate name to Morgan Stanley Dean
Witter & Co. (the "Company").
The Company
The condensed consolidated financial statements include the accounts of
Morgan Stanley Dean Witter & Co. and its U.S. and international subsidiaries,
including Morgan Stanley & Co. Incorporated ("MS&Co."), Morgan Stanley & Co.
International Limited ("MSIL"), Morgan Stanley Japan Limited ("MSJL"), Dean
Witter Reynolds Inc. ("DWR"), Morgan Stanley Dean Witter Advisors Inc. and
NOVUS Credit Services Inc.
The Company, through its subsidiaries, provides a wide range of financial
and securities services on a global basis and provides credit and transaction
services nationally. Its securities and asset management businesses include
securities underwriting, distribution and trading; merger, acquisition,
restructuring, real estate, project finance and other corporate finance
advisory activities; asset management; private equity and other principal
investment activities; brokerage and research services; the trading of foreign
exchange and commodities as well as derivatives on a broad range of asset
categories, rates and indices; and global custody, securities clearance
services and securities lending. The Company's credit and transaction services
businesses include the operation of the NOVUS Network, a proprietary network
of merchant and cash access locations, and the issuance of the Discover(R)
Card and other proprietary general purpose credit cards. The Company's
services are provided to a large and diversified group of clients and
customers, including corporations, governments, financial institutions and
individuals.
Basis of Financial Information and Change in Fiscal Year End
The condensed consolidated financial statements give retroactive effect to
the Merger, which was accounted for as a pooling of interests. The pooling of
interests method of accounting requires the restatement of all periods
presented as if Dean Witter Discover and Morgan Stanley had always been
combined.
Prior to the Merger, Dean Witter Discover's year ended on December 31 and
Morgan Stanley's fiscal year ended on November 30. Subsequent to the Merger,
the Company adopted a fiscal year end of November 30. All information included
herein reflects the change in fiscal year end.
The condensed consolidated financial statements are prepared in accordance
with generally accepted accounting principles, which require management to
make estimates and assumptions regarding certain trading inventory valuations,
consumer loan loss levels, the potential outcome of litigation and other
matters that affect the financial statements and related disclosures.
Management believes that the estimates utilized in the preparation of the
condensed consolidated financial statements are prudent and reasonable. Actual
results could differ materially from these estimates.
4
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain reclassifications have been made to prior year amounts to conform to
the current presentation. All material intercompany balances and transactions
have been eliminated.
The condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K (the "Form 10-K")
for the fiscal year ended November 30, 1997. The condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for
the fair statement of the results for the interim period. The results of
operations for interim periods are not necessarily indicative of results for
the entire year.
Financial instruments, including derivatives, used in the Company's trading
activities are recorded at fair value, and unrealized gains and losses are
reflected in trading revenues. Interest revenue and expense arising from
financial instruments used in trading activities are reflected in the
condensed consolidated statements of income as interest revenue or expense.
The fair values of trading positions generally are based on listed market
prices. If listed market prices are not available or if liquidating the
Company's positions would reasonably be expected to impact market prices, fair
value is determined based on other relevant factors, including dealer price
quotations and price quotations for similar instruments traded in different
markets, including markets located in different geographic areas. Fair values
for certain derivative contracts are derived from pricing models which
consider current market and contractual prices for the underlying financial
instruments or commodities, as well as time value and yield curve or
volatility factors underlying the positions. Purchases and sales of financial
instruments are recorded in the accounts on trade date. Unrealized gains and
losses arising from the Company's dealings in over-the-counter ("OTC")
financial instruments, including derivative contracts related to financial
instruments and commodities, are presented in the accompanying condensed
consolidated statements of financial condition on a net-by-counterparty basis,
when appropriate.
Equity securities purchased in connection with private equity and other
principal investment activities are initially carried in the condensed
consolidated financial statements at their original costs. The carrying value
of such equity securities is adjusted when changes in the underlying fair
values are readily ascertainable, generally as evidenced by listed market
prices or transactions which directly affect the value of such equity
securities. Downward adjustments relating to such equity securities are made
in the event that the Company determines that the eventual realizable value is
less than the carrying value. The carrying value of investments made in
connection with principal real estate activities which do not involve equity
securities are adjusted periodically based on independent appraisals,
estimates prepared by the Company of discounted future cash flows of the
underlying real estate assets or other indicators of fair value.
Loans made in connection with private equity and investment banking
activities are carried at cost plus accrued interest less reserves, if deemed
necessary, for estimated losses.
The Company has entered into various contracts as hedges against specific
assets, liabilities or anticipated transactions. These contracts include
interest rate swaps, foreign exchange forwards, foreign currency swaps, and
cost of funds agreements. The Company uses interest rate and currency swaps to
manage the interest rate and currency exposure arising from certain borrowings
and to match the refinancing characteristics of consumer loans with the
borrowings that fund these loans. For contracts that are designated as hedges
of the Company's assets and liabilities, gains and losses are deferred and
recognized as adjustments to interest revenue or expense over the remaining
life of the underlying assets or liabilities. For contracts that are hedges of
asset securitizations, gains and losses are recognized as adjustments to
servicing fees. Gains and losses resulting from the termination of hedge
contracts prior to their stated maturity are recognized ratably over the
remaining life of the instrument being hedged. The Company also uses foreign
exchange forward contracts to manage the currency exposure relating to its net
monetary investment in non-U.S. dollar functional currency operations. The
gain or loss from
5
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
revaluing these contracts is deferred and reported within cumulative
translation adjustments in shareholders' equity, net of tax effects, with the
related unrealized amounts due from or to counterparties included in
receivables from or payables to brokers, dealers and clearing organizations.
Earnings Per Share
As of December 1, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 replaces the previous earnings per share ("EPS") categories of
primary and fully diluted with "basic EPS," which reflects no dilution from
common stock equivalents, and "diluted EPS," which reflects dilution from
common stock equivalents and other dilutive securities based on the average
price per share of the Company's common stock during the period. The EPS
amounts of prior periods have been restated in accordance with SFAS No. 128.
The adoption of SFAS No. 128 has not had a material effect on the Company's
EPS calculations.
The calculations of earnings per common share are based on the weighted
average number of common shares and share equivalents outstanding and give
effect to preferred stock dividend requirements. All per share and share
amounts reflect stock splits effected by Dean Witter Discover and Morgan
Stanley prior to the Merger, as well as the additional shares issued to Morgan
Stanley shareholders pursuant to the Exchange Ratio.
Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," which was
effective for transfers and pledges of certain financial assets and collateral
made after December 31, 1997. The adoption of SFAS No. 127 created additional
assets and liabilities on the Company's condensed consolidated statement of
financial condition related to the recognition of securities provided and
received as collateral. At May 31, 1998, the impact of SFAS No. 127 on the
Company's condensed consolidated statement of financial condition (excluding
reclassifications) was an increase to total assets and total liabilities of
$13,459 million.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These statements, which
are effective for fiscal years beginning after December 15, 1997, establish
standards for the reporting and presentation of comprehensive income and the
disclosure requirements related to segments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises and
standardizes pension and other postretirement benefit plan disclosures that
are to be included in the employers' financial statements. SFAS No. 132 does
not change the measurement or recognition rules for pensions and other
postretirement benefit plans, and is effective for fiscal years beginning
after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement is effective for fiscal years beginning after June 15, 1999.
6
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. CONSUMER LOANS
Activity in the allowance for consumer loan losses was as follows (dollars
in millions):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, beginning of period ................... $ 905 $ 809 $ 884 $ 781
Provision for loan losses ...................... 275 378 680 755
Less deductions
Charge-offs .................................. 348 415 794 817
Recoveries ................................... (56) (42) (99) (82)
------ ------ ------ ------
Net charge-offs ............................ 292 373 695 735
------ ------ ------ ------
Other(1) ....................................... (64) 7 (45) 20
------ ------ ------ ------
Balance, end of period ......................... $ 824 $ 821 $ 824 $ 821
====== ====== ====== ======
</TABLE>
- --------
(1) Primarily reflects transfers related to asset securitizations and the
fiscal 1998 sale of the Company's Prime Option MasterCard portfolio.
Interest accrued on loans subsequently charged off, recorded as a reduction
of interest revenue, was $47 million and $115 million in the quarter and six
month period ended May 31, 1998 and $85 million and $160 million in the
quarter and six months ended May 31, 1997.
The Company received net proceeds from asset securitizations of $1,835
million and $2,203 million in the quarter and six month period ended May 31,
1998. The uncollected balances of consumer loans sold through asset
securitizations were $16,178 million at May 31, 1998 and $15,033 million at
November 30, 1997.
3. LONG-TERM BORROWINGS
Long-term borrowings at May 31, 1998 scheduled to mature within one year
aggregated $6,974 million.
During the six month period ended May 31, 1998, the Company issued senior
notes aggregating $7,931 million, including non-U.S. dollar currency notes
aggregating $778 million, primarily pursuant to its public debt shelf
registration statements. The weighted average coupon interest rate of these
notes was 5.6% at May 31, 1998; the Company has entered into certain
transactions to obtain floating interest rates based primarily on short-term
LIBOR trading levels. Maturities in the aggregate of these notes by fiscal
year are as follows: 1999, $1,222 million; 2000, $2,456 million; 2001, $1,343
million; and thereafter, $2,910 million. In the six month period ended May 31,
1998, $4,184 million of senior notes were repaid.
7
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PREFERRED STOCK, CAPITAL UNITS AND PREFERRED SECURITIES ISSUED BY
SUBSIDIARIES
Preferred stock is composed of the following issues:
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT BALANCE AT
---------------------- --------------------------
MAY 31, NOVEMBER 30, MAY 31, NOVEMBER 30,
1998 1997 1998 1997
--------- ------------ ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ESOP Convertible Preferred
Stock, liquidation
preference $35.88 .......... 3,612,663 3,646,664 $ 130 $ 131
Series A Fixed/Adjustable
Rate Cumulative Preferred
Stock, stated value $200 ... 1,725,000 1,725,000 345 345
7- 3/4% Cumulative Preferred
Stock, stated value $200 ... 1,000,000 1,000,000 200 200
7- 3/8% Cumulative Preferred
Stock, stated value $200 ... 1,000,000 1,000,000 200 200
---------- ----------
Total ....................... $ 875 $ 876
========== ==========
</TABLE>
Each issue of outstanding preferred stock ranks in parity with all other
outstanding preferred stock of the Company.
The Company has Capital Units outstanding which were issued by the Company
and Morgan Stanley Finance plc ("MS plc"), a U.K. subsidiary. A Capital Unit
consists of (a) a Subordinated Debenture of MS plc guaranteed by the Company
and having maturities from 2013 to 2017 and (b) a related Purchase Contract
issued by the Company, which may be accelerated by the Company beginning
approximately one year after the issuance of each Capital Unit, requiring the
holder to purchase one Depositary Share representing shares (or fractional
shares) of the Company's Cumulative Preferred Stock. The aggregate amount of
Capital Units outstanding was $999 million at May 31, 1998 and November 30,
1997.
On March 5, 1998, MSDW Capital Trust I, a Delaware statutory business trust
(the "Capital Trust"), all of the common securities of which are owned by the
Company, issued $400 million of 7.10% Capital Securities (the "Capital
Securities") that are guaranteed by the Company. The Capital Trust issued the
Capital Securities and invested the proceeds in 7.10% Junior Subordinated
Deferrable Interest Debentures issued by the Company, which are due February
28, 2038.
5. COMMON STOCK AND SHAREHOLDERS' EQUITY
MS&Co. and DWR are registered broker-dealers and registered futures
commission merchants and, accordingly, are subject to the minimum net capital
requirements of the Securities and Exchange Commission, the New York Stock
Exchange and the Commodity Futures Trading Commission. MS&Co. and DWR have
consistently operated in excess of these net capital requirements. MS&Co.'s
net capital totaled $2,691 million at May 31, 1998, which exceeded the amount
required by $2,200 million. DWR's net capital totaled $650 million at May 31,
1998, which exceeded the amount required by $568 million. MSIL, a London-based
broker-dealer subsidiary, is subject to the capital requirements of the
Securities and Futures Authority, and MSJL, a Tokyo-based broker-dealer, is
subject to the capital requirements of the Japanese Ministry of Finance. MSIL
and MSJL have consistently operated in excess of their respective regulatory
capital requirements.
Under regulatory net capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other regulatory capital guidelines,
FDIC-insured financial institutions must maintain (a) 3% to 5% of Tier 1
capital, as defined, to total assets ("leverage ratio") and (b) 8% combined
Tier 1 and Tier 2 capital, as defined, to risk weighted assets ("risk-weighted
capital ratio"). At May 31, 1998, the leverage ratio and risk-weighted
8
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
capital ratio of each of the Company's FDIC-insured financial institutions
exceeded these and all other regulatory minimums.
Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their local capital adequacy requirements.
6. EARNINGS PER SHARE
Earnings per share was calculated as follows (in millions, except for per
share data):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MAY 31, MAY 31,
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income................................... $ 854 $ 527 $1,545 $1,098
Less: preferred stock dividend requirements.. (14) (18) (29) (37)
------ ------ ------ ------
Net income available to common shareholders.. $ 840 $ 509 $1,516 $1,061
====== ====== ====== ======
Weighted-average common shares outstanding... 581 578 584 575
====== ====== ====== ======
Basic EPS.................................... $ 1.44 $ 0.88 $ 2.60 $ 1.84
====== ====== ====== ======
DILUTED EPS:
Net income................................... $ 854 $ 527 $1,545 $1,098
Less: preferred stock dividend requirements
after assumed conversion of ESOP preferred
stock....................................... (13) (17) (26) (34)
------ ------ ------ ------
Net income available to common shareholders.. $ 841 $ 510 $1,519 $1,064
====== ====== ====== ======
Weighted-average common shares outstanding... 581 578 584 575
Effect of dilutive securities:
Stock options.............................. 20 20 18 21
ESOP convertible preferred stock........... 12 12 12 12
------ ------ ------ ------
Weighted-average common shares outstanding
and common stock equivalents................ 613 610 614 608
====== ====== ====== ======
Diluted EPS.................................. $ 1.37 $ 0.84 $ 2.47 $ 1.75
====== ====== ====== ======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has been named as a defendant
in various lawsuits and has been involved in certain investigations and
proceedings. Some of these matters involve claims for substantial amounts.
Although the ultimate outcome of these matters cannot be ascertained at this
time, it is the opinion of management, after consultation with outside
counsel, that the resolution of such matters will not have a material adverse
effect on the consolidated financial condition of the Company, but may be
material to the Company's operating results for any particular period,
depending upon the level of the Company's net income for such period.
The Company had approximately $6.9 billion and $5.5 billion of letters of
credit outstanding at May 31, 1998 and at November 30, 1997 to satisfy various
collateral requirements.
9
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DERIVATIVE CONTRACTS
In the normal course of business, the Company enters into a variety of
derivative contracts related to financial instruments and commodities. The
Company uses swap agreements in managing its interest rate exposure. The
Company also uses forward and option contracts, futures and swaps in its
trading activities; these financial instruments also are used to hedge the
U.S. dollar cost of certain foreign currency exposures. In addition, financial
futures and forward contracts are actively traded by the Company and are used
to hedge proprietary inventory. The Company also enters into delayed delivery,
when-issued, and warrant and option contracts involving securities. These
instruments generally represent future commitments to swap interest payment
streams, exchange currencies or purchase or sell other financial instruments
on specific terms at specified future dates. Many of these products have
maturities that do not extend beyond one year; swaps and options and warrants
on equities typically have longer maturities. For further discussion of these
matters, refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Derivative Financial Investments" and Note 8 to the
consolidated financial statements for the fiscal year ended November 30, 1997,
included in the Form 10-K.
These derivative instruments involve varying degrees of off-balance sheet
market risk. Future changes in interest rates, foreign currency exchange rates
or the fair values of the financial instruments, commodities or indices
underlying these contracts ultimately may result in cash settlements exceeding
fair value amounts recognized in the condensed consolidated statements of
financial condition, which, as described in Note 1, are recorded at fair
value, representing the cost of replacing those instruments.
The Company's exposure to credit risk with respect to these derivative
instruments at any point in time is represented by the fair value of the
contracts reported as assets. These amounts are presented on a net-by-
counterparty basis (when appropriate), but are not reported net of collateral,
which the Company obtains with respect to certain of these transactions to
reduce its exposure to credit losses.
10
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The credit quality of the Company's trading-related derivatives at May 31,
1998 and November 30, 1997 is summarized in the tables below, showing the fair
value of the related assets by counterparty credit rating. The credit ratings
are determined by external rating agencies or by equivalent ratings used by
the Company's Credit Department:
<TABLE>
<CAPTION>
COLLATERALIZED OTHER
NON- NON-
INVESTMENT INVESTMENT
AAA AA A BBB GRADE GRADE TOTAL
------ ------ ------ ------ -------------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
AT MAY 31, 1998
Interest rate and
currency swaps and
options (including
caps, floors and swap
options) and other
fixed income securities
contracts ............. $1,007 $3,533 $2,864 $ 949 $ 108 $ 930 $ 9,391
Foreign exchange forward
contracts and
options ............... 691 2,275 1,150 253 -- 115 4,484
Mortgage-backed
securities forward
contracts, swaps and
options ............... 100 11 22 6 -- 5 144
Equity securities
contracts (including
equity swaps, warrants
and options) .......... 1,673 1,350 529 301 1,466 125 5,444
Commodity forwards,
options and swaps ..... 70 343 448 682 2 218 1,763
------ ------ ------ ------ ------ ------ -------
Total ................. $3,541 $7,512 $5,013 $2,191 $1,576 $1,393 $21,226
====== ====== ====== ====== ====== ====== =======
Percent of total ....... 17% 35% 24% 10% 7% 7% 100%
====== ====== ====== ====== ====== ====== =======
AT NOVEMBER 30, 1997
Interest rate and
currency swaps and
options (including
caps, floors and swap
options) and other
fixed income securities
contracts ............. $ 754 $2,761 $2,544 $ 436 $ 33 $ 568 $ 7,096
Foreign exchange forward
contracts and
options ............... 788 2,504 1,068 72 -- 176 4,608
Mortgage-backed
securities forward
contracts, swaps and
options ............... 156 90 50 2 -- 10 308
Equity securities
contracts (including
equity swaps, warrants
and options) .......... 1,141 917 567 233 780 152 3,790
Commodity forwards,
options and swaps ..... 70 425 380 312 12 145 1,344
------ ------ ------ ------ ------ ------ -------
Total ................. $2,909 $6,697 $4,609 $1,055 $ 825 $1,051 $17,146
====== ====== ====== ====== ====== ====== =======
Percent of total ....... 17% 39% 27% 6% 5% 6% 100%
====== ====== ====== ====== ====== ====== =======
</TABLE>
A substantial portion of the Company's securities and commodities
transactions are collateralized and are executed with and on behalf of
commercial banks and other institutional investors, including other brokers
and dealers. Positions taken and commitments made by the Company, including
positions taken and underwriting and financing commitments made in connection
with its private equity and other principal investment activities, often
involve substantial amounts and significant exposure to individual issuers and
businesses, including non-investment grade issuers. The Company seeks to limit
concentration risk created in its businesses through a variety of separate but
complementary financial, position and credit exposure reporting systems,
including the use of trading limits based in part upon the Company's review of
the financial condition and credit ratings of its counterparties.
See also "Risk Management" in the Form 10-K for discussions of the Company's
risk management policies and procedures for its securities businesses.
9. DISPOSITIONS
In the quarter ended May 31, 1998, the Company entered into several
transactions that reflect its strategic decision to focus on growing its core
Securities and Asset Management and Credit and Transaction Services
businesses.
11
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the quarter ended May 31, 1998, the Company completed the sale of its
Prime Option SM MasterCard(R) portfolio ("Prime Option"), a business it had
operated with NationsBank Corporation. The gain resulting from the sale was
not material to the Company's financial condition or results of operations.
On April 18, 1998, SPS Transaction Services, Inc. ("SPS") and Associates
First Capital Corporation ("Associates") entered into a stock purchase
agreement (the "Purchase Agreement") pursuant to which SPS agreed to sell
substantially all of its assets to Associates. SPS is a 73% owned, publicly
held subsidiary of the Company which provides a range of technology
outsourcing services, including the processing of credit and debit card
transactions, consumer private label credit card programs, commercial account
processing services, and call center customer service activities in the U.S.
The transaction is subject to certain conditions contained in the Purchase
Agreement, including certain regulatory approvals and approval by SPS's
shareholders, and is expected to close by the end of fiscal 1998.
On May 7, 1998, the Company and Chase Manhattan Corporation ("Chase")
announced that they had reached a definitive agreement pursuant to which the
Company agreed to sell its Global Custody business to Chase. The transaction
is subject to certain closing conditions, including certain regulatory
approvals, and is expected to close by the end of fiscal 1998.
On May 28, 1998, the Company and NationsBanc Montgomery Securities, LLC
("NationsBanc"), a subsidiary of NationsBank Corporation, announced that they
had reached a definitive agreement pursuant to which the Company agreed to
sell its Correspondent Clearing business to NationsBanc. The transaction is
subject to certain closing conditions, including certain regulatory approvals,
and is expected to close by the end of fiscal 1998.
The expected gains resulting from the sale of SPS, the Global Custody
business and the Correspondent Clearing business will be recognized by the
Company during the period in which the respective transactions are completed.
12
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Shareholders
ofMorgan Stanley Dean Witter & Co.
We have reviewed the accompanying condensed consolidated statement of
financial condition of Morgan Stanley Dean Witter & Co. and subsidiaries
(formerly Morgan Stanley, Dean Witter, Discover & Co.) as of May 31, 1998, and
the related condensed consolidated statements of income for the three and six
month periods ended May 31, 1998 and 1997, and cash flows for the six month
periods ended May 31, 1998 and 1997. These condensed consolidated financial
statements are the responsibility of the management of Morgan Stanley Dean
Witter & Co. We were furnished with the report of other accountants on their
review of the interim financial information of Morgan Stanley Group Inc. and
subsidiaries for the quarter ended February 28, 1997, which statements reflect
total revenues of $4,076 million for the three month period ended February 28,
1997.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the report of other accountants, we are not aware of
any material modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Morgan Stanley
Dean Witter & Co. and subsidiaries as of November 30, 1997, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for the fiscal year then ended (not presented herein), included in
Morgan Stanley Dean Witter & Co.'s Annual Report on Form 10-K for the fiscal
year ended November 30, 1997; and in our report dated January 23, 1998, we
expressed an unqualified opinion on those consolidated financial statements
based on our audit and the report of other auditors.
/s/ Deloitte & Touche LLP
New York, New York
July 14, 1998
13
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Stockholders and Board of
Directors ofMorgan Stanley Group
Inc.
We have reviewed the condensed consolidated statement of financial condition
of Morgan Stanley Group Inc. and subsidiaries (the "Company") as of February
28, 1997 and the related condensed consolidated statements of income and cash
flows for the three-month period ended February 28, 1997 (not presented
separately herein). These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 27, 1997
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Merger
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the
"Merger"). At that time, Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"). In conjunction with the
Merger, each share of Morgan Stanley common stock then outstanding was
converted into 1.65 shares of MSDWD's common stock and each share of Morgan
Stanley preferred stock was converted into one share of a corresponding series
of preferred stock of MSDWD. The Merger was treated as a tax-free exchange.
On March 24, 1998, MSDWD changed its corporate name to Morgan Stanley Dean
Witter & Co. (the "Company").
Basis of Financial Information and Change in Fiscal Year End
The condensed consolidated financial statements give retroactive effect to
the Merger, which was accounted for as a pooling of interests. The pooling of
interests method of accounting requires the restatement of all periods
presented as if Dean Witter Discover and Morgan Stanley had always been
combined.
Prior to the Merger, Dean Witter Discover's year ended on December 31 and
Morgan Stanley's fiscal year ended on November 30. Subsequent to the Merger,
the Company adopted a fiscal year end of November 30. All information included
herein reflects the change in fiscal year end.
RESULTS OF OPERATIONS*
Certain Factors Affecting Results of Operations
The Company's results of operations may be materially affected by market
fluctuations and economic factors. In addition, results of operations in the
past have been and in the future may continue to be materially affected by
many factors of a global nature, including economic and market conditions; the
availability of capital; the level and volatility of interest rates; currency
values and other market indices; the availability of credit; inflation; and
legislative and regulatory developments. Such factors may also have an impact
on the Company's ability to achieve its strategic objectives, including
(without limitation) profitable global expansion.
The Company's Securities and Asset Management business, particularly its
involvement in primary and secondary markets for all types of financial
products, including derivatives, is subject to substantial positive and
negative fluctuations due to a variety of factors that cannot be predicted
with great certainty, including variations in the fair value of securities and
other financial products and the volatility and liquidity of trading markets.
Fluctuations also occur due to the level of market activity, which, among
other things, affects the flow of investment dollars into mutual funds, and
the size, number and timing of transactions or assignments (including
realization of returns from the Company's private equity investments).
In the Company's Credit and Transaction Services business, changes in
economic variables may substantially affect consumer loan growth and credit
quality. Such variables include the number of personal bankruptcy filings, the
rate of unemployment and the level of consumer debt as a percentage of income.
The Company's results of operations also may be materially affected by
competitive factors. In addition to competition from firms traditionally
engaged in the securities business, there has been increased competition
- --------
* This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements, as well as a discussion
of some of the risks and uncertainties involved in the Company's business
that could affect the matters referred to in such statements.
15
<PAGE>
from other sources, such as commercial banks, insurance companies, mutual fund
groups and other companies offering financial services both in the U.S. and
globally. As a result of recent and pending legislative and regulatory
initiatives in the U.S. to remove or relieve certain restrictions on
commercial banks, competition in some markets that have traditionally been
dominated by investment banks and retail securities firms has increased and
may continue to increase in the near future. In addition, recent and
continuing convergence and consolidation in the financial services industry
will lead to increased competition from larger diversified financial services
organizations.
Such competition, among other things, affects the Company's ability to
attract and retain highly skilled individuals. Competitive factors also affect
the Company's success in attracting and retaining clients and assets by its
ability to meet investors' saving and investment needs through consistency of
investment performance and accessibility to a broad array of financial
products and advice. In the credit services industry, competition centers on
merchant acceptance of credit cards, credit card account acquisition and
customer utilization of credit cards. Merchant acceptance is based on both
competitive transaction pricing and the volume of credit cards in circulation.
Credit card account acquisition and customer utilization are driven by the
offering of credit cards with competitive and appealing features such as no
annual fees, low introductory and attractive interest rates, and other
customized features targeting specific consumer groups and by having broad
merchant acceptance.
As a result of the above economic and competitive factors, net income and
revenues in any particular period may not be representative of full-year
results and may vary significantly from year to year and from quarter to
quarter. The Company intends to manage its business for the long term and help
mitigate the potential effects of market downturns by strengthening its
competitive position in the global financial services industry through
diversification of its revenue sources and enhancement of its global
franchise. The Company's ability and success in maintaining high levels of
profitable business activities, emphasizing fee-based assets that are designed
to generate a continuing stream of revenues, managing risks in both the
Securities and Asset Management and Credit and Transaction Services
businesses, evaluating credit product pricing and monitoring costs will
continue to affect its overall financial results. In addition, the
complementary trends in the financial services industry of consolidation and
globalization present, among other things, technological, risk management and
other infrastructure challenges that will require effective resource
allocation in order for the Company to remain competitive.
Economic and Market Conditions in the Quarter Ended May 31, 1998
The favorable economic and market conditions that characterized the global
financial markets in fiscal 1997 continued through much of the second quarter
of fiscal 1998. Despite turmoil and uncertainty relating to the economic and
political situation existing in Southeast Asia, the U.S. economy continued to
exhibit signs of growth. The levels of inflation and interest rates remained
relatively low, and during the quarter the Federal Reserve Board decided to
leave the overnight lending rate unchanged. While the overall performance of
U.S. financial markets continued to be favorable, such performance was, at
times, volatile. Investors also became concerned about lower corporate
earnings resulting from the financial instability in the Asia-Pacific region,
as well as from the potential impact of domestic wage inflation.
Conditions in European markets were generally favorable during the quarter.
Many European stock exchanges recorded sizable gains, primarily due to strong
corporate earnings, merger and consolidation activity, and stable economic
conditions. The region's performance also benefited from positive investor
sentiment relating to the approaching European Economic and Monetary Union
("EMU"), as the member nations and bilateral currency conversion rates for the
first phase of the EMU were announced during the quarter. Market conditions in
Russia were less favorable. Investor concerns regarding the state of the
Russian economy led to significant declines in the nation's financial markets,
which prompted the government to significantly increase interest rates in
order to stabilize the ruble and to reduce the outflow of capital.
Market conditions in the Far East continued to be weak due to the ongoing
economic and financial difficulties existing in the region since the latter
half of fiscal 1997. The continued lack of economic growth in
16
<PAGE>
Japan led its government to approve a 16.65 trillion yen fiscal stimulus
package during the quarter. However, the ability of these fiscal policies to
significantly improve the nation's future economic performance was viewed with
skepticism by many investors. Market conditions were also unstable elsewhere
in Asia. In Indonesia, difficult economic conditions and anti-government
sentiment led to significant political and social unrest. Other Southeast
Asian markets also suffered fallout from the Indonesian crisis.
Results of the Company for the Quarter and Six Month Periods ended May 31,
1998 and 1997
The Company's net income of $854 million and $1,545 million in the quarter
and six month period ended May 31, 1998 represented increases of 62% and 41%
from the comparable periods of fiscal 1997. Diluted earnings per common share
were $1.37 and $2.47 in the quarter and six month period ended May 31, 1998 as
compared to $0.84 and $1.75 in the quarter and six month period ended May 31,
1997. The Company's annualized return on common equity was 25.0% and 22.6% for
the quarter and six month period ended May 31, 1998, as compared with 18.3%
and 19.5% for the comparable periods of fiscal 1997.
The increase in net income in the quarter and six month period ended May 31,
1998 from the comparable prior year periods was primarily due to higher
revenues from securities activities, including investment banking, principal
transactions and commissions, increased asset management, distribution and
administration fees, as well as improved operating results from the Company's
Credit and Transaction Services business. These increases were partially
offset by lower gains from the Company's private equity portfolio, coupled
with higher incentive-based compensation and other non-interest expenses.
In the quarter ended May 31, 1998, the Company entered into several
transactions that reflect its strategic decision to focus on growing its core
Securities and Asset Management and Credit and Transaction Services
businesses.
During the quarter ended May 31, 1998, the Company completed the sale of its
Prime Option SM MasterCard(R) portfolio ("Prime Option"), a business it had
operated with NationsBank Corporation. The gain resulting from the sale was
not material to the Company's financial condition or results of operations.
On April 18, 1998, SPS Transaction Services, Inc. ("SPS") and Associates
First Capital Corporation ("Associates") entered into a stock purchase
agreement (the "Purchase Agreement") pursuant to which SPS agreed to sell
substantially all of its assets to Associates. SPS is a 73% owned, publicly
held subsidiary of the Company which provides a range of technology
outsourcing services, including the processing of credit and debit card
transactions, consumer private label credit card programs, commercial account
processing services, and call center customer service activities in the U.S.
The transaction is subject to certain conditions contained in the Purchase
Agreement, including certain regulatory approvals and approval by SPS's
shareholders, and is expected to close by the end of fiscal 1998.
On May 7, 1998, the Company and Chase Manhattan Corporation ("Chase")
announced that they had reached a definitive agreement pursuant to which the
Company agreed to sell its Global Custody business to Chase. The transaction
is subject to certain closing conditions, including certain regulatory
approvals, and is expected to close by the end of fiscal 1998.
On May 28, 1998, the Company and NationsBanc Montgomery Securities, LLC
("NationsBanc"), a subsidiary of NationsBank Corporation, announced that they
had reached a definitive agreement pursuant to which the Company agreed to
sell its Correspondent Clearing business to NationsBanc. The transaction is
subject to certain closing conditions, including certain regulatory approvals,
and is expected to close by the end of fiscal 1998.
The expected gains resulting from the sale of SPS, the Global Custody
business and the Correspondent Clearing business will be recognized by the
Company during the period in which the respective transactions are completed.
17
<PAGE>
The remainder of Results of Operations is presented on a business segment
basis. Substantially all of the operating revenues and operating expenses of
the Company can be directly attributable to its two business segments:
Securities and Asset Management and Credit and Transaction Services. Certain
reclassifications have been made to prior period amounts to conform to the
current year's presentation.
SECURITIES AND ASSET MANAGEMENT
STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
------------- ---------------
1998 1997 1998 1997
------ ------ ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Investment banking............................. $ 988 $ 581 $ 1,788 $ 1,103
Principal transactions:
Trading...................................... 1,091 722 1,994 1,591
Investments.................................. 101 136 173 192
Commissions.................................... 602 476 1,141 965
Asset management, distribution and administra-
tion fees..................................... 741 610 1,417 1,197
Interest and dividends......................... 3,540 2,416 6,690 5,018
Other.......................................... 44 33 97 62
------ ------ ------- -------
Total revenues............................... 7,107 4,974 13,300 10,128
Interest expense............................... 3,303 2,191 6,155 4,617
------ ------ ------- -------
Net revenues................................. 3,804 2,783 7,145 5,511
------ ------ ------- -------
Non-interest expenses:
Compensation and benefits...................... 1,870 1,369 3,516 2,724
Occupancy and equipment........................ 125 112 247 225
Brokerage, clearing and exchange fees.......... 127 109 243 204
Information processing and communications...... 161 149 308 291
Marketing and business development............. 121 100 232 196
Professional services.......................... 132 83 237 158
Other.......................................... 132 114 253 240
------ ------ ------- -------
Total non-interest expenses.................. 2,668 2,036 5,036 4,038
------ ------ ------- -------
Income before income taxes....................... 1,136 747 2,109 1,473
Income tax expense............................... 449 286 830 567
------ ------ ------- -------
Net income................................... $ 687 $ 461 $ 1,279 $ 906
====== ====== ======= =======
</TABLE>
Securities and Asset Management net revenues of $3,804 million and $7,145
million in the quarter and six month period ended May 31, 1998 represented an
increase of 37% and 30% from the comparable periods of fiscal 1997. Securities
and Asset Management net income of $687 million and $1,279 million in the
quarter and six month period ended May 31, 1998 represented an increase of 49%
and 41% from comparable periods of fiscal 1997. In both periods, the increases
reflected higher levels of investment banking revenues; asset management,
distribution and administration fees; and principal transaction trading
revenues and commissions, partially offset by higher incentive-based
compensation and other non-interest expenses.
Investment Banking
Investment banking revenues are derived from the underwriting of securities
offerings and fees from advisory services. Investment banking revenues in the
quarter ended May 31, 1998 increased 70% from the quarter ended May 31, 1997,
primarily reflecting higher revenues from merger and acquisition transactions
and debt and equity underwritings. Revenues from merger, acquisition and
restructuring activities increased to record
18
<PAGE>
levels, as the global market for such transactions continued to be robust
during the quarter. Nearly $1 trillion of transactions were announced during
the first five months of the calendar year, which was approximately twice the
volume reported in the comparable period of 1997. The high levels of
transaction activity reflected the continuing trend of consolidation and
globalization across many industry sectors, as companies attempted to expand
into new markets and businesses through strategic combinations. Advisory fees
from real estate transactions also increased during the quarter. A stable
financing environment, favorable economic conditions and a strong real estate
market, including accelerated consolidation activity among real estate
investment trusts and high investor demand for the securities of public real
estate companies, contributed to the increase. Fixed income underwriting
revenues also increased, primarily attributable to higher revenues from
issuances of global high yield and investment grade fixed income securities.
The market for high yield fixed income securities continued to benefit from
strong investor demand and from the favorable market and economic conditions
that existed during much of the quarter which enabled certain non-investment
grade issuers to obtain attractive financing rates. Underwriting revenues from
investment grade securities also benefited from the favorable economic
conditions in the U.S. and Europe as certain investors increased their demand
for higher credit quality financial instruments. Equity financing revenues
also increased, primarily due to a higher volume of equity offerings as
compared to the prior year's quarter, coupled with the Company's strong market
share.
In the six month period ended May 31, 1998, investment banking revenues
increased 62% from the comparable period of 1997, reflecting higher revenues
from merger and acquisition transactions as well as from both debt and equity
underwritings as volumes in the primary markets continued to be strong.
Principal Transactions
Principal transaction trading revenues, which include revenues from customer
purchases and sales of securities in which the Company acts as principal and
gains and losses on securities held for resale, including derivatives,
increased 51% in the quarter ended May 31, 1998 from the comparable period of
fiscal 1997. The increase was due to higher revenues from all of the Company's
trading businesses: equities; fixed income; foreign exchange; and commodities.
Equity trading revenues in the quarter ended May 31, 1998 increased to
record levels and were significantly higher than the comparable prior year
period. Revenues from trading in equity cash products increased, primarily due
to higher activity in European markets. Most European stock exchanges
benefited from favorable market conditions, low interest rates and positive
investor sentiment regarding the EMU. European revenues also benefited from
the Company's increased sales and research coverage of the region that began
in mid-1997, as well as from higher customer trading volumes as investors
sought to increase their positions in these markets. The increased volume of
equity issuances in the primary markets, as well as higher revenues from
equity derivative securities, also contributed to the increase in equity
trading revenues.
Fixed income trading revenues increased in the quarter ended May 31, 1998
from the quarter ended May 31, 1997, primarily due to higher revenues from
trading in investment grade, high yield and derivative fixed income
securities. Revenues from trading investment grade fixed income securities
benefited from favorable market conditions in the U.S., including stable
economic growth and relatively low rates of interest and inflation. Trading
activity also increased as investors sought to decrease their positions of
securities issued by Asian entities due to higher levels of market and credit
risk. In contrast, market conditions during the second quarter of fiscal 1997
were less favorable due to the Federal Reserve Board's decision to raise the
overnight lending rate in March 1997. Revenues from high yield fixed income
securities benefited from the low interest rate environment and from strong
investor demand. Derivative trading revenues benefited primarily from higher
levels of customer trading volume. These increases were partially offset by
lower revenues from trading securitized fixed income securities.
19
<PAGE>
Foreign exchange trading revenues also increased in the quarter ended May
31, 1998. The increase was attributable to high levels of customer transaction
volumes and volatility in the foreign exchange markets, particularly in the
currencies of Southeast Asian nations. The political and economic turmoil in
that region, coupled with the continued weakness in the Japanese yen,
increased the levels of customer transaction volume and market volatility.
Certain European currencies also experienced higher levels of volatility due
to expectations of interest rate fluctuations in anticipation of the EMU.
Trading revenues from commodity products increased in the quarter ended May
31, 1998, primarily driven by higher revenues from trading in precious metals,
which benefited from increased volatility in the gold market. Higher palladium
prices, resulting from a significantly lower quantity of Russian exports, also
had a favorable impact on precious metals trading revenues. Higher revenues
from trading in commodity derivative products and electricity also contributed
to the increase. These increases were partially offset by lower revenues from
trading in crude oil and natural gas products. Crude oil prices continued to
decline due to relatively high inventory levels and lower levels of customer
demand, while natural gas prices fell as the result of unseasonably warm
weather, causing a reduction in the demand for home heating fuel.
Principal transaction investment gains aggregating $101 million were
recorded in the quarter ended May 31, 1998, as compared to $136 million in the
comparable prior year period. Fiscal 1998's revenues primarily reflected the
complete or partial sales of certain private equity investments, including CAT
Ltd.
Principal transaction trading revenues for the six month period ended May
31, 1998 increased 25% from the comparable prior year period. Equity trading
revenues increased, primarily due to higher revenues from European equity cash
products and equity derivative securities. European equity markets were
characterized by strong performances by most of the major indices and high
customer transaction volumes due to favorable market conditions and positive
investor sentiment regarding the approaching EMU. Fixed income trading
revenues increased as higher revenues from high yield and derivative fixed
income securities were partially offset by lower revenues from securitized
instruments. Foreign exchange trading revenues also increased, benefiting from
high levels of volatility in the currency markets, particularly in Asia, and
strong customer trading volumes. Commodities trading revenues increased due to
higher revenues from precious metals, refined energy products and electricity.
Principal transaction investment gains aggregating $173 million were
recorded in the six month period ended May 31, 1998 as compared to $192
million in the comparable prior year period. Both periods' revenues reflect
realized gains from sales of the Company's positions in Fort James
Corporation, which were more significant in fiscal 1997, as well as gains from
increases in the carrying values of other private equity investments.
Commissions
Commission revenues primarily arise from agency transactions in listed and
over-the-counter equity securities, and sales of mutual funds, futures,
insurance products and options. Commission revenues increased 26% in the
quarter ended May 31, 1998 from the comparable period of fiscal 1997. In U.S.
markets, the Company benefited from a higher volume of customer securities
transactions. Revenues from markets in Europe benefited from the continuance
of high trading volumes due to the strong performance of many equity markets
within that region. The Company's addition of over 1,000 financial advisors
since May 31, 1997 also contributed to the increase.
Commission revenues increased 18% in the six month period ended May 31, 1998
from the comparable period in fiscal 1997. The increase primarily reflects
increased customer trading activity in the global markets for equity
securities.
20
<PAGE>
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration revenues include fees for
asset management services, including fund management fees which are received
for investment management, fees received for promoting and distributing mutual
funds ("12b-1 fees"), and other administrative fees and non-interest revenues
earned from correspondent clearing and custody services. Fund management fees
arise from investment management services the Company provides to registered
investment companies (the "Funds") pursuant to various contractual
arrangements. The Company receives management fees based upon each Fund's
average daily net assets. The Company receives 12b-1 fees for services it
provides in promoting and distributing certain open-ended Funds. These fees
are based on either the average daily Fund net 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. The Company also receives
fees from investment management services provided to segregated customer
accounts pursuant to various contractual arrangements.
Asset management, distribution and administration revenues increased 21% in
the quarter ended May 31, 1998 from the comparable period of fiscal 1997,
reflecting strong fund performance, a comprehensive product line and favorable
market conditions which continue to attract inflows of net new business and
growth in assets under management. Higher fund management and 12b-1 fees, as
well as increased revenues from international equity and U.S. fixed income
products resulting from inflows of client assets and market appreciation, had
a favorable impact on these revenues.
In the six month period ended May 31, 1998, asset management, distribution
and administration revenues increased 18% from the comparable period in fiscal
1997. The increase primarily reflects higher fund management and 12b-1 fees as
well as other revenues resulting from the continued growth in assets under
management.
Customer assets under management or supervision increased to $374 billion at
May 31, 1998 from $303 billion at May 31, 1997. The increase in assets under
management or supervision reflected continued inflows of customer assets and
appreciation in the value of existing customer portfolios. Customer assets
under management or supervision included products offered primarily to
individual investors of $206 billion at May 31, 1998 and $174 billion at May
31, 1997. Products offered primarily to institutional investors were $168
billion at May 31, 1998 and $129 billion at May 31, 1997.
Net Interest
Interest and dividend revenues and expense are a function of the level and
mix of total assets and liabilities, including financial instruments owned,
reverse repurchase and repurchase agreements and customer margin loans, and
the prevailing level, term structure and volatility of interest rates.
Interest and dividend revenues and expense should be viewed in the broader
context of principal trading and investment banking results. Decisions
relating to principal transactions in securities are based on an overall
review of aggregate revenues and costs associated with each transaction or
series of transactions. This review includes an assessment of the potential
gain or loss associated with a trade, the interest income or expense
associated with financing or hedging the Company's positions, and potential
underwriting, commission or other revenues associated with related primary or
secondary market sales. Net interest revenues increased 5% and 33% in the
quarter and six month period ended May 31, 1998 from the comparable periods of
fiscal 1997. In both periods, the increases were primarily attributable to
higher levels of revenues from net interest earning assets, including
financial instruments owned and customer margin receivable balances. Higher
levels of securities lending transactions also had a positive affect on net
interest and dividend revenues. These increases were partially offset by
higher interest expense associated with a higher level of interest bearing
liabilities, including long-term debt.
Non-Interest Expenses
Total non-interest expenses increased 31% and 25% in the quarter and six
month period ended May 31, 1998 from the comparable periods of fiscal 1997.
Within that category, compensation and benefits expense
21
<PAGE>
increased 37% and 29%, principally reflecting increased incentive compensation
based on higher levels of revenues and earnings. Excluding compensation and
benefits expense, non-interest expenses increased 20% and 16%. Occupancy and
equipment expenses increased 12% and 10%, primarily due to increased office
space in New York and Hong Kong, higher occupancy costs in London, and the
addition of 30 new branch locations. Brokerage, clearing and exchange fees
increased 17% and 19%, primarily related to the higher level of securities
trading volume. The increase in the six month period also reflects the
Company's acquisition of the institutional global custody business of Barclays
Bank PLC on April 3, 1997. Information processing and communications expense
increased 8% and 6%, primarily due to the impact of increased rates for
certain data services as well as other telecommunications and information
systems costs. A higher number of employees also contributed to the increase.
Marketing and business development expenses increased 21% and 18%, reflecting
increased travel and entertainment costs associated with the continued high
levels of activity in the global financial markets as the Company continues to
develop new business. Professional services expenses increased 59% and 50%,
primarily reflecting higher consulting costs associated with information
technology initiatives and the Company's increased global business activities.
Higher temporary staff, legal costs and employment fees also contributed to
the increase. Other expenses increased 16% and 5%, primarily reflecting
increases in various expense items resulting from the Company's higher level
of global business and trading activities.
22
<PAGE>
CREDIT AND TRANSACTION SERVICES
STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MAY 31, MAY 31,
------------- -------------
1998 1997 1998 1997
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Fees:
Merchant and cardmember.......................... $ 404 $ 424 $ 832 $ 860
Servicing........................................ 232 186 403 386
Commissions........................................ 9 8 17 9
Other.............................................. 3 3 5 5
------ ------ ------ ------
Total non-interest revenues...................... 648 621 1,257 1,260
------ ------ ------ ------
Interest revenue................................... 673 781 1,456 1,548
Interest expense................................... 251 287 544 570
------ ------ ------ ------
Net interest income.............................. 422 494 912 978
Provision for consumer loan losses................. 275 378 680 755
------ ------ ------ ------
Net credit income................................ 147 116 232 223
------ ------ ------ ------
Net revenues..................................... 795 737 1,489 1,483
------ ------ ------ ------
Compensation and benefits.......................... 147 136 289 271
Occupancy and equipment............................ 18 15 36 30
Brokerage, clearing and exchange fees.............. 5 4 8 4
Information processing and communications.......... 114 118 234 246
Marketing and business development................. 165 174 348 366
Professional services.............................. 24 16 47 34
Other.............................................. 58 64 103 120
------ ------ ------ ------
Total non-interest expenses...................... 531 527 1,065 1,071
------ ------ ------ ------
Income before income taxes......................... 264 210 424 412
Provision for income taxes......................... 97 81 158 157
------ ------ ------ ------
Net income....................................... $ 167 $ 129 $ 266 $ 255
====== ====== ====== ======
</TABLE>
Credit and Transaction Services net income of $167 million and $266 million
in the quarter and six month period ended May 31, 1998 represented an increase
of 29% and 4% from the comparable periods of 1997, primarily attributable to a
lower provision for loan losses, partially offset by a lower yield on consumer
loans. The results of operations for the quarter and six month period ended
May 31, 1998 were also positively affected by the sale of Prime Option, which
occurred during the second quarter.
As a result of enhancements made to certain of the Company's operating
systems in the fourth quarter of fiscal 1997, the Company began recording
charged off cardmember fees and interest revenue directly against the income
statement line items to which they were originally recorded. Prior to the
enhancements, charged off cardmember fees and interest revenue were both
recorded as a reduction of interest revenue. While this change has no impact
on net revenues, the Company believes that the revised presentation better
reflects the manner in which charge-offs affect the Credit and Transaction
Services statements of income. However, since prior periods have not been
restated to reflect this change, the comparability of merchant and cardmember
fees and interest revenues between the quarter and six month period ended May
31, 1998 and the quarter and six month period ended May 31, 1997 has been
affected. Accordingly, the following sections will also discuss the changes in
these income statement categories excluding the impact of this
reclassification.
23
<PAGE>
Non-Interest Revenues
Total non-interest revenues increased 4% in the quarter ended May 31, 1998
and remained level in the six month period ended May 31, 1998 from the
comparable periods of 1997. Excluding the effect of the reclassification of
charged off cardmember fees discussed above, non-interest revenue would have
increased 8% and 4% in the quarter and six month period ended May 31, 1998.
Merchant and cardmember fees include revenues from fees charged to merchants
on credit card sales, late payment fees, overlimit fees, insurance fees, cash
advance fees, and fees for the administration of credit card programs and
transaction processing services. Merchant and cardmember fees decreased 5% and
3% in the quarter and six month period ended May 31, 1998 from the comparable
periods of 1997. Excluding the effect of the reclassification of charged off
cardmember fees discussed above, merchant and cardmember fees would have
remained level in the quarter and six month period ended May 31, 1998. In both
periods, higher merchant discount revenue associated with increased sales
volume was offset by decreases in overlimit, late payment and cash advance
fees. Overlimit and late payment fees decreased due to a lower average level
of owned consumer loans. Cash advance fees decreased as a result of decreased
cash advance transaction volume.
Servicing fees are revenues derived from consumer loans that have been sold
to investors through asset securitizations. Cash flows from the interest yield
and cardmember fees generated by securitized loans are used to pay investors
in these loans a predetermined fixed or floating rate of return on their
investment, to reimburse 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 condensed
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 Company completed asset
securitizations of $1,842 million in the quarter ended May 31, 1998 and $2,211
million in the six month period ended May 31, 1998. No asset securitizations
were completed during the comparable periods of fiscal 1997. These asset
securitizations have expected maturities ranging from 3 years to 5 years from
the date of issuance.
The table below presents the components of servicing fees (dollars in
millions):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MAY 31, MAY 31,
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Merchant and cardmember fees.................... $ 115 $ 105 $ 220 $ 216
Interest revenue................................ 648 518 1,227 1,036
Interest expense................................ (251) (204) (485) (407)
Provision for consumer loan losses.............. (280) (233) (559) (459)
------ ------ ------ ------
Servicing fees.................................. $ 232 $ 186 $ 403 $ 386
====== ====== ====== ======
</TABLE>
Servicing fees increased 25% in the quarter and 4% in the six months ended
May 31, 1998 from the comparable periods of 1997. The increase in both periods
was due to higher levels of net interest cash flows, partially offset by
increased credit losses from securitized consumer loans. The increases in net
interest and credit losses were primarily a result of higher levels of average
securitized loans. In addition, the quarter ended May 31, 1998 benefited from
a modest decrease in the rate of consumer loans charged off.
Commission revenues arise from customer securities transactions associated
with Discover Brokerage Direct, Inc. ("DBD"), the Company's provider of
electronic brokerage services acquired in January 1997. The increase in
commission revenues in the quarter ended May 31, 1998 reflected an increase in
the number of DBD customer accounts and a higher level of customer transaction
volume. The increase in the six month period ended May 31, 1998 was due to
higher customer transaction volume as well as the inclusion of DBD's results
for six months in 1998 as compared to four months in 1997.
24
<PAGE>
Net Interest Income
Net interest income is equal to the difference between interest revenue
derived from Credit and Transaction Services consumer loans and short-term
investment assets and interest expense incurred to finance those assets.
Credit and Transaction Services assets, consisting primarily of consumer
loans, earn interest revenue at both fixed rates and market-indexed variable
rates. The Company incurs interest expense at fixed and floating rates.
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 related financing. Net interest income decreased 15% and 7% in the quarter
and six month period ended May 31, 1998 from the comparable periods of 1997.
Excluding the effect of the reclassification of charged off cardmember fees
discussed above, net interest income would have decreased 19% and 12% from the
comparable prior year periods. The decrease in both periods was predominately
due to lower average levels of owned consumer loans and a lower yield on
general purpose credit card loans. In addition, the results reflect lower net
interest income as a result of the sale of Prime Option during the quarter.
The lower yield on general purpose credit card loans was primarily due to a
larger number of cardmembers taking advantage of lower promotional rates.
The following tables present analyses of Credit and Transaction Services
average balance sheets and interest rates for the quarter and six month period
ended May 31, 1998 and 1997 and changes in net interest income during those
periods:
AVERAGE BALANCE SHEET ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
-------------------------------------------------
1998 1997
------------------------ ------------------------
AVERAGE AVERAGE
BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
General purpose credit card
loans....................... $16,732 13.59% $574 $19,098 14.20% $684
Other consumer loans......... 1,561 16.24 64 1,839 15.57 72
Investment securities........ 597 7.95 12 188 5.39 2
Other........................ 1,460 6.41 23 1,488 6.08 23
------- ---- ------- ----
Total interest earning
assets.................... 20,350 13.12 673 22,613 13.70 781
Allowance for loan losses.... (845) (909)
Non-interest earning assets.. 1,630 1,557
------- -------
Total assets............... $21,135 $23,261
======= =======
LIABILITIES & SHAREHOLDER'S
EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings..................... $ 975 4.83% $ 12 $ 1,013 4.05% $ 10
Brokered.................... 6,075 6.65 102 4,035 6.69 68
Other time.................. 2,208 6.14 35 2,207 6.15 34
------- ---- ------- ----
Total interest bearing
deposits.................. 9,258 6.34 149 7,255 6.15 112
Other borrowings............. 6,928 5.91 102 11,451 6.05 175
------- ---- ------- ----
Total interest bearing
liabilities............... 16,186 6.15 251 18,706 6.09 287
Shareholder's equity/other
liabilities................. 4,949 4,555
------- -------
Total liabilities &
shareholder's equity...... $21,135 $23,261
======= =======
Net interest income.......... $422 $494
==== ====
Net interest margin.......... 8.22% 8.66%
Interest rate spread......... 6.97% 7.61%
</TABLE>
25
<PAGE>
AVERAGE BALANCE SHEET ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
-------------------------------------------------
1998 1997
------------------------ ------------------------
AVERAGE AVERAGE
BALANCE RATE INTEREST BALANCE RATE INTEREST
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
General purpose credit card
loans....................... $18,391 13.77% $1,263 $19,227 14.16% $1,357
Other consumer loans......... 1,612 16.57 133 1,904 15.33 146
Investment securities........ 422 7.33 15 186 5.65 5
Other........................ 1,379 6.51 45 1,363 5.93 40
------- ------ ------- ------
Total interest earning
assets.................... 21,804 13.39 1,456 22,680 13.69 1,548
Allowance for loan losses.... (866) (881)
Non-interest earning assets.. 1,658 1,568
------- -------
Total assets............... $22,596 $23,367
======= =======
LIABILITIES & SHAREHOLDER'S
EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings..................... $ 916 4.75% $ 22 $ 1,025 4.33% $ 22
Brokered.................... 5,995 6.63 198 3,890 6.71 130
Other time.................. 2,282 6.12 70 2,187 6.10 67
------- ------ ------- ------
Total interest bearing
deposits.................. 9,193 6.32 290 7,102 6.18 219
Other borrowings............. 8,421 6.07 254 11,749 6.00 351
------- ------ ------- ------
Total interest bearing
liabilities............... 17,614 6.20 544 18,851 6.07 570
Shareholder's equity/other
liabilities................. 4,982 4,516
------- -------
Total liabilities &
shareholder's equity...... $22,596 $23,367
======= =======
Net interest income.......... $ 912 $ 978
====== ======
Net interest margin.......... 8.39% 8.65%
Interest rate spread......... 7.19% 7.62%
</TABLE>
26
<PAGE>
RATE/VOLUME ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31, 1998 VS. SIX MONTHS ENDED
1997 MAY 31, 1998 VS. 1997
--------------------- -------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
--------------------- -------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ----- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST REVENUE
General purpose credit card
loans....................... $ (84) $ (25) $ (109) $ (59) $ (35) $ (94)
Other consumer loans......... (11) 2 (9) (23) 10 (13)
Investment securities........ 6 4 10 7 3 10
Other........................ (1) 1 -- 1 4 5
------ ------
Total interest revenue..... (78) (30) (108) (60) (32) (92)
------ ------
INTEREST EXPENSE
Interest bearing deposits
Savings...................... -- 3 3 (2) 2 --
Brokered..................... 35 (1) 34 70 (2) 68
Other time................... -- -- -- 4 -- 4
------ ------
Total interest bearing
deposits.................. 32 5 37 64 8 72
Other borrowings............. (71) (2) (73) (101) 3 (98)
------ ------
Total interest expense..... (38) 2 (36) (37) 11 (26)
------ ------
Net interest income.......... $ (40) $ (32) $ (72) $ (22) $ (44) $ (66)
===== ===== ====== ======= ====== ======
</TABLE>
The supplemental table below provides average managed loan balance and rate
information which takes into account both owned and securitized loans:
SUPPLEMENTAL AVERAGE MANAGED LOAN BALANCE SHEET INFORMATION (DOLLARS IN
MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
-----------------------------------------------------
1998 1997
-------------------------- --------------------------
AVG. BAL. RATE % INTEREST AVG. BAL. RATE % INTEREST
--------- ------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans.......... $34,479 14.79% $1,286 $34,032 14.85% $1,274
General purpose credit
card loans............. 32,249 14.64 1,190 31,524 14.72 1,169
Total interest earning
assets................. 36,537 14.35 1,321 35,709 14.44 1,299
Total interest bearing
liabilities............ 32,373 6.16 502 31,802 6.13 491
Consumer loan interest
rate spread............ 8.63 8.72
Interest rate spread.... 8.19 8.31
Net interest margin..... 8.89 8.98
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
-----------------------------------------------------
1998 1997
-------------------------- --------------------------
AVG. BAL. RATE % INTEREST AVG. BAL. RATE % INTEREST
--------- ------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans.......... $35,641 14.76% $2,623 $34,277 14.85% $2,538
General purpose credit
card loans............. 33,359 14.60 2,429 31,703 14.74 2,331
Total interest earning
assets................. 37,441 14.37 2,683 35,826 14.47 2,584
Total interest bearing
liabilities............ 33,251 6.21 1,029 31,997 6.12 977
Consumer loan interest
rate spread............ 8.55 8.73
Interest rate spread.... 8.16 8.35
Net interest margin..... 8.86 9.00
</TABLE>
27
<PAGE>
Provision for Consumer Loan Losses
The provision for consumer loan losses is the amount necessary to establish
the allowance for loan losses at a level the Company believes is adequate to
absorb estimated losses in its consumer loan portfolio at the balance sheet
date. The Company's allowance for loan losses is regularly evaluated by
management for adequacy on a portfolio-by-portfolio basis and was $824 million
and $821 million at May 31, 1998 and 1997. The provision for consumer loan
losses, which is affected by net charge-offs, loan volume and changes in the
amount of consumer loans estimated to be uncollectable, decreased 27% and 10%
in the quarter and six month period ended May 31, 1998 due to a decrease in net
charge-offs. The decrease in net charge-offs in the quarter and six month
period ended May 31, 1998 was due to lower average levels of owned consumer
loans, primarily attributable to an increased level of securitized loans, and a
decrease in the rate of charge-offs primarily due to the sale of Prime Option.
Net charge-offs as a percentage of average owned consumer loans outstanding
decreased to 6.33% and 6.96% in the quarter and six month period ended May 31,
1998 from 7.07% and 6.97% in the comparable periods of 1997. In fiscal 1997,
the Company intensified efforts designed to reduce the impact of increased net
charge-offs and continues to implement measures designed to improve the credit
quality of both new and existing credit card accounts. The Company's
expectations about future charge-off rates and credit quality are subject to
uncertainties that could cause actual results to differ materially from what
has been discussed above. Factors that influence the level and direction of
consumer loan delinquencies and charge-offs include changes in consumer
spending and payment behaviors, bankruptcy trends, the seasoning of the
Company's loan portfolio, interest rate movements and their impact on consumer
behavior, and the rate and magnitude of changes in the Company's consumer loan
portfolio, including the overall mix of accounts, products and loan balances
within the portfolio.
Consumer loans are considered delinquent when interest or principal payments
become 30 days past due. Consumer loans are charged off when they become 180
days past due, except in the case of bankruptcies and fraudulent transactions,
where loans are charged off earlier. Loan delinquencies and charge-offs are
primarily affected by changes in economic conditions and may vary throughout
the year due to seasonal consumer spending and payment behaviors.
From time to time, the Company has offered and may continue to offer
cardmembers with accounts in good standing the opportunity to skip a minimum
monthly payment, while continuing to accrue periodic finance charges, without
being considered to be past due ("skip-a-payment"). The comparison of
delinquency rates at any particular point in time may be affected depending on
the timing of the skip-a-payment program. The delinquency rates for consumer
loans 90-179 days past due at May 31, 1998 and 1997 were favorably impacted by
skip-a-payment offers made in January 1998 and 1997. The delinquency rates for
consumer loans 30-89 days past due at November 30, 1997 were favorably impacted
by a skip-a-payment offer made in October 1997.
The following table presents delinquency and net charge-off rates with
supplemental managed loan information. Information at May 31, 1998 includes the
effects of the sale of Prime Option.
ASSET QUALITY (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
---------------------------------- ----------------
1998 1997 1997
---------------- ---------------- ----------------
OWNED MANAGED OWNED MANAGED OWNED MANAGED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans at period-
end..................... $17,913 $34,091 $21,143 $34,167 $20,917 $35,950
Consumer loans
contractually past due
as a percentage of
period-end consumer
loans:
30 to 89 days.......... 4.26% 4.33% 4.24% 4.20% 3.96% 3.91%
90 to 179 days......... 2.71% 2.73% 2.77% 2.70% 3.11% 3.07%
Net charge-offs as a
percentage of average
consumer loans (year-to-
date)................... 6.96% 7.05% 6.97% 6.98% 6.78% 6.95%
</TABLE>
28
<PAGE>
Non-Interest Expenses
Non-interest expenses remained level in the quarter and six month period
ended May 31, 1998 from the comparable periods of 1997.
Compensation and benefits expense increased 8% and 7% in the quarter and six
month period ended May 31, 1998 from the comparable periods of 1997 due to an
increase in the number of employees. Brokerage, clearing and exchange fees
relate to the trading activity associated with DBD. The increase in the
quarter ended May 31, 1998 was due to an increased level of customer
transaction volume. The increase in the six month period ended May 31, 1998
was due to an increased level of customer transaction volume and a full six
months of operations of DBD. Information processing and communications expense
decreased 3% and 5% primarily due to lower transaction processing costs, an
adjustment resulting from the sale of the Company's indirect interest in one
of the Company's transaction processing vendors and favorable repricing of
certain data communication contracts. Marketing and business development
expense decreased 5% in the quarter and the six month period ended May 31,
1998. The decreases in both periods were due to lower advertising and
promotional expenses partially offset by increases in Cardmember rewards
expense. Lower advertising and promotional expenses were associated with the
Company's discontinuance of the BRAVO(R) card, partially offset by an increase
in expenses related to partnership programs. Cardmember rewards expense
includes the Cashback Bonus(R) award, pursuant to which the Company annually
pays Discover(R) Cardmembers and Private Issue(R) Cardmembers electing this
feature a percentage of their purchase amounts. Commencing March 1, 1998, the
terms of the Private Issue Cashback Bonus were amended by limiting the maximum
bonus amount to $500 and by increasing the amount of purchases required to
receive this bonus amount. The Company believes that its Cardmember rewards
expense in future periods will not be materially impacted by these changes.
Professional services expense increased 50% and 38%, primarily due to
increased costs associated with account collections and consulting fees. Other
expenses decreased 9% and 14% due to a continuing decrease in fraud losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $302.3 billion at November 30,
1997 to $380.7 billion at May 31, 1998, reflecting growth in financial
instruments owned, resale agreements and securities borrowed, partially
attributable to higher volumes in the global securities markets, as well as
additional assets recognized due to the adoption of Statement of Financial
Accounting Standards No. 127. A substantial portion of the Company's total
assets consists of highly liquid marketable securities and short-term
receivables arising principally from securities transactions. The highly
liquid nature of these assets provides the Company with flexibility in
financing and managing its business.
The Company's senior management establishes the overall funding and capital
policies of the Company, reviews the Company's performance relative to these
policies, monitors the availability of sources of financing, reviews the
foreign exchange risk of the Company and oversees the liquidity and interest
rate sensitivity of the Company's asset and liability position. The primary
goal of the Company's funding and liquidity activities is to ensure adequate
financing over a wide range of potential credit ratings and market
environments.
The Company views return on equity to be an important measure of its
performance, both in the context of the particular business environment in
which the Company is operating and its peer group's results. In this regard,
the Company actively manages its consolidated capital position based upon,
among other things, business opportunities, capital availability and rates of
return together with internal capital policies, regulatory requirements and
rating agency guidelines and therefore may, in the future, expand or contract
its capital base to address the changing needs of its businesses. The Company
returns internally generated equity capital which is in excess of the needs of
its businesses to its shareholders through common stock repurchases and
dividends.
The Company funds its balance sheet on a global basis. The Company's funding
for its Securities and Asset Management business is raised through diverse
sources. These include the Company's capital, including equity and long-term
debt; repurchase agreements; U.S., Canadian, Euro, French and Japanese
commercial paper; letters of credit; unsecured bond borrows; German
Schuldschein loans; securities lending; buy/sell agreements; municipal re-
investments; master notes; and committed and uncommitted lines of credit.
Repurchase
29
<PAGE>
transactions, securities lending and a portion of the Company's bank
borrowings are made on a collateralized basis and therefore provide a more
stable source of funding than short-term unsecured borrowings.
The funding sources utilized for the Company's Credit and Transaction
Services business include the Company's capital, including equity and long-
term debt; asset securitizations; commercial paper; deposits; asset-backed
commercial paper; Fed Funds; and short-term bank notes. The Company sells
consumer loans through asset securitizations using several transaction
structures. Riverwoods Funding Corporation ("RFC"), an entity included in the
condensed consolidated financial statements of the Company, issues asset-
backed commercial paper.
The Company's bank subsidiaries solicit deposits from consumers, purchase
federal funds and issue short-term bank notes. Interest bearing deposits are
classified by type as savings, brokered and other time deposits. Savings
deposits consist primarily of money market deposits and certificate of deposit
accounts sold directly to cardmembers and savings deposits from individual
securities clients. Brokered deposits consist primarily of certificates of
deposits issued by the Company's bank subsidiaries. Other time deposits
include institutional certificates of deposits. The Company, through Greenwood
Trust Company, an indirect subsidiary of the Company, sells notes under a
short-term bank note program.
The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others from which it draws funds in
a variety of currencies. The volume of the Company's borrowings generally
fluctuates in response to changes in the amount of repurchase transactions
outstanding, the level of the Company's securities inventories and consumer
loans receivable, and overall market conditions. Availability and cost of
financing to the Company can vary depending upon market conditions, the volume
of certain trading activities, the Company's credit ratings and the overall
availability of credit.
The Company's reliance on external sources to finance a significant portion
of its day-to-day operations makes access to global sources of financing
important. The cost and availability of unsecured financing generally are
dependent on the Company's short-term and long-term debt ratings. In addition,
the Company's debt ratings have a significant impact on certain trading
revenues, particularly in those businesses where longer term counterparty
performance is critical, such as over-the-counter derivative transactions.
As of June 30, 1998, the Company's credit ratings were as follows:
<TABLE>
<CAPTION>
COMMERCIAL SENIOR
PAPER DEBT
----------- ------
<S> <C> <C>
Dominion Bond Rating Service Limited.................. R-1 (middle) n/a
Duff & Phelps Credit Rating Co........................ D-1+ AA-
Fitch IBCA Inc........................................ F1+ AA-
Japan Rating & Investment Information, Inc............ A-1+ AA-
Moody's Investors Service(1).......................... P-1 A1
Standard & Poor's..................................... A-1 A+
Thomson BankWatch, Inc. .............................. TBW-1 AA
</TABLE>
--------
(1) On June 5, 1998, Moody's Investors Service announced that
it had placed the Company's senior debt credit rating on
review for possible upgrade.
As the Company continues its global expansion and as revenues are
increasingly derived from various currencies, foreign currency management is a
key element of the Company's financial policies. The Company benefits from
operating in several different currencies because weakness in any particular
currency is often offset by strength in another currency. The Company closely
monitors its exposure to fluctuations in currencies and, where cost-justified,
adopts strategies to reduce the impact of these fluctuations on the Company's
financial performance. These strategies include engaging in various hedging
activities to manage income and cash flows denominated in foreign currencies
and using foreign currency borrowings, when appropriate, to finance
investments outside the U.S.
30
<PAGE>
During the six month period ended May 31, 1998, the Company issued senior
notes aggregating $7,931 million, including non-U.S. dollar currency notes
aggregating $778 million, primarily pursuant to its public debt shelf
registration statements. These notes have maturities from 1998 to 2024 and a
weighted average coupon interest rate of 5.6% at May 31, 1998; the Company has
entered into certain transactions to obtain floating interest rates based
primarily on short-term LIBOR trading levels. At May 31, 1998, the aggregate
outstanding principal amount of the Company's Senior Indebtedness (as defined
in the Company's public debt shelf registration statements) was approximately
$45.0 billion.
On February 12, 1998, the Company's Board of Directors authorized the
Company to purchase, subject to market conditions and certain other factors,
up to $3 billion of the Company's common stock. During the six month period
ended May 31, 1998 the Company purchased $1,487 million of its common stock.
Subsequent to May 31, 1998 and through June 30, 1998, the Company purchased an
additional $204 million of its common stock.
On February 25, 1998, the Company's shelf registration statement for an
additional $8 billion of debt securities, warrants, preferred stock or
purchase contracts or any combination thereof in the form of units, became
effective.
On March 5, 1998, MSDW Capital Trust I, a Delaware statutory business trust
(the "Capital Trust"), all of the common securities of which are owned by the
Company, issued $400 million of 7.10% Capital Securities (the "Capital
Securities") that are guaranteed by the Company. The Capital Trust issued the
Capital Securities and invested the proceeds in 7.10% Junior Subordinated
Deferrable Interest Debentures issued by the Company, which are due February
28, 2038.
The Company maintains a senior revolving credit agreement with a group of
banks to support general liquidity needs, including the issuance of commercial
paper (the "MSDW Facility"). Under the terms of the MSDW Facility, the banks
are committed to provide up to $6.0 billion. The MSDW Facility contains
restrictive covenants which require, among other things, that the Company
maintain shareholders' equity of at least $8.3 billion at all times. The
Company believes that the covenant restrictions will not impair the Company's
ability to pay its current level of dividends. At May 31, 1998, no borrowings
were outstanding under the MSDW Facility.
The Company maintains a master collateral facility that enables Morgan
Stanley & Co. Incorporated ("MS&Co."), one of the Company's U.S. broker-dealer
subsidiaries, to pledge certain collateral to secure loan arrangements,
letters of credit and other financial accommodations (the "MS&Co. Facility").
As part of the MS&Co. Facility, MS&Co. also maintains a secured committed
credit agreement with a group of banks that are parties to the master
collateral facility under which such banks are committed to provide up to
$1.875 billion. At May 31, 1998, no borrowings were outstanding under the
MS&Co. Facility.
The Company also maintains a revolving committed financing facility that
enables Morgan Stanley & Co. International Limited ("MSIL"), the Company's
U.K. broker-dealer subsidiary, to secure committed funding from a syndicate of
banks by providing a broad range of collateral under repurchase agreements
(the "MSIL Facility"). Such banks are committed to provide up to an aggregate
of $1.85 billion available in 12 major currencies. At May 31, 1998, no
borrowings were outstanding under the MSIL Facility.
RFC also maintains a $2.55 billion senior bank credit facility which
supports the issuance of asset-backed commercial paper. RFC has never borrowed
from its senior bank credit facility.
The Company anticipates that it will utilize the MSDW Facility, the MS&Co.
Facility or the MSIL Facility for short-term funding from time to time.
At May 31, 1998, certain assets of the Company, such as real property,
equipment and leasehold improvements of $1.8 billion, and goodwill and other
intangible assets of $1.4 billion, were illiquid. In addition, certain equity
investments made in connection with the Company's private equity and other
principal investment
31
<PAGE>
activities, high-yield debt securities, emerging market debt, certain
collateralized mortgage obligations and mortgage-related loan products, bridge
financings, and certain senior secured loans and positions are not highly
liquid.
In connection with its private equity and other principal investment
activities, the Company has equity investments (directly or indirectly through
funds managed by the Company) in privately and publicly held companies. At May
31, 1998, the aggregate carrying value of the Company's equity investments in
privately held companies (including direct investments and partnership
interests) was $170 million, and its aggregate investment in publicly held
companies was $262 million.
In addition, at May 31, 1998, the aggregate value of high-yield debt
securities and emerging market loans and securitized instruments held in
inventory was $1,820 million (a substantial portion of which was subordinated
debt) with not more than 6%, 15% and 8% of all such securities, loans and
instruments attributable to any one issuer, industry or geographic region,
respectively. Non-investment grade securities generally involve greater risk
than investment grade securities due to the lower credit ratings of the
issuers, which typically have relatively high levels of indebtedness and are,
therefore, more sensitive to adverse economic conditions. In addition, the
market for non-investment grade securities and emerging market loans and
securitized instruments has been, and may in the future be, characterized by
periods of volatility and illiquidity. The Company has credit and other risk
policies and procedures to control total inventory positions and risk
concentrations for non-investment grade securities and emerging market loans
and securitized instruments.
The Company acts as an underwriter of and as a market-maker in mortgage-
backed pass-through securities, collateralized mortgage obligations and
related instruments, and as a market-maker in commercial, residential and real
estate loan products. In this capacity, the Company takes positions in market
segments where liquidity can vary greatly from time to time. The carrying
value of the portion of the Company's mortgage-related portfolio at May 31,
1998 traded in markets that the Company believed were experiencing lower
levels of liquidity than traditional mortgage-backed pass-through securities
approximated $2,727 million.
The Company may, from time to time, also provide financing or financing
commitments to companies in connection with its investment banking and private
equity activities. The Company may provide extensions of credit to leveraged
companies in the form of senior or subordinated debt, as well as bridge
financing on a selective basis (which may be in connection with the Company's
commitment to the Morgan Stanley Bridge Fund, LLC). At May 31, 1998, the
Company had six commitments to provide an aggregate of $1,025 million
primarily in connection with its high-yield underwriting activities.
Subsequent to May 31, 1998, the Company had one loan outstanding in the amount
of $93 million, and its aggregate commitments decreased to $15 million.
The Company also engages in senior lending activities, including
origination, syndication and trading of senior secured loans of non-investment
grade companies. Such companies are more sensitive to adverse economic
conditions than investment grade issuers, but the loans are generally made on
a secured basis and are senior to any non-investment grade securities of these
issuers that trade in the capital markets. At May 31, 1998, the aggregate
value of senior secured loans and positions held by the Company was $1,428
million, and aggregate senior secured loan commitments were $761 million.
At May 31, 1998, financial instruments owned by the Company included
derivative products (generally in the form of futures, forwards, swaps, caps,
collars, floors, swap options and similar instruments which derive their value
from underlying interest rates, foreign exchange rates or commodity or equity
instruments and indices) related to financial instruments and commodities with
an aggregate net replacement cost of $21.2 billion. The net replacement cost
of all derivative products in a gain position represents the Company's maximum
exposure to derivatives related credit risk. Derivative products may have both
on- and off-balance sheet risk implications, depending on the nature of the
contract. It should be noted, however, that in many cases derivatives serve to
reduce, rather than increase, the Company's exposure to losses from market,
credit and other risks. The risks associated with the Company's derivative
activities, including market and credit risks, are managed on an integrated
basis with associated cash instruments in a manner consistent with the
Company's overall risk
32
<PAGE>
management policies and procedures. The Company manages its credit exposure to
derivative products through various means, which include reviewing
counterparty financial soundness periodically; entering into master netting
agreements and collateral arrangements with counterparties in appropriate
circumstances; and limiting the duration of exposure.
Year 2000 and EMU
Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000" issue).
The Company continues to review its computer systems and programs in order
to prepare for Year 2000 compliance. Based upon current information, the
Company believes that its Year 2000 expenditures for fiscal 1998 and through
the project's completion will be approximately $125 million. Costs incurred
relating to this project are being expensed by the Company during the period
in which they are incurred. The Company's expectations about future costs
associated with the Year 2000 issue are subject to uncertainties that could
cause actual results to differ materially from what has been discussed above.
Factors that could influence the amount and timing of future costs include the
success of the Company in identifying systems and programs that contain two-
digit year codes, the nature and amount of programming and testing required to
upgrade or replace each of the affected programs, the nature and amount of
testing, verification and reporting required by the Company's regulators
around the world, including securities exchanges, central banks and various
govermental regulatory bodies, the rate and magnitude of related labor and
consulting costs, and the success of the Company's external counterparties and
suppliers, as well as worldwide exchanges, clearing organizations and
depositaries, in addressing the Year 2000 issue.
Modifications to the Company's computer systems and programs are also being
made in order to prepare for the upcoming EMU. The EMU, which will ultimately
result in the replacement of certain European currencies with the "Euro," will
primarily impact the Company's Securities and Asset Management business. Costs
associated with the modifications necessary to prepare for the EMU are also
being expensed by the Company during the period in which they are incurred.
33
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following developments have occurred with respect to certain matters
previously reported in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1997 and/or the Company's Quarterly Report on Form 10-
Q for the fiscal quarter ended February 28, 1998.
Term Trust Class Actions. On June 1, 1998, the plaintiff's motion to certify
the class was granted as to a California statewide class and denied as to a
nationwide class.
Global Opportunity Fund Litigation. On April 1, 1998, Morgan Stanley & Co.
International Limited ("MSIL") filed a notice of removal of the action brought
by The Growth Fund to the United States District Court for the Southern
District of New York. On May 6, 1998, plaintiffs moved to remand the action to
state court.
County of Orange and Moorlach v. Morgan Stanley & Co., Inc. Morgan Stanley &
Co. Incorporated ("Morgan Stanley") supported a motion that was filed by
Merrill Lynch seeking partial summary judgment as to the ultra vires claims
that were asserted by Orange County in its action against Merrill Lynch. That
motion has now become moot due to the County's settlement with Merrill Lynch,
which was announced on June 2, 1998. The County's action against Morgan
Stanley is proceeding.
Litigation Regarding Merger. On April 9, 1998, the Court so ordered a
stipulation dismissing the action.
In re Merrill Lynch, et al. Securities Litigation. On April 30, 1998, a
petition for certiorari in the United States Supreme Court was filed by the
defendants. On June 12, 1998, the plaintiffs filed a motion for permission to
file an amended complaint to extend the class period end from November 4, 1994
to August 28, 1996 and to name new class representatives.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders of the Company was held on March 24,
1998.
The stockholders voted on proposals to (1) elect directors, (2) amend the
Company's Certificate of Incorporation to change the Company's name to Morgan
Stanley Dean Witter & Co. and (3) ratify the appointment of Deloitte & Touche
LLP as independent auditors. The vote of the stockholders resulted in the
approval of the amendment to the Certificate of Incorporation and the
ratification of the appointment of the independent auditors. In addition, all
nominees for election to the board were elected to the terms of office set
forth in the Proxy Statement dated February 20, 1998. The number of votes cast
for, against or withheld, and the number of abstentions and broker non-votes
with respect to each proposal, is set forth below.
<TABLE>
<CAPTION>
AGAINST/ BROKER
FOR WITHHELD ABSTAIN NON-VOTE
--- --------- --------- --------
<S> <C> <C> <C> <C>
ELECTION OF DIRECTORS:
NOMINEE:
Robert P. Bauman................ 526,648,558 5,137,430 * *
Edward A. Brennan............... 523,283,248 8,502,740 * *
Diana D. Brooks................. 526,389,859 5,496,129 * *
Clarence B. Rogers, Jr.......... 526,272,599 5,513,389 * *
APPROVAL OF THE AMENDMENT TO THE
CERTIFICATE OF INCORPORATION TO
CHANGE THE COMPANY'S NAME: 528,546,698 1,986,423 1,235,165 *
RATIFICATION OF INDEPENDENT
AUDITORS: 529,449,108 1,104,859 1,231,751 *
</TABLE>
- --------
* Not Applicable.
ITEM 5. OTHER INFORMATION
Pursuant to the Company's By-Laws, stockholder proposals submitted outside
the processes of Securities and Exchange Commission Proxy Rule 14a-8 (17 CFR
Section 240.14a-8) intended to be presented at the
34
<PAGE>
Company's 1999 annual meeting of stockholders shall be considered timely if
they are delivered to the Secretary of the Company, 1585 Broadway, New York,
New York 10036 on or after November 24, 1998 and on or before December 24,
1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
An exhibit index has been filed as part of this Report on Page E-1.
(B) REPORTS ON FORM 8-K
Form 8-K dated March 26, 1998 reporting Items 5 and 7.
35
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Morgan Stanley Dean Witter & Co.
(REGISTRANT)
/s/ Eileen K. Murray
By: _________________________________
Eileen K. Murray, Controller and
Principal Accounting Officer
Date: July 14, 1998
36
<PAGE>
EXHIBIT INDEX
MORGAN STANLEY DEAN WITTER & CO.
QUARTER ENDED MAY 31, 1998
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<C> <S>
10.1 Tax Deferred Equity Participation Plan, Amended and Restated as of June
26, 1998.
10.2 Amendment to Dean Witter START Plan (Saving Today Affords Retirement
Tomorrow) (effective May 31, 1997).
10.3 Amendment to Dean Witter START Plan (Saving Today Affords Retirement
Tomorrow) (adopted April 14, 1998).
11 Computation of earnings per share.
12 Computation of ratio of earnings to fixed charges.
15.1 Letter of awareness from Deloitte & Touche LLP, dated July 14, 1998,
concerning unaudited interim financial information.
15.2 Letter of awareness from Ernst & Young LLP, dated July 14, 1998,
concerning unaudited interim financial information.
27 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 10.1
MORGAN STANLEY DEAN WITTER & CO.
TAX DEFERRED EQUITY PARTICIPATION PLAN
Amended and Restated June 26, 1998
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
Purposes of the Plan................................................... 1
Definitions............................................................ 1
Election by a Company to Participate in the Plan....................... 5
Stock Subject to the Plan.............................................. 5
Administration of the Plan............................................. 5
Eligibility............................................................ 6
Awards under the Plan.................................................. 7
Funding of the Plan.................................................... 8
Maintenance of Accounts................................................ 8
Payments under the Plan................................................ 9
Securities Matters.....................................................10
Adjustment of Accounts in Certain Events...............................10
Certain Divestitures...................................................11
No Special Employment Rights...........................................12
Payroll and Withholding Taxes..........................................12
Termination and Amendment..............................................13
Payments Upon the Death of a Participant...............................14
Shareholder Approval Required..........................................14
-1-
<PAGE>
Effect of Revocation Event.............................................14
Miscellaneous..........................................................15
-2-
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
TAX DEFERRED EQUITY PARTICIPATION PLAN
(AMENDED AND RESTATED JUNE 26, 1998)
1. PURPOSES OF THE PLAN.
Morgan Stanley Dean Witter & Co., a Delaware corporation ("MWD"),
hereby adopts the Morgan Stanley Dean Witter & Co. Tax Deferred Equity
Participation Plan. The purpose of this Plan is to promote the long-term growth
and financial success of MWD by attracting and retaining employees of
outstanding ability and assisting MWD in promoting a greater identity of
interest between Participants and MWD's shareholders. The Plan is intended to
be an unfunded "bonus program" (within the meaning of 29 CFR Part 2510.3-2(c))
designed primarily to provide deferred bonuses to a select group of highly
compensated or management employees.
2. DEFINITIONS.
As used in the Plan, the following terms have the following meanings:
(a) "Accounts" means a Participant's Cash Account and Stock Account.
(b) "Administrator" means the individual or individuals to whom the
Committee delegates authority under the Plan in accordance with Section 5.
(c) "Affiliate" means any corporation which is a member of a "controlled
group of corporations" (as defined in Code section 414(b)) of which MWD is a
member and any trade or business (whether or not incorporated) under "common
control" (as defined in Code section 414(c)) with MWD.
(d) "Award" means an award granted to a Participant by the Committee
pursuant to Section 7. An Award shall be deemed to have been made for the fiscal
year in which a Company would, in the absence of the Plan, have accrued a
compensation expense for accounting purposes for the value of the Award.
(e) "Award Certificate" means a written certificate issued by the Company
which is approved in accordance with Section 7, executed on behalf of the
Company and sets forth the terms and conditions of the Award.
(f) "Beneficiary" means the person or entity determined to be a
Participant's beneficiary under Section 18.
(g) "Board" means the Board of Directors of MWD.
(h) "Cash Account" means a book account maintained by a Company reflecting,
with respect to shares of Stock credited to a Participant's Stock Account which
are treated as if tendered, the cash amount to be distributed to a Participant
upon a Realization Event.
-1-
<PAGE>
(i) Definition of "Change in Control":
(A) In respect of each Award having an effective date on or before
December 31, 1997, "Change in Control" means: (i) The acquisition by any person
(including a group, within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act), other than (I) any employee plan established by a Company or (II)
any of MWD's affiliates (as defined in Rule 12b-2 promulgated under the Exchange
Act), without the prior approval of the Board, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either the then outstanding shares of Stock or the combined voting power of
MWD's then outstanding voting securities in a transaction or series of
transactions not approved by a majority of the Directors as of the Effective
Date; or
(ii) A change in the composition of the Board such that individuals
who, as of the Effective Date, constitute the Board cease for any reason to
constitute at least a majority thereof, provided that any person who becomes a
Director subsequent to the Effective Date and whose nomination for election is
approved by at least a majority of the Directors as of the Effective Date,
(other than a nomination of an individual whose initial assumption of office is
in connection with an actual or threatened election contest relating to the
election of the Directors of MWD, as such terms are used in Rule 14a-11 of
Regulation 14A under the Exchange Act) shall be deemed a Director as of the
Effective Date.
(B) In respect of each Award having an effective date on or after
January 1, 1998, "Change in Control" shall have the meaning ascribed to such
term by the Committee in respect of such Award.
(j) "Code" means the Internal Revenue Code of 1986, as amended.
(k) "Committee" means such committee of two or more persons as the Board
shall appoint from time to time to administer the Plan. It is intended that the
members of the Committee shall be "non-employee directors" within the meaning of
Rule 16b-3 and "outside directors" within the meaning of Code Section 162(m);
however, the mere fact that a Committee member shall fail to qualify under
either of these requirements shall not invalidate any Award made by the
Committee that is otherwise valid.
(l) "Company" means each of MWD, its Affiliates and any Subsidiary of MWD
that has adopted the Plan pursuant to Section 3(a), while such Subsidiary
remains a participant in the Plan.
(m) "Compensation" for a year means the annual rate of salary payable to
the Participant as of April 1 of such year (disregarding any salary reduction
agreements under any deferred compensation plan, including plans described in
Code section 125 or 401(k)) plus the annual incentive bonus payable to such
Participant for such year. Compensation shall not include the amount of any
contribution payable under the Plan.
(n) Unless the Committee otherwise determines, "Disability" means any
physical or mental condition that would qualify a Participant for a disability
benefit under any long-term disability plan maintained by any Company and
applicable to the Participant.
-2-
<PAGE>
(o) "Effective Date" means January 1, 1994.
(p) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(r) Unless the Committee otherwise determines, "Fair Market Value" means:
(i) for purposes of determining the number of shares of Stock to be
allocated to an Award made pursuant to Section 7 and to a Participant's Stock
Account pursuant to Section 9(a)(i), the fair market value thereof as of the
relevant date of determination, as determined in accordance with a valuation
methodology approved by the Committee; and
(ii) for purposes of crediting a Participant's Stock Account with
shares of Stock based upon cash dividends paid or deemed to be paid on shares of
Stock credited to the Participant's Stock Account pursuant to Section 9(a)(ii),
the average of the high and low sales prices, regular way, of a share of Stock
as reported on the New York Stock Exchange Composite Tape (the "High/Low Price")
on the relevant dividend payment date, or, if Stock is not traded on public
markets on the relevant dividend payment date, the first preceding date on which
Stock is traded on public markets; provided, however, that in the event a "Fair
Market Value" cannot be determined pursuant to the foregoing, the fair market
value thereof as of the relevant date of determination, as determined in
accordance with a valuation methodology approved by the Committee; and
(iii) for purposes of distributing cash, either in lieu of a
fractional share following a Realization Event pursuant to Section 10, in lieu
of Stock pursuant to Section 11(b) or in lieu of Stock following a Revocation
Event pursuant to Section 20, the High/Low Price on the date of the Realization
Event or the Revocation Event, as applicable, or, if Stock is not traded on
public markets on the date of the Realization Event or the Revocation Event, the
first preceding date on which Stock is traded on public markets; provided,
however, that in the event a "Fair Market Value" cannot be determined pursuant
to the foregoing, the fair market value thereof as of the relevant date of
determination, as determined in accordance with a valuation methodology approved
by the Committee.
(s) "Investment Period", with respect to an Award, means: (A) in respect of
each Award having an effective date on or before December 31, 1997, the five-
year period beginning on the date as of which such Award is granted; and (B) in
respect of each Award having an effective date on or after January 1, 1998, the
period beginning on the date as of which the Award is granted and concluding on
the date specified by the Committee as the conclusion of the Investment Period
in respect of such Award.
(t) "Minimum Eligible Compensation" means $100,000 with respect to the
calendar year ending December 31, 1997, and with respect to each fiscal year of
the Company beginning on or after December 1, 1997, $100,000 or such greater
amount as the Committee shall determine.
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(u) "Participant" means a key employee of any Company who is determined by
the Committee to be eligible to participate in the Plan and who is designated as
a Participant pursuant to Sec tion 6.
(v) "Plan" means the Morgan Stanley Dean Witter & Co. Tax Deferred Equity
Participation Plan.
(w) In respect of each Award having an effective date on or before
December 31, 1997, "Realization Event" means the first to occur of (i) the
expiration of the Investment Period with respect to such Award, (ii) the
occurrence of a Change of Control or (iii) the termination of the Plan pursuant
to Section 17. In respect of each Award having an effective date on or after
January 1, 1998, "Realization Event" shall have the meaning ascribed to such
term by the Committee in respect of such Award.
(x) "Retirement" means a Participant's termination of employment with all
Companies on or after: (i) the date (the "Pension Retirement Date") on which
the Participant would first be eligible to retire under any tax-qualified
defined benefit pension plan maintained by a Company in which the Participant
participates; or (ii) in respect of any Award as the Committee determines, such
date preceding the Pension Retirement Date as the Committee may determine.
(y) "Revocation Event" means a determination by the Board in its sole
discretion that any of the following has occurred or is likely to occur:
(i) A determination by the Department of Labor or a court of
competent jurisdiction that the assets of the Trust are subject to Part 4 of
Subtitle B of Title I of ERISA or that the Plan is a "pension plan" (within the
meaning of ERISA section 3(2)) subject to Parts 2, 3 and 4 of Subtitle B of
Title I of ERISA;
(ii) A determination by the Internal Revenue Service or a court of
competent jurisdiction that any amount deposited in the Trust is taxable to any
Participant or Beneficiary prior to the distribution of such amount; or
(iii) A determination by the Company's independent public accountants
that the accounting expense to the Companies of maintaining the Trust under the
Plan is based on a value of the shares of Stock other than such value on the
date shares of Stock are (A) acquired by the Trust or (B) credited to a
Participant's Accounts.
(z) "Rule 16b-3" means Rule 16b-3 promulgated under Section 16 of the
Exchange Act.
(aa) "Securities Act" means the Securities Act of 1933, as amended from
time to time.
(ab) "Stock" means the common stock, par value $.01 per share, of MWD, or
the common stock of any successor thereto.
(ac) "Stock Account" means a book account maintained by MWD reflecting,
with respect to each Award, the number of shares of Stock to be distributed to
each Participant upon a Realization Event.
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(ad) "Subsidiary" means (i) a corporation or other entity with respect to
which MWD, directly or indirectly, has the power, whether through the ownership
of voting securities, by contract or otherwise, to elect at least a majority of
the members of such corporation's board of directors or analogous governing
body, or (ii) any other corporation or other entity in which MWD, directly or
indirectly, has an equity or similar interest and which the Committee designates
as a Subsidiary for purposes of the Plan.
(ae) "Trust" means any trust established in connection with the Plan or any
other employee benefit plan of the Company under which current or former
employees of the Company constitute the principal beneficiaries.
(af) "Trustee" means the trustee of the Trust.
3. ELECTION BY A COMPANY TO PARTICIPATE IN THE PLAN.
(a) By appropriate action, subject to the approval of the Board, any
Subsidiary may adopt the Plan. Such Subsidiary may recommend to the Committee
which of its employees should be eligible to participate in the Plan.
(b) By appropriate action, a Company may terminate its participation in the
Plan.
(c) No Subsidiary that participates in the Plan shall have any power with
respect to the Plan except as specifically provided in the Plan.
(d) MWD may require each Company (other than MWD), as a condition of
participation in the Plan, to enter into an agreement obligating such Company to
pay to MWD, in cash, the appropriate value, as determined by the Board, of any
Stock that MWD contributes to the Trust in respect of Participants employed by
such Company and/or to reimburse MWD for any other amounts paid by MWD
hereunder, directly or indirectly, in respect of Participants employed by such
Company.
4. STOCK SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 13, the Committee may
grant Awards under the Plan with respect to a number of shares of Stock that, in
the aggregate, does not exceed 7,000,000 shares. In the event that any Award is
forfeited for any reason, the number of shares of Stock making up such forfeited
Award (other than shares of Stock credited to such Participant's Accounts solely
as a result of earnings on such Award) shall again be available for grant under
the Plan.
5. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. The Committee may, but
need not, from time to time delegate some or all of its authority under the Plan
to an Administrator consisting of one or more members of the Committee or one or
more directors or officers of the Company; provided, however, that the Committee
may not delegate its authority (i) to make Awards to key
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employees (A) who are subject as of the effective date of the Award to the
reporting rules under Section 16(a) of the Exchange Act, (B) who are, as of the
effective date of the Award, one of MWD's "covered employees" within the meaning
of Section 162(m) of the Code, or any regulations thereunder (or any successor
provision thereto) or (C) who are officers of the Company who are delegated
authority by the Committee hereunder, (ii) to construe and interpret the Plan or
(iii) under Section 17(a) of the Plan. Any delegation hereunder shall be subject
to the restrictions and limits that the Committee specifies at the time of such
delegation or thereafter. Nothing in the Plan shall be construed as obligating
the Committee to delegate authority to an Administrator, and the Committee may
at any time rescind or modify the authority delegated to an Administrator
hereunder or appoint a new Administrator. At all times, the Administrator
appointed hereunder shall serve in such capacity at the pleasure of the
Committee. Any action undertaken by the Administrator in accordance with the
Committee's delegation of authority shall have the same force and effect as if
undertaken directly by the Committee, and any reference to the Committee in the
Plan shall, to the extent consistent with the terms and limitations of such
delegation, be deemed to include a reference to the Administrator.
The Committee shall have full authority, consistent with the Plan, to
administer the Plan, including authority to interpret and construe any Plan
provision and to adopt such rules and regulations and such forms of elections as
it may deem necessary or appropriate. Decisions of the Committee shall be final
and binding on all parties. In the event of a disagreement between the
Committee and the Administrator, the Committee's determination on such matter
shall be final and binding on all parties, including the Administrator. Subject
to Section 3(d), all expenses of the Plan shall be paid by MWD.
No member of the Committee or any Administrator shall be liable for any
action, omission or determination relating to the Plan, and the Companies shall
indemnify and hold harmless each member of the Committee, each Administrator and
each other director or employee of the Companies to whom any duty or power
relating to the Plan has been delegated, against any cost, expense (including
counsel fees, which fees shall be paid as incurred) or liability (including any
sum paid in settlement of a claim with the approval of the Board) arising out of
any action, omission or determination relating to the Plan, if made in good
faith in a manner reasonably believed to be in or not opposed to the best
interests of the Companies, and with respect to any criminal action or
proceeding, if made with reasonable cause to believe that such conduct was
lawful.
6. ELIGIBILITY.
The persons eligible to participate in the Plan with respect to a
fiscal year shall be key employees of the Companies, as determined by the
Committee. The Committee shall grant Awards to such Participants as it shall,
in its sole discretion, determine, provided that no Award shall be made in any
fiscal year to any eligible employee whose annualized Compensation with respect
to such fiscal year is not at least equal to the Minimum Eligible Compensation.
The Committee may from time to time add to or exclude from participation one or
more eligible employees. Each eligible employee shall become a Participant
effective on the date as of which the employee is designated as a Participant or
members of a class of employees including the employee are designated as
Participants.
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7. AWARDS UNDER THE PLAN.
(a) Awards.
(i) The Committee shall grant Awards to Participants which shall be based
on a percentage of a Participant's Compensation or cash bonus with respect to a
fiscal year, be denominated in a number of shares of Stock determined under
Section 9(a) and reduce the Participant's cash bonus that would otherwise be
payable with respect to such fiscal year, provided that in respect of each Award
having an effective date on or after January 1, 1998, (A) the Award shall be
subject to any terms and conditions as may be established by the Committee in
connection with the Award and specified in the applicable Award Certificate and
(B) the terms, conditions and other provisions of the Award shall be set forth
in an Award Certificate approved by the Committee and delivered or made
available to the Participant as soon as practicable after the effective date of
the Award.
(ii) Unless otherwise determined by the Committee, no Award with respect
to a fiscal year shall be granted to a Participant whose employment with the
Companies and Affiliates terminates prior to the end of such fiscal year.
(b) Vesting.
(i) In respect of each Award having an effective date on or before
December 31, 1997, a Participant shall have a vested interest in the Award upon
the first to occur of: (A) completion of two years of service for the Companies
and the Affiliates following the grant of such Award; (B) the Participant's
termination of employment with all Companies and the Affiliates as a result of
Disability or Retirement; (C) the Participant's termination of employment with
all Companies and the Affiliates which is initiated by a Company by reason of
the Company's 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; or (D) the Participant's death while
employed by a Company or one of the Affiliates; provided, however, that any
vested Award shall be canceled if a Participant's employment with any Company or
any Affiliate is terminated for cause, the Participant resigns for cause or the
Committee determines that the Participant has committed an act or omission upon
which a Company would have terminated the Participant's employment for cause.
(ii) In respect of each Award having an effective date on or after
January 1, 1998, (A) a Participant shall have a vested interest in the Award
upon the satisfaction of such terms and conditions as the Committee may
determine applicable to such Award and (B) the Committee may provide that such
Award shall be subject to forfeiture, cancellation or termination on such terms
and conditions as the Committee may determine.
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8. FUNDING OF THE PLAN.
The Plan shall be unfunded. Benefits under the Plan shall be paid
from the general assets of MWD. MWD shall establish the Trust, which shall be
intended to be a "grantor trust" within the meaning of Code section 671, to
assist MWD in meeting its obligations hereunder. MWD intends to contribute to
the Trust from time to time Stock or cash (which shall be used by the Trustee to
purchase Stock) to enable MWD to satisfy its obligations under the Plan, but
shall not be obligated to do so.
9. MAINTENANCE OF ACCOUNTS.
(a) Stock Account. With respect to each Participant, the Committee shall
maintain a Stock Account as follows:
(i) In respect of each Award having an effective date on or before
December 31, 1997, such Participant's Stock Account shall be credited as of the
date of each Award with a number of shares of Stock equal to: (I) the dollar
amount of such Participant's Award divided by (II) the product of the Fair
Market Value of a share of Stock multiplied by .80. In respect of each Award
having an effective date on or after January 1, 1998, each such Participant's
Stock Account shall be credited as of the date of each Award with a number of
shares of Stock equal to: (I) the dollar amount of such Participant's Award
divided by (II) the product of the Fair Market Value of a share of Stock
multiplied by a fraction determined by the Committee to reflect the various
restrictions, conditions and limitations applicable to such Award.
(ii) In respect of each Award having an effective date on or before
December 31, 1997, such Participant's Stock Account shall be credited as soon as
practicable following the payment date of cash dividends on Stock with a number
of shares of Stock, the Fair Market Value of which equals the dollar amount of
dividends that would have been paid with respect to Stock credited to such
Participant's Stock Account had the Participant held such Stock as of the record
date applicable to such dividends. In respect of each Award having an effective
date on or after January 1, 1998, unless the Committee otherwise determines,
each such Participant's Stock Account shall be credited as soon as practicable
following the payment date of cash dividends on Stock with a number of shares of
Stock, the Fair Market Value of which equals the dollar amount of dividends that
would have been paid with respect to Stock credited to such Participant's Stock
Account had the Participant held such Stock as of the record date applicable to
such dividends; provided, however, that the Committee may determine, in respect
of each Award having an effective date on or after January 1, 1998, in lieu of
so crediting a Participant's Stock Account, to (I) make cash payments to the
Participant equal to the dollar amount of dividends that would have been paid
with respect to Stock credited to such Participant's Stock Account had the
Participant held such Stock as of the record date applicable to such dividends
("Dividend Equivalents") or (II) allow the Participant to elect between having
MWD so credit the Participant's Stock Account and receiving Dividend
Equivalents, all on such terms and conditions as the Committee may determine.
(iii) Each Participant's Stock Account shall be reduced by the number
of shares of Stock distributed to the Participant in respect of such Account,
whether such shares are distributed from the Trust or directly from MWD.
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(b) Cash Account. If the Trustee tenders shares of Stock held in the Trust
in respect of a Participant's Stock Account, the number of shares of Stock
credited to such Participant's Stock Account that are tendered shall be
converted to a dollar amount per share equal to the consideration received in
respect of such tendered shares. Such dollar amount shall thereafter be
credited to the Participant's Cash Account and shall be credited with interest
during the period beginning on the date as of which such shares were tendered
and ending on the last day of the month immediately preceding the month in which
such amounts are paid to the Participant at a rate which, through the end of the
first fiscal month in such period shall equal the London Interbank Offered Rate
(LIBOR) for 1-month deposits that appears in the Wall Street Journal on the date
immediately preceding the date that such shares were tendered, and which shall
be recalculated for each successive 1-month period based on the London Interbank
Offered Rate (LIBOR) for 1-month deposits published in the Wall Street Journal
on the last day of each preceding fiscal month. If such rate does not appear in
the Wall Street Journal on any date as provided above, then such rate shall be
the last such rate that appeared in the Wall Street Journal prior to the date of
determination set forth above.
10. PAYMENTS UNDER THE PLAN.
Within 30 days after the occurrence of a Realization Event with
respect to an Award, MWD shall deliver or cause to be delivered to the
Participant (a) the number of whole shares of Stock credited to such
Participant's Stock Account as of the date of the Realization Event as a result
of such Award (including shares reflecting the reinvestment of dividends paid
thereon), and cash with respect to any fractional shares of Stock credited to
such Participant's Stock Account in an amount equal to the Fair Market Value of
such fractional shares as of the date of the Realization Event and (b) the
dollar amount credited to a Participant's Cash Account as of the date of the
Realization Event in respect of such Award. Notwithstanding the fact that MWD
establishes the Trust for the purpose of assisting it in meeting its obligations
under the Plan, MWD shall remain obligated to pay the amounts credited to
Participants' Accounts. Nothing shall relieve MWD of its liabilities under the
Plan except to the extent amounts are paid from Trust assets or otherwise.
In order to accomplish the purposes of the Plan, amounts allocated to
Participants' Accounts generally must track the performance of the Stock until
the occurrence of the Realization Event with respect to such amounts.
Accordingly, if a court of competent jurisdiction finally determines that MWD is
obligated to distribute to any person shares of Stock credited to a
Participant's Accounts prior to the occurrence of a Realization Event with
respect to such shares, the Stock so distributed shall be restricted as to
transferability until the date that a Realization Event would have occurred with
respect to such shares had they not been distributed and remained subject to the
Plan, and if certificated shall bear any legend determined appropriate by the
Committee and the following legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and conditions
(including forfeiture and restrictions against transfer) contained in the
Morgan Stanley Dean Witter & Co. Tax Deferred Equity Participation Plan. A
copy of the Plan is on file in the office of the Secretary of Morgan
Stanley Dean Witter & Co., 1585 Broadway, New York, New York 10036."
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11. SECURITIES MATTERS.
(a) Subject to Section 10, MWD shall use its best efforts to assure that
any securities distributed to Participants hereunder are freely transferable at
the time of distribution, including, to the extent required under applicable
law, effecting the registration pursuant to the Securities Act of any shares of
Stock to be distributed hereunder or effecting similar compliance under any
state laws; provided, however, that with respect to any Award having an
effective date on or after January 1, 1998, securities distributed to
Participants hereunder may be subject to such restrictions on transfer as the
Committee may determine. Notwithstanding anything herein to the contrary, MWD
shall not be obligated to cause to be issued or delivered any shares of Stock
pursuant to the Plan unless and until MWD is advised by its counsel that the
issuance and delivery of such shares complies with all applicable laws,
regulations of governmental authorities and the requirements of any securities
exchange on which Stock is listed. The Committee may require, as a condition of
the issuance and delivery of shares of Stock pursuant to the terms hereof, the
recipient of such shares to make such covenants, agreements and representations,
and that if certificated, the certificates representing such shares bear such
legends, as the Committee, in its sole discretion, deems necessary or desirable.
(b) Without limitation on the Committee's powers pursuant to Section 11(a),
if and to the extent required by Rule 16b-3 or any comparable or successor
exemption under which the Board believes it is appropriate for the Plan to
qualify, the Committee may (i) restrict a Participant's ability to sell any
shares of Stock distributed to such Participant hereunder until the expiration
of six months (or such other period as the Committee deems appropriate) after
the date as of which such shares were credited to the Participant's Accounts,
(ii) in lieu of distributing shares of Stock that were credited to a
Participant's Accounts within six months (or such other period as the Committee
deems appropriate) prior to the Realization Event, distribute a cash amount
equal to the Fair Market Value of such Stock as of the Realization Event or
(iii) impose such other conditions on the exercise of any election under the
Plan or in connection with any distribution under the Plan as the Committee
deems appropriate.
12. [INTENTIONALLY OMITTED]
13. ADJUSTMENT OF ACCOUNTS IN CERTAIN EVENTS.
(a) Unless the Committee otherwise determines, a Participant's Accounts
shall be adjusted to reflect the amount of any securities, cash and other
property that would have been received with respect to shares of Stock credited
to such Participant's Accounts if such Stock were held by the Participant as a
result of any stock dividend or split, recapitalization, extraordinary dividend,
merger, consolidation, combination or exchange of shares or similar corporate
change or any other event that the Committee, in its sole discretion, deems
appropriate.
(b) In the event of any change in the number of shares of Stock outstanding
by reason of any stock dividend or split, recapitalization, extraordinary
dividend, merger, consolidation, combination or exchange of shares or similar
corporate change or any other event that the Committee, in its sole discretion,
deems appropriate, the maximum aggregate number of shares of Stock subject to
the Plan shall be appropriately adjusted by the Committee. In the event of any
change in the number of shares of Stock outstanding by reason of any other event
or
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transaction, the Committee may, but need not, make such adjustments in the
number and class of shares of Stock subject to the Plan as the Committee may
deem appropriate.
(c) Except as expressly provided in this Section, a Participant shall have
no rights as a result of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change.
14. CERTAIN DIVESTITURES.
(a) Company with Publicly Traded Stock that No Longer is a 50% Affiliate.
In the event of any transaction immediately after which any Company both ceases
to be a member of a "controlled group of corporations" of which MWD is a member
(as defined in Code section 414(b) but substituting the phrase "at least 50%"
for the phrase "at least 80%" in each place that it appears in Code section
1563(a)) and either has stock that is publicly traded or is a member of a
"controlled group of corporations" (as defined in Code section 414(b)) with any
trade or business which has publicly traded stock as a result of the
transaction:
(i) the Stock credited to the Accounts of (A) Participants who are
employed by such Company immediately after the transaction and (B) terminated
Participants who are not so employed, but who were employed by such Company on
the date that their employment with the Companies and Affiliates terminated,
shall be converted to equivalent amounts of such publicly traded stock based on
the relative values of such publicly traded stock and Stock immediately after
the transaction. Thereafter, each such Participant's Accounts shall be
maintained in such publicly traded stock or its economic equivalent, as the case
may be, and such Company shall cease to participate in the Plans with respect to
future Awards;
(ii) the Board of Directors of the affected Company shall succeed to the
powers of the Committee and the Board under the Plan with respect to the
Participants described in Section 14(a)(i); and
(iii) a separate trust containing the Accounts of such Participants may be
created in the Committee's discretion to hold any stock allocated to the
Participants' Accounts. Such trust shall be substantially the same as the Trust
and shall be created pursuant to a trust agreement between the affected Company
and the Trustee.
(b) Company with Publicly Traded Stock that Remains a 50% Affiliate. In
the event that a public market develops for the stock of any Company and
immediately after such public market develops such Company remains a member of a
"controlled group of corporations" of which MWD is a member (as defined in Code
section 414(b) but substituting the phrase "at least 50%" for the phrase "at
least 80%" in each place that it appears in Code section 1563(a)), the Stock
credited to the Accounts of (i) the Participants who are employed by such
Company immediately after such public market develops and (ii) terminated
Participants who are not so employed, but who were employed by such Company on
the date that their employment with the Companies and Affiliates terminated,
shall be converted to equivalent amounts of the publicly traded stock of such
Company based on the principles described in Section 14(a)(i) or its economic
equivalent, as the Committee deems appropriate, unless the Committee and MWD
determine that such a conversion would be financially detrimental to any Company
or Affiliate or such Participants. Thereafter, each
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such Participant's Accounts shall be maintained in such publicly traded stock or
its economic equivalent, as the case may be.
(c) Satisfaction of Obligations After a Divestiture. In the event of a
divestiture described in this Section 14, any distributions in respect of the
shares credited to the affected Participants' Accounts as of the date of the
divestiture shall be deemed to be payments in respect of MWD's obligations under
the Plan, except to the extent such obligations are assumed and discharged by
the affected Company.
15. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing in the Plan shall confer upon any Participant any right to
continue in the service of any Company or Affiliate or affect any right that any
Company or Affiliate may have to terminate the service of the Participant.
Nothing in the Plan shall be deemed to give any employee of any Company or
Affiliate any right to participate in the Plan.
16. PAYROLL AND WITHHOLDING TAXES.
All federal, state, local and other withholding tax requirements, if
any, relating to the Plan shall be met pursuant to procedures determined by the
Committee which may include:
(a) Withholding from any cash amounts payable to a Participant or under the
Plan (including salary, bonus or any other amounts payable from any Company or
Affiliate);
(b) Requiring Participants to remit to MWD an amount in cash prior to the
delivery of any certificate for Stock or other payments under the Plan;
(c) At the election of the Participant, tendering to MWD a number of shares
of Stock;
(d) At the election of the Participant, withholding by MWD of shares of
Stock. In the event that the Trustee withholds shares pursuant to this
Paragraph, the Trustee shall distribute such shares from the Trust to MWD and
MWD shall make appropriate withholding tax payments; and
(e) If a Participant is subject to Section 16(b) of the Exchange Act, the
Committee may prescribe such requirements or limitations on the Participant's
ability to elect the withholding options contained in Section 16(c) and (d) of
the Plan as may be required by Rule 16b-3 or by any comparable or successor
exemption.
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17. TERMINATION AND AMENDMENT.
(a) The Plan may be terminated in whole or in part with respect to
any or all Participants at any time by the Board. Subject to Sections 19 and
20, upon such termination, the assets of the Trust with respect to whom the Plan
has been terminated shall be distributed to each affected Participant in order
to meet the benefit obligations under the Plan with respect to each such
Participant. In the event the entire Plan is terminated, the remaining assets
related to the Plan, if any, in the Trust after the payment of such benefits
shall be paid to MWD. The Plan may be amended by the Board from time to time in
any respect; provided, however, that if and to the extent required by Rule 16b-3
or by any comparable or successor exemption under which the Board believes it is
appropriate for the Plan to qualify, no amendment shall be effective without the
approval of the shareholders of MWD, which (a) except as provided in Section 13,
increases the number of shares of Stock that may be distributed under the Plan,
(b) materially increases the benefits accruing to individuals under the Plan or
(c) materially modifies the requirements as to eligibility for participation in
the Plan. No amendment or termination shall be made that would materially
impair the rights of any Participant in any Award theretofore granted or made,
or any earnings with respect thereto, without such Participant's prior written
consent; provided, however, that MWD may amend the Plan and the Trust from time
to time in such a manner as may be necessary to avoid having the trust agreement
pursuant to which the Trust is created, the Plan or the Trust being subject to
ERISA and to avoid the current taxation of the assets held in the trusts
established in connection with the Plan to Participants. Neither a
Participant's incurring any income tax liability nor the loss of an investment
opportunity as a result of the termination of the Plan shall be considered an
impairment of the rights of a Participant.
(b) Subject to the terms and conditions of the Plan, the Committee may amend
outstanding Awards, including, without limitation, by any amendment which would
accelerate the time or times at which the Award may vest or become payable and
by any other amendment to any other term or condition of the Award; provided,
however, that no amendment shall be made that would materially impair the rights
of any Participant in any outstanding Award, or any earnings with respect
thereto, without the prior written consent of such Participant. Neither a
Participant's incurring any income tax liability nor the loss of an investment
opportunity as a result of an amendment to an Award shall be considered an
impairment of the rights of a Participant in the Award.
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18. PAYMENTS UPON THE DEATH OF A PARTICIPANT.
Each Participant may designate in writing from time to time one or
more Beneficiaries by filing a written notice of such designation with MWD. A
Participant's designation of any Beneficiary may be revoked by filing with MWD
an instrument of revocation or a later designation. Any designation or
revocation shall be effective when received by MWD. In the event of a
Participant's death, any payment required to be made hereunder to such
Participant shall be made to such Participant's Beneficiary. Unless the
Participant's Beneficiary designation provides otherwise, no person shall be
entitled to benefits upon the death of the Participant unless such person
survives the Participant. If the Beneficiary designated by a Participant does
not survive the Participant or if the Participant has not made a valid
Beneficiary designation, such Participant's Beneficiary shall be such
Participant's estate. If the Participant's Beneficiary is the Participant's
estate, no payment shall be made unless the Committee shall have been furnished
with such evidence as the Committee may deem necessary to establish the validity
of the payment.
19. SHAREHOLDER APPROVAL REQUIRED.
The Plan's adoption is subject to approval by the shareholders of MWD
in accordance with applicable law, the rules of the New York Stock Exchange and
the requirements of Rule 16b-3. Awards may be granted under the Plan at any time
prior to the receipt of such shareholder approval; provided, however, that each
such Award shall be subject to such approval. Without limitation on the
foregoing, no share certificate shall be distributed pursuant to an Award and no
share shall be voted prior to the receipt of such approval. If the Plan is not
so approved prior to December 31, 1999, then the Plan shall forthwith
automatically terminate and be of no force and effect. In the event of such
termination of the Plan, in consideration of and as soon as practicable after
MWD's providing the Trustee with a written undertaking to pay to Participants
the amount required to be paid under this Section, the Trustee shall distribute
any amounts related to the Plan held in the Trust to MWD and MWD shall pay to
each Participant a lump sum in cash equal to the original dollar value of any
Award credited to such Participant's Accounts plus interest, credited from the
date as of which such Award was credited to the Participant's Accounts through
the last day of the month immediately preceding the month in which such amounts
are paid to the Participant, the effective annual yield of which equals 9%.
20. EFFECT OF REVOCATION EVENT.
Upon the occurrence of a Revocation Event, the Board may, in its sole
discretion, elect to terminate the Plan and/or the Trust in whole or in part.
In the event that the Board elects to so terminate the Plan, the Trust or any
Participant's Accounts as a result of a Revocation Event, in consideration of
and as soon as practicable after MWD's providing the Trustee with a written
undertaking to pay to Participants the amount required to be paid under this
Section, all amounts related to the Plan held in the Trust (or if the entire
Trust is not terminated, any terminated Accounts) shall be distributed to MWD.
MWD shall, in its sole discretion, (a) pay to each Participant whose Accounts
are terminated, as soon as practicable after the date of such termination, a
lump sum in cash equal to the Fair Market Value multiplied by the number of
shares of Stock and cash amounts reflected in each Participant's Accounts as of
the date of such termination, (b) distribute to each Participant whose Accounts
are terminated, as soon as practicable after the date of such termination, that
number of shares of Stock that would have been distributable to
-14-
<PAGE>
such Participant under the Plan and pay to such Participant at such time any
cash allocated to the Participant's Cash Account or (c) distribute to each
Participant whose Accounts are terminated that number of shares of Stock and
that amount of cash that would have been distributable to such Participant at
such time as shares and cash would have been distributable to such Participant
under the Plan, had the Plan continued. If it is finally determined in a
proceeding, which MWD either controls or was offered the right to control and
declines, that the Participant's interest in the Trust was taxable to the
Participant notwithstanding any termination of such Participant's Accounts in
the Trust, MWD shall pay or distribute the Participant's interest (whether or
not the Board has previously elected to terminate the Plan, the Trust or the
Participant's Accounts) in accordance with either (a) or (b) of the preceding
sentence.
21. MISCELLANEOUS.
(a) No transfer (other than any transfer made by will or by the laws of
descent and distribution) by a Participant of any right to any payment
hereunder, whether voluntary or involuntary, by operation of law or otherwise,
shall vest the transferee with any interest or right in or with respect to such
payment, and the transfer shall be of no force and effect.
(b) The Plan and all rights hereunder shall be subject to and interpreted
in accordance with the laws of the State of Delaware without reference to the
principles of conflicts of law.
-15-
<PAGE>
EXHIBIT 10.2
Section 3(h) of the Dean Witter START Plan
(Saving Today Affords Retirement Tomorrow)
Adopted By the Compensation Committee
of the Board of Directors of Dean Witter Reynolds Inc.
Effective May 31, 1997
(h) Service with Morgan Stanley. Solely for purposes of determining an
---------------------------
individual's eligibility and vesting service under this Section 3, employment
(and absences from employment) with Morgan Stanley Group Inc. ("MS") or an ERISA
Affiliate before the Effective Time shall be taken into account as if such
employment were service with the Affiliated Group. For this purpose, "Effective
Time" shall have the meaning given to that term in the Amended and Restated
Agreement and Plan of Merger, dated as of April 10, 1997, between DWD and MS and
"ERISA Affiliate" shall mean a member of the Affiliated Group determined, as of
any relevant date, as if MS were a Participating Company.
<PAGE>
EXHIBIT 10.3
EXTRACT FROM RESOLUTIONS APPROVED
BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF
DEAN WITTER REYNOLDS INC.
ON APRIL 14, 1998
RESOLVED, that, effective January 1, 1998, the Dean Witter START Plan
(Saving Today Affords Retirement Tomorrow) (the "Plan"), amended and restated
effective as of January 1, 1997, is hereby amended as follows:
FIRST, Section 12(g)(ii) of the Plan be and is hereby amended and
restated to read in its entirety as follows:
(ii) 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.
SECOND, Section 5(e) of the Plan be and hereby is amended and restated
to read in its entirety as follows:
(e) Distribution of Excess Elective Deferrals. Not later than the first
March 1 following the close of a Participant's tax year, the Participant
may notify the Plan administrator of the amount of the Excess Elective
Deferrals received by the Plan for the Participant's tax year. A
Participant shall be deemed to have notified the Plan of the amount of any
such Excess Elective Deferrals to the extent the Participant has Excess
Elective Deferrals for the taxable year calculated by taking into account
only Elective Deferrals under the Plan and any other Plan maintained by a
member of the Affiliated Group. No later than the first April 15
following the close of such taxable year, the Plan shall distribute to the
Participant the amount designated as an Excess Elective Deferral under this
section (adjusted for any income or loss allocable to that amount). 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
recharacterized 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.
FURTHER RESOLVED, that, the Chairman of the Board and Chief Executive
Officer, any Executive Vice President, and Senior Vice President or any other
proper officer of DWR be, and each of them hereby is, authorized to take any
and all actions which they deem necessary or appropriate to carry out the
purposes or intent of the foregoing resolutions and to make, execute and
deliver, or cause to be made, executed and delivered, all agreements,
undertakings, documents, instruments or certificates in the name and on behalf
of DWR as they may deem necessary or desirable in connection therewith, to
perform or cause to be performed, the obligations of DWR referred to herein.
<PAGE>
Exhibit 11
Morgan Stanley Dean Witter & Co.
Computation of Earnings Per Share
(In millions, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC:
Weighted-average shares outstanding 581,326,618 577,985,371 583,502,306 575,301,529
=========== =========== =========== ===========
Earnings:
Net income $854 $527 $1,545 $1,098
Less: Preferred stock dividend
requirements 14 18 29 37
----------- ----------- ----------- -----------
Earnings applicable to common shares $840 $509 $1,516 $1,061
=========== =========== =========== ===========
Basic earnings per share $1.44 $0.88 $2.60 $1.84
=========== =========== =========== ===========
DILUTED:
Weighted-average shares outstanding 581,326,618 577,985,371 583,502,306 575,301,529
Average common shares issuable
under employee benefit plans 19,341,537 20,297,164 18,689,467 20,298,537
Average common shares issuable upon
conversion of ESOP preferred stock 11,957,199 12,148,363 11,987,642 12,171,735
----------- ----------- ----------- -----------
Total weighted-average diluted shares 612,625,354 610,430,898 614,179,415 607,771,801
=========== =========== =========== ===========
Earnings:
Net income $854 $527 $1,545 $1,098
Less: Preferred stock dividend
requirements 13 17 26 34
----------- ----------- ----------- -----------
Earnings applicable to common shares $841 $510 $1,519 $1,064
=========== =========== =========== ===========
Diluted earnings per share $1.37 $0.84 $2.47 $1.75
=========== =========== =========== ===========
</TABLE>
<PAGE>
Exhibit 12
Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
(Dollars in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
1998 1997 1998 1997
--------- -------- ------- ------
<S> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
Earnings:
Income before income taxes $1,400 $ 883 $2,533 $1,811
Add: Fixed charges, net 3,579 2,505 6,748 5,238
--------- -------- ------- ------
Income before income taxes and
fixed charges, net $4,979 $3,388 $9,281 $7,049
========= ======== ======= ======
Fixed charges:
Total interest expense $3,554 $2,478 $6,699 $5,187
Interest factor in rents 25 27 49 51
--------- -------- ------- ------
Total fixed charges $3,579 $2,505 $6,748 $5,238
========= ======== ======= ======
Ratio of earnings to fixed charges 1.4 1.4 1.4 1.3
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Earnings:
Income before income taxes $1,400 $ 883 $2,533 $1,811
Add: Fixed charges, net 3,579 2,505 6,748 5,238
--------- -------- ------- ------
Income before income taxes and
fixed charges, net $4,979 $3,388 $9,281 $7,049
========= ======== ======= ======
Fixed charges:
Total interest expense $3,554 $2,478 $6,699 $5,187
Interest factor in rents 25 27 49 51
Preferred stock dividends 24 29 48 60
--------- -------- ------- ------
Total fixed charges and preferred
stock dividends $3,603 $2,534 $6,796 $5,298
========= ======== ======= ======
Ratio of earnings to fixed charges and
preferred stock dividends 1.4 1.3 1.4 1.3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
Earnings:
Income before income taxes $ 4,274 $ 3,117 $ 2,292
Add: Fixed charges, net 10,898 9,026 8,285
---------- -------- ---------
Income before income taxes and
fixed charges, net $15,172 $12,143 $10,577
========== ======== =========
Fixed charges:
Total interest expense $10,806 $ 8,934 $ 8,190
Interest factor in rents 92 92 95
---------- -------- ---------
Total fixed charges $10,898 $ 9,026 $ 8,285
========== ======== =========
Ratio of earnings to fixed charges 1.4 1.3 1.3
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Earnings:
Income before income taxes $ 4,274 $ 3,117 $ 2,292
Add: Fixed charges, net 10,898 9,026 8,285
---------- -------- ---------
Income before income taxes and
fixed charges, net $15,172 $12,143 $10,577
========== ======== =========
Fixed charges:
Total interest expense $10,806 $ 8,934 $ 8,190
Interest factor in rents 92 92 95
Preferred stock dividends 110 101 95
---------- -------- ---------
Total fixed charges and preferred
stock dividends $11,008 $ 9,127 $ 8,380
========== ======== =========
Ratio of earnings to fixed charges and
preferred stock dividends 1.4 1.3 1.3
</TABLE>
"Earnings" consist of income before income taxes and fixed charges. "Fixed
charges" consist of interest costs, including interest on deposits, and that
portion of rent expense estimated to be representative of the interest factor.
The preferred stock dividend amounts represent pre-tax earnings required to
cover dividends on preferred stock.
<PAGE>
EXHIBIT 15.1
To the Directors and Shareholders of Morgan Stanley Dean Witter & Co.:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim condensed
consolidated financial information of Morgan Stanley Dean Witter & Co. and
subsidiaries (formerly Morgan Stanley, Dean Witter, Discover & Co.) as of May
31, 1998 and for the three and six month periods ended May 31, 1998 and 1997, as
indicated in our report dated July 14, 1998 (which makes reference to the review
of Morgan Stanley Group Inc. and subsidiaries for the quarter ended February 28,
1997 by other accountants); because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report, which is included in your Quarterly Report on Form
10-Q for the quarter ended May 31, 1998, is incorporated by reference in the
following Registration Statements:
Filed on Form S-3:
Registration Statement No. 33-57202
Registration Statement No. 33-60734
Registration Statement No. 33-89748
Registration Statement No. 33-92172
Registration Statement No. 333-07947
Registration Statement No. 333-22409
Registration Statement No. 333-27881
Registration Statement No. 333-27893
Registration Statement No. 333-27919
Registration Statement No. 333-46403
Registration Statement No. 333-46935
Filed on Form S-4:
Registration Statement No. 333-25003
Filed on Form S-8:
Registration Statement No. 33-62374
Registration Statement No. 33-63024
Registration Statement No. 33-63026
Registration Statement No. 33-78038
Registration Statement No. 33-79516
Registration Statement No. 33-82240
Registration Statement No. 33-82242
Registration Statement No. 33-82244
Registration Statement No. 333-04212
Registration Statement No. 333-28141
Registration Statement No. 333-25003
Registration Statement No. 333-28263
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 14, 1998
<PAGE>
EXHIBIT 15.2
The Stockholders and
Board of Directors of
Morgan Stanley Dean Witter & Co.
We are aware of the incorporation by reference in the Registration Statements
(Form S-4 No. 333-25003, Form S-3 No. 33-92172, Form S-3 No. 33-57202, Form S-3
No. 33-60734, Form S-3 No. 33-89748, Form S-3 No. 333-7947, Form S-3 No.
333-22409, Form S-3 No. 333-27919, Form S-3 No. 333-27881, Form S-3 No.
333-27893, Form S-8 No. 333-28141, Form S-8 No. 33-62374, Form S-8 No. 33-63024,
Form S-8 No. 33-63026, Form S-8 No. 33-78038, Form S-8 No. 33-79516, Form S-8
No. 33-82240, Form S-8 No. 33-82242, Form S-8 No. 33-82244, Form S-8 No.
333-4212, Form S-8 No. 333-28263, Amendment to Form S-4 No. 333-25003 on Form
S-8, Form S-3 No. 333-46403, and Form S-3 No. 333-46935) of Morgan Stanley Dean
Witter & Co. ("MSDW") of our report dated March 27, 1997 in MSDW's Form 10-Q
filed on July 14, 1998, relating to the unaudited condensed consolidated interim
financial statements of Morgan Stanley Group Inc. (not presented separately
herein).
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
New York, New York
July 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statements of Financial Condition at May 31, 1998 and
the Condensed Consolidated Statements of Income for the Six Months Ended May
31, 1998 and is qualified in its entirety by reference to such condensed
consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 17,078
<RECEIVABLES> 69,220
<SECURITIES-RESALE> 93,431
<SECURITIES-BORROWED> 88,414
<INSTRUMENTS-OWNED> 103,277
<PP&E> 1,760
<TOTAL-ASSETS> 380,665
<SHORT-TERM> 37,292
<PAYABLES> 74,307
<REPOS-SOLD> 114,628
<SECURITIES-LOANED> 24,032
<INSTRUMENTS-SOLD> 78,030
<LONG-TERM> 28,354
0
875
<COMMON> 6
<OTHER-SE> 12,944
<TOTAL-LIABILITY-AND-EQUITY> 380,665
<TRADING-REVENUE> 1,994
<INTEREST-DIVIDENDS> 8,146
<COMMISSIONS> 1,158
<INVESTMENT-BANKING-REVENUES> 1,788
<FEE-REVENUE> 2,652
<INTEREST-EXPENSE> 6,699
<COMPENSATION> 3,805
<INCOME-PRETAX> 2,533
<INCOME-PRE-EXTRAORDINARY> 2,533
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,545
<EPS-PRIMARY> 2.60
<EPS-DILUTED> 2.47
</TABLE>
