<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 AUGUST 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 September 30, 1998 there were 577,665,449 shares of Registrant's
Common Stock, par value $.01 per share, outstanding.
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<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition--August 31,
1998 (unaudited) and November 30, 1997............................... 1
Condensed Consolidated Statements of Income (unaudited)--Three and
Nine Months Ended August 31, 1998 and 1997........................... 2
Condensed Consolidated Statements of Cash Flows (unaudited)--Nine
Months Ended August 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............................................... 37
Item 6. Exhibits and Reports on Form 8-K................................ 38
</TABLE>
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 9,820 $ 8,255
Cash and securities deposited with clearing
organizations or segregated under federal and other
regulations (including securities at fair value of
$6,383 at August 31, 1998 and $4,655 at November 30,
1997)............................................... 10,192 6,890
Financial instruments owned:
U.S. government and agency securities............... 14,760 12,901
Other sovereign government obligations.............. 20,636 22,900
Corporate and other debt............................ 29,280 24,499
Corporate equities.................................. 10,903 10,329
Derivative contracts................................ 22,511 17,146
Physical commodities................................ 238 242
Securities purchased under agreements to resell...... 89,466 84,516
Receivable for securities provided as collateral(2).. 13,975 --
Securities borrowed.................................. 82,359 55,266
Receivables:
Consumer loans (net of allowances of $855 at August
31, 1998 and $884 at November 30, 1997) ........... 16,802 20,033
Customers, net...................................... 19,992 12,259
Brokers, dealers and clearing organizations......... 5,585 13,263
Fees, interest and other............................ 5,090 4,705
Office facilities, at cost (less accumulated
depreciation and amortization of $1,405 at August
31, 1998 and $1,279 at November 30, 1997)........... 1,779 1,705
Other assets......................................... 7,541 7,378
-------- --------
Total assets......................................... $360,929 $302,287
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper and other short-term borrowings..... $ 22,870 $ 22,614
Deposits............................................. 8,718 8,993
Financial instruments sold, not yet purchased:
U.S. government and agency securities............... 12,804 11,563
Other sovereign government obligations.............. 12,349 12,095
Corporate and other debt............................ 3,016 1,699
Corporate equities.................................. 11,593 13,305
Derivative contracts................................ 20,790 15,599
Physical commodities................................ 358 68
Securities sold under agreements to repurchase....... 118,148 111,680
Obligation to return securities received as
collateral(2)....................................... 8,868 --
Securities loaned.................................... 30,115 14,141
Payables:
Customers........................................... 52,938 25,086
Brokers, dealers and clearing organizations......... 5,208 16,097
Interest and dividends.............................. 687 970
Other liabilities and accrued expenses............... 9,356 8,630
Long-term borrowings................................. 28,070 24,792
-------- --------
345,888 287,332
-------- --------
Capital Units........................................ 999 999
-------- --------
Preferred Securities Issued by Subsidiaries.......... 400 --
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock..................................... 674 876
Common stock(1) ($0.01 par value, 1,750,000,000
shares authorized, 605,842,952 and 602,829,994
shares issued, 582,790,622 and 594,708,971 shares
outstanding at August 31, 1998 and at November 30,
1997).............................................. 6 6
Paid-in capital(1).................................. 3,741 3,952
Retained earnings................................... 11,120 9,330
Employee stock trust................................ 1,601 1,337
Cumulative translation adjustments.................. (10) (9)
-------- --------
Subtotal............................................ 17,132 15,492
Note receivable related to sale of preferred stock
to ESOP............................................ (68) (68)
Common stock held in treasury, at cost(1) ($0.01 par
value, 23,052,330 and 8,121,023 shares at
August 31, 1998 and at November 30, 1997).......... (1,821) (250)
Stock compensation related adjustments.............. -- 119
Common stock issued to employee trust............... (1,601) (1,337)
-------- --------
Total shareholders' equity.......................... 13,642 13,956
-------- --------
Total liabilities and shareholders' equity........... $360,929 $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 NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Investment banking........... $ 819 $ 818 $ 2,607 $ 1,921
Principal transactions:
Trading.................... 499 778 2,493 2,369
Investments................ (174) 206 (1) 398
Commissions.................. 608 559 1,766 1,533
Fees:
Asset management,
distribution and
administration............ 718 656 2,135 1,853
Merchant and cardmember.... 438 433 1,270 1,293
Servicing.................. 255 196 658 582
Interest and dividends....... 4,283 3,570 12,429 10,136
Other........................ 52 41 154 108
----------- ----------- ----------- -----------
Total revenues............. 7,498 7,257 23,511 20,193
Interest expense............. 3,377 2,765 10,076 7,952
Provision for consumer loan
losses...................... 280 385 960 1,140
----------- ----------- ----------- -----------
Net revenues............... 3,841 4,107 12,475 11,101
----------- ----------- ----------- -----------
Non-interest expenses:
Compensation and benefits.. 1,609 1,849 5,414 4,844
Occupancy and equipment.... 148 134 431 389
Brokerage, clearing and
exchange fees............. 126 130 377 338
Information processing and
communications............ 291 249 833 786
Marketing and business
development............... 354 293 934 855
Professional services...... 176 127 460 319
Other...................... 193 219 549 579
Merger related costs....... -- -- -- 74
----------- ----------- ----------- -----------
Total non-interest
expenses................ 2,897 3,001 8,998 8,184
----------- ----------- ----------- -----------
Income before income taxes... 944 1,106 3,477 2,917
Provision for income taxes... 299 428 1,287 1,141
----------- ----------- ----------- -----------
Net income................... $ 645 $ 678 $ 2,190 $ 1,776
=========== =========== =========== ===========
Preferred stock dividend
requirements................ $ 14 $ 15 $ 43 $ 52
=========== =========== =========== ===========
Earnings applicable to common
shares(1)................... $ 631 $ 663 $ 2,147 $ 1,724
=========== =========== =========== ===========
Earnings per common share(2)
Basic...................... $ 1.10 $ 1.15 $ 3.69 $ 3.00
=========== =========== =========== ===========
Diluted.................... $ 1.05 $ 1.09 $ 3.51 $ 2.85
=========== =========== =========== ===========
Average common shares
outstanding(2)
Basic...................... 573,170,507 578,082,806 582,105,755 574,048,186
=========== =========== =========== ===========
Diluted.................... 604,779,594 610,019,122 613,265,207 605,565,186
=========== =========== =========== ===========
</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>
NINE MONTHS
ENDED AUGUST 31,
-----------------
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 2,190 $ 1,776
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Non-cash charges included in net income................. 1,382 1,252
Changes in assets and liabilities:
Cash and securities deposited with clearing
organizations or segregated under federal and other
regulations.......................................... (3,302) 1,717
Financial instruments owned, net of financial
instruments sold, not yet purchased.................. (8,974) 4,676
Securities borrowed, net of securities loaned......... (11,119) (8,907)
Receivables and other assets.......................... (1,008) (2,497)
Payables and other liabilities........................ 17,419 6,002
-------- -------
Net cash (used for) provided by operating activities........ (3,412) 4,019
-------- -------
Cash flows from investing activities
Net (payments for) proceeds from:
Office facilities....................................... (283) (92)
Net principal disbursed on consumer loans............... (1,130) (3,248)
Sales of consumer loans................................. 3,416 787
Other investing activities.............................. -- (96)
-------- -------
Net cash provided by (used for) investing activities........ 2,003 (2,649)
-------- -------
Cash flows from financing activities
Net proceeds (payments) related to short-term borrowings.. 169 (1,232)
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell.......... 1,518 (200)
Deposits.................................................. (275) 1,631
Proceeds from:
Issuance of common stock................................ 175 108
Issuance of long-term borrowings........................ 9,245 6,375
Issuance of Capital Units............................... -- 134
Preferred Securities Issued by Subsidiaries............. 400 --
Payments for:
Repurchases of common stock............................. (2,049) (124)
Repayments of long-term borrowings...................... (5,614) (3,398)
Redemption of cumulative preferred stock................ (200) (345)
Cash dividends.......................................... (395) (319)
-------- -------
Net cash provided by financing activities................... 2,974 2,630
-------- -------
Elimination of Dean Witter, Discover & Co.'s net cash
activity for the month of December 1996.................... -- (1,158)
-------- -------
Net increase in cash and cash equivalents................... 1,565 2,842
Cash and cash equivalents, at beginning of period........... 8,255 6,544
-------- -------
Cash and cash equivalents, at end of period................. $ 9,820 $ 9,386
======== =======
</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
In July 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14"). Under
EITF 97-14, assets of the rabbi trust are to be consolidated with those of the
employer, and the value of the employer's stock held in the rabbi trust should
be classified in shareholders' equity and accounted for in a manner similar to
treasury stock. The Company has therefore included the assets of its rabbi
trusts, consisting solely of shares of the Company's common stock issued under
certain deferred compensation plans, in employee stock trust with a
corresponding amount in common stock issued to employee trust, both components
of shareholders' equity. The adoption of EITF 97-14 did not result in any
change to the Company's condensed consolidated statement of income, total
assets, total liabilities or total shareholders' equity.
In September 1998, the FASB staff addressed the accounting for expenditures
incurred by the investment advisors of closed-end funds. The FASB staff
concluded that such costs are to be considered start-up costs in accordance
with AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). Accordingly, offering costs incurred by an
investment advisor in connection with the distribution of shares of a closed-
end fund should be expensed as incurred. As a result, the Company will be
required to expense its deferred advisory fees and record a cumulative effect
charge as of the beginning of the period during which it adopts the provisions
of SOP 98-5, which must be no later than fiscal 2000. The Company is in the
process of evaluating the cumulative effect of adopting SOP 98-5.
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 August 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
$3,477 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.
6
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The
Company is in the process of evaluating the impact of adopting SFAS No. 133.
2. CONSUMER LOANS
Activity in the allowance for consumer loan losses was as follows (dollars
in millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
---------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period............ $824 $821 $ 884 $ 781
Provision for loan losses............... 280 385 960 1,140
Less deductions
Charge-offs........................... 318 401 1,112 1,218
Recoveries............................ (40) (44) (139) (126)
-------- -------- -------- --------
Net charge-offs..................... 278 357 973 1,092
-------- -------- -------- --------
Other(1)................................ 29 19 (16) 39
-------- -------- -------- --------
Balance, end of period.................. $855 $868 $ 855 $ 868
======== ======== ======== ========
</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 $42 million and $157 million in the quarter and nine
month period ended August 31, 1998 and $70 million and $230 million in the
quarter and nine months ended August 31, 1997. Due to enhancements made to
certain of the Company's operating systems, the amounts charged off in fiscal
1998 include only interest, whereas the prior year also included cardmember
fees.
The Company received net proceeds from asset securitizations of $1,213
million and $3,416 million in the quarter and nine month period ended August
31, 1998. The uncollected balances of consumer loans sold through asset
securitizations were $16,571 million at August 31, 1998 and $15,033 million at
November 30, 1997.
3. LONG-TERM BORROWINGS
Long-term borrowings at August 31, 1998 scheduled to mature within one year
aggregated $6,246 million.
During the nine month period ended August 31, 1998, the Company issued
senior notes aggregating $9,301 million, including non-U.S. dollar currency
notes aggregating $1,532 million, primarily pursuant to its public debt shelf
registration statements. The weighted average coupon interest rate of these
notes was 5.84% at August 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: 1998, $35 million; 1999, $1,222 million; 2000, $2,810
million; 2001, $1,657 million; 2002, $6 million; 2003, $1,286 million; and
thereafter $2,285. In the nine month period ended August 31, 1998, $5,614
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
----------------------- -----------------------
AUGUST 31, NOVEMBER 30, AUGUST 31, NOVEMBER 30,
1998 1997 1998 1997
---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ESOP Convertible Preferred
Stock, liquidation preference
$35.88........................ 3,596,408 3,646,664 $129 $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 -- 200
---- ----
Total.......................... $674 $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 August 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.
On August 31, 1998, the Company redeemed all 1,000,000 outstanding shares of
its 7- 3/8% Cumulative Preferred Stock at a redemption price of $200 per
share. The Company also simultaneously redeemed all corresponding Depositary
Shares at a redemption price of $25 per Depositary Share. Each Depositary
Share represented 1/8 of a share of the Company's 7- 3/8% Cumulative Preferred
Stock.
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 $2,772 million at August 31, 1998, which exceeded the
amount required by $2,206 million. DWR's net capital totaled $597 million at
August 31, 1998, which exceeded the amount required by $514 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,
8
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to risk weighted assets ("risk-weighted capital ratio"). At August 31, 1998,
the leverage ratio and risk-weighted capital ratio of each of the Company's
FDIC-insured financial institutions exceeded these and all other regulatory
minimums.
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 NINE MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income................................... $ 645 $ 678 $2,190 $1,776
Less: preferred stock dividend requirements.. (14) (15) (43) (52)
------ ------ ------ ------
Net income available to common shareholders.. $ 631 $ 663 $2,147 $1,724
====== ====== ====== ======
Weighted-average common shares outstanding... 573 578 582 574
====== ====== ====== ======
Basic EPS.................................... $1.10 $1.15 $ 3.69 $ 3.00
====== ====== ====== ======
DILUTED EPS:
Net income................................... $ 645 $ 678 $2,190 $1,776
Less: preferred stock dividend requirements
after assumed conversion of ESOP preferred
stock....................................... (13) (14) (38) (49)
------ ------ ------ ------
Net income available to common shareholders.. $ 632 $ 664 $2,152 $1,727
====== ====== ====== ======
Weighted-average common shares outstanding... 573 578 582 574
Effect of dilutive securities:
Stock options.............................. 20 20 19 20
ESOP convertible preferred stock........... 12 12 12 12
------ ------ ------ ------
Weighted-average common shares outstanding
and common stock equivalents................ 605 610 613 606
====== ====== ====== ======
Diluted EPS.................................. $ 1.05 $ 1.09 $ 3.51 $ 2.85
====== ====== ====== ======
</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 $5.8 billion and $5.5 billion of letters of
credit outstanding at August 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 August
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-INVESTMENT NON-INVESTMENT
AAA AA A BBB GRADE GRADE TOTAL
------ ------ ------ ------ -------------- -------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
AT AUGUST 31, 1998
Interest rate and
currency swaps and
options (including
caps, floors and swap
options) and other
fixed income securities
contracts.............. $ 876 $3,995 $3,539 $1,261 $ 65 $ 913 $10,649
Foreign exchange forward
contracts and options.. 194 1,832 1,667 386 -- 204 4,283
Mortgage-backed
securities forward
contracts, swaps and
options................ 95 17 35 5 -- 8 160
Equity securities
contracts (including
equity swaps, warrants
and options)........... 2,079 1,343 491 605 926 111 5,555
Commodity forwards,
options and swaps...... 69 398 328 620 20 429 1,864
------ ------ ------ ------ ------ ------ -------
Total.................. $3,313 $7,585 $6,060 $2,877 $1,011 $1,665 $22,511
====== ====== ====== ====== ====== ====== =======
Percent of total........ 15% 34% 27% 13% 4% 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.
11
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. DISPOSITIONS
During the quarter ended August 31, 1998, the Company completed the sale of
its Correspondent Clearing business to NationsBanc Montgomery Securities, LLC
("NationsBanc"), a subsidiary of NationsBank Corporation. The gain resulting
from the sale was not material to the Company's financial condition or results
of operations.
During the quarter ended May 31, 1998, the Company completed the sale of its
Prime OptionSM MasterCard(R) portfolio ("Prime Option"), a business it had
operated with NationsBank of Delaware, N.A. 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 the conditions of the Purchase Agreement 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. On September 30,
1998 this transaction was completed.
The expected gains resulting from the sale of SPS and the Global Custody
business will be recognized by the Company during the period in which the
respective transactions are completed.
10. SUBSEQUENT EVENTS
In September 1998, the Company made an investment of $300 million in the
Long-Term Capital Portfolio, L.P. ("LTCP"). The Company is a member of a
consortium of 14 financial institutions participating in an equity
recapitalization of LTCP. The objectives of this investment, the term of which
is three years, are to continue active management of its positions and, over
time, to reduce excessive risk exposures and leverage, return capital to the
participants and ultimately realize the potential value of the LTCP portfolio.
12
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Shareholders of
Morgan 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 August 31, 1998,
and the related condensed consolidated statements of income for the three and
nine month periods ended August 31, 1998 and 1997, and cash flows for the nine
month periods ended August 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
October 14, 1998
13
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Stockholders and Board of Directors of
Morgan 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 August 31, 1998
Conditions in the global financial markets during the third quarter of
fiscal 1998 were extremely turbulent, particularly during the month of August,
resulting in difficult conditions in many global financial markets.
In the U.S., the domestic economy continued to exhibit signs of growth, as
high levels of consumer spending and relatively low levels of inflation and
unemployment existed during the quarter. The Federal Reserve Board decided to
leave the overnight lending rate unchanged during the quarter in light of the
stability of the U.S. economy and fragility in certain global financial
markets. However, during the last month of the quarter U.S. financial markets
were adversely impacted by investor reaction to the severe economic turmoil in
Asia, Russia and certain emerging market nations. Fears of lower corporate
earnings and a slowing rate of economic growth caused difficult conditions in
the equity and fixed income markets, while U.S. Treasury yields fell to record
lows as investors sought a safe haven from riskier financial instruments.
Conditions in European markets were also volatile during the quarter. While
the region continued to benefit from positive investor sentiment relating to
the approaching European Economic and Monetary Union ("EMU"), many European
financial markets were negatively impacted by developments in Russia. The
Russian economy was adversely affected by the difficult conditions in Asia,
declining oil prices and an unstable political infrastructure. These factors
contributed to a significant reduction of investor confidence, causing sizable
declines and extreme volatility in Russian financial markets during the
quarter. Investor confidence was further shaken when the Russian government
announced plans to restructure its external debt obligations and to allow the
ruble to devalue in order to stabilize the nation's currency rate and banking
system. While the fallout from these
16
<PAGE>
developments affected many European markets, German markets were particularly
vulnerable due to their strong economic and commercial ties to Russia and
exposure to Russian debt.
Market conditions in the Far East continued to be weak due to the ongoing
economic and financial difficulties that have existed in the region since the
latter half of fiscal 1997. The Japanese economy continued to struggle due to
shrinking consumer demand, declining corporate profits, rising unemployment
and deflation. While these conditions contributed to the resignation of
Japan's Prime Minister during the quarter, many investors expressed
uncertainty about the new government's ability to improve the nation's
economic performance. Market conditions were also unstable elsewhere in Asia,
as the poor economic performance of Japan and the persistent weakness of the
yen continued to adversely affect the financial markets of many nations within
the region.
Instability in the global financial markets has continued in the fourth
quarter.
Results of the Company for the Quarter and Nine Month Periods ended August
31, 1998 and 1997
The Company's net income of $645 million and $2,190 million in the quarter
and nine month period ended August 31, 1998 represented a decrease of 5% as
compared to the third quarter of fiscal 1997 and an increase of 19% from the
comparable nine month period of fiscal 1997. Diluted earnings per common share
were $1.05 and $3.51 in the quarter and nine month period ended August 31,
1998 as compared to $1.09 and $2.85 in the quarter and nine month period ended
August 31, 1997. The Company's annualized return on common equity was 19.3%
and 21.5% for the quarter and nine month period ended August 31, 1998, as
compared to 22.8% and 20.6% for the comparable periods of fiscal 1997.
The decrease in net income in the quarter ended August 31, 1998 from the
quarter ended August 31, 1997 was primarily due to lower revenues from
principal trading and principal investment activities. These decreases were
partially offset by higher commission revenues, increased asset management,
distribution and administration fees, improved operating results from the
Company's Credit and Transaction Services business, and lower incentive-based
compensation expenses. The increase in net income in the nine month period
ended August 31, 1998 from the comparable prior year period was primarily due
to higher revenues from securities and asset management activities, including
investment banking, commissions and asset management, distribution and
administration fees, partially offset by lower principal investment revenues
and higher incentive-based compensation expenses.
In the nine month period ended August 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 OptionSM MasterCard(R) portfolio ("Prime Option"), a business it had
operated with NationsBank of Delaware N.A. The gain resulting from the sale
was not material to the Company's financial condition or results of
operations.
During the quarter ended August 31, 1998, the Company completed the sale of
its Correspondent Clearing business to NationsBanc Montgomery Securities, LLC
("NationsBanc"), a subsidiary of 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
17
<PAGE>
center customer service activities in the U.S. The transaction is subject to
the conditions of the Purchase Agreement 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. On September 30,
1998 this transaction was completed.
The expected gains resulting from the sale of SPS and the Global Custody
business will be recognized by the Company during the period in which the
respective transactions are completed.
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 NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Investment banking..................... $ 819 $ 818 $ 2,607 $ 1,921
Principal transactions:
Trading.............................. 499 778 2,493 2,369
Investments.......................... (174) 206 (1) 398
Commissions............................ 599 550 1,740 1,515
Asset management, distribution and
administration fees................... 718 656 2,135 1,853
Interest and dividends................. 3,601 2,758 10,291 7,776
Other.................................. 41 38 138 100
-------- -------- -------- --------
Total revenues....................... 6,103 5,804 19,403 15,932
Interest expense....................... 3,145 2,462 9,300 7,079
-------- -------- -------- --------
Net revenues......................... 2,958 3,342 10,103 8,853
-------- -------- -------- --------
Non-interest expenses:
Compensation and benefits.............. 1,464 1,713 4,980 4,437
Occupancy and equipment................ 128 118 375 343
Brokerage, clearing and exchange fees.. 122 126 365 330
Information processing and
communications........................ 171 141 479 432
Marketing and business development..... 118 101 350 297
Professional services.................. 150 103 387 261
Other.................................. 138 146 391 386
-------- -------- -------- --------
Total non-interest expenses.......... 2,291 2,448 7,327 6,486
-------- -------- -------- --------
Income before income taxes............... 667 894 2,776 2,367
Income tax expense....................... 197 350 1,027 917
-------- -------- -------- --------
Net income........................... $ 470 $ 544 $ 1,749 $ 1,450
======== ======== ======== ========
</TABLE>
Securities and Asset Management net revenues of $2,958 million in the
quarter ended August 31, 1998 represented a decrease of 11% from the quarter
ended August 31, 1997. Net revenues of $10,103 million in the
18
<PAGE>
nine month period ended August 31, 1998 represented an increase of 14% from
the comparable period of fiscal 1997. Securities and Asset Management net
income of $470 million in the quarter ended August 31, 1998 represented a
decrease of 14% from the quarter ended August 31, 1997, while net income of
$1,749 million for the nine month period ended August 31, 1998 increased 21%
over the comparable period of fiscal 1997. The decreases in the quarterly
period were primarily attributable to lower revenues from principal trading
and lower principal investment gains, partially offset by higher commissions
revenues, asset management, distribution and administration fees, net interest
revenues and lower incentive-based compensation expenses. The increases in the
nine month period were primarily due to higher investment banking revenues,
commissions revenues, asset management, distribution and administration fees
and net interest revenues, partially offset by lower principal investment
revenues and higher incentive-based compensation 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 August 31, 1998 were comparable to the quarter ended August 31,
1997, as higher revenues from merger, acquisition and restructuring activities
were offset by lower revenues from debt and equity underwritings.
Revenues from merger, acquisition and restructuring activities increased to
record levels, as the global market for such transactions continued to be
robust during the quarter. The aggregate value of announced global
transactions was approximately $1.7 trillion through August 31, 1998, which
was twice the volume reported in the comparable period of 1997. The high level
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. Favorable
market conditions, driven by consolidation activities in the U.S. and a
recovering real estate market in Europe, contributed to the increase.
Fixed income underwriting revenues decreased, primarily attributable to
lower revenues from issuances of global high yield fixed income securities.
The market for high yield fixed income securities was adversely affected by
high levels of volatility in the global financial markets, primarily resulting
from the difficult conditions in Asia and Russia, which caused credit spreads
to increase. In addition, the demand for high yield securities declined as
many investors preferred higher credit quality instruments.
Equity underwriting revenues also decreased, as the significant level of
volatility in the global financial markets during the quarter contributed to a
lower volume of equity offerings as compared to the prior year period.
In the nine month period ended August 31, 1998, investment banking revenues
increased 36% from the comparable period of 1997, reflecting higher revenues
from merger and acquisition transactions as well as from both debt and equity
underwritings.
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,
decreased 36% in the quarter ended August 31, 1998 from the comparable period
of fiscal 1997. The decrease was primarily due to lower fixed income trading
revenues, partially offset by higher equity, foreign exchange and commodity
trading revenues.
Fixed income trading revenues decreased significantly in the quarter ended
August 31, 1998 from the quarter ended August 31, 1997, primarily due to lower
revenues from trading in investment grade, high yield, securitized and other
credit sensitive fixed income securities. Revenues from investment grade fixed
income securities were adversely affected by the difficult economic conditions
in Asia, Russia and other emerging
19
<PAGE>
markets. Investor preferences shifted towards less risky financial
instruments, principally to U.S. Treasury securities. This negatively affected
the trading of credit sensitive fixed income products by widening credit
spreads, reducing liquidity, and de-coupling the historical price
relationships between credit sensitive securities and government bonds.
Revenues from high yield fixed income securities were also impacted by the
significant downturn in the global financial markets, as investors became
concerned about the impact of a prolonged economic downturn on high yield
issuers. Revenues from securitized fixed income securities also declined, as
the relatively low interest rate environment in the U.S. led to greater
prepayment levels and wider spreads.
Equity trading revenues in the quarter ended August 31, 1998 were higher
than the comparable prior year period. Revenues from trading in equity cash
products increased, primarily due to higher activity in European markets.
European equity trading revenues benefited from the Company's increased sales
and research coverage of the region that began in mid-1997. In addition,
trading volumes were higher in many European markets due to positive investor
sentiment regarding the approaching EMU. Revenues from trading equity
derivative securities also increased, benefiting from higher levels of
volatility, particularly in technology stocks in U.S. markets.
Foreign exchange trading revenues also increased in the quarter ended August
31, 1998. The increase was attributable to high levels of customer transaction
volume and volatility in the foreign exchange markets. Certain Asian nations
continued to experience adverse economic conditions and slumping equity
markets. These factors, coupled with continued weakness in the Japanese yen,
increased the levels of customer transaction volume and market volatility. In
addition, the economic and political turmoil in Russia led to the collapse of
the ruble and resulted in higher levels of volatility in certain European
currencies, particularly the German mark.
Commodity trading revenues increased to record levels in the quarter ended
August 31, 1998, primarily driven by higher revenues from trading in
electricity and crude oil products. Electricity trading revenues benefited
from an increase in the demand for electric power, as portions of the Midwest
and Atlantic regions of the U.S. experienced a summer heat wave during the
quarter. These conditions caused a significant increase in the price of
electricity, particularly during the month of June, 1998. Revenues from
trading crude oil products benefited from declining energy prices throughout
much of the quarter, reflecting the impact of a high level of supply, low
customer demand and the continuing economic turmoil in Asia.
Principal transaction investment losses aggregating $174 million were
recorded in the quarter ended August 31, 1998, as compared to gains of $206
million in the comparable prior year period. Fiscal 1998's results primarily
reflect losses from an institutional leveraged emerging markets debt
portfolio, partially offset by gains of $129 million resulting from increases
in the value of certain private equity investments, including gains from the
initial public offering of Equant, a Netherlands based data communications
company.
Principal transaction trading revenues for the nine month period ended
August 31, 1998 increased 5% from the comparable prior year period. Fixed
income trading revenues decreased due to lower revenues from trading
investment grade, high yield and securitized fixed income securities,
primarily resulting from the difficult market conditions that existed during
the third quarter of fiscal 1998. Equity trading revenues increased, primarily
due to higher revenues from European equity cash products. European revenues
benefited from the generally favorable performance of most equity markets
within the region, high customer transaction volumes and positive investor
sentiment regarding the approaching EMU. Higher trading revenues from equity
derivative securities also contributed to the increase. Foreign exchange
trading revenues 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, crude oil and electricity.
Principal transaction investment losses aggregating $1 million were recorded
in the nine month period ended August 31, 1998 as compared to gains of $398
million in the comparable prior year period. Fiscal 1998's results reflect
losses from an institutional leveraged emerging markets debt portfolio that
occurred during the third quarter, partially offset by gains from increases in
the carrying values of certain private equity investments.
20
<PAGE>
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 9% in the
quarter ended August 31, 1998 from the comparable period of fiscal 1997. In
the U.S., the high levels of market volatility contributed to an increased
volume of customer securities transactions. Revenues from markets in Europe
benefited from the continuance of high trading volumes in the region, as well
as from the Company's increased sales and research activities in the region.
The Company's addition of over 900 financial advisors since August 31, 1997
also contributed to the increase.
Commission revenues increased 15% in the nine month period ended August 31,
1998 from the comparable period in fiscal 1997. The increase primarily
reflects increased customer trading activity in the global markets for equity
securities, as well as an increased number of financial advisors.
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 9% in
the quarter ended August 31, 1998 from the comparable period of fiscal 1997,
primarily reflecting higher fund management and 12b-1 fees as well as other
revenues resulting from a higher level of assets under management. These
increases were partially offset by the impact of market depreciation on
certain of the Company's products resulting from the difficult conditions
existing in the global financial markets during the latter portion of the
quarter.
In the nine month period ended August 31, 1998, asset management,
distribution and administration revenues increased 15% 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 a higher level of
assets under management.
Customer assets under management or supervision increased to $356 billion at
August 31, 1998 from $325 billion at August 31, 1997. The increase in assets
under management or supervision primarily reflected net inflows of customer
assets. In addition, appreciation in the value of existing customer portfolios
also contributed to the increases. Customer assets under management or
supervision included products offered primarily to individual investors of
$200 billion at August 31, 1998 and $186 billion at August 31, 1997. Products
offered primarily to institutional investors were $156 billion at August 31,
1998 and $139 billion at August 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
21
<PAGE>
Company's positions, and potential underwriting, commission or other revenues
associated with related primary or secondary market sales. Net interest
revenues increased 54% and 42% in the quarter and nine month period ended
August 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 effect 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 decreased 6% in the quarter ended August 31,
1998 from the quarter ended August 31, 1997. Total non-interest expenses
increased 13% in the nine month period ended August 31, 1998 from the
comparable period of fiscal 1997. Within the non-interest expense category,
compensation and benefits expense decreased 15% in the quarterly period,
principally reflecting decreased incentive compensation based on lower levels
of revenues and earnings. During the nine month period, compensation and
benefits expense increased 12%, reflecting the higher level of revenues and
earnings and its impact on incentive based compensation. Excluding
compensation and benefits expense, non-interest expenses increased 13% in the
quarter and 15% in the nine month period ended August 31, 1998. Occupancy and
equipment expenses increased 8% and 9% in the quarter and nine month period,
respectively, primarily due to increased office space in New York and Hong
Kong, higher occupancy costs in London, and additional rent associated with 28
new branch locations in the U.S. Brokerage, clearing and exchange fees
decreased 3% in the quarter and increased 11% in the nine month period. The
decrease in the quarter was primarily attributable to lower agent bank costs,
partially offset by higher securities trading volume. The increase in the nine
month period reflects the higher level of securities trading volume as well as
the Company's acquisition of the institutional global custody business of
Barclays Bank PLC on April 3, 1997. Information processing and communications
expense increased 21% and 11% in the quarter and nine month period,
respectively, 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 utilizing communications systems also contributed
to the increase. Marketing and business development expenses increased 17% and
18% in the quarter and nine month period, respectively, 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 46% and 48% in the
quarter and nine month period, respectively, primarily reflecting higher
consulting costs associated with certain information technology initiatives,
including the preparation for EMU and Year 2000, coupled with the Company's
increased global business activities. Higher temporary staff, legal costs and
employment fees also contributed to the increase. Other expenses decreased 5%
in the quarter and increased 1% in the nine month period. The decrease in the
quarter is primarily due to lower costs for certain tax matters and other
operating costs as compared to the prior year period. The increase in the nine
month period primarily reflects 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 NINE MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
------------- -------------
1998 1997 1998 1997
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Fees:
Merchant and cardmember........................... $ 438 $ 433 $1,270 $1,293
Servicing......................................... 255 196 658 582
Commissions......................................... 9 9 26 18
Other............................................... 11 3 16 8
------ ------ ------ ------
Total non-interest revenues....................... 713 641 1,970 1,901
------ ------ ------ ------
Interest revenue.................................... 682 812 2,138 2,360
Interest expense.................................... 232 303 776 873
------ ------ ------ ------
Net interest income............................... 450 509 1,362 1,487
Provision for consumer loan losses.................. 280 385 960 1,140
------ ------ ------ ------
Net credit income................................. 170 124 402 347
------ ------ ------ ------
Net revenues...................................... 883 765 2,372 2,248
------ ------ ------ ------
Compensation and benefits........................... 145 136 434 407
Occupancy and equipment............................. 20 16 56 46
Brokerage, clearing and exchange fees............... 4 4 12 8
Information processing and communications........... 120 108 354 354
Marketing and business development.................. 236 192 584 558
Professional services............................... 26 24 73 58
Other............................................... 55 73 158 193
------ ------ ------ ------
Total non-interest expenses....................... 606 553 1,671 1,624
------ ------ ------ ------
Income before income taxes.......................... 277 212 701 624
Provision for income taxes.......................... 102 78 260 235
------ ------ ------ ------
Net income........................................ $ 175 $ 134 $ 441 $ 389
====== ====== ====== ======
</TABLE>
Credit and Transaction Services net income of $175 million and $441 million
in the quarter and nine month period ended August 31, 1998 represented an
increase of 31% and 13% from the comparable periods of 1997. The quarterly net
income represented a record level for the Company. The increase in net income
in both periods was primarily attributable to a lower provision for loan
losses and an increase in fee revenue, partially offset by an increase in non-
interest expenses.
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 nine month period ended
August 31, 1998 and the quarter and nine month period ended August 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 11% in the quarter ended August 31,
1998 and 4% in the nine month period ended August 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 15%
and 7% in the quarter and nine month period ended August 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 increased 1% in
the quarter ended August 31, 1998 and decreased 2% in the nine month period
ended August 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 increased 6% and 4% in the quarter and
nine month period ended August 31, 1998. The increase in both periods was due
to an increase in merchant discount revenue associated with increased sales
volume partially offset by a decrease in cash advance fees and the effect of a
higher level of securitized loans during the quarter. Cash advance fees
decreased as a result of decreased cash advance transaction volume, primarily
attributable to limits on cash advances imposed by the Company in an effort to
reduce charge-offs.
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 $1,234 million in the quarter ended August 31, 1998 and
$3,444 million in the nine month period ended August 31, 1998. During the
comparable periods of 1997, the Company completed asset securitizations of
$789 million. The asset securitizations in fiscal 1997 and 1998 have expected
maturities ranging from 3 years to 10 years from the date of issuance.
The table below presents the components of servicing fees (dollars in
millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Merchant and cardmember fees.................... $ 139 $ 108 $ 359 $ 325
Interest revenue................................ 683 512 1,910 1,547
Interest expense................................ (269) (204) (754) (611)
Provision for consumer loan losses.............. (298) (220) (857) (679)
------ ------ ------ ------
Servicing fees.................................. $ 255 $ 196 $ 658 $ 582
====== ====== ====== ======
</TABLE>
Servicing fees increased 30% in the quarter ended August 31, 1998 and 13% in
the nine months ended August 31, 1998 from the comparable periods of 1997. The
increase in both periods was due to higher levels of net interest cash flows
and increased fee revenue, partially offset by increased credit losses from
securitized consumer loans. The increases in net interest, fee revenue and
credit losses were primarily a result of higher levels of average securitized
loans.
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. Commissions revenue
remained level in the quarter ended August 31, 1998 and increased 44% in the
nine month period ended August 31, 1998 from the comparable periods of 1997.
The increase in the nine month period ended
24
<PAGE>
August 31, 1998 was due to higher customer transaction volume as well as the
inclusion of DBD's results for nine months in 1998 as compared to seven months
in 1997.
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 12% and 8% in the quarter
and nine month period ended August 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 15% and 11%
from the comparable prior year periods. The decrease in the quarter ended
August 31, 1998 was predominately due to lower average levels of owned
consumer loans partially offset by a higher yield on general purpose credit
card loans reflective of the sale of Prime Option. The decrease in the nine
month period ended August 31, 1998 was due to lower average levels of owned
consumer loans and a lower yield on general purpose credit card loans. In both
periods, the decrease in owned general purpose credit card loans was primarily
due to an increase in securitized loans and the sale of Prime Option. The
lower yield on general purpose credit card loans in the nine month period
ended August 31, 1998 was due to a larger number of cardmembers taking
advantage of promotional rates.
25
<PAGE>
The following tables present analyses of Credit and Transaction Services
average balance sheets and interest rates for the quarter and nine month
period ended August 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 AUGUST 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....................... $15,913 14.61% $ 586 $20,017 14.19% $716
Other consumer loans......... 1,503 16.99% 65 1,667 15.90% 66
Investment securities........ 460 5.56% 7 158 5.49% 2
Other........................ 1,498 6.58% 24 1,698 6.18% 28
------- ----- ------- ----
Total interest earning
assets.................. 19,374 13.96% 682 23,540 13.67% 812
Allowance for loan losses.... (836) (831)
Non-interest earning assets.. 1,602 1,509
------- -------
Total assets............. $20,140 $24,218
======= =======
LIABILITIES & SHAREHOLDER'S
EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings.................... $ 1,211 4.93% $ 15 $ 924 4.08% $ 10
Brokered................... 5,643 6.53% 93 4,963 6.64% 83
Other time................. 2,047 6.24% 32 2,229 6.15% 35
------- ----- ------- ----
Total interest bearing
deposits................ 8,901 6.25% 140 8,116 6.22% 128
Other borrowings............. 6,079 5.97% 92 11,300 6.17% 175
------- ----- ------- ----
Total interest bearing
liabilities............. 14,980 6.13% 232 19,416 6.19% 303
Shareholder's equity/other
liabilities................. 5,160 4,802
------- -------
Total liabilities &
shareholder's equity.... $20,140 $24,218
======= =======
Net interest income.......... $ 450 $509
===== ====
Net interest margin.......... 9.22% 8.57%
Interest rate spread......... 7.83% 7.48%
</TABLE>
26
<PAGE>
AVERAGE BALANCE SHEET ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 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....................... $17,559 14.02% $1,849 $19,494 14.17% $2,073
Other consumer loans......... 1,575 16.70% 198 1,823 15.51% 212
Investment securities........ 435 6.70% 22 182 5.46% 7
Other........................ 1,419 6.54% 69 1,475 6.03% 68
------- ------ ------- ------
Total interest earning
assets.................. 20,988 13.57% 2,138 22,974 13.68% 2,360
Allowance for loan losses.... (857) (812)
Non-interest earning assets.. 1,640 1,508
------- -------
Total assets............. $21,771 $23,670
======= =======
LIABILITIES & SHAREHOLDER'S
EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings.................... $ 1,015 4.82% $ 37 $ 992 4.25% $ 32
Brokered................... 5,877 6.60% 291 4,250 6.68% 213
Other time................. 2,203 6.16% 102 2,205 6.11% 101
------- ------ ------- ------
Total interest bearing
deposits................ 9,095 6.29% 430 7,447 6.19% 346
Other borrowings............. 7,635 6.04% 346 11,604 6.05% 527
------- ------ ------- ------
Total interest bearing
liabilities............. 16,730 6.18% 776 19,051 6.11% 873
Shareholder's equity/other
liabilities................. 5,041 4,619
------- -------
Total liabilities &
shareholder's equity.... $21,771 $23,670
======= =======
Net interest income.......... $1,362 $1,487
====== ======
Net interest margin.......... 8.64% 8.62%
Interest rate spread......... 7.39% 7.57%
</TABLE>
27
<PAGE>
RATE/VOLUME ANALYSIS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, 1998 VS. AUGUST 31, 1998 VS.
1997 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........................... $(147) $ 17 $ (130) $ (204) $ (20) $ (224)
Other consumer loans............. (6) 5 (1) (28) 14 (14)
Investment securities............ 5 -- 5 11 4 15
Other............................ (5) 1 (4) (3) 4 1
------ ------
Total interest revenue......... (144) 14 (130) (205) (17) (222)
------ ------
INTEREST EXPENSE
Interest bearing deposits
Savings.......................... 3 2 5 1 4 5
Brokered......................... 12 (2) 10 82 (4) 78
Other time....................... (3) -- (3) -- 1 1
------ ------
Total interest bearing
deposits...................... 11 1 12 77 7 84
Other borrowings................. (80) (3) (83) (180) (1) (181)
------ ------
Total interest expense......... (69) (2) (71) (106) 9 (97)
------ ------
Net interest income.............. $ (75) $ 16 $ (59) $ (99) $ (26) $ (125)
====== ===== ====== ====== ===== ======
</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 AUGUST 31,
-----------------------------------------------------
1998 1997
-------------------------- --------------------------
AVG. BAL. RATE % INTEREST AVG. BAL. RATE % INTEREST
--------- ------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans............. $34,076 15.19% $1,305 $34,620 14.83% $1,294
General purpose credit card
loans..................... 31,955 15.06% 1,212 32,283 14.73% 1,198
Total interest earning
assets.................... 36,034 14.71% 1,336 36,476 14.38% 1,322
Total interest bearing
liabilities............... 31,640 6.13% 489 32,352 6.21% 507
Consumer loan interest rate
spread.................... 9.06% 8.62%
Interest rate spread....... 8.58% 8.17%
Net interest margin........ 9.32% 8.87%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
-----------------------------------------------------
1998 1997
-------------------------- --------------------------
AVG. BAL. RATE % INTEREST AVG. BAL. RATE % INTEREST
--------- ------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans............. $35,115 14.90% $3,928 $34,393 14.84% $3,831
General purpose credit card
loans..................... 32,887 14.75% 3,641 31,899 14.74% 3,529
Total interest earning
assets.................... 36,969 14.48% 4,019 36,050 14.44% 3,906
Total interest bearing
liabilities............... 32,710 6.18% 1,518 32,126 6.15% 1,484
Consumer loan interest rate
spread.................... 8.72% 8.69%
Interest rate spread....... 8.30% 8.29%
Net interest margin........ 9.01% 8.95%
</TABLE>
28
<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 $855 million
and $868 million at August 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 16%
in the quarter and nine month period ended August 31, 1998 due to a decrease
in net charge-offs. The decrease in net charge-offs in the quarter and nine
month period ended August 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 6.34% and 6.77% in the quarter and nine month period
ended August 31, 1998 from 6.53% and 6.82% in the comparable periods of 1997.
The Company 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 comparability 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 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 August 31, 1998 includes
the effects of the sale of Prime Option.
ASSET QUALITY (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
---------------------------------- ----------------
1998 1997 1997
---------------- ---------------- ----------------
OWNED MANAGED OWNED MANAGED OWNED MANAGED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans at period-
end..................... $17,658 $34,228 $21,493 $34,868 $20,917 $35,950
Consumer loans
contractually past due
as a Percentage of
period-end consumer
loans:
30 to 89 days.......... 4.15% 4.22% 4.50% 4.51% 3.96% 3.91%
90 to 179 days......... 2.95% 2.99% 2.96% 2.97% 3.11% 3.07%
Net charge-offs as a
percentage of average
consumer loans (year-to-
date)................... 6.77% 6.89% 6.82% 6.86% 6.78% 6.95%
</TABLE>
29
<PAGE>
Non-Interest Expenses
Non-interest expenses increased 10% in the quarter ended August 31, 1998 and
increased 3% in the nine month period ended August 31, 1998 from the
comparable periods of 1997.
Compensation and benefits expense increased 7% in both the quarter and nine
month period ended August 31, 1998 from the comparable periods of 1997 due to
an increase in the number of employees. Occupancy and equipment expense
increased 25% in the quarter and 22% in the nine month period ended August 31,
1998 primarily due to higher rent and other occupancy costs at certain of the
Company's facilities. Brokerage, clearing and exchange fees relate to the
trading activity associated with DBD. The increase in the nine month period
ended August 31, 1998 was due to higher customer transaction volume as well as
the inclusion of DBD's results for nine months in 1998 as compared to seven
months in 1997. Information processing and communications expense increased
11% in the quarter ended August 31, 1998 and remained level in the nine month
period ended August 31, 1998 from the comparable periods of 1997. The increase
in the quarter ended August 31, 1998 was due to higher external data
processing costs coupled with an adjustment resulting from the sale of the
Company's indirect interest in one of the Company's transaction processing
vendors in the third quarter of 1997. Marketing and business development
expense increased 23% and 5% in the quarter and the nine month period ended
August 31, 1998. The increases in both periods were due to higher advertising
and promotional expenses associated with increased direct mail and other
promotional activities related to the Discover(R) Card, partnership programs,
and DBD, as well as higher cardmember rewards expense. These increases were
partially offset by a decrease in promotional expenses resulting from the
Company's discontinuance of the BRAVO(R) card and sale of Prime Option. The
Company intends to continue its marketing program into the fourth quarter in
order to focus on growing its consumer loan portfolio. Cardmember rewards
expense includes the Cashback Bonus(R) award, pursuant to which the Company
annually pays Discover 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 annual 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 8% in the third
quarter ended August 31, 1998 and 26% in the nine month period ended August
31, 1998 from the comparable periods of 1997. The increase in both periods was
primarily due to increased costs associated with account collections and
consumer credit counseling. Other expenses decreased 25% and 18% due to a
continuing decrease in fraud losses and other general business expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $302.3 billion at November 30,
1997 to $360.9 billion at August 31, 1998, reflecting growth in securities
borrowed, financial instruments owned and resale agreements, partially
attributable to higher volumes in the global securities markets. 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
30
<PAGE>
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 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 September 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
31
<PAGE>
by strength in another currency. The Company closely monitors its exposure to
fluctuations in currencies and, where cost-justified, adopts strategies to
reduce the impact of these fluctuations on the Company's financial
performance. These strategies include engaging in various hedging activities
to manage income and cash flows denominated in foreign currencies and using
foreign currency borrowings, when appropriate, to finance investments outside
the U.S.
During the nine month period ended August 31, 1998, the Company issued
senior notes aggregating $9,301 million, including non-U.S. dollar currency
notes aggregating $1,532 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 5.84% at August 31, 1998; the Company
has entered into certain transactions to obtain floating interest rates based
primarily on short-term LIBOR trading levels. At August 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 $41.0 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 nine month period
ended August 31, 1998 the Company purchased $2,049 million of its common
stock. Subsequent to August 31, 1998 and through September 30, 1998, the
Company purchased an additional $284 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.
On August 31, 1998, the Company redeemed all 1,000,000 outstanding shares of
its 7 -3/8% Cumulative Preferred Stock at a redemption price of $200 per
share. The Company also simultaneously redeemed all corresponding Depositary
Shares at a redemption price of $25 per Depositary Share. Each Depositary
Share represented 1/8 of a share of the Company's 7 -3/8% Cumulative Preferred
Stock.
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 August 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 August 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
32
<PAGE>
Facility"). Such banks are committed to provide up to an aggregate of $1.85
billion available in 12 major currencies. At August 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 August 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 $1.3 billion, were illiquid. In addition, certain equity
investments made in connection with the Company's private equity and other
principal investment 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
August 31, 1998, the aggregate carrying value of the Company's equity
investments in privately held companies (including direct investments and
partnership interests) was $153 million, and its aggregate investment in
publicly held companies was $377 million.
In addition, at August 31, 1998, the aggregate value of high-yield debt
securities and emerging market loans and securitized instruments held in
inventory was $1,488 million (a substantial portion of which was subordinated
debt). These securities, loans and instruments were not attributable to more
than 4% to any one issuer, 22% to any one industry or 16% to any one
geographic region. 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 continue to 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 August 31,
1998 traded in markets that the Company believed were experiencing lower
levels of liquidity than traditional mortgage-backed pass-through securities
approximated $2,265 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 August 31, 1998, the
Company had six commitments to provide an aggregate of $350 million primarily
in connection with its high-yield underwriting activities. At September 30,
1998, the Company had no loans outstanding, and its aggregate commitments
increased to $370 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 August 31, 1998, the aggregate
value of senior secured loans and positions held by the Company was $1,233
million, and aggregate senior secured loan commitments were $577 million.
33
<PAGE>
During the month of August, 1998 and continuing in the fourth quarter of
fiscal 1998, inventories of certain credit sensitive fixed income securities
(e.g., certain investment grade, high yield and securitized securities)
experienced a decrease in liquidity. The Company continues to manage the risks
associated with these inventories, including market, credit and concentration
risks, in a manner consistent with the Company's overall risk management
policies and procedures (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Management" and Note 8 to
the consolidated financial statements for the fiscal year ended November 30,
1997, included in the Form 10-K).
In September 1998, the Company made an investment of $300 million in the
Long-Term Capital Portfolio, L.P. ("LTCP"). The Company is a member of a
consortium of 14 financial institutions participating in an equity
recapitalization of LTCP. The objectives of this investment, the term of which
is three years, are to continue active management of its positions and, over
time, to reduce excessive risk exposures and leverage, return capital to the
participants and ultimately realize the potential value of the LTCP portfolio.
At August 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 $22.5 billion. The net replacement cost
of all derivative products in a gain position represents the Company's maximum
exposure to derivatives related credit risk. Derivative products may have both
on- and off-balance sheet risk implications, depending on the nature of the
contract. It should be noted, however, that in many cases derivatives serve to
reduce, rather than increase, the Company's exposure to losses from market,
credit and other risks. The risks associated with the Company's derivative
activities, including market and credit risks, are managed on an integrated
basis with associated cash instruments in a manner consistent with the
Company's overall risk management policies and procedures. The Company manages
its credit exposure to derivative products through various means, which
include reviewing counterparty financial soundness periodically; entering into
master netting agreements and collateral arrangements with counterparties in
appropriate circumstances; and limiting the duration of exposure.
PREPARATION FOR THE YEAR 2000 AND EMU
Year 2000
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit
format. If not addressed, 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 potential costs
and uncertainties associated with the Year 2000 issue will depend on a number
of factors, including software, hardware and the nature of the industry in
which a company operates. Additionally, companies must coordinate with other
entities with which they electronically interact.
The Company has established a firm-wide initiative to address issues
associated with the Year 2000. The Year 2000 and EMU (discussed below)
projects have been designated as the highest priority activities of the
Company's Information Technology Department. To ensure that the Company's
computer systems are Year 2000 compliant, a team of Information Technology
professionals began preparing for the Year 2000 issue in 1995. Since then, the
Company has been reviewing its systems and programs to identify those that
contain two-digit year codes, and is in the process of upgrading its global
infrastructure and corporate facilities to achieve Year 2000 compliance. In
addition, the Company is actively working with its major external
counterparties and suppliers to assess their compliance and remediation
efforts and the Company's exposure to them.
In addressing the Year 2000 issue, the Company has identified the following
phases. In the Awareness phase, the Company defined the Year 2000 issue and
obtained executive level support and funding. In the Inventory phase, the
Company collected a comprehensive list of items that may be affected by Year
2000
34
<PAGE>
compliance issues. Such items include facilities and related non-information
technology systems (embedded technology), computer systems, hardware, and
services and products provided by third parties. In the Assessment phase, the
Company evaluated the items identified in the Inventory phase to determine
which will function properly with the change to the new century, and ranked
items which will need to be remediated based on their potential impact to the
Company. The Remediation phase includes an analysis of the items that are
affected by Year 2000, the identification of problem areas and the repair of
non-compliant items. The Testing phase includes a thorough testing of all
proposed repairs, including present and forward date testing which simulates
dates in the Year 2000. The Implementation phase consists of placing all items
that have been remediated and successfully tested into production. Finally,
the Integration and External Testing phase includes exercising business
critical production systems in a future time environment and testing with
external entities.
As of August 31, 1998, the Company had completed the Awareness, Inventory
and Assessment phases. As of August 31, 1998, the Company was also conducting
the procedures associated with the Remediation, Testing and Implementation
phases. The Company expects to complete the Remediation and Testing phases
with respect to its mission critical applications by December 1998, with the
Implementation phase completed by the first fiscal quarter of 1999. The
Integration and External Testing phase commenced in the second quarter of 1998
and will continue through 1999. In addition, the major business relationships
of the Company have been identified and many of them are scheduled to be
tested. The Company continues to survey and communicate with counterparties,
intermediaries and vendors with whom it has important financial and
operational relationships to determine the extent to which they are vulnerable
to Year 2000 issues. As of August 31, 1998, the Company has not yet received
sufficient information from all parties about their remediation plans to
predict the outcomes of their efforts. In particular, in some international
markets in which the Company conducts business, the level of awareness and
remediation efforts relating to the Year 2000 issue is thought to be less
advanced than in the United States.
During the third quarter, the Company participated in the Securities
Industry Association's Beta test and a test sponsored by the Bank of England's
Central Gilts Office. These tests were run in "future time", using a portion
of the Company's production system and employed test scripts to check
functionality. The Company has achieved successful results in each of the
industry-wide tests in which it participated. During the remainder of 1998 and
1999, the Company will continue to participate in industry-wide and vendor
specific tests.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. Such failures could have a material adverse effect on the
Company and may cause systems malfunctions, incorrect or incomplete
transaction processing resulting in failed trade settlements, the inability to
reconcile accounting books and records, the inability to reconcile trading
positions and balances with counterparties, inaccurate information to manage
the Company's exposure to trading risks and disruptions of funding
requirements. In addition, even if the Company successfully remediates its
Year 2000 issues, it can be materially and adversely affected by failures of
third parties to remediate their own Year 2000 issues. The failure of third
parties with which the Company has financial or operational relationships such
as securities exchanges, clearing organizations, depositories, regulatory
agencies, banks, clients, counterparties, vendors and utilities, to remediate
their computer and non-information technology systems issues in a timely
manner could result in a material financial risk to the Company.
If the above mentioned risks are not remedied, the Company may experience
business interruption or shutdown, financial loss, regulatory actions, damage
to the Company's global franchise and legal liability.
The Company has business continuity plans in place that cover its current
worldwide operations, and Year 2000 specific contingency planning has begun.
The Company intends to document Year 2000 specific contingency plans during
1999 as part of its Year 2000 risk mitigation efforts.
Based upon current information, the Company estimates that the total cost of
implementing its Year 2000 initiative will be between $225 and $250 million.
The Year 2000 costs include all activities undertaken on Year 2000 related
matters across the Company, including, but not limited to, remediation,
testing (internal and external), third party review, risk mitigation and
contingency planning. Through the third quarter of fiscal 1998
35
<PAGE>
the Company has expended approximately $117 million on the Year 2000 project.
The majority of the remaining costs are expected to be directed primarily
towards testing activities. These costs have been and will continue to be
funded through operating cash flow and are expensed in the period in which
they are incurred.
The Company's expectations about future costs and the timely completion of
its Year 2000 modifications are subject to uncertainties that could cause
actual results to differ materially from what has been discussed above.
Factors that could influence the amount of future costs and the effective
timing of remediation efforts include the success of the Company in
identifying computer programs and non-information technology systems that
contain two-digit year codes, the nature and amount of programming and testing
required to upgrade or replace each of the affected programs and systems, 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 governmental 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 depositories, in addressing the Year 2000 issue.
EMU
EMU replaces the national currencies of 11 participating European Union
countries with a single European currency -- the "Euro." This new currency is
expected to be launched on January 1, 1999, when the European Central Bank
assumes control of monetary policy for the participating nations. During a
three-year transition period, the national currencies would continue to exist
but only as fixed denominations of the Euro. EMU will primarily impact the
Company's Securities and Asset Management businesses.
The introduction of the Euro presents major business opportunities for
financial market participants such as the Company as well as significant
challenges for such participants to be prepared for EMU. The Company expects
that the introduction of the Euro will lead to greater cross-border price
transparency and will have a significant impact on the markets in which the
Company operates.
The Company has been actively preparing for the introduction of the Euro and
is in the process of implementing significant modifications to its information
technology systems and programs in order to prepare for transition to the
Euro. The Company is engaged in extensive testing of the systems and processes
affected by EMU. The testing plan is currently on schedule for completion. The
Company is also communicating extensively with its clients and counterparties
regarding the implications of EMU and the effect that this will have on their
business relationships with the Company. The Company expects to be prepared
for EMU by the end of the fourth quarter of fiscal 1998.
Several operating risks are associated with changes of this magnitude. If
not properly implemented, these changes could lead to failed trade
settlements, the inability to reconcile trading positions and balances with
third parties, and funding disruptions. The Company is also dependent on the
successful implementation of conversion procedures by market counterparties
such as exchanges, clearing agents and information providers. If these third
party systems do not appropriately address the introduction of the Euro, the
Company's clearance, settlement and other activities could also be adversely
impacted.
Based upon current information, the Company estimates that the costs
associated with reviewing and amending its information technology systems to
prepare for EMU for fiscal 1998 and through the project's
completion will be approximately $70 million. These costs have been and will
continue to be funded through operating cash flow and are expensed in the
period in which they are incurred.
36
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
(a) The following matters were recently commenced against the Company.
Friedman, et al. v. Salomon Smith Barney, Inc., et al. On or about August
21, 1998, a purported class action complaint was filed in the United States
District Court for the Southern District of New York against Salomon Smith
Barney, Inc., Goldman Sachs, Merrill Lynch & Co., Inc., Credit Suisse First
Boston, Inc., Morgan Stanley Dean Witter & Co., Paine Webber Inc., Natwest
Securities, BT Alex Brown, Inc., Coburn & Meredith, and Shamrock Partners Ltd.
The plaintiff class purports to consist of all individuals who purchased
shares of public offerings from defendants and their alleged co-conspirators
and who were discouraged from selling those shares prior to the expiration of
the penalty bid period of an offering. The complaint alleges that defendants
engaged in anticompetitive activity with respect to the sale and distribution
of public offerings of securities by agreeing to fix, raise, stabilize and
maintain the price of shares of public offerings at levels above free market
prices through a pattern and practice of discouraging the "flipping" or sale
of shares by customers and/or penalizing or otherwise preventing "flipping" by
customers. The complaint alleges violations of Section 1 of the Sherman Act
and breach of fiduciary duty, and seeks compensatory and treble damages in
unspecified amounts, injunctive relief, costs and expenses, including
attorneys', accountants' and experts' fees.
Another purported class action, captioned Myers v. Merrill Lynch & Co., Inc.
et al., was filed on or about August 17, 1998 in California Superior Court,
San Francisco County, against Merrill Lynch & Co., Inc., Paine Webber Group
Incorporated, Morgan Stanley Dean Witter & Co., Travelers Group Inc., Legg
Mason Inc., H.J. Meyers & Co., Inc. and The Bear Stearns Companies Inc. The
complaint alleges that defendants sold the stock of public companies to
investors in public offerings without disclosing the existence of restrictions
on "flipping" and purported conflicts of interest with investors resulting
from financial and other penalties imposed on brokers and clients for
"flipping." The complaint also alleges that similar restrictions were not
imposed on larger institutional purchasers of stock in those offerings. The
complaint asserts claims for unfair competition and false advertising under
various sections of the California Business and Professions Code, negligent
misrepresentations under the California Civil Code and unfair, fraudulent and
unlawful business practices under the California Business Code. The complaint
seeks injunctive relief and an award of costs and expenses, including
attorneys' and experts' fees. On September 15, 1998, the action was removed to
the United States District Court for the Northern District of California.
(b) 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 Reports on Form
10-Q for the quarters ended February 28, 1998 and May 31, 1998.
Department of Justice NASDAQ Investigation. On August 6, 1998, the United
States Court of Appeals for the Second Circuit affirmed the Order and
Stipulation, rejecting the intervenors' contention that it was impermissible
to insulate the telephone tapes from discovery in civil litigation.
Global Opportunity Fund Litigation. On July 2, 1998, the United States
District Court for the Southern District of New York granted The Growth Fund's
motion to remand its lawsuit against Morgan Stanley & Co. International
Limited ("MSIL") to state court. On July 2, 1998, MSIL filed a motion to
dismiss the action.
County of Orange and Moorlach v. Morgan Stanley & Co., Inc. On July 21,
1998, the Company agreed to settle with Orange County. The agreement is
subject to court approval, and the County has filed motions seeking
determinations that its existing settlements are fair.
In re Merrill Lynch, et al., Securities Litigation. On July 21, 1998, the
Magistrate granted the plaintiff's motion to file an amended complaint.
Defendants have appealed that ruling to the district court judge.
In re Sumitomo Copper Litigation. On July 22, 1998, Morgan Stanley & Co.
Incorporated entered into an agreement to settle the litigation. The
settlement agreement is subject to court approval.
37
<PAGE>
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 June 18, 1998 reporting Item 5 and 7.
38
<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: October 14, 1998
39
<PAGE>
EXHIBIT INDEX
MORGAN STANLEY DEAN WITTER & CO.
QUARTER ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<C> <S>
3 Amended and Restated Bylaws.
10.1 Dean Witter Reynolds Inc. Branch Manager Compensation Plan , Amended and
Restated as of September 25, 1998.
10.2 Dean Witter Reynolds Inc. Financial Advisor Productivity Compensation
Plan, Amended and Restated as of September 25, 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 October 14, 1998,
concerning unaudited interim financial information.
15.2 Letter of awareness from Ernst & Young LLP, dated October 14, 1998,
concerning unaudited interim financial information.
27 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 3
AS AMENDED SEPTEMBER 25, 1998
AMENDED AND RESTATED
BYLAWS
OF
MORGAN STANLEY DEAN WITTER & CO.
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE 1
OFFICES AND RECORDS
SECTION 1.01. Delaware Office. The principal office of the Corporation in
the State of Delaware shall be located in the City of Wilmington, County of New
Castle.
SECTION 1.02. Other Offices. The Corporation may have such other offices,
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.
ARTICLE 2
STOCKHOLDERS
SECTION 2.01. Annual Meeting. The annual meeting of the stockholders of
the Corporation shall be held at such date, place and time as may be fixed by
resolution of the Board of Directors.
SECTION 2.02. Special Meeting. Subject to the rights of the holders of
any series of preferred stock of the Corporation (the "Preferred Stock") or any
other series or class of stock as set forth in the Amended and Restated
Certificate of Incorporation, special meetings of the stockholders may be called
at any time only by the Secretary at the direction of the Board of Directors
pursuant to a resolution adopted by the Board of Directors.
SECTION 2.03. Place of Meeting. The Board of Directors may designate the
place of meeting for any meeting of the stockholders. If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation, which will be 1585 Broadway, New York, New York.
SECTION 2.04. Notice of Meeting. Written or printed notice, stating the
place, day and hour of the meeting and, in the case of special meetings, the
purpose or purposes for which such special meeting is called, shall be prepared
and delivered by the Corporation not less than ten days nor more than sixty days
before the date of the meeting, either personally, or by mail, to each
stockholder of record entitled to vote at
<PAGE>
such meeting. Such further notice shall be given as may be required by law.
Only such business shall be conducted at a special meeting of stockholders as
shall have been brought before the meeting pursuant to the Corporation's notice
of meeting. Any previously scheduled meeting of the stockholders may be
postponed, and (unless the Amended and Restated Certificate of Incorporation
otherwise provides) any special meeting of the stockholders may be canceled, by
resolution of the Board of Directors upon public notice given prior to the time
previously scheduled for such meeting of stockholders.
SECTION 2.05. Quorum and Adjournment. Except as otherwise provided by law
or by the Amended and Restated Certificate of Incorporation, the holders of a
majority of the voting power of the outstanding shares of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders, except that when specified business is to be voted on by a class
or series voting as a class, the holders of a majority of the voting power of
the shares of such class or series shall constitute a quorum for the transaction
of such business. The Chairman of the Board or the holders of a majority of the
voting power of the shares of Voting Stock so represented may adjourn the
meeting from time to time, whether or not there is such a quorum (or, in the
case of specified business to be voted on by a class or series, the Chairman of
the Board or the holders of a majority of the voting power of the shares of such
class or series so represented may adjourn the meeting with respect to such
specified business). No notice of the time and place of adjourned meetings need
be given except as required by law. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 2.06. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy as may be permitted by law; provided, that no proxy shall be voted
after three years from its date, unless the proxy provides for a longer period.
Any proxy to be used at a meeting of stockholders must be filed with the
Secretary of the Corporation or his representative at or before the time of the
meeting.
SECTION 2.07. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (A) pursuant to the
Corporation's notice of meeting delivered pursuant to Section 2.04 of these
Amended and Restated Bylaws, (B) by or at the direction of the Board of
Directors or (C) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complied with the notice procedures set forth in clauses
(ii) and (iii) of this Section 2.07(a) and who was a stockholder of record at
the time such notice is delivered to the Secretary of the Corporation.
2
<PAGE>
(ii) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (C) of paragraph (a) (i) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and, in the case of business other than
nominations, such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not less
than ninety days nor more than one hundred and twenty days prior to the first
anniversary of the preceding year's annual meeting; provided however, that with
respect to the annual meeting to be held in 1998, the anniversary date shall be
deemed to be April 2, 1998; provided further, that in the event that the date of
the annual meeting is advanced by more than thirty days, or delayed by more than
ninety days, from such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the one hundred and twentieth day prior to
such annual meeting and not later than the close of business on the later of the
ninetieth day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made. In no
event shall the public announcement of an adjournment or postponement of an
annual meeting commence a new time period for the giving of a stockholder's
notice as described in this Section 2.07(a). Such stockholder's notice shall set
forth (A) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is other-wise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder, including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (2) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of clause (ii) of
this Section 2.07(a) to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the Corporation
at least one hundred days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the tenth day following the day on which such public announcement is
first made by the Corporation.
3
<PAGE>
(b) Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting of stockholders
as shall have been brought before the meeting pursuant to the Corporation's
notice of meeting pursuant to Section 2.04 of these Amended and Restated Bylaws.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be elected pursuant to
the Corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complies with the notice procedures set forth in this Bylaw
and who is a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation. In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate such number of persons for
election to such position(s) as are specified in the Corporation's Notice of
Meeting, if the stockholder's notice as required by clause (ii) of Section
2.07(a) of these Amended and Restated Bylaws shall be delivered to the Secretary
at the principal executive offices of the Corporation not earlier than the one
hundred and twentieth day prior to such special meeting and not later than the
close of business on the later of the ninetieth day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period for the giving of a stockholder's notice as described above.
(c) General
(i) Only persons who are nominated in accordance with the procedures set
forth in this Bylaw shall be eligible to be elected as directors at a meeting of
stockholders and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Bylaw. Except as otherwise provided by law,
the Amended and Restated Certificate of Incorporation or these Amended and
Restated Bylaws, the Chairman of the Board shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this Bylaw and,
if any proposed nomination or business is not in compliance with this Bylaw, to
declare that such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
4
<PAGE>
(iii) Notwithstanding the foregoing provisions of this Bylaw, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 2.08. Procedure For Election of Directors; Voting. The election
of directors submitted to stockholders at any meeting shall be decided by a
plurality of the votes cast thereon, except as otherwise set forth in the
Amended and Restated Certificate of Incorporation with respect to the right of
the holders of any series of Preferred Stock or any other series or class of
stock to elect additional directors under specified circumstances. Except as
otherwise provided by law, the Amended and Restated Certificate of Incorporation
or these Amended and Restated Bylaws, all matters other than the election of
directors submitted to the stockholders at any meeting shall be decided by the
affirmative vote of a majority of the voting power of the shares present in
person or represented by proxy at the meeting and entitled to vote thereon, and
where a separate vote by class is required, a majority of the voting power of
the shares of that class present in person or represented by proxy at the
meeting and entitled to vote thereon.
The vote on any matter, including the election of directors, shall be by
written ballot. Each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, and shall state the number of shares voted.
SECTION 2.09. Inspectors of Elections; Opening and Closing the Polls.
(a) The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may not be directors, officers or
employees of the Corporation, to act at the meeting and make a written report
thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act, or if all inspectors or alternates who have been appointed are
unable to act, at a meeting of stockholders, the Chairman of the Board shall
appoint one or more inspectors to act at the meeting. Each inspector, before
discharging his or her duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability. The inspectors shall have the duties prescribed by the
General Corporation Law of the State of Delaware.
(b) The Chairman of the Board shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the stockholders will vote at the meeting.
5
<PAGE>
ARTICLE 3
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors. In
addition to the powers and authorities by these Amended and Restated Bylaws
expressly conferred upon them, the Board of Directors may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Amended and Restated Certificate of Incorporation or by these
Amended and Restated Bylaws required to be exercised or done by the
stockholders.
SECTION 3.02. Number, Tenure and Qualifications. Subject to Section 3.12
of these Amended and Restated Bylaws and to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth in
the Amended and Restated Certificate of Incorporation, to elect directors under
specified circumstances, the number of directors shall be fixed from time to
time exclusively pursuant to a resolution adopted by the Board of Directors, but
shall consist of not less than three nor more than fourteen directors. However,
no decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director. The directors, other than those who
may be elected by the holders of any series of Preferred Stock, or any other
series or class of stock as set forth in the Amended and Restated Certificate of
Incorporation, shall be divided into such classes and hold office for such terms
as set forth in, and may be removed only in accordance with, the Amended and
Restated Certificate of Incorporation.
Each director shall be required to become a stockholder of the Corporation
within 60 days after the date such director is first elected to the Board of
Directors.
SECTION 3.03. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, each annual meeting of stockholders. The Board of
Directors may, by resolution, provide the time and place for the holding of
additional regular meetings without other notice than such resolution. Unless
otherwise determined by the Board of Directors, the Secretary of the Corporation
shall act as secretary at all regular meetings of the Board of Directors and in
the Secretary's absence a temporary secretary shall be appointed by the chairman
of the meeting.
SECTION 3.04. Special Meetings. Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board and the
President, acting together, or a majority of the Board of Directors. The person
or persons authorized to call special meetings of the Board of Directors may fix
the place and time of the meetings. Unless otherwise determined by the Board of
Directors, the Secretary of the Corporation shall act as secretary at all
special meetings of the Board of Directors and in the Secretary's absence a
temporary secretary shall be appointed by the chairman of the meeting.
6
<PAGE>
SECTION 3.05. Notice. Notice of any special meeting shall be mailed to
each director at his business or residence not later than three days before the
day on which such meeting is to be held or shall be sent to either of such
places by telegraph or facsimile or other electronic transmission, or be
communicated to each director personally or by telephone, not later than the day
before such day of meeting. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice of such meeting, except for amendments to these Amended
and Restated Bylaws as provided pursuant to Section 8.01 hereof. A meeting may
be held at any time without notice if all the directors are present (except as
otherwise provided by law) or if those present waive notice of the meeting in
accordance with Section 6.04 hereof, either before or after such meeting.
SECTION 3.06. Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if a written consent thereto is signed by all members
of the Board or of such committee, as the case may be, and such written consent
is filed with the records of the proceedings of the Board or such committee.
SECTION 3.07. Conference Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.08. Quorum. At all meetings of the Board of Directors, a
majority of the entire Board of Directors (as defined in Section 3.09(a)) shall
constitute a quorum for the transaction of business. At all meetings of the
committees of the Board of Directors, the presence of 50% or more of the total
number of members (assuming no vacancies) shall constitute a quorum. The act of
the directors or committee members present at any meeting at which there is a
quorum shall be the act of the Board of Directors or such committee, as the case
may be, except as otherwise provided in the Delaware General Corporation Law,
the Amended and Restated Certificate of Incorporation or these Amended and
Restated Bylaws. If a quorum shall not be present at any meeting of the Board
of Directors or any committee, a majority of the directors or members, as the
case may be, present thereat may adjourn the meeting from time to time without
further notice other than announcement at the meeting. If permitted by
applicable law, the directors or members, as the case may be, present at a duly
authorized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
SECTION 3.09. Committees. (a) The Corporation shall have four standing
committees: the executive committee, the nominating and directors committee,
the audit committee and the compensation committee. The executive committee
shall have those
7
<PAGE>
powers and authority as are delegated to it from time to time pursuant to a
resolution passed by a three-quarters vote of the total number of directors
specified in the resolution pursuant to Section 3.02 of these Amended and
Restated Bylaws which the Corporation would have if there were no vacancies (the
"entire Board of Directors").
(b) The nominating and directors committee shall have the following powers
and authority: (i) evaluating and recommending director candidates to the Board
of Directors, (ii) assessing Board of Directors performance not less frequently
than every three years, (iii) recommending director compensation and benefits
philosophy for the Corporation, (iv) reviewing individual director performance
as issues arise, (v) periodically reviewing the Corporation's corporate
governance profile, and (vi) such additional powers and authority as the Board
of Directors may from time to time determine. None of the members of the
nominating and directors committee shall be a member of the executive committee
or an officer or full-time employee of the Corporation or of any subsidiary or
affiliate of the Corporation.
(c) The audit committee shall have the following powers and authority:
(i) to recommend to the Board of Directors the appointment of independent public
accountants to audit the financial statements of the Corporation and to perform
such other duties from time to time as the audit committee may prescribe, (ii)
to receive the reports and comments of the Corporation's internal auditors and
of the independent public accountants, including reports on the adequacy of
internal controls, and to take such action with respect thereto as may seem
appropriate, (iii) to review the accounting principles employed in financial
reporting and (iv) to exercise such additional powers and authority as the Board
of Directors may from time to time determine. None of the members of the audit
committee shall be a member of the executive committee or an officer or full-
time employee of the Corporation or of any subsidiary or affiliate of the
Corporation.
(d) The compensation committee shall have the following powers and
authority: (i) determining and fixing the compensation for all senior officers
of the Corporation and those of its Subsidiaries (as defined in Section 6.07(f))
that the compensation committee shall from time to time consider appropriate, as
well as all employees of the Corporation and its Subsidiaries compensated at a
rate in excess of such amount per annum as may be fixed or determined from time
to time by the Board of Directors, (ii) performing the duties of the committees
of the Board of Directors provided for in any present or future stock option,
incentive compensation or employee benefit plan of the Corporation or, if the
compensation committee shall so determine, any such plan of any Subsidiary,
(iii) reviewing the operations of and policies pertaining to any present or
future stock option, incentive compensation or employee benefit plan of the
Corporation or any Subsidiary that the compensation committee shall from time to
time consider appropriate, (iv) authorizing the issuance or grant of stock,
stock options, restricted stock, stock appreciation rights, stock units or any
other award consisting of or relating to stock of the Corporation under or
pursuant to any present or future stock option, incentive compensation, employee
benefit or other plan of the Corporation or of any Subsidiary, and (v) such
additional powers and authority as the Board of Directors may from time to
8
<PAGE>
time determine. None of the members of the compensation committee shall be a
member of the executive committee or an officer or full-time employee of the
Corporation or of any subsidiary or affiliate of the Corporation.
(e) In addition, the Board of Directors may, by resolution passed by a
three-quarters vote of the entire Board of Directors, designate one or more
additional committees, with each such committee consisting of one or more
directors of the Corporation and having such powers and authority as the Board
of Directors shall designate by such resolutions.
(f) Any modification to the powers and authority of any committee shall
require the adoption of a resolution by a three-quarters vote of the entire
Board of Directors.
(g) All acts done by any committee within the scope of its powers and
authority pursuant to these Amended and Restated Bylaws and the resolutions
adopted by the Board of Directors in accordance with the terms hereof shall be
deemed to be, and may be certified as being, done or conferred under authority
of the Board of Directors. The Secretary or any Assistant Secretary is
empowered to certify that any resolution duly adopted by any such committee is
binding upon the Corporation and to execute and deliver such certifications from
time to time as may be necessary or proper to the conduct of the business of the
Corporation.
(h) Regular meetings of committees shall be held at such times as may be
determined by resolution of the Board of Directors or the committee in question
and no notice shall be required for any regular meeting other than such
resolution. A special meeting of any committee shall be called by resolution of
the Board of Directors, or by the Secretary or an Assistant Secretary upon the
request of the chairman or a majority of the members of any committee. Notice
of special meetings shall be given to each member of the committee in the same
manner as that provided for in Section 3.05 of these Amended and Restated
Bylaws.
SECTION 3.10. Committee Members. (a) Each member of any committee of the
Board of Directors shall hold office until such member's successor is elected
and has qualified, unless such member sooner dies, resigns or is removed. The
number of directors which shall constitute any committee shall be determined by
resolution adopted by a three-quarters vote of the entire Board of Directors.
(b) The Board of Directors may remove a director from a committee or
change the chairmanship of a committee only by resolution adopted by a three-
quarters vote of the entire Board of Directors.
(c) The Board of Directors may designate one or more directors as
alternate members of any committee to fill any vacancy on a committee and to
fill a vacant chairmanship of a committee, occurring as a result of a member or
chairman leaving the committee, whether through death, resignation, removal or
otherwise; provided, that any
9
<PAGE>
such designation may only be amended by a three-quarters vote of the entire
Board of Directors.
SECTION 3.11. Committee Secretary. The Board of Directors may elect a
secretary of any such committee. If the Board of Directors does not elect such
a secretary, the committee shall do so. The secretary of any committee need not
be a member of the committee, but shall be selected from a member of the staff
of the office of the Secretary of the Corporation, unless otherwise provided by
the Board of Directors or the committee, as applicable.
SECTION 3.12. Certain Modifications. Except as otherwise provided in the
Amended and Restated Certificate of Incorporation, any action by the Board of
Directors to change the number of directors comprising the Board or comprising
any class of directors to other than an even number of directors shall require a
three-quarters vote of the entire Board of Directors.
SECTION 3.13. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid
compensation as director or chairman of any committee and for attendance at
each meeting of the Board of Directors. Members of special or standing
committees may be allowed like compensation and payment of expenses for
attending committee meetings.
ARTICLE 4
OFFICERS
SECTION 4.01. General. The officers of the Corporation shall be elected
by the Board of Directors and shall consist of: a Chairman of the Board and
Chief Executive Officer; a President and Chief Operating Officer; a Chief
Financial Officer; a Chief Strategic and Administrative Officer; a Chief Legal
Officer; one or more Senior Executive Vice Presidents; one or more Executive
Vice Presidents; one or more Senior Vice Presidents; one or more First Vice
Presidents; one or more Vice Presidents; a Secretary; one or more Assistant
Secretaries; a Treasurer; one or more Assistant Treasurers; a Controller; and
such other officers as in the judgment of the Board of Directors may be
necessary or desirable. All officers chosen by the Board of Directors shall
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article 4. Such officers shall also
have powers and duties as from time to time may be conferred by the Board of
Directors or any committee thereof. Any number of offices may be held by the
same person, unless otherwise prohibited by law, the Amended and Restated
Certificate of Incorporation or these Amended and Restated Bylaws. The officers
of the Corporation need not be stockholders or directors of the Corporation.
SECTION 4.02. Election and Term of Office. Subject to Section 4.08 of
these Amended and Restated Bylaws, the elected officers of the Corporation shall
be elected
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annually by the Board of Directors at the regular meeting of the Board of
Directors held after each annual meeting of the stockholders. If the election
of officers shall not be held at such meeting, such election shall be held as
soon thereafter as convenient. Subject to Section 4.08 of these Amended and
Restated Bylaws, each officer shall hold office until his successor shall have
been duly elected and shall have qualified or until his death or until he shall
resign or be removed.
SECTION 4.03. Chairman of the Board and Chief Executive Officer. The
Chairman of the Board shall be a member of the Board of Directors and shall be
an officer of the Corporation. The Chairman of the Board shall be the Chief
Executive Officer of the Corporation and shall supervise, coordinate and manage
the Corporation's business and activities and supervise, coordinate and manage
its operating expenses and capital allocation, shall have general authority to
exercise all the powers necessary for the Chief Executive Officer of the
Corporation and shall perform such other duties and have such other powers as
may be prescribed by the Board of Directors or these Amended and Restated
Bylaws, all in accordance with basic policies as established by and subject to
the oversight of the Board of Directors. The Chairman of the Board, if present,
shall preside at all meetings of the Board of Directors.
SECTION 4.04. President and Chief Operating Officer. The President and
Chief Operating Officer shall be a member of the Board of Directors and an
officer of the Corporation. The President and Chief Operating Officer shall
supervise, coordinate and manage the Corporation's business and activities and
supervise, coordinate and manage its operating expenses and capital allocation,
shall have general authority to exercise all the powers necessary for the
President and Chief Operating Officer of the Corporation and shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors and the Chairman and Chief Executive Officer. In the absence or
disability of the Chairman of the Board and Chief Executive Officer, the duties
of the Chairman of the Board shall be performed and the Chairman of the Board's
authority may be exercised by the President and Chief Operating Officer, and in
the event the President and Chief Operating Officer is absent or disabled, such
duties shall be performed and such authority may be exercised by a director
designated for this purpose by the Board of Directors.
SECTION 4.05. Chief Financial Officer. The Chief Financial Officer shall
have responsibility for the financial affairs of the Corporation and shall
exercise supervisory responsibility for the performance of the duties of the
Treasurer and the Controller. The Chief Financial Officer shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and Chief
Operating Officer.
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SECTION 4.06. Chief Strategic and Administrative Officer. The Chief
Strategic and Administrative Officer shall have the responsibility for the
business strategy and strategic planning for the Corporation and shall have the
responsibility for making recommendations regarding the capital allocation of
the Corporation. The Chief Strategic and Administrative Officer shall perform
such other duties and have such other powers as may be prescribed by the Board
of Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and Chief
Operating Officer.
SECTION 4.07. Chief Legal Officer. The Chief Legal Officer shall have
responsibility for the legal affairs of the Corporation and for the performance
of the duties of the Secretary. The Chief Legal Officer shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and Chief
Operating Officer.
SECTION 4.08. Certain Actions. Notwithstanding anything to the contrary
contained in these Amended and Restated Bylaws, the removal of the current
Chairman and Chief Executive Officer or the current President and Chief
Operating Officer as of May 31, 1997, or any modification to either of their
respective roles, duties or authority shall require a three-quarters vote of the
entire Board of Directors.
SECTION 4.09. Vacancies. A newly created office and a vacancy in any
office because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the terms at any meeting of the Board of
Directors.
ARTICLE 5
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.01. Stock Certificates and Transfers. (a) The interest of each
stockholder of the Corporation shall be evidenced by certificates for shares of
stock in such form as the appropriate officers of the Corporation may from time
to time prescribe; provided that the Board of Directors may provide by
resolution or resolutions that all or some of all classes or series of the stock
of the Corporation shall be represented by uncertificated shares.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates and upon request every holder
of uncertificated shares shall be entitled to have a certificate signed by, or
in the name of the Corporation by the Chairman of the Board of Directors, or the
President or any other authorized officer and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation
representing the number of shares registered in certificate form. Except as
otherwise expressly provided by law, the rights and
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obligations of the holders of uncertificated stock and the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.
(b) The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may permit all or any of the signatures on such certificates to
be in facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
(c) The shares of the stock of the Corporation represented by certificates
shall be transferred on the books of the Corporation by the holder thereof in
person or by his attorney, upon surrender for cancelation of certificates for
the same number of shares, with an assignment and power of transfer endorsed
thereon or attached thereto, duly executed, with such proof of the authenticity
of the signature as the Corporation or its agents may reasonably require. Upon
receipt of proper transfer instructions from the registered owner of
uncertificated shares such uncertificated shares shall be canceled and issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the Corporation. Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to the Delaware General Corporation Law or, unless
otherwise provided by the Delaware General Corporation Law, a statement that the
Corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
SECTION 5.02. Lost, Stolen or Destroyed Certificates. No certificate for
shares or uncertificated shares of stock in the Corporation shall be issued in
place of any certificate alleged to have been lost, destroyed or stolen, except
on production of such evidence of such loss, destruction or theft and on
delivery to the Corporation of a bond of indemnity in such amount, upon such
terms and secured by such surety, as the Board of Directors or its designee may
in its or his discretion require.
ARTICLE 6
MISCELLANEOUS PROVISIONS
SECTION 6.01. Fiscal Year. The fiscal year of the Corporation shall be as
specified by the Board of Directors.
SECTION 6.02. Dividends. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner
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and upon the terms and conditions provided by law and its Amended and Restated
Certificate of Incorporation.
SECTION 6.03. Seal. The corporate seal shall have thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.
SECTION 6.04. Waiver of Notice. Whenever any notice is required to be
given to any stockholder or director of the Corporation under the provisions of
the General Corporation Law of the State of Delaware, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders or any meeting of the Board of
Directors or committee thereof need be specified in any waiver of notice of such
meeting.
SECTION 6.05. Audits. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the audit committee, and it shall be the
duty of the audit committee to cause such audit to be made annually.
SECTION 6.06. Resignations. Any director or any officer, whether elected
or appointed, may resign at any time upon notice of such resignation to the
Corporation.
SECTION 6.07. Indemnification and Insurance.
(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any manner in any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
or a person of whom he or she is the legal representative is or was a director
or officer of the Corporation or a director or elected officer of a Subsidiary,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted from time to time by the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended (but, if permitted by
applicable law, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment) or any
other applicable laws as presently or hereafter in effect, and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided however, that the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors or is a proceeding to enforce such person's
claim to indemnification pursuant to the rights granted by this Bylaw. The
Corporation shall pay the expenses incurred by such person in defending any such
proceeding in advance of its
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final disposition upon receipt (unless the Corporation upon authorization of the
Board of Directors waives such requirement to the extent permitted by applicable
law) of an undertaking by or on behalf of such person to repay such amount if it
shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Bylaw or otherwise.
(b) The indemnification and the advancement of expenses incurred in
defending a proceeding prior to its final disposition provided by, or granted
pursuant to this Bylaw shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the Amended
and Restated Certificate of Incorporation, other provision of these Amended and
Restated Bylaws, agreement, vote of stockholders or Disinterested Directors or
otherwise. No repeal, modification or amendment of, or adoption of any
provision inconsistent with, this Section 6.07, nor to the fullest extent
permitted by applicable law, any modification of law, shall adversely affect any
right or protection of any person granted pursuant hereto existing at, or with
respect to any events that occurred prior to, the time of such repeal,
amendment, adoption or modification.
(c) The Corporation may maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, partner, member,
employee or agent of the Corporation or a Subsidiary or of another corporation,
partnership, limited liability company, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Law of the State of Delaware.
(d) The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and rights to be paid by
the Corporation the expenses incurred in defending any proceeding in advance of
its final disposition, to any person who is or was an employee or agent (other
than a director or officer) of the Corporation or a Subsidiary and to any person
who is or was serving at the request of the Corporation or a Subsidiary as a
director, officer, partner, member, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust or other
enterprise, including service with respect to employee benefit plans maintained
or sponsored by the Corporation or a Subsidiary, to the fullest extent of the
provisions of this Bylaw with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.
(e) If any provision or provisions of this Bylaw shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the validity,
the legality and enforceability of the remaining provisions of this Bylaw
(including, without limitation, each portion of any paragraph or clause of this
Bylaw containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and (2) to the fullest
extent possible, the provisions of this Bylaw (including, without limitation,
each such portion of any paragraph of this Bylaw containing any such provision
held to be invalid,
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illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
(f) For purposes of these Amended and Restated Bylaws:
(1) "Disinterested Director" means a director of the Corporation who is
not and was not a party to the proceeding or matter in respect of which
indemnification is sought by the claimant.
(2) "Subsidiary" means a corporation, a majority of the capital stock of
which is owned directly or indirectly by the Corporation, other than directors'
qualifying shares.
(g) Any notice, request, or other communication required or permitted to
be given to the Corporation under this Bylaw shall be in writing and either
delivered in person or sent by telecopy, telex, telegram, overnight mail or
courier service, or certified or registered mail, postage prepaid, return
receipt requested, to the Secretary of the Corporation and shall be effective
only upon receipt by the Secretary.
ARTICLE 7
CONTRACTS, PROXIES, ETC.
SECTION 7.01. Contracts. Except as otherwise required by law, the Amended
and Restated Certificate of Incorporation or these Amended and Restated Bylaws,
any contracts or other instruments may be executed and delivered in the name and
on the behalf of the Corporation by such officer or officers of the Corporation
as the Board of Directors may from time to time direct. Such authority may be
general or confined to specific instances as the Board may determine. Subject
to the control and direction of the Board of Directors, the Chairman of the
Board, the President, the Chief Financial Officer, the Chief Strategic and
Administrative Officer, the Chief Legal Officer and the Treasurer may enter
into, execute, deliver and amend bonds, promissory notes, contracts, agreements,
deeds, leases, guarantees, loans, commitments, obligations, liabilities and
other instruments to be made or executed for or on behalf of the Corporation.
Subject to any restrictions imposed by the Board of Directors, such officers of
the Corporation may delegate such powers to others under his or her
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise of
such delegated power.
SECTION 7.02. Proxies. Unless otherwise provided by resolution adopted by
the Board of Directors, the Chairman of the Board or the President may from time
to time appoint an attorney or attorneys or agent or agents of the Corporation,
in the name and behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as the holder of stock or other securities
in any other corporation or entity, any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation or entity, or to consent in writing, in the
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name of the Corporation as such holder, to any action by such other corporation
or entity, and may instruct the person or persons so appointed as to the manner
of casting such vote or giving such consent, and may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal or otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises.
ARTICLE 8
AMENDMENTS
SECTION 8.01. Amendments. These Amended and Restated Bylaws may be
altered, amended or repealed, in whole or in part, or new Amended and Restated
Bylaws may be adopted by the stockholders or by the Board of Directors at any
meeting thereof; provided however, that notice of such alteration, amendment,
repeal or adoption of new Amended and Restated Bylaws is contained in the notice
of such meeting of stockholders or in the notice of such meeting of the Board of
Directors and, in the latter case, such notice is given not less than twenty-
four hours prior to the meeting. Unless a higher percentage is required by the
Amended and Restated Certificate of Incorporation as to any matter which is the
subject of these Amended and Restated Bylaws, all such amendments must be
approved by either the holders of eighty percent (80%) of the Voting Stock or by
a majority of the Board of Directors; provided further, notwithstanding the
foregoing, the Board of Directors may alter, amend or repeal, or adopt new
Amended and Restated Bylaws in conflict with, (i) any provision of these Amended
and Restated Bylaws which requires a three-quarters vote of the entire Board of
Directors for action to be taken thereunder, (ii) subsection (c) of Section 3.10
of these Amended and Restated Bylaws and (iii) this proviso to this Section 8.01
of these Amended and Restated Bylaws only by a resolution adopted by a three-
quarters vote of the entire board of Directors until December 31, 2000; provided
further, that, notwithstanding the foregoing, the Board of Directors may alter,
amend or repeal, or adopt new Amended and Restated Bylaws in conflict with, (i)
Section 4.08 of these Amended and Restated Bylaws and (ii) this further proviso
to this Section 8.01 of these Amended and Restated Bylaws only by a resolution
adopted by a three-quarters vote of the entire Board of Directors.
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EXHIBIT 10.1
DEAN WITTER REYNOLDS INC.
BRANCH MANAGER COMPENSATION PLAN
[Amended as of September 25, 1998]
SECTION I
INTRODUCTION
The name of this Plan is the Dean Witter Reynolds Inc. Branch Manager
Compensation Plan (the "Plan"). The Plan was initially adopted for Fiscal Years
beginning with 1984; was amended and restated on December 23, 1985 retroactive
to 1984; was further amended as of December 8, 1986, January 1, 1988, December
23, 1990, and July 15, 1991; was amended and restated January 1, 1992; amended
and restated as of April 21, 1992, retroactive to January 1, 1992; amended and
restated effective October 1, 1993; amended effective January 1, 1994; amended
and restated effective January 1, 1994; amended and restated effective October
21, 1994; amended effective June 18, 1997; and was amended effective September
25, 1998.
SECTION II
PURPOSE OF PLAN
The purpose of the Plan is to retain and recruit key Branch Managers for Dean
Witter Reynolds Inc. by enabling them to accumulate significant net worth based
on the profitable management of Branch Offices of DWR.
SECTION III
DEFINITIONS
(a) "Account" means a Branch Manager Compensation Plan Account maintained in a
confidential ledger by DWR pursuant to Section VI of the Plan for each
Participant in the Plan. MIC awards are also made under the Plan but
Accounts are maintained only for Participants, i.e., those who get
challenge or other awards.
(b) "Financial Advisor" means an Employee performing the functions of that
position for DWR.
(c) "Agreement" means a subordination agreement described in Section VIII and
Appendix A.
(d) "Board" means the Compensation Committee of the Board of Directors of DWR.
(e) "Branch Office" means any branch office of DWR.
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(f) "Branch Manager" means an Employee performing the functions of that
position for DWR. For purposes of this Plan, "Branch Manager" shall also
mean a Satellite Manager, unless otherwise specified in the Plan.
(g) "Disability" means termination of employment from DWR due to a medically
determinable physical or mental incapacity which is reasonably expected to
be of long-term duration or result in death. The determination of DWR shall
be conclusive on all parties as to whether a Participant is Disabled.
(h) "MWD" means Morgan Stanley Dean Witter & Co., a Delaware corporation.
(i) "DWR" means Dean Witter Reynolds Inc., a Delaware corporation.
(j) "Employee" means an employee of DWR.
(k) "Fair Market Value" means:
(1) for purposes of determining the number of shares of Stock to be allocated
pursuant to Section VII(b)(i) to a Deferred Bonus awarded pursuant to Section V,
the fair market value thereof as of the relevant date of determination, as
determined in accordance with a valuation methodology approved by the Board of
Directors of MWD or a committee thereof designated by such Board of Directors
(such Board of Directors or committee is hereinafter referred to as the "MWD
Committee"); and
(2) for purposes of crediting a Participant pursuant to Section VII(b)(iii)
with shares of Stock based upon cash dividends paid or deemed to be paid on
shares of Stock credited to the Participant as of the record date for such
dividends, 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 MWD Committee; and
(3) for purposes of distributing cash in lieu of a fractional share pursuant to
Section VII(b)(i), the High/Low Price on the date of the distribution, or, if
Stock is not traded on public markets on the date of the distribution, 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 MWD Committee; and
(4) for such other purposes as may arise in connection with the Plan, the fair
market value of a share of Stock as of the relevant date of determination, as
determined in accordance with a valuation methodology approved by the MWD
Committee.
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(1) "Fiscal Year" means the Fiscal Year of DWR.
(m) "MIC" means the Branch Manager Management Incentive Compensation Plan.
(n) "Net Income After Allocated Expense" means the Branch Office monthly gross
revenue less all expenses charged to such Branch Office, both direct and
allocated, before accrual of income taxes and the Branch Manager's MIC
credit as reflected in the statements of revenue and expense prepared by
DWR in accordance with its standard accounting practices.
(o) "Non-Producing Branch Manager" means a Branch Manager who does not
personally produce gross revenues for DWR through the sale of securities
and other investments to clients of DWR.
(p) "Office Gross Revenue" means the gross revenue generated in a Fiscal Year
by a Branch Office as reflected in the statements of revenue and expense
prepared by DWR in accordance with its standard accounting practices.
(q) "Participant" means a Branch Manager to whom a Challenge Bonus has been
awarded or to whom another deferred bonus has been awarded, pursuant to
Section V.
(r) "Producing Branch Manager" means a Branch Manager who personally produces
gross revenues for DWR through the sale of securities and other investments
to clients of DWR.
(s) "Profit Margin" means the Branch Office Net Income After Allocated Expense
divided by the Branch Office Total Gross Income.
(t) "Regional Director" means an Employee performing the functions of that
position for DWR.
(u) "Retirement" means termination of employment from DWR (i) after attaining
age 65, (ii) as defined in the Dean Witter Reynolds Inc. Pension Plan
whether or not the individual is a participant therein, or (iii) as
otherwise specified by written agreement between DWR and a Branch Manager.
(v) "Stock" means the common stock of MWD, par value $.01 per share.
(w) "Satellite Manager" means the manager of a satellite sales office of DWR.
(x) "Total Gross Income" means the monthly gross income generated by a Branch
Office as reflected in the statements of revenue and expense prepared by
DWR in accordance with its standard accounting practices.
(y) "Valuation Date" means the last day of each Fiscal Year.
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SECTION IV
ELIGIBILITY
All Branch Managers shall be eligible to participate in the Plan.
SECTION V
COMPENSATION
(a) Salaries. Salary levels for Branch Managers shall be established each year
by DWR in its sole discretion taking into account such factors as Office
Gross Revenue for each Branch Manager's respective Branch Office and/or
such other factors as DWR may determine. The criteria for determining
Branch Manager salaries on an annual basis may be the same or different for
Non-Producing Branch Managers, Producing Branch Managers and/or Satellite
Managers. Salaries shall be paid in cash on a periodic basis throughout
each Fiscal Year. Salary payments will cease immediately upon termination
of employment.
(b) MIC Award. Branch Managers shall be eligible for an MIC award to be based
on a formula which shall be determined by the Board from time to time. A
Branch Manager's MIC award shall be based on the monthly Profit Margin of
his or her respective Branch Office. However, in the event of a Branch
Office loss, such loss shall be carried forward to succeeding months and
shall be used to reduce the monthly Profit Margin in such succeeding months
in calculating MIC until such losses shall have been offset in whole by the
Branch Office's Profit Margins in successive months of the same Fiscal
Year. The amount of any Branch Manager's MIC award may be increased at any
time by DWR in its sole discretion. MIC award payments shall be paid in
cash.
(c) Challenge Bonuses.
(1) Branch Managers shall also be eligible for an additional "Challenge
Bonus." The Challenge Bonus will be based on the achievement of challenge goals
agreed to between each Branch Manager and his or her Regional Director at the
beginning of each Fiscal Year. The Regional Director shall establish a Target
Challenge Bonus for a Branch Manager at such time as challenge goals are agreed
to with each Branch Manager.
(2) The Board, in its sole discretion, shall determine whether a Branch
Manager has achieved and/or exceeded the challenge goals agreed on by the Branch
Manager and Regional Director. If the Board determines that a Branch Manager has
exceeded the challenge goals agreed to between the Branch Manager and the
Regional Director, it may award a Challenge Bonus up to two times the target
Challenge Bonus. If a Branch Manager has not achieved the challenge goals for a
Fiscal Year agreed to between the Branch Manager and the Regional Director, the
Branch Manager may receive a Challenge Bonus that is less than the target
Challenge Bonus, in an amount determined solely by the Board.
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(3) DWR shall pay 80% of the Challenge Bonus in cash as soon as practicable
following the end of the Fiscal Year in which a Challenge Bonus is earned. The
remaining 20% (the "Deferred Bonus"), will be paid in the form of shares of
common stock of MWD, par value $.01 per share ("Stock") in accordance with
Section VII and subject to Appendix A.
(d) Other Deferred Bonus Awards. At the beginning of any Fiscal Year, the Board
may establish any other criteria which will entitle a Branch Manager to
receive a deferred bonus award under the Plan for that or any one or more
succeeding Fiscal Years. A Branch Manager who achieves such other criteria
in a Fiscal Year shall receive an award for that Fiscal Year. Any deferred
bonus awards made pursuant to this paragraph shall be made subject to the
same terms and conditions as the deferred portion of a Challenge Bonus
Award made under Section V(c)(3) and shall be Payment Obligations for
purposes of Section VIII except that the Board may in its sole discretion,
elect not to credit deferred bonus awards made pursuant to this subsection
with the annual increments described in Section VI(c).
(e) The MWD Committee, may, in its discretion from time to time, make to an
individual, in consideration of such individual becoming (and remaining for
such period of time, if any, as the MWD Committee determines) a Branch
Manager and such other consideration, if any, as the MWD Committee
determines, an award of Stock on such terms and conditions as the MWD
Committee may determine, which terms and conditions need not be uniform
with the terms and conditions of Section VI, VII or VIII hereof, but which
shall be set forth in a written award certificate or award agreement
delivered or made available by DWR to the individual as soon as practicable
following the date of the award. Awards of Stock under this Section V(e)
shall be satisfied only out of shares held in treasury and not out of
authorized but unissued shares.
SECTION VI
ACCOUNTS - ESCROW AGENT
(a) A separate Account shall be maintained by DWR for each Participant in a
confidential ledger for each Fiscal Year. Each such Account shall be
credited with such deferred bonuses as may be awarded to the Participant
pursuant to Section V of the Plan. Each such Account shall be decreased by
any (i) payments of deferred awards, or (ii) forfeitures of deferred awards
pursuant to Section VII.
(b) Within a reasonable time after the end of each Fiscal Year the Controller
of DWR shall give each Participant a written report of the status of such
Participant's Account under the Plan, including the value thereof. For each
Fiscal Year, Accounts shall be valued as of the Valuation Date.
(c) As a condition to participation in this Plan, each eligible Employee shall
be required to hold restricted Stock awards hereunder in an escrow account
and such Employee's decision to participate in the Plan shall constitute
the appointment of
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Morgan Stanley Dean Witter Trust FSB, or such other custodian as DWR shall
designate (the "Custodian"), as the custodial agent for the purpose of
holding such Stock. Such escrow account will be governed by and subject to
the terms and conditions of a written agreement with the Custodian.
SECTION VII
AWARD PAYMENTS
(a) In order to be entitled to any payment of compensation an Employee must be
employed by DWR on the date such compensation is paid. If any Employee
terminates employment after any MIC, bonus or other compensation is or
becomes determinable but before actual payment of such MIC, bonus, or other
compensation is paid by DWR in the normal course of business, the Employee
shall not be entitled to receive any such payment. Notwithstanding the
foregoing, in the event of the death or Disability of an Employee,
compensation, including MIC and other bonuses under this Plan, which is
determinable as of the last day of employment, shall be paid to the
Employee or the Employee's representative at the times specified herein for
the payment of such compensation.
(b) (i) Deferred Bonuses will be paid in the form of Stock valued at
80% of the Fair Market Value of Stock as of the date the Deferred Bonus is
awarded, payable as soon as practicable following the close of the Fiscal Year
for which the award is made. Deferred bonuses under Section V(d) may be paid in
cash or in Stock as determined by the Compensation Committee of the Board of
Directors of DWR. The number of shares of Stock payable with respect to a
Deferred Bonus shall be calculated by reference to the amount of the Deferred
Bonus determined under Section V. Payments to Participants of Deferred Bonuses
made in the form of Stock shall be made in the form of a certificate for whole
shares and cash in lieu of any fractional share. A Participant on a leave of
absence approved by DWR or who is absent due to disability on the date payment
is made shall not be entitled to payment of such Deferred Bonus until the
Participant returns to DWR following completion of such leave of absence or
disability.
(ii) Stock awarded with respect to a Fiscal Year shall vest four years
and three months following the close of that Fiscal Year; provided that the
Participant's status as an Employee has not been terminated prior to such date.
Upon the Participant's termination of employment with DWR, all unvested Stock
shall be forfeited. Notwithstanding the foregoing, if a Participant terminates
employment with DWR due to Disability, Retirement or death, all of the
Participant's restricted Stock awards shall become vested in accordance with
this Section VII without regard to the Participant's termination of employment.
(iii) A Participant may vote and receive dividends on any Stock awarded
to such Participant under Section VII(b)(i) or credited under this Section
VII(b)(iii); provided that all dividends on Stock (other than dividends payable
in Stock) shall be reinvested in shares of Stock at 100% of the Fair Market
Value of Stock which shares shall be credited to the Participant and held by the
Custodian. All shares of Stock received as a distribution with respect to Stock
or acquired with reinvested dividends hereunder shall be subject to the same
restrictions as shares of Stock on which such distribution or dividend is
awarded.
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<PAGE>
(c) Except as provided in Section VII(b), payments made hereunder shall be made
in cash and shall not be eligible for rollover or transfer into other
retirement or deferred compensation plans sponsored by DWR, MWD or any of
their affiliates.
(d) In the event a Participant terminates employment with DWR due to Disability
or Retirement or the Participant dies, the undistributed balance of the
Participant's Account at the end of the Fiscal Year preceding the
Participant's Disability, Retirement or death shall be paid to the
Participant or the personal representative of the Participant's estate in
the manner provided by this Section VII and to the extent permitted by
Appendix A to the Plan.
(e) DWR reserves the right to accelerate payment of a Participant's entire
Account balance and/or the vesting of any Stock awarded pursuant to Section
V(c) or Section (d) of the Plan, subject to the provisions of Section VIII
and an Agreement. The MWD Committee reserves the right to accelerate the
vesting of any Stock awarded pursuant to Section V(e) of the Plan; provided
that if the award of such Stock was made subject to Section VIII and an
Agreement, then vesting of such Stock shall be subject to Section VIII and
an Agreement.
(f) A Participant shall be entitled to payment of his or her Account pursuant
to Section VII(b) provided the Participant is employed by DWR at the time
such payment is due, regardless of the position in which the Participant is
employed at such time.
(g) In accordance with the provisions of an Agreement, if DWR must recover a
Payment Obligation previously paid to a Participant pursuant to this
Section VII, a Participant shall be required to repay such amount. With
respect to amounts awarded in Stock, the Participant shall be required to
repay the number of shares of Stock received (or an amount in cash equal to
the fair market value of such Stock as of the date of such repayment). If
any such amount is not repaid, DWR reserves the right to withhold from the
Participant's compensation the amount of any Payment Obligation which a
Participant fails to repay as required herein.
(h) All federal, state, local and other withholding tax requirements, if any,
relating to the Plan shall be met pursuant to procedures determined by DWR
which may include:
1. Withholding from any cash amounts payable to a Participant under the
Plan including salary, bonus or any other amounts payable from DWR or any
affiliate of DWR;
2. Requiring Participants to remit to DWR an amount in cash prior to the
delivery of any certificate for Stock or other payments under the Plan;
3. At the election of the Participant, tendering to DWR a number of shares
of Stock;
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4. At the election of the Participant, withholding by DWR of shares of
Stock. In the event that the Custodian is directed by DWR to withhold
shares pursuant to this Section VII(h)(4), the Custodian shall distribute
such shares from the custodial account to DWR (or, at the direction of DWR,
sell such shares on public markets and distribute the cash proceeds to DWR)
and DWR shall make appropriate withholding tax payments.
5. If a Participant is subject to Section 16(b) of the Securities Exchange
Act of 1934, DWR may prescribe such requirements or limitations on the
Participant's ability to elect the withholding options contained in
Sections VII(h)(3) and (4) of the Plan as may be required by Securities and
Exchange Commission rule 16b-3 or by any comparable or successor exemption.
(i) The commencement of Related Employment by a Participant shall not be
treated for purposes of the Plan and any Deferred Bonus or Other Deferred
Bonus Award hereunder as a termination of employment. The Retirement,
Disability or death of an individual during a period of Related Employment
shall be treated for purposes of the Plan and any Deferred Bonus or Other
Deferred Bonus Award hereunder as if such event had occurred while the
individual was an Employee. For purposes of this Section VII(i), "Related
Employment" shall mean the employment of a Participant by an employer other
than DWR, provided that: (1) such employment is undertaken by the
individual at the request or with the consent of DWR; (2) immediately prior
to undertaking such employment the individual was an Employee or was
engaged in Related Employment as defined herein; and (3) such employment is
recognized by DWR, in its discretion, as Related Employment.
8
<PAGE>
SECTION VIII
SUBORDINATION OF DEFERRED BONUSES
(a) All Branch Managers, as a condition of participation, shall execute and
deliver a written agreement (the "Agreement") within forty-five (45) days
after notice of eligibility to Participate or the announcement of a
Deferred Bonus Award made after December 24, 1990, that such Branch
Manager's right to any payment hereunder (the "Payment Obligation") is
subordinate to the prior payment or provision for payment in full of all
claims of all present and future creditors of DWR arising out of any matter
occurring prior to the date on which the related Payment Obligation matures
consistent with all applicable statutes, regulations and rules, except for
claims which are the subject of subordination agreements which ran on the
same priority (which claims shall be paid pari passu) or are junior to the
Payment Obligation under the Agreement. The Agreement shall also provide
that the Participant's right to payment hereunder shall be subordinate to
claims which are now or hereafter expressly stated in the instruments
creating such claims to be senior in right of payment to the claims of the
class of claims created hereunder which arise out of any matter occurring
prior to the maturity date of any payment under the Payment Obligation.
(b) The form of the Agreement shall be determined by DWR. In the event DWR
elects to treat Payment Obligations as subordinated liabilities for
purposes of determining net capital under Rule 15c3-1 promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of
1934 and similar regulations promulgated under the Commodities Exchange
Act, the form of the Agreement shall be subject to approval of the
Examining Authority as defined by the Agreement. A copy of the Agreement is
annexed hereto as Appendix "A", and incorporated by reference as fully as
if set forth herein at length.
(c) Any amount credited to a Participant's Account shall not be segregated but
shall remain a part of the general corporate funds of DWR subject to the
claims of general, unsecured creditors of DWR to which claims the rights of
the Participant to receive payment of the amount credited to his or her
Account shall be subordinated pursuant to the terms of an Agreement.
(d) If a Participant does not execute and deliver an Agreement within the
forty-five (45) day period described in (a) above, such Participant shall
cease to have any rights whatsoever hereunder with respect to awards
deferred under Sections V(c)(3) and (d).
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<PAGE>
SECTION IX
ADMINISTRATION
(a) DWR shall have full power and authority to construe, interpret and
administer the Plan. Its decision shall be final, conclusive and binding
upon all persons, including Employees and officers and the beneficiaries
and personal representatives of such employees and officers.
(b) The expenses of administering the Plan shall be borne by DWR.
(c) The interest and property rights of any person in the Plan or in any
distribution to be made under the Plan shall not be subject to option nor
be assignable either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment
or other creditor's process and any act in violation hereof shall be void.
(d) Nothing herein shall be construed to require DWR or any affiliate to
segregate or set aside any funds or any property for the purpose of making
award payments hereunder.
(e) DWR's determinations under the Plan need not be uniform and may be made by
it selectively among persons who receive or are eligible to receive awards
under the Plan (whether or not such persons are similarly situated).
Without limiting the generality of the foregoing, DWR shall be entitled,
among other things, to make non-uniform and selective determinations and to
enter into non-uniform and selective Plan agreements as to (1) the persons
to receive awards under the Plan; (2) the terms and provisions of awards
under the Plan; and (3) the exercise by DWR of its discretion in respect of
the terms of the Plan.
SECTION X
MISCELLANEOUS
(a) The establishment of the Plan, the granting of benefits or any action by
DWR or any other person shall not be held or construed to confer upon any
person any right to employment by DWR nor, upon termination of employment,
to confer any right or interest other than as provided herein. No provision
of the Plan shall restrict the right of DWR to terminate any Employee's
employment with or without cause.
(b) If, in the opinion of DWR, any person becomes unable to handle properly any
amount payable to such person under the Plan, DWR may make any reasonable
arrangement for payment on such person's behalf as it deems appropriate.
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(c) Where appropriate, the use of masculine terms within the Plan shall mean
the feminine, the use of singular terms shall mean the plural, and visa
versa.
SECTION XI
EFFECTIVE DATE, AMENDMENT, SUSPENSION AND DISCONTINUANCE
(a) DWR reserves the right to amend the Plan, in whole or in part, or to
suspend or discontinue the Plan, in whole or in part, at any time. DWR
further reserves the right to change the criteria for awarding MIC or
Challenge Bonuses provided that it gives adequate notice of such change to
Branch Managers prior to the beginning of the Fiscal Year for which such
changes are effective.
(b) If any part of this Plan, including Appendix A hereto, fails to receive any
required approval of a regulatory or governing body or is otherwise
declared void and of no effect, the rest of the Plan shall continue in full
force.
(c) This Plan shall govern Payment Obligations of deferred Challenge Bonuses
accrued for the Fiscal Year beginning in 1984 and thereafter.
(d) The Plan shall continue in effect as amended from time to time until
suspended or discontinued by DWR.
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APPENDIX A
TO THE
DEAN WITTER REYNOLDS INC.
BRANCH MANAGER COMPENSATION PLAN
For purposes of this Appendix A, a Branch Manager who is designated in
writing by DWR as a participant under the Plan, shall be known as a
"Participant", Dean Witter Reynolds Inc. shall be known as "DWR", and DWR's
"Payment Obligation" shall be as defined below.
1. Payment Obligation
------------------
(a) Payment Obligations shall consist of any deferred payments of Challenge
Bonuses owed from time to time to a Participant by DWR pursuant to the Plan.
(b) Payment Obligations including the dates payments are due, shall be
determined in accordance with the provisions of the Plan as in effect on the
date hereof, or as hereafter amended. As provided in Sections 4 and 5 of this
Appendix A, no payment of any amount of a Payment Obligation may be made sooner
than five years following the year for which such Payment Obligation is accrued
by DWR. If any provision of the Plan as now in effect or as hereafter amended
shall be inconsistent with this Appendix A, this Appendix A shall govern.
2. Subordination of Right of Payment
---------------------------------
(a) Payment Obligations are and shall be subordinated in right of payment
and subject to prior payment or provision for payment in full of all claims of
other present and future creditors of DWR whose claims are not similarly
subordinated (claims hereunder shall rank pari passu with claims similarly
subordinated) and to claims which are now or hereafter expressly stated in the
instruments creating such claims to be senior in right of payment to the claims
or the class of claims hereunder which arise out of any matter occurring prior
to the maturity date of any payment under the Payment Obligation.
(b) In the event of the appointment of a receiver or trustee for the DWR or
in the event of its insolvency, liquidation pursuant to the Securities Investor
Protection Act of 1970 ("SIPA") or otherwise, its bankruptcy, assignment for the
benefit of creditors, reorganization whether or not pursuant to bankruptcy laws
or any other marshaling of the assets and liabilities of DWR, Participant shall
not be entitled to participate or share, ratably or otherwise, in the
distribution of the assets of DWR until all claims of all other present and
future creditors of DWR whose claims are senior to claims hereunder have been
fully satisfied or provision has been made therefor.
(c) Notwithstanding the maturing of the Payment Obligation under any
provision of the Plan or this Appendix A, the right of a Participant to receive
payment of any Payment Obligation is and shall remain subordinate as provided in
this Section 2.
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3. Suspension of Maturity During Net Capital Stringency
----------------------------------------------------
(a) DWR's Payment Obligations shall be suspended and not mature for any
period of time during which, after giving effect to such Payment Obligations
(together with the payment of any other subordinated obligation of DWR payable
at or prior to such payment of the Payment Obligations),
(i) if DWR is not operating pursuant to the alternative net capital
requirements provided for in paragraph (f) of Rule 15c3-1 (the "Rule")
under the Securities Exchange Act of 1934 (the "Act"), the aggregate
indebtedness of DWR would exceed 1,200 percentum of its net capital, as
those terms are defined in the Rule, as in effect at the time such payment
is to be made, or such percentum as may be made applicable to DWR from time
to time by the Examining Authority (as defined in paragraph 6(f) hereof)
plus an amount equal to the guaranty deposits with clearing organizations,
other than the Chicago Board of Trade ("CBOT") which were included in
current assets under Section 211 of the CBOT "Capital Requirements for
Member FCM's" to the extent such deposits cannot be used for margin
purposes, or
(ii) if DWR is operating pursuant to the alternative net capital
requirements provided for in paragraph (f) of the Rule, its net capital
would be less than five (5) percentum of aggregate debit items (or such
other percentum as may be made applicable to DWR by the Examining
Authority) computed in accordance with Exhibit A to Rule 15c3-3 under the
Act or any successor rule as in effect at the time such payment is to be
made, plus an amount equal to the guaranty deposits with clearing
organizations other than the CBOT, which were included in current assets
under Section 211 of the CBOT "Capital Requirements for Member FCM's", to
the extent such deposits cannot be used for margin purposes, or
(iii) if DWR is registered as a futures commission merchant under the
Commodity Exchange Act (the "CEA"), the net capital of DWR would be less
than the greatest of (A) six (6) percentum of the funds required to be
segregated pursuant to the CEA and Commodities Futures Trading Commission
("CFTC") Regulations and the foreign futures or foreign options secured
amount exclusive of the market value of commodity options purchased by
option customers of DWR on or subject to the rules of a contract market or
a foreign board of trade, provided the deduction for each option customer
shall be limited to the amount of customer funds in each option customer's
account(s) and foreign futures and foreign options secured amounts plus an
amount equal to the guaranty deposits with clearing organizations other
than the CBOT, which were included in current assets under Section 211 of
the CBOT "Capital Requirements for Member FCM's", to the extent such
deposits cannot be used for margin purposes, (B) such amount as may be made
applicable to DWR at the time of such payment by the Examining Authority
under Rule 15c3-1(b)(7), or (C) $2,000,000 (or such other amount as
required by the CEA and CFTC Regulations), or
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(iv) if DWR's net capital, as defined in the Rule or any successor
rule as in effect at the time such payment is to be made, would be less
than 120 percentum (or such other percentum as may be made applicable to
DWR at the time of such payment by the Examining Authority) of the minimum
dollar amount required by the Rule as in effect at such time, or such
dollar amount as may be made applicable to DWR by the Examining Authority,
plus an amount equal to the guaranty deposits with clearing organizations
other than the CBOT, which were included in current assets under Section
211 of the CBOT "Capital Requirements for Member FCM's", to the extent such
deposits cannot be used for margin purposes, or
(v) if DWR is registered as a futures commission merchant under the
CEA and if its net capital, as defined in the CEA or CFTC Regulations
thereunder as in effect at the time of such payment, would be less than 120
percentum (or such other percentum as may be made applicable to DWR by the
Examining Authority) of the minimum dollar amount required by the CEA or
the regulations thereunder as in effect at such time (or such other dollar
amount as may be made applicable to DWR by the Examining Authority at the
time of such payment), plus an amount equal to the guaranty deposits with
clearing organizations other than the CBOT, which were included in current
assets under Section 211 of the CBOT "Capital Requirements for Member
FCM's", to the extent such deposits cannot be used for margin purposes, or
(vi) if DWR is subject to the provisions of paragraph (a)(6)(v) or
(a)(7)(iv) or (c)(2)(x)(B)(1) of the Rule, its net capital would be less
than the amount required to satisfy the 1,000 percentum test (or such other
percentum test as may be made applicable to DWR by the Examining Authority
at the time of such payment) stated in such applicable paragraph, plus an
amount equal to the guaranty deposits with clearing organizations other
than the CBOT, which were included in current assets under Section 211 of
the CBOT "Capital Requirements for Member FCM's", to the extent such
deposits cannot be used for margin purposes.
The net capital required by (i)-(vi) above, is hereinafter referred to as
the "Applicable Minimum Capital". During any such suspension DWR shall, as
promptly as consistent with the protection of its customers, reduce its business
to a condition whereby payment due under Payment Obligations could be made
(together with the payment of any other subordinated obligation of DWR payable
at or prior to such payment) without DWR's net capital being below the
Applicable Minimum Capital, at which time DWR shall make payment due under
Payment Obligations on not less than five days prior written notice to the
Examining Authority.
(b) If immediately after any payment of a Payment Obligation DWR's net
capital is less than the Applicable Minimum Capital, whether or not the
Participant had any knowledge or notice of such fact at the time of any such
payment, a Participant must repay to DWR, its
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successors or assigns, any sum so paid, to be held by DWR pursuant to the
provisions of the Plan as if such payment had never been made; provided,
however, that any suit for the recovery of any such payment must be commenced
within two years of the date of such payment. DWR reserves the right to withhold
from the Participant's compensation the amount of any Payment Obligation which a
Participant fails to repay as required herein.
(c) If pursuant to the terms hereof payment of DWR's Payment Obligations
are suspended, DWR may be summarily suspended by the Examining Authority.
4. Permissive Prepayment
---------------------
With the prior written permission of the Examining Authority, DWR may, at
its option and to the extent permitted by the Plan, pay all or any portion of
the Payment Obligation to the Participant (such payment hereinafter referred to
as a "Prepayment") at any time subsequent to one year from the date subordinated
funds became subject to this Appendix A. No Prepayment shall be made, however,
if after giving effect thereto (and to all other payments of any other
subordinated obligation of DWR payable within six months of such Prepayment)
without reference to any projected profit or loss of DWR,
(i) in the event that DWR is not operating pursuant to the alternative
net capital requirement provided for in paragraph (f) of the Rule, the
aggregate indebtedness of DWR would exceed 1,000 percentum of its net
capital as those terms are defined in the Rule or any successor rule as in
effect at the time such Prepayment is to be made (or such other percentum
as may be made applicable at such time to DWR by the Examining Authority),
plus an amount equal to the guaranty deposits with clearing organizations
other than the CBOT, which were included in current assets under Section
211 of the CBOT "Capital Requirements for Member FCM's", to the extent such
deposits cannot be used for margin purposes, or
(ii) in the event that DWR is operating pursuant to such alternative
net capital requirement, the net capital of DWR would be less than 5
percentum (or such other percentum as may be made applicable to DWR at the
time of such Prepayment by the Examining Authority) of aggregate debit
items computed in accordance with Exhibit A to Rule 15c3-3 under the Act or
any successor rule as in effect at such time, plus an amount equal to the
guaranty deposits with clearing organizations other than the CBOT, which
were included in current assets under Section 211 of the CBOT "Capital
Requirements for Member FCM's", to the extent such deposits cannot be used
for margin purposes, or
(iii) in the event that DWR is registered as a futures commission
merchant under the CEA, the net capital of DWR (as defined in the CEA or
CFTC Regulations as in effect at the time of such Prepayment) would be less
than the greatest of (A) 7 percentum (or such other percentum as may be
made applicable to DWR at the time of such Prepayment by the Examining
Authority) of the funds required to be segregated pursuant to the CEA and
CFTC Regulations and the
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foreign futures or foreign options secured amount, exclusive of the market
value of commodity options purchased by option customers on or subject to
the rules of a contract market or a foreign board of trade (provided the
deduction for each option customer shall be limited to the amount of
customer funds in each option customer's account(s) and foreign futures and
foreign options secured amounts), plus an amount equal to the guaranty
deposits with clearing organizations other than the CBOT, which were
included in current assets under Section 211 of the CBOT "Capital
Requirements for Member FCM's", to the extent such deposits cannot be used
for margin purposes, (B) such amount as may be made applicable to DWR by an
Examining Authority under Rule 15c3-1(b)(7) or (C) $2,000,000 (or such
other amount as required by the CEA or CFTC Regulations), or
(iv) DWR's net capital as defined in the Rule or any successor rule as
in effect at the time of such Prepayment, would be less than 120 percentum
(or such other percentum as may be made applicable to DWR at the time of
such Prepayment by the Examining Authority) of the minimum dollar amount
required by the rule as in effect at such time (or such other dollar amount
as may be made applicable to DWR at the time of such Prepayment by the
Examining Authority), plus an amount equal to the guaranty deposits with
clearing organizations other than the CBOT, which were included in current
assets under Section 211 of the CBOT "Capital Requirements for Member
FCM's", to the extent such deposits cannot be used for margin purposes, or
(v) in the event that DWR is registered as a futures commission
merchant under the CEA, its net capital, as defined in the CEA or the
regulations thereunder, as in effect at the time of such Prepayment would
be less than 120 percentum (or such other percentum as may be made
applicable to DWR at the time of such Prepayment by the Examining
Authority) of the minimum dollar amount required by the CEA or the
regulations thereunder as in effect at such time or such other dollar
amount as may be made applicable to DWR at the time of such Prepayment by
the Examining Authority, plus an amount equal to the guaranty deposits with
clearing organizations other than the CBOT, which were included in current
assets under Section 211 of the CBOT "Capital Requirements for Member
FCM's", to the extent such deposits cannot be used for margin purposes, or
(vi) in the event that DWR is subject to the provision of paragraph
(a)(6)(v) or (a)(7)(iv) or (c)(2)(x)(B)(1) of the Rule, the net capital of
DWR would be less than the amount required to satisfy the 1,000 percentum
test (or such other percentum test as may be made applicable to DWR at the
time of such Prepayment by the Examining Authority) stated in such
applicable paragraph, plus an amount equal to the guaranty deposits with
clearing organizations other than the CBOT which were included in current
assets under Section 211 of the CBOT "Capital Requirements for Member
FCM's," to the extent such deposits cannot be used for margin purposes.
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If Prepayment is made of all or any part of the Payment Obligation before
the date payment is due and if DWR's net capital is less than the amount
required to permit such Prepayment pursuant to the foregoing provisions of this
paragraph, the Participant agrees irrevocable (whether or not such Participant
had any knowledge or notice of such fact at the time of such Prepayment) to
repay DWR, its successors or assigns, the sum so paid to be held by DWR pursuant
to the provisions hereof as if such Prepayment had never been made; provided,
however, that any suit for the recovery of any such Prepayment must be commenced
within two years of the date of such Prepayment. DWR reserves the right to
withhold from the Participant's compensation the amount of any Payment
Obligation which a Participant fails to repay as required herein.
5. Special Prepayment
------------------
DWR, at its option and as permitted by the Plan, but not at the option of
the Participant, may make a payment of all or any portion of the Payment
Obligation hereunder sooner than one year from the date on which such amount
became subject to this agreement (a "Special Prepayment"), if the written
consent of the appropriate regulatory authority is first obtained. If DWR shall
be a futures commission merchant, as that term is defined in the CEA and CFTC
Regulations, no such prepayment shall be made if:
(i) after giving effect thereto (and to all payments of payment
obligations under any other Subordination Agreements then outstanding, the
maturities or accelerated maturities of which are scheduled to fall due
within six months after the date such Special Prepayment is to occur
pursuant to this provision or on or prior to the date on which the Payment
Obligation with respect to such Special Prepayment is scheduled to mature
disregarding this provision whichever date is earlier) without reference to
any projected profit or loss of DWR the net capital of DWR is less than the
greatest of (A) 10 percentum of the funds required to be segregated
pursuant to the CEA and CFTC Regulations and the foreign futures or foreign
options secured amount, exclusive of the market value of commodity options
purchased by option customers of DWR on or subject to the rules of a
contract market or a foreign board of trade (provided the deduction for
each option customer shall be limited to the amount of customer funds in
such option customer's account(s) and foreign futures and foreign options
secured amount), plus an amount equal to the guaranty deposits with
clearing organizations, other than the CBOT, which were included in current
assets under Section 211, (B) if DWR is a securities broker or dealer, the
amount of net capital specified in Rule 15c3-1d(c)(5)(ii) of the
regulations of the Securities and Exchange Commission (17 C.F.R. 240.15c3-
1d(c)5(ii), or (C) $2,000,000 (or such other amount as required by the CEA
or CFTC Regulations), or
(ii) Pretax losses during the latest three month period were greater than
15% of current excess adjusted net capital.
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6. Maturity Upon Certain Events
----------------------------
Notwithstanding the provisions of Section 3 hereof, the Payment Obligation
shall (to the extent not already matured) forthwith mature, together with all
other Subordination Agreements then outstanding, in the event of any
receivership, insolvency, liquidation pursuant to SIPA or otherwise, bankruptcy,
assignment for the benefit of creditors, reorganization whether or not pursuant
to bankruptcy laws, or any other marshaling of the assets and liabilities of
DWR.
7. Miscellaneous Provisions
------------------------
(a) Participants may not rely upon any commodity exchange or securities
exchange to provide any information concerning or relating to DWR. Such
exchanges have no responsibility to disclose to the Participant any
information concerning or relating to DWR which they may have now or at any
future time. The Participant agrees that the New York Stock Exchange (the
"NYSE"), its Special Trust Fund or any director, officer, trustee or employee
of the NYSE or said Trust Fund or any other exchange or director, officer,
trustee or employee thereof shall not be liable to the Participant with
respect to the Plan or any distribution pursuant thereto.
(b) The funds represented by the Payment Obligations shall be dealt with
in all respects as capital of DWR, shall be subject to the risks of the
business and may be deposited in an account or accounts in DWR's name in any
bank or trust company.
(c) Payment Obligations under the Plan may not be transferred, sold,
assigned, pledged or otherwise encumbered or disposed of and no lien, charge
or other encumbrance may be created or permitted to be created hereon, without
the prior written consent of the Examining Authority.
(d) If DWR is a futures commission merchant as that term is defined in
the CEA, DWR agrees, consistent with the requirements of Section 1.17(h) of
the CFTC Regulations that whenever prior written notice by DWR to the
Examining Authority is required pursuant to the provisions of this agreement,
the same prior written notice shall be given by DWR to (1) the CFTC at its
principal office in Washington, D.C., Attention Chief Accountant of Division
of Trading and Markets, and/or (2) the commodity exchanges of which the
Corporation is a member and which are then designated by the CFTC as DWR's
designated self-regulatory organizations as defined in Section 1.3(ff) of the
CFTC Regulations (the "DSROs").
(e) "Subordination Agreement" as used herein shall include any
subordinated loan agreement and any secured demand note agreement constituting
a satisfactory subordination agreement under the Rule under which DWR is the
borrower or the pledgee of collateral, and reference herein to the payment of
a subordinated obligation of DWR shall be deemed to include the return to the
maker-pledgor of any secured demand note and the collateral therefor held by
DWR.
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(f) The term "Examining Authority" shall refer to the regulatory body,
specified in paragraph (c)(12) of the Rule, responsible for inspecting or
examining DWR for compliance with financial responsibility requirements. If
DWR is and continues to be a member of the NYSE, the references herein to the
Examining Authority shall be deemed to refer to the NYSE. If DWR is and
continues to be a futures commission merchant as that term is defined in the
CEA and regulations thereunder, references to the Examining Authority shall
also be deemed to refer to the CFTC and DWR's DSROs.
(g) The provisions of this Appendix A shall be binding upon and inure to
the benefit of DWR, its successors and assigns and the Participant and the
Participant's heirs, executors and administrators.
(h) Any controversy arising out of or relating to this Plan shall be
submitted to and settled by arbitration pursuant to the Constitution and Rules
of the NYSE, DWR and Participant shall be conclusively bound by such
arbitration.
(i) DWR shall not modify, amend or cancel this Appendix or any provision
of the Plan governing the Payment Obligations that are the subject of the
Appendix without the prior approval of the Examining Authority.
(j) This agreement shall be deemed to have been made under and shall be
governed by the laws of the State of New York.
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EXHIBIT 10.2
DEAN WITTER REYNOLDS INC.
FINANCIAL ADVISOR PRODUCTIVITY COMPENSATION PLAN
[Amended as of September 25, 1998]
SECTION I
INTRODUCTION
(a) The name of this plan is the Dean Witter Reynolds Inc. Financial Advisor
Productivity Compensation Plan (the "Plan").
(b) The Plan was initially adopted to be effective for Awards granted for
Fiscal Years commencing with 1984; was amended and restated December 23,
1985 retroactive to the 1984 Fiscal Year; was further amended effective
December 24, 1990 and July 15, 1991; was restated for Fiscal Years
beginning with 1992; was amended and restated effective October 1, 1993;
was amended effective January 1, 1994; amended and restated effective
January 1, 1994; was amended and restated effective October 21, 1994; was
amended June 18, 1997; and was amended effective September 25, 1998.
SECTION II
PURPOSE OF PLAN
(a) The purposes of the Plan are to retain and recruit key Financial Advisors
to Dean Witter Reynolds Inc. by enabling them to accumulate significant net
worth.
SECTION III
DEFINITIONS
(a) "Financial Advisor" means an Employee performing the functions of a retail
Financial Advisor, as defined by DWR.
(b) "Account" means a bookkeeping account maintained in a confidential ledger
by DWR pursuant to Section VI of the Plan for each Participant under the
Plan.
(c) "Disability" means termination of employment from DWR due to a medically
determinable physical or mental incapacity which is reasonably expected to
be of long-term duration or result in death. The determination of DWR shall
be conclusive on all parties as to whether a Participant is Disabled.
(d) "MWD" means Morgan Stanley Dean Witter & Co., a Delaware corporation.
(e) "DWR" means Dean Witter Reynolds Inc., a Delaware corporation.
<PAGE>
(f) "Employee" means an employee of DWR.
(g) "Fair Market Value" means:
(1) for purposes of determining the number of shares of Stock to be allocated
pursuant to Section VII(a) to an award made pursuant to Section V, the fair
market value thereof as of the relevant date of determination, as determined in
accordance with a valuation methodology approved by the Board of Directors of
MWD or a committee thereof designated by such Board of Directors (such Board of
Directors or committee is hereinafter referred to as the "MWD Committee"); and
(2) for purposes of crediting a Participant pursuant to Section VII(c) with
shares of Stock based upon cash dividends paid or deemed to be paid on shares of
Stock credited to the Participant as of the record date for such dividends, 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 MWD Committee; and
(3) for purposes of distributing cash in lieu of a fractional share pursuant to
Section VII(a), the High/Low Price on the date of the distribution, or, if Stock
is not traded on public markets on the date of the distribution, 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 MWD Committee; and
(4) for such other purposes as may arise in connection with the Plan, the fair
market value of a share of Stock as of the relevant date of determination, as
determined in accordance with a valuation methodology approved by the MWD
Committee.
(h) "Fiscal Year" means the fiscal year of DWR.
(i) "Gross Revenue" means the total gross revenue generated in a Fiscal Year by
a Financial Advisor for any purchase or sale of securities and other
investments to a DWR client, based on criteria established and reported by
DWR in accordance with its standard accounting practices.
(j) "Participant" means an Employee to whom an award has been made pursuant to
Section V.
(k) "Retirement" means termination of employment from DWR: (i) after attaining
age 65; (ii) as defined in the Dean Witter Reynolds Inc. Pension Plan
whether or not the individual is a participant therein; or (iii) as
otherwise specified by written agreement between DWR and a Financial
Advisor.
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(l) "Stock" means the common stock of MWD, par value $.01 per share.
(m) "Valuation Date" means the last day of each Fiscal Year.
SECTION IV
ELIGIBILITY
(a) Financial Advisors who produce Gross Revenue within a Fiscal Year which is
equal to or exceeds criteria established from time to time by the
Compensation Committee of the Board of Directors of DWR, or who equal or
exceed any other performance or production criteria established from time
to time by the Compensation Committee of the Board of Directors of DWR,
shall be eligible to participate in the Plan.
(b) Any Financial Advisor who is eligible to participate in the Plan pursuant
to Section IV(a) shall be eligible to participate in the Plan only with
respect to the Fiscal Year for which he or she meets the criteria specified
pursuant to Section V of the Plan.
(c) Individuals selected to receive awards pursuant to Section V(d) of the Plan
shall be eligible to participate in the Plan in connection with, and
subject to the terms of, their awards.
SECTION V
AWARDS
(a) At the beginning of each Fiscal Year DWR shall establish the Gross Revenue
criteria which will entitle a Financial Advisor to receive an award under
the Plan for that Fiscal Year. Awards shall be expressed as a percentage of
each Financial Advisor's Gross Revenue production for the Fiscal Year for
which such award is being made. A Financial Advisor who achieves the Gross
Revenue criteria for a Fiscal Year shall receive an award for that Fiscal
Year based on such criteria. Awards shall be payable in accordance with
Section VII.
(b) At the beginning of each Fiscal Year, the Compensation Committee of the
Board of Directors of DWR may establish any other criteria which will
entitle a Financial Advisor to receive an award under the Plan for that
Fiscal Year. A Financial Advisor who achieves such other criteria shall
receive an award for that Fiscal Year based on such criteria.
(c) Any Participant who terminates as an Employee during the Fiscal Year, for
whatever reason, shall not be eligible for any award for such Fiscal Year.
(d) The MWD Committee may, in its discretion from time to time, make to an
individual, in consideration of such individual becoming (and remaining for
such
3
<PAGE>
period of time, if any, as the MWD Committee may determine) a Financial
Advisor and such other consideration, if any, as the MWD Committee
determines, an award of Stock on such terms and conditions as the MWD
Committee may determine, which terms and conditions need not be uniform
with the terms and conditions of Section VI, VII or VIII hereof, but which
shall be set forth in a written award certificate or award agreement
delivered or made available by DWR to the individual as soon as practicable
following the date of the award. Awards of Stock under this Section V(d)
shall be satisfied only out of shares held in treasury and not out of
authorized but unissued shares.
SECTION VI
ACCOUNTS-ESCROW AGENT
(a) A separate Account shall be maintained by DWR in a confidential ledger for
each Participant awarded cash by DWR for each Fiscal Year. Each such
Account shall be credited with the amount of cash awards not paid to the
Participant pursuant to Section VII of the Plan and increased from time to
time by any additional cash awards not paid to each Participant. Each
Account shall be decreased by any cash amounts paid to or on behalf of a
Participant or forfeited pursuant to Section VII of the Plan.
(b) Within a reasonable time after the end of each Fiscal Year, the Controller
of DWR shall give each Participant a written report of the status of such
Participant's Account under the Plan, including the value thereof. For each
Fiscal Year, Accounts shall be valued as of the Valuation Date.
(c) As a condition to participation in this Plan, each eligible Employee shall
be required to hold restricted Stock awarded hereunder in an escrow account
and such Employee's decision to participate in the Plan shall constitute
the appointment of Morgan Stanley Dean Witter Trust FSB, or such other
custodian as DWR shall designate (the "Custodian"), as the custodial agent
for the purpose of holding such Stock. Such escrow account will be governed
by and subject to the terms and conditions of a written agreement with the
Custodian.
SECTION VII
AWARD PAYMENTS
(a) Awards under Section V(a) for the 1994 Fiscal Year will be paid, at the
Participant's election prior to the date the award is made, in the form of
(i) cash, payable four years and six months following the close of the
Fiscal Year for which the award is made, or (ii) shares of Stock valued at
100% of the Fair Market Value of Stock as of the date the award is made,
payable as soon as practicable following
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<PAGE>
the close of the Fiscal Year for which the award is made. Awards under
Section V(a) for Fiscal Years commencing with the 1995 Fiscal Year, will be
paid entirely in Stock valued at 100% of the Fair Market Value of Stock as
of the date the award is made, payable as soon as practicable following the
close of the Fiscal Year for which the award is made. Awards under Section
V(b) may be paid in cash or in Stock as determined by the Compensation
Committee of the Board of Directors of DWR. The number of shares of Stock
payable with respect to an award shall be calculated by reference to the
amount of the award determined under Section V, discounted by an
appropriate interest rate factor as DWR shall establish from time to time
so that the value of the award payable under this Section VII is equal to
the present value of the amount determined pursuant to Section V and
payable four years and six months following the close of the Fiscal Year
for which the award is made. Payments to Participants of awards made in the
form of Stock shall be made in the form of a certificate for whole shares
and cash in lieu of any fractional share. A Participant on a leave of
absence approved by DWR or who is absent due to disability on the date an
award payment is made shall not be entitled to payment of such award until
the Participant returns to DWR following completion of such leave of
absence or disability.
(b) Stock awards shall vest and cash awards shall be paid, four years and six
months following the close of the Fiscal Year with respect to which
awarded; provided that the Participant's status as an Employee has not been
terminated prior to such date. Upon the Participant's termination of
employment with DWR, all unvested Stock awards and unpaid cash awards shall
be forfeited. Notwithstanding the foregoing, if a Participant terminated
employment with DWR due to Disability, Retirement or death, all of the
Participant's awards shall become vested and/or payable in accordance with
this Section VII(b) without regard to the Participant's termination of
employment.
(c) A Participant may vote and receive dividends on any Stock awarded to such
Participant under Section VII(a) or credited under this Section VII(c);
provided that all dividends on Stock (other than dividends payable in
Stock) shall be reinvested in shares of Stock at 100% of the Fair Market
Value of Stock which shares shall be credited to the Participant and held
by the Custodian. All shares of Stock received as a distribution with
respect to Stock or purchased with reinvested dividends shall be subject to
the same restrictions as the Stock on which the distribution or dividend is
awarded.
(d) In accordance with the provisions of Appendix A to the Plan, if DWR must
recover a Payment Obligation previously paid to a Participant pursuant to
this Section VII, a Participant shall be required to repay the amount of
cash or the number of shares of Stock received (or an amount in cash equal
to the fair market value of such Stock as of the date of such repayment).
If any such amount is not repaid, DWR reserves the right to withhold from a
Participant's compensation the amount of any Payment Obligation which a
Participant fails to repay as required herein.
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<PAGE>
(e) All federal, state, local and other withholding tax requirements, if any,
relating to the Plan shall be met pursuant to procedures determined by DWR
which may include:
1. Withholding from any cash amounts payable to a Participant under the Plan
(including salary, bonus or any other amounts payable from DWR or any
affiliate of DWR).
2. Requiring Participants to remit to DWR an amount in cash prior to the
delivery of any certificate for Stock or other payments under the Plan.
3. At the election of the Participant, tendering to DWR a number of shares of
Stock.
4. At the election of the Participant, withholding by DWR of shares of Stock.
In the event that the Custodian is directed by DWR to withhold shares
pursuant to this Section VII(e)(4), the Custodian shall distribute such
shares from the custodial account to DWR (or, at the direction of DWR, sell
such shares on public markets and distribute the cash proceeds to DWR) and
DWR shall make appropriate withholding tax payments.
5. If a Participant is subject to Section 16(b) of the Securities Exchange Act
of 1934, DWR may prescribe such requirements or limitations on the
Participant's ability to elect the withholding options contained in
Sections VII(e)(3) and (4) of the Plan as may be required by Securities and
Exchange Commission Rule 16b-3 or by any comparable or successor exemption.
(f) Notwithstanding the foregoing provisions of this Section VII, DWR reserves
the right to accelerate the payment of any cash and/or the vesting of any
Stock awarded pursuant to Sections V(a) and V(b) of the Plan, subject to
the provisions of Appendix A hereof. The MWD Committee reserves the right
to accelerate the vesting of any Stock awarded pursuant to Section V(d) of
the Plan; provided that if the award of such Stock was made subject to
Appendix A hereof, then vesting of such Stock shall be subject to Appendix
A hereof.
(g) The commencement of Related Employment by a Participant shall not be
treated for purposes of the Plan and any Award hereunder as a termination
of employment. The Retirement, Disability or death of an individual during
a period of Related Employment shall be treated for purposes of the Plan
and any Award hereunder as if such event had occurred while the individual
was an Employee. For purposes of this Section VII(g), "Related Employment"
shall mean the employment of a Participant by an employer other than DWR,
provided that: (1) such employment is undertaken by the individual at the
request or with the consent of DWR; (2) immediately prior to undertaking
such employment, the individual was an Employee or was engaged in Related
Employment as defined herein; and (3) such employment is recognized by DWR,
in its discretion, as Related Employment.
6
<PAGE>
SECTION VIII
SUBORDINATION OF AWARDS
(a) All Financial Advisors as a condition of participation, shall execute and
deliver a written agreement (the "Agreement") within forty-five (45) days
after notice of eligibility to Participate, or the announcement after
December 24, 1990 of an award made under Section V(b), that such Financial
Advisor's right to payment hereunder (the "Payment Obligation"), is
subordinate to the prior payment or provision for payment in full of all
claims of all present and future creditors of DWR arising out of any matter
occurring prior to the date on which the related Payment Obligation matures
consistent with all applicable statutes, regulations and rules, except for
claims which are the subject of subordination agreements which rank on the
same priority (which claims shall be paid pari passu) or are junior to the
Payment Obligation under the Agreement. The Agreement shall also provide
that the Participant's right to payment hereunder shall be subordinate to
claims which are now or hereafter expressly stated in the instruments
creating such claims to be senior in right of payment to the claims of the
class of claims created hereunder which arise out of any matter occurring
prior to the maturity date of any payment under the Payment Obligation.
(b) The form of the Agreement shall be determined by DWR. In the event DWR
elects to treat Payment Obligations as subordinated liabilities for
purposes of determining net capital under Rule 15c3-1 promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of
1934 and similar regulations promulgated under the Commodities Exchange
Act, the form of the Agreement shall be subject to approval of the
Examining Authority as defined by the Agreement. A copy of the Agreement is
annexed hereto as Appendix "A", and incorporated by reference as fully as
if set forth herein at length.
(c) Any amount credited to a Participant's Account shall not be segregated but
shall remain a part of the general corporate funds of DWR subject to the
claims of general, unsecured creditors of DWR to which claims the rights of
the Participant to receive payment of the amount credited to the
Participant's Account shall be subordinated pursuant to the terms of an
Agreement.
(d) If a Participant does not execute and deliver an Agreement within the
forty-five (45) day period described in (a) above, such Participant shall
cease to have any rights whatsoever hereunder.
SECTION IX
ADMINISTRATION
(a) DWR shall have full power and authority to construe, interpret and
administer the
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Plan. Its decisions shall be final, conclusive and binding upon all
persons, including employees and officers and the beneficiaries and
personal representatives of such employees and officers.
(b) The Plan shall be effective for all awards accrued for the Fiscal Year
beginning in 1984 and each Fiscal Year thereafter, as amended from time to
time until suspended or discontinued by DWR.
(c) The expenses of administering the Plan shall be borne by DWR.
(d) The interest and property rights of any person in the Plan or in any
distribution to be made under the Plan shall not be subject to option nor
be assignable, either by voluntary or involuntary assignment or by
operation of law, including (without limitation) bankruptcy, garnishment,
attachment or other creditor's process and any act in violation hereof
shall be void.
(e) Nothing herein shall be construed to require DWR or any affiliate to
segregate or set aside any funds or any property for the purpose of making
award payments hereunder.
(f) DWR's determinations under the Plan need not be uniform and may be made by
it selectively among persons who receive, or are eligible to receive,
Awards under the Plan (whether or not such persons are similarly situated).
Without limiting the generality of the foregoing, DWR shall be entitled,
among other things, to make non-uniform and selective determinations and to
enter into non-uniform and selective Award agreements, as to (1) the person
to receive Awards under the Plan, (2) the terms and provisions of Awards
under the Plan and (3) the exercise by DWR of its discretion in respect of
the terms of the Plan.
SECTION X
MISCELLANEOUS
(a) The establishment of the Plan, the granting of benefits or any action by
DWR or any other person shall not be held or construed to confer upon any
person any right to be continued as an employee of DWR nor, upon
termination of employment, to confer any right or interest other than as
provided herein. No provision of the Plan shall restrict the right of DWR
to terminate any employee's employment with or without cause.
(b) If, in the opinion of DWR, any person becomes unable to handle properly any
amount payable to such person under the Plan, DWR may make any reasonable
arrangement for payment on such person's behalf as it deems appropriate.
(c) Where appropriate, the use of masculine terms within the Plan shall mean
the
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feminine, the use of singular terms shall mean the plural, and visa versa.
SECTION XI
AMENDMENT, SUSPENSION AND DISCONTINUANCE
(a) DWR shall have the authority to amend the Plan, in whole or in part, or to
suspend or discontinue the Plan, in whole or in part, at any time.
(b) The Plan shall continue in effect as amended from time to time, until
suspended or discontinued by DWR.
(c) Notwithstanding any amendment, suspension or discontinuance, award payments
previously announced shall be paid pursuant to the appropriate provisions
of the Plan. Notwithstanding the foregoing, in the event of the
discontinuance or termination of the Plan, DWR reserves the right to
accelerate payment of a Participant's entire Account balance to any date
prior to the vesting periods applicable to awards in such Account, subject
to provisions of Appendix A to the Plan.
(d) If any part of this Plan, including Appendix A hereto, fails to receive any
required approval of the appropriate regulatory and governing bodies or is
otherwise declared void and of no effect, the rest of the Plan shall
continue in full force.
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APPENDIX A
DEAN WITTER REYNOLDS INC.
FINANCIAL ADVISOR PRODUCTIVITY COMPENSATION PLAN
For purposes of this Appendix A, a Financial Advisor who is designated in
writing by DWR as a participant under the Plan shall be known as a
"Participant", Dean Witter Reynolds Inc. shall be known as "DWR", and DWR's
"Payment Obligation" shall be as defined below.
1. Payment Obligation
------------------
(a) Payment Obligations shall consist of any deferred payments of deferred
bonuses owed from time to time to a Participant by DWR pursuant to the Plan.
(b) Payment Obligations, including the dates payments are due, shall be
determined in accordance with the provisions of the Plan as in effect on the
date hereof, or as hereafter amended. As provided in Sections 4 and 5 of this
Appendix A, payment of any amount of a Payment Obligation may be made sooner
than five years following the year for which such Payment Obligation is accrued
by DWR. If any provision of the Plan as now in effect or as hereafter amended
shall be inconsistent with the Appendix A, this Appendix A shall govern.
2. Subordination of Right of Payment
---------------------------------
(a) Payment Obligations are and shall be subordinated in right of payment
and subject to prior payment or provision for payment in full of all claims of
other present and future creditors of DWR whose claims are not similarly
subordinated (claims hereunder shall rank pari passu with claims similarly
subordinated) and to claims which are now or hereafter expressly stated in the
instruments creating such claims to be senior in right of payment to the claims
or the class of claims hereunder which arise out of any matter occurring prior
to the maturity date of any payment under the Payment Obligation.
(b) In the event of the appointment of a receiver or trustee for DWR or in
the event of its insolvency, liquidation pursuant to the Securities Investor
Protection Act of 1970 ("SIPA"), or otherwise, its bankruptcy, assignment for
the benefit of creditors, reorganization, whether or not pursuant to bankruptcy
laws, or any other marshaling of the assets and liabilities of DWR, Participants
shall not be entitled to participate or share, ratably or otherwise, in the
distribution of the assets of DWR until all claims of all other present and
future creditors of DWR whose claims are senior to claims hereunder have been
fully satisfied or provision has been made therefor.
(c) Notwithstanding the maturing of the Payment Obligation under any
provision of the Plan or this Appendix A, the right of a Participant to receive
payment of any Payment Obligation is and shall remain subordinate as provided in
this Section 2.
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3. Suspension of Maturity During Net Capital Stringency
----------------------------------------------------
(a) DWR's Payment Obligations shall be suspended and not mature for any
period of time during which, after giving effect to such Payment Obligations
(together with the payment of any other subordinated obligation of DWR payable
at or prior to such payment of the Payment Obligations),
(i) if DWR is not operating pursuant to the alternative net capital
requirements provided for in paragraph (f) of Rule 15c3-1 (the "Rule") under the
Securities Exchange Act of 1934 (the "Act"), the aggregate indebtedness of DWR
would exceed 1,200 percentum of its net capital, as those terms are defined in
the Rule, as in effect at the time such payment is to be made, or such percentum
as may be made applicable to DWR from time to time by the Examining Authority
(as defined in paragraph 6(f) hereof) plus an amount equal to the guaranty
deposits with clearing organizations other than the Chicago Board of Trade
("CBOT"), which were included in current assets under Section 211 of the CBOT
"Capital Requirements for Member FCM's," to the extent such deposits cannot be
used for margin purposes, or
(ii) if DWR is operating pursuant to the alternative net capital
requirements provided for in paragraph (f) of the Rule, its net capital would be
less than five (5) percentum of aggregate debit items (or such other percentum
as may be made applicable to DWR by the Examining Authority) computed in
accordance with Exhibit A to Rule 15c3-3 under the Act or any successor rule as
in effect at the time such payment is to be made, plus an amount equal to the
guaranty deposits with clearing organizations other than the CBOT, which were
included in current assets under Section 211 of the CBOT "Capital Requirements
for Member FCM's", to the extent such deposits cannot be used for margin
purposes, or
(iii) if DWR is registered as a futures commission merchant under the
Commodity Exchange Act (the "CEA"), the net capital of DWR would be less than
the greatest of (A) six (6) percentum of the funds required to be segregated
pursuant to the CEA and Commodities Futures Trading Commission ("CFTC")
Regulations and the foreign futures or foreign options secured amount exclusive
of the market value of commodity options purchased by option customers of DWR on
or subject to the rules of a contract market or a foreign board of trade,
provided the deduction for each option customer shall be limited to the amount
of customer funds in each option customer's account(s), and foreign futures and
foreign options secured amounts plus an amount equal to the guaranty deposits
with clearing organizations other than the CBOT, which were included in current
assets under Section 211 of the CBOT "Capital Requirements for Member FCM's", to
the extent such deposits cannot be used for margin purposes, (B) such amount as
may be made applicable to DWR at the time of such payment by an Examining
Authority under Rule 15c3-1(b)(7), or (C) $2,000,000 (or such other amount as
required by the CEA and CFTC Regulations), or
(iv) if DWR's net capital, as defined in the Rule or any successor
rule as in effect at the time such payment is to be made would be less than 120
percentum (or such other percentum as may be made applicable to DWR at the time
of such payment by the Examining Authority) of the minimum dollar amount
required by the Rule as in effect at such time or such dollar amount as may be
made applicable to DWR by the Examining Authority, plus an amount
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equal to the guaranty deposits with clearing organizations other than the CBOT,
which were included in current assets under Section 211 of the CBOT "Capital
Requirements for Member FCM's", to the extent such deposits cannot be used for
margin purposes, or
(v) if DWR is registered as a futures commission merchant under the
CEA and if its net capital, as defined in the CEA or CFTC Regulations as in
effect at the time of such payment, would be less than 120 percentum (or such
other percentum as may be made applicable to DWR by the Examining Authority) of
the minimum dollar amount required by the CEA or the regulations thereunder as
in effect at such time (or such other dollar amount as may be made applicable to
DWR by the Examining Authority at the time of such payment), plus an amount
equal to the guaranty deposits with clearing organizations other than the CBOT,
which were included in current assets under Section 211 of the CBOT "Capital
Requirements for Member FCM's", to the extent such deposits cannot be used for
margin purposes, or
(vi) if DWR is subject to the provisions of paragraph (a)(6)(v) or
(a)(7)(iv) or (c)(2)(x)(B)(1) of the Rule, its net capital would be less than
the amount required to satisfy the 1,000 percentum test (or such other percentum
test as may be made applicable to DWR by the Examining Authority at the time of
such payment) stated in such applicable paragraph, plus an amount equal to the
guaranty deposits with clearing organizations other than the CBOT, which were
included in current assets under Section 211 of the CBOT "Capital Requirements
for Member FCM's", to the extent such deposits cannot be used for margin
purposes.
The net capital required by (i)-(vi) above is hereinafter referred to as
the "Applicable Minimum Capital". During any such suspension, DWR shall, as
promptly as consistent with the protection of its customers, reduce its business
to a condition whereby payment due under Payment Obligations could be made
(together with the payment of any other subordinated obligation of DWR payable
at or prior to such payment) without DWR's net capital being below the
Applicable Minimum Capital, at which time DWR shall make payment due under
Payment Obligations on not less than five (5) days prior written notice to the
Examining Authority.
(b) If immediately after any payment of a Payment Obligation DWR's net
capital is less than the Applicable Minimum Capital, whether or not the
Participant had any knowledge or notice of such fact at the time of any such
payment, a Participant must repay to DWR, its successors or assigns, any sum so
paid, to be held by DWR pursuant to the provisions of the Plan as if such
payment had never been made; provided, however, that any suit for the recovery
of any such payment must be commenced within two years of the date of such
payment. DWR reserves the right to withhold from the Participant's compensation
the amount of any Payment Obligation which a Participant fails to repay as
required herein.
(c) If, pursuant to the terms hereof, payment of DWR's Payment Obligations
are suspended, DWR may be summarily suspended by the Examining Authority.
4. Permissive Prepayment
---------------------
With the prior written permission of the Examining Authority, DWR may, at
its option and to the extent permitted by the Plan, pay all or any portion of
the Payment Obligation to the
12
<PAGE>
Participant (such payment hereinafter referred to as a "Prepayment") at any time
subsequent to one year from the date subordinated funds became subject to this
Appendix A. No Prepayment shall be made, however, if after giving effect thereto
(and to all other payments of any other subordinated obligation of DWR payable
within six months of such Prepayment) without reference to any projected profit
or loss of DWR,
(i) in the event that DWR is not operating pursuant to the alternative
net capital requirement provided for in paragraph (f) of the Rule, the aggregate
indebtedness of DWR would exceed 1,000 percentum of its net capital as those
terms are defined in the Rule or any successor rule as in effect at the time
such Prepayment is to be made (or such other percentum as may be made applicable
at such time to DWR by the Examining Authority), plus an amount equal to the
guaranty deposits with clearing organizations other than the CBOT, which were
included in current assets under Section 211 of the CBOT "Capital Requirements
for Member FCM's", to the extent such deposits cannot be used for margin
purposes, or
(ii) in the event that DWR is operating pursuant to such alternative
net capital requirement, the net capital of DWR would be less than 5 percentum
(or such other percentum as may be made applicable to DWR at the time of such
Prepayment by the Examining Authority) of aggregate debit items computed in
accordance with Exhibit A to Rule 15c3-3 under the Act or any successor rule as
in effect at such time, plus an amount equal to the guaranty deposits with
clearing organizations other than the CBOT, which were included in current
assets under Section 211 of the CBOT "Capital Requirements for Member FCM's", to
the extent such deposits cannot be used for margin purposes, or
(iii) in the event that DWR is registered as a futures commission
merchant under the CEA, the net capital of DWR (as defined in the CEA or CFTC
Regulations as in effect at the time of such Prepayment) would be less than the
greatest of (A) 7 percentum (or such other percentum as may be made applicable
to DWR at the time of such Prepayment by the Examining Authority) of the funds
required to be segregated pursuant to the CEA and CFTC Regulations and the
foreign futures or foreign options secured amount, exclusive of the market value
of commodity options purchased by option customers on or subject to the rules of
a contract market or a foreign board of trade (provided the deduction for each
option customer shall be limited to the amount of customer funds in each option
customer's account(s) and foreign futures and foreign options secured amounts),
plus an amount equal to the guaranty deposits with clearing organizations other
than the CBOT, which were included in current assets under Section 211 of the
CBOT "Capital Requirements for Member FCM's", to the extent such deposits cannot
be used for margin purposes, (B) such amount as may be made applicable to DWR by
an Examining Authority under Rule 15c3-1(b)(7), or (C) $2,000,000 (or such other
amount as required by the CEA or CFTC Regulations), or
(iv) DWR's net capital, as defined in the Rule or any successor rule
as in effect at the time of such Prepayment, would be less than 120 percentum
(or such other percentum as may be made applicable to DWR at the time of such
Prepayment by the Examining Authority) of the minimum dollar amount required by
the Rule as in effect at such time (or such other dollar amount as may be made
applicable to DWR at the time of such Prepayment by the Examining Authority),
plus an amount equal to the guaranty deposits with clearing organizations other
than
13
<PAGE>
the CBOT, which were included in current assets under Section 211 of the CBOT
"Capital Requirements for Member FCM's", to the extent such deposits cannot be
used for margin purposes, or
(v) in the event that DWR is registered as a futures commission
merchant under the CEA, its net capital, as defined in the CEA or the
regulations thereunder, as in effect at the time of such Prepayment would be
less than 120 percentum (or such other percentum as may be made applicable to
DWR at the time of such Prepayment by the Examining Authority) of the minimum
dollar amount required by the CEA or the regulations thereunder as in effect as
such time or such other dollar amount as may be made applicable to DWR at the
time of such Prepayment by the Examining Authority, plus an amount equal to the
guaranty deposits with clearing organizations other than the CBOT, which were
included in current assets under Section 211 of the CBOT "Capital Requirements
for Member FCM's", to the extent such deposits cannot be used for margin
purposes, or
(vi) in the event that DWR is subject to the provisions of paragraph
(a)(6)(v) or (a)(7)(iv) or (c)(2)(x)(B)(1) of the Rule, the net capital of DWR
would be less than the amount required to satisfy the 1000 percentum test (or
such other percentum test as may be made applicable to DWR at the time of such
Prepayment by the Examining Authority) stated in such applicable paragraph, plus
an amount equal to the guaranty deposits with clearing organizations other than
the CBOT, which were included in current assets under Section 211 of the CBOT
"Capital Requirements for Member FCM's", to the extent such deposits cannot be
used for margin purposes.
If Prepayment is made of all or any part of the Payment Obligation before
the date payment is due and if DWR's net capital is less than the amount
required to permit such Prepayment pursuant to the foregoing provisions of this
paragraph, the Participant agrees irrevocably (whether or not such Participant
had any knowledge or notice of such fact at the time of such Prepayment) to
repay DWR, its successors or assigns, the sum so paid to be held by DWR pursuant
to the provisions hereof as if such Prepayment had never been made; provided,
however, that any suit for the recovery of any such Prepayment must be commenced
within two years of the date of such Prepayment. DWR reserves the right to
withhold from the Participant's compensation the amount of any Payment
Obligation which a Participant fails to repay as required herein.
5. Special Prepayment
------------------
DWR, at its option and as permitted by the Plan, but not at the option of
the Participant, may make a payment of all or any portion of the Payment
Obligation hereunder sooner than one year from the date on which such amount
became subject to this agreement (a "Special Prepayment"), if the written
consent of the appropriate regulatory authority is first obtained. If DWR shall
be a futures commission merchant, as that term is defined in the CEA and CFTC
Regulations, no such prepayment shall be made if:
(i) after giving effect thereto (and to all payments of payment
obligations under any other Subordination Agreements then outstanding, the
maturities or accelerated
14
<PAGE>
maturities of which are scheduled to fall due within six months after the date
such Special Prepayment is to occur pursuant to this provision or on or prior to
the date on which the Payment Obligation in respect to such Special Prepayment
is scheduled to mature disregarding this provision, whichever date is earlier)
without reference to any projected profit or loss of DWR, the net capital of DWR
is less than the greatest of (A) 10 percentum of the funds required to be
segregated pursuant to the CEA and CFTC Regulations and the foreign futures or
foreign options secured amount, exclusive of the market value of commodity
options purchased by option customers of DWR on or subject to the rules of a
contract market or a foreign board of trade (provided the deduction for each
option customer shall be limited to the amount of customer funds in such option
customer's account(s) and foreign futures and foreign options secured amount),
plus an amount equal to the guaranty deposits with clearing organizations, other
than the CBOT, which were included in current assets under Section 211 of the
CBOT "Capital Requirement for Member FCM's", to the extent such deposits cannot
be used for margin purposes, (B) if DWR is a securities broker or dealer, the
amount of net capital specified in Rule 15c3-1(c)(5)(ii) of the regulations of
the Securities and Exchange Commission (17 CFR 240.l5c3-1d(c)5(ii), or (C)
$2,000,000 (or such other amount as required by the CEA or CFTC Regulations), or
(ii) Pretax losses during the latest three month period were greater
than 15% of current excess adjusted net capital.
6. Maturity Upon Certain Events
----------------------------
Notwithstanding the provisions of Section 3 hereof, the Payment Obligation
shall (to the extent not already matured) forthwith mature, together with all
other Subordination Agreements then outstanding in the event of any
receivership, insolvency, liquidation pursuant to SIPA or otherwise, bankruptcy,
assignment for the benefit of creditors, reorganization whether or not pursuant
to bankruptcy laws, or any other marshaling of the assets and liabilities of
DWR.
7. Miscellaneous Provisions
------------------------
(a) Participants may not rely upon any commodity exchange or securities
exchange to provide any information concerning or relating to DWR. Such
exchanges have no responsibility to disclose to the Participant any information
concerning or relating to DWR which they may have now or at any future time. The
Participant agrees that the New York Stock Exchange (the "NYSE"), its Special
Trust Fund or any director, officer, trustee or employee of the NYSE or said
Trust Fund or any other exchange or director, officer, trustee or employee
thereof shall not be liable to the Participant with respect to the Plan or any
distribution pursuant thereto.
(b) The funds represented by the Payment Obligation shall be dealt with in
all respects as capital of DWR, shall be subject to the risks of the business
and may be deposited in an account or accounts in DWR's name in any bank or
trust company.
(c) Payment Obligations under the Plan may not be transferred, sold,
assigned, pledged or otherwise encumbered or disposed of and no lien, charge or
other encumbrance may
15
<PAGE>
be created or permitted to be created hereon, without the prior written consent
of the Examining Authority.
(d) If DWR is a futures commission merchant as that term is defined in the
CEA, DWR agrees, consistent with the requirements of Section l.17(h) of CFTC
Regulations that whenever prior written notice by DWR to the Examining Authority
is required pursuant to the provisions of this agreement the same prior written
notice shall be given by DWR to (1) the CFTC at its principal office in
Washington, D.C., Attention: Chief Accountant of Division of Trading and
Markets, and/or (2) the commodity exchanges of which DWR is a member and which
are then designated by the CFTC as DWR's designated self-regulatory
organizations as defined in Section 1.3(ff) of the CFTC Regulations (the
"DSROs").
(e) "Subordination Agreement" as used herein shall include any subordinated
loan agreement and any secured demand note agreement constituting a satisfactory
subordination agreement under the Rule under which DWR is the borrower or the
pledgee of collateral, and reference herein to the payment of a subordinated
obligation of DWR shall be deemed to include the return to the maker-pledgor of
any secured demand note and the collateral therefore held by DWR.
(f) The term "Examining Authority" shall refer to the regulatory body,
specified in paragraph (c)(12) of the Rule, responsible for inspecting or
examining DWR for compliance with financial responsibility requirements. If DWR
is and continues to be a member of the NYSE, the references herein to the
Examining Authority shall be deemed to refer to the NYSE. If DWR is and
continues to be a futures commission merchant as that term is defined in the CEA
and regulations thereunder, references to the Examining Authority shall also be
deemed to refer to the CFTC and DWR's DSROs.
(g) The provisions of this Appendix A shall be binding upon and inure to
the benefit of DWR, its successors and assigns, and the Participant and the
Participant's heirs, executors and administrators.
(h) Any controversy arising out of or relating to this Plan shall be
submitted to and settled by arbitration pursuant to the Constitution and Rules
of the NYSE. DWR and Participant shall be conclusively bound by such
arbitration.
(i) DWR shall not modify, amend or cancel this Appendix or any provision of
the Plan governing the Payment Obligations that are the subject of this Appendix
without the prior approval of the Examining Authority.
(j) This agreement shall be deemed to have been made under and shall be
governed by the laws of the State of New York.
16
<PAGE>
EXHIBIT 11
Morgan Stanley Dean Witter & Co.
Computation of Earnings Per Share
(In millions, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ---------------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Weighted-average shares outstanding 573,170,507 578,082,806 582,105,755 574,048,186
=========== =========== =========== ===========
Earnings:
Net income $645 $678 $2,190 $1,776
Less: Preferred stock dividend
requirements 14 15 43 52
------------ ----------- ----------- -----------
Earnings applicable to common shares $631 $663 $2,147 $1,724
============ ============ ============ ===========
Basic earnings per share $1.10 $1.15 $3.69 $3.00
============ ============ ============ ===========
Diluted:
Weighted-average shares outstanding 573,170,507 578,082,806 582,105,755 574,048,186
Average common shares issuable
under employee benefit plans 19,708,913 19,839,048 19,201,179 19,370,268
Average common shares issuable upon
conversion of ESOP preferred stock 11,900,174 12,097,268 11,958,273 12,146,732
------------ ----------- ----------- -----------
Total weighted-average diluted shares 604,779,594 610,019,122 613,265,207 605,565,186
============ ============ ============ ===========
Earnings:
Net income $645 $678 $2,190 $1,776
Less: Preferred stock dividend
requirements 13 14 38 49
------------ ----------- ----------- -----------
Earnings applicable to common shares $632 $664 $2,152 $1,727
============ ============ ============ ===========
Diluted earnings per share $1.05 $1.09 $3.51 $2.85
============ ============ ============ ===========
</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 NINE MONTHS ENDED
------------------------------ ----------------------------
AUGUST 31 AUGUST 31 AUGUST 31 AUGUST 31
1998 1997 1998 1997
------------- ----------- ------------- ----------
RATIO OF EARNINGS TO FIXED CHARGES
<S> <C> <C> <C> <C>
Earnings:
Income before income taxes $ 944 $ 1,106 $ 3,477 $ 2,917
Add: Fixed charges, net 3,410 2,789 10,158 8,026
Income before income taxes and -------- -------- ---------- --------
fixed charges, net $ 4,354 $ 3,895 $13,635 $10,943
======== ======== ========== ========
Fixed charges:
Total interest expense $ 3,377 $ 2,765 $10,076 $ 7,952
Interest factor in rents 33 24 82 74
-------- ------- ---------- -------
Total fixed charges $ 3,410 $ 2,789 $10,158 $ 8,026
======== ======= ========== =======
Ratio of earnings to fixed charges 1.3 1.4 1.3 1.4
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Earnings:
Income before income taxes $ 944 $ 1,106 $ 3,477 $ 2,917
Add: Fixed charges, net 3,410 2,789 10,158 8,026
Income before income taxes and -------- -------- ------- -------
fixed charges, net $ 4,354 $ 3,895 $13,635 $10,943
======== ======== ======= =======
Fixed charges:
Total interest expense $ 3,377 $ 2,765 $10,076 $ 7,952
Interest factor in rents 33 24 82 74
Preferred stock dividends 21 24 69 85
------- ------- ------- -------
Total fixed charges and preferred
stock dividends $ 3,431 $ 2,813 $10,227 $ 8,111
======= ======= ======= =======
Ratio of earnings to fixed charges and
preferred stock dividends 1.3 1.4 1.3 1.3
<CAPTION>
FISCAL YEAR
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES
<S> <C> <C> <C>
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 August
31, 1998 and for the three and nine month periods ended August 31, 1998 and
1997, as indicated in our report dated October 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 August 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
Registration Statement No. 333-62869
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
October 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, Form S-3 No. 333-46935, and Form S-8 No. 333-62869)
of Morgan Stanely Dean Witter & Co. ("MSDW") of our report dated March 27, 1997
in MSDW's Form 10-Q filed on October 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.
ERNST & YOUNG LLP
New York, New York
October 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 August 31, 1998 and
the Condensed Consolidated Statements of Income for the Nine Months Ended August
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> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 20,012
<RECEIVABLES> 61,444
<SECURITIES-RESALE> 89,466
<SECURITIES-BORROWED> 82,359
<INSTRUMENTS-OWNED> 98,328
<PP&E> 1,779
<TOTAL-ASSETS> 360,929
<SHORT-TERM> 31,588
<PAYABLES> 67,701
<REPOS-SOLD> 118,148
<SECURITIES-LOANED> 30,115
<INSTRUMENTS-SOLD> 60,910
<LONG-TERM> 28,070
0
674
<COMMON> 6
<OTHER-SE> 12,962
<TOTAL-LIABILITY-AND-EQUITY> 360,929
<TRADING-REVENUE> 2,493
<INTEREST-DIVIDENDS> 12,429
<COMMISSIONS> 1,766
<INVESTMENT-BANKING-REVENUES> 2,607
<FEE-REVENUE> 4,063
<INTEREST-EXPENSE> 10,076
<COMPENSATION> 5,414
<INCOME-PRETAX> 3,477
<INCOME-PRE-EXTRAORDINARY> 3,477
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,190
<EPS-PRIMARY> 3.69
<EPS-DILUTED> 3.51
</TABLE>
