<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, 1999
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)
----------------
<TABLE>
<C> <S>
Delaware 36-3145972
(I.R.S. Employer Identification
(State of Incorporation) No.)
1585 Broadway 10036
New York, NY (Zip Code)
(Address of Principal
Executive Offices)
</TABLE>
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, 1999 there were 556,961,756 shares of Registrant's
Common Stock, par value $.01 per share, outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Quarter Ended August 31, 1999
<TABLE>
<CAPTION>
Page
----
Part I--Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition--August 31,
1999 (unaudited) and November 30, 1998............................... 1
Condensed Consolidated Statements of Income (unaudited)--Three and
Nine Months Ended August 31, 1999 and 1998........................... 2
Condensed Consolidated Statements of Comprehensive Income
(unaudited)--Three and Nine Months Ended August 31, 1999 and 1998.... 3
Condensed Consolidated Statements of Cash Flows (unaudited)--Nine
Months Ended August 31, 1999 and 1998................................ 4
Notes to Condensed Consolidated Financial Statements (unaudited)...... 5
Independent Accountants' Report....................................... 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 35
Part II--Other Information
Item 1. Legal Proceedings................................................. 36
Item 2. Changes in Securities and Use of Proceeds......................... 36
Item 6. Exhibits and Reports on Form 8-K.................................. 36
</TABLE>
i
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in millions, except share and per share data)
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents............................ $ 13,382 $ 16,878
Cash and securities deposited with clearing
organizations or segregated under federal and other
regulations (including securities at fair value of
$8,035 at August 31, 1999 and $7,518 at November 30,
1998)............................................... 10,418 10,531
Financial instruments owned:
U.S. government and agency securities............... 18,249 12,350
Other sovereign government obligations.............. 16,720 15,050
Corporate and other debt............................ 25,782 22,388
Corporate equities.................................. 16,228 14,289
Derivative contracts................................ 21,024 21,442
Physical commodities................................ 858 416
Securities purchased under agreements to resell...... 80,169 79,570
Receivable for securities provided as collateral..... 5,482 4,388
Securities borrowed.................................. 72,862 69,338
Receivables:
Consumer loans (net of allowances of $766 at August
31, 1999 and $787 at November 30, 1998)............ 15,791 15,209
Customers, net...................................... 23,074 18,785
Brokers, dealers and clearing organizations......... 5,392 4,432
Fees, interest and other............................ 4,152 3,359
Office facilities, at cost (less accumulated
depreciation and amortization of $1,622 at August
31, 1999 and $1,375 at November 30, 1998)........... 2,145 1,834
Other assets......................................... 9,142 7,331
-------- --------
Total assets......................................... $340,870 $317,590
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and other short-term borrowings..... $ 22,231 $ 28,137
Deposits............................................. 9,286 8,197
Financial instruments sold, not yet purchased:
U.S. government and agency securities............... 12,526 11,305
Other sovereign government obligations.............. 10,398 13,899
Corporate and other debt............................ 3,111 3,093
Corporate equities.................................. 18,827 11,501
Derivative contracts................................ 19,769 21,198
Physical commodities................................ 813 348
Securities sold under agreements to repurchase....... 103,649 92,327
Obligation to return securities received as
collateral.......................................... 11,697 6,636
Securities loaned.................................... 22,014 23,152
Payables:
Customers........................................... 39,151 40,606
Brokers, dealers and clearing organizations......... 6,668 5,244
Interest and dividends.............................. 4,932 371
Other liabilities and accrued expenses............... 10,332 8,623
Long-term borrowings................................. 29,038 27,435
-------- --------
324,442 302,072
-------- --------
Capital Units........................................ 583 999
-------- --------
Preferred Securities Issued by Subsidiaries.......... 400 400
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock..................................... 671 674
Common stock ($0.01 par value, 1,750,000,000 shares
authorized, 605,842,952 and 605,842,952 shares
issued, 559,244,249 and 565,670,808 shares
outstanding at August 31, 1999 and November 30,
1998).............................................. 6 6
Paid-in capital..................................... 3,716 3,746
Retained earnings................................... 14,796 12,080
Employee stock trust................................ 1,840 1,913
Cumulative translation adjustments.................. (28) (12)
-------- --------
Subtotal.......................................... 21,001 18,407
Note receivable related to sale of preferred stock
to ESOP............................................ (60) (60)
Common stock held in treasury, at cost ($0.01 par
value, 46,598,703 and 40,172,144 shares at August
31, 1999 and November 30, 1998).................... (3,656) (2,702)
Common stock issued to employee trust............... (1,840) (1,526)
-------- --------
Total shareholders' equity........................ 15,445 14,119
-------- --------
Total liabilities and shareholders' equity........... $340,870 $317,590
======== ========
</TABLE>
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,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Investment banking.......... $ 1,207 $ 819 $ 3,186 $ 2,607
Principal transactions:
Trading.................... 1,184 499 4,801 2,493
Investments................ 78 (174) 493 (1)
Commissions................. 729 608 2,183 1,766
Fees:
Asset management,
distribution and
administration............ 799 718 2,278 2,135
Merchant and cardmember.... 392 438 1,090 1,270
Servicing.................. 313 255 876 658
Interest and dividends...... 4,961 4,283 12,130 12,429
Other....................... 39 52 124 154
----------- ----------- ----------- -----------
Total revenues............. 9,702 7,498 27,161 23,511
Interest expense............ 4,246 3,377 10,401 10,076
Provision for consumer loan
losses..................... 113 280 409 960
----------- ----------- ----------- -----------
Net revenues............... 5,343 3,841 16,351 12,475
----------- ----------- ----------- -----------
Non-interest expenses:
Compensation and
benefits.................. 2,302 1,609 7,078 5,414
Occupancy and equipment.... 166 148 465 431
Brokerage, clearing and
exchange fees............. 128 160 369 416
Information processing and
communications............ 325 291 949 833
Marketing and business
development............... 408 354 1,184 934
Professional services...... 214 176 567 460
Other...................... 237 193 646 548
----------- ----------- ----------- -----------
Total non-interest
expenses................ 3,780 2,931 11,258 9,036
----------- ----------- ----------- -----------
Income before income taxes
and cumulative effect of
accounting change.......... 1,563 910 5,093 3,439
Provision for income taxes.. 593 284 1,935 1,270
----------- ----------- ----------- -----------
Income before cumulative
effect of accounting
change..................... 970 626 3,158 2,169
----------- ----------- ----------- -----------
Cumulative effect of
accounting change.......... -- -- -- (117)
----------- ----------- ----------- -----------
Net income.................. $ 970 $ 626 $ 3,158 $ 2,052
=========== =========== =========== ===========
Preferred stock dividend
requirements............... $ 11 $ 14 $ 33 $ 43
=========== =========== =========== ===========
Earnings applicable to
common shares(1)........... $ 959 $ 612 $ 3,125 $ 2,009
=========== =========== =========== ===========
Basic earnings per share:
Income before cumulative
effect of accounting
change.................... $ 1.74 $ 1.07 $ 5.65 $ 3.65
Cumulative effect of
accounting change......... -- -- -- (.20)
----------- ----------- ----------- -----------
Net income................. $ 1.74 $ 1.07 $ 5.65 $ 3.45
=========== =========== =========== ===========
Diluted earnings per share:
Income before cumulative
effect of accounting
change.................... $ 1.65 $ 1.01 $ 5.35 $ 3.47
Cumulative effect of
accounting change......... -- -- -- (.19)
----------- ----------- ----------- -----------
Net income................. $ 1.65 $ 1.01 $ 5.35 $ 3.28
=========== =========== =========== ===========
Average common shares
outstanding
Basic...................... 550,056,731 573,170,507 553,362,966 582,105,755
=========== =========== =========== ===========
Diluted.................... 580,700,823 604,779,594 584,717,406 613,265,207
=========== =========== =========== ===========
</TABLE>
- --------
(1) Amounts shown are used to calculate basic earnings per common share.
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
<TABLE>
<CAPTION>
Nine Months
Three Months Ended August
Ended August 31, 31,
----------------- --------------
1999 1998 1999 1998
-------- -------- ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income..................................... $ 970 $ 626 $3,158 $2,052
Other comprehensive income, net of tax:
Foreign currency translation adjustment...... 8 6 (16) (1)
-------- -------- ------ ------
Comprehensive income........................... $ 978 $ 632 $3,142 $2,051
======== ======== ====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
Nine Months
Ended August 31,
-----------------
1999 1998
------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income.................................................. $ 3,158 $ 2,052
Adjustments to reconcile net income to net cash used for
operating activities:
Cumulative effect of accounting change.................. -- 117
Other non-cash charges included in net income........... 860 1,382
Changes in assets and liabilities:
Cash and securities deposited with clearing
organizations or segregated under federal and other
regulations............................................ 134 (3,302)
Financial instruments owned, net of financial
instruments sold, not yet purchased.................... (4,972) (8,974)
Securities borrowed, net of securities loaned........... (4,662) (11,119)
Receivables and other assets............................ (7,315) (973)
Payables and other liabilities.......................... 6,076 17,405
------- --------
Net cash used for operating activities...................... (6,721) (3,412)
------- --------
Cash flows from investing activities
Net (payments for) proceeds from:
Office facilities....................................... (560) (283)
Purchase of AB Asesores, net of cash acquired........... (223) --
Net principal disbursed on consumer loans............... (4,149) (1,130)
Sales of consumer loans................................. 2,992 3,416
------- --------
Net cash (used for) provided by investing activities........ (1,940) 2,003
------- --------
Cash flows from financing activities
Net (payments) proceeds related to short-term borrowings.. (5,983) 169
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell.......... 10,723 1,518
Proceeds from:
Deposits................................................ 1,089 (275)
Issuance of common stock................................ 245 175
Issuance of put options................................. 7 --
Issuance of long-term borrowings........................ 7,227 9,245
Preferred Securities Issued by Subsidiaries............. -- 400
Payments for:
Repurchases of common stock............................. (1,732) (2,049)
Repayments of long-term borrowings...................... (5,562) (5,614)
Redemption of cumulative preferred stock................ -- (200)
Redemption of Capital Units............................. (416) --
Cash dividends.......................................... (433) (395)
------- --------
Net cash provided by financing activities................... 5,165 2,974
------- --------
Net (decrease) increase in cash and cash equivalents........ (3,496) 1,565
Cash and cash equivalents, at beginning of period........... 16,878 8,255
------- --------
Cash and cash equivalents, at end of period................. $13,382 $ 9,820
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Introduction and Basis of Presentation
The Company
The condensed consolidated financial statements include the accounts of
Morgan Stanley Dean Witter & Co. and its U.S. and international subsidiaries
(the "Company"), 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 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; securities lending and on-line securities services offered by
Discover Brokerage Direct, Inc. The Company's Credit Services businesses
include the issuance of the Discover(R) Card and other proprietary general
purpose credit cards and the operation of the Discover/Novus(R) Network, a
proprietary network of merchant and cash access locations. 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
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.
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, 1998. 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 and dividend revenue and interest
expense arising from financial instruments used in trading activities are
reflected in the condensed consolidated statements of income as interest and
dividend revenue or interest 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
5
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and foreign currency swaps. The
Company uses interest rate and currency swaps to manage the interest rate and
currency exposure arising from certain borrowings and to match the repricing
characteristics of consumer loans with those of the borrowings that fund these
loans. For contracts that are designated as hedges of the Company's assets and
liabilities, gains and losses are deferred and recognized as adjustments to
interest revenue or expense over the remaining life of the underlying assets
or liabilities. For contracts that are hedges of asset securitizations, gains
and losses are recognized as adjustments to servicing fees. Gains and losses
resulting from the termination of hedge contracts prior to their stated
maturity are recognized ratably over the remaining life of the instrument
being hedged. The Company also uses foreign exchange forward contracts to
manage the currency exposure relating to its net monetary investment in non-
U.S. dollar functional currency operations. The gain or loss from revaluing
these contracts is deferred and reported within cumulative translation
adjustments in shareholders' equity, net of tax effects, with the related
unrealized amounts due from or to counterparties included in receivables from
or payables to brokers, dealers and clearing organizations.
Accounting Change
In the fourth quarter of fiscal 1998, the Company adopted American Institute
of Certified Public Accountants ("AICPA") Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), with respect to
the accounting for offering costs paid by investment advisors of closed-end
funds where such costs are not specifically reimbursed through separate
advisory contracts. In accordance with SOP 98-5 and per an announcement by the
Financial Accounting Standards Board ("FASB") staff in September 1998, such
costs are to be considered start-up costs and expensed as incurred. Prior to
the adoption of SOP 98-5, the Company deferred such costs and amortized them
over the life of the fund. The Company recorded a charge to earnings for the
cumulative effect of the accounting change as of December 1, 1997, of $117
million, net of taxes of $79 million. The third quarter of fiscal 1998 was
also retroactively restated to reflect this change, decreasing net income by
$21 million.
6
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting Pronouncements
As of December 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement establishes standards for the reporting and presentation of
comprehensive income.
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. As
issued, SFAS No. 133 was effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 for
one year to fiscal years beginning after June 15, 2000. The Company is in the
process of evaluating the impact of adopting SFAS No. 133.
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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes the
standards for determining an operating segment and the required financial
information to be disclosed.
2. Consumer Loans
Activity in the allowance for consumer loan losses was as follows (dollars
in millions):
<TABLE>
<CAPTION>
Three
Months Nine
Ended Months
August Ended
31, August 31,
---------- -----------
1999 1998 1999 1998
---- ---- ---- -----
<S> <C> <C> <C> <C>
Balance, beginning of period........................... $768 $824 $787 $ 884
Provision for loan losses.............................. 113 280 409 960
Less deductions:
Charge-offs.......................................... 201 318 683 1,112
Recoveries........................................... (27) (40) (89) (139)
---- ---- ---- -----
Net charge-offs...................................... 174 278 594 973
---- ---- ---- -----
Other (1).............................................. 59 29 164 (16)
---- ---- ---- -----
Balance, end of period................................. $766 $855 $766 $ 855
==== ==== ==== =====
</TABLE>
- --------
(1) Primarily reflects transfers related to asset securitizations and the
fiscal 1998 sale of the Company's Prime Option SM MasterCard(R) portfolio.
Interest accrued on loans subsequently charged off, recorded as a reduction
of interest revenue, was $26 million and $89 million in the quarter and nine
month periods ended August 31, 1999 and $42 million and $157 million in the
quarter and nine month periods ended August 31, 1998.
The Company received net proceeds from asset securitizations of $525 million
and $2,992 million in the quarter and nine month periods ended August 31, 1999
and $1,213 million and $3,416 million in the quarter and nine month periods
ended August 31, 1998. The uncollected balances of consumer loans sold through
asset securitizations were $17,824 million at August 31, 1999 and $16,506
million at November 30, 1998.
7
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Long-Term Borrowings
Long-term borrowings at August 31, 1999 scheduled to mature within one year
aggregated $6,726 million.
During the nine month period ended August 31, 1999 the Company issued senior
notes aggregating $7,311 million, including non-U.S. dollar currency notes
aggregating $2,314 million, primarily pursuant to its public debt shelf
registration statements. The weighted average coupon interest rate of these
notes was 4.3% at August 31, 1999; 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: 2000, $1,014 million; 2001, $1,294 million; 2002, $1,584
million; 2004, $2,574 million; and thereafter, $845 million. In the nine month
period ended August 31, 1999, $5,562 million of senior notes were repaid.
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,
1999 1998 1999 1998
--------- ------------ ---------- ------------
(dollars in millions)
<S> <C> <C> <C> <C>
ESOP Convertible Preferred
Stock, liquidation
preference $35.88.............. 3,513,290 3,581,964 $126 $129
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
---- ----
Total......................... $671 $674
==== ====
</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.
Effective March 1, 1999, the Company redeemed all of the outstanding 7.82%
Capital Units and 7.80% Capital Units. The aggregate principal amount of the
Capital Units redeemed was $352 million. During the quarter ended May 31,
1999, the Company repurchased in a series of transactions in the open market
approximately $64 million of the $134 million outstanding 8.03% Capital Units.
During the third fiscal quarter the Company retired these repurchased Capital
Units.
In fiscal 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.
8
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $3,337 million at August 31, 1999, which exceeded the
amount required by $2,931 million. DWR's net capital totaled $711 million at
August 31, 1999 which exceeded the amount required by $588 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 Financial
Supervisory Agency. MSIL and MSJL have consistently operated in excess of
their respective regulatory capital requirements.
Under regulatory net capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other regulatory capital guidelines, FDIC-
insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital,
as defined, to total assets ("leverage ratio") and (b) 8% combined Tier 1 and
Tier 2 capital, as defined, to risk weighted assets ("risk-weighted capital
ratio"). At August 31, 1999, 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.
In an effort to enhance its ongoing stock repurchase program, the Company
may sell put options on shares of its common stock to third parties. These put
options entitle the holder to sell shares of the Company's common stock to the
Company on certain dates at specified prices. As of August 31, 1999, put
options were outstanding on an aggregate of 1,068,500 shares of the Company's
common stock. The maturity dates of these put options range from September
1999 through November 1999. The Company may elect cash settlement of the put
options instead of taking delivery of the stock.
9
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Earnings per Share
Basic EPS reflects no dilution from common stock equivalents. Diluted EPS
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 following table presents the calculation of basic and diluted EPS
(in millions, except for per share data):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
August 31, August 31,
-------------- --------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS:
Income before cumulative effect of accounting
change...................................... $ 970 $ 626 $3,158 $2,169
Cumulative effect of accounting change....... -- -- -- (117)
Preferred stock dividend requirements........ (11) (14) (33) (43)
------ ------ ------ ------
Net income available to common shareholders.. $ 959 $ 612 $3,125 $2,009
====== ====== ====== ======
Weighted-average common shares outstanding... 550 573 553 582
====== ====== ====== ======
Basic EPS before cumulative effect of
accounting change........................... $ 1.74 $ 1.07 $ 5.65 $ 3.65
Cumulative effect of accounting change....... -- -- -- (0.20)
------ ------ ------ ------
Basic EPS.................................... $ 1.74 $ 1.07 $ 5.65 $ 3.45
====== ====== ====== ======
Diluted EPS:
Income before cumulative effect of accounting
change...................................... $ 970 $ 626 $3,158 $2,169
Cumulative effect of accounting change....... -- -- -- (117)
Preferred stock dividend requirements........ (9) (13) (27) (38)
------ ------ ------ ------
Net income available to common shareholders.. $ 961 $ 613 $3,131 $2,014
====== ====== ====== ======
Weighted-average common shares outstanding... 550 573 553 582
Effect of dilutive securities:
Stock options............................... 19 20 20 19
ESOP convertible preferred stock............ 12 12 12 12
------ ------ ------ ------
Weighted-average common shares outstanding
and common stock equivalents................ 581 605 585 613
====== ====== ====== ======
Diluted EPS before cumulative effect of
accounting change........................... $ 1.65 $ 1.01 $ 5.35 $ 3.47
Cumulative effect of accounting change....... -- -- -- (0.19)
------ ------ ------ ------
Diluted EPS.................................. $ 1.65 $ 1.01 $ 5.35 $ 3.28
====== ====== ====== ======
</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 $7.6 billion and $5.7 billion of letters of
credit outstanding at August 31, 1999 and at November 30, 1998, respectively,
to satisfy various collateral requirements.
10
<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 derivative instruments also are used to hedge the
U.S. dollar cost of certain foreign currency exposures. In addition, financial
futures and forward contracts are actively traded by the Company and are used
to hedge proprietary inventory. The Company also enters into delayed delivery,
when-issued, and warrant and option contracts involving securities. These
instruments generally represent future commitments to swap interest payment
streams, exchange currencies or purchase or sell other financial instruments
on specific terms at specified future dates. Many of these products have
maturities that do not extend beyond one year; swaps and options and warrants
on equities typically have longer maturities. For further discussion of these
matters, refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Derivative Financial Instruments" and Note 9 to the
consolidated financial statements for the fiscal year ended November 30, 1998,
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.
11
<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, 1999 and November 30, 1998 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>
Other
Collateralized Non-
Non-Investment Investment
AAA AA A BBB Grade Grade Total
------ ------ ------ ------ -------------- ---------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
At August 31, 1999
Interest rate and
currency swaps and
options (including
caps, floors and swap
options) and other
fixed income securities
contracts.............. $1,559 $3,835 $2,607 $ 785 $ 186 $ 289 $ 9,261
Foreign exchange forward
contracts and options.. 417 1,617 1,087 235 -- 172 3,528
Equity securities
contracts (including
equity swaps, warrants
and options)........... 1,499 1,731 841 207 1,082 268 5,628
Commodity forwards,
options and swaps...... 173 725 433 591 28 556 2,506
Mortgage-backed
securities forward
contracts, swaps and
options................ 43 30 21 2 2 3 101
------ ------ ------ ------ ------ ------ -------
Total.................. $3,691 $7,938 $4,989 $1,820 $1,298 $1,288 $21,024
====== ====== ====== ====== ====== ====== =======
Percent of total........ 18% 38% 24% 8% 6% 6% 100%
====== ====== ====== ====== ====== ====== =======
At November 30, 1998
Interest rate and
currency swaps and
options (including
caps, floors and swap
options) and other
fixed income securities
contracts ............. $ 894 $3,727 $3,694 $1,181 $ 98 $ 510 $10,104
Foreign exchange forward
contracts and options.. 306 1,413 1,435 337 -- 263 3,754
Equity securities
contracts (including
equity swaps, warrants
and options)........... 1,995 1,105 478 61 1,364 165 5,168
Commodity forwards,
options and swaps...... 71 448 401 708 46 534 2,208
Mortgage-backed
securities forward
contracts, swaps and
options................ 130 51 21 3 -- 3 208
------ ------ ------ ------ ------ ------ -------
Total.................. $3,396 $6,744 $6,029 $2,290 $1,508 $1,475 $21,442
====== ====== ====== ====== ====== ====== =======
Percent of total........ 16% 31% 28% 11% 7% 7% 100%
====== ====== ====== ====== ====== ====== =======
</TABLE>
A substantial portion of the Company's securities and commodities
transactions are collateralized and are executed with and on behalf of
commercial banks and other institutional investors, including other brokers
and dealers. Positions taken and commitments made by the Company, including
positions taken and underwriting and financing commitments made in connection
with its private equity and other principal investment activities, often
involve substantial amounts and significant exposure to individual issuers and
businesses, including non-investment grade issuers. The Company seeks to limit
concentration risk created in its businesses through a variety of separate but
complementary financial, position and credit exposure reporting systems,
including the use of trading limits based in part upon the Company's review of
the financial condition and credit ratings of its counterparties.
See also "Risk Management" in the Form 10-K for discussions of the Company's
risk management policies and procedures for its securities businesses.
9. Business Acquisition
During the second quarter of fiscal 1999, the Company completed its
acquisition of AB Asesores, the largest independent financial services firm in
Spain. AB Asesores has strategic positions in personal investment, asset
management, institutional research and brokerage, and investment banking. The
Company's fiscal 1999 results include the operations of AB Asesores since
March 25, 1999, the date of acquisition. In connection with this acquisition,
the Company issued 688,943 shares of common stock having a fair value of $64
million on the date of acquisition.
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 as of
August 31, 1999, and the related condensed consolidated statements of income
and comprehensive income for the three and nine month periods ended August 31,
1999 and 1998, and cash flows for the nine month periods ended August 31, 1999
and 1998. These condensed consolidated financial statements are the
responsibility of the management of Morgan Stanley Dean Witter & Co.
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, 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, 1998, 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, 1998; and, in our report dated January 22, 1999, we
expressed an unqualified opinion on those consolidated financial statements
based on our audit (which report includes an explanatory paragraph for a
change in the method of accounting for certain offering costs of closed-end
funds).
/s/ Deloitte & Touche LLP
New York, New York
October 15, 1999
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Morgan Stanley Dean Witter & Co. (the "Company") is a pre-eminent global
financial services firm that maintains leading market positions in each of its
businesses--Securities and Asset Management and Credit Services. The Company
combines global strength in investment banking (including underwriting public
offerings of securities and mergers and acquisitions advice) and institutional
sales and trading with strength in providing investment and global asset
management products and services and, primarily through its Discover Card
brand, quality consumer credit products. The Company's business also includes
direct-marketed activities such as the on-line securities services offered by
Discover Brokerage Direct, Inc.
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 equity prices and
interest rates; currency values and other market indices; technological
changes and events (such as the increased use of the Internet and the Year
2000 issue); the availability of credit; inflation; investor sentiment; and
legislative and regulatory developments. Such factors may also have an impact
on the Company's ability to achieve its strategic objectives on a global
basis, including (without limitation) continued increased market share in its
securities activities, growth in assets under management and the expansion of
its Credit Services business.
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 global 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 client assignments
(including realization of returns from the Company's private equity and other
principal investments).
In the Company's Credit Services business, changes in economic variables may
substantially affect consumer loan levels and credit quality. Such variables
include the number and size 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 and asset management businesses, there has been
increased competition from other sources, such as commercial banks, insurance
companies, mutual fund groups, online service providers 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 global 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
- --------
* 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.
14
<PAGE>
through its ability to meet investors' saving and investment needs by
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 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 businesses 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 overall financial results will continue to be
affected by its 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 Services businesses, evaluating
credit product pricing and monitoring costs. 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.
The impact of either anticipated or actual Year 2000 problems in the
financial services industry may reduce the general level of investment banking
activity and trading activity by market participants and may have an adverse
affect on the Company's business and operations in the fourth quarter of
fiscal 1999 and the first quarter of fiscal 2000. For further information on
the Year 2000 issue, refer to the Company's "Year 2000 Readiness Disclosure"
beginning on page 33.
Global Market and Economic Conditions in the Quarter Ended August 31, 1999
Global market and economic conditions in the quarter ended August 31, 1999
were generally favorable, although not as positive as during the first two
quarters of fiscal 1999. Economic growth remained robust in the U.S., while
conditions in Europe and the Far East continued to exhibit signs of
improvement. Market conditions during the quarter were significantly more
favorable than those which existed in the third quarter of fiscal 1998. During
that period, severe economic turmoil in Russia, Asia and certain emerging
market nations adversely affected investor confidence and led to periods of
extreme volatility, low levels of liquidity and increased credit spreads,
creating difficult conditions in the global financial markets.
In the U.S., the domestic economy continued to exhibit positive fundamentals
and a steady rate of growth. The strength of the U.S. economy reflected
several favorable domestic trends, including low unemployment, high levels of
consumer confidence and spending, and a high demand for imports. In addition,
the U.S. economy benefited from the ongoing recovery in certain international
markets. Throughout the quarter, there were numerous indications that U.S.
economic growth was continuing at a brisk pace and at a higher rate than
anticipated. Such indications, coupled with the renewed vigor in international
markets, greatly increased fears of accelerating inflation. As a result, the
Federal Reserve Board (the "Fed") raised the overnight lending rate by 0.25%
on two separate occasions during the quarter, and also raised the discount
rate by 0.25%. While the Fed announced that it was adopting a neutral stance
toward interest rates, considerable uncertainty still remained as to whether
additional actions would be necessary in order to mitigate inflationary
pressures.
Conditions in European markets were relatively stable during the quarter.
European financial markets have benefited from positive investor sentiment
relating to the European Economic and Monetary Union ("EMU"). Since the EMU's
inception on January 1, 1999, the euro has emerged as a new funding
alternative for many issuers, although its performance relative to the U.S.
dollar has been negatively affected by the sluggish rate of economic growth
within the European Union (the "EU") and the ongoing strength of the U.S.
economy. However, during the quarter the prospects for improved economic
performance within Europe increased due to indications of recovery in the
levels of manufacturing output and exports in Germany, the region's largest
economy. Economic prospects in the EU have also improved due to the ongoing
recovery of international
15
<PAGE>
economies, and from the European Central Bank's (the "ECB") decision to cut
interest rates by 0.50% during the second quarter of fiscal 1999.
Economic and financial difficulties have existed in the Far East since the
latter half of fiscal 1997. The Japanese economy has suffered from its worst
recession since the end of World War II, and has been adversely affected by
shrinking consumer demand, declining corporate profits, rising unemployment
and deflation. However, there were indications that the steps taken by Japan's
government to mitigate these conditions, including bank bailouts, emergency
loans and stimulus packages, were beginning to have a favorable impact on the
nation's economic performance. As a result, market conditions in Japan have
exhibited signs of improvement. Market conditions elsewhere in the Far East,
including Hong Kong and Korea, have also exhibited signs of recovery. Although
much uncertainty still remains, investor interest in the Far East region has
generally increased as a result of these developments.
Results of the Company for the Quarter and Nine Month Period ended August 31,
1999 and 1998
The Company's net income of $970 million and $3,158 million in the quarter
and nine month periods ended August 31, 1999 represented increases of 55% and
54% from the comparable periods of fiscal 1998. Net income for the nine month
period ended August 31, 1998 included a charge of $117 million resulting from
the cumulative effect of an accounting change. Excluding the impact of the
cumulative effect of an accounting change, net income for the nine month
period ended August 31, 1999 increased 46% from the comparable prior year
period. Diluted earnings per common share were $1.65 and $5.35 in the quarter
and nine month periods ended August 31, 1999 as compared to $1.01 and $3.28 in
the quarter and nine month periods ended August 31, 1998. Excluding the
cumulative effect of an accounting change, diluted earnings per share for the
nine month period ended August 31, 1998 was $3.47. The Company's annualized
return on common equity was 25.9% and 28.9% for the quarter and nine month
periods ended August 31, 1999, as compared to 18.9% and 20.3% for the
comparable periods of fiscal 1998. Excluding the cumulative effect of an
accounting change, the annualized return on common equity for the nine month
period ended August 31, 1998 was 21.3%.
The increase in net income in the quarter and nine month periods ended
August 31, 1999 from the comparable prior year periods was primarily due to
higher principal trading, principal investment, commission and investment
banking revenues coupled with improved operating results from the Company's
Credit Services business. These increases were partially offset by higher
incentive-based compensation and other non-interest expenses. In addition, the
results of the comparable quarterly period in fiscal 1998 were adversely
affected by difficult conditions in the global financial markets. The
Company's income tax rate for the quarter and nine month periods ended August
31, 1999 was 38.0%, as compared to 31.2% and 37.0% in the quarter and nine
month periods ended August 31, 1998. The higher income tax rate in the fiscal
1999 quarterly and nine month periods reflects, among other things, a less
favorable mix of earnings in certain geographic locations; the prior year's
results also included the impact of favorable tax transactions.
Business Acquisition
During the second quarter of fiscal 1999, the Company completed its
acquisition of AB Asesores, the largest independent financial services firm in
Spain. AB Asesores has strategic positions in personal investment, asset
management, institutional research and brokerage, and investment banking.
Through its approximately 290 financial advisors, it offers its individual
investors proprietary mutual funds and other financial products. This
acquisition reflects the Company's strategic initiative to build an
international Securities and Asset Management business to serve the needs of
individual investors. The Company's fiscal 1999 results include the operations
of AB Asesores since March 25, 1999, the date of acquisition.
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 Services. Certain reclassifications
have been made to prior period amounts to conform to the current year's
presentation.
The accompanying business segment information includes the operating results
of Discover Brokerage Direct, Inc. ("DBD"), the Company's provider of
electronic brokerage services, within the Securities and Asset Management
segment. Previously, the Company had included DBD's results within its Credit
Services segment. The segment data of prior periods have been restated in
order to reflect this change.
16
<PAGE>
SECURITIES AND ASSET MANAGEMENT
Statements of Income (dollars in millions)
<TABLE>
<CAPTION>
Nine Months
Three Months Ended August
Ended August 31, 31,
----------------- -------------
1999 1998 1999 1998
-------- -------- ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Investment banking......................... $ 1,207 $ 819 $3,186 $2,607
Principal transactions:
Trading.................................. 1,184 499 4,801 2,493
Investments.............................. 78 (174) 493 (1)
Commissions................................ 729 608 2,183 1,766
Asset management, distribution and
administration fees....................... 799 718 2,278 2,135
Interest and dividends..................... 4,415 3,603 10,506 10,297
Other...................................... 39 51 124 150
-------- ------- ------ ------
Total revenues........................... 8,451 6,124 23,571 19,447
Interest expense........................... 4,043 3,146 9,779 9,301
-------- ------- ------ ------
Net revenues............................. 4,408 2,978 13,792 10,146
-------- ------- ------ ------
Non-interest expenses:
Compensation and benefits.................. 2,170 1,468 6,704 4,991
Occupancy and equipment.................... 150 130 425 380
Brokerage, clearing and exchange fees...... 128 160 369 416
Information processing and communications.. 202 175 600 489
Marketing and business development......... 155 135 471 377
Professional services...................... 184 151 485 388
Other...................................... 189 140 504 395
-------- ------- ------ ------
Total non-interest expenses.............. 3,178 2,359 9,558 7,436
-------- ------- ------ ------
Income before income taxes and cumulative
effect of accounting change................. 1,230 619 4,234 2,710
Income tax expense........................... 462 177 1,613 1,000
-------- ------- ------ ------
Income before cumulative effect of accounting
change...................................... 768 442 2,621 1,710
Cumulative effect of accounting change ...... -- -- -- (117)
-------- ------- ------ ------
Net income............................... $ 768 $ 442 $2,621 $1,593
======== ======= ====== ======
</TABLE>
Securities and Asset Management net revenues of $4,408 million and $13,792
million in the quarter and nine month period ended August 31, 1999 represented
an increase of 48% and 36% from the comparable periods of fiscal 1998.
Securities and Asset Management net income of $768 million and $2,621 million
in the quarter and nine month period ended August 31, 1999 represented an
increase of 74% and 65% from the comparable periods of fiscal 1998. Net income
for the nine month period ended August 31, 1998 included a charge of $117
million representing a cumulative effect of an accounting change. Excluding
the cumulative effect of an accounting change, net income for the nine month
period ended August 31, 1999 increased 53% from the comparable prior year
period. In both periods, the increases were primarily attributable to higher
principal trading, principal investment, investment banking and commission
revenues, partially offset by higher incentive-based compensation and other
non-interest expenses.
Investment Banking
Investment banking revenues are derived from the underwriting of securities
offerings and fees from advisory services. Investment banking revenues in the
quarter ended August 31, 1999 increased 47% primarily due to higher revenues
from merger, acquisition and restructuring activities and higher revenues from
both debt and equity underwritings. Investment banking revenues in the quarter
ended August 31, 1998 were adversely affected by high levels of volatility in
the global financial markets, primarily attributable to periods of economic
turmoil which existed in Russia and Asia.
17
<PAGE>
Revenues from merger, acquisition and restructuring activities increased to
record levels in the quarter ended August 31, 1999. The global market for such
transactions continued to be robust during the quarter, particularly in the
U.S. and Europe. The high level of transaction activity reflected the
continuing trend of consolidation and globalization across many industry
sectors. The generally favorable market conditions which existed during the
quarter and the Company's strong global market share in many industry sectors
contributed to the high level of revenues from merger and acquisition
transactions. Higher revenues from real estate advisory transactions also
contributed to the increase.
Equity underwriting revenues in the quarter ended August 31, 1999 increased
from the comparable prior year period. Equity underwriting revenues benefited
from the high volume of equity offerings which occurred during the beginning
of the quarter, particularly in the U.S. and Europe. The Company's strong
global market share also continued to have a favorable impact on equity
underwriting revenues.
Fixed income underwriting revenues in the quarter ended August 31, 1999 also
increased from the comparable prior year period. The volume of fixed income
underwriting transactions continued to be strong, benefiting from the need for
strategic financing and the relatively low level of interest rates in the U.S.
In addition, the EMU has permitted many corporate issuers to access the euro-
denominated credit market, which continued to have a favorable impact on the
volume of fixed income primary transactions.
Investment banking revenues in the nine month period ended August 31, 1999
increased 22% from the comparable period of fiscal 1998. The increase was
attributable to higher revenues from merger, acquisition and restructuring
activities and from both equity and debt underwritings, reflecting continued
strong transaction volumes.
Principal Transactions
Principal transaction trading revenues, which include revenues from customer
purchases and sales of securities, including derivatives, in which the Company
acts as principal and gains and losses on securities held for resale,
increased 137% in the quarter ended August 31, 1999 from the comparable period
of fiscal 1998. The significant increase reflected higher levels of fixed
income, equity and commodity trading revenues, partially offset by a decline
in foreign exchange trading revenues. The increase also reflects the difficult
global market and economic conditions which adversely affected principal
trading revenues during the quarter ended August 31, 1998.
Fixed income trading revenues increased in the quarter ended August 31, 1999
from the comparable period of fiscal 1998, primarily reflecting higher
revenues from trading investment grade securities and global high yield
securities. Conditions in the fixed income markets during the third quarter of
fiscal 1999 were affected by heightened concerns of inflation in the U.S.,
speculation as to the Fed's monetary policy and widening credit spreads in
certain markets. However, such conditions were more favorable than those which
existed during the third quarter of fiscal 1998, when difficult economic
conditions in Russia, Asia and certain emerging markets caused investor
preferences to shift toward less risky financial instruments, principally to
U.S. Treasury securities. Such conditions 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.
Equity trading revenues increased in the quarter ended August 31, 1999 as
compared to the prior year period, primarily reflecting higher revenues from
equity cash products. Higher revenues from trading in equity cash products
were primarily driven by increased levels of customer trading volumes in both
listed and over-the-counter securities, particularly in the U.S. and in
Europe. Revenues from equity cash products in Asian markets also increased, as
improved conditions in the region led to increased customer trading volumes.
Higher revenues from certain proprietary trading activities also contributed
to the increase in equity trading revenues. Such increases were partially
offset by a decline in revenues from equity derivative products, primarily
attributable to lower levels of volatility, particularly in U.S. markets.
Commodity trading revenues increased significantly in the quarter ended
August 31, 1999 as compared to the prior year period, primarily driven by
higher revenues from trading in energy related products. Trading
18
<PAGE>
revenues from energy related products benefited from a sharp rise in global
energy prices throughout the quarter, which was primarily attributable to
reduced production volumes and lower inventory levels. In addition, natural
gas prices also rose during the quarter, as warm temperatures in certain
regions of the U.S. increased demand.
Foreign exchange trading revenues decreased in the quarter ended August 31,
1999 as compared to the prior year period. Trading revenues were negatively
impacted by reduced customer activity and lower levels of volatility in the
foreign exchange markets. The value of the euro against the U.S. dollar
continued to be affected by the strong economic performance of the U.S.,
coupled with sluggish growth within much of Europe. During the quarter there
was also uncertainty in the direction of the euro due to the Fed's interest
rate actions and speculation about possible interest rate actions by the ECB.
The Japanese yen strengthened against the U.S. dollar during the quarter due
to the prospects of improved economic performance in Japan and increased
investor demand for yen-denominated assets.
Principal transaction investment gains aggregating $78 million were recorded
in the quarter ended August 31, 1999, as compared to losses of $174 million in
the quarter ended August 31, 1998. Fiscal 1999's results primarily reflect
gains from increases in the value of certain private equity and venture
capital investments. Fiscal 1998's results primarily reflect losses from an
institutional leveraged emerging markets debt portfolio, partially offset by
gains from increases in the value of certain private equity investments,
including gains from the initial public offering of Equant N.V., a Netherlands
based data communications company.
Principal transaction trading revenues increased 93% in the nine month
period ended August 31, 1999 from the comparable prior year period, primarily
reflecting higher fixed income, equity and commodity trading revenues. Fixed
income trading revenues increased due to higher revenues from trading
investment grade, global high yield and derivative securities, and benefited
from improved overall conditions in the global financial markets, strong
customer transaction volume and market volatility. The increase in equity
trading revenues reflected higher revenues from trading both cash and
derivative equity products. Equity trading revenues benefited from high levels
of customer trading volume and market volatility, particularly in the U.S. and
in Europe. Higher revenues from certain proprietary trading activities also
contributed to the increase in equity trading revenues. Commodity trading
revenues also increased, reflecting higher revenues from commodity derivatives
and energy products which benefited from rallying energy prices. These
increases were partially offset by lower foreign exchange trading revenues.
Principal transaction investment gains aggregating $493 million were
recognized in the nine month period ended August 31, 1999 as compared to
losses of $1 million in the nine month period ended August 31, 1998. Fiscal
1999's results primarily reflect realized and unrealized gains relating to the
Company's investments in Equant N.V. and Knight/Trimark Group Inc. Net gains
from increases in the value of certain other private equity investments also
contributed to fiscal 1999's results. 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.
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 20% in the
quarter ended August 31, 1999 from the comparable period of fiscal 1998. In
the U.S., favorable market conditions contributed to an increased volume of
customer securities transactions, including listed agency and over-the-counter
equity products. Revenues from markets in Europe also benefited from high
trading volumes and market volatility, as well as from the Company's increased
sales and research coverage of the region which began in mid-1997. Revenues
from Asian markets benefited from higher trading volumes as improved economic
conditions increased investor interest in the region. The continued growth in
the number of the Company's financial advisors also contributed to the
increase.
Commission revenues increased 24% in the nine month period ended August 31,
1999 from the comparable period of fiscal 1998. The increase primarily
reflects a higher level of customer trading activity in the global equity
markets.
19
<PAGE>
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration revenues include fees for
asset management services, including fund management fees which are received
for investment management, and fees received for promoting and distributing
mutual funds ("12b-1 fees"). 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 for investment
management services provided to segregated customer accounts pursuant to
various contractual arrangements.
Asset management, distribution and administration revenues increased 11% and
7% in the quarter and nine month period ended August 31, 1999 from the
comparable periods of fiscal 1998, primarily reflecting higher fund management
and 12b-1 fees as well as other revenues resulting from a higher level of
assets under management or supervision. The increases were partially offset by
the absence of revenues from correspondent clearing and global custody
activities, which was attributable to the Company's sale of its correspondent
clearing business in the third quarter of fiscal 1998 and its global custody
business in the fourth quarter of fiscal 1998.
Customer assets under management or supervision increased to $415 billion at
August 31, 1999 from $353 billion at August 31, 1998. The increase in assets
under management or supervision primarily reflected appreciation in the value
of customer portfolios. Customer assets under management or supervision
included products offered primarily to individual investors of $247 billion at
August 31, 1999 and $200 billion at August 31, 1998. Products offered
primarily to institutional investors were $168 billion at August 31, 1999 and
$153 billion at August 31, 1998.
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, trading strategies associated
with the Company's institutional securities business, customer margin loans,
and the prevailing level, term structure and volatility of interest rates.
Interest and dividend revenues and expense should be viewed in the broader
context of principal trading and investment banking results. Decisions
relating to principal transactions in securities are based on an overall
review of aggregate revenues and costs associated with each transaction or
series of transactions. This review includes an assessment of the potential
gain or loss associated with a trade, the interest income or expense
associated with financing or hedging the Company's positions, and potential
underwriting, commission or other revenues associated with related primary or
secondary market sales. Net interest revenues decreased 19% and 27% in the
quarter and nine month period ended August 31, 1999 from the comparable
periods of fiscal 1998, partially reflecting the level and mix of interest
bearing assets and liabilities during the respective periods, as well as
certain trading strategies utilized in the institutional securities business.
Non-Interest Expenses
Total non-interest expenses increased 35% and 29% in the quarter and nine
month period ended August 31, 1999 from the comparable periods of fiscal 1998.
Within the non-interest expense category, compensation and benefits expense
increased 48% and 34% in the quarter and nine month period ended August 31,
1999, principally reflecting higher incentive-based compensation due to higher
levels of revenues and earnings. Excluding compensation and benefits expense,
non-interest expense increased 13% and 17% in the quarter and nine month
period ended August 31, 1999 from the comparable periods of fiscal 1998.
Occupancy and equipment expense increased 15% and 12% in the quarter and nine
month period ended August 31, 1999, primarily due to increased office space in
New York and certain other locations, and additional rent associated with 31
new branch locations in the U.S. Brokerage, clearing and exchange fees
decreased 20% and 11% in the quarter and nine month period ended August 31,
1999. In both periods, the decrease was primarily attributable to the
inclusion of external commissions paid in connection with the Company's launch
of the Van Kampen Senior Income Trust
20
<PAGE>
mutual fund in fiscal 1998's expenses. In addition, lower agent bank costs
were incurred due to the Company's fiscal 1998 sale of its global custody
business. These decreases were partially offset by higher brokerage expenses
due to increased global securities trading volume. Information processing and
communications expense increased 15% and 23% in the quarter and nine month
period ended August 31, 1999, primarily due to increased costs associated with
the Company's information processing infrastructure, including server and data
center costs. A higher number of employees utilizing communications systems
and certain data services also contributed to the increase. Marketing and
business development expense increased 15% and 25% in the quarter and nine
month period ended August 31, 1999, reflecting higher advertising expenses
associated with the Company's individual securities business. Increased travel
and entertainment costs associated with the continued high levels of activity
in the global financial markets also contributed to the increase in both
periods. The increase in the nine month period also reflects higher
advertising costs associated with DBD. Professional services expense increased
22% and 25% in the quarter and nine month period ended August 31, 1999,
primarily reflecting higher consulting costs associated with certain
information technology initiatives, including the preparation for the Year
2000, as well as the Company's increased global business activities. Higher
legal costs also contributed to the increase. Other expense increased 35% and
28% in the quarter and nine month period ended August 31, 1999, which reflects
the impact of a higher level of business activity on various operating
expenses. The amortization of goodwill associated with the Company's
acquisition of AB Asesores in March 1999 also contributed to the increase.
Credit Services
Statements of Income (dollars in millions)
<TABLE>
<CAPTION>
Three
Months Nine Months
Ended Ended
August 31, August 31,
----------- -------------
1999 1998 1999 1998
----- ----- ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Fees:
Merchant and cardmember............................ $ 392 $ 438 $1,090 $1,270
Servicing.......................................... 313 255 876 658
Other................................................ -- 1 -- 4
----- ----- ------ ------
Total non-interest revenues........................ 705 694 1,966 1,932
----- ----- ------ ------
Interest revenue..................................... 546 680 1,624 2,132
Interest expense..................................... 203 231 622 775
----- ----- ------ ------
Net interest income................................ 343 449 1,002 1,357
Provision for consumer loan losses................... 113 280 409 960
----- ----- ------ ------
Net credit income.................................. 230 169 593 397
----- ----- ------ ------
Net revenues....................................... 935 863 2,559 2,329
----- ----- ------ ------
Non-interest expenses:
Compensation and benefits.......................... 132 141 374 423
Occupancy and equipment............................ 16 18 40 51
Information processing and communications.......... 123 116 349 344
Marketing and business development................. 253 219 713 557
Professional services.............................. 30 25 82 72
Other.............................................. 48 53 142 153
----- ----- ------ ------
Total non-interest expenses...................... 602 572 1,700 1,600
----- ----- ------ ------
Income before income taxes........................... 333 291 859 729
Provision for income taxes........................... 131 107 322 270
----- ----- ------ ------
Net income......................................... $ 202 $ 184 $ 537 $ 459
===== ===== ====== ======
</TABLE>
21
<PAGE>
Credit Services net income of $202 million and $537 million in the quarter
and nine month period ended August 31, 1999 represented an increase of 10% and
17% from the comparable periods of fiscal 1998. The increases in net income in
both periods were primarily attributable to a lower provision for loan losses
and increased servicing fees, partially offset by lower net interest income,
merchant and cardmember fees and higher marketing and business development
expenses.
The quarter and nine month period ended August 31, 1999 does not include the
results from operations of SPS Transaction Services, Inc. ("SPS"), the Prime
Option SM MasterCard(R) portfolio ("POS") and certain receivables associated
with the discontinued BRAVO(R) Card, all of which were sold during fiscal
1998. The Company sold its interest in the operations of SPS, which was a 73%-
owned, publicly held subsidiary of the Company, in the fourth quarter of
fiscal 1998. POS, a business the Company operated with NationsBank of
Delaware, N.A., was sold during the second quarter of fiscal 1998. The Company
discontinued its BRAVO Card in fiscal 1998 and sold certain credit card
receivables associated with the BRAVO Card in the fourth quarter of fiscal
1998.
During the quarter ended August 31, 1999, the Company announced plans for
the launch of the Morgan Stanley Dean Witter Card (the "MSDW SM Card") in the
United Kingdom, which features a Cashback Bonus(R) award, attractive pricing
and no annual fee. The MSDW Card is issued by Morgan Stanley Dean Witter Bank
Limited on the Europay/MasterCard(R) Network. The new credit card is offered
in the United Kingdom through a major marketing initiative that includes a new
advertising campaign as well as direct mail and press inserts.
Non-Interest Revenues
Total non-interest revenues increased 2% in both the quarter and nine month
period ended August 31, 1999 from the comparable periods of fiscal 1998.
Merchant and cardmember fees include revenues from fees charged to merchants
on credit card sales, late payment fees, overlimit fees, insurance fees and
cash advance fees. Merchant and cardmember fees decreased 11% and 14% in the
quarter and nine month period ended August 31, 1999 from the comparable
periods of fiscal 1998. In both periods, the decreases were primarily due to
the Company's sale of the operations of SPS. The decrease in the nine month
period was also affected by the sale of POS. Both periods were also impacted
by higher merchant discount revenue offset by lower levels of overlimit fees
associated with the Discover Card. The nine month period ended August 31, 1999
was also impacted by a decrease in cash advance fees and late payment fees
associated with the Discover Card. The increases in Discover Card merchant
discount revenue in both periods were associated with higher levels of sales
volume. Overlimit fees decreased in both periods primarily due to a lower
level of owned consumer loans. Cash advance fees decreased in the nine month
period ended August 31, 1999 due to lower cash advance transaction volume,
primarily attributable to the Company's actions to limit cash advances in an
effort to improve credit quality. Late payment fees decreased in the nine
month period ended August 31, 1999 primarily due to lower levels of owned
consumer loans.
Servicing fees are revenues derived from consumer loans which 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 $526 million in the quarter ended August 31, 1999 and
$3,000 million in the nine month period ended August 31, 1999. During the
comparable periods of fiscal 1998, the Company completed asset securitizations
of $1,234 million and $3,444 million. The asset securitization transaction
completed in the third quarter of fiscal 1999 has an expected maturity of 5
years from the date of issuance.
22
<PAGE>
The table below presents the components of servicing fees (dollars in
millions):
<TABLE>
<CAPTION>
Three
Months
Ended Nine Months
August Ended
31, August 31,
---------- ------------
1999 1998 1999 1998
---- ---- ----- -----
<S> <C> <C> <C> <C>
Merchant and cardmember fees.......................... $149 $139 $ 418 $ 359
Interest revenue...................................... 705 683 2,028 1,910
Interest expense...................................... (264) (269) (744) (754)
Provision for consumer loan losses.................... (277) (298) (826) (857)
---- ---- ----- -----
Servicing fees........................................ $313 $255 $ 876 $ 658
==== ==== ===== =====
</TABLE>
Servicing fees increased 23% and 33% in the quarter and nine month period
ended August 31, 1999 from the comparable periods of fiscal 1998. The increase
in both periods was due to higher levels of net interest cash flows, increased
fee revenue, and lower credit losses from securitized consumer loans. The
increases in net interest and fee revenue were primarily a result of higher
levels of average securitized loans. The decrease in credit losses was the
result of a lower level of charge-offs related to the Discover Card portfolio
and the positive impact of the sale of the operations of SPS, partially offset
by an increase in the level of securitized consumer loans.
Net Interest Income
Net interest income represents the difference between interest revenue
derived from Credit Services consumer loans and short-term investment assets
and interest expense incurred to finance those assets. Credit Services assets,
consisting primarily of consumer loans, currently earn interest revenue at
fixed rates and, to a lesser extent, 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 24% and 26% in the quarter and nine
month period ended August 31, 1999 from the comparable periods of fiscal 1998.
The decreases in both periods were primarily due to lower average levels of
owned consumer loans and a lower yield on these loans. The decrease in owned
consumer loans in both periods was due to the sale of the operations of SPS,
the discontinuance of the BRAVO Card in fiscal 1998, and a higher level of
securitized Discover Card loans. The nine month period was also affected by
the sale of POS. The lower yield during both periods was due to a lower yield
on Discover Card loans coupled with the exclusion of SPS loans from the
Company's portfolio. The lower yield on Discover Card loans in the quarter
ended August 31, 1999 was primarily due to the more competitive interest rates
offered to both existing and new cardmembers. In the nine month period ended
August 31, 1999, the lower yield on Discover Card loans was due to the
Company's repricing of credit card receivables, coupled with the effect of
changes in the interest rates on the Company's variable loan portfolio,
primarily associated with a decrease in the prime rate in the fourth quarter
of fiscal 1998.
The Company repriced a substantial portion of its existing credit card
receivables to a range of fixed interest rates beginning with cardmembers'
March 1999 billing cycle. The Company believes that the repricing will not
have a material impact on net interest income, or its interest rate risk
exposure, because of the Company's matched financing objectives and because
the Company has the ability to exercise its rights, with notice to
cardmembers, to adjust the interest rate the cardmember pays at the Company's
discretion. Given this strategic decision, the Company's interest rate
sensitivity analysis now incorporates a pricing strategy that assumes an
appropriate repricing of fixed rate credit card receivables to reflect the
market interest rate environment, the Company's liability management policy
and competitive factors.
23
<PAGE>
The following tables present analyses of Credit Services average balance
sheets and interest rates for the quarters and nine month periods ended August
31, 1999 and 1998 and changes in net interest income during those periods:
Average Balance Sheet Analysis (dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended August 31,
--------------------------------------------------
1999 1998
------------------------ -------------------------
Average Average
Balance Rate Interest Balance Rate Interest
------- ----- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
General purpose credit card
loans....................... $15,307 13.37% $ 516 $15,913 14.61% $586
Other consumer loans......... 4 8.95 -- 1,503 16.99 65
Investment securities........ 551 5.04 7 460 5.56 7
Other........................ 1,607 5.78 23 1,498 5.95 22
------- ----- ------- ----
Total interest earning
assets.................. 17,469 12.40 546 19,374 13.91 680
Allowance for loan losses.... (771) (836)
Non-interest earning assets.. 1,720 1,602
------- -------
Total assets............. $18,418 $20,140
======= =======
LIABILITIES AND SHAREHOLDER'S
EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings.................... $ 1,447 4.42% $ 16 $ 1,211 4.93% $ 15
Brokered................... 5,607 6.21 88 5,643 6.53 93
Other time................. 1,848 5.77 27 2,047 6.24 32
------- ----- ------- ----
Total interest bearing
deposits................ 8,902 5.83 131 8,901 6.25 140
Other borrowings............. 5,235 5.50 72 6,079 5.95 91
------- ----- ------- ----
Total interest bearing
liabilities............. 14,137 5.71 203 14,980 6.13 231
Shareholder's equity/other
liabilities................. 4,281 5,160
------- -------
Total liabilities and
shareholder's equity.... $18,418 $20,140
======= =======
----- ----
Net interest income.......... $ 343 $449
===== ====
Net interest margin.......... 7.79% 9.17%
Interest rate spread......... 6.69% 7.78%
</TABLE>
24
<PAGE>
Average Balance Sheet Analysis (dollars in millions)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
-------------------------------------------------
1999 1998
------------------------ ------------------------
Average Average
Balance Rate Interest Balance Rate Interest
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
General purpose credit card
loans....................... $15,454 13.18% $1,530 $17,559 14.02% $1,849
Other consumer loans......... 4 9.02 -- 1,575 16.70 198
Investment securities........ 712 5.09 27 435 6.70 22
Other........................ 1,622 5.50 67 1,419 5.96 63
------- ------ ------- ------
Total interest earning
assets.................. 17,792 12.16 1,624 20,988 13.53 2,132
Allowance for loan losses.... (775) (857)
Non-interest earning assets.. 1,676 1,640
------- -------
Total assets............. $18,693 $21,771
======= =======
LIABILITIES AND SHAREHOLDER'S
EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings.................... $ 1,456 4.38% $ 48 $ 1,015 4.82% $ 37
Brokered................... 5,238 6.37 250 5,877 6.60 291
Other time................. 1,949 5.54 81 2,203 6.16 102
------- ------ ------- ------
Total interest bearing
deposits................ 8,643 5.85 379 9,095 6.29 430
Other borrowings............. 5,853 5.52 243 7,635 6.02 345
------- ------ ------- ------
Total interest bearing
liabilities............. 14,496 5.72 622 16,730 6.17 775
Shareholder's equity/other
liabilities................. 4,197 5,041
------- -------
Total liabilities &
shareholder's equity.... $18,693 $21,771
======= =======
------ ------
Net interest income.......... $1,002 $1,357
====== ======
Net interest margin.......... 7.50% 8.61%
Interest rate spread......... 6.44% 7.36%
</TABLE>
25
<PAGE>
Rate/Volume Analysis (dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, 1999 vs. August 31, 1999 vs.
1998 1998
------------------------ -----------------------
Increase/(Decrease) Increase/(Decrease)
Due to Changes in Due to Changes in
------------------------ -----------------------
Volume Rate Total Volume Rate Total
------- ------ ------- ------- ------ ------
INTEREST REVENUE
<S> <C> <C> <C> <C> <C> <C>
General purpose credit card
loans..................... $ (22) $ (48) $ (70) $ (222) $ (97) $ (319)
Other consumer loans....... (65) -- (65) (198) -- (198)
Investment securities...... 1 (1) -- 14 (9) 5
Other...................... 2 (1) 1 9 (5) 4
------- ------
Total interest revenue... (67) (67) (134) (325) (183) (508)
<CAPTION>
INTEREST EXPENSE
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits
Savings.................... 3 (2) 1 16 (5) 11
Brokered................... (1) 9 8 (32) 5 (27)
Other time................. (3) (2) (5) (12) (9) (21)
------- ------
Total interest bearing
deposits................ -- 4 4 (21) (16) (37)
Other borrowings........... (13) (19) (32) (80) (36) (116)
------- ------
Total interest expense... (13) (15) (28) (104) (49) (153)
------- ------
Net interest income........ $ (54) $ (52) $ (106) $ (221) $ (134) $ (355)
====== ====== ======= ====== ====== ======
</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,
-----------------------------------------------
1999 1998
----------------------- -----------------------
Avg. Rate Avg. Rate
Bal. % Interest Bal. % Interest
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans................ $33,379 14.30% $1,204 $34,076 15.19% $1,304
General purpose credit card
loans........................ 33,375 14.30 1,203 31,955 15.06 1,212
Total interest earning
assets....................... 35,537 13.78 1,234 36,034 14.68 1,333
Total interest bearing
liabilities.................. 32,205 5.69 462 31,640 6.13 489
Consumer loan interest rate
spread....................... 8.61 9.06
Interest rate spread.......... 8.09 8.55
Net interest margin........... 8.62 9.30
<CAPTION>
Nine Months Ended August 31,
-----------------------------------------------
1999 1998
----------------------- -----------------------
Avg. Rate Avg. Rate
Bal. % Interest Bal. % Interest
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans................ $32,845 14.25% $3,515 $35,115 14.90% $3,927
General purpose credit card
loans........................ 32,841 14.25 3,514 32,887 14.75 3,641
Total interest earning
assets....................... 35,179 13.67 3,609 36,969 14.46 4,012
Total interest bearing
liabilities.................. 31,883 5.64 1,350 32,710 6.18 1,518
Consumer loan interest rate
spread....................... 8.61 8.72
Interest rate spread.......... 8.03 8.28
Net interest margin........... 8.55 8.99
</TABLE>
26
<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 $766 million
and $855 million at August 31, 1999 and 1998, respectively. 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 60% and 57% in the quarter and nine month period ended August 31,
1999 from the comparable periods of fiscal 1998. The decreases in both periods
were primarily due to a lower level of charge-offs related to the Discover
Card portfolio and the positive impact of the sale of the operations of SPS
and the discontinuance of the BRAVO Card. The nine month period was also
affected by the sale of POS. These decreases were reflective of the Company's
continuing efforts to improve the credit quality of its portfolio. The
provision for consumer loan losses was also positively impacted by a decline
in the loan loss allowance in connection with securitization transactions
entered into prior to the third quarter of 1996. This loan loss allowance will
be fully amortized over fiscal 1999. The Company's 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 provision for consumer loan losses include the level and direction of
consumer loan delinquencies and charge-offs, 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 in the month in which
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 following table presents delinquency and net charge-off rates with
supplemental managed loan information:
Asset Quality (dollars in millions)
<TABLE>
<CAPTION>
August 31, November 30,
---------------------------------- ----------------
1999 1998 1998
---------------- ---------------- ----------------
Owned Managed Owned Managed Owned Managed
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans at
period-end............. $16,557 $34,381 $17,657 $34,228 $15,996 $32,502
Consumer loans
contractually past due
as a percentage of
period-end consumer
loans:
30 to 89 days......... 2.71% 4.04% 4.15% 4.20% 3.54% 3.69%
90 to 179 days........ 1.46% 2.30% 2.95% 2.99% 2.67% 2.84%
Net charge-offs as a
percentage of average
consumer loans (year-
to-date)............... 5.12% 5.70% 6.77% 6.89% 6.75% 6.90%
</TABLE>
Non-Interest Expenses
Non-interest expenses increased 5% and 6% in the quarter and nine month
period ended August 31, 1999 from the comparable periods of fiscal 1998.
27
<PAGE>
Compensation and benefits expense decreased 6% and 12% in the quarter and
nine month period ended August 31, 1999 from the comparable periods of fiscal
1998 due to a lower level of compensation costs resulting from the sale of the
operations of SPS, partially offset by higher employment costs at Discover
Financial Services associated with increased employment levels. The decrease
in the nine month period was also affected by the sale of POS. Occupancy and
equipment expense decreased 11% and 22%, primarily due to the exclusion of the
results of SPS in fiscal 1999. The decrease in the nine month period was also
affected by the sale of POS. Information processing and communications expense
increased 6% and 1% due to increased external data processing costs at
Discover Financial Services, partially offset by the exclusion of the results
of SPS in fiscal 1999. The increase in the nine month period was also
partially offset by the sale of POS. Marketing and business development
expense increased 16% and 28% during the quarter and nine month period ended
August 31, 1999 from the comparable periods of fiscal 1998. In both periods
the increases were due to direct mailing and other promotional activities
related to the launch and continued promotion of the Discover Platinum Card
and higher cardmember rewards expense. Higher cardmember rewards expense in
both periods was due to increased sales volume. Cardmember rewards expense
includes the Cashback Bonus award, pursuant to which the Company annually pays
Discover cardmembers and Private Issue(R) cardmembers electing this feature a
percentage of their purchase amounts. The Company expects to continue to
invest in the growth of its credit card business, including the launch of the
MSDW Card in the United Kingdom which was announced during the quarter ended
August 31, 1999. Professional services expense increased 20% and 14% during
the quarter and nine month period ended August 31, 1999 from the comparable
periods of fiscal 1998 due to increased costs associated with account
collections and consumer credit counseling, partially offset by a decrease in
expenses associated with the sale of the operations of SPS. The increase in
the nine month period was also partially offset by the sale of POS. Other
expenses decreased 9% and 7% during the quarter and nine month period ended
August 31, 1999 from the comparable periods of fiscal 1998. The decreases in
both periods were due to the exclusion of the results of SPS in fiscal 1999
and a decrease in fraud losses, partially offset by higher expenses related to
the Discover Platinum Card and expenses associated with the launch of the MSDW
Card in the United Kingdom.
Liquidity and Capital Resources
The Company's total assets increased from $317.6 billion at November 30,
1998 to $340.9 billion at August 31, 1999 primarily reflecting higher
financial instruments owned, securities borrowed and customer receivables. A
substantial portion of the Company's total assets consists of highly liquid
marketable securities and short-term receivables arising principally from
securities transactions. The highly liquid nature of these assets provides the
Company with flexibility in financing and managing its business.
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, in the context of both the particular business environment in
which the Company is operating and its peer group's results. In this regard,
the Company actively manages its consolidated capital position based upon,
among other things, business opportunities, capital availability and rates of
return together with internal capital policies, regulatory requirements and
rating agency guidelines and therefore may, in the future, expand or contract
its capital base to address the changing needs of its businesses. The Company
returns internally generated equity capital which is in excess of the needs of
its businesses to its shareholders through common stock repurchases and
dividends.
The Company funds its balance sheet on a global basis. The Company's funding
for its Securities and Asset Management business is raised through diverse
sources. These sources include the Company's capital, including equity and
long-term debt; repurchase agreements; U.S., Canadian, Euro and Japanese
commercial paper; letters of credit; unsecured bond borrows; securities
lending; buy/sell agreements; municipal re-investments; master notes; and
committed and uncommitted lines of credit. Repurchase agreement transactions,
securities lending and
28
<PAGE>
a portion of the Company's bank borrowings are made on a collateralized basis
and therefore provide a more stable source of funding than short-term
unsecured borrowings.
The funding sources utilized for the Company's Credit Services business
include the Company's capital, including equity and long-term debt; asset
securitizations; commercial paper; deposits; asset-backed commercial paper;
Federal 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 Company's condensed
consolidated financial statements, 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 certificates 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, 1999 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. (1)....... a-1+ AA
Moody's Investors Service............................. P-1 Aa3
Standard & Poor's (2)................................. A-1 A+
Thomson Financial BankWatch (3)....................... TBW-1 AA+
</TABLE>
- --------
(1) On September 21, 1999, Japan Rating & Investment Information, Inc.
upgraded the Company's senior debt rating from AA- to AA.
(2) On April 16, 1999, Standard & Poor's placed the Company's senior debt
ratings on Positive Outlook.
(3) On September 23, 1999, Thomson Financial BankWatch upgraded the Company's
senior debt rating from AA to AA+.
As part of its Year 2000 preparations, the Company's Treasury Department, in
conjunction with the Company's business areas, has developed a Year 2000
Funding Plan that addresses the issue of maintaining adequate liquidity over
the fourth calendar quarter of 1999 and the first calendar quarter of 2000.
The Company's Year 2000 liquidity strategy is the culmination of a global
effort on the part of the Treasury Department and the Company's business areas
to determine potential funding needs, assess Year 2000 opportunities and extra
liquidity needs, determine the precise timing and size of these needs and
evaluate appropriate currencies for funding.
29
<PAGE>
In developing this plan, the Company has attempted to identify potential
levels of disruption and has determined that, while it may well turn out that
the level of disruption may be negligible or easily manageable, it is prudent
to establish a reasonable, but not extreme, amount of liquidity over the
course of the remainder of 1999 in order to avoid the potential for an
illiquidity problem late in the year.
In connection with this plan, the Company has extended the maturity of a
portion of its existing short-term unsecured funding. The Company has
substantially completed executing its core 1999 long-term financing plan, and
has renewed its committed credit facilities. With respect to funding
liquidity, the Company's preparation for the Year 2000 will continue
throughout the remainder of 1999.
As the Company continues to expand globally and as revenues are increasingly
derived from various currencies, foreign currency management is a key element
of the Company's financial policies. The Company benefits from operating in
several different currencies because weakness in any particular currency is
often offset by strength in another currency. The Company closely monitors its
exposure to fluctuations in currencies and, where cost-justified, adopts
strategies to reduce the impact of these fluctuations on the Company's
financial performance. These strategies include engaging in various hedging
activities to manage income and cash flows denominated in foreign currencies
and using foreign currency borrowings, when appropriate, to finance
investments outside the U.S.
During the nine month period ended August 31, 1999, the Company issued
senior notes aggregating $7,311 million, including non-U.S. dollar currency
notes aggregating $2,314 million, primarily pursuant to its public debt shelf
registration statements. These notes have maturities from 2000 to 2029 and a
weighted average coupon interest rate of 4.3% at August 31, 1999; the Company
has entered into certain transactions to obtain floating interest rates based
primarily on short-term LIBOR trading levels. At August 31, 1999 the aggregate
outstanding principal amount of the Company's Senior Indebtedness (as defined
in the Company's public debt shelf registration statements) was approximately
$37.8 billion.
Effective March 1, 1999, the Company redeemed all of the outstanding 7.82%
Capital Units and 7.80% Capital Units. The aggregate principal amount of the
Capital Units redeemed was $352 million. During the quarter ended May 31,
1999, the Company repurchased in a series of transactions in the open market
approximately $64 million of the $134 million outstanding 8.03% Capital Units.
During the third fiscal quarter the Company retired these repurchased Capital
Units.
On May 5, 1999, the Company's shelf registration statement for the issuance
of an additional $12 billion of debt securities, units, warrants or purchase
contracts or any combination thereof in the form of units or preferred stock,
became effective.
During the nine month period ended August 31, 1999, the Company purchased
$1,732 million of its common stock. Subsequent to August 31, 1999 and through
September 30, 1999, the Company purchased an additional $222 million of its
common stock.
In an effort to enhance its ongoing stock repurchase program, the Company
may sell put options on shares of its common stock to third parties. These put
options entitle the holder to sell shares of the Company's common stock to the
Company on certain dates at specified prices. As of August 31, 1999, put
options were outstanding on an aggregate of 1,068,500 shares of the Company's
common stock. The maturity dates of these put options range from September
1999 through November 1999. The Company may elect cash settlement of the put
options instead of taking delivery of the stock.
On April 28, 1999, the Company renewed its 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
30
<PAGE>
terms of the MSDW Facility, the banks are committed to provide up to $5.5
billion. The MSDW Facility contains restrictive covenants which require, among
other things, that the Company maintain shareholders' equity of at least $9.1
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, 1999, 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. Both the master collateral facility and the secured committed
credit agreement were renewed on June 8, 1999. At August 31, 1999, no
borrowings were outstanding under the MS&Co. Facility.
On May 25, 1999, the Company renewed its revolving committed financing
facility that enables Morgan Stanley & Co. International Limited ("MSIL"), the
Company's London-based broker-dealer subsidiary, to secure committed funding
from a syndicate of banks by providing a broad range of collateral under
repurchase agreements (the "MSIL Facility"). Such banks are committed to
provide up to an aggregate of $1.91 billion available in 6 currencies. At
August 31, 1999 no borrowings were outstanding under the MSIL Facility.
On June 7, 1999, Morgan Stanley Japan Limited ("MSJL"), the Company's Tokyo-
based broker-dealer subsidiary, entered into a committed revolving credit
facility guaranteed by the Company, that provides funding to support general
liquidity needs, including support of MSJL's unsecured borrowings (the "MSJL
Facility"). Under the terms of the MSJL Facility, a syndicate of banks is
committed to provide up to 60 billion Japanese yen.
RFC also maintains a $2.6 billion senior bank credit facility which supports
the issuance of asset-backed commercial paper. On July 12, 1999, the RFC
senior bank credit facility was renewed. RFC has never borrowed from its
senior bank credit facility.
The Company anticipates that it will utilize the MSDW Facility, the MS&Co.
Facility, the MSIL Facility or the MSJL Facility for short-term funding from
time to time.
At August 31, 1999, certain assets of the Company, such as real property,
equipment and leasehold improvements of $2.1 billion, and goodwill and other
intangible assets of $1.4 billion, were illiquid. In addition, certain equity
investments made in connection with the Company's private equity and other
principal investment 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, real estate and certain 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, 1999, the aggregate carrying value of the
Company's equity investments in privately held companies (including direct
investments and partnership interests) was $239 million, and its aggregate
investment in publicly held companies was $436 million. The Company also has
commitments of $448 million at August 31, 1999 in connection with its private
equity and other principal investment activities.
In addition, at August 31, 1999, the aggregate value of high-yield debt
securities and emerging market loans and securitized instruments held in
inventory was $1,551 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 6% to any one geographic
region. Non-investment grade securities generally
31
<PAGE>
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
in place credit and other risk policies and procedures to control total
inventory positions and risk concentrations for non-investment grade
securities and emerging market loans and securitized instruments that are
administered 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 9 to
the consolidated financial statements for the fiscal year ended November 30,
1998, included in the Company's Annual Report on Form 10-K).
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,
1999 traded in markets that the Company believed were experiencing lower
levels of liquidity than traditional mortgage-backed pass-through securities
approximated $1,350 million.
In connection with certain of its business activities, the Company provides
financing or financing commitments (on a secured and unsecured basis) to
companies in the form of senior and subordinated debt, including bridge
financing on a selective basis. The borrowers may be rated investment grade or
non-investment grade and the loans may have varying maturities. As part of
these activities, the Company may syndicate and trade certain positions of
these loans. At August 31, 1999, the aggregate value of loans and positions
were $1,927 million. The Company has also provided additional commitments
associated with these activities aggregating $6,909 million at August 31,
1999. At September 30, 1999, the Company had loans and positions outstanding
of $2,165 million and aggregate commitments of $5,789 million. The higher
level of the Company's commitments as compared to prior periods is primarily
attributable to increased merger and acquisition activities, particularly in
Europe. However, there can be no assurance that the level of such activities
will continue in future periods.
The Company has entered into an agreement that will result in the
development of an office tower in New York City. Pursuant to this agreement,
the Company has entered into a 99-year lease for the land at the proposed
development site. The total investment in this project (which will be incurred
over the next several years) is estimated to be approximately $650 million.
At August 31, 1999 financial instruments owned by the Company included
derivative products (generally in the form of futures, forwards, swaps, caps,
collars, floors, swap options and similar instruments which derive their value
from underlying interest rates, foreign exchange rates or commodity or equity
instruments and indices) related to financial instruments and commodities with
an aggregate net replacement cost of $21.0 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.
32
<PAGE>
Year 2000 Readiness Disclosure
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 may 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 may 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 issue. Each of the Company's business areas has
taken responsibility for the identification and remediation of Year 2000
issues within its own areas of operations and for addressing all
interdependencies. A corporate team of internal and external professionals
supports the business teams by providing direction and company-wide
coordination as needed. The Year 2000 project has been designated as the
highest priority activity of the Company. 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 reviewed its systems and programs to identify those that contain
two-digit year codes and has upgraded its global infrastructure and corporate
facilities. 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 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 included 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 included a thorough
testing of all repairs, including present and forward date testing which
simulates dates in the Year 2000. The Implementation phase consisted of
placing all items that were 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.
The Company has completed the Awareness, Inventory, Assessment, Remediation,
Testing and Implementation phases pursuant to plan. As of September 30, 1999,
Integration Testing has been completed. External Testing is substantially
complete, although the Company will continue to participate in global external
testing through the remainder of 1999 as deemed necessary.
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. In addition, the major operational relationships with
vendors of the Company have been identified, and the most critical of them
have been tested. The Company is closely monitoring the status of non-
compliant vendors. In some cases, the Company has implemented risk reduction
steps or created specific contingency plans to mitigate the risk associated
with the non-compliant vendor.
The Company has participated in the planning and execution of the Year 2000
Industrywide Tests organized by the membership of the Securities Industry
Association (the "SIA"). Such testing involved the participation of hundreds
of firms and a significant number of simulated transactions and conditions.
Additionally, the Company has participated in a variety of external tests in
the U.S., U.K., Japan, Hong Kong and selected European countries. The Company
has achieved successful results in each of the tests in which it participated.
33
<PAGE>
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 credit card
transactions and balances; the inability to reconcile trading positions and
balances with counterparties; and 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 Company recognizes the uncertainty
of such external dependencies since it can not directly control the
remediation efforts of third parties. 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 (including data center, data network and
voice service providers) 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. In addition, the
Company is monitoring the extent to which the impact of either anticipated or
actual Year 2000 problems in the financial services industry, such as a
reduction in the general level of investment banking activity and trading
activity by market participants, may affect its business and operations.
The Company has business continuity plans in place for its critical business
functions on a worldwide basis. The Company also has in place a Year 2000
Funding Plan (see "Liquidity & Capital Resources"). To help mitigate the
impact of potential Year 2000-related issues, the Company is continuing to
review the status of its major external counterparties and suppliers with
respect to their Year 2000 preparation. Where necessary, contingency plans
have been expanded or developed to address specific Year 2000 risk scenarios.
In addition, the Company has established a global Command, Control and
Communication network (the "C3 Network") to monitor internal and external
status, manage escalation procedures and provide a rapid response mechanism to
address critical issues. The objective of the C3 Network is to enable Company
management, on both a global and regional basis, to monitor and manage any
Year 2000 related issues and their impact on the Company's business
activities. This preparation includes the development of analytical tools to
monitor critical business functions over the event horizon. Monitoring and
status reporting will be continuous during the event period.
The Company has begun and will continue to test Year 2000 specific
contingency plans during the remainder of calendar year 1999 as part of its
Year 2000 mitigation efforts. As part of this process, the Company expects to
conduct "dress rehearsals" among all of the Company's business areas and
regional locations. The dress rehearsals will include simulations of potential
event scenarios to test the effectiveness of the Company's decision-making
ability and escalation tools and certain of the Company's contingency plans as
well as the responsiveness of the Company's C3 Network.
The Company notes that no contingency plan can guarantee that mission
critical systems will not be impacted by the Year 2000 issue, particularly
with respect to systems that interact with third party products or services
outside the Company's control.
Based upon current information, the Company estimates that the total cost of
implementing its Year 2000 initiative will be between $225 million and $250
million. The increase in these estimates from amounts previously reported
primarily relate to revised internal estimates associated with the C3 Network
and contingency planning. 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 August 31, 1999, the Company
has expended approximately $190 million on the Year 2000 project. The majority
of the remaining costs are expected to be incurred primarily in relation to
the C3 Network and contingency planning 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.
34
<PAGE>
The Company's expectations about future costs and the effectiveness of its
Year 2000 activities 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 effectiveness of the Year
2000 project 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 any newly discovered Year 2000 issues; 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of August 31, 1999, the Company's market risk (in its trading and related
activities) as measured by its Value-at-Risk ("VaR") model (with a 99% / one
day confidence level) has decreased to $31 million as compared to $38 million
at November 30, 1998. This decrease primarily reflected a decrease in the
interest rate component of VaR attributable to a reduction in certain interest
rate risk positions, as well as a greater overall diversification benefit. The
decrease was partially offset by an increase in the commodity price component
of aggregate value at risk, which was attributable to increased prices in
certain commodities, including energy-related products.
For a further discussion of the Company's risk management policy and control
structure, refer to the "Risk Management" section of the Company's Annual
Report on Form 10-K for the fiscal year ended November 30, 1998.
35
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The following developments have occurred with respect to certain matters
previously reported in the Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1998 and in the Company's Quarterly Reports on Form
10-Q for the fiscal quarters ended February 28, 1999 and May 31, 1999.
Penalty Bid Litigation. In Myers v. Merrill Lynch & Co., Inc., et al., on
August 23, 1999, the court denied plaintiffs' motion to remand the action, and
granted a motion filed by certain defendants to dismiss the complaint on the
grounds of preemption. On September 23, 1999, plaintiffs appealed the decision
to the United States Court of Appeals for the Ninth Circuit.
Nenni, et al. v. Dean Witter Reynolds Inc. On September 29, 1999, the court
granted defendant's motion to dismiss the amended complaint.
Term Trust Class Actions. Motions to dismiss were filed by the defendants in
the Florida action on August 30, 1999 and in the New Jersey action on July 26,
1999 and in the New York action on September 10, 1999. The New Jersey motion
was denied by the court on September 27, 1999.
Item 2. Changes in Securities and Use of Proceeds.
(c) To enhance its ongoing stock repurchase program, during the quarter
ended August 31, 1999, the Company sold European-style put options on an
aggregate of 700,000 shares of its common stock in addition to those
previously reported. These put options expire on various dates through
November 1999. They entitle the holder to sell common stock to the Company at
prices ranging from $84.1220 to $95.2413 per share, although the Company may
elect cash settlement of the put options instead of taking delivery of the
stock. The sale of these put options, which were made as private placements to
third parties, generated proceeds to the Company of approximately $3 million.
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 15, 1999 reporting Items 5 and 7.
Form 8-K dated June 24, 1999 reporting Items 5 and 7.
36
<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/ Joanne Pace
By: _________________________________
Joanne Pace, Controller and
Principal Accounting Officer
Dated: October 15, 1999
37
<PAGE>
EXHIBIT INDEX
MORGAN STANLEY DEAN WITTER & CO.
Quarter Ended August 31, 1999
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.1 Dean Witter Reynolds Inc. Branch Manager Compensation Plan, Amended
and Restated as of September 21, 1999.
10.2 Dean Witter Reynolds Inc. Financial Advisor Productivity Compensation
Plan, Amended and Restated as of September 21, 1999.
10.3 Tax Deferred Equity Participation Plan, Amended and Restated as of
September 21, 1999.
10.4 Services Agreement by and between the Company and International
Business Machines Corporation, Effective as of July 1, 1999 (Portions
of this Exhibit have been omitted pursuant to a request for
confidential treatment of such omitted information under Rule 24b-2).
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,
1999, concerning unaudited interim financial information.
27 Financial Data Schedule.
</TABLE>
E-1
<PAGE>
Exhibit 10.1
DEAN WITTER REYNOLDS INC.
BRANCH MANAGER COMPENSATION PLAN
[Amended as of September 21, 1999]
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; amended effective September 25, 1998;
and was amended effective September 21, 1999.
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.
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(d) "Board" means the Compensation Committee of the Board of Directors of DWR.
(e) "Branch Office" means any branch office of DWR.
(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
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(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.
(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.
3
<PAGE>
(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.
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
4
<PAGE>
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.
(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.
5
<PAGE>
(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 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 or Retirement, all of the Participant's
6
<PAGE>
restricted Stock awards shall become vested in accordance with this Section VII
without regard to the Participant's termination of employment. Notwithstanding
anything in this Plan to the contrary, upon a Participant's death, all of the
Participant's awards shall become vested immediately and payable as promptly as
practicable.
(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.
(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, the undistributed balance of the Participant's Account at
the end of the Fiscal Year preceding the Participant's Disability or
Retirement shall be paid to the Participant in the manner provided by this
Section VII and to the extent permitted by Appendix A to the Plan. In the
event a Participant dies, the undistributed balance of the Participant's
Account at the end of the Fiscal Year preceding the Participant's death
shall be paid to the personal representative of the Participant's estate as
promptly as practicable 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
7
<PAGE>
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;
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.
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<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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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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<PAGE>
(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 vice
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 decuton 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
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<PAGE>
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 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
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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 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
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(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 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
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<PAGE>
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.
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
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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.
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").
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<PAGE>
(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.
(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 21, 1999]
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; was amended effective September 25, 1998; and was
amended effective September 21, 1999.
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.
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(e) "DWR" means Dean Witter Reynolds Inc., a Delaware corporation.
(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
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<PAGE>
the individual is a participant therein; or (iii) as otherwise specified by
written agreement between DWR and a Financial Advisor.
(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.
3
<PAGE>
(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 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,
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<PAGE>
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 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 or Retirement, 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. Notwithstanding anything in this Plan to the contrary, upon a
Participant's death, all of the Participant's awards shall become vested
immediately and payable as promptly as practicable.
(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
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<PAGE>
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.
(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
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<PAGE>
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.
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
7
<PAGE>
(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 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
8
<PAGE>
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 feminine, the use of singular terms shall mean the plural, and vice
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.
9
<PAGE>
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.
10
<PAGE>
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
11
<PAGE>
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 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.
12
<PAGE>
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
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
13
<PAGE>
(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 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
14
<PAGE>
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 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.
15
<PAGE>
(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 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.
16
<PAGE>
(j) This agreement shall be deemed to have been made under and shall be
governed by the laws of the State of New York.
17
<PAGE>
Exhibit 10.3
MORGAN STANLEY DEAN WITTER & CO.
TAX DEFERRED EQUITY PARTICIPATION PLAN
(Amended September 21, 1999)
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
Purposes of the Plan......................................................... 1
Definitions.................................................................. 1
Election by a Company to Participate in the Plan............................. 5
Stock Subject to the Plan.................................................... 5
Administration of the Plan................................................... 6
Eligibility.................................................................. 7
Awards under the Plan........................................................ 7
Funding of the Plan.......................................................... 8
Maintenance of Accounts...................................................... 8
Payments under the Plan...................................................... 9
Securities Matters........................................................... 10
Adjustment of Accounts in Certain Events..................................... 10
Certain Divestitures......................................................... 11
No Special Employment Rights................................................. 12
Payroll and Withholding Taxes................................................ 12
Termination and Amendment.................................................... 13
Payments Upon the Death of a Participant..................................... 14
Shareholder Approval Required................................................ 14
-2-
<PAGE>
Effect of Revocation Event................................................... 14
Miscellaneous................................................................ 15
-3-
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
TAX DEFERRED EQUITY PARTICIPATION PLAN
(Amended September 21, 1999)
1. Purposes of the Plan.
Morgan Stanley Dean Witter & Co., a Delaware corporation ("MWD"), hereby
adopts the Morgan Stanley Dean Witter & Co. Tax Deferred Equity Participation
Plan. The purpose of this Plan is to promote the long-term growth and financial
success of MWD by attracting and retaining employees of outstanding ability and
assisting MWD in promoting a greater identity of interest between Participants
and MWD's shareholders. The Plan is intended to be an unfunded "bonus program"
(within the meaning of 29 CFR Part 2510.3-2(c)) designed primarily to provide
deferred bonuses to a select group of highly compensated or management
employees.
2. Definitions.
As used in the Plan, the following terms have the following meanings:
(a) "Accounts" means a Participant's Cash Account and Stock Account.
(b) "Administrator" means the individual or individuals to whom the Committee
delegates authority under the Plan in accordance with Section 5.
(c) "Affiliate" means any corporation which is a member of a "controlled group
of corporations" (as defined in Code section 414(b)) of which MWD is a member
and any trade or business (whether or not incorporated) under "common control"
(as defined in Code section 414(c)) with MWD.
(d) "Award" means an award granted to a Participant by the Committee pursuant
to Section 7. An Award shall be deemed to have been made for the fiscal year in
which a Company would, in the absence of the Plan, have accrued a compensation
expense for accounting purposes for the value of the Award.
(e) "Award Certificate" means a written certificate issued by the Company
which is approved in accordance with Section 7, executed on behalf of the
Company and sets forth the terms and conditions of the Award.
(f) "Beneficiary" means the person or entity determined to be a Participant's
beneficiary under Section 18.
(g) "Board" means the Board of Directors of MWD.
(h) "Cash Account" means a book account maintained by a Company reflecting,
with respect to shares of Stock credited to a Participant's Stock Account
which are treated as if tendered, the cash amount to be distributed to a
Participant upon a Realization Event.
-1-
<PAGE>
(i) Definition of "Change in Control":
(A) In respect of each Award having an effective date on or before
December 31, 1997, "Change in Control" means: (i) The acquisition by any person
(including a group, within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act), other than (I) any employee plan established by a Company or (II)
any of MWD's affiliates (as defined in Rule 12b-2 promulgated under the Exchange
Act), without the prior approval of the Board, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either the then outstanding shares of Stock or the combined voting power of
MWD's then outstanding voting securities in a transaction or series of
transactions not approved by a majority of the Directors as of the Effective
Date; or
(ii) A change in the composition of the Board such that individuals
who, as of the Effective Date, constitute the Board cease for any reason to
constitute at least a majority thereof, provided that any person who becomes a
Director subsequent to the Effective Date and whose nomination for election is
approved by at least a majority of the Directors as of the Effective Date,
(other than a nomination of an individual whose initial assumption of office is
in connection with an actual or threatened election contest relating to the
election of the Directors of MWD, as such terms are used in Rule 14a-11 of
Regulation 14A under the Exchange Act) shall be deemed a Director as of the
Effective Date.
(B) In respect of each Award having an effective date on or after
January 1, 1998, "Change in Control" shall have the meaning ascribed to such
term by the Committee in respect of such Award.
(j) "Code" means the Internal Revenue Code of 1986, as amended.
(k) "Committee" means such committee of two or more persons as the Board
shall appoint from time to time to administer the Plan. It is intended
that the members of the Committee shall be "non-employee directors"
within the meaning of Rule 16b-3 and "outside directors" within the
meaning of Code Section 162(m); however, the mere fact that a Committee
member shall fail to qualify under either of these requirements shall not
invalidate any Award made by the Committee that is otherwise valid.
(l) "Company" means each of MWD, its Affiliates and any Subsidiary of MWD
that has adopted the Plan pursuant to Section 3(a), while such Subsidiary
remains a participant in the Plan.
(m) "Compensation" for a year means the annual rate of salary payable to the
Participant as of April 1 of such year (disregarding any salary reduction
agreements under any deferred compensation plan, including plans
described in Code section 125 or 401(k)) plus the annual incentive bonus
payable to such Participant for such year. Compensation shall not include
the amount of any contribution payable under the Plan.
(n) Unless the Committee otherwise determines, "Disability" means any
physical or mental condition that would qualify a Participant for a
disability benefit under any long-term disability plan maintained by any
Company and applicable to the Participant.
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(o) "Effective Date" means January 1, 1994.
(p) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(r) Unless the Committee otherwise determines, "Fair Market Value" means:
(i) for purposes of determining the number of shares of Stock
to be allocated to an Award made pursuant to Section 7 and to a
Participant's Stock Account pursuant to Section 9(a)(i), the fair market
value thereof as of the relevant date of determination, as determined in
accordance with a valuation methodology approved by the Committee; and
(ii) for purposes of crediting a Participant's Stock Account
with shares of Stock based upon cash dividends paid or deemed to be paid
on shares of Stock credited to the Participant's Stock Account pursuant
to Section 9(a)(ii), the average of the high and low sales prices,
regular way, of a share of Stock as reported on the New York Stock
Exchange Composite Tape (the "High/Low Price") on the relevant dividend
payment date, or, if Stock is not traded on public markets on the
relevant dividend payment date, the first preceding date on which Stock
is traded on public markets; provided, however, that in the event a "Fair
Market Value" cannot be determined pursuant to the foregoing, the fair
market value thereof as of the relevant date of determination, as
determined in accordance with a valuation methodology approved by the
Committee; and
(iii) for purposes of distributing cash, either in lieu of a
fractional share following a Realization Event pursuant to Section 10, in
lieu of Stock pursuant to Section 11(b) or in lieu of Stock following a
Revocation Event pursuant to Section 20, the High/Low Price on the date
of the Realization Event or the Revocation Event, as applicable, or, if
Stock is not traded on public markets on the date of the Realization
Event or the Revocation Event, the first preceding date on which Stock is
traded on public markets; provided, however, that in the event a "Fair
Market Value" cannot be determined pursuant to the foregoing, the fair
market value thereof as of the relevant date of determination, as
determined in accordance with a valuation methodology approved by the
Committee.
(s) "Investment Period", with respect to an Award, means: (A) in respect of
each Award having an effective date on or before December 31, 1997, the
five-year period beginning on the date as of which such Award is granted;
and (B) in respect of each Award having an effective date on or after
January 1, 1998, the period beginning on the date as of which the Award is
granted and concluding on the date specified by the Committee as the
conclusion of the Investment Period in respect of such Award.
(t) "Minimum Eligible Compensation" means $100,000 with respect to the
calendar year ending December 31, 1997, and with respect to each fiscal year of
the Company beginning on or after December 1, 1997, $100,000 or such greater
amount as the Committee shall determine.
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(u) "Participant" means a key employee of any Company who is determined by
the Committee to be eligible to participate in the Plan and who is designated as
a Participant pursuant to Section 6.
(v) "Plan" means the Morgan Stanley Dean Witter & Co. Tax Deferred Equity
Participation Plan.
(w) "Realization Event" means: (A) in respect of each Award issued on or
before December 31, 1997, the first to occur of (i) the expiration of the
Investment Period with respect to such Award, (ii) the occurrence of a Change of
Control, (iii) the termination of the Plan pursuant to Section 17, or (iv) the
Participant's death; and (B) in respect of each Award issued on or after January
1, 1998, the first to occur of (i) the expiration of the Investment Period with
respect to such Award, (ii) the occurrence of a Change of Ownership, (iii) the
termination of the Plan pursuant to Section 17, or (iv) the Participant's death;
provided, however, that if a Realization Event as so defined would occur at a
time when the Participant is considered by the Company to be one of its "covered
employees" within the meaning of Section 162(m) of the Code or any regulations
thereunder (or any successor provisions thereto), then, unless the Committee
shall determine otherwise in its sole discretion, the Realization Event shall
automatically be deferred until the first date after the Participant has ceased
to be considered such a "covered employee."
(x) "Retirement" means a Participant's termination of employment with all
Companies on or after: (i) the date (the "Pension Retirement Date") on which
the Participant would first be eligible to retire under any tax-qualified
defined benefit pension plan maintained by a Company in which the Participant
participates; or (ii) in respect of any Award as the Committee determines, such
date preceding the Pension Retirement Date as the Committee may determine.
(y) "Revocation Event" means a determination by the Board in its sole
discretion that any of the following has occurred or is likely to occur:
(i) A determination by the Department of Labor or a court of competent
jurisdiction that the assets of the Trust are subject to Part 4 of Subtitle B of
Title I of ERISA or that the Plan is a "pension plan" (within the meaning of
ERISA section 3(2)) subject to Parts 2, 3 and 4 of Subtitle B of Title I of
ERISA;
(ii) A determination by the Internal Revenue Service or a court of
competent jurisdiction that any amount deposited in the Trust is taxable to any
Participant or Beneficiary prior to the distribution of such amount; or
(iii) A determination by the Company's independent public accountants
that the accounting expense to the Companies of maintaining the Trust under the
Plan is based on a value of the shares of Stock other than such value on the
date shares of Stock are (A) acquired by the Trust or (B) credited to a
Participant's Accounts.
(z) "Rule 16b-3" means Rule 16b-3 promulgated under Section 16 of the
Exchange Act.
(aa) "Securities Act" means the Securities Act of 1933, as amended from time
to time.
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(ab) "Stock" means the common stock, par value $.01 per share, of MWD, or
the common stock of any successor thereto.
(ac) "Stock Account" means a book account maintained by MWD reflecting,
with respect to each Award, the number of shares of Stock to be distributed to
each Participant upon a Realization Event.
(ad) "Subsidiary" means (i) a corporation or other entity with respect to
which MWD, directly or indirectly, has the power, whether through the ownership
of voting securities, by contract or otherwise, to elect at least a majority of
the members of such corporation's board of directors or analogous governing
body, or (ii) any other corporation or other entity in which MWD, directly or
indirectly, has an equity or similar interest and which the Committee designates
as a Subsidiary for purposes of the Plan.
(ae) "Trust" means any trust established in connection with the Plan or any
other employee benefit plan of the Company under which current or former
employees of the Company constitute the principal beneficiaries.
(af) "Trustee" means the trustee of the Trust.
3. Election by a Company to Participate in the Plan .
(a) By appropriate action, subject to the approval of the Board, any
Subsidiary may adopt the Plan. Such Subsidiary may recommend to the Committee
which of its employees should be eligible to participate in the Plan.
(b) By appropriate action, a Company may terminate its participation
in the Plan.
(c) No Subsidiary that participates in the Plan shall have any power
with respect to the Plan except as specifically provided in the Plan.
(d) MWD may require each Company (other than MWD), as a condition of
participation in the Plan, to enter into an agreement obligating such Company to
pay to MWD, in cash, the appropriate value, as determined by the Board, of any
Stock that MWD contributes to the Trust in respect of Participants employed by
such Company and/or to reimburse MWD for any other amounts paid by MWD
hereunder, directly or indirectly, in respect of Participants employed by such
Company.
4. Stock Subject to the Plan.
Subject to adjustment as provided in Section 13, the Committee may
grant Awards under the Plan with respect to a number of shares of Stock that, in
the aggregate, does not exceed 7,000,000 shares. In the event that any Award is
forfeited for any reason, the number of shares of Stock making up such forfeited
Award (other than shares of Stock credited to such Participant's Accounts solely
as a result of earnings on such Award) shall again be available for grant under
the Plan.
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5. Administration of the Plan.
The Plan shall be administered by the Committee. The Committee may, but
need not, from time to time delegate some or all of its authority under the Plan
to an Administrator consisting of one or more members of the Committee or one or
more directors or officers of the Company; provided, however, that the Committee
may not delegate its authority (i) to make Awards to key employees (A) who are
subject as of the effective date of the Award to the reporting rules under
Section 16(a) of the Exchange Act, (B) who are, as of the effective date of the
Award, one of MWD's "covered employees" within the meaning of Section 162(m) of
the Code, or any regulations thereunder (or any successor provision thereto) or
(C) who are officers of the Company who are delegated authority by the Committee
hereunder, (ii) to construe and interpret the Plan or (iii) under Section 17(a)
of the Plan. Any delegation hereunder shall be subject to the restrictions and
limits that the Committee specifies at the time of such delegation or
thereafter. Nothing in the Plan shall be construed as obligating the Committee
to delegate authority to an Administrator, and the Committee may at any time
rescind or modify the authority delegated to an Administrator hereunder or
appoint a new Administrator. At all times, the Administrator appointed hereunder
shall serve in such capacity at the pleasure of the Committee. Any action
undertaken by the Administrator in accordance with the Committee's delegation of
authority shall have the same force and effect as if undertaken directly by the
Committee, and any reference to the Committee in the Plan shall, to the extent
consistent with the terms and limitations of such delegation, be deemed to
include a reference to the Administrator.
The Committee shall have full authority, consistent with the Plan, to
administer the Plan, including authority to interpret and construe any Plan
provision and to adopt such rules and regulations and such forms of elections as
it may deem necessary or appropriate. Decisions of the Committee shall be final
and binding on all parties. In the event of a disagreement between the
Committee and the Administrator, the Committee's determination on such matter
shall be final and binding on all parties, including the Administrator. Subject
to Section 3(d), all expenses of the Plan shall be paid by MWD.
No member of the Committee or any Administrator shall be liable for any
action, omission or determination relating to the Plan, and the Companies shall
indemnify and hold harmless each member of the Committee, each Administrator and
each other director or employee of the Companies to whom any duty or power
relating to the Plan has been delegated, against any cost, expense (including
counsel fees, which fees shall be paid as incurred) or liability (including any
sum paid in settlement of a claim with the approval of the Board) arising out of
any action, omission or determination relating to the Plan, if made in good
faith in a manner reasonably believed to be in or not opposed to the best
interests of the Companies, and with respect to any criminal action or
proceeding, if made with reasonable cause to believe that such conduct was
lawful.
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6. Eligibility.
The persons eligible to participate in the Plan with respect to a fiscal
year shall be key employees of the Companies, as determined by the Committee.
The Committee shall grant Awards to such Participants as it shall, in its sole
discretion, determine, provided that no Award shall be made in any fiscal year
to any eligible employee whose annualized Compensation with respect to such
fiscal year is not at least equal to the Minimum Eligible Compensation. The
Committee may from time to time add to or exclude from participation one or more
eligible employees. Each eligible employee shall become a Participant effective
on the date as of which the employee is designated as a Participant or members
of a class of employees including the employee are designated as Participants.
7. Awards under the Plan.
(a) Awards.
(i) The Committee shall grant Awards to Participants which shall
be based on a percentage of a Participant's Compensation or cash bonus with
respect to a fiscal year, be denominated in a number of shares of Stock
determined under Section 9(a) and reduce the Participant's cash bonus that would
otherwise be payable with respect to such fiscal year, provided that in respect
of each Award having an effective date on or after January 1, 1998, (A) the
Award shall be subject to any terms and conditions as may be established by the
Committee in connection with the Award and specified in the applicable Award
Certificate and (B) the terms, conditions and other provisions of the Award
shall be set forth in an Award Certificate approved by the Committee and
delivered or made available to the Participant as soon as practicable after the
effective date of the Award.
(ii) Unless otherwise determined by the Committee, no Award with
respect to a fiscal year shall be granted to a Participant whose employment with
the Companies and Affiliates terminates prior to the end of such fiscal year.
(b) Vesting.
(i) In respect of each Award having an effective date on or before
December 31, 1997, a Participant shall have a vested interest in the Award upon
the first to occur of: (A) completion of two years of service for the Companies
and the Affiliates following the grant of such Award; (B) the Participant's
termination of employment with all Companies and the Affiliates as a result of
Disability or Retirement; (C) the Participant's termination of employment with
all Companies and the Affiliates which is initiated by a Company by reason of
the Company's decision to close permanently a branch office or other facility,
or to reduce permanently the number of employees which it employs due to
substantial change in economic conditions; or (D) the Participant's death while
employed by a Company or one of the Affiliates; provided, however, that any
vested Award shall be canceled if a Participant's employment with any Company or
any Affiliate is terminated for cause, the Participant resigns for cause or the
Committee determines that the Participant has committed an act or omission upon
which a Company would have terminated the Participant's employment for cause.
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(ii) In respect of each Award having an effective date on or after
January 1, 1998, (A) a Participant shall have a vested interest in the Award
upon the satisfaction of such terms and conditions as the Committee may
determine applicable to such Award and (B) the Committee may provide that such
Award shall be subject to forfeiture, cancellation or termination on such terms
and conditions as the Committee may determine.
8. Funding of the Plan.
The Plan shall be unfunded. Benefits under the Plan shall be paid from
the general assets of MWD. MWD shall establish the Trust, which shall be
intended to be a "grantor trust" within the meaning of Code section 671, to
assist MWD in meeting its obligations hereunder. MWD intends to contribute to
the Trust from time to time Stock or cash (which shall be used by the Trustee to
purchase Stock) to enable MWD to satisfy its obligations under the Plan, but
shall not be obligated to do so.
9. Maintenance of Accounts.
(a) Stock Account. With respect to each Participant, the Committee shall
maintain a Stock Account as follows:
(i) In respect of each Award having an effective date on or before
December 31, 1997, such Participant's Stock Account shall be credited as of the
date of each Award with a number of shares of Stock equal to: (I) the dollar
amount of such Participant's Award divided by (II) the product of the Fair
Market Value of a share of Stock multiplied by .80. In respect of each Award
having an effective date on or after January 1, 1998, each such Participant's
Stock Account shall be credited as of the date of each Award with a number of
shares of Stock equal to: (I) the dollar amount of such Participant's Award
divided by (II) the product of the Fair Market Value of a share of Stock
multiplied by a fraction determined by the Committee to reflect the various
restrictions, conditions and limitations applicable to such Award.
(ii) In respect of each Award having an effective date on or before
December 31, 1997, such Participant's Stock Account shall be credited as soon as
practicable following the payment date of cash dividends on Stock with a number
of shares of Stock, the Fair Market Value of which equals the dollar amount of
dividends that would have been paid with respect to Stock credited to such
Participant's Stock Account had the Participant held such Stock as of the record
date applicable to such dividends. In respect of each Award having an effective
date on or after January 1, 1998, unless the Committee otherwise determines,
each such Participant's Stock Account shall be credited as soon as practicable
following the payment date of cash dividends on Stock with a number of shares of
Stock, the Fair Market Value of which equals the dollar amount of dividends that
would have been paid with respect to Stock credited to such Participant's Stock
Account had the Participant held such Stock as of the record date applicable to
such dividends; provided, however, that the Committee may determine, in respect
of each Award having an effective date on or after January 1, 1998, in lieu of
so crediting a Participant's Stock Account, to (I) make cash payments to the
Participant equal to the dollar amount of dividends that would have been paid
with respect to Stock credited to such Participant's Stock Account had the
Participant held such Stock as of the record date applicable to such dividends
("Dividend Equivalents") or (II) allow the Participant to elect between having
MWD so credit the
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Participant's Stock Account and receiving Dividend Equivalents, all on such
terms and conditions as the Committee may determine.
(iii) Each Participant's Stock Account shall be reduced by the number
of shares of Stock distributed to the Participant in respect of such Account,
whether such shares are distributed from the Trust or directly from MWD.
(b) Cash Account. If the Trustee tenders shares of Stock held in the
Trust in respect of a Participant's Stock Account, the number of shares of Stock
credited to such Participant's Stock Account that are tendered shall be
converted to a dollar amount per share equal to the consideration received in
respect of such tendered shares. Such dollar amount shall thereafter be
credited to the Participant's Cash Account and shall be credited with interest
during the period beginning on the date as of which such shares were tendered
and ending on the last day of the month immediately preceding the month in which
such amounts are paid to the Participant at a rate which, through the end of the
first fiscal month in such period shall equal the London Interbank Offered Rate
(LIBOR) for 1-month deposits that appears in the Wall Street Journal on the date
immediately preceding the date that such shares were tendered, and which shall
be recalculated for each successive 1-month period based on the London Interbank
Offered Rate (LIBOR) for 1-month deposits published in the Wall Street Journal
on the last day of each preceding fiscal month. If such rate does not appear in
the Wall Street Journal on any date as provided above, then such rate shall be
the last such rate that appeared in the Wall Street Journal prior to the date of
determination set forth above.
10. Payments under the Plan.
Within 30 days after the occurrence of a Realization Event with respect
to an Award, MWD shall deliver or cause to be delivered to the Participant (a)
the number of whole shares of Stock credited to such Participant's Stock Account
as of the date of the Realization Event as a result of such Award (including
shares reflecting the reinvestment of dividends paid thereon), and cash with
respect to any fractional shares of Stock credited to such Participant's Stock
Account in an amount equal to the Fair Market Value of such fractional shares as
of the date of the Realization Event and (b) the dollar amount credited to a
Participant's Cash Account as of the date of the Realization Event in respect of
such Award. Notwithstanding the fact that MWD establishes the Trust for the
purpose of assisting it in meeting its obligations under the Plan, MWD shall
remain obligated to pay the amounts credited to Participants' Accounts. Nothing
shall relieve MWD of its liabilities under the Plan except to the extent amounts
are paid from Trust assets or otherwise.
In order to accomplish the purposes of the Plan, amounts allocated to
Participants' Accounts generally must track the performance of the Stock until
the occurrence of the Realization Event with respect to such amounts.
Accordingly, if a court of competent jurisdiction finally determines that MWD is
obligated to distribute to any person shares of Stock credited to a
Participant's Accounts prior to the occurrence of a Realization Event with
respect to such shares, the Stock so distributed shall be restricted as to
transferability until the date that a Realization Event would have occurred with
respect to such shares had they not been distributed and remained subject to the
Plan, and if certificated shall bear any legend determined appropriate by the
Committee and the following legend:
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"The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and conditions
(including forfeiture and restrictions against transfer) contained in the
Morgan Stanley Dean Witter & Co. Tax Deferred Equity Participation Plan. A
copy of the Plan is on file in the office of the Secretary of Morgan
Stanley Dean Witter & Co., 1585 Broadway, New York, New York 10036."
11. Securities Matters.
(a) Subject to Section 10, MWD shall use its best efforts to assure
that any securities distributed to Participants hereunder are freely
transferable at the time of distribution, including, to the extent required
under applicable law, effecting the registration pursuant to the Securities Act
of any shares of Stock to be distributed hereunder or effecting similar
compliance under any state laws; provided, however, that with respect to any
Award having an effective date on or after January 1, 1998, securities
distributed to Participants hereunder may be subject to such restrictions on
transfer as the Committee may determine. Notwithstanding anything herein to the
contrary, MWD shall not be obligated to cause to be issued or delivered any
shares of Stock pursuant to the Plan unless and until MWD is advised by its
counsel that the issuance and delivery of such shares complies with all
applicable laws, regulations of governmental authorities and the requirements of
any securities exchange on which Stock is listed. The Committee may require, as
a condition of the issuance and delivery of shares of Stock pursuant to the
terms hereof, the recipient of such shares to make such covenants, agreements
and representations, and that if certificated, the certificates representing
such shares bear such legends, as the Committee, in its sole discretion, deems
necessary or desirable.
(b) Without limitation on the Committee's powers pursuant to Section
11(a), if and to the extent required by Rule 16b-3 or any comparable or
successor exemption under which the Board believes it is appropriate for the
Plan to qualify, the Committee may (i) restrict a Participant's ability to sell
any shares of Stock distributed to such Participant hereunder until the
expiration of six months (or such other period as the Committee deems
appropriate) after the date as of which such shares were credited to the
Participant's Accounts, (ii) in lieu of distributing shares of Stock that were
credited to a Participant's Accounts within six months (or such other period as
the Committee deems appropriate) prior to the Realization Event, distribute a
cash amount equal to the Fair Market Value of such Stock as of the Realization
Event or (iii) impose such other conditions on the exercise of any election
under the Plan or in connection with any distribution under the Plan as the
Committee deems appropriate.
12. [Intentionally Omitted]
13. Adjustment of Accounts in Certain Events.
(a) Unless the Committee otherwise determines, a Participant's
Accounts shall be adjusted to reflect the amount of any securities, cash and
other property that would have been received with respect to shares of Stock
credited to such Participant's Accounts if such Stock were held by the
Participant as a result of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change or any other event that the Committee, in its sole
discretion, deems appropriate.
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(b) In the event of any change in the number of shares of Stock
outstanding by reason of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change or any other event that the Committee, in its sole
discretion, deems appropriate, the maximum aggregate number of shares of Stock
subject to the Plan shall be appropriately adjusted by the Committee. In the
event of any change in the number of shares of Stock outstanding by reason of
any other event or transaction, the Committee may, but need not, make such
adjustments in the number and class of shares of Stock subject to the Plan as
the Committee may deem appropriate.
(c) Except as expressly provided in this Section, a Participant shall
have no rights as a result of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change.
14. Certain Divestitures.
(a) Company with Publicly Traded Stock that No Longer is a 50%
Affiliate. In the event of any transaction immediately after which any Company
both ceases to be a member of a "controlled group of corporations" of which MWD
is a member (as defined in Code section 414(b) but substituting the phrase "at
least 50%" for the phrase "at least 80%" in each place that it appears in Code
section 1563(a)) and either has stock that is publicly traded or is a member of
a "controlled group of corporations" (as defined in Code section 414(b)) with
any trade or business which has publicly traded stock as a result of the
transaction:
(i) the Stock credited to the Accounts of (A) Participants who
are employed by such Company immediately after the transaction and (B)
terminated Participants who are not so employed, but who were employed by such
Company on the date that their employment with the Companies and Affiliates
terminated, shall be converted to equivalent amounts of such publicly traded
stock based on the relative values of such publicly traded stock and Stock
immediately after the transaction. Thereafter, each such Participant's Accounts
shall be maintained in such publicly traded stock or its economic equivalent, as
the case may be, and such Company shall cease to participate in the Plans with
respect to future Awards;
(ii) the Board of Directors of the affected Company shall succeed
to the powers of the Committee and the Board under the Plan with respect to the
Participants described in Section 14(a)(i); and
(iii) a separate trust containing the Accounts of such
Participants may be created in the Committee's discretion to hold any stock
allocated to the Participants' Accounts. Such trust shall be substantially the
same as the Trust and shall be created pursuant to a trust agreement between the
affected Company and the Trustee.
(b) Company with Publicly Traded Stock that Remains a 50% Affiliate.
In the event that a public market develops for the stock of any Company and
immediately after such public market develops such Company remains a member of a
"controlled group of corporations" of which MWD is a member (as defined in Code
section 414(b) but substituting the phrase "at least 50%" for the phrase "at
least 80%" in each place that it appears in Code section 1563(a)), the Stock
credited to the Accounts of (i) the Participants who are employed by such
Company immediately after such public market develops and (ii) terminated
Participants who are not so employed, but
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who were employed by such Company on the date that their employment with the
Companies and Affiliates terminated, shall be converted to equivalent amounts of
the publicly traded stock of such Company based on the principles described in
Section 14(a)(i) or its economic equivalent, as the Committee deems appropriate,
unless the Committee and MWD determine that such a conversion would be
financially detrimental to any Company or Affiliate or such Participants.
Thereafter, each such Participant's Accounts shall be maintained in such
publicly traded stock or its economic equivalent, as the case may be.
(c) Satisfaction of Obligations After a Divestiture. In the event of
a divestiture described in this Section 14, any distributions in respect of the
shares credited to the affected Participants' Accounts as of the date of the
divestiture shall be deemed to be payments in respect of MWD's obligations under
the Plan, except to the extent such obligations are assumed and discharged by
the affected Company.
15. No Special Employment Rights.
Nothing in the Plan shall confer upon any Participant any right to
continue in the service of any Company or Affiliate or affect any right that any
Company or Affiliate may have to terminate the service of the Participant.
Nothing in the Plan shall be deemed to give any employee of any Company or
Affiliate any right to participate in the Plan.
16. Payroll and Withholding Taxes.
All federal, state, local and other withholding tax requirements, if
any, relating to the Plan shall be met pursuant to procedures determined by the
Committee which may include:
(a) Withholding from any cash amounts payable to a Participant or
under the Plan (including salary, bonus or any other amounts payable from any
Company or Affiliate);
(b) Requiring Participants to remit to MWD an amount in cash prior to
the delivery of any certificate for Stock or other payments under the Plan;
(c) At the election of the Participant, tendering to MWD a number of
shares of Stock;
(d) At the election of the Participant, withholding by MWD of shares
of Stock. In the event that the Trustee withholds shares pursuant to this
Paragraph, the Trustee shall distribute such shares from the Trust to MWD and
MWD shall make appropriate withholding tax payments; and
(e) If a Participant is subject to Section 16(b) of the Exchange Act,
the Committee may prescribe such requirements or limitations on the
Participant's ability to elect the withholding options contained in Section
16(c) and (d) of the Plan as may be required by Rule 16b-3 or by any comparable
or successor exemption.
-12-
<PAGE>
17. Termination and Amendment.
(a) The Plan may be terminated in whole or in part with respect to any
or all Participants at any time by the Board. Subject to Sections 19 and 20,
upon such termination, the assets of the Trust with respect to whom the Plan has
been terminated shall be distributed to each affected Participant in order to
meet the benefit obligations under the Plan with respect to each such
Participant. In the event the entire Plan is terminated, the remaining assets
related to the Plan, if any, in the Trust after the payment of such benefits
shall be paid to MWD. The Plan may be amended by the Board from time to time in
any respect; provided, however, that if and to the extent required by Rule 16b-3
or by any comparable or successor exemption under which the Board believes it is
appropriate for the Plan to qualify, no amendment shall be effective without the
approval of the shareholders of MWD, which (a) except as provided in Section 13,
increases the number of shares of Stock that may be distributed under the Plan,
(b) materially increases the benefits accruing to individuals under the Plan or
(c) materially modifies the requirements as to eligibility for participation in
the Plan. No amendment or termination shall be made that would materially impair
the rights of any Participant in any Award theretofore granted or made, or any
earnings with respect thereto, without such Participant's prior written consent;
provided, however, that MWD may amend the Plan and the Trust from time to time
in such a manner as may be necessary to avoid having the trust agreement
pursuant to which the Trust is created, the Plan or the Trust being subject to
ERISA and to avoid the current taxation of the assets held in the trusts
established in connection with the Plan to Participants. Neither a Participant's
incurring any income tax liability nor the loss of an investment opportunity as
a result of the termination of the Plan shall be considered an impairment of the
rights of a Participant.
(b) Subject to the terms and conditions of the Plan, the Committee
may amend outstanding Awards, including, without limitation, by any amendment
which would accelerate the time or times at which the Award may vest or become
payable and by any other amendment to any other term or condition of the Award;
provided, however, that no amendment shall be made that would materially impair
the rights of any Participant in any outstanding Award, or any earnings with
respect thereto, without the prior written consent of such Participant. Neither
a Participant's incurring any income tax liability nor the loss of an investment
opportunity as a result of an amendment to an Award shall be considered an
impairment of the rights of a Participant in the Award.
-13-
<PAGE>
18. Payments Upon the Death of a Participant.
Each Participant may designate in writing from time to time one or more
Beneficiaries by filing a written notice of such designation with MWD. A
Participant's designation of any Beneficiary may be revoked by filing with MWD
an instrument of revocation or a later designation. Any designation or
revocation shall be effective when received by MWD. In the event of a
Participant's death, any payment required to be made hereunder to such
Participant shall be made to such Participant's Beneficiary. Unless the
Participant's Beneficiary designation provides otherwise, no person shall be
entitled to benefits upon the death of the Participant unless such person
survives the Participant. If the Beneficiary designated by a Participant does
not survive the Participant or if the Participant has not made a valid
Beneficiary designation, such Participant's Beneficiary shall be such
Participant's estate. If the Participant's Beneficiary is the Participant's
estate, no payment shall be made unless the Committee shall have been furnished
with such evidence as the Committee may deem necessary to establish the validity
of the payment.
19. Shareholder Approval Required.
The Plan's adoption is subject to approval by the shareholders of MWD
in accordance with applicable law, the rules of the New York Stock Exchange and
the requirements of Rule 16b-3. Awards may be granted under the Plan at any time
prior to the receipt of such shareholder approval; provided, however, that each
such Award shall be subject to such approval. Without limitation on the
foregoing, no share certificate shall be distributed pursuant to an Award and no
share shall be voted prior to the receipt of such approval. If the Plan is not
so approved prior to December 31, 1999, then the Plan shall forthwith
automatically terminate and be of no force and effect. In the event of such
termination of the Plan, in consideration of and as soon as practicable after
MWD's providing the Trustee with a written undertaking to pay to Participants
the amount required to be paid under this Section, the Trustee shall distribute
any amounts related to the Plan held in the Trust to MWD and MWD shall pay to
each Participant a lump sum in cash equal to the original dollar value of any
Award credited to such Participant's Accounts plus interest, credited from the
date as of which such Award was credited to the Participant's Accounts through
the last day of the month immediately preceding the month in which such amounts
are paid to the Participant, the effective annual yield of which equals 9%.
20. Effect of Revocation Event.
Upon the occurrence of a Revocation Event, the Board may, in its sole
discretion, elect to terminate the Plan and/or the Trust in whole or in part.
In the event that the Board elects to so terminate the Plan, the Trust or any
Participant's Accounts as a result of a Revocation Event, in consideration of
and as soon as practicable after MWD's providing the Trustee with a written
undertaking to pay to Participants the amount required to be paid under this
Section, all amounts related to the Plan held in the Trust (or if the entire
Trust is not terminated, any terminated Accounts) shall be distributed to MWD.
MWD shall, in its sole discretion, (a) pay to each Participant whose Accounts
are terminated, as soon as practicable after the date of such termination, a
lump sum in cash equal to the Fair Market Value multiplied by the number of
shares of Stock and cash amounts reflected in each Participant's Accounts as of
the date of such termination, (b) distribute to each Participant whose Accounts
are terminated, as soon as practicable after the date of such termination, that
number of shares of Stock that would have been distributable to such Participant
under the Plan and pay to such Participant at such time any cash allocated to
the Participant's Cash Account or (c) distribute to each Participant whose
Accounts are terminated that number of shares of Stock and that amount of cash
that would have been distributable to such Participant at such time as shares
and cash would have been distributable to
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<PAGE>
such Participant under the Plan, had the Plan continued. If it is finally
determined in a proceeding, which MWD either controls or was offered the right
to control and declines, that the Participant's interest in the Trust was
taxable to the Participant notwithstanding any termination of such Participant's
Accounts in the Trust, MWD shall pay or distribute the Participant's interest
(whether or not the Board has previously elected to terminate the Plan, the
Trust or the Participant's Accounts) in accordance with either (a) or (b) of the
preceding sentence.
21. Miscellaneous.
(a) No transfer (other than any transfer made by will or by the laws
of descent and distribution) by a Participant of any right to any payment
hereunder, whether voluntary or involuntary, by operation of law or otherwise,
shall vest the transferee with any interest or right in or with respect to such
payment, and the transfer shall be of no force and effect.
(b) The Plan and all rights hereunder shall be subject to and
interpreted in accordance with the laws of the State of Delaware without
reference to the principles of conflicts of law.
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<PAGE>
EXHIBIT 10.4
(Certain confidential portions of this Exhibit have been omitted,
as indicated by an {*} on the margin or in the text, and
filed with the Commission.)
SERVICES AGREEMENT
by and between
MORGAN STANLEY DEAN WITTER & CO.
and
INTERNATIONAL BUSINESS MACHINES CORPORATION
Effective as of July 1, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. BACKGROUND AND CONSTRUCTION..................................................1
1.1 Background................................................................1
1.2 Construction..............................................................1
2. DEFINITIONS..................................................................2
2.1 Certain Definitions.......................................................2
2.2 Other Terms...............................................................8
3. SERVICES.....................................................................8
3.1 Provision of Services.....................................................8
3.2 Recipients of the Services................................................9
3.3 {*}.....................................................................{*}
3.4 Refresh..................................................................10
3.5 {*}.....................................................................{*}
3.6 {*}.....................................................................{*}
4. TERM........................................................................12
4.1 Term.....................................................................12
4.2 Renewal..................................................................12
4.3 Extension................................................................12
4.4 Termination of Previous Agreement........................................12
5. IBM PERSONNEL...............................................................13
5.1 Key IBM Positions........................................................13
5.2 Qualifications and Replacement of IBM Personnel..........................14
5.3 {*}.....................................................................{*}
6. EQUIPMENT AND FACILITIES....................................................15
6.1 MSDW Equipment...........................................................15
6.2 Other Equipment..........................................................15
6.3 MSDW Facilities..........................................................16
7. {*}........................................................................{*}
7.1 {*}.....................................................................{*}
7.2 {*}.....................................................................{*}
7.3 {*}.....................................................................{*}
7.4 {*}.....................................................................{*}
7.5 {*}.....................................................................{*}
7.6 {*}.....................................................................{*}
7.7 Export...................................................................22
7.8 Required Consents........................................................22
8. PERFORMANCE STANDARDS.......................................................23
8.1 General..................................................................23
8.2 Failure to Perform.......................................................23
8.3 Periodic Reviews.........................................................24
8.4 Measurement and Monitoring Tools.........................................24
9. PROJECT AND CONTRACT MANAGEMENT.............................................24
9.1 Steering Committee.......................................................24
9.2 Reports..................................................................25
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
9.3 Meetings.................................................................25
9.4 Procedures Manual........................................................26
9.5 Change Control...........................................................27
9.6 Use of Subcontractors....................................................28
9.7 Annual Technology Plan...................................................29
9.8 Quality Assurance and Improvement Programs...............................30
9.9 Productivity and Management Tools........................................30
10. AUDITS......................................................................31
10.1 Audit Rights..........................................................31
10.2 Audit Follow-up.......................................................31
10.3 Records Retention.....................................................32
11. MSDW RESPONSIBILITIES.......................................................32
11.1 Responsibilities......................................................32
11.2 {*}..................................................................{*}
12. CHARGES.....................................................................33
12.1 General...............................................................33
12.2 Incidental Expenses...................................................33
12.3 Taxes.................................................................33
12.4 New Services..........................................................34
12.5 {*}..................................................................{*}
12.6 Cost of Living Adjustment.............................................36
12.7 {*}..................................................................{*}
13. INVOICING AND PAYMENT.......................................................38
13.1 Invoicing.............................................................38
13.2 Payment Due...........................................................39
13.3 Accountability........................................................39
13.4 Proration.............................................................39
13.5 Set Off...............................................................39
13.6 Disputed Charges......................................................40
14. SAFEGUARDING OF MSDW DATA...................................................40
14.1 Safeguarding MSDW Data................................................40
14.2 Unauthorized Access...................................................40
15. CONFIDENTIALITY.............................................................41
15.1 Confidential Information..............................................41
15.2 Obligations...........................................................42
15.3 Exclusions............................................................43
15.4 Loss of Confidential Information......................................44
15.5 No Implied Rights.....................................................44
15.6 Survival..............................................................44
16. REPRESENTATIONS AND WARRANTIES..............................................44
16.1 Work Standards........................................................44
16.2 {*}..................................................................{*}
16.3 {*}..................................................................{*}
16.4 {*}..................................................................{*}
16.5 Non-Infringement......................................................45
16.6 Software Ownership or Use.............................................45
</TABLE>
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<TABLE>
<S> <C>
16.7 Compliance With Laws and Regulations; Non-Contravention...............45
16.8 Authorization.........................................................46
16.9 Inducements...........................................................46
16.10 {*}..................................................................{*}
16.11 {*}..................................................................{*}
16.12 {*}..................................................................{*}
16.13 Disclaimer............................................................47
17. INSURANCE AND RISK OF LOSS..................................................47
17.1 Insurance.............................................................47
17.2 Risk of Loss..........................................................48
18. INDEMNITIES.................................................................48
18.1 Indemnity by IBM......................................................48
18.2 Indemnity by MSDW.....................................................48
18.3 Additional Indemnities................................................49
18.4 Indemnification Procedures............................................49
18.5 Subrogation...........................................................50
19. LIABILITY...................................................................50
19.1 General Intent........................................................50
19.2 Liability Restrictions................................................50
19.3 Force Majeure.........................................................51
20. DISPUTE RESOLUTION..........................................................52
20.1 Informal Dispute Resolution...........................................52
20.2 Formal Dispute Resolution.............................................53
20.3 Continued Performance.................................................54
20.4 Governing Law.........................................................54
20.5 Limitations Period....................................................54
21. TERMINATION.................................................................54
21.1 Termination for Cause.................................................54
21.2 {*}..................................................................{*}
21.3 Termination of SSAs and NSAs..........................................55
21.4 Extension of Termination Effective Date...............................55
21.5 Termination/Expiration Assistance.....................................55
21.6 {*}..................................................................{*}
22. GENERAL.....................................................................56
22.1 Binding Nature and Assignment.........................................56
22.2 Entire Agreement......................................................57
22.3 Notices...............................................................57
22.4 Counterparts..........................................................57
22.5 Headings..............................................................58
22.6 Relationship of Parties...............................................58
22.7 Severability..........................................................58
22.8 Consents and Approval.................................................58
22.9 Waiver of Default; Cumulative Remedies................................58
22.10 Survival..............................................................59
22.11 Public Disclosures....................................................59
22.12 Service Marks.........................................................59
</TABLE>
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<TABLE>
<S> <C>
22.13 Third Party Beneficiaries.............................................59
22.14 Amendment.............................................................59
22.15 Order of Precedence...................................................59
22.16 Covenant of Good Faith................................................60
</TABLE>
SCHEDULE A Scope of Services............................................A-1
SCHEDULE B Performance Standards........................................B-1
SCHEDULE C Charges......................................................C-1
SCHEDULE D Key IBM Positions............................................D-1
SCHEDULE E Software.....................................................E-1
SCHEDULE F {*}..........................................................{*}
SCHEDULE G Termination/Expiration Assistance............................G-1
SCHEDULE H SSAs and Certain Other Documents.............................H-1
SCHEDULE I New Services Amendment Form..................................I-1
SCHEDULE J Equipment....................................................J-1
SCHEDULE K {*}..........................................................{*}
SCHEDULE L {*}..........................................................{*}
SCHEDULE M Certain Leases, Licenses and Contracts.......................M-1
SCHEDULE N International Agreements.....................................N-1
SCHEDULE O Service Delivery Processes...................................O-1
iv
<PAGE>
SERVICES AGREEMENT
This Services Agreement (the "Agreement"), effective as of July 1, 1999 (the
"Effective Date"), is entered into by and between Morgan Stanley Dean Witter &
Co., a Delaware corporation with a place of business located at 2500 Lake Cook
Road, Riverwoods, Illinois 60015 ("MSDW"), and International Business Machines
Corporation, a New York corporation with its principal place of business located
at New Orchard Road, Armonk, New York 10504 ("IBM"). As used in the Agreement,
"Party" means either MSDW or IBM, as appropriate, and "Parties" means MSDW and
IBM. The Parties agree that the following terms and conditions shall apply to
the services to be provided by IBM under the Agreement in consideration of
certain payments to be made by MSDW.
1. BACKGROUND AND CONSTRUCTION
1.1 Background.
----------
This Agreement is being made and entered into with reference to the
following:
(a) On November 30, 1992, MSDW (f/k/a Dean Witter Financial Services Group,
Inc.) and IBM (f/k/a Advantis) entered into that certain Master Agreement
for Systems Operations Services whereby IBM agreed to provide MSDW with
certain data networking services, data processing services and voice
networking services to MSDW as consideration for MSDW's commitment to pay
certain minimum annual payments to IBM.
(b) On March 13, 1997, MSDW (f/k/a Dean Witter, Discover & Co.) and IBM (f/k/a
Advantis) entered into that certain Amended Agreement for Systems
Operations Services (the "Previous Agreement"), which amended and restated
the Master Agreement for Systems Operations Services between MSDW and IBM.
Under the Previous Agreement, as amended, IBM agreed to provide MSDW,
MSDW's affiliates, and the clients of such entities certain data networking
services, data processing services and voice networking services as
consideration for MSDW's commitment to pay certain amounts to IBM.
(c) Prior to MSDW's divestiture of SPS Payment Systems, Inc. ("SPS"), SPS was
an Affiliate of MSDW entitled to receive services provided by IBM under the
Previous Agreement. As of the Effective Date, SPS is no longer an
Affiliate of MSDW.
1.2 Construction.
------------
(a) Terms other than those defined in the Agreement shall be given their plain
English meaning, and those terms, acronyms and phrases known in the
information technology services industry shall be interpreted in accordance
with their generally known meanings. Unless the context otherwise
requires, words importing the singular include the plural and vice-versa.
1
<PAGE>
(b) References to an "Article," "Section," or "Subsection" shall be references
to the articles, sections, and subsections of this Services Agreement,
unless otherwise specifically stated.
(c) The Article and Section headings in the Agreement are intended to be for
reference purposes only and shall in no way be construed to modify or
restrict any of the terms or provisions of the Agreement.
(d) The words "include," "includes", and "including" shall mean "include but
are not limited to", "includes but is not limited to", and "including but
not limited to", respectively.
2. DEFINITIONS
2.1 Certain Definitions.
-------------------
As used in the Agreement:
(a) "Affiliate" means, with respect to any entity, any other entity
Controlling, Controlled by or under common Control with such entity.
(b) "Agreement" means this Services Agreement and the Schedules attached to
this Services Agreement, which Schedules are hereby incorporated by this
reference into this Services Agreement.
(c) "Annex" shall mean any of the annexes attached to an Attachment.
(d) "Applications Software" or "Applications" means those programs and
programming (including the supporting documentation, media, on-line help
facilities and tutorials) that perform specific user related data
processing and telecommunications tasks and that are required for the
provision of, or are otherwise used in conjunction with, the Services.{*}
(e) "Attachment" means any attachment attached to a Schedule, including any
Annexes attached to such attachment which Annexes are hereby incorporated
by reference into such attachment by this reference subject to Section
22.15.
(f) {*}
(g) {*}
(h) "Change Control Procedures" has the meaning set forth in Section 9.5(b).
(i) "Confidential Information" has the meaning set forth in Section 15.1.
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(j) "Contract Year" means any twelve (12) month period commencing on the
Effective Date or any anniversary thereof.
(k) "Control" and its derivatives mean with regard to any entity (i) the legal,
beneficial, or equitable ownership, directly or indirectly, of greater than
fifty percent (50%) of the capital stock (or other ownership interest, if
not a corporation) of such entity ordinarily having voting rights {*}.
(l) "Data Network Services" means collectively (i) those services, functions
and responsibilities described in Article 3 of Schedule A to the Agreement,
and (ii) those services, functions and responsibilities described in
Article 4 of Schedule A to the Agreement to the extent applicable to those
services, functions and responsibilities described in such Article 3, as
such services, functions and responsibilities described in (i) and (ii) may
evolve during the Term and be supplemented and enhanced as provided by the
Agreement.
(m) {*}
(n) "Effective Date" has the meaning set forth in the preamble to this Services
Agreement.
(o) "Equipment" means the computer and telecommunications equipment owned or
leased by MSDW or IBM (or in the case of either Party, by an Affiliate of
such Party {*}) that are necessary or used to provide the Services.
Equipment includes the following: (i) computer equipment and associated
attachments, features, accessories, peripheral devices, and other
equipment, (ii) telecommunications equipment, including private branch
exchanges, multiplexers, modems, hubs, bridges, routers, and other
telecommunications equipment; and (iii) related services (e.g., maintenance
and support services, upgrades, subscription services) provided by third
parties (e.g., vendor, manufacturer, lessor) in the same contract covering
the provision of such Equipment. {*}
(p) "Extraordinary Event" has the meaning set forth in Section 12.5.
(q) "Force Majeure Event" shall have the meaning set forth in Section 19.3(a).
(r) "Former Affiliate" has the meaning set forth in Section 3.2(b).
(s) "IBM" has the meaning set forth in the preamble to this Services Agreement.
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<PAGE>
(t) {*}
(u) "IBM Confidential Information" has the meaning set forth in Section
15.1(c).
(v) "IBM Equipment" means Equipment that is owned or leased by IBM or any of
IBM's Affiliates. {*}
(w) "IBM Facility" means any operating location or office of IBM, any IBM
Affiliate {*} of either of such entities, from which Services are
provided.
(x) "IBM Personnel" means {*} employees of IBM or its Affiliates, including
any temporary-duty personnel, that perform any of the Services, {*}.
(y) "IBM Project Executive" has the meaning set forth in Subsection 5.1(c).
(z) "IBM Software" means Software used by IBM in providing the Services that
is owned by IBM or any IBM Affiliate. {*}
(aa) "International Agreements" shall have the meaning set forth in Schedule N
of the Agreement.
(bb) "IPSS Services" means collectively (i) those services, functions and
responsibilities described in Article 2 of Schedule A to the Agreement,
and (ii) those services, functions and responsibilities described in
Article 4 of Schedule A to the Agreement to the extent applicable to those
services, functions and responsibilities described in such Article 2,as
such services, functions and responsibilities described in (i) and (ii)
may evolve during the Term and be supplemented and enhanced as provided by
the Agreement.
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<PAGE>
(cc) {*}
(dd) "Key IBM Positions" means the positions set forth as such in Schedule D.
(ee) "Losses" means all losses, liabilities, damages and claims, and all related
costs and expenses (including reasonable legal fees and disbursements and
costs of investigation, litigation, settlement, judgment, interest and
penalties).
(ff) "Minimum Annual Revenue Commitment" shall have the meaning set forth in
Schedule C.
(gg) {*}
(hh) "Monthly Performance Report" has the meaning set forth in Section 9.2.
(ii) "MSDW" has the meaning set forth in the preamble to this Services
Agreement.
(jj) "MSDW Business Unit" means any of the Affiliates of MSDW from time to time
and includes, with respect to any particular MSDW Affiliate, any entity
permitted to receive Services from IBM pursuant to the Agreement. As of
the Effective Date, the MSDW Business Units include: Novus Financial
Corporation ("Novus Financial"), Discover Financial Services, Inc.
("Discover"), Dean Witter Reynolds Inc. (also known as Private Client
Group) ("DWR", "Private Client Group" or "PCG") , and Morgan Stanley & Co.
("Morgan Stanley").
(kk) "MSDW Confidential Information" has the meaning set forth in Subsection
15.1(b).
(ll) "MSDW Contract Executive" has the meaning set forth in Subsection 11.1(a).
(mm) "MSDW Data" means {*} all information provided to IBM, {*} by or on behalf
of any recipient of the Services (as described in Section 3.2) that is
entered into, or transmitted by or through, Software or Equipment {*}.
(nn) "MSDW Equipment" shall mean Equipment that is owned or leased by MSDW or
any of MSDW's Affiliates. As of the Effective Date, MSDW Equipment
includes that Equipment set forth as such in Schedule J.
(oo) "MSDW Facility" means any operating location or office of MSDW or MSDW's
Affiliates for which access to IBM Personnel is necessary for such
personnel to provide the Services.
(pp) "MSDW Software" means Software owned by MSDW or any MSDW Affiliate (whether
or not created by MSDW or an MSDW Affiliate) that is used to provide the
Services. {*}
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<PAGE>
(qq) "New Services Amendment" or "NSA" shall mean an amendment to this
Agreement in which IBM agrees to provide New Services to MSDW pursuant to
pricing and terms set forth in such NSA. Each NSA shall be incorporated
by reference into this Agreement and subject to the order of precedence
set forth in Section 22.15. A form NSA is set forth in Schedule I.
(rr) "Out-of-Pocket Expenses" means reasonable and actual out-of-pocket
expenses incurred by IBM for equipment, materials, supplies, or other
services {*}.
(ss) "Party" and "Parties" have the meaning set forth in the preamble to this
Services Agreement.
(tt) "Performance Standard" has the meaning given in Section 8.1(a).
(uu) "Previous Agreement" has the meaning set forth in Subsection 1.1(b).
"Previous Agreement" shall include all Special Services Amendments
executed under the Previous Agreement.
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<PAGE>
(vv) "Procedures Manual" has the meaning set forth in Section 9.4.
(ww) "Required Consents" means any consents, approvals and authorizations from
third parties necessary to permit a Party to access Equipment or Software
as provided by the Agreement.
(xx) "Schedule" means any schedule attached to this Services Agreement,
including any Attachments attached to such schedule which Attachments are
hereby incorporated into such schedule by this reference subject to
Section 22.15.
(yy) "Services Agreement" means this Services Agreement between MSDW and IBM.
(zz) "Services" has the meaning set forth in Section 3.1(a).
(aaa) "Software" means either of or both of Applications Software and
Systems Software, as applicable.
(bbb) "Source Code" shall mean the source code form of software, including
source code listings as then commented, system and program flowcharts,
and such other components, programs and documents necessary to fully
utilize, modify and maintain such software, including all necessary
support routines, all of which, where applicable, shall be on media able
to be read and processed.
(ccc) "SPS" has the meaning set forth in Section 1.1(c).
(ddd) "SSA" means any of those Special Services Amendments being continued
from the Previous Agreement; SSAs are as set forth in Schedule H.
(eee) "Systems Software" means those programs and programming (including the
supporting documentation, media, on-line help facilities and tutorials)
that perform tasks basic to the functioning of Equipment and that are
required to operate the Applications Software or otherwise support the
provision of the Services. Systems Software includes operating systems,
utilities, job scheduling, security, online terminal environments, and
file management subsystems. {*}
(fff) "Technology Plan" has the meaning set forth in Section 9.7.
(ggg) "Term" has the meaning specified in Section 4.1.
(hhh) "Termination/Expiration Assistance" has the meaning set forth in
Subsection 21.5(a).
(iii) "Third Party Applications Software" means Third Party Software that
is Applications Software.
(jjj) "Third Party Software" means {*} the Applications Software and Systems
Software that is provided under license to IBM or MSDW (or in the case of
either Party, to an Affiliate of such {*}) by a third party, and shall
include any ongoing services
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7
<PAGE>
(e.g., maintenance and support services, upgrades, subscription services)
provided by third parties (e.g., {*} vendor, manufacturer, lessor) in the
same license covering such Software. {*}
(kkk) "Third Party Systems Software" means Third Party Software that is
Systems Software.
(lll) {*}
(mmm) "Voice Services" shall have the meaning set forth in Section
3.1(a)(ii) of the Agreement.
(nnn) {*}
2.2 Other Terms.
-----------
Other terms used in the Agreement are defined in the context in which
they are used and shall have the meanings there indicated.
3. SERVICES
3.1 Provision of Services.
---------------------
(a) Commencing on the Effective Date, IBM shall provide the following
services and perform the following functions and responsibilities (such
services, functions and responsibilities set forth in this Subsection (a)
collectively the "Services"):
(i) the services, functions and responsibilities described in the Agreement,
as such services, functions and responsibilities may evolve during the
Term and be supplemented and enhanced as provided by the Agreement;
(ii) the services, functions and responsibilities described in exhibit 3 of
the Previous Agreement (such services, functions and responsibilities the
"Voice Services");
(iii) the services, functions and responsibilities set forth in the
International Agreements;
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(iv) the services, functions and responsibilities described in the SSAs,
notwithstanding the termination of the Previous Agreement pursuant to
Section 4.4;
(v) the services, functions and responsibilities not described in Subsections
(i), (ii), (iii) and (vi) of this Subsection (a) but which were
previously performed by IBM under the Previous Agreement, excluding (A)
those services, functions and responsibilities described in any Special
Services Amendment under the Previous Agreement that is not being
continued under this Agreement, and (B) those services, functions and
responsibilities which the Agreement expressly states will be assumed by
MSDW; and
(vi) {*}
(b) {*}
3.2 Recipients of the Services.
--------------------------
(a) As of the Effective Date, IBM shall provide the Services to (i) MSDW,
(ii) MSDW's Affiliates {*}. For purposes of the Agreement, Services
provided to the entities referenced in this Section shall be deemed to be
Services provided to MSDW. Notwithstanding the foregoing, MSDW shall have
right to specify, in its absolute and sole discretion, which of the
entities described in this Section shall receive the Services.
(b) In the event that MSDW relinquishes Control of an MSDW Affiliate after
the Effective Date such that the entity is no longer an MSDW Affiliate
(such entity a "Former Affiliate"), then upon MSDW's request, IBM shall
continue to provide the Services to such Former Affiliate after the date
such entity becomes a Former Affiliate for a period of time requested by
MSDW, which shall not exceed {*}; provided, however, that the Former
Affiliate agrees in writing to abide by the terms and conditions of the
Agreement. MSDW shall (i) remain the single point-of-contact with IBM
with respect to those Services provided to a Former Affiliate, (ii)
remain obligated to perform its payment obligations under the Agreement
with respect to those Services provided to a Former Affiliate, and (iii)
reimburse IBM for {*}. For purposes of the Agreement, Services provided
to a Former Affiliate shall be deemed to be Services provided to MSDW.
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3.3 {*}
3.4 Refresh.
-------
(a) IBM shall refresh Equipment and Software as follows:
(i) IBM shall maintain Software (other than (A) MSDW Software that is
Applications Software, (B) Third Party Applications Software licensed by
MSDW or an MSDW Affiliate, and (C) Systems Software for which MSDW has
maintenance responsibility as indicated in Schedule E) {*}. MSDW will use
commercially reasonable efforts to eliminate the use of multiple releases
of Software other than MSDW Software that is Applications Software and
Third Party Applications Software licensed by MSDW or an MSDW Affiliate.
(ii) {*}
(b) {*}
3.5 {*}
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3.6 {*}
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4. TERM
4.1 Term.
----
The term of the Agreement shall begin on the Effective Date and shall
expire on June 30, 2005, unless terminated (in whole or in part)
earlier or extended in accordance with the Agreement (the "Term").
4.2 Renewal.
-------
In the event that MSDW provides IBM with notice at least {*} prior to
the expiration of the Term that MSDW desires to renew the Agreement,
IBM shall provide to MSDW, within {*} after such notice, a written
proposal setting forth the pricing and any changes to the other terms
and conditions set forth in the Agreement that IBM proposes to govern
a renewal of the Agreement.
4.3 Extension.
---------
Upon giving written notice to IBM no less than {*} prior to the then-
existing expiration date of the Agreement (including in the event that
MSDW and IBM fail to agree in writing upon the terms and conditions
applicable to renewal of the Agreement pursuant to Section 4.2), MSDW
shall have the right to extend the Term for up to {*} on the terms and
conditions then in effect. {*}
4.4 Termination of Previous Agreement.
---------------------------------
(a) Subject to Subsection (b) of this Section, and except to the extent
provided in Subsections 7.2(c), 7.2(d), 7.2(f), and 7.3(b)(ii) of the
Agreement, as of the
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Effective Date, the Previous Agreement shall be terminated at no charge
to MSDW. The rights and responsibilities of the Parties from and after
the Effective Date shall be defined solely by the Agreement; the rights
and responsibilities of the Parties prior to the Effective Date shall be
defined solely by the Previous Agreement.
(b) Notwithstanding termination of the Previous Agreement pursuant to
Subsection (a) of this Section, with respect to exhibit 3 of the Previous
Agreement and any SSAs as defined by the Agreement:
(i) the Voice Services and corresponding pricing described in such exhibit 3,
and such SSAs, shall be incorporated by reference into the Agreement,
subject to the order of precedence set forth in Section 22.15, and shall
remain in full force and effect;
(ii) any references to the Previous Agreement in such exhibit 3 or SSAs shall
be deemed references to the Agreement; and
(iii) MSDW's payment of charges pursuant to such SSAs shall apply toward MSDW's
satisfaction of the Minimum Annual Revenue Commitment described in
Schedule C.
5. IBM PERSONNEL
5.1 Key IBM Positions.
-----------------
(a) {*}
(b) {*} Before assigning an individual to a Key IBM Position, whether as an
initial assignment or a subsequent assignment, IBM shall notify MSDW of
the proposed assignment {*} and shall provide MSDW with a resume and
other information about the individual reasonably requested by MSDW. If
MSDW in good faith objects to the proposed assignment, the Parties shall
attempt to resolve MSDW's concerns on a mutually agreeable basis. {*}
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(c) IBM shall, in accordance with Subsection (b) above, designate an
individual to (i) serve as the single point of accountability for IBM for
the Services, (ii) have the authority to act for and bind IBM in matters
relating to the Agreement, and (iii) have day-to-day authority for
undertaking to ensure customer satisfaction (such individual the "IBM
Project Executive"). The IBM Project Executive shall be one of the Key
IBM Positions. {*}
(d) The personnel approved as of the Effective Date to fill the Key IBM
Positions are listed in Schedule D. {*}
5.2 Qualifications and Replacement of IBM Personnel.
-----------------------------------------------
(a) IBM shall assign an adequate number of personnel to perform the Services.
The personnel IBM assigns to perform the Services shall be properly
educated, skilled, trained and qualified for the Services they are to
perform.
(b) In the event that MSDW determines in good faith that the continued
assignment to the MSDW account of one of the IBM Personnel is not in the
best interests of MSDW, then MSDW shall give IBM written notice to that
effect. After receipt of such notice, IBM shall have a reasonable period
of time in which to investigate the matters stated in such notice,
discuss its findings with MSDW and resolve any problems with such person.
{*}
5.3 {*}
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6. EQUIPMENT AND FACILITIES
6.1 MSDW Equipment.
--------------
(a) During the Term and subject to the Parties having obtained any necessary
Required Consents pursuant to Subsection (b) of this Section, MSDW grants
to IBM for the sole purpose of performing the Services, access to MSDW
Equipment to the extent that such access is necessary to provide the
Services; provided, however, that with respect to MSDW Equipment leased
by MSDW, such grant of access by MSDW shall be limited to the extent MSDW
has the rights to provide such access to IBM. IBM shall have management,
operational, support and administrative responsibility for MSDW Equipment
during the Term (i) as and to the extent that IBM requires such Equipment
to provide the Services, and (ii) with respect to leased MSDW Equipment,
to the same extent as if IBM were the lessee of such Equipment (exclusive
of financial obligations). With respect to leased MSDW Equipment, IBM
shall comply with the duties imposed on MSDW under the leases for such
Equipment. As between MSDW and IBM, the MSDW Equipment will remain the
property of MSDW. MSDW Equipment is provided to IBM on an "as is, where
is" basis, with no warranties whatsoever.
(b) MSDW authorizes IBM to administer, and pay amounts pertaining to the MSDW
Equipment leases, licenses for Third Party Software licensed by MSDW or
an MSDW Affiliate, and third-party service contracts set forth in
Schedule M for which IBM shall be financially responsible. MSDW shall not
terminate, extend or amend such leases, licenses and contracts without
the prior written approval of IBM. MSDW agrees to promptly notify all
appropriate third parties of such authorization to the extent necessary
and appropriate. IBM may, in its sole discretion, terminate, cancel,
substitute or change such leases, licenses and contracts; provided,
however that (i) IBM shall be solely responsible for any additional
charges resulting from such termination, cancellation, substitution or
change, and (ii) IBM continues to perform the Services as required by the
Agreement.
6.2 Other Equipment.
---------------
Except for MSDW Equipment,
(a) IBM will provide all additional or replacement Equipment, including
upgrades, as necessary to provide the Services in accordance with the
Agreement;
15
<PAGE>
(b) IBM shall have financial responsibility for acquisition, lease, and
ownership costs for Equipment, including current and future Equipment,
upgrades, enhancements, and growth and technology refreshments in
accordance with this Agreement;
(c) IBM shall have financial responsibility for all costs and expenses
related to operational support, including installation, support,
Equipment maintenance, disaster recovery of the Equipment, Performance
Standards, and moves, adds and changes, except as otherwise agreed upon
by MSDW in writing; and
(d) IBM shall be administratively and operationally responsible for the
Equipment used to provide the Services, including provisioning, staging,
configuring, installing, operating, maintaining, upgrading, and enhancing
the Equipment, all as set forth in more detail in Schedule A of the
Agreement.
IBM's costs of performing the obligations set forth in this Section will
be recovered by IBM through the charges set forth in the Agreement.
6.3 MSDW Facilities.
---------------
(a) MSDW Obligations.
----------------
(i) MSDW will provide IBM with access to the MSDW Facilities to the extent
and for so long as such access is reasonably necessary for IBM to perform
the Services.
(ii) With respect to office space, MSDW shall provide to IBM the office space
provided by MSDW to IBM immediately prior to the Effective Date under the
Previous Agreement in the condition and configuration that exists as of
the Effective Date, except that such office space will be equitably
adjusted to reflect any adjustment in the scope of Services either (A)
relative to the scope of services provided under the Previous Agreement,
or (B) occurring after the Effective Date. With respect to such office
space, MSDW shall provide adequate furniture and office supplies. With
respect to the personnel that may occupy such office space, MSDW shall
provide office support services, parking privileges and cafeteria
services similar to that offered to similarly-situated MSDW employees.
(iii) MSDW will inform IBM of any relocation of an MSDW Facility that MSDW is
contemplating or has made a final decision to make (if such relocation
could reasonably be expected to impact IBM's performance of the Services)
so that IBM will have a reasonable amount of time to prepare for and
implement such relocation as it impacts IBM, with MSDW reimbursing IBM
for IBM's Out-of-Pocket Expenses reasonably incurred for the relocation
of IBM Personnel stationed on-site at such facility.
(iv) The MSDW Facilities shall be made available to IBM on an "as is, where
is" basis. Unless otherwise expressly stated in the Agreement, IBM will
16
<PAGE>
be responsible for providing any other materials and support it requires
in order to provide the Services.
(b) IBM Obligations.
---------------
(i) IBM shall use the MSDW Facilities for the sole and exclusive purpose of
providing the Services, except as otherwise approved by MSDW in writing
(including as approved by MSDW pursuant to any node license agreements),
which approval may be withheld at MSDW's sole discretion. The use of such
facilities by IBM shall not constitute a leasehold interest in favor of
IBM, IBM Personnel or IBM customers.
(ii) IBM shall use the MSDW Facilities in a reasonably efficient manner. {*}
IBM shall be responsible for any damage to the MSDW Facilities resulting
from the abuse, misuse, neglect or gross negligence of IBM, its employees
and subcontractors or other failure to comply with its obligations
respecting the MSDW Facilities.
(iii) IBM, its employees and agents shall keep the MSDW Facilities in good
order, not commit or permit waste or damage to such facilities, not use
such facilities for any unlawful purpose or act, and comply with MSDW's
standard policies and procedures regarding access to and use of such
facilities (including procedures for the physical security of the MSDW
Facilities) that are (A) made available to IBM, and {*}.
(iv) IBM shall permit MSDW and its agents and representatives to enter into
those portions of the MSDW Facilities occupied by IBM Personnel at any
time to perform facilities-related services.
(v) IBM shall not make any improvements or changes involving structural,
mechanical or electrical alterations to the MSDW Facilities without
MSDW's prior written approval. Any improvements to the MSDW Facilities
will become the property of MSDW.
(vi) When the MSDW Facilities are no longer required for performance of the
Services, IBM shall return such facilities to MSDW in substantially the
same condition as when IBM began use of such facilities, subject to
reasonable wear and tear.
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7. {*}
7.1 {*}
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7.2 {*}
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
19
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(e) {*}
(f) {*}
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7.3 [*]
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7.4 {*}
7.5 {*}
7.6 {*}
7.7 Export.
------
The Parties acknowledge that certain Software and technical data to be
provided under the Agreement and certain transactions under the Agreement
may be subject to export controls under the laws and regulations of the
United States and other countries. Neither Party shall export or re-
export any such items or any direct product thereof or undertake any
transaction in violation of any such laws or regulations. To the extent
within IBM's control, IBM shall be responsible for, and shall coordinate
and oversee, compliance with such export laws in respect of such items
exported or imported under the Agreement.
7.8 Required Consents.
-----------------
(a) MSDW, with the cooperation of IBM, shall obtain any Required Consents
necessary to grant the licenses described in this Article 7 for [*]. MSDW
shall pay such fees (such as transfer or upgrade fees) as may be required
to obtain such Required Consents.
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<PAGE>
(b) IBM, with the cooperation of MSDW, shall obtain any Required Consents
necessary to grant the licenses described in this Article 7 for Software
other than the Software described in Subsection (a) of this Section. IBM
shall pay such fees (such as transfer or upgrade fees) as may be required
to obtain such Required Consents.
(c) If a Required Consent is not obtained, then, unless and until such
Required Consent is obtained, the Parties shall cooperate with each other
in achieving a reasonable alternative arrangement for MSDW to continue to
process its work with minimum interference to its business operations.
(d) MSDW shall be responsible for any claim arising prior to the Effective
Date from the failure to obtain consents or approvals required before the
Effective Date for the licensing or transfer to IBM under the Previous
Agreement of the right to use or access:
(i) equipment that was owned or leased by MSDW before the Effective Date and
for which MSDW, rather than IBM, retained financial and administrative
responsibility under the Previous Agreement; or
(ii) software and programs that were owned or licensed by MSDW before the
Effective Date for which MSDW, rather than IBM, retained financial and
administrative responsibility under the Previous Agreement.
8. PERFORMANCE STANDARDS
8.1 General.
-------
{*}
(a) At all times IBM's level of performance shall meet or exceed the
quantitative and qualitative performance standards for certain of the
Services ("Performance Standards") identified in Schedule B to the
Agreement, {*}
(b) {*}
8.2 Failure to Perform.
------------------
(a) If IBM fails to meet any Performance Standard, IBM shall, at no
additional charge to MSDW, (i) investigate and report on the causes of
the problem; (ii) advise MSDW, as and to the extent reasonably requested
by MSDW, of the status of remedial efforts being undertaken with respect
to such problems {*}.
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(b) {*}
8.3 Periodic Reviews.
----------------
Within three (3) months after the expiration of the first Contract Year
following the Effective Date and at least annually thereafter, MSDW and
IBM shall review the Performance Standards pursuant to the process set
forth in Article 5 of Schedule B and shall make adjustments to them as
appropriate to reflect improved performance capabilities associated with
advances in the technology and methods used to perform the Services. {*}
8.4 Measurement and Monitoring Tools.
--------------------------------
IBM shall utilize the necessary measurement and monitoring tools and
procedures required to monitor, measure and report IBM's performance of
the Services against the applicable Performance Standards, including as
set forth in Schedule B. Such measurement and monitoring shall permit
reporting at a level of precision and detail sufficient to verify
compliance with the Performance Standards, and shall be subject to audit
by MSDW. For purposes of verification and at MSDW's request, IBM shall
provide MSDW with information about and from such tools and procedures
and, with IBM's participation, with access to such tools and procedures.
9. PROJECT AND CONTRACT MANAGEMENT
9.1 Steering Committee.
------------------
The Parties shall form a steering committee to facilitate communications
between them (the "Steering Committee"). The Steering Committee shall be
composed of:
(a) the MSDW Contract Executive;
(b) the chief information officer from each of the MSDW Business Units that
are receiving Services;
(c) the IBM Project Executive;
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(d) {*};
(e) {*}; and
(f) such other persons as may be mutually agreed by the Parties.
9.2 Reports.
-------
Within ninety (90) days after the Effective Date, the Parties shall
determine an appropriate set of periodic reports to be issued by IBM to
MSDW. Such reports shall be issued at the frequency and contain the level
of detail reasonably requested by MSDW. Unless otherwise requested by
MSDW, such reports shall be no less comprehensive and be issued no less
frequently than the reports provided by IBM prior to the Effective Date
under the Previous Agreement. IBM shall provide MSDW with suggested
formats for such reports, for MSDW's review and approval. As one such
report, IBM shall provide a monthly performance report, which shall be
delivered to MSDW within fifteen (15) days after the end of each calendar
month (commencing with the calendar month following the calendar month
that includes the Effective Date), describing IBM's performance of the
Services in the preceding month (the "Monthly Performance Report"). Such
report shall:
(a) separately address IBM's performance in each area of the Services;
(b) for each area of the Services, assess the degree to which IBM has
attained or failed to attain the pertinent objectives in that area;
(c) include a performance report for each MSDW Business Unit in no less
detail than similar reports provided by IBM to the MSDW Business Units
prior to the Effective Date, that at a minimum explains deviations from
the Performance Standards, includes a plan for corrective action where
appropriate, {*}
(d) describe the status of applications development projects (if any),
problem resolution efforts, and other initiatives;
(e) on a quarterly basis only, set forth a record of all material Equipment,
Software, and IBM Personnel changes that pertain to the Services and
describe planned changes during the upcoming quarter that may affect the
Services;
(f) set forth the utilization of resources for the month and report on
utilization trends and statistics; and
(g) include such documentation and other information as MSDW may reasonably
request to verify compliance with the Agreement.
9.3 Meetings.
--------
The Parties shall participate in the following meetings:
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(a) working-level meetings, held no less frequently than similar meetings
between the Parties before the Effective Date, between the Parties to
review any technical, operational, administrative or related matters with
respect to Schedule B, which may include matters with respect to
performance, capacity, changes, problems, measurement of the Performance
Standards, or any other matters agreed upon by the Parties;
(b) a monthly meeting among operational personnel representing MSDW and IBM
to discuss daily performance and planned or anticipated activities,
changes that might adversely affect performance, and otherwise address,
review, and discuss matters specific to MSDW;
(c) a quarterly meeting with each MSDW Business Unit and their respective
chief information officer to (i) review the Monthly Performance Reports
for the quarter, (ii) review IBM's overall performance under the
Agreement, (iii) review any managerial, contractual, financial,
relationship or related matters with respect to Schedule B, (iv) review
any proposal to modify the Performance Standards made pursuant to Article
5 of Schedule B, (v) review progress on the resolution of issues, (vi)
provide a strategic outlook for MSDW's information systems requirements,
and (vii) discuss such other matters as appropriate;
(d) a semi-annual meeting of Steering Committee to review relevant contract
and performance issues; and
(e) such other meetings between MSDW representatives and IBM Personnel
reasonably requested by either Party as necessary to address performance
of the Services.
IBM shall prepare and circulate an agenda sufficiently in advance of each
meeting to give participants an opportunity to prepare for the meeting.
IBM shall incorporate into such agenda items that MSDW desires to
discuss. At MSDW's request, IBM shall prepare and circulate minutes
promptly after a meeting.
9.4 Procedures Manual.
-----------------
(a) Within {*} calendar days after the Effective Date, IBM will deliver a
draft procedures manual to MSDW, for its comments and review (the
"Procedures Manual"). The Procedures Manual will describe how IBM shall
perform and deliver the Services under the Agreement, the Equipment and
Software being used, and the documentation (e.g., operations manuals,
user guides, specifications) that provides further details of such
activities. The Procedures Manual shall describe the activities IBM
proposes to undertake in order to provide the Services, including those
direction, supervision, monitoring, staffing, reporting, planning and
oversight activities normally undertaken at facilities that provide
services of the type IBM shall provide under the Agreement. The
Procedures Manual shall also include descriptions of the acceptance
testing and quality assurance procedures approved by MSDW, IBM's problem
management and escalation procedures, and the other standards and
procedures of IBM pertinent to MSDW's interaction with IBM in obtaining
the Services. The
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Procedures Manual shall be suitable for use by MSDW to understand the
Services.
(b) Following MSDW's review of the draft Procedures Manual, IBM shall
incorporate reasonable comments or suggestions of MSDW and shall finalize
the Procedures Manual within {*} of the Effective Date. {*} IBM shall
periodically update the Procedures Manual to reflect changes in the
operations or procedures described therein. Updates of the Procedures
Manual shall be provided to MSDW for review {*}.
9.5 Change Control.
--------------
(a) IBM shall comply with the following change control requirements:
(i) {*}
(ii) {*}
(iii) IBM shall move programs from development and test environments to
production environments in a controlled and documented manner, so that no
changes are introduced into the programs being moved to production
environments during such activity.
(iv) IBM shall control all changes to MSDW's computing environment, including
changes to programs, manual procedures, job control language statements,
distribution parameters, or schedules.
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(b) Within {*} after the Effective Date, IBM shall prepare and provide to
MSDW change control procedures detailing how IBM will comply with the
requirements set forth in Subsection (a) of this Section and otherwise
control changes to the Services (such procedures the "Change Control
Procedures"). The Change Control Procedures may not modify or change the
scope of Services to be provided under, or any other terms or conditions
of, the Agreement. The Change Control Procedures shall be provided to
MSDW for review, comment and approval; and reasonable comments or
suggestions of MSDW shall be incorporated into the Change Control
Procedures. IBM shall perform the Services in accordance with the Change
Control Procedures.
9.6 Use of Subcontractors.
---------------------
(a) {*}
(i) {*}
(ii) {*}
(b) IBM may, in the ordinary course of business and without MSDW approval,
subcontract for third party services or products where
(i) {*}
(ii) {*}
{*} If MSDW expresses concerns to IBM about a subcontract covered by this
Subsection 9.5(b), IBM shall
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<PAGE>
discuss such concerns with MSDW and work in good faith to resolve MSDW's
concerns on a mutually acceptable basis.
(c) IBM shall not insert in any subcontract any provision the effect of which
would be to limit the ability of a subcontractor to contract directly
with MSDW. {*}
(d) IBM shall remain responsible for obligations, services and functions
performed by IBM Affiliates and {*} Subcontractors to the same extent as
if such obligations, services and functions were performed by IBM
employees and for purposes of the Agreement such work shall be deemed
work performed by IBM. IBM shall be MSDW's sole point of contact
regarding the Services, including with respect to payment. IBM shall not
disclose MSDW Confidential Information to a subcontractor unless and
until such subcontractor has agreed in writing to protect the
confidentiality of such Confidential Information in a manner
substantially equivalent to that required of IBM under the Agreement.
9.7 Annual Technology Plan.
----------------------
The Parties shall jointly prepare an annual technology plan in accordance
with the provisions of this Section (the "Technology Plan"). Preparation
of the Technology Plan shall be under the overall direction and guidance
of the Steering Committee. The Technology Plan shall address the
information technology requirements of MSDW's activities. Each Technology
Plan after the first shall review and assess the immediately preceding
Technology Plan. The Technology Plan shall consist of a three-year plan
and annual implementation plans as described below. {*}
(a) Three-Year Plan. The Technology Plan shall include a comprehensive
---------------
assessment and strategic analysis of MSDW's then-current information
technology systems and services for the next three (3) years, including
an assessment of the appropriate direction for such systems and services,
in light of MSDW's business priorities and strategies and competitive
market forces (to the extent such business information is provided by
MSDW to IBM). The plan shall consider growth requirements, IBM and MSDW
initiatives that may materially affect either Party, re-assessment of
skill and resource requirements, lessons learned from previous projects,
operational issues, technical solutions, and any other issues that foster
strategic planning and collaboration. The plan shall include specific
technical or business information, such as the identification of proposed
software and hardware strategies and direction, a cost projection, a
cost/benefit analysis of any
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proposed changes, a description of the types of personnel skills and
abilities needed to respond to recommended changes or upgrades in
technology, a project plan and related schedule for developing and
achieving the recommended elements, and references to appropriate
information that supports service level requirements, exploits industry
trends in production capabilities, and outlines potential price
performance improvement opportunities, as applicable.
(b) Annual Implementation Plan. As necessary to support the overall
--------------------------
objectives and directions of the Three-Year Plan described above, each
annual implementation plan shall provide specific guidance as to the
information services requirements, projects, and plans for the upcoming
year, including details on operations, solutions and design and
development activities, as applicable. The annual implementation plan
shall include a summary review of IBM's performance of the Services in
the year then concluding and shall make updates and revisions of the
long-term plan as appropriate. An annual implementation plan shall be
prepared for each Contract Year of the Agreement or as otherwise mutually
agreed by the Parties.
(c) Drafting Responsibility. IBM shall submit to MSDW a draft of the
-----------------------
Technology Plan for MSDW's review, which draft shall have been developed
with input from key business users from MSDW. IBM shall submit the final
Technology Plan within {*} of receiving MSDW's comments on the draft, and
the Parties shall mutually agree upon the final Technology Plan. The
draft of the Technology Plan for the first Contract Year shall be
provided by IBM within {*} of the Effective Date or as otherwise mutually
agreed by the Parties. IBM shall recommend modifications to the
Technology Plan as it deems appropriate and, subject to the mutual
agreement of the Parties, shall revise the Technology Plan based upon
MSDW's review on an annual basis or as otherwise mutually agreed by the
Parties.
9.8 Quality Assurance and Improvement Programs.
------------------------------------------
IBM, as part of its total quality management process, shall provide
continuous quality assurance and quality improvement through: (a) the
identification and application of proven techniques and tools from other
installations within its operations {*} that would benefit MSDW either
operationally or financially; and (ii) the implementation of concrete
programs, practices and measures designed at a minimum to ensure that the
Services are performed in accordance with the Agreement and to improve
the Performance Standards. Such procedures shall include checkpoint
reviews, testing, acceptance, and other procedures for MSDW to assure the
quality of IBM's performance and shall be included in the Procedures
Manual.
9.9 Productivity and Management Tools.
---------------------------------
IBM shall utilize project management tools, including productivity aids
and project management systems, as reasonably necessary to perform the
Services. IBM shall use project management tools in all major projects
and employ a regular reporting mechanism to identify project tasks,
present current status reports, and identify potential bottlenecks and
problems.
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10. AUDITS
10.1 Audit Rights.
------------
{*} IBM shall provide to MSDW, its auditors (including internal audit
staff and external auditors), regulators and other representatives {*}
access upon reasonable prior notice {*} to any Equipment, Software, IBM
Personnel, MSDW Facilities, IBM Facilities and to data and records
relating to the Services for the purpose of performing audits and
inspections {*} to:
(a) verify the accuracy of charges and invoices;
(b) verify the integrity of MSDW Data and examine the systems that process,
store, support and transmit that data; and
(c) examine IBM's performance of the Services including, to the extent
applicable to the Services performed by IBM and to the charges under the
Agreement, performing audits (i) of practices and procedures, (ii) of
Equipment and Software systems, (iii) of general controls and security
practices and procedures, (iv) of disaster recovery and back-up
procedures, (v) of the efficiency of IBM in using resources for which
MSDW is being charged, and (vi) any audit necessary to enable MSDW to
meet applicable regulatory requirements.
IBM shall provide to such auditors, inspectors, regulators, and
representatives such assistance as they reasonably require {*}. IBM shall
cooperate fully with MSDW or its designees in connection with audit
functions and with regard to examinations by regulatory authorities.
MSDW's auditors and other representatives shall comply with IBM's
reasonable security requirements. MSDW will make reasonable efforts to
limit the number, scope and duration of such audits and otherwise attempt
to minimize any disruption to IBM's business caused by such audits.
10.2 Audit Follow-up.
---------------
(a) Following an audit or examination, MSDW shall conduct (in the case of an
internal audit), or request its external auditors or examiners to
conduct, an exit conference with IBM to obtain factual concurrence with
issues identified in the review.
(b) {*}
(c) IBM and MSDW shall meet to review each audit report promptly after the
issuance thereof and to mutually agree upon the appropriate manner, if
any, in which to respond to the changes suggested by the audit report.
Notwithstanding
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<PAGE>
the foregoing, in the event that an audit reveals that IBM is not
complying with its obligations under the Agreement, IBM shall take action
as is necessary to correct such non-compliance. MSDW and IBM agree to
develop operating procedures for the sharing of audit and regulatory
findings and reports related to IBM's operating practices and procedures
produced by auditors or regulators of either Party.
10.3 Records Retention.
-----------------
(a) Until the latest of (i) three (3) years after expiration or termination
of the Agreement, (ii) the date that all pending matters relating to the
Agreement (e.g., disputes) are closed, (iii) the date that retention of
records is no longer required to meet MSDW's records retention policy as
identified to IBM as such policy may be reasonably adjusted from time to
time, or (iv) as otherwise required by law or regulation (the latest of
such dates the "Retention Date"), IBM shall maintain and provide access
upon request to the records, documents and other information required to
meet MSDW's audit rights under the Agreement.
(b) After the Retention Date, IBM may destroy or otherwise dispose of such
records, documents and other information required to meet MSDW's audit
rights under the Agreement {*}.
11. MSDW RESPONSIBILITIES
11.1 Responsibilities.
----------------
In addition to MSDW's responsibilities set forth elsewhere in the
Agreement, MSDW shall be responsible for the following:
(a) MSDW shall designate one individual to whom all IBM communications
concerning the Agreement may be addressed (such individual the "MSDW
Contract Executive"). The MSDW Contract Executive shall have the
authority to act for and bind MSDW in matters relating to the Agreement.
(b) MSDW shall cooperate with IBM by, among other things, making available,
as reasonably requested by IBM, data processing priorities, management
decisions, information, approvals and acceptances so that IBM may
accomplish its obligations and responsibilities under the Agreement. The
MSDW Contract Executive, or his or her designee, will be the principal
point of contact for obtaining such decisions, information, approvals and
acceptances.
11.2 {*}
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<PAGE>
12. CHARGES
12.1 General.
-------
All charges for the Services are set forth in this Article 12, in
Schedule C, in the SSAs, in the NSAs or in the International Agreements.
MSDW shall not be required to pay IBM any amounts for the Services in
addition to those payable to IBM under this Article 12 or Schedule C.
12.2 Incidental Expenses.
-------------------
IBM acknowledges that, except as may be otherwise provided in the
Agreement, expenses that IBM expects to incur in performing the Services
(including travel and lodging, document reproduction and shipping, and
long-distance telephone) are included in IBM's charges and rates set
forth in the Agreement. Accordingly, such IBM expenses are not separately
reimbursable by MSDW unless, on a case-by-case basis for unusual
expenses, MSDW has agreed in advance and in writing to reimburse IBM for
the expense.
12.3 Taxes.
-----
The Parties' respective responsibilities for taxes arising under or in
connection with the Agreement shall be as follows:
(a) Each Party shall be responsible for any personal property taxes on
property it owns or leases, for franchise and privilege taxes on its
business, and for taxes based on its net income or gross receipts.
(b) IBM shall be responsible for any sales, use, excise, value-added,
services, consumption, and other taxes and duties payable by IBM, {*} on
any goods or services that are used or consumed by such entities in
providing the Services where the tax is imposed on the acquisition or use
of such goods or services by such entities and the amount of tax is
measured by the costs in acquiring such goods or services.
(c) MSDW shall be responsible for any sales, use, excise, value-added,
services, consumption, or other tax that is assessed on the provision of
the Services as a whole, or on any particular Service received by MSDW
from IBM. If and to the extent any such tax is reduced or eliminated
during the Term, IBM shall reduce or eliminate any charges for such
taxes, as appropriate. In the event that any interest or penalty is
assessed against MSDW with respect to any such tax, then IBM shall
reimburse MSDW for such interest or penalty to the extent that such
interest or penalty arises from IBM's failure to invoice MSDW for such
tax or to remit amounts paid by MSDW to IBM for such tax.
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33
<PAGE>
(d) In the event that a sales, use, excise, value added, services,
consumption, or other tax is assessed on the provision of any of the
Services, MSDW shall provide tax calculations at the Affiliate level
based upon the benefit that each Affiliate receives within a tax
jurisdiction. The benefit shall be determined by MSDW and provided to IBM
so that the Parties can work together to segregate the payments under the
Agreement into three (3) payment streams:
(i) those for taxable Services;
(ii) those in which IBM functions merely as a payment agent for MSDW in
receiving goods, supplies, or services (including leasing and licensing
arrangements); and
(iii) those for other nontaxable Services.
(e) The Parties agree to cooperate with each other to enable each to more
accurately determine its own tax liability and to minimize such liability
to the extent legally permissible. IBM shall provide MSDW with
information that separately states, for each applicable tax jurisdiction,
the amount of any taxes IBM is collecting from MSDW. Each Party shall
provide and make available to the other any resale certificates,
information regarding out-of-state or out-of-country sales or use of
equipment, materials or services, and other exemption certificates or
information reasonably requested by the other Party.
(f) {*}
12.4 New Services.
------------
In the event that MSDW requests IBM to perform functions that are
materially different from, and in addition to, the Services, the Parties'
obligations with respect to such functions shall be as follows:
(a) To the extent that such additional functions require additional resources
for which a pricing metric exists under the Agreement, the additional
functions shall:
(i) subject to Subsection (e) of this Section, be priced in accordance with
the pricing metric;
(ii) be documented pursuant to Subsection (f) of this Section, and
(iii) be considered "Services" and be subject to the provisions of the
Agreement.
(b) To the extent that such additional functions require additional resources
for which a pricing metric does not exist under the Agreement, then prior
to performing such additional functions:
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34
<PAGE>
(i) IBM shall provide to MSDW a project plan and shall, subject to Subsection
(e) of this Section, quote MSDW a charge for such additional functions
that takes into account {*}.
(ii) MSDW, upon receipt of such quote, may then elect to have IBM perform the
additional functions. If MSDW elects to have IBM perform such additional
functions, then
(A) the charges under the Agreement shall be adjusted, if and to the extent
appropriate, to reflect such functions,
(B) such additional functions and adjustment of charges shall be documented
pursuant to Subsection (f) of this Section; and
(C) such additional functions shall be deemed "Services" and shall be subject
to the provisions of the Agreement.
(c) MSDW may elect to solicit and receive bids from third parties to perform
such additional functions. {*}
(d) The Parties anticipate that:
(i) the Services will evolve and be supplemented, modified, enhanced or
replaced over time to keep pace with technological advancements and
improvements in the methods of delivering services, and
(ii) Schedules E (Software) and J (Equipment) will be supplemented and
modified over time to accurately reflect the Equipment and Software,
respectively, used to provide the Services.
{*}
(e) If MSDW's request for additional functions pursuant to this Section
includes a request for, or otherwise would cause, IBM to correspondingly
reduce or eliminate Services it is providing, then such additional
functions shall be considered "Replacement Services." {*}
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35
<PAGE>
(f) If MSDW elects to have IBM perform additional functions pursuant to
Subsections (a) or (b) of this Section, such additional functions (and
the appropriate adjustment to the charges under this Agreement as
determined pursuant to this Section 12.4) shall be documented using the
New Services Amendment form set forth in Schedule I; provided, however,
that no such writing shall be effective unless signed by the MSDW
Contract Executive. Such writing if effective shall constitute a New
Services Amendment. MSDW's payment of charges under any New Services
Amendment shall apply toward MSDW's satisfaction of the Minimum Annual
Revenue Commitment.
12.5 {*}
12.6 Cost of Living Adjustment.
--------------------------
(a) The Parties intend that commencing January 1, 2000, certain identified
charges listed in Section 7.4 of Schedule C (such charges the "Identified
Charges") will increase if inflation, measured from January 1, 1993,
exceeds four percent (4%) per year, compounded annually. These Identified
Charges include protection against inflation at a rate of four percent
(4%) per year, compounded annually (such inflation protection included in
the Identified Charges the "COLA Index"). The COLA Index for each
calendar year of the Term is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Calendar Year
- ----------------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2005
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COLA Index {*} {*} {*} {*} {*} {*} {*}
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
MSDW agrees to pay IBM a Cost of Living Adjustment ("COLA") beginning
January 1, 2000 if actual cumulative inflation exceeds the COLA Index as
set forth above. IBM and MSDW agree to use the Consumer Price Index, as
published by the Bureau of Labor Statistics, U.S. Department of Labor,
For All Urban Consumers, U.S. City Average, All Items, 1982-84=100 ("CPI-
U") for purposes of calculating actual inflation. The COLA will be
calculated using the COLA Factor specified below. This COLA shall be
applied on a prospective basis, i.e., the Identified Charges payable by
MSDW will be surcharged by the COLA Factor after January 1, 2000 as
determined below, if such COLA Factor is in excess of zero. The COLA
Factor will be determined as soon as practicable after the end of each
calendar year during the Term beginning with the calendar year 2000. If
applicable, IBM will invoice MSDW for the COLA beginning with Services
rendered on or after January 1, 2000 in accordance with Article 13. The
COLA Factor shall be calculated as follows:
COLA Factor = ((Actual Inflation - Protected Inflation) /
Prior Year's Protected Inflation) x {*}, where:
(i) Actual Inflation = CPI-U for the December preceding the calendar year
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36
<PAGE>
for which COLA is being calculated;
(ii) Protected Inflation = the Base Year Index multiplied by the COLA Index,
set forth above, for the calendar year preceding the calendar year for
which COLA is being calculated;
(iii) Prior Year's Protected Inflation = the Base Year Index multiplied by the
COLA Index, set forth above, for the calendar year preceding the calendar
year for which the Protected Inflation is being calculated; and
(iv) Base Year Index = CPI-U for December, 1992.
(b) In the event the Bureau of Labor Statistics stops publishing the CPI-U or
substantially changes its content and format, IBM and MSDW will
substitute another comparable index published at least annually by a
mutually agreeable source. If the Bureau of Labor Statistics merely
redefines the base year for the CPI-U from 1982-84 to another year, IBM
and MSDW will continue to use the CPI-U, but will convert the COLA Index
to the new base year by using an appropriate conversion formula.
12.7 {*}
(a) {*}
(b) {*}
(c) {*}
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37
<PAGE>
13. INVOICING AND PAYMENT
13.1 Invoicing.
---------
(a) IBM shall invoice MSDW for all amounts due under the Agreement on a
monthly basis in accordance with the SSA referenced as "DWD 18" (as
described in Schedule H). IBM shall separately invoice MSDW for the
following as follows:
(i) IBM shall invoice MSDW for the Monthly Service Charge for a calendar
month {*}, and
(ii) IBM shall invoice all other amounts due under the Agreement {*}.
IBM shall provide details as to charges as specified by MSDW. IBM shall
include in each invoice the calculations utilized to establish the
charges.
(b) To the extent a credit may be due MSDW pursuant to the Agreement, IBM
shall provide MSDW with an appropriate credit against amounts then due
and owing. If no further payments are due to IBM, IBM shall pay such
amounts to MSDW within thirty (30) days.
(c) IBM shall render invoices for each month's charges pursuant to Subsection
(a) of this Section, showing such details as reasonably specified by MSDW
including as necessary to satisfy MSDW's internal accounting and
chargeback requirements
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38
<PAGE>
(such as allocating charges among portions of the Service, locations, and
business units). Such invoices shall separately state the amounts of any
taxes IBM is collecting from MSDW.
13.2 Payment Due.
-----------
(a) Subject to the other provisions of this Article 13:
(i) invoices described in Section 13.1(a)(i) that are properly submitted to
MSDW pursuant to the Agreement shall be due and payable by MSDW within
seven (7) business days after receipt thereof; and
(ii) invoices described in Section 13.1(a)(ii) that are properly submitted to
MSDW pursuant to the Agreement shall be due and payable by MSDW within
twenty (20) calendar days after receipt thereof.
(b) All amounts due and payable to IBM under this Article 13 shall be paid by
electronic funds transfer to IBM from account(s) designated by MSDW.
(c) In the event that any amounts due are not received by IBM within five (5)
business days following the applicable due date set forth in Subsection
(a), such amounts due shall be subject to a late fee equal to {*} of such
amounts due per month accruing from the original due date set forth in
Subsection (a) until the date MSDW pays such amount due.
13.3 Accountability.
--------------
IBM shall maintain complete and accurate records of and supporting
documentation for the amounts billable to and payments made by MSDW
hereunder, in accordance with generally accepted accounting principles
applied on a consistent basis. IBM agrees to provide MSDW with
documentation and other information with respect to each invoice as may
be reasonably requested by MSDW to verify accuracy and compliance with
the provisions of the Agreement. MSDW and its authorized agents and
representatives shall have access to such records for purposes of audit
pursuant to Article 10 of the Agreement.
13.4 Proration.
---------
Periodic charges under the Agreement are to be computed on a calendar
month basis, and shall be prorated for any partial calendar month.
13.5 Set Off.
-------
With respect to any amount to be paid by MSDW under the Agreement, MSDW
may set off against such amount any amount that IBM is obligated to pay
MSDW under the Agreement.
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39
<PAGE>
13.6 Disputed Charges.
- ---- ----------------
Subject to Section 13.5, MSDW shall pay undisputed charges when such
payments are due under this Article 13. MSDW may withhold payment of any
particular charge that MSDW disputes in good faith, subject to the
following limitations:
(a) For any monthly invoice, no more than {*} of the total amount invoiced to
MSDW as set forth in such invoice may be withheld with respect to such
invoice; and
(b) No more than {*} may be withheld at any given time by MSDW. For each
calendar year, such aggregate shall be calculated as {*}.
If the dispute underlying an amount withheld from a particular invoice is
not recieved within {*} after such amount is withheld by MSDW, {*}.
14. SAFEGUARDING OF MSDW DATA
14.1 Safeguarding MSDW Data.
----------------------
IBM shall establish and maintain safeguards against the destruction,
loss, or alteration of MSDW Data in the possession of IBM that are no
less rigorous than those maintained by IBM on behalf of MSDW prior to the
Effective Date, and shall be no less rigorous than those maintained by
IBM for its own information of a similar nature. MSDW or at MSDW's
request, a third party vendor, shall have the right to establish backup
security for data and to keep backup data and data files in its
possession at MSDW's expense.
14.2 Unauthorized Access.
-------------------
Without limiting the generality of Section 14.1 above:
(a) IBM Personnel shall not attempt to access, or allow access to, any data,
files or programs within the information systems environment to which
they are not entitled under the Agreement. {*}
(b) IBM shall institute {*} systems security measures with respect to the
access and controls it affords to its employees, Affiliates and IBM
Personnel (including the employees of such Affiliates and IBM Personnel)
to guard against, identify and promptly terminate the unauthorized
access, alteration
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<PAGE>
or destruction of Software and MSDW Data. Such measures shall include the
installation of Software that (i) requires all entities described in the
preceding sentence to enter a user identification and password prior to
gaining access to the information systems; (ii) controls and tracks the
addition and deletion of such entities; and (iii) controls access by such
entities to areas and features of the systems.
15. CONFIDENTIALITY
15.1 Confidential Information.
------------------------
(a) IBM and MSDW each acknowledge that they may be furnished with, receive,
or otherwise have access to information of or concerning the other Party
which such Party considers to be confidential, proprietary, a trade
secret or otherwise restricted. As used in the Agreement, "Confidential
Information" shall mean {*}. The terms and conditions of the Agreement
shall be deemed Confidential Information.
(b) In the case of MSDW, Confidential Information also shall include {*}:
(i) {*}
(ii) {*}
(iii) {*}
(iv) {*}
(collectively, the "MSDW Confidential Information").
(c) In the case of IBM, Confidential Information also shall include {*}
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41
<PAGE>
(collectively, the "IBM Confidential Information").
15.2 Obligations.
-----------
(a) Each Party's Confidential Information shall remain the property of that
Party except as expressly provided otherwise by the other provisions of
the Agreement. MSDW and IBM shall each use at least the same degree of
care, but in any event no less than a reasonable degree of care, to
prevent disclosing to third parties the Confidential Information of the
other as it employs to avoid unauthorized disclosure, publication or
dissemination of its own information of a similar nature; provided that a
Party may disclose such information to entities performing services
required hereunder where (i) use of such entity is authorized under the
Agreement, (ii) such disclosure is necessary or otherwise naturally
occurs in that entity's scope of responsibility, and (iii) the entity
agrees in writing to assume the obligations described in this Article 15.
Any disclosure to such entity shall be under the terms and conditions as
provided in this Section.
(b) Neither Party may:
(i) make any use of the Confidential Information of the other Party except as
required to perform its obligations under the Agreement;
(ii) possess or assert any lien or similar right against or to the
Confidential Information of the other Party; or
(iii) sell, assign, lease, or otherwise dispose of to third parties or
commercially exploit the Confidential Information of the other Party.
(c) As requested by MSDW during the Term, upon expiration or any termination
of the Agreement, or with respect to any particular MSDW Confidential
Information, on such earlier date that the same shall be no longer
required by IBM in order to render the Services, IBM shall either return
in a form reasonably requested by MSDW or destroy, as MSDW may direct,
all material (including all copies) in any medium that contains {*} MSDW
Confidential Information; provided, however, that IBM may retain one (1)
copy of such information to the extent required to provide the Services,
to comply with laws or regulations, or to establish IBM's rights under
the Agreement.
(d) As requested by IBM
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42
<PAGE>
(i) after {*} MSDW shall either return in a form reasonably requested by IBM
or destroy, as IBM may direct, all material (including all copies) in any
medium that contains {*} IBM Confidential Information to the extent no
longer required by MSDW for the receipt of any Services after such
expiration or termination; or
(ii) after the use of IBM Confidential Information by MSDW that constitutes a
breach of MSDW's obligations described in Subsections (a) or (b) of this
Section, MSDW shall either return in a form reasonably requested by IBM
or destroy, as IBM may direct, all material (including all copies) in any
medium that contains {*} the IBM Confidential Information upon which such
breach is based;
provided, however, that in each case described in Subsections (i) and
(ii) of this Subsection, MSDW may retain one (1) copy of such information
to the extent required to perform its obligations under the Agreement, to
comply with laws or regulations, or to establish MSDW's rights under the
Agreement.
(e) Each Party shall take reasonable steps to ensure that its employees
comply with the terms and conditions of this Article 15.
15.3 Exclusions.
----------
(a) Section 15.2 shall not apply to any particular information which IBM or
MSDW can demonstrate (i) was, at the time of disclosure to it, lawfully
in the public domain; (ii) after disclosure to it, is published or
otherwise lawfully becomes part of the public domain through no fault of
the receiving Party; (iii) was in the possession of the receiving Party
at the time of disclosure to it; (iv) was received after disclosure to it
from a third party who had a lawful right to disclose such information to
it without any obligation to restrict its further use or disclosure; or
(v) was independently developed by the receiving Party without reference
to Confidential Information of the furnishing Party. In addition, a Party
shall not be considered to have breached its obligations by disclosing
Confidential Information of the other Party as required to satisfy any
legal requirement of a competent government body provided that,
immediately upon receiving any such request and to the extent that it may
legally do so, such Party advises the other Party promptly and prior to
making such disclosure in order that the other Party may interpose an
objection to such disclosure, take action to assure confidential handling
of the Confidential Information, or take such other action as it deems
appropriate to protect the Confidential Information.
(b) Either Party may disclose the terms and conditions of the Agreement to
third parties that (i) have expressed a bona fide interest in
consummating a significant financing, merger or acquisition transaction
between such third parties and the disclosing Party, (ii) have a
reasonable ability (financial and otherwise) to
- -------
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43
<PAGE>
consummate such transaction, and (iii) have executed a nondisclosure
agreement that (A) includes within its scope the terms and conditions of
the Agreement, (B) limits distribution to those with a need to know in
connection with such transaction, and (C) allows use only in connection
with the transaction. Each Party shall endeavor to delay the disclosure
of the terms and conditions of the Agreement until the status of
discussions concerning such transaction warrants such disclosure.
15.4 Loss of Confidential Information.
--------------------------------
In the event of any unauthorized disclosure or loss of, or inability to
account for, any Confidential Information of the furnishing Party by the
Party to whom such information was disclosed, upon becoming aware of such
event the receiving Party shall promptly, at its own expense (a) notify
the furnishing Party in writing; (b) take such actions as reasonably
requested by the furnishing Party, and (c) otherwise cooperate with the
furnishing Party to minimize the adverse effects to the furnishing Party
of such event and any damage resulting from such event.
15.5 No Implied Rights.
-----------------
Nothing contained in this Article 15 shall be construed as obligating a
Party to disclose its Confidential Information to the other Party, or as
granting to or conferring on a Party, expressly or impliedly, any rights
or license to the Confidential Information of the other Party.
15.6 Survival.
--------
This Article 15 shall survive the expiration or termination of the
Agreement for a period equal to {*}
(a) {*}
(b) {*}
16. REPRESENTATIONS AND WARRANTIES
16.1 Work Standards.
--------------
IBM represents and warrants that the Services will be executed in a
workmanlike manner, in accordance with {*}.
16.2 {*}
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44
<PAGE>
16.3 {*}
16.4 {*}
16.5 Non-Infringement.
----------------
Each Party represents and warrants that it will perform its
responsibilities under the Agreement in a manner that does not infringe,
or constitute an infringement or misappropriation of, any patent,
copyright, trademark, trade secret or other intellectual proprietary
rights of the other Party or any third party.
16.6 Software Ownership or Use.
-------------------------
Subject to Section 7.8, each Party represents and warrants to the other
that it is, or will be at the applicable time, either the owner of, or
authorized to distribute, provide and use Software to the extent it is
licensed or developed by such Party.
16.7 Compliance With Laws and Regulations; Non-Contravention.
-------------------------------------------------------
(a) Each Party represents and warrants that it will perform its obligations
in a manner that complies with applicable laws, regulations, ordinances
and codes, including identifying and procuring required permits,
certificates, approvals and inspections. If a charge of non-compliance
with such laws, regulations, ordinances, or codes occurs, such Party will
promptly notify the other Party of such charge in writing.
(b) To the extent such matters relate to IBM's performance of the Services,
MSDW will identify and make available to IBM interpretations of any laws
applicable to MSDW and its industry.
(c) Each Party represents and warrants that such Party's execution, delivery,
and performance of the Agreement will not constitute (i) a violation of
any judgment, order, or decree; (ii) a material default under any
material contract by which it or
- -------
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45
<PAGE>
any of its material assets are bound; or (iii) an event that would, with
notice or lapse of time, or both, constitute such a default as described
in (ii).
16.8 Authorization.
-------------
Each Party represents and warrants that:
(a) it has the requisite power and authority to enter into the Agreement and
to carry out the transactions contemplated by the Agreement; and
(b) the execution, delivery and performance of the Agreement and the
consummation of the transactions contemplated by the Agreement have been
duly authorized by the requisite action on the part of such Party.
16.9 Inducements.
-----------
IBM represents and warrants to MSDW that it has not violated and will not
violate any applicable laws or regulations or any MSDW policies of which
IBM has been given notice regarding the offering of unlawful inducements
in connection with the Agreement. {*}
16.10 {*}
16.11 {*}
16.12 {*}
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46
<PAGE>
16.13 Disclaimer.
----------
EXCEPT AS PROVIDED IN THE AGREEMENT, THERE ARE NO OTHER EXPRESS
WARRANTIES AND THERE ARE NO IMPLIED WARRANTIES, INCLUDING THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
17. INSURANCE AND RISK OF LOSS
17.1 Insurance.
---------
IBM shall during the Term have and maintain in force the following
insurance coverages:
(a) Worker's compensation insurance, including occupational illness or disease
coverage, or other similar social insurance in accordance with the laws of
the country, state, or territory exercising jurisdiction over the employee
and employer's liability insurance with a minimum limit of {*};
(b) Commercial general liability insurance, including products, completed
operations liability and personal injury, contractual liability and broad
form property damage liability coverage for damages to any property with a
minimum combined single limit of {*};
(c) Electronic data processing all-risk property insurance on equipment, data,
media and valuable papers, including extra expense coverage, with a minimum
limit adequate to cover such risks on a replacement costs basis;
(d) Automotive liability insurance covering use of all owned, non-owned, and
hired automobiles with a minimum combined single limit of {*} for
bodily injury and property damage liability;
(e) Umbrella liability insurance with a minimum limit of {*}; and
(f) Employee dishonesty and computer fraud coverage for loss arising out of or
in connection with any fraudulent or dishonest acts committed by the
employees of IBM, acting alone or in collusion with others, including the
property and funds of others in their care, custody or control, in a
minimum amount of {*}.
The foregoing insurance coverages shall be primary and non-contributing
with respect to any other insurance or self insurance which may be
maintained by MSDW, and the insurance coverages described in Subsections
(b), (d) and (e) of this Section shall be endorsed to MSDW as an additional
insured to the extent of MSDW's insurable interest. IBM shall cause its
insurers to issue certificates of insurance evidencing that the coverages
and policy endorsements required under the Agreement are maintained in
force and that not less than thirty (30) days written notice shall be given
to MSDW prior to any modification,
- -------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
47
<PAGE>
cancellation or non-renewal of the corresponding policies. The insurers
selected by IBM shall have an A.M. Best rating of A- or better or Class
12 or better, or if such ratings are no longer available, with a
comparable rating from a recognized insurance rating agency. IBM shall
assure that Authorized Subcontractors, if any, maintain insurance
coverages as specified in this Article 17 or are endorsed as additional
insureds on all required IBM coverages.
17.2 Risk of Loss.
------------
Each Party shall be responsible for risk of loss of, and damage to, any
Equipment, Software or other materials in its possession or under its
control.
18. INDEMNITIES
18.1 Indemnity by IBM.
----------------
IBM agrees to indemnify, defend and hold harmless MSDW and its Affiliates
and their respective officers, directors, employees, agents, successors,
and assigns, from any and all Losses and threatened Losses incurred as a
result of a third-party claim arising from, in connection with, or based
on allegations of:
(a) Any occurrences that IBM is required to insure against pursuant to
Article 17, but only to the extent that IBM fails to provide such
coverage and only to the extent of such coverage;
(b) Any infringement of any patent, trademark, trade secret, copyright or
other intellectual proprietary rights, alleged to have occurred because
of software, materials or other resources provided by IBM to MSDW, or
based upon performance of the Services by IBM, except to the extent
caused by the modification, misuse or improper combination with other
products by MSDW or MSDW's Affiliates, not authorized by IBM, of such
items; or
(c) Any breach of an IBM obligation under Sections 6.1 or 7.3 of the
Agreement to comply with applicable lease and license terms for MSDW
Equipment or Third Party Software licensed by MSDW or an MSDW Affiliate.
18.2 Indemnity by MSDW.
-----------------
MSDW agrees to indemnify, defend and hold harmless IBM and its Affiliates
and their respective officers, directors, employees, agents, successors,
and assigns, from any and all Losses and threatened Losses incurred as a
result of a third-party claim arising from, in connection with, or based
on allegations of
(a) MSDW's failure to pay rent or utilities at any location where MSDW is
required to furnish space or utilities to IBM pursuant to the Agreement;
or
(b) Any infringement of any patent, trademark, trade secret, copyright or
other intellectual proprietary rights, alleged to have occurred because
of software, materials or other resources provided to IBM by MSDW or
based upon MSDW's
48
<PAGE>
performance of its obligations under the Agreement, except to the extent
caused by the modification, misuse or improper combination with other
products by IBM, IBM's Affiliates or IBM Personnel, not authorized by
MSDW, of such items.
18.3 Additional Indemnities.
----------------------
IBM and MSDW each agree to indemnify, defend and hold harmless the other,
and its Affiliates, officers, directors, employees, agents, successors,
and assigns, from any and all Losses and threatened Losses incurred as a
result of a third-party claim arising from, in connection with, or based
on allegations of:
(a) the death or bodily injury of any agent, employee, customer, business
invitee, or business visitor or other person caused by the tortious
conduct of the indemnitor (limited to Losses in proportion to the
indemnitor's comparative fault);
(b) the damage, loss or destruction of any real or tangible personal property
caused by the tortious conduct of the indemnitor (limited to Losses in
proportion to the indemnitor's comparative fault);
(c) an act or omission of the indemnitor in its capacity as an employer of a
person;
(d) a Party's breach of its obligations with respect to Confidential
Information; or
(e) the indemnitor's breach of any of the representations and warranties set
forth in Sections 16.7(a) and 16.7(c) of the Agreement.
{*}
18.4 Indemnification Procedures.
--------------------------
With respect to third-party claims that are subject to indemnification
pursuant to this Article 18, the following procedures shall apply:
(a) Notice. Promptly after receipt by any entity entitled to indemnification
------
under Sections 18.1 through 18.3 of notice of the commencement or
threatened commencement of any civil, criminal, administrative, or
investigative action or proceeding involving a claim in respect of which
the indemnitee will seek indemnification pursuant to any such Section,
the indemnitee shall notify the indemnitor of such claim in writing. No
failure to so notify an indemnitor shall relieve it of its obligations
under the Agreement except to the extent that it can demonstrate damages
attributable to such failure. Within fifteen (15) days following receipt
of written notice from the indemnitee relating to any claim, but no later
than ten (10) days before the date on which any response to a complaint
or summons is due, the indemnitor shall notify the indemnitee in writing
if the indemnitor elects to assume control of the defense and settlement
of that claim (a "Notice of Election").
- -------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
49
<PAGE>
(b) Procedure Following Notice of Election. If the indemnitor delivers a
--------------------------------------
Notice of Election relating to any claim within the required notice
period, the indemnitor shall be entitled to have sole control over the
defense and settlement of such claim; provided that (i) the indemnitee
shall be entitled to participate in the defense of such claim and to
employ counsel at its own expense to assist in the handling of such
claim, and (ii) the indemnitor shall obtain the prior written approval of
the indemnitee before entering into any settlement of such claim or
ceasing to defend against such claim. After the indemnitor has delivered
a Notice of Election relating to any claim in accordance with the
preceding paragraph, the indemnitor shall not be liable to the indemnitee
for any legal expenses incurred by the indemnitee in connection with the
defense of that claim. The indemnitee shall cooperate in all reasonable
respects with the indemnitor and its attorneys in the investigation,
trial and defense of such claim and any appeal arising therefrom. In
addition, the indemnitor shall not be required to indemnify the
indemnitee for any amount paid or payable by the indemnitee in the
settlement of any claim for which the indemnitor has delivered a timely
Notice of Election if such amount was agreed to without the written
consent of the indemnitor.
(c) Procedure Where No Notice of Election Is Delivered. If the indemnitor
--------------------------------------------------
does not deliver a Notice of Election relating to any claim within the
required notice period, the indemnitee shall have the right to defend the
claim in such manner as it may deem appropriate, at the cost and expense
of the indemnitor. The indemnitor shall promptly reimburse the indemnitee
for all such costs and expenses.
18.5 Subrogation.
-----------
In the event that an indemnitor shall be obligated to indemnify an
indemnitee pursuant to Sections 18.1 through 18.3, the indemnitor shall,
upon payment of such indemnity in full, be subrogated to all rights of
the indemnitee with respect to the claims to which such indemnification
relates.
19. LIABILITY
19.1 General Intent.
--------------
Subject to the specific provisions of this Article 19, it is the intent
of the Parties that each Party shall be liable to the other Party for any
actual damages incurred by the non-breaching Party as a result of the
breaching Party's failure to perform its obligations in the manner
required by the Agreement.
19.2 Liability Restrictions.
----------------------
(a) SUBJECT TO SUBSECTION 19.2(c), IN NO EVENT, WHETHER IN CONTRACT OR IN
TORT (INCLUDING BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY IN TORT
AND WITH RESPECT TO MSDW'S LIABILITY FOR FAILURE TO PAY AMOUNTS DUE UNDER
THIS AGREEMENT), SHALL A PARTY BE LIABLE FOR INDIRECT OR CONSEQUENTIAL,
EXEMPLARY, PUNITIVE OR SPECIAL DAMAGES
50
<PAGE>
EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN
ADVANCE.
(b) Subject to Subsection 19.2(c), each Party's total liability to the other,
whether in contract or in tort (including breach of warranty, negligence,
strict liability in tort and with respect to MSDW's liability for failure
to pay amounts due under this Agreement) shall be limited in the
aggregate, for all claims, causes of action and occurrences, {*}.
(c) The limitations set forth in {*} shall not apply with respect to:
(i) {*}
(ii) {*}
(iii) {*}
(d) Each Party shall have a duty to mitigate damages for which the other
Party is responsible.
19.3 Force Majeure.
-------------
(a) No Party shall be liable for any default or delay in the performance of
its obligations under the Agreement if and to the extent such default or
delay is caused, directly or indirectly, by fire, flood, earthquake,
elements of nature or acts of God, riots, civil disorders, rebellions or
revolutions in any country, or any other cause beyond the reasonable
control of such Party; provided, however, that the non-performing Party
is without fault in causing such default or delay, and such default or
delay could not have been prevented by reasonable precautions and cannot
reasonably be circumvented by the non-performing Party through the use of
alternate sources, workaround plans or other means (including with
respect to IBM by IBM meeting its obligations for performing disaster
recovery Services as described in the Agreement) (any event for which a
Party is not liable for default or delay in the performance of its
obligation sunder this Subsection (a) a "Force Majeure Event").
(b) In the event of a Force Majeure Event, the non-performing Party shall be
excused from further performance or observance of the obligation(s) so
affected for as long as such circumstances prevail and such Party
continues to use its commercially reasonable efforts to recommence
performance or observance whenever and to whatever extent possible
without delay. Any Party so delayed in its performance
- -------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
51
<PAGE>
shall immediately notify the Party to whom performance is due by
telephone (to be confirmed in writing within five (5) calendar days of
the inception of such delay) and describe at a reasonable level of detail
the circumstances causing such delay.
(c) If any Force Majeure Event substantially prevents, hinders, or delays
performance of the Services necessary for the performance of MSDW
functions reasonably identified by MSDW as critical for more than {*}
then at MSDW's option:
(i) {*};
(ii) MSDW may terminate any portion of the Services so affected {*} and the
charges payable under the Agreement shall be equitably adjusted to
reflect those terminated Services; or
(iii) MSDW may terminate the Agreement {*} as of a date specified by MSDW in a
written notice of termination to IBM;
provided, however, that MSDW may not terminate the Agreement or any
portion of the Services pursuant to Subsections (ii) or (iii) of this
Subsection as long as IBM is performing those functions reasonably
identified by MSDW as critical. If IBM is performing such functions
following a Force Majeure Event, then upon sixty (60) calendar days'
prior written notice to MSDW, IBM may cease performing such functions in
which case MSDW may terminate the Agreement or any portion of the
Services pursuant to Subsections (ii) or (iii) of this Subsection. MSDW
and IBM will cooperate with each other to (A) identify a process for
minimizing IBM's costs and expenses incurred by IBM as a result of any
Force Majeure Event.
20. DISPUTE RESOLUTION
Any dispute between the Parties arising out of or relating to the
Agreement, including with respect to the interpretation of any provision
of the Agreement and with respect to the performance by IBM or MSDW,
shall be resolved as provided in this Article 20.
20.1 Informal Dispute Resolution.
---------------------------
Prior to the initiation of formal dispute resolution procedures, the
Parties shall first attempt to resolve their dispute informally, as
follows:
(a) Upon the written request of a Party, each Party shall appoint a
designated representative who does not devote substantially all of his or
her time to performance under the Agreement, whose task it will be to
meet for the purpose of endeavoring to resolve such dispute.
- -------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
52
<PAGE>
(i) The designated representatives shall meet as often as the Parties
reasonably deem necessary in order to gather and furnish to the other all
information with respect to the matter in issue which the Parties believe
to be appropriate and germane in connection with its resolution. The
representatives shall discuss the problem and attempt to resolve the
dispute without the necessity of any formal proceeding.
(ii) During the course of discussion, all reasonable requests made by one
Party to another for nonprivileged information, reasonably related to the
Agreement, shall be honored in order that each of the Parties may be
fully advised of the other's position.
(iii) The specific format for the discussions shall be left to the discretion
of the designated representatives.
(b) Formal proceedings for the resolution of a dispute pursuant to Section
20.2(a) may not be commenced until the earlier of:
(i) the designated representatives concluding in good faith that amicable
resolution through continued negotiation of the matter does not appear
likely; or
(ii) {*} days after the initial written request to appoint a designated
representative pursuant to Subsection 20.1(a) above (this period shall be
deemed to run notwithstanding any claim that the process described in
this Section was not followed or completed).
This Section shall not be construed to prevent a Party from instituting,
and a Party is authorized to institute, formal proceedings earlier to
avoid the expiration of any applicable limitations period, or to preserve
a superior position with respect to other creditors, or as provided in
Section 20.2(b) or Section 21.6.
20.2 Formal Dispute Resolution.
-------------------------
(a) If the Parties are unable to resolve any dispute as contemplated by
Section 20.1, either Party may file an action to resolve any dispute,
controversy or claim.
(b) Immediate Injunctive Relief. The Parties agree that disputes,
---------------------------
controversies or claims between them shall not be subject to Sections
20.1 where a Party makes a good faith determination that a breach of the
terms of the Agreement by the other Party is such that a temporary
restraining order or other injunctive relief is the only appropriate and
adequate remedy. If a Party files a pleading with a court seeking
immediate injunctive relief and this pleading is challenged by the other
Party and the injunctive relief sought is not awarded in substantial
part, the Party filing the pleading seeking immediate injunctive relief
shall pay all of the costs and reasonable attorneys' fees of the Party
successfully challenging the pleading.
(c) Jurisdiction. The Parties consent to the non-exclusive jurisdiction of
------------
competent {*} state courts or federal courts in the {*} for all
litigation which may be brought with respect to the terms of, and the
transactions
- -------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
53
<PAGE>
and relationships contemplated by, the Agreement. The Parties further
consent to the jurisdiction of any state court located within a district
which encompasses assets of a Party against which a judgment has been
rendered for the enforcement of such judgment or award against the assets
of such Party.
20.3 Continued Performance.
---------------------
Each Party agrees to continue performing its obligations under the
Agreement while any dispute is being resolved except to the extent the
issue in dispute precludes performance (dispute over payment shall not be
deemed to preclude performance).
20.4 Governing Law.
-------------
The Agreement and performance under it shall be governed by and construed
in accordance with the laws of State of {*} without regard to its choice
of law principles.
20.5 Limitations Period.
------------------
No Party may bring an action, regardless of form, arising out of the
Agreement after the earlier to occur of:
(a) the expiration of the applicable statutory limitations period under
applicable law; and
(b) {*} years after the later of (i) the date the underlying cause of
action arose or (ii) the date such cause of action was or should have
been discovered by such Party.
21. TERMINATION
21.1 Termination for Cause.
---------------------
(a) In the event that IBM:
(i) Commits a material breach of the Agreement, which breach is capable of
being cured within thirty (30) days and fails to cure the breach within
thirty (30) days after notice of breach from MSDW to IBM;
(ii) Commits a material breach of the Agreement which is not capable of being
cured within thirty (30) days and fails to (i) proceed promptly and
diligently to correct the breach, (ii) develop within thirty (30) days
following written notice of breach from MSDW a complete plan for curing
the breach, and (iii) cure the breach within sixty (60) days of notice
thereof;
(iii) {*}
(iv) {*}
- ------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
54
<PAGE>
(v) Terminates or suspends its business;
then MSDW may, by giving written notice to IBM and as of a date specified
in such notice, terminate {*}
(b) {*} and (ii) MSDW fails to cure such breach {*} of written notice of such
breach from IBM, then IBM may, by giving written notice to MSDW,
terminate the Agreement as of a date specified in such notice of
termination.
21.2 {*}
21.3 Termination of SSAs and NSAs.
----------------------------
If MSDW is entitled to terminate the IPSS Services, Data Network Services
or Voice Services pursuant to Sections 21.1(a) or 21.2, then as part of
such termination, MSDW may also terminate any SSAs, NSAs and
International Agreements associated with those Services being terminated,
as designated by MSDW. {*}
21.4 Extension of Termination Effective Date.
---------------------------------------
MSDW may extend the effective date of a termination by MSDW one (1) time,
at its sole discretion, provided that the duration of such extension
shall not exceed one hundred eighty (180) days following the original
effective date of termination. For any notice or notices of such
extension provided to IBM within sixty (60) days of the actual date of
termination, MSDW shall reimburse IBM at its then-current commercially
available rates for those additional resources required as a result of
MSDW's failure to provide such notice or notices sixty (60) days prior to
the actual date of termination.
21.5 Termination/Expiration Assistance.
---------------------------------
- -------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
55
<PAGE>
(a) (i) Commencing six (6) months prior to expiration of the Agreement or on
such earlier date as MSDW may request, or commencing upon any notice of
termination {*} or of non-renewal of the Agreement (including notice
based upon material breach by MSDW pursuant to Section 21.1(b)), and
continuing through the effective date of expiration (as such effective
date may be extended pursuant to Section 4.2) or, if applicable, through
the effective date of termination of the Agreement (as such effective
date may be extended pursuant to Section 21.3), IBM shall provide to MSDW
at no additional charge except as otherwise provided in this Subsection
(a), or at MSDW's request to MSDW's designee, the reasonable
termination/expiration assistance requested by MSDW to allow the Services
to continue without interruption or adverse effect and to facilitate the
orderly transfer of the Services to MSDW or its designee (such assistance
"Termination/Expiration Assistance"). {*}
(b) {*}
21.6 {*}
22. GENERAL
22.1 Binding Nature and Assignment.
-----------------------------
The Agreement shall be binding on the Parties as well as their respective
successors and permitted assigns. Neither Party may, or shall have the
power to, assign the Agreement or delegate such Party's obligations under
the Agreement without the prior written consent of the other Party, such
consent not to be unreasonably withheld, except that
(a) IBM may delegate its obligations under the Agreement to {*}
in accordance with Section 9.6 of the Agreement;
(b) MSDW may assign its rights and obligations under the Agreement without
the approval of IBM to an entity which acquires all or substantially all
of the assets of MSDW or to any subsidiary or Affiliate or successor in a
merger or acquisition of MSDW; and
- -------
{*} = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
56
<PAGE>
(c) IBM may assign or transfer to a third party its rights to receive
payments from MSDW under the Agreement.
In the event of an assignment of the Agreement, delegation of a Party's
obligations or assignment or transfer of rights to receive payments as
permitted by this Section, the assigning Party shall remain obligated to
perform its obligations under the Agreement (including any obligations
assigned or delegated).
22.2 Entire Agreement.
----------------
The Agreement constitutes the entire agreement between the Parties with
respect to the subject matter hereof and supersedes all prior agreements
(including the Previous Agreement), whether written or oral, with respect
to the subject matter contained in the Agreement.
22.3 Notices.
-------
All notices, requests, demands, and determinations under the Agreement
(other than routine operational communications), shall be in writing and
shall be deemed duly given (i) when delivered by hand, (ii) one business
(1) day after being given to an express, overnight courier with a
reliable system for tracking delivery, or (iii) six (6) business days
after the day of mailing, when mailed by United States mail, registered
or certified mail, return receipt requested, postage prepaid, and
addressed as follows:
<TABLE>
<CAPTION>
In the case of MSDW: With a copy to:
- ------------------- --------------
<S> <C>
Morgan Stanley Dean Witter Morgan Stanley Dean Witter
2500 Lake Cook Road 1585 Broadway
Riverwoods, Illinois 60015 New York, NY 10036
Attention: MSDW Contract Executive Attention: General Counsel
(Steven Van Wyk)
- --------------------------------------------------------------------------------------------------------
In the case of IBM: With a copy to:
- ------------------ --------------
International Business Machines Corporation International Business Machines Corporation
231 North Martingale Road Route 100
Schaumburg, Illinois 60173-2254 Somers, New York 10589
Attention: IBM Project Executive, MSDW Attention: General Counsel, IBM Global
Services
- --------------------------------------------------------------------------------------------------------
</TABLE>
A Party may from time to time change its address or designee for
notification purposes by giving the other Party prior written notice of
the new address or designee and the date upon which it will become
effective.
22.4 Counterparts.
------------
The Agreement may be executed in several counterparts, all of which taken
together shall constitute one single agreement between the Parties.
57
<PAGE>
22.5 Headings.
--------
The Article, Section, and Subsection headings of the Agreement, and the
table of contents of the Agreement, are for reference and convenience
only and shall not enter into the interpretation of the Agreement.
22.6 Relationship of Parties.
-----------------------
IBM, in furnishing the Services, is acting as an independent contractor.
IBM has the sole right and obligation to supervise, manage, contract,
direct, procure, perform or cause to be performed, all work to be
performed by IBM under the Agreement. IBM is not an agent of MSDW and has
no authority to represent MSDW as to any matters, except as otherwise
expressly authorized in the Agreement.
22.7 Severability.
------------
In the event that any provision of the Agreement conflicts with the law
under which the Agreement is to be construed or if any such provision is
held invalid by a court with jurisdiction over the Parties, such
provision shall be deemed to be restated to reflect as nearly as possible
the original intentions of the Parties in accordance with applicable law.
The remainder of the Agreement shall remain in full force and effect.
22.8 Consents and Approval.
---------------------
Except where expressly provided as being in the discretion of a Party,
where agreement, approval, acceptance, consent, or similar action by
either Party is required under the Agreement, such action shall not be
unreasonably delayed or withheld. An approval or consent given by a Party
under the Agreement shall not relieve the other Party from responsibility
for complying with the requirements of the Agreement, nor shall it be
construed as a waiver of any rights under the Agreement, except as and to
the extent otherwise expressly provided in such approval or consent.
22.9 Waiver of Default; Cumulative Remedies.
--------------------------------------
(a) No waiver of any right, or discharge of any obligation, under the
Agreement shall be valid unless in writing and signed by an authorized
representative of the Party against which such waiver or discharge is
sought to be enforced. A delay or omission by either Party to exercise
any right or power under the Agreement shall not be construed to be a
waiver of such right or power. A waiver by either Party of any of
obligation to be performed by the other Party or of any breach by the
other Party shall not be construed to be a waiver of any succeeding
obligation or breach, or of any other obligation under the Agreement.
(b) Except as otherwise expressly provided by the Agreement, all remedies
under the Agreement shall be cumulative and in addition to and not in
lieu of any other remedies available to either Party at law, in equity or
otherwise.
58
<PAGE>
22.10 Survival.
--------
Any provision of the Agreement which contemplates performance or
observance subsequent to any termination or expiration of the Agreement
(in whole or in part) shall survive any termination or expiration of the
Agreement (in whole or in part, as applicable) and continue in full force
and effect.
22.11 Public Disclosures.
------------------
All media releases, public announcements, and public disclosures by
either Party relating to the Agreement or the subject matter of the
Agreement, including promotional or marketing material, but not including
announcements intended solely for internal distribution or disclosures to
the extent required to meet legal or regulatory requirements beyond the
reasonable control of the disclosing Party, shall be coordinated with and
approved by the other Party prior to release. Notwithstanding the
foregoing, IBM may list MSDW as a customer, and MSDW may list IBM as an
information technology services provider, and each Party may describe in
general terms the services provided by IBM under the Agreement in
proposals and other marketing materials.
22.12 Service Marks.
-------------
Each Party agrees that it shall not, without the other Party's prior
written consent, use the name, service marks or trademarks of such other
Party.
22.13 Third Party Beneficiaries.
-------------------------
The Agreement is entered into solely between, and may be enforced only
by, MSDW and IBM. The Agreement shall not be deemed to create any rights
in third parties, including suppliers and customers of a Party.
22.14 Amendment.
----------
This Agreement shall not be modified, amended or in any way altered
except by an instrument in writing signed by both Parties.
22.15 Order of Precedence.
-------------------
It is the intent of the Parties that the language in the documents making
up the Agreement be construed to the maximum extent possible so as not to
create a conflict among or between such documents. To the extent any
conflict among or between the documents making up the Agreement cannot be
resolved through application of the foregoing rule, such conflict will be
resolved in accordance with the following order of precedence (in
descending order of precedence (i.e., starting with highest precedence
and ending with lowest precedence)):
(i) NSAs, International Agreements as well as SSAs that were executed by the
MSDW Contract Executive;
(ii) The Schedules and exhibit 3 of the Previous Agreement;
59
<PAGE>
(iii) The Attachments to the Schedules;
(iv) The Annexes to the Attachments;
(v) The Services Agreement; and
(vi) SSAs and International Agreements not executed by the MSDW Contract
Executive.
22.16 Covenant of Good Faith.
----------------------
Each Party agrees that, in its respective dealings with the other Party
under or in connection with the Agreement, it shall act in good faith.
MORGAN STANLEY DEAN WITTER & CO. INTERNATIONAL BUSINESS MACHINES
CORPORATION
By: By:
------------------------------ ------------------------------
Printed: Printed:
------------------------- -------------------------
Title: Title:
--------------------------- ---------------------------
Date: Date:
---------------------------- ----------------------------
60
<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
1999 1998 1999 1998
------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Basic:
Weighted-average shares outstanding 550,056,731 573,170,507 553,362,966 582,105,755
================== ================== ================ ================
Earnings:
Income before cumulative effect
of accounting change $970 $626 $3,158 $2,169
Cumulative effect of accounting change - - - (117)
Less: Preferred stock dividend
requirements (11) (14) (33) (43)
------------------ ------------------ ---------------- ----------------
Earnings applicable to common shares $959 $612 $3,125 $2,009
================== ================== ================ ================
Basic EPS before cumulative effect
of accounting change $1.74 $1.07 $5.65 $3.65
Cumulative effect of accounting change - - - (0.20)
================== ================== ================ ================
Basic earnings per share $1.74 $1.07 $5.65 $3.45
================== ================== ================ ================
Diluted:
Weighted-average shares outstanding 550,056,731 573,170,507 553,362,966 582,105,755
Average common shares issuable
under employee benefit plans 19,004,202 19,708,913 19,637,682 19,201,179
and exercise of put options
Average common shares issuable upon
conversion of ESOP preferred stock 11,639,890 11,900,174 11,716,758 11,958,273
------------------ ------------------ ---------------- ----------------
Total weighted-average diluted shares 580,700,823 604,779,594 584,717,406 613,265,207
================== ================== ================ ================
Earnings:
Income before cumulative effect
of accounting change $970 $626 $3,158 $2,169
Cumulative effect of accounting change (117)
Less: Preferred stock dividend
requirements (9) (13) (27) (38)
------------------ ------------------ ---------------- ----------------
Earnings applicable to common shares $961 $613 $3,131 $2,014
================== ================== ================ ================
Diluted EPS before cumulative effect
of accounting change $1.65 $1.01 $5.35 $3.47
Cumulative effect of accounting change - - - (0.19)
================== ================== ================ ================
Diluted earnings per share $1.65 $1.01 $5.35 $3.28
================== ================== ================ ================
</TABLE>
<PAGE>
EXHBIT 12
Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
(Dollars in millions)
<TABLE>
Three Months Ended Nine Months Ended
------------------------------------------- ----------------------------------------
August 31 August 31 August 31 August 31
1999 1998 1999 1998
------------------- ------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Earnings:
Income before income taxes(1) $1,563 $910 $5,093 $3,439
Add: Fixed charges, net 4,277 3,410 10,489 10,159
------------------- ------------------- -------------------- -------------------
Income before income taxes and
fixed charges, net $5,840 $4,320 $15,582 $13,598
=================== =================== ==================== ===================
Fixed charges:
Total interest expense $4,246 $3,377 $10,401 $10,076
Interest factor in rents 31 33 88 82
------------------- ------------------- -------------------- -------------------
Total fixed charges $4,277 $3,410 $10,489 $10,158
=================== =================== ==================== ===================
Ratio of earnings to fixed charges 1.4 1.3 1.5 1.3
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
Earnings:
Income before income taxes $1,563 $910 $5,093 $3,439
Add: Fixed charges, net 4,277 3,410 10,489 10,159
------------------- ------------------- -------------------- -------------------
Income before income taxes and
fixed charges, net $5,840 $4,320 $15,582 $13,598
=================== =================== ==================== ===================
Fixed charges:
Total interest expense $4,246 $3,377 $10,401 $10,076
Interest factor in rents 31 33 88 82
Preferred stock dividends 18 21 53 69
------------------- ------------------- -------------------- -------------------
Total fixed charges and preferred
stock dividends $4,295 $3,431 $10,542 $10,227
=================== =================== ==================== ===================
Ratio of earnings to fixed charges and
preferred stock dividends 1.4 1.3 1.5 1.3
<CAPTION>
Fiscal Year
---------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ----------------------
<S> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Earnings:
Income before income taxes(1) $5,385 $4,274 $3,117
Add: Fixed charges, net 13,614 10,898 9,026
------------------- -------------------- ----------------------
Income before income taxes and
fixed charges, net $18,999 $15,172 $12,143
=================== ==================== ======================
Fixed charges:
Total interest expense $13,514 $10,806 $8,934
Interest factor in rents 100 92 92
------------------- -------------------- ----------------------
Total fixed charges $13,614 $10,898 $9,026
=================== ==================== ======================
Ratio of earnings to fixed charges 1.4 1.4 1.3
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
Earnings:
Income before income taxes $5,385 $4,274 $3,117
Add: Fixed charges, net 13,614 10,898 9,026
------------------- -------------------- ----------------------
Income before income taxes and
fixed charges, net $18,999 $15,172 $12,143
=================== ==================== ======================
Fixed charges:
Total interest expense $13,514 $10,806 $8,934
Interest factor in rents 100 92 92
Preferred stock dividends 87 110 101
------------------- -------------------- ----------------------
Total fixed charges and preferred
stock dividends $13,701 $11,008 $9,127
=================== ==================== ======================
Ratio of earnings to fixed charges and
preferred stock dividends 1.4 1.4 1.3
</TABLE>
(1) 1998 Income before income taxes does not include a cumulative effect of
accounting change.
"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 as of August 31, 1999 and for the three and nine month periods
ended August 31, 1999 and 1998, as indicated in our report dated October 14,
1999; 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, 1999, 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
Registration Statement No. 333-76111
Registration Statement No. 333-75289
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
Registration Statement No. 333-78081
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 15, 1999
<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, 1999 AND
THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED AUGUST
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 23,800
<RECEIVABLES> 53,891
<SECURITIES-RESALE> 80,169
<SECURITIES-BORROWED> 72,862
<INSTRUMENTS-OWNED> 98,861
<PP&E> 2,145
<TOTAL-ASSETS> 340,870
<SHORT-TERM> 31,517
<PAYABLES> 62,448
<REPOS-SOLD> 103,649
<SECURITIES-LOANED> 22,014
<INSTRUMENTS-SOLD> 65,444
<LONG-TERM> 29,038
0
671
<COMMON> 6
<OTHER-SE> 14,768
<TOTAL-LIABILITY-AND-EQUITY> 340,870
<TRADING-REVENUE> 4,801
<INTEREST-DIVIDENDS> 12,130
<COMMISSIONS> 2,183
<INVESTMENT-BANKING-REVENUES> 3,186
<FEE-REVENUE> 4,244
<INTEREST-EXPENSE> 10,401
<COMPENSATION> 7,078
<INCOME-PRETAX> 5,093
<INCOME-PRE-EXTRAORDINARY> 5,093
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,158
<EPS-BASIC> 5.65
<EPS-DILUTED> 5.35
</TABLE>
