<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 February 28, 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>
<S> <C>
Delaware 36-3145972
(State of Incorporation) (I.R.S. Employer Identification No.)
1585 Broadway 10036
New York, NY (Zip Code)
(Address of Principal
Executive Offices)
</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 March 31, 1999 there were 570,574,025 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 February 28, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I--Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition--February 28,
1999 (unaudited) and November 30, 1998............................... 1
Condensed Consolidated Statements of Income (unaudited)--Three Months
Ended February 28, 1999 and 1998..................................... 2
Condensed Consolidated Statements of Comprehensive Income
(unaudited)--Three Months Ended February 28, 1999 and 1998 .......... 3
Condensed Consolidated Statements of Cash Flows (unaudited)--Three
Months Ended February 28, 1999 and 1998.............................. 4
Notes to Condensed Consolidated Financial Statements (unaudited)...... 5
Independent Accountants' Report....................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 13
Part II--Other Information
Item 1. Legal Proceedings............................................... 32
Item 2. Changes in Securities and Use of Proceeds....................... 32
Item 6. Exhibits and Reports on Form 8-K................................ 32
</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>
February 28, November 30,
1999 1998
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents............................ $ 6,225 $ 16,878
Cash and securities deposited with clearing
organizations or segregated under federal and other
regulations (including securities at fair value of
$10,906 at February 28, 1999 and $7,518 at November
30, 1998)........................................... 14,495 10,531
Financial instruments owned:
U.S. government and agency securities............... 20,464 12,350
Other sovereign government obligations.............. 15,776 15,050
Corporate and other debt............................ 21,996 22,388
Corporate equities.................................. 14,636 14,289
Derivative contracts................................ 21,800 21,442
Physical commodities................................ 509 416
Securities purchased under agreements to resell...... 74,363 79,570
Receivable for securities provided as collateral..... 6,346 4,388
Securities borrowed.................................. 71,185 69,338
Receivables:
Consumer loans (net of allowances of $777 at
February 28, 1999 and $787 at November 30, 1998)... 14,752 15,209
Customers, net...................................... 18,358 18,785
Brokers, dealers and clearing organizations......... 5,916 4,432
Fees, interest and other............................ 5,090 3,359
Office facilities, at cost (less accumulated
depreciation and amortization of $1,435 at February
28, 1999 and $1,375 at November 30, 1998)........... 2,121 1,834
Other assets......................................... 7,746 7,331
-------- --------
Total assets......................................... $321,778 $317,590
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and other short-term borrowings..... $ 20,052 $ 28,137
Deposits............................................. 8,422 8,197
Financial instruments sold, not yet purchased:
U.S. government and agency securities............... 8,882 11,305
Other sovereign government obligations.............. 11,781 13,899
Corporate and other debt............................ 2,763 3,093
Corporate equities.................................. 14,316 11,501
Derivative contracts................................ 20,765 21,198
Physical commodities................................ 467 348
Securities sold under agreements to repurchase....... 108,248 92,327
Obligation to return securities received as
collateral.......................................... 8,723 6,636
Securities loaned.................................... 21,736 23,152
Payables:
Customers........................................... 40,172 40,606
Brokers, dealers and clearing organizations......... 2,447 5,244
Interest and dividends.............................. 1,816 371
Other liabilities and accrued expenses............... 7,654 8,623
Long-term borrowings................................. 27,298 27,435
-------- --------
305,542 302,072
-------- --------
Capital Units........................................ 999 999
-------- --------
Preferred Securities Issued by Subsidiaries.......... 400 400
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock..................................... 673 674
Common stock ($0.01 par value, 1,750,000,000 shares
authorized, 605,842,952 and 605,842,952 shares
issued, 570,589,670 and 565,670,808 shares
outstanding at February 28, 1999 and November 30,
1998).............................................. 6 6
Paid-in capital..................................... 3,727 3,746
Retained earnings................................... 12,968 12,080
Employee stock trust................................ 1,892 1,913
Cumulative translation adjustments.................. (31) (12)
-------- --------
Subtotal............................................ 19,235 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, 35,253,282 and 40,172,144 shares at February
28, 1999 and November 30, 1998).................... (2,446) (2,702)
Common stock issued to employee trust............... (1,892) (1,526)
-------- --------
Total shareholders' equity......................... 14,837 14,119
-------- --------
Total liabilities and shareholders' equity........... $321,778 $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
Ended February 28,
-----------------------
<S> <C> <C>
1999 1998
----------- -----------
(unaudited)
Revenues:
Investment banking................................... $ 957 $ 800
Principal transactions:
Trading............................................ 1,691 903
Investments........................................ 265 72
Commissions.......................................... 665 547
Fees:
Asset management, distribution and administration.. 714 676
Merchant and cardmember............................ 341 428
Servicing.......................................... 253 171
Interest and dividends............................... 3,480 3,933
Other................................................ 39 55
----------- -----------
Total revenues..................................... 8,405 7,585
Interest expense..................................... 2,877 3,145
Provision for consumer loan losses................... 177 405
----------- -----------
Net revenues....................................... 5,351 4,035
----------- -----------
Non-interest expenses:
Compensation and benefits.......................... 2,363 1,788
Occupancy and equipment............................ 146 140
Brokerage, clearing and exchange fees.............. 114 121
Information processing and communications.......... 309 267
Marketing and business development................. 395 294
Professional services.............................. 162 128
Other.............................................. 190 165
----------- -----------
Total non-interest expenses...................... 3,679 2,903
----------- -----------
Income before income taxes and cumulative effect of
accounting change................................... 1,672 1,132
Provision for income taxes........................... 635 441
----------- -----------
Income before cumulative effect of accounting
change.............................................. 1,037 691
Cumulative effect of accounting change............... -- (117)
----------- -----------
Net income........................................... $ 1,037 $ 574
=========== ===========
Preferred stock dividend requirements................ $ 11 $ 15
=========== ===========
Earnings applicable to common shares(1).............. $ 1,026 $ 559
=========== ===========
Basic earnings per share:
Income before cumulative effect of accounting
change............................................ $ 1.85 $ 1.15
Cumulative effect of accounting change............. -- (0.20)
----------- -----------
Net income......................................... $ 1.85 $ 0.95
=========== ===========
Diluted earnings per share:
Income before cumulative effect of accounting
change............................................ $ 1.76 $ 1.10
Cumulative effect of accounting change............. -- (0.19)
----------- -----------
Net income......................................... $ 1.76 $ 0.91
=========== ===========
Average common shares outstanding
Basic.............................................. 553,935,578 586,751,340
=========== ===========
Diluted............................................ 584,593,156 616,377,562
=========== ===========
</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>
Three Months Ended
February 28,
---------------------
1999 1998
---------- ---------
(unaudited)
<S> <C> <C>
Net income................................................. $ 1,037 $ 574
Other comprehensive income, net of tax:
Foreign currency translation adjustment.................. (19) 6
---------- --------
Comprehensive income....................................... $ 1,018 $ 580
========== ========
</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>
Three Months
Ended February 28,
--------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income............................................. $ 1,037 $ 574
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........ 355 552
Changes in assets and liabilities:
Cash and securities deposited with clearing
organizations or segregated under federal and
other regulations................................. (3,964) 1,839
Financial instruments owned, net of financial
instruments sold, not yet purchased............... (11,549) (11,473)
Securities borrowed, net of securities loaned...... (3,263) (629)
Receivables and other assets....................... (3,274) (5,272)
Payables and other liabilities..................... (2,750) 61
--------- ---------
Net cash used for operating activities................... (23,408) (14,231)
--------- ---------
Cash flows from investing activities
Net (payments for) proceeds from:
Office facilities.................................... (357) (85)
Net principal disbursed on consumer loans............ (298) (693)
Sales of consumer loans.............................. 525 368
--------- ---------
Net cash used for investing activities................... (130) (410)
--------- ---------
Cash flows from financing activities
Net (payments) proceeds related to short-term
borrowings............................................ (8,110) 6,022
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell....... 21,128 5,194
Deposits............................................... 225 206
Proceeds from:
Issuance of common stock............................. 64 64
Issuance of long-term borrowings..................... 3,056 2,917
Payments for:
Repurchases of common stock.......................... (272) (27)
Repayments of long-term borrowings................... (3,060) (1,658)
Cash dividends....................................... (146) (134)
--------- ---------
Net cash provided by financing activities................ 12,885 12,584
--------- ---------
Net decrease in cash and cash equivalents................ (10,653) (2,057)
Cash and cash equivalents, at beginning of period........ 16,878 8,255
--------- ---------
Cash and cash equivalents, at end of period.............. $ 6,225 $6,198
========= =========
</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 and transaction
services nationally. Its Securities and Asset Management businesses include
securities underwriting, distribution and trading; merger, acquisition,
restructuring, real estate, project finance and other corporate finance
advisory activities; asset management; private equity and other principal
investment activities; brokerage and research services; the trading of foreign
exchange and commodities as well as derivatives on a broad range of asset
categories, rates and indices; and securities lending. The Company's Credit
and Transaction Services businesses include the issuance of the Discover(R)
Card and other proprietary general purpose credit cards, the operation of the
Discover/Novus(R) Network, a proprietary network of merchant and cash access
locations, and direct-marketed activities such as the on-line securities
services offered by Discover Brokerage Direct, Inc. 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 underlying financial instruments or commodities, as well as
time value and yield curve or volatility factors
5
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 refinancing
characteristics of consumer loans with the borrowings that fund these loans.
For contracts that are designated as hedges of the Company's assets and
liabilities, gains and losses are deferred and recognized as adjustments to
interest revenue or expense over the remaining life of the underlying assets
or liabilities. For contracts that are hedges of asset securitizations, gains
and losses are recognized as adjustments to servicing fees. Gains and losses
resulting from the termination of hedge contracts prior to their stated
maturity are recognized ratably over the remaining life of the instrument
being hedged. The Company also uses foreign exchange forward contracts to
manage the currency exposure relating to its net monetary investment in non-
U.S. dollar functional currency operations. The gain or loss from revaluing
these contracts is deferred and reported within cumulative translation
adjustments in shareholders' equity, net of tax effects, with the related
unrealized amounts due from or to counterparties included in receivables from
or payables to brokers, dealers and clearing organizations.
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.
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.
6
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement is effective for fiscal years beginning after June 15, 1999. The
Company is in the process of evaluating the impact of adopting SFAS No. 133.
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
Ended
February
28,
----------
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period........................................ $787 $884
Provision for loan losses........................................... 177 405
Less deductions:
Charge-offs....................................................... 271 446
Recoveries........................................................ (32) (43)
---- ----
Net charge-offs................................................. 239 403
---- ----
Other(1)............................................................ 52 19
---- ----
Balance, end of period.............................................. $777 $905
==== ====
</TABLE>
- --------
(1) Primarily reflects transfers related to asset securitizations.
Interest accrued on loans subsequently charged off, recorded as a reduction
of interest revenue, was $35 million in the quarter ended February 28, 1999
and $68 million in the quarter ended February 28, 1998.
The Company received net proceeds from asset securitizations of $525 million
in the quarter ended February 28, 1999 and $368 million in the quarter ended
February 28, 1998. The uncollected balances of consumer loans sold through
asset securitizations were $16,605 million at February 28, 1999 and $16,506
million at November 30, 1998.
3. Long-Term Borrowings
Long-term borrowings at February 28, 1999 scheduled to mature within one
year aggregated $4,146 million.
During the three month period ended February 28, 1999 the Company issued
senior notes aggregating $3,049 million, including non-U.S. dollar currency
notes aggregating $587 million, primarily pursuant to its public debt shelf
registration statements. The weighted average coupon interest rate of these
notes was 5.1% at February 28, 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: 2001, $618 million; 2002, $110 million; 2004, $2,000
million; and thereafter, $321 million. In the three month period ended
February 28, 1999, $3,060 million of senior notes were repaid.
7
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Preferred Stock, Capital Units and Preferred Securities Issued by
Subsidiaries
Preferred stock is composed of the following issues:
<TABLE>
<CAPTION>
Shares Outstanding at Balance at
------------------------- -------------------------
February 28, November 30, February 28, November 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(dollars in millions)
<S> <C> <C> <C> <C>
ESOP Convertible Preferred
Stock, liquidation
preference $35.88........ 3,559,639 3,581,964 $128 $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................... $673 $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 and MS plc 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.
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.
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 $3,157 million at February 28, 1999, which exceeded the
amount required by $2,729 million. DWR's net capital totaled $753 million at
February 28, 1999 which exceeded the amount required by $659 million. MSIL, a
London-based broker-dealer subsidiary, is subject to the capital requirements
of the Securities and Futures Authority, and MSJL, a Tokyo-based broker-
dealer, is subject to the capital requirements of the Japanese Ministry of
Finance. MSIL and MSJL have consistently operated in excess of their
respective regulatory capital requirements.
Under regulatory net capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other regulatory capital guidelines, FDIC-
insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital,
as defined, to total assets ("leverage ratio") and (b) 8% combined Tier 1 and
Tier 2 capital, as defined, to risk weighted assets ("risk-weighted capital
ratio"). At February 28, 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.
8
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their local capital adequacy requirements.
6. Earnings per Share
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
Ended
February 28,
--------------
1999 1998
------ ------
<S> <C> <C>
Basic EPS:
Income before cumulative effect of accounting change......... $1,037 $ 691
Cumulative effect of accounting change....................... -- (117)
Preferred stock dividend requirements........................ (11) (15)
------ ------
Net income available to common shareholders.................. $1,026 $ 559
====== ======
Weighted-average common shares outstanding................... 554 587
====== ======
Basic EPS before cumulative effect of accounting change...... $ 1.85 $ 1.15
Cumulative effect of accounting change....................... -- (0.20)
------ ------
Basic EPS.................................................... $ 1.85 $ 0.95
====== ======
Diluted EPS:
Income before cumulative effect of accounting change......... $1,037 $ 691
Cumulative effect of accounting change....................... -- (117)
Preferred stock dividend requirements........................ (9) (13)
------ ------
Net income available to common shareholders.................. $1,028 $ 561
====== ======
Weighted-average common shares outstanding................... 554 587
Effect of dilutive securities:
Stock options.............................................. 19 17
ESOP convertible preferred stock........................... 12 12
------ ------
Weighted-average common shares outstanding and common stock
equivalents................................................. 585 616
====== ======
Diluted EPS before cumulative effect of accounting change.... $ 1.76 $ 1.10
Cumulative effect of accounting change....................... -- (0.19)
------ ------
Diluted EPS.................................................. $ 1.76 $ 0.91
====== ======
</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
9
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
adverse effect on the consolidated financial condition of the Company, but may
be material to the Company's operating results for any particular period,
depending upon the level of the Company's net income for such period.
The Company had approximately $6.3 billion and $5.7 billion of letters of
credit outstanding at February 28, 1999 and at November 30, 1998,
respectively, to satisfy various collateral requirements.
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.
10
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The credit quality of the Company's trading-related derivatives at February
28, 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>
Collateralized Other
Non-Investment Non-Investment
AAA AA A BBB Grade Grade Total
--- ------ ------ ------ -------------- -------------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
At February 28, 1999
Interest rate and
currency swaps and
options (including
caps, floors and swap
options) and other
fixed income securities
contracts.............. $ 756 $4,289 $2,944 $1,044 $ 117 $ 417 $ 9,567
Foreign exchange forward
contracts and options.. 132 1,782 1,586 321 -- 155 3,976
Equity securities
contracts (including
equity swaps, warrants
and options)........... 2,249 1,564 512 169 1,355 155 6,004
Commodity forwards,
options and swaps...... 48 602 337 633 40 421 2,081
Mortgage-backed
securities forward
contracts, swaps and
options................ 88 28 49 6 -- 1 172
------ ------ ------ ------ ------ ------ -------
Total.................. $3,273 $8,265 $5,428 $2,173 $1,512 $1,149 $21,800
====== ====== ====== ====== ====== ====== =======
Percent of total........ 15% 38% 25% 10% 7% 5% 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. Subsequent Event--Business Acquisition
On March 25, 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.
11
<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
February 28, 1999, and the related condensed consolidated statements of
income, comprehensive income and cash flows for the three month periods ended
February 28, 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
April 14, 1999
12
<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 and Transaction
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(R) 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 Discover Card brand.
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
investments).
In the Company's Credit and Transaction 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.
- --------
* 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.
13
<PAGE>
Such competition, among other things, affects the Company's ability to
attract and retain highly skilled individuals. Competitive factors also affect
the Company's success in attracting and retaining clients and assets through
its ability to meet investors' saving and investment needs 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 ability and success in maintaining high levels of
profitable business activities, emphasizing fee-based assets that are designed
to generate a continuing stream of revenues, managing risks in both the
Securities and Asset Management and Credit and Transaction Services
businesses, evaluating credit product pricing and monitoring costs will
continue to affect its overall financial results. In addition, the
complementary trends in the financial services industry of consolidation and
globalization present, among other things, technological, risk management and
other infrastructure challenges that will require effective resource
allocation in order for the Company to remain competitive.
Global Market and Economic Conditions in the Quarter Ended February 28, 1999
Global market and economic conditions in the quarter ended February 28, 1999
were generally favorable. Conditions in many regions were significantly
improved in comparison to the third and fourth quarters of fiscal 1998, during
which periods of extreme volatility, low levels of liquidity and increased
credit spreads created difficult conditions in many global financial markets.
In the U.S., market conditions benefited from the overall strength of the
domestic economy, which continued to exhibit positive fundamentals and a
steady rate of growth. In addition, the relatively low levels of inflation and
unemployment continued to persist. The performance of the U.S. economy
reflected improved conditions in certain foreign markets, as well as the
Federal Reserve Board's decision to lower the overnight lending rate by 0.25%
on three separate occasions during the fourth quarter of fiscal 1998. The
strength of the U.S. economy had a positive effect on investor confidence,
which contributed to a shift in investor preferences away from less-risky U.S.
Treasury securities and toward higher-yielding financial instruments. As a
result, high levels of activity existed in the primary and secondary markets
for equity and fixed income securities during the quarter.
Conditions in European markets were also generally favorable during the
quarter. European financial markets benefited from positive investor sentiment
relating to the European Economic and Monetary Union ("EMU"). EMU commenced on
January 1, 1999 when the European Central Bank assumed control of monetary
policy for the 11 European Union countries participating in EMU. Since its
inception, the euro has emerged as a new funding alternative for many issuers.
During the quarter, three interest rate cuts by the Bank of England
aggregating 1.25%, and one coordinated interest rate cut of 0.25% by the EMU
member countries occurred as the result of indications of an economic slowdown
in Europe, particularly in Germany. The slowing growth rates in portions of
Europe is partially attributable to a decline in exports, which have been
negatively impacted by the ongoing financial difficulties in Asia, Russia and
Latin America.
Market conditions in the Far East continued to be sluggish due to the
ongoing economic and financial difficulties that have existed in the region
since the latter half of fiscal 1997. The Japanese economy continued to suffer
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. Although Japan's government has taken steps to
mitigate these conditions, including bank bailouts, emergency loans and
stimulus packages,
14
<PAGE>
such measures have yet to significantly improve the nation's economic
performance. Market conditions were also difficult elsewhere in the Far East,
as the poor economic performance of Japan continued to adversely affect the
financial markets of many nations within the region.
Results of the Company for the Quarter ended February 28, 1999 and February
28, 1998
The Company's net income of $1,037 million in the quarter ended February 28,
1999 represented an increase of 81% as compared to the first quarter of fiscal
1998. Net income for the quarter ended February 28, 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 quarter ended February 28, 1999 increased 50% from the
comparable prior year period. Diluted earnings per common share were $1.76 in
the quarter ended February 28, 1999 as compared to $0.91 in the quarter ended
February 28, 1998. Excluding the cumulative effect of an accounting change,
diluted earnings per share for the quarter ended February 28, 1998 was $1.10.
The Company's annualized return on common equity was 29.5% for the quarter
ended February 28, 1999, as compared to 16.8% for the comparable period of
fiscal 1998. Excluding the cumulative effect of an accounting change, the
annualized return on common equity for the quarter ended February 28, 1998 was
20.1%.
The increase in net income in the quarter ended February 28, 1999 from the
quarter ended February 28, 1998 was primarily due to higher principal trading,
principal investment, investment banking and commission revenues coupled with
improved operating results from the Company's Credit and Transaction Services
business. These increases were partially offset by higher incentive-based
compensation and other non-interest expenses.
Business Acquisition
On March 25, 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 250 financial
advisors, it offers its individual investors proprietary mutual funds and
other financial products. At the end of 1998, it had approximately $4.4
billion of mutual fund assets under management. 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 remainder of Results of Operations is presented on a business segment
basis. Substantially all of the operating revenues and operating expenses of
the Company can be directly attributable to its two business segments:
Securities and Asset Management and Credit and Transaction Services. Certain
reclassifications have been made to prior period amounts to conform to the
current year's presentation.
15
<PAGE>
Securities and Asset Management
Statements of Income (dollars in millions)
<TABLE>
<CAPTION>
Three Months
Ended February 28,
-------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Revenues:
Investment banking..................................... $ 957 $ 800
Principal transactions:
Trading.............................................. 1,691 903
Investments.......................................... 229 72
Commissions............................................ 652 539
Asset management, distribution and administration
fees.................................................. 712 676
Interest and dividends................................. 2,919 3,150
Other.................................................. 39 53
--------- ---------
Total revenues....................................... 7,199 6,193
Interest expense....................................... 2,655 2,852
--------- ---------
Net revenues......................................... 4,544 3,341
--------- ---------
Non-interest expenses:
Compensation and benefits.............................. 2,238 1,646
Occupancy and equipment................................ 133 122
Brokerage, clearing and exchange fees.................. 112 118
Information processing and communications.............. 190 147
Marketing and business development..................... 129 111
Professional services.................................. 140 105
Other.................................................. 144 120
--------- ---------
Total non-interest expenses.......................... 3,086 2,369
--------- ---------
Income before income taxes and cumulative effect of
accounting change 1,458 972
Income tax expense....................................... 556 380
--------- ---------
Income before cumulative effect of accounting change..... 902 592
Cumulative effect of accounting change .................. -- (117)
--------- ---------
Net income........................................... $ 902 $ 475
========= =========
</TABLE>
Securities and Asset Management net revenues of $4,544 million in the
quarter ended February 28, 1999 represented an increase of 36% from the
quarter ended February 28, 1998. Securities and Asset Management net income of
$902 million in the quarter ended February 28, 1999 represented an increase of
90% from the quarter ended February 28, 1998. Net income for the quarter ended
February 28, 1998 included a charge of $117 million resulting from the
cumulative effect of an accounting change. Excluding the cumulative effect of
an accounting change, net income for the quarter ended February 28, 1999
increased 52% from the comparable prior year period. 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 February 28, 1999 increased primarily due to higher revenues
from merger, acquisition and restructuring activities and from equity
underwritings.
16
<PAGE>
Revenues from merger, acquisition and restructuring activities increased to
record levels in the quarter ended February 28, 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, as well as deregulation and privatization. The improved market
conditions which existed during the quarter also contributed to the favorable
environment for merger and acquisition transactions.
Equity underwriting revenues increased significantly, as improved conditions
in the global financial markets, particularly in the U.S. and Europe,
contributed to a strong volume of equity offerings during the quarter. 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 February 28, 1999
were comparable to the prior year period, as lower revenues from issuances of
global high yield fixed income securities were partially offset by higher
revenues from investment grade issuances. The decline in revenues from high
yield fixed income securities was primarily attributable to lower investor
demand for these instruments as compared to the prior year period. Revenues
from issuances of investment grade fixed income securities benefited from the
relatively low level of interest rates which allowed issuers to take advantage
of lower borrowing costs. Increased stability in the global financial markets
also increased investor demand for investment grade fixed income securities.
Principal Transactions
Principal transaction trading revenues, which include revenues from customer
purchases and sales of securities in which the Company acts as principal and
gains and losses on securities held for resale, including derivatives,
increased 87% in the quarter ended February 28, 1999 from the comparable
period of fiscal 1998. The significant increase reflected record levels of
quarterly revenues from all of the Company's trading areas: fixed income,
equity, foreign exchange and commodities.
Fixed income trading revenues increased substantially in the quarter ended
February 28, 1999 from the comparable period of fiscal 1998, primarily due to
higher revenues from trading in investment grade securities and fixed income
derivatives. Revenues from investment grade fixed income securities were
favorably affected by the improved conditions in the global financial markets,
including the continued stability of the U.S. economy. Such conditions shifted
investor preferences away from U.S. Treasury securities and toward credit
sensitive instruments. In addition, improved liquidity in the fixed income
markets reduced credit spreads and favorably affected the price relationship
between credit-sensitive securities and government securities. Revenues from
fixed income derivatives, including options and swaps, benefited from strong
investor demand, high transaction volume and from volatility in the global
fixed income markets, which resulted in increased trading opportunities.
Equity trading revenues increased in the quarter ended February 28, 1999 as
compared to the prior year period, primarily reflecting higher revenues from
both cash and derivative equity products. Higher revenues from trading in
equity cash products were primarily driven by strong customer trading volumes,
particularly in the U.S. and Europe, as improved conditions in the global
financial markets increased investor demand for equity securities. Revenues
from trading equity derivatives also increased, benefiting from high levels of
volatility, particularly in technology stocks in U.S. markets.
Foreign exchange trading revenues increased in the quarter ended February
28, 1999 as compared to the prior year period. The increase was attributable
to high levels of customer transaction volume and volatility in the foreign
exchange markets. The strong economic performance of the U.S. contributed to
the U.S. dollar's appreciation against major currencies, including the
Japanese yen and the euro. Volatility in foreign exchange markets was also
affected by the Brazilian government's decision to allow its currency (the
real) to float freely against the U.S. dollar in January 1999.
17
<PAGE>
Commodity trading revenues also increased in the quarter ended February 28,
1999 as compared to the prior year period, primarily driven by higher revenues
from trading in commodity derivatives and an increase in customer trading
volumes. Trading revenues from commodity derivatives benefited from volatile
energy prices during the quarter. Energy prices fluctuated due to changing
weather conditions, varying expectations of production and supply levels, and
continuing tensions between the U.S. and Iraq. Revenues from trading natural
gas products also benefited from price volatility, particularly during the
first half of the quarter.
Principal transaction investment gains aggregating $229 million were
recorded in the quarter ended February 28, 1999, as compared to gains of $72
million in the comparable prior year period. Fiscal 1999's results primarily
reflect realized and unrealized gains relating to the Company's investment in
Equant N.V., a Netherlands based data communications company. Net gains
resulting from increases in the value of certain other private equity
investments also contributed to the quarter's results.
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 21% in the
quarter ended February 28, 1999 from the comparable period of fiscal 1998. In
the U.S., improved market conditions and continuing market volatility
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. The continued growth in the
number of the Company's financial advisors also contributed to the increase.
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 from investment
management services provided to segregated customer accounts pursuant to
various contractual arrangements.
Asset management, distribution and administration revenues increased 5% in
the quarter ended February 28, 1999 from the comparable period 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 including increased revenues from certain fixed income products.
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 $385 billion at
February 28, 1999 from $356 billion at February 28, 1998. The increase in
assets under management or supervision reflected net inflows of customer
assets, as well as appreciation in the value of existing customer portfolios.
Customer assets under management or supervision included products offered
primarily to individual investors of $227 billion at February 28, 1999 and
$201 billion at February 28, 1998. Products offered primarily to institutional
investors were $158 billion at February 28, 1999 and $155 billion at February
28, 1998.
18
<PAGE>
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 11% in the quarter
ended February 28, 1999 from the comparable period of fiscal 1998, partially
reflecting the level and mix of interest bearing assets and liabilities during
the respective periods.
Non-Interest Expenses
Total non-interest expenses increased 30% in the quarter ended February 28,
1999 from the comparable prior year period. Within the non-interest expense
category, compensation and benefits expense increased 36%, principally
reflecting higher incentive compensation based on record levels of revenues
and earnings. Excluding compensation and benefits expense, non-interest
expense increased 17% in the quarter ended February 28, 1999. Occupancy and
equipment expense increased 9% primarily due to increased office space in New
York and certain other locations, and additional rent associated with 29 new
branch locations in the U.S. Brokerage, clearing and exchange fees decreased
5%, which was primarily attributable to lower agent bank costs resulting from
the Company's fiscal 1998 sale of its global custody business. This decrease
was partially offset by higher brokerage expenses due to increased securities
trading volume. Information processing and communications expense increased
29% primarily due to the impact of increased rates for certain data services
as well as other telecommunications and information systems costs. A higher
number of employees utilizing communications systems also contributed to the
increase. Marketing and business development expense increased 16% 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. Professional services expense increased 33%
primarily reflecting higher consulting costs associated with certain
information technology initiatives, including the preparation for the Year
2000, coupled with the Company's increased global business activities. Other
expense increased 20%, which reflects the impact of a higher level of business
activity on various operating expenses.
19
<PAGE>
Credit and Transaction Services
Statements of Income (dollars in millions)
<TABLE>
<CAPTION>
Three
Months
Ended
February
28,
-----------
1999 1998
----- -----
(unaudited)
<S> <C> <C>
Fees:
Merchant and cardmember.......................................... $ 341 $ 428
Servicing........................................................ 253 171
Principal transactions:
Investments...................................................... 36 --
Commissions........................................................ 13 8
Asset management, distribution and administration fees............. 2 --
Other.............................................................. -- 2
----- -----
Total non-interest revenues...................................... 645 609
----- -----
Interest revenue................................................... 561 783
Interest expense................................................... 222 293
----- -----
Net interest income.............................................. 339 490
Provision for consumer loan losses................................. 177 405
----- -----
Net credit income................................................ 162 85
----- -----
Net revenues..................................................... 807 694
----- -----
Compensation and benefits.......................................... 125 142
Occupancy and equipment............................................ 13 18
Brokerage, clearing and exchange fees.............................. 2 3
Information processing and communications.......................... 119 120
Marketing and business development................................. 266 183
Professional services.............................................. 22 23
Other.............................................................. 46 45
----- -----
Total non-interest expenses...................................... 593 534
----- -----
Income before income taxes......................................... 214 160
Provision for income taxes......................................... 79 61
----- -----
Net income....................................................... $ 135 $ 99
===== =====
</TABLE>
Credit and Transaction Services net income of $135 million in the quarter
ended February 28, 1999 represented an increase of 36% from the comparable
period of fiscal 1998. The increase in net income was primarily attributable
to a lower provision for loan losses and increases in servicing fees and
principal transaction investment revenue. These increases were partially
offset by lower net interest income and merchant and cardmember fees and
higher non-interest expenses.
The quarter ended February 28, 1999 does not include the results from
operations of SPS Transaction Services, Inc. ("SPS"), the Prime Option SM
MasterCard(R) portfolio ("POS") and the receivables associated with the
discontinued BRAVO(R) Card, all of which were sold subsequent to the first
quarter of 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. The Company sold
certain credit card receivables associated with the BRAVO Card in the fourth
quarter of fiscal 1998 and will be consolidating certain portions of the
remaining BRAVO portfolio with its Private Issue and Discover Card brands.
20
<PAGE>
Non-Interest Revenues
Total non-interest revenues increased 6% in the quarter ended February 28,
1999 from the comparable period of 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 20% in the quarter
ended February 28, 1999 from the comparable period of fiscal 1998. The
decrease was primarily due to a lower level of merchant and cardmember fees
resulting from the Company's sale of the operations of SPS and the sale of
POS. Also contributing to the decrease were lower levels of late payment fees
and cash advance fees associated with the Discover Card brand. Late payment
fees decreased due to a lower level of owned consumer loans, partially offset
by a fee increase implemented in the later part of fiscal 1998. Cash advance
fees decreased as a result of decreased cash advance transaction volume,
primarily attributable to the Company's actions to limit cash advances in an
effort to improve credit quality. These decreases were partially offset by an
increase in Discover Card merchant discount revenue associated with higher
sales volume and by higher overlimit fees. Overlimit fees increased as a
consequence of a higher fee implemented in the latter part of fiscal 1998.
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 $525 million in the quarter ended February 28, 1999. During
the comparable period of fiscal 1998, the Company completed asset
securitizations of $368 million. The asset securitizations completed in the
first quarters of fiscal 1999 and 1998 have expected maturities ranging from 3
years to 10 years from the date of issuance.
The table below presents the components of servicing fees (dollars in
millions):
<TABLE>
<CAPTION>
Three
Months
Ended
February
28,
----------
1999 1998
---- ----
<S> <C> <C>
Merchant and cardmember fees........................................ $131 $105
Interest revenue.................................................... 625 579
Interest expense.................................................... (230) (234)
Provision for consumer loan losses.................................. (273) (279)
---- ----
Servicing fees...................................................... $253 $171
==== ====
</TABLE>
Servicing fees increased 48% in the quarter ended February 28, 1999 from the
comparable period of fiscal 1998. The increase was due to higher levels of net
interest cash flows, increased fee revenue, and decreased 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 net charge-off rate, partially
offset by an increase in the level of securitized consumer loans.
Commission revenues arise from customer securities transactions associated
with Discover Brokerage Direct, Inc. ("DBD"), the Company's provider of
electronic brokerage services. Commission revenues increased 63% in the
quarter ended February 28, 1999 from the comparable period of fiscal 1998
resulting from an increase in the level of customer trading activity,
partially offset by lower revenue per trade due to an increase in Internet
trades as a percentage of total trades.
Principal transaction investment revenues of $36 million represents a
realized gain associated with DBD's sale of a portion of its holdings in
Knight/Trimark Group Inc., as well as an unrealized gain on the remainder of
the position.
21
<PAGE>
Asset management, distribution and administration fees include revenues from
asset management services, including fund management fees which DBD receives
for promoting and distributing mutual funds.
Net Interest Income
Net interest income represents the difference between interest revenue
derived from Credit and Transaction Services consumer loans and short-term
investment assets and interest expense incurred to finance those assets.
Credit and Transaction Services assets, consisting primarily of consumer
loans, currently earn interest revenue at both fixed rates and market-indexed
variable rates. The Company incurs interest expense at fixed and floating
rates. Interest expense also includes the effects of interest rate contracts
entered into by the Company as part of its interest rate risk management
program. This program is designed to reduce the volatility of earnings
resulting from changes in interest rates and is accomplished primarily through
matched financing, which entails matching the repricing schedules of consumer
loans and related financing. Net interest income decreased 31% in the quarter
ended February 28, 1999 from the comparable period of 1998. The decrease was
predominately due to lower average levels of owned consumer loans and a lower
yield on general purpose credit card loans. The decrease in owned general
purpose credit card loans was primarily due to the sale of the operations of
SPS, the sale of POS and the discontinuance of the BRAVO Card in fiscal 1998.
The lower yield on general purpose credit card loans during the quarter was
due to 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.
During the first quarter of fiscal 1999 the Company made a strategic
decision to reprice a substantial portion of its existing credit card
receivables to a fixed interest rate beginning with the 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.
22
<PAGE>
The following tables present analyses of Credit and Transaction Services
average balance sheets and interest rates for the quarters ended February 28,
1999 and 1998 and changes in net interest income during those periods:
Average Balance Sheet Analysis (dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended February 28,
-------------------------------------------------
1999 1998(1)
------------------------ ------------------------
Average Average
Balance Rate Interest Balance Rate Interest
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
General purpose credit card
loans....................... $16,416 12.90% $ 522 $20,087 13.92% $689
Other consumer loans......... 4 9.09 -- 1,665 16.89 69
Investment securities........ 927 5.25 12 243 5.78 3
Other........................ 1,594 6.78 27 1,296 6.63 22
------- ----- ------- ----
Total interest earning
assets................... 18,941 12.01 561 23,291 13.64 783
Allowance for loan losses.... (778) (890)
Non-interest earning assets.. 1,344 1,687
------- -------
Total assets.............. $19,507 $24,088
======= =======
LIABILITIES AND SHAREHOLDER'S
EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings..................... $ 1,506 4.37% $ 16 $ 855 4.64% $ 10
Brokered.................... 4,875 6.90 83 5,914 6.61 96
Other time.................. 2,004 5.47 27 2,357 6.10 35
------- ----- ------- ----
Total interest bearing
deposits................. 8,385 6.10 126 9,126 6.30 141
Other borrowings............. 6,390 6.08 96 9,947 6.17 152
------- ----- ------- ----
Total interest bearing
liabilities.............. 14,775 6.09 222 19,073 6.23 293
Shareholder's equity/other
liabilities................. 4,732 5,015
------- -------
Total liabilities and
shareholder's equity..... $19,507 $24,088
======= =======
Net interest income.......... $ 339 $490
===== ====
Net interest margin.......... 7.26% 8.54%
Interest rate spread......... 5.92% 7.41%
</TABLE>
- --------
(1) Certain prior-year information has been reclassified to conform to the
current year's presentation.
23
<PAGE>
Rate/Volume Analysis (dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended
February 28, 1999 vs. 1998
-------------------------------
Increase/(Decrease)
Due to Changes in
-------------------------------
Volume Rate Total
--------- -------- ---------
<S> <C> <C> <C>
INTEREST REVENUE
General purpose credit card loans............. $ (126) $ (41) $ (167)
Other consumer loans.......................... (69) -- (69)
Investment securities......................... 10 (1) 9
Other......................................... 4 1 5
---------
Total interest revenue...................... (146) (76) (222)
---------
INTEREST EXPENSE
Interest bearing deposits
Savings....................................... 7 (1) 6
Brokered...................................... (17) 4 (13)
Other time.................................... (5) (3) (8)
---------
Total interest bearing deposits............. (11) (4) (15)
Other borrowings.............................. (55) (1) (56)
---------
Total interest expense...................... (66) (5) (71)
---------
Net interest income........................... $ (80) $ (71) $ (151)
========= ======== =========
</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 February 28,
-----------------------------------------------
1999 1998
----------------------- -----------------------
Average Average
Balance Rate Interest Balance Rate Interest
------- ----- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans................ $32,900 14.06% $1,141 $36,828 14.72% $1,337
General purpose credit card
loans........................ 32,895 14.06 1,141 34,493 14.57 1,239
Total interest earning
assets....................... 35,421 13.50 1,179 38,367 14.39 1,362
Total interest bearing
liabilities.................. 31,255 5.83 450 34,149 6.26 527
Consumer loan interest rate
spread....................... 8.23 8.46
Interest rate spread.......... 7.67 8.13
Net interest margin........... 8.36 8.82
</TABLE>
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 $777 million
and $905 million at February 28, 1999 and 1998. 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 56% in
the quarter ended February 28, 1999 from the comparable period of fiscal 1998.
The decrease was primarily due to the positive impact of the sale of the
operations of SPS, the sale of POS, the discontinuance of the BRAVO Card, and
a lower level of charge offs related to the Discover Card portfolio. This
decrease was reflective of the Company's continuing efforts to
24
<PAGE>
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 securitized transactions entered into prior to the third
quarter of 1996. The Company expects this loan loss allowance will be fully
amortized over fiscal 1999. The Company's expectations about future charge-off
rates and credit quality are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. Factors that
influence the 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 when they become 180
days past due, except in the case of bankruptcies and fraudulent transactions,
where loans are charged off earlier. Loan delinquencies and charge-offs are
primarily affected by changes in economic conditions and may vary throughout
the year due to seasonal consumer spending and payment behaviors.
From time to time, the Company has offered, and may continue to offer,
cardmembers with accounts in good standing the opportunity to skip a minimum
monthly payment, while continuing to accrue periodic finance charges, without
being considered to be past due ("skip-a-payment"). The comparability of
delinquency rates at any particular point in time may be affected depending on
the timing of the skip-a-payment program.
The following table presents delinquency and net charge-off rates with
supplemental managed loan information.
Asset Quality (dollars in millions)
<TABLE>
<CAPTION>
February 28, November 30,
---------------------------------- ----------------
1999 1998 1998
---------------- ---------------- ----------------
Owned Managed Owned Managed Owned Managed
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans at
period-end............. $15,529 $32,134 $20,839 $35,804 $15,996 $32,502
Consumer loans
contractually past due
as a percentage of
period-end consumer
loans:
30 to 89 days......... 4.29% 4.26% 4.36% 4.39% 3.54% 3.69%
90 to 179 days........ 2.76% 2.83% 3.00% 3.00% 2.67% 2.84%
Net charge-offs as a
percentage of average
consumer loans (year-
to-date)............... 5.89% 6.28% 7.51% 7.50% 6.75% 6.90%
</TABLE>
Non-Interest Expenses
Non-interest expenses increased 11% in the quarter ended February 28, 1999
from the comparable period of 1998.
Compensation and benefits expense decreased 12% in the quarter ended
February 28, 1999 from the comparable period of fiscal 1998 due to a lower
level of compensation costs reflecting the sale of the operations of SPS and
the sale of POS, partially offset by higher employment costs at Discover
Financial Services. Occupancy and equipment expense decreased 28%, primarily
due to the exclusion of the results of SPS and POS in fiscal 1999's results.
Brokerage, clearing and exchange fees relate to the trading activity
associated with DBD. The decrease in brokerage, clearing and exchange fees was
due to a lower cost per trade, partially offset by a higher level of trading
volume. Information processing and communications expense decreased 1% due to
the exclusion of SPS and POS results in fiscal 1999, partially offset by
increased external data processing and transaction processing costs at
Discover Financial Services. Marketing and business development expense
increased 45% which was due to increased direct mail and other promotional
activities related to the Discover
25
<PAGE>
Platinum card, higher advertising and promotional expenses associated with
DBD, and higher cardmember rewards expense. Cardmember rewards expense
includes the Cashback Bonus(R) award, pursuant to which the Company annually
pays Discover cardmembers and Private Issue cardmembers electing this feature
a percentage of their purchase amounts. In fiscal 1999, the Company expects to
continue to invest in the growth of its credit card and Internet brokerage
businesses. Professional services expense decreased 4% due to a decrease in
expenses associated with the sale of the operations of SPS and the sale of
POS, partially offset by increased costs associated with account collections
and consumer credit counseling. Other expenses increased 2% due to higher
general business expenses, including costs associated with the launch of the
Discover Platinum card. Such increases were partially offset by a continuing
decrease in fraud losses and the exclusion of SPS and POS results in fiscal
1999.
Liquidity and Capital Resources
The Company's total assets increased from $317.6 billion at November 30,
1998 to $321.8 billion at February 28, 1999. 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 a portion of the Company's bank borrowings are made on
a collateralized basis and therefore provide a more stable source of funding
than short-term unsecured borrowings.
The funding sources utilized for the Company's Credit and Transaction
Services business include the Company's capital, including equity and long-
term debt; asset securitizations; commercial paper; deposits; asset-backed
commercial paper; 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
26
<PAGE>
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 March 31, 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. ........... A-1+ AA-
Moody's Investors Service.............................. P-1 Aa3
Standard & Poor's...................................... A-1 A+
Thomson BankWatch, Inc. ............................... TBW-1 AA
</TABLE>
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 quarter ended February 28, 1999, the Company issued senior notes
aggregating $3,049 million, including non-U.S. dollar currency notes
aggregating $587 million, primarily pursuant to its public debt shelf
registration statements. These notes have maturities from 2001 to 2028 and a
weighted average coupon interest rate of 5.1% at February 28, 1999; the
Company has entered into certain transactions to obtain floating interest
rates based primarily on short-term LIBOR trading levels. At February 28, 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 $36.1 billion.
Effective March 1, 1999, the Company and Morgan Stanley Finance, plc, a U.K.
subsidiary, 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.
On March 30, 1999, the Company filed a shelf registration statement with the
Securities and Exchange Commission to issue an additional $12 billion of debt
securities, units, warrants, preferred stock or purchase contracts or any
combination thereof in the form of units.
During the quarter ended February 28, 1999, the Company purchased $272
million of its common stock. Subsequent to February 28, 1999 and through March
31, 1999, the Company purchased an additional $149 million of its common
stock.
The Company maintains a senior revolving credit agreement with a group of
banks to support general liquidity needs, including the issuance of commercial
paper (the "MSDW Facility"). Under the terms of the MSDW Facility, the banks
are committed to provide up to $6.0 billion. The MSDW Facility contains
restrictive covenants which require, among other things, that the Company
maintain shareholders' equity of at least $9.1
27
<PAGE>
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
February 28, 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. At February 28, 1999 no borrowings were outstanding under the
MS&Co. Facility.
The Company also maintains a revolving committed financing facility that
enables Morgan Stanley & Co. International Limited ("MSIL"), the Company's
U.K. broker-dealer subsidiary, to secure committed funding from a syndicate of
banks by providing a broad range of collateral under repurchase agreements
(the "MSIL Facility"). Such banks are committed to provide up to an aggregate
of $1.85 billion available in 12 major currencies and the euro. At February
28, 1999 no borrowings were outstanding under the MSIL Facility.
RFC also maintains a $2.6 billion senior bank credit facility which supports
the issuance of asset-backed commercial paper. RFC has never borrowed from its
senior bank credit facility.
The Company anticipates that it will utilize the MSDW Facility, the MS&Co.
Facility or the MSIL Facility for short-term funding from time to time.
At February 28, 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 $1.2 billion, were illiquid. In addition, certain equity
investments made in connection with the Company's private equity and other
principal investment activities, high-yield debt securities, emerging market
debt, certain collateralized mortgage obligations and mortgage-related loan
products, bridge financings, and certain senior secured loans and positions
are not highly liquid.
In connection with its private equity and other principal investment
activities, the Company has equity investments (directly or indirectly through
funds managed by the Company) in privately and publicly held companies. At
February 28, 1999, the aggregate carrying value of the Company's equity
investments in privately held companies (including direct investments and
partnership interests) was $195 million, and its aggregate investment in
publicly held companies was $324 million. The Company also has commitments of
$367 million at February 28, 1999 in connection with its private equity and
other principal investment activities.
In addition, at February 28, 1999 the aggregate value of high-yield debt
securities and emerging market loans and securitized instruments held in
inventory was $2,407 million (a substantial portion of which was subordinated
debt). These securities, loans and instruments were not attributable to more
than 6% to any one issuer, 20% to any one industry or 18% to any one
geographic region. Non-investment grade securities generally involve greater
risk than investment grade securities due to the lower credit ratings of the
issuers, which typically have relatively high levels of indebtedness and are,
therefore, more sensitive to adverse economic conditions. In addition, the
market for non-investment grade securities and emerging market loans and
securitized instruments has been, and may continue to be, characterized by
periods of volatility and illiquidity. The Company has 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
28
<PAGE>
can vary greatly from time to time. The carrying value of the portion of the
Company's mortgage-related portfolio at February 28, 1999 traded in markets
that the Company believed were experiencing lower levels of liquidity than
traditional mortgage-backed pass-through securities approximated $1,632
million.
The Company may, from time to time, also provide financing or financing
commitments to companies in connection with its investment banking and private
equity activities. The Company may provide extensions of credit to leveraged
companies in the form of senior or subordinated debt, as well as bridge
financing on a selective basis. At February 28, 1999 the Company had two
commitments to provide an aggregate of $82 million and had one loan in the
amount of $8 million outstanding in connection with its high-yield
underwriting activities. Subsequent to February 28, 1999, the Company had two
loans outstanding in the aggregate amount of $1,001 million, and its aggregate
commitments increased to $357 million.
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 Company has an investment of $300 million in the Long-Term Capital
Portfolio, L.P. ("LTCP"). The Company is a member of a consortium of 14
financial institutions participating in an equity recapitalization of LTCP.
The objectives of this investment, the term of which is three years, are to
continue active management of its positions and, over time, reduce excessive
risk exposures and leverage, return capital to the participants and ultimately
realize the potential value of the LTCP portfolio.
The Company also engages in senior lending activities, including
origination, syndication and trading of senior secured loans of non-investment
grade companies. Such companies are more sensitive to adverse economic
conditions than investment grade issuers, but the loans are generally made on
a secured basis and are senior to any non-investment grade securities of these
issuers that trade in the capital markets. At February 28, 1999 the aggregate
value of senior secured loans and positions held by the Company was $1,599
million, and aggregate senior secured loan commitments were $665 million.
At February 28, 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 $21.8 billion. The net replacement cost
of all derivative products in a gain position represents the Company's maximum
exposure to derivatives related credit risk. Derivative products may have both
on- and off-balance sheet risk implications, depending on the nature of the
contract. It should be noted, however, that in many cases derivatives serve to
reduce, rather than increase, the Company's exposure to losses from market,
credit and other risks. The risks associated with the Company's derivative
activities, including market and credit risks, are managed on an integrated
basis with associated cash instruments in a manner consistent with the
Company's overall risk management policies and procedures. The Company manages
its credit exposure to derivative products through various means, which
include reviewing counterparty financial soundness periodically; entering into
master netting agreements and collateral arrangements with counterparties in
appropriate circumstances; and limiting the duration of exposure.
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.
29
<PAGE>
The Company has established a firm-wide initiative to address issues
associated with the Year 2000. 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 been reviewing its
systems and programs to identify those that contain two-digit year codes and
is in the process of upgrading its global infrastructure and corporate
facilities to achieve Year 2000 compliance. In addition, the Company is
actively working with its major external counterparties and suppliers to
assess their compliance and remediation efforts and the Company's exposure to
them.
In addressing the Year 2000 issue, the Company has identified the following
phases. In the Awareness phase, the Company defined the Year 2000 issue and
obtained executive level support and funding. In the Inventory phase, the
Company collected a comprehensive list of items that may be affected by Year
2000 compliance issues. Such items include facilities and related non-
information technology systems (embedded technology), computer systems,
hardware, and services and products provided by third parties. In the
Assessment phase, the Company evaluated the items identified in the Inventory
phase to determine which will function properly with the change to the new
century, and ranked items which will need to be remediated based on their
potential impact to the Company. The Remediation phase includes an analysis of
the items that are affected by Year 2000, the identification of problem areas
and the repair of non-compliant items. The Testing phase includes a thorough
testing of all proposed repairs, including present and forward date testing
which simulates dates in the Year 2000. The Implementation phase consists of
placing all items that have been remediated and successfully tested into
production. Finally, the Integration and External Testing phase includes
exercising business critical production systems in a future time environment
and testing with external entities.
The Company has completed the Awareness, Inventory and Assessment phases.
The Remediation, Testing and Implementation phases of substantially all
mission-critical systems were completed by March 31, 1999. The Integration and
External Testing phase commenced in the second quarter of 1998 and will
continue through 1999.
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 or are scheduled to be tested. While the Company has received much
feedback and progress continues to be made, as of February 28, 1999 the
Company had not yet received sufficient information from all parties about
their remediation plans to predict the outcomes of their efforts. In
particular, in some international markets in which the Company conducts
business, the level of awareness and remediation efforts relating to the Year
2000 issue is thought to be less advanced than in the United States.
In fiscal 1998, the Company participated in a series of tests sponsored by
the Securities Industry Association (the "SIA") in which certain firms tested
their computer systems with transactions that simulated dates in December 1999
and January 2000. The Company is also participating in expanded tests
sponsored by the SIA, which began in March 1999 and will continue through
April 1999. Such testing involves the participation of hundreds of firms and a
significant number of simulated transactions and conditions. The Company also
continues to participate in the industry-wide Year 2000 systems tests on a
global basis, including those in Hong Kong, Tokyo and London. The Company has
achieved successful results in each of the industry-wide tests in which it
participated. The Company will continue to participate in industry-wide and
vendor-specific tests throughout the remainder of 1999.
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
30
<PAGE>
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 potential or
actual Year 2000 problems in the financial services industry, such as a
reduction in the general level of 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. To help mitigate the impact of potential Year
2000-related issues, the Company is currently reviewing responses from its
major external counterparties and suppliers with respect to their Year 2000
preparation, assessing the results of various internal and external systems
tests and analyzing possible Year 2000 scenarios to determine a range of
likely outcomes. Where necessary, contingency plans are being expanded or
developed to address specific Year 2000 risk scenarios. In addition, the
Company is developing command, control and communication functions to assist
in event management and provide for a timely response to Year 2000 induced
failures. This preparation includes the development of analytical tools to
monitor critical business functions over the event horizon. The Company
intends to test Year 2000 specific contingency plans during 1999 as part of
its Year 2000 mitigation efforts. 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. The Company also has
in place a general contingency funding strategy, which provides a
comprehensive one-year action plan in the event of a severe funding
disruption.
Based upon current information, the Company estimates that the total cost of
implementing its Year 2000 initiative will be between $200 million and $225
million. The Year 2000 costs include all activities undertaken on Year 2000
related matters across the Company, including, but not limited to,
remediation, testing (internal and external), third party review, risk
mitigation and contingency planning. Through February 28, 1999, the Company
has expended approximately $130 million on the Year 2000 project. The majority
of the remaining costs are expected to be directed primarily towards testing
activities. These costs have been and will continue to be funded through
operating cash flow and are expensed in the period in which they are incurred.
The Company's expectations about future costs and the timely completion of
its Year 2000 modifications are subject to uncertainties that could cause
actual results to differ materially from what has been discussed above.
Factors that could influence the amount of future costs and the effective
timing of remediation efforts include the success of the Company in
identifying computer programs and non-information technology systems that
contain two-digit year codes; the nature and amount of programming and testing
required to upgrade or replace each of the affected programs and systems; the
nature and amount of testing, verification and reporting required by the
Company's regulators around the world, including securities exchanges, central
banks and various governmental regulatory bodies; the rate and magnitude of
related labor and consulting costs; and the success of the Company's external
counterparties and suppliers, as well as worldwide exchanges, clearing
organizations and depositories, in addressing the Year 2000 issue.
31
<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.
Global Opportunity Fund Litigation. On March 12, 1999 Morgan Stanley Bank
Luxembourg, S.A. and Morgan Stanley & Co. International Limited reached an
agreement in principle with the other parties to settle both actions.
IPO Fee Litigation. On February 11, 1999, Gillet v. Goldman, Sachs & Co., et
al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman, Sachs & Co.
et al. were consolidated and on March 15, 1999, a Consolidated Amended
Complaint, captioned In re Public Offering Fee Antitrust Litigation, was filed
against the Company and 24 other underwriters. The consolidated amended
complaint alleges that defendants conspired to fix the "fee" paid by purported
class members to buy and sell IPO securities of U.S. companies by invariably
setting the underwriters' spread at 7% particularly in issuances of $20 to $80
million in violation of Section 1 of the Sherman Act. The Consolidated Amended
Complaint seeks treble damages and injunctive relief, as well as reasonable
attorneys' fees and costs.
Nenni, et al. v. Dean Witter Reynolds Inc. Defendants filed a motion to
dismiss the action on February 24, 1999.
Item 2. Changes in Securities and Use of Proceeds.
(a) On January 28, 1999, the Company and Morgan Stanley Finance plc, a U.K.
subsidiary, announced that they had called for redemption all of their
outstanding 7.82% Capital Units and 7.80% Capital Units. The 4,889,900 7.82%
Capital Units consisted of $122,247,500 aggregate outstanding principal amount
of 7.82% Subordinated Debentures due November 30, 2013 of Morgan Stanley
Finance plc and 4,889,900 related purchase contracts of the Company, which
required holders of the Capital Units to purchase depositary shares
representing ownership interests in shares of the Company's 7.82% Cumulative
Preferred Stock. The 9,200,000 7.80% Capital Units consisted of $230,000,000
aggregate outstanding principal amount of 7.80% Subordinated Debentures due
February 28, 2014 of Morgan Stanley Finance plc and 9,200,000 related purchase
contracts of the Company, which required holders of the Capital Units to
purchase depositary shares representing ownership interests in shares of the
Company's 7.80% Cumulative Preferred Stock. Both series of debentures are
guaranteed by the Company. Both series of Capital Units were redeemed on
February 28, 1999 at a price of $25.025 per Capital Unit ($25.00 for the
underlying debentures at par and $0.025 for the related purchase contract).
(c) Pursuant to an agreement dated February 9, 1999 (the "Purchase
Agreement"), the Company agreed to acquire from AIG Capital Partners, Inc.,
AIG Asset Management Services Inc. and certain other selling stockholders all
of the issued and outstanding capital stock of AB Asesores CFMB, S.A. and AB
Red, S.A., and their respective subsidiaries (collectively, the "AB
Companies"). The AB Companies, based in Madrid, Spain, have strategic
positions in personal investment, asset management, institutional research and
brokerage and investment banking. The closing of the acquisition of the AB
Companies occurred on March 25, 1999. As part of the consideration for the
purchase of the AB Companies, the selling stockholders received a total of
688,943 shares of the Company's common stock. The issuance of the shares was a
private transaction not involving a public offering, for which the Company
relied on the exemption afforded by Section 4(2) of the Securities Act of
1933.
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 January 7, 1999 reporting Item 5 and Item 7.
Form 8-K dated January 12, 1999 reporting Item 5 and Item 7.
32
<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)
By: /s/Joanne Pace
----------------------------------
Joanne Pace, Controller and
Principal Accounting Officer
Date: April 14, 1999
33
<PAGE>
EXHIBIT INDEX
MORGAN STANLEY DEAN WITTER & CO.
Quarter Ended February 28, 1999
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended November 30, 1998).
3.2 Certificate of Elimination of the 7.80% Cumulative Preferred Stock
($200.00 Stated Value) of Morgan Stanley Dean Witter & Co.
3.3 Certificate of Elimination of the 7.82% Cumulative Preferred Stock
($200.00 Stated Value) of Morgan Stanley Dean Witter & Co.
3.4 Amended and Restated Bylaws of Morgan Stanley Dean Witter & Co.
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 April 14, 1999
concerning unaudited interim financial information.
27 Financial Data Schedule.
</TABLE>
E-1
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF ELIMINATION
OF THE
7.80% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF MORGAN STANLEY DEAN WITTER & CO.
(Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware)
Morgan Stanley Dean Witter & Co., a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
certifies as follows:
FIRST: The Corporation's Amended and Restated Certificate of Corporation
authorizes the issuance of 1,150,000 shares of a series of Preferred Stock
designated 7.80% Cumulative Preferred Stock, par value $0.01 per share, with a
stated value of $200.00 per share (the "7.80% Preferred Stock").
SECOND: Pursuant to the provisions of Section 151(g) of the General
Corporation Law of the State of Delaware (the "DGCL"), the Preferred Stock
Financing Committee of the Board of Directors of the Corporation adopted the
following resolutions:
RESOLVED FURTHER, that none of the authorized shares of the 7.80%
Preferred Stock are outstanding and none of the authorized shares of
such series of Preferred Stock will be issued; and
RESOLVED FURTHER, that any officer of the Corporation is authorized
and directed to execute a Certificate of Elimination as provided by
Section 151(g) of the DGCL in accordance with Section 103 of the DGCL,
substantially in the form attached as Exhibit A, with such changes
therein as the officer executing the same may approve and as are
permitted by the DGCL to be made by such officer, such approval to be
conclusively evidenced by such officer's execution of such Certificate
of Elimination, and to file the same forthwith in the Office of the
Secretary of State of the State of Delaware, and when such Certificate
of Elimination becomes effective, all references to the 7.80%
Preferred Stock in the Amended and Restated Certificate of
Incorporation of the Corporation shall be eliminated and the shares of
7.80% Preferred Stock shall resume the status of authorized and
unissued shares of Preferred Stock of the Corporation, without
designation as to series.
THIRD: Pursuant to the provisions of Section 151(g) of the DGCL, all
references to 7.80% Preferred Stock in the Amended and Restated Certificate of
Incorporation of the Corporation hereby are eliminated, and the shares that were
designated to such series hereby are
<PAGE>
returned to the status of authorized but unissued shares of the Preferred Stock
of the Corporation, without designation as to series.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Martin M. Cohen, its assistant Secretary, this 2nd day of March, 1999.
MORGAN STANLEY DEAN WITTER & CO.
By /s/ Martin M. Cohen
-------------------
Name: Martin M. Cohen
Title: Assistant Secretary
2
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF ELIMINATION
OF THE
7.82% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF MORGAN STANLEY DEAN WITTER & CO.
(Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware)
Morgan Stanley Dean Witter & Co., a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
certifies as follows:
FIRST: The Corporation's Amended and Restated Certificate of Corporation
authorizes the issuance of 611,238 shares of a series of Preferred Stock
designated 7.82% Cumulative Preferred Stock, par value $0.01 per share, with a
stated value of $200.00 per share (the "7.82% Preferred Stock").
SECOND: Pursuant to the provisions of Section 151(g) of the General
Corporation Law of the State of Delaware (the "DGCL"), the Preferred Stock
Financing Committee of the Board of Directors of the Corporation adopted the
following resolutions:
RESOLVED FURTHER, that none of the authorized shares of the 7.82%
Preferred Stock are outstanding and none of the authorized shares of
such series of Preferred Stock will be issued; and
RESOLVED FURTHER, that any officer of the Corporation is authorized
and directed to execute a Certificate of Elimination as provided by
Section 151(g) of the DGCL in accordance with Section 103 of the DGCL,
substantially in the form attached as Exhibit A, with such changes
therein as the officer executing the same may approve and as are
permitted by the DGCL to be made by such officer, such approval to be
conclusively evidenced by such officer's execution of such Certificate
of Elimination, and to file the same forthwith in the Office of the
Secretary of State of the State of Delaware, and when such Certificate
of Elimination becomes effective, all references to the 7.82%
Preferred Stock in the Amended and Restated Certificate of
Incorporation of the Corporation shall be eliminated and the shares of
7.82% Preferred Stock shall resume the status of authorized and
unissued shares of Preferred Stock of the Corporation, without
designation as to series.
THIRD: Pursuant to the provisions of Section 151(g) of the DGCL, all
references to 7.82% Preferred Stock in the Amended and Restated Certificate of
Incorporation of the Corporation hereby are eliminated, and the shares that were
designated to such series hereby are
<PAGE>
returned to the status of authorized but unissued shares of the Preferred Stock
of the Corporation, without designation as to series.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Martin M. Cohen, its assistant Secretary, this 2nd day of March, 1999.
MORGAN STANLEY DEAN WITTER & CO.
By /s/ Martin M. Cohen
--------------------
Name: Martin M. Cohen
Title: Assistant Secretary
2
<PAGE>
EXHIBIT 3.4
As amended April 9, 1999
AMENDED AND RESTATED
BYLAWS
OF
MORGAN STANLEY DEAN WITTER & CO.
(hereinafter called the "Corporation")
ARTICLE 1
OFFICES AND RECORDS
SECTION 1.01. Delaware Office. The principal office of the Corporation in
the State of Delaware shall be located in the City of Wilmington, County of New
Castle.
SECTION 1.02. Other Offices. The Corporation may have such other offices,
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.
ARTICLE 2
STOCKHOLDERS
SECTION 2.01. Annual Meeting. The annual meeting of the stockholders of
the Corporation shall be held at such date, place and time as may be fixed by
resolution of the Board of Directors.
SECTION 2.02. Special Meeting. Subject to the rights of the holders of
any series of preferred stock of the Corporation (the "Preferred Stock") or any
other series or class of stock as set forth in the Amended and Restated
Certificate of Incorporation, special meetings of the stockholders may be called
at any time only by the Secretary at the direction of the Board of Directors
pursuant to a resolution adopted by the Board of Directors.
SECTION 2.03. Place of Meeting. The Board of Directors may designate the
place of meeting for any meeting of the stockholders. If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation, which will be 1585 Broadway, New York, New York.
SECTION 2.04. Notice of Meeting. Written or printed notice, stating the
place, day and hour of the meeting and, in the case of special meetings, the
purpose or purposes for which such special meeting is called, shall be prepared
and delivered by the Corporation not less than ten days nor more than sixty days
before the date of the meeting, either personally, or by mail, to each
stockholder of record entitled to vote at
<PAGE>
such meeting. Such further notice shall be given as may be required by law. Only
such business shall be conducted at a special meeting of stockholders as shall
have been brought before the meeting pursuant to the Corporation's notice of
meeting. Any previously scheduled meeting of the stockholders may be postponed,
and (unless the Amended and Restated Certificate of Incorporation otherwise
provides) any special meeting of the stockholders may be canceled, by resolution
of the Board of Directors upon public notice given prior to the time previously
scheduled for such meeting of stockholders.
SECTION 2.05. Quorum and Adjournment. Except as otherwise provided by law
or by the Amended and Restated Certificate of Incorporation, the holders of a
majority of the voting power of the outstanding shares of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders, except that when specified business is to be voted on by a class
or series voting as a class, the holders of a majority of the voting power of
the shares of such class or series shall constitute a quorum for the transaction
of such business. The Chairman of the Board or the holders of a majority of the
voting power of the shares of Voting Stock so represented may adjourn the
meeting from time to time, whether or not there is such a quorum (or, in the
case of specified business to be voted on by a class or series, the Chairman of
the Board or the holders of a majority of the voting power of the shares of such
class or series so represented may adjourn the meeting with respect to such
specified business). No notice of the time and place of adjourned meetings need
be given except as required by law. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 2.06. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy as may be permitted by law; provided, that no proxy shall be voted
after three years from its date, unless the proxy provides for a longer period.
Any proxy to be used at a meeting of stockholders must be filed with the
Secretary of the Corporation or his representative at or before the time of the
meeting.
SECTION 2.07. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (A) pursuant to the
Corporation's notice of meeting delivered pursuant to Section 2.04 of these
Amended and Restated Bylaws, (B) by or at the direction of the Board of
Directors or (C) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complied with the notice procedures set forth in clauses
(ii) and (iii) of this Section 2.07(a) and who was a stockholder of record at
the time such notice is delivered to the Secretary of the Corporation.
2
<PAGE>
(ii) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (C) of paragraph (a) (i) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and, in the case of business other than
nominations, such other business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not less
than ninety days nor more than one hundred and twenty days prior to the first
anniversary of the preceding year's annual meeting; provided however, that with
respect to the annual meeting to be held in 1998, the anniversary date shall be
deemed to be April 2, 1998; provided further, that in the event that the date of
the annual meeting is advanced by more than thirty days, or delayed by more than
ninety days, from such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the one hundred and twentieth day prior to
such annual meeting and not later than the close of business on the later of the
ninetieth day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made. In no
event shall the public announcement of an adjournment or postponement of an
annual meeting commence a new time period for the giving of a stockholder's
notice as described in this Section 2.07(a). Such stockholder's notice shall set
forth (A) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is other-wise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder, including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (2) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of clause (ii) of
this Section 2.07(a) to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the Corporation
at least one hundred days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the tenth day following the day on which such public announcement is
first made by the Corporation.
3
<PAGE>
(b) Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting of stockholders
as shall have been brought before the meeting pursuant to the Corporation's
notice of meeting pursuant to Section 2.04 of these Amended and Restated Bylaws.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be elected pursuant to
the Corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complies with the notice procedures set forth in this Bylaw
and who is a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation. In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate such number of persons for
election to such position(s) as are specified in the Corporation's Notice of
Meeting, if the stockholder's notice as required by clause (ii) of Section
2.07(a) of these Amended and Restated Bylaws shall be delivered to the Secretary
at the principal executive offices of the Corporation not earlier than the one
hundred and twentieth day prior to such special meeting and not later than the
close of business on the later of the ninetieth day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period for the giving of a stockholder's notice as described above.
(c) General
(i) Only persons who are nominated in accordance with the procedures set
forth in this Bylaw shall be eligible to be elected as directors at a meeting of
stockholders and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Bylaw. Except as otherwise provided by law,
the Amended and Restated Certificate of Incorporation or these Amended and
Restated Bylaws, the Chairman of the Board shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this Bylaw and,
if any proposed nomination or business is not in compliance with this Bylaw, to
declare that such defective proposal or nomination shall be disregarded.
(ii) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
4
<PAGE>
(iii) Notwithstanding the foregoing provisions of this Bylaw, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 2.08. Procedure For Election of Directors; Voting. The election
of directors submitted to stockholders at any meeting shall be decided by a
plurality of the votes cast thereon, except as otherwise set forth in the
Amended and Restated Certificate of Incorporation with respect to the right of
the holders of any series of Preferred Stock or any other series or class of
stock to elect additional directors under specified circumstances. Except as
otherwise provided by law, the Amended and Restated Certificate of Incorporation
or these Amended and Restated Bylaws, all matters other than the election of
directors submitted to the stockholders at any meeting shall be decided by the
affirmative vote of a majority of the voting power of the shares present in
person or represented by proxy at the meeting and entitled to vote thereon, and
where a separate vote by class is required, a majority of the voting power of
the shares of that class present in person or represented by proxy at the
meeting and entitled to vote thereon.
The vote on any matter, including the election of directors, shall be by
written ballot. Each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, and shall state the number of shares voted.
SECTION 2.09. Inspectors of Elections; Opening and Closing the Polls.
(a) The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may not be directors, officers or
employees of the Corporation, to act at the meeting and make a written report
thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act, or if all inspectors or alternates who have been appointed are
unable to act, at a meeting of stockholders, the Chairman of the Board shall
appoint one or more inspectors to act at the meeting. Each inspector, before
discharging his or her duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability. The inspectors shall have the duties prescribed by the
General Corporation Law of the State of Delaware.
(b) The Chairman of the Board shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the stockholders will vote at the meeting.
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ARTICLE 3
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors. In
addition to the powers and authorities by these Amended and Restated Bylaws
expressly conferred upon them, the Board of Directors may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Amended and Restated Certificate of Incorporation or by these
Amended and Restated Bylaws required to be exercised or done by the
stockholders.
SECTION 3.02. Number, Tenure and Qualifications. Subject to Section 3.12
of these Amended and Restated Bylaws and to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth in
the Amended and Restated Certificate of Incorporation, to elect directors under
specified circumstances, the number of directors shall be fixed from time to
time exclusively pursuant to a resolution adopted by the Board of Directors, but
shall consist of not less than three nor more than fifteen directors. However,
no decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director. The directors, other than those who
may be elected by the holders of any series of Preferred Stock, or any other
series or class of stock as set forth in the Amended and Restated Certificate of
Incorporation, shall be divided into such classes and hold office for such terms
as set forth in, and may be removed only in accordance with, the Amended and
Restated Certificate of Incorporation.
Each director shall be required to become a stockholder of the Corporation
within 60 days after the date such director is first elected to the Board of
Directors.
SECTION 3.03. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, each annual meeting of stockholders. The Board of
Directors may, by resolution, provide the time and place for the holding of
additional regular meetings without other notice than such resolution. Unless
otherwise determined by the Board of Directors, the Secretary of the Corporation
shall act as secretary at all regular meetings of the Board of Directors and in
the Secretary's absence a temporary secretary shall be appointed by the chairman
of the meeting.
SECTION 3.04. Special Meetings. Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board and the
President, acting together, or a majority of the Board of Directors. The person
or persons authorized to call special meetings of the Board of Directors may fix
the place and time of the meetings. Unless otherwise determined by the Board of
Directors, the Secretary of the Corporation shall act as secretary at all
special meetings of the Board of Directors and in the Secretary's absence a
temporary secretary shall be appointed by the chairman of the meeting.
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SECTION 3.05. Notice. Notice of any special meeting shall be mailed to
each director at his business or residence not later than three days before the
day on which such meeting is to be held or shall be sent to either of such
places by telegraph or facsimile or other electronic transmission, or be
communicated to each director personally or by telephone, not later than the day
before such day of meeting. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice of such meeting, except for amendments to these Amended
and Restated Bylaws as provided pursuant to Section 8.01 hereof. A meeting may
be held at any time without notice if all the directors are present (except as
otherwise provided by law) or if those present waive notice of the meeting in
accordance with Section 6.04 hereof, either before or after such meeting.
SECTION 3.06. Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if a written consent thereto is signed by all members
of the Board or of such committee, as the case may be, and such written consent
is filed with the records of the proceedings of the Board or such committee.
SECTION 3.07. Conference Telephone Meetings. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
SECTION 3.08. Quorum. At all meetings of the Board of Directors, a
majority of the entire Board of Directors (as defined in Section 3.09(e)) shall
constitute a quorum for the transaction of business. At all meetings of the
committees of the Board of Directors, the presence of 50% or more of the total
number of members (assuming no vacancies) shall constitute a quorum. The act of
the directors or committee members present at any meeting at which there is a
quorum shall be the act of the Board of Directors or such committee, as the case
may be, except as otherwise provided in the Delaware General Corporation Law,
the Amended and Restated Certificate of Incorporation or these Amended and
Restated Bylaws. If a quorum shall not be present at any meeting of the Board
of Directors or any committee, a majority of the directors or members, as the
case may be, present thereat may adjourn the meeting from time to time without
further notice other than announcement at the meeting. If permitted by
applicable law, the directors or members, as the case may be, present at a duly
authorized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
SECTION 3.09. Committees. (a) The Corporation shall have three standing
committees: the nominating and directors committee, the audit committee and the
compensation committee.
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(b) The nominating and directors committee shall have the following powers
and authority: (i) evaluating and recommending director candidates to the Board
of Directors, (ii) assessing Board of Directors performance not less frequently
than every three years, (iii) recommending director compensation and benefits
philosophy for the Corporation, (iv) reviewing individual director performance
as issues arise, (v) periodically reviewing the Corporation's corporate
governance profile, and (vi) such additional powers and authority as the Board
of Directors may from time to time determine. None of the members of the
nominating and directors committee shall be an officer or full-time employee of
the Corporation or of any subsidiary or affiliate of the Corporation.
(c) The audit committee shall have the following powers and authority:
(i) to recommend to the Board of Directors the appointment of independent public
accountants to audit the financial statements of the Corporation and to perform
such other duties from time to time as the audit committee may prescribe, (ii)
to receive the reports and comments of the Corporation's internal auditors and
of the independent public accountants, including reports on the adequacy of
internal controls, and to take such action with respect thereto as may seem
appropriate, (iii) to review the accounting principles employed in financial
reporting and (iv) to exercise such additional powers and authority as the Board
of Directors may from time to time determine. None of the members of the audit
committee shall be an officer or full-time employee of the Corporation or of any
subsidiary or affiliate of the Corporation.
(d) The compensation committee shall have the following powers and
authority: (i) determining and fixing the compensation for all senior officers
of the Corporation and those of its Subsidiaries (as defined in Section 6.07(f))
that the compensation committee shall from time to time consider appropriate, as
well as all employees of the Corporation and its Subsidiaries compensated at a
rate in excess of such amount per annum as may be fixed or determined from time
to time by the Board of Directors, (ii) performing the duties of the committees
of the Board of Directors provided for in any present or future stock option,
incentive compensation or employee benefit plan of the Corporation or, if the
compensation committee shall so determine, any such plan of any Subsidiary,
(iii) reviewing the operations of and policies pertaining to any present or
future stock option, incentive compensation or employee benefit plan of the
Corporation or any Subsidiary that the compensation committee shall from time to
time consider appropriate, (iv) authorizing the issuance or grant of stock,
stock options, restricted stock, stock appreciation rights, stock units or any
other award consisting of or relating to stock of the Corporation under or
pursuant to any present or future stock option, incentive compensation, employee
benefit or other plan of the Corporation or of any Subsidiary, and (v) such
additional powers and authority as the Board of Directors may from time to time
determine. None of the members of the compensation committee shall be an
officer or full-time employee of the Corporation or of any subsidiary or
affiliate of the Corporation.
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(e) In addition, the Board of Directors may, by resolution passed by a
three-quarters vote of the total number of directors specified in the resolution
pursuant to Section 3.02 of these Amended and Restated Bylaws which the
Corporation would have if there were no vacancies (the "entire Board of
Directors"), designate one or more additional committees, with each such
committee consisting of one or more directors of the Corporation and having such
powers and authority as the Board of Directors shall designate by such
resolutions.
(f) Any modification to the powers and authority of any committee shall
require the adoption of a resolution by a three-quarters vote of the entire
Board of Directors.
(g) All acts done by any committee within the scope of its powers and
authority pursuant to these Amended and Restated Bylaws and the resolutions
adopted by the Board of Directors in accordance with the terms hereof shall be
deemed to be, and may be certified as being, done or conferred under authority
of the Board of Directors. The Secretary or any Assistant Secretary is
empowered to certify that any resolution duly adopted by any such committee is
binding upon the Corporation and to execute and deliver such certifications from
time to time as may be necessary or proper to the conduct of the business of the
Corporation.
(h) Regular meetings of committees shall be held at such times as may be
determined by resolution of the Board of Directors or the committee in question
and no notice shall be required for any regular meeting other than such
resolution. A special meeting of any committee shall be called by resolution of
the Board of Directors, or by the Secretary or an Assistant Secretary upon the
request of the chairman or a majority of the members of any committee. Notice
of special meetings shall be given to each member of the committee in the same
manner as that provided for in Section 3.05 of these Amended and Restated
Bylaws.
SECTION 3.10. Committee Members. (a) Each member of any committee of the
Board of Directors shall hold office until such member's successor is elected
and has qualified, unless such member sooner dies, resigns or is removed. The
number of directors which shall constitute any committee shall be determined by
resolution adopted by a three-quarters vote of the entire Board of Directors.
(b) The Board of Directors may remove a director from a committee or
change the chairmanship of a committee only by resolution adopted by a three-
quarters vote of the entire Board of Directors.
(c) The Board of Directors may designate one or more directors as
alternate members of any committee to fill any vacancy on a committee and to
fill a vacant chairmanship of a committee, occurring as a result of a member or
chairman leaving the committee, whether through death, resignation, removal or
otherwise; provided, that any such designation may only be amended by a three-
quarters vote of the entire Board of Directors.
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SECTION 3.11. Committee Secretary. The Board of Directors may elect a
secretary of any such committee. If the Board of Directors does not elect such
a secretary, the committee shall do so. The secretary of any committee need not
be a member of the committee, but shall be selected from a member of the staff
of the office of the Secretary of the Corporation, unless otherwise provided by
the Board of Directors or the committee, as applicable.
SECTION 3.12. Certain Modifications. Except as otherwise provided in the
Amended and Restated Certificate of Incorporation, any action by the Board of
Directors to change the number of directors comprising the Board or comprising
any class of directors to other than an even number of directors shall require a
three-quarters vote of the entire Board of Directors.
SECTION 3.13. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid
compensation as director or chairman of any committee and for attendance at each
meeting of the Board of Directors. Members of special or standing committees
may be allowed like compensation and payment of expenses for attending committee
meetings.
ARTICLE 4
OFFICERS
SECTION 4.01. General. The officers of the Corporation shall be elected
by the Board of Directors and shall consist of: a Chairman of the Board and
Chief Executive Officer; a President and Chief Operating Officer; a Chief
Financial Officer; a Chief Strategic and Administrative Officer; a Chief Legal
Officer; one or more Senior Executive Vice Presidents; one or more Executive
Vice Presidents; one or more Senior Vice Presidents; one or more First Vice
Presidents; one or more Vice Presidents; a Secretary; one or more Assistant
Secretaries; a Treasurer; one or more Assistant Treasurers; a Controller; and
such other officers as in the judgment of the Board of Directors may be
necessary or desirable. All officers chosen by the Board of Directors shall
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article 4. Such officers shall also
have powers and duties as from time to time may be conferred by the Board of
Directors or any committee thereof. Any number of offices may be held by the
same person, unless otherwise prohibited by law, the Amended and Restated
Certificate of Incorporation or these Amended and Restated Bylaws. The officers
of the Corporation need not be stockholders or directors of the Corporation.
SECTION 4.02. Election and Term of Office. Subject to Section 4.08 of
these Amended and Restated Bylaws, the elected officers of the Corporation shall
be elected annually by the Board of Directors at the regular meeting of the
Board of Directors held after each annual meeting of the stockholders. If the
election of officers shall not be held
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at such meeting, such election shall be held as soon thereafter as convenient.
Subject to Section 4.08 of these Amended and Restated Bylaws, each officer shall
hold office until his successor shall have been duly elected and shall have
qualified or until his death or until he shall resign or be removed.
SECTION 4.03. Chairman of the Board and Chief Executive Officer. The
Chairman of the Board shall be a member of the Board of Directors and shall be
an officer of the Corporation. The Chairman of the Board shall be the Chief
Executive Officer of the Corporation and shall supervise, coordinate and manage
the Corporation's business and activities and supervise, coordinate and manage
its operating expenses and capital allocation, shall have general authority to
exercise all the powers necessary for the Chief Executive Officer of the
Corporation and shall perform such other duties and have such other powers as
may be prescribed by the Board of Directors or these Amended and Restated
Bylaws, all in accordance with basic policies as established by and subject to
the oversight of the Board of Directors. The Chairman of the Board, if present,
shall preside at all meetings of the Board of Directors.
SECTION 4.04. President and Chief Operating Officer. The President and
Chief Operating Officer shall be a member of the Board of Directors and an
officer of the Corporation. The President and Chief Operating Officer shall
supervise, coordinate and manage the Corporation's business and activities and
supervise, coordinate and manage its operating expenses and capital allocation,
shall have general authority to exercise all the powers necessary for the
President and Chief Operating Officer of the Corporation and shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors and the Chairman and Chief Executive Officer. In the absence or
disability of the Chairman of the Board and Chief Executive Officer, the duties
of the Chairman of the Board shall be performed and the Chairman of the Board's
authority may be exercised by the President and Chief Operating Officer, and in
the event the President and Chief Operating Officer is absent or disabled, such
duties shall be performed and such authority may be exercised by a director
designated for this purpose by the Board of Directors.
SECTION 4.05. Chief Financial Officer. The Chief Financial Officer shall
have responsibility for the financial affairs of the Corporation and shall
exercise supervisory responsibility for the performance of the duties of the
Treasurer and the Controller. The Chief Financial Officer shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and Chief
Operating Officer.
SECTION 4.06. Chief Strategic and Administrative Officer. The Chief
Strategic and Administrative Officer shall have the responsibility for the
business strategy and strategic planning for the Corporation and shall have the
responsibility for making
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recommendations regarding the capital allocation of the Corporation. The Chief
Strategic and Administrative Officer shall perform such other duties and have
such other powers as may be prescribed by the Board of Directors or these
Amended and Restated Bylaws, all in accordance with basic policies as
established by and subject to the oversight of the Board of Directors, the
Chairman and Chief Executive Officer and the President and Chief Operating
Officer.
SECTION 4.07. Chief Legal Officer. The Chief Legal Officer shall have
responsibility for the legal affairs of the Corporation and for the performance
of the duties of the Secretary. The Chief Legal Officer shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and Chief
Operating Officer.
SECTION 4.08. Certain Actions. Notwithstanding anything to the contrary
contained in these Amended and Restated Bylaws, the removal of the current
Chairman and Chief Executive Officer or the current President and Chief
Operating Officer as of May 31, 1997, or any modification to either of their
respective roles, duties or authority shall require a three-quarters vote of the
entire Board of Directors.
SECTION 4.09. Vacancies. A newly created office and a vacancy in any
office because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the terms at any meeting of the Board of
Directors.
ARTICLE 5
STOCK CERTIFICATES AND TRANSFERS
SECTION 5.01. Stock Certificates and Transfers. (a) The interest of each
stockholder of the Corporation shall be evidenced by certificates for shares of
stock in such form as the appropriate officers of the Corporation may from time
to time prescribe; provided that the Board of Directors may provide by
resolution or resolutions that all or some of all classes or series of the stock
of the Corporation shall be represented by uncertificated shares.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates and upon request every holder
of uncertificated shares shall be entitled to have a certificate signed by, or
in the name of the Corporation by the Chairman of the Board of Directors, or the
President or any other authorized officer and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation
representing the number of shares registered in certificate form. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of uncertificated stock and the rights and obligations of the holders of
certificates representing stock of the same class and series shall be identical.
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(b) The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may permit all or any of the signatures on such certificates to
be in facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
(c) The shares of the stock of the Corporation represented by certificates
shall be transferred on the books of the Corporation by the holder thereof in
person or by his attorney, upon surrender for cancelation of certificates for
the same number of shares, with an assignment and power of transfer endorsed
thereon or attached thereto, duly executed, with such proof of the authenticity
of the signature as the Corporation or its agents may reasonably require. Upon
receipt of proper transfer instructions from the registered owner of
uncertificated shares such uncertificated shares shall be canceled and issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the Corporation. Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to the Delaware General Corporation Law or, unless
otherwise provided by the Delaware General Corporation Law, a statement that the
Corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
SECTION 5.02. Lost, Stolen or Destroyed Certificates. No certificate for
shares or uncertificated shares of stock in the Corporation shall be issued in
place of any certificate alleged to have been lost, destroyed or stolen, except
on production of such evidence of such loss, destruction or theft and on
delivery to the Corporation of a bond of indemnity in such amount, upon such
terms and secured by such surety, as the Board of Directors or its designee may
in its or his discretion require.
ARTICLE 6
MISCELLANEOUS PROVISIONS
SECTION 6.01. Fiscal Year. The fiscal year of the Corporation shall be as
specified by the Board of Directors.
SECTION 6.02. Dividends. The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its Amended and
Restated Certificate of Incorporation.
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SECTION 6.03. Seal. The corporate seal shall have thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.
SECTION 6.04. Waiver of Notice. Whenever any notice is required to be
given to any stockholder or director of the Corporation under the provisions of
the General Corporation Law of the State of Delaware, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders or any meeting of the Board of
Directors or committee thereof need be specified in any waiver of notice of such
meeting.
SECTION 6.05. Audits. The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the audit committee, and it shall be the
duty of the audit committee to cause such audit to be made annually.
SECTION 6.06. Resignations. Any director or any officer, whether elected
or appointed, may resign at any time upon notice of such resignation to the
Corporation.
SECTION 6.07. Indemnification and Insurance.
(a) Each person who was or is made a party or is threatened to be made a
party to or is involved in any manner in any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
or a person of whom he or she is the legal representative is or was a director
or officer of the Corporation or a director or elected officer of a Subsidiary,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted from time to time by the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended (but, if permitted by
applicable law, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment) or any
other applicable laws as presently or hereafter in effect, and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided however, that the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors or is a proceeding to enforce such person's
claim to indemnification pursuant to the rights granted by this Bylaw. The
Corporation shall pay the expenses incurred by such person in defending any such
proceeding in advance of its final disposition upon receipt (unless the
Corporation upon authorization of the Board of Directors waives such requirement
to the extent permitted by applicable law) of an undertaking by or on behalf of
such person to repay such amount if it shall ultimately be
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determined that such person is not entitled to be indemnified by the Corporation
as authorized in this Bylaw or otherwise.
(b) The indemnification and the advancement of expenses incurred in
defending a proceeding prior to its final disposition provided by, or granted
pursuant to this Bylaw shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the Amended
and Restated Certificate of Incorporation, other provision of these Amended and
Restated Bylaws, agreement, vote of stockholders or Disinterested Directors or
otherwise. No repeal, modification or amendment of, or adoption of any
provision inconsistent with, this Section 6.07, nor to the fullest extent
permitted by applicable law, any modification of law, shall adversely affect any
right or protection of any person granted pursuant hereto existing at, or with
respect to any events that occurred prior to, the time of such repeal,
amendment, adoption or modification.
(c) The Corporation may maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, partner, member,
employee or agent of the Corporation or a Subsidiary or of another corporation,
partnership, limited liability company, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Law of the State of Delaware.
(d) The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and rights to be paid by
the Corporation the expenses incurred in defending any proceeding in advance of
its final disposition, to any person who is or was an employee or agent (other
than a director or officer) of the Corporation or a Subsidiary and to any person
who is or was serving at the request of the Corporation or a Subsidiary as a
director, officer, partner, member, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust or other
enterprise, including service with respect to employee benefit plans maintained
or sponsored by the Corporation or a Subsidiary, to the fullest extent of the
provisions of this Bylaw with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.
(e) If any provision or provisions of this Bylaw shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the validity,
the legality and enforceability of the remaining provisions of this Bylaw
(including, without limitation, each portion of any paragraph or clause of this
Bylaw containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and (2) to the fullest
extent possible, the provisions of this Bylaw (including, without limitation,
each such portion of any paragraph of this Bylaw containing any such provision
held to be invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
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(f) For purposes of these Amended and Restated Bylaws:
(1) "Disinterested Director" means a director of the Corporation who is
not and was not a party to the proceeding or matter in respect of which
indemnification is sought by the claimant.
(2) "Subsidiary" means a corporation, a majority of the capital stock of
which is owned directly or indirectly by the Corporation, other than directors'
qualifying shares.
(g) Any notice, request, or other communication required or permitted to
be given to the Corporation under this Bylaw shall be in writing and either
delivered in person or sent by telecopy, telex, telegram, overnight mail or
courier service, or certified or registered mail, postage prepaid, return
receipt requested, to the Secretary of the Corporation and shall be effective
only upon receipt by the Secretary.
ARTICLE 7
CONTRACTS, PROXIES, ETC.
SECTION 7.01. Contracts. Except as otherwise required by law, the Amended
and Restated Certificate of Incorporation or these Amended and Restated Bylaws,
any contracts or other instruments may be executed and delivered in the name and
on the behalf of the Corporation by such officer or officers of the Corporation
as the Board of Directors may from time to time direct. Such authority may be
general or confined to specific instances as the Board may determine. Subject
to the control and direction of the Board of Directors, the Chairman of the
Board, the President, the Chief Financial Officer, the Chief Strategic and
Administrative Officer, the Chief Legal Officer and the Treasurer may enter
into, execute, deliver and amend bonds, promissory notes, contracts, agreements,
deeds, leases, guarantees, loans, commitments, obligations, liabilities and
other instruments to be made or executed for or on behalf of the Corporation.
Subject to any restrictions imposed by the Board of Directors, such officers of
the Corporation may delegate such powers to others under his or her
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise of
such delegated power.
SECTION 7.02. Proxies. Unless otherwise provided by resolution adopted by
the Board of Directors, the Chairman of the Board or the President may from time
to time appoint an attorney or attorneys or agent or agents of the Corporation,
in the name and behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as the holder of stock or other securities
in any other corporation or entity, any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation or entity, or to consent in writing, in the
name of the Corporation as such holder, to any action by such other corporation
or entity, and may instruct the person or persons so appointed as to the manner
of casting such vote or giving such consent, and may execute or cause to be
executed in the name
16
<PAGE>
and on behalf of the Corporation and under its corporate seal or otherwise, all
such written proxies or other instruments as he may deem necessary or proper in
the premises.
ARTICLE 8
AMENDMENTS
SECTION 8.01. Amendments. These Amended and Restated Bylaws may be
altered, amended or repealed, in whole or in part, or new Amended and Restated
Bylaws may be adopted by the stockholders or by the Board of Directors at any
meeting thereof; provided however, that notice of such alteration, amendment,
repeal or adoption of new Amended and Restated Bylaws is contained in the notice
of such meeting of stockholders or in the notice of such meeting of the Board of
Directors and, in the latter case, such notice is given not less than twenty-
four hours prior to the meeting. Unless a higher percentage is required by the
Amended and Restated Certificate of Incorporation as to any matter which is the
subject of these Amended and Restated Bylaws, all such amendments must be
approved by either the holders of eighty percent (80%) of the Voting Stock or by
a majority of the Board of Directors; provided further, notwithstanding the
foregoing, the Board of Directors may alter, amend or repeal, or adopt new
Amended and Restated Bylaws in conflict with, (i) any provision of these Amended
and Restated Bylaws which requires a three-quarters vote of the entire Board of
Directors for action to be taken thereunder, (ii) subsection (c) of Section 3.10
of these Amended and Restated Bylaws and (iii) this proviso to this Section 8.01
of these Amended and Restated Bylaws only by a resolution adopted by a three-
quarters vote of the entire board of Directors until December 31, 2000; provided
further, that, notwithstanding the foregoing, the Board of Directors may alter,
amend or repeal, or adopt new Amended and Restated Bylaws in conflict with, (i)
Section 4.08 of these Amended and Restated Bylaws and (ii) this further proviso
to this Section 8.01 of these Amended and Restated Bylaws only by a resolution
adopted by a three-quarters vote of the entire Board of Directors.
17
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter & Co.
Computation of Earnings Per Share Exhibit 11
(In millions, except share data)
Three Months Ended
----------------------------------------------
February 28, February 28,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Basic:
Weighted-average shares outstanding 553,935,578 586,751,340
===================== =====================
Earnings:
Income before cumulative effect
of accounting change $1,037 $691
Cumulative effect of accounting
change - (117)
Less: Preferred stock dividend
requirements (11) (15)
--------------------- ---------------------
Earnings applicable to common shares $1,026 $559
===================== =====================
Basic EPS before cumulative effect
of accounting change $1.85 $1.15
Cumulative effect of accounting
change - (0.20)
===================== =====================
Basic earnings per share $1.85 $0.95
===================== =====================
Diluted:
Weighted-average shares outstanding 553,935,578 586,751,340
Average common shares issuable
under employee benefit plans 18,859,505 17,607,461
Average common shares issuable upon
conversion of ESOP preferred stock 11,798,073 12,018,761
--------------------- ---------------------
Total weighted-average diluted shares 584,593,156 616,377,562
===================== =====================
Earnings:
Income before cumulative effect
of accounting change $1,037 $691
Cumulative effect of accounting
change - (117)
Less: Preferred stock dividend
requirements (9) (13)
--------------------- ---------------------
Earnings applicable to common shares $1,028 $561
===================== =====================
Diluted EPS before cumulative effect
of accounting change $1.76 $1.10
Cumulative effect of accounting
change - (0.19)
===================== =====================
Diluted earnings per share $1.76 $0.91
===================== =====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter & Co.
Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
Exhibit 12
(Dollars in millions)
Three Months Ended
February 28, February 28, Fiscal Year
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Earnings:
Income before income taxes(1) $1,672 $1,132 $5,385 $4,274 $3,117
Add: Fixed charges, net 2,906 3,168 13,614 10,898 9,026
--------- --------- --------- --------- ---------
Income before income taxes and
fixed charges, net $4,578 $4,300 $18,999 $15,172 $12,143
========= ========= ========= ========= =========
Fixed Charges:
Total interest expense $2,877 $3,145 $13,514 $10,806 $8,934
Interest factor in rents 29 23 100 92 92
--------- --------- --------- --------- ---------
Total fixed charges $2,906 $3,168 $13,614 $10,898 $9,026
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 1.6 1.4 1.4 1.4 1.3
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
Earnings:
Income before income taxes $1,672 $1,132 $5,385 $4,274 $3,117
Add: Fixed charges, net 2,906 3,168 13,614 10,898 9,026
--------- --------- --------- --------- ---------
Income before income taxes and
fixed charges, net $4,578 $4,300 $18,999 $15,172 $12,143
========= ========= ========= ========= =========
Fixed Charges:
Total interest expense $2,877 $3,145 $13,514 $10,806 $8,934
Interest factor in rents 29 23 100 92 92
Preferred stock dividends 18 24 87 110 101
--------- --------- --------- --------- ---------
Total fixed charges and preferred
stock dividends $2,924 $3,192 $13,701 $11,008 $9,127
========= ========= ========= ========= =========
Ratio of earnings to fixed charges and
preferred stock dividends 1.6 1.3 1.4 1.4 1.3
</TABLE>
(1) 1998 income before income taxes does not include the 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 expenses 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 February 28, 1999 and for the three month periods ended
February 28, 1999 and 1998, as indicated in our report dated April 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 February 28, 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. 333-75289
Registration Statement No. 333-76111
Filed on Form S-4:
Registration Statement No. 333-25003
Filed on Form S-8:
Registration Statement No. 33-62374
Registration Statement No. 33-63024
Registration Statement No. 33-63026
Registration Statement No. 33-78038
Registration Statement No. 33-79516
Registration Statement No. 33-82240
Registration Statement No. 33-82242
Registration Statement No. 33-82244
Registration Statement No. 333-04212
Registration Statement No. 333-28141
Registration Statement No. 333-25003
Registration Statement No. 333-28263
Registration Statement No. 333-62869
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
New York, New York
April 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statements of Financial Condition at February 28, 1999
and the Condensed Consolidated Statements of Income for the Three Months Ended
February 28, 1999 and is qualified in its entirety by reference to such
Condensed consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 20,720
<RECEIVABLES> 50,462
<SECURITIES-RESALE> 74,363
<SECURITIES-BORROWED> 71,185
<INSTRUMENTS-OWNED> 95,181
<PP&E> 2,121
<TOTAL-ASSETS> 321,778
<SHORT-TERM> 28,474
<PAYABLES> 53,158
<REPOS-SOLD> 108,248
<SECURITIES-LOANED> 21,736
<INSTRUMENTS-SOLD> 58,974
<LONG-TERM> 27,298
0
673
<COMMON> 6
<OTHER-SE> 14,158
<TOTAL-LIABILITY-AND-EQUITY> 321,778
<TRADING-REVENUE> 1,691
<INTEREST-DIVIDENDS> 3,480
<COMMISSIONS> 665
<INVESTMENT-BANKING-REVENUES> 957
<FEE-REVENUE> 1,308
<INTEREST-EXPENSE> 2,877
<COMPENSATION> 2,363
<INCOME-PRETAX> 1,672
<INCOME-PRE-EXTRAORDINARY> 1,672
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,037
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.76
</TABLE>
