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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
Commission File Number 1-11758
Morgan Stanley Dean Witter & Co.
(Exact name of Registrant as specified in its charter)
Delaware 36-3145972
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1585 Broadway 10036
New York, N.Y. (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (212) 761-4000
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Name of each exchange
Title of each class on which registered
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<S> <C>
Common Stock, $.01 par value New York Stock Exchange
Pacific Exchange
Rights to Purchase Series A Junior Participating
Preferred Stock New York Stock Exchange
Pacific Exchange
Depositary Shares, each representing 1/4 of a share
of 7 3/4% Cumulative Preferred Stock, $200 stated
value New York Stock Exchange
Depositary Shares, each representing 1/4 of a share
of Series A Fixed/Adjustable Rate Cumulative
Preferred Stock, $200 stated value New York Stock Exchange
8.40% Capital Units; 8.20% Capital Units; 8.03%
Capital Units New York Stock Exchange
6% Reset PERQS /SM/ Due May 15, 2000; 6% Reset PERQS
Due March 15, 2001; 6% Reset PERQS Due May 30,
2001; 6% Reset PERQS Due August 1, 2001; 7% Reset
PERQS Due August 15, 2001; 6% Reset PERQS Due
December 15, 2001; 7.5% Currency Protected PERQS
Due May 8, 2000; 7.0% Currency Protected PERQS Due
May 22, 2000 American Stock Exchange
Exchangeable Notes Due September 30, 2000;
Exchangeable Notes Due July 31, 2003; Exchangeable
Notes Due December 30, 2005; Exchangeable Notes
Due August 15, 2006; Exchangeable Notes Due March
2, 2006 (2 issuances); Exchangeable Notes Due May
30, 2006; Exchangeable Notes Due June 5, 2006;
Exchangeable Notes Due July 7, 2006; Exchangeable
Notes Due August 6, 2006; Exchangeable Notes Due
August 17, 2005; Exchangeable Notes Due October
19, 2006; Exchangeable Notes Due December 13, 2004 New York Stock Exchange
Exchangeable Notes Due July 29, 2005 (two
issuances); Exchangeable Notes Due April 15, 2005 American Stock Exchange
PEEQS/SM/ Due May 1, 2001 American Stock Exchange
3% CPS/SM/ Due August 8, 2000; 3% CPS Due May 17,
2000 American Stock Exchange
Nikkei 225 Protection Step-Up Exchangeable Notes
Due July 31, 2003 New York Stock Exchange
Dow Jones Industrial Average BRIDGES/SM/ Due April
30, 2004; Standard & Poor's 500 BRIDGES Due
December 31, 2003; Dow Jones Euro Stoxx 50 BRIDGES
Due July 30, 2004; Redeemable BRIDGES Due May 30,
2005 (based on Morgan Stanley High-Tech 35 Index) New York Stock Exchange
5 5/8% Notes Due January 20, 2004; 7.25% Notes Due
June 17, 2029 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 12, 2000 was approximately $66,689,313,224. For purposes
of this information, the outstanding shares of common stock owned by (1)
directors and executive officers of the Registrant and (2) certain senior
officers of certain wholly-owned subsidiaries of the Registrant who are
subject to certain restrictions on voting and disposition, were deemed to be
shares of common stock held by affiliates.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
As of January 12, 2000, there were 1,139,379,666 shares of Common Stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Morgan Stanley Dean Witter & Co. 1999 Annual Report to Shareholders--
Incorporated in part in Form 10-K, Parts I, II and IV.
(2) Morgan Stanley Dean Witter & Co. Proxy Statement for its 2000 Annual
Meeting of Stockholders--Incorporated in part in Form 10-K, Part III.
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PART I
Item 1. Business
Background and Overview
Morgan Stanley Dean Witter & Co. (the "Company"*) is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses:
. securities;
. asset management; and
. credit services.
The Company combines global strength in investment banking and institutional
sales and trading with strength in providing full-service and on-line
brokerage services, investment and global asset management services and,
primarily through its Discover(R) Card brand, quality consumer credit
products. The Company provides its products and services to a large and
diversified group of clients and customers, including corporations,
governments, financial institutions and individuals.**
As of November 30, 1999, the Company had the second largest financial
advisor sales organization in the United States and had 12,674 professional
financial advisors and 475 securities branch offices globally. The Company
also had one of the largest global asset management operations of any full-
service securities firm, with total assets under management or supervision of
$425 billion. In addition, based on its approximately 38.5 million general
purpose credit card accounts as of November 30, 1999, the Company was one of
the nation's largest credit card issuers, with the largest proprietary
merchant and cash access network in the United States.
The Company's securities businesses ("Securities") include:
. Securities underwriting and distribution;
. Financial advisory services, including advice on mergers and
acquisitions, restructurings, real estate and project finance;
. Sales, trading and market-making activities in equity and fixed income
securities, foreign exchange, commodities and derivatives, including
proprietary trading and arbitrage activities and securities lending;
. Full-service and online brokerage services for individual investors and
financial advisory services for high net worth clients; and
. Principal investing, including private equity activities.
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* Unless the context otherwise requires, the term "Company" means Morgan
Stanley Dean Witter & Co. and its consolidated subsidiaries.
** Certain statements contained herein, including (without limitation) certain
statements made under "Legal Proceedings" in Part I, Item 3 of this Report;
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in Part II, Item 7 of this Report
("MD&A"); and "Quantitative and Qualitative Disclosure about Market Risk"
incorporated by reference in Part II, Item 7A of this Report, are forward-
looking statements. The matters referred to in such statements could be
affected by the risks and uncertainties involved in the Company's
businesses, including (without limitation) the effect of economic and
market conditions, the level and volatility of interest rates and currency
values and equity and commodity prices, the actions undertaken by both
current and potential new competitors, the impact of current, pending or
future legislation and regulation both in the United States and throughout
the world, the potential effects of technological changes and other risks
and uncertainties detailed in the MD&A and in "Competition and Regulation"
under "Securities," "Asset Management" and "Credit Services" herein.
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The Company's asset management businesses ("Asset Management") include:
. Asset management products and services for individual investors,
primarily through Morgan Stanley Dean Witter Advisors ("MSDW Advisors")
and Van Kampen Investments ("Van Kampen"); and
. Global asset and portfolio management for institutional investors,
primarily through Morgan Stanley Dean Witter Investment Management
("MSDW Investment Management") and Miller Anderson & Sherrerd ("MAS").
The Company's credit services businesses ("Credit Services") include:
. Discover Card, other proprietary general purpose credit cards and the
Morgan Stanley Dean Witter CardSM ("MSDW Card"); and
. Discover/Novus(R) Network, a proprietary network of merchant and cash
access locations.
The Company conducts its worldwide businesses through several highly
integrated subsidiaries and affiliates, which frequently participate together
in the facilitation and consummation of a single transaction. Because of the
increasing integration of the international financial markets, the Company
manages its principal operating subsidiaries on a coordinated global basis
with a view to the profitability of the enterprise as a whole. Financial
information concerning the Company for each of the three fiscal years ended
November 30, 1999, November 30, 1998 and November 30, 1997 is set forth in the
Consolidated Financial Statements and the Notes thereto in the 1999 Annual
Report to Shareholders and incorporated herein by reference.
The Company believes that technological advancements on the Internet and the
growth of electronic commerce will continue to present both challenges and
opportunities to the Company and could lead to significant changes and
innovations. The Company's initiatives in this area have included Web-enabling
existing businesses and enhancing client communication and access to
information and services. For example, ClientLinkSM, the focal point of the
Company's institutional client connectivity strategy, provides clients with a
private, secure Internet platform that delivers browser-based information,
products and services across many of the Company's business units. The Company
has also been making investments or otherwise participating in alternative
trading systems, electronic communication networks and related businesses or
technologies.
The Company conducts its business from its headquarters in New York City,
its regional offices and branches throughout the United States, and its
principal offices in London, Tokyo, Hong Kong and other financial centers
throughout the world. At November 30, 1999, the Company had 55,288 employees.
The Company is a combination of Dean Witter, Discover & Co. ("Dean Witter
Discover") and Morgan Stanley Group Inc. ("Morgan Stanley") and was formed
pursuant to a merger of equals that was effected on May 31, 1997 (the
"Merger"). The Company was originally incorporated under the laws of the State
of Delaware in 1981, and its predecessor companies date back to 1924.
SECURITIES
The Company provides worldwide financial advisory and capital-raising
services to a diverse group of domestic and international corporate and
institutional clients, primarily through Morgan Stanley & Co. Incorporated
("MS&Co."), Morgan Stanley & Co. International Limited, Morgan Stanley Dean
Witter Japan Limited and Morgan Stanley Dean Witter Asia Limited, among other
subsidiaries. These subsidiaries also conduct sales and trading activities
around the world, both as principal and as agent on behalf of a wide range of
domestic and international institutional investors. The Company also sponsors,
acts as general partner for and invests in several limited partnerships that
conduct a variety of activities broadly described as principal investing. In
addition, the Company provides individual investors with a broad range of
securities and savings products and services, primarily through Dean Witter
Reynolds Inc. ("DWR"). The Company offers its Securities services on a global
basis under the brand name "Morgan Stanley Dean Witter."
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Investment Banking
Underwriting
The Company manages and participates in public offerings and private
placements of debt, equity and other securities worldwide. The Company is a
leading underwriter of common stock, preferred stock and other equity-related
securities, including convertible securities and American Depositary Receipts
("ADRs"). The Company is also a leading underwriter of debt and other fixed
income securities, including investment grade debt, high-yield securities
(debt issued by non-investment grade issuers), tax-exempt securities,
mortgage-related and other asset-backed securities and commercial paper and
other short-term securities.
Financial Advisory Services
The Company provides domestic and international corporate and institutional
clients with a wide range of advisory services on key strategic matters such
as mergers and acquisitions, divestitures, corporate defense strategies, joint
ventures, privatizations, spin-offs, restructurings, proxy and consent
solicitations, tender offers, exchange offers and leveraged buyouts. Other
services include advice with respect to recapitalizations, rights offerings,
dividend policy, valuations, foreign exchange exposure, financial risk
management strategies and long-range financial planning. The Company also
furnishes advice and services in connection with project financings, including
infrastructure, electric power and natural resource projects. In addition, the
Company provides advisory services in connection with the purchase, sale,
leasing and financing of real estate.
Financing and Investing
In connection with its investment banking activities, the Company from time
to time also provides financing or financing commitments to certain companies.
For example, 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 select basis. The Company also conducts senior lending
activities, including the origination and syndication of senior secured loans
of non-investment grade companies.
The Company also makes equity and equity-related investments that arise out
of its worldwide investment banking activities through Princes Gate Investors
II, L.P. ("Princes Gate"), the general partner of which is a subsidiary of the
Company. Princes Gate is a limited partnership with $1 billion in aggregate
investment capacity that was formed to invest in special situation
opportunities. Princes Gate generally makes minority investments that are
short to medium-term in duration. Princes Gate will not make new investments
after February 2000. In January 2000, the Company launched fund-raising for
Princes Gate Investors III, L.P., a successor investment partnership, to
continue Princes Gate's investment focus.
Sales, Trading and Market-Making Activities
Equity
The Company's equity sales, trading and market-making activities cover
domestic and foreign equity and equity-related products, including ADRs, World
Equity Benchmark Shares ("WEBSSM") and restricted/control stock; convertible
debt and preferred securities, including Preferred Equity Redemption
Cumulative Stock ("PERCS(R)"), Performance Equity-linked Redemption Quarterly-
pay Securities ("PERQSSM") and warrants; equity index products; equity swaps;
and options and other structured products. The Company also advises clients in
connection with international index arbitrage, equity repurchases (including
put strategies) and program and block trade execution. In addition, the
Company engages in a variety of proprietary trading and arbitrage activities
in equity securities and equity-related products for its own account. The
Company's equity sales, trading and market-making activities are conducted
both on stock exchanges and in over-the-counter ("OTC") transactions.
The Company is a member of most major stock exchanges around the world,
including the New York Stock Exchange, the London Stock Exchange, the
Frankfurt Stock Exchange, the Tokyo Stock Exchange and the Stock Exchange of
Hong Kong.
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The Company also provides various equity financing services, including prime
brokerage, which offers consolidated clearance and settlement of securities
trades, custody, financing and portfolio reporting services. The Company acts
both as principal and agent in stock borrowing and stock loan transactions in
support of its domestic and international trading and brokerage, asset
management and clearing activities, and as an intermediary between broker-
dealers.
Fixed Income
The Company trades and makes markets in a variety of domestic and
international debt and other fixed income securities and related products,
including non-convertible preferred stock, investment grade corporate debt,
high-yield securities, senior loans, government securities, municipal
securities, mortgage-related and other asset-backed securities, real estate
loan products, commercial paper, money market and other short-term securities,
and interest rate and other swaps. The Company also advises institutional
accounts and other clients on investment strategies, develops swap and other
risk management strategies for its customers, and assists corporations in
their repurchases of debt. The Company is also involved in structuring debt
securities and derivatives with multiple risk/return factors designed to suit
investor objectives, including using repackaged asset vehicles through which
investors can restructure asset portfolios to provide liquidity or
recharacterize risk profiles.
The Company also borrows and lends fixed income securities, and acts as an
intermediary between borrowers and lenders of short-term funds utilizing
repurchase and reverse repurchase agreements.
The Company is one of 30 primary dealers of U.S. government securities
currently recognized by the Federal Reserve Bank of New York and a member of
the selling groups responsible for distributing various U.S. agency and other
debt securities. The Company is also a member of the primary syndicates that
underwrite German government bonds and Japanese government bonds and a primary
dealer in Belgian, Canadian, French, Italian and U.K. government bonds.
Foreign Exchange and Commodities
The Company actively trades numerous foreign currencies on a spot and
forward basis with its customers, for its own account and to hedge its
securities positions, assets or liabilities. In connection with its market-
making activities, the Company takes open positions in the foreign exchange
market for its own account. On a more limited basis, the Company also enters
into forward currency transactions both as agent and as principal. The Company
is a leading participant in currency futures trading at the International
Monetary Market division of the Chicago Mercantile Exchange and is a leading
dealer in OTC and exchange-traded currency options worldwide.
The Company also trades as principal in the spot, forward and futures
markets in a variety of commodities, including precious metals, base metals,
crude oil, oil products, natural gas, electric power and related energy
products. The Company is an active market-maker in swaps and OTC options on
commodities such as metals, crude oil, oil products, natural gas and
electricity, and offers a range of hedging programs to customers relating to
production, consumption and reserve/inventory management. The Company is an
electricity power marketer in the United States and owns a majority equity
interest in an exempt wholesale generator from which the Company is the
exclusive purchaser of electric power.
Derivatives
The Company offers to clients and takes proprietary positions in a variety
of financial instruments known as "derivative products" or "derivatives."
These products may be in the form of exchange-traded futures and options or
OTC forwards, options, swaps, caps, collars, floors, swap options or similar
instruments which derive their value from underlying interest rates, foreign
exchange rates, commodities, equity instruments, equity indices or other
assets. Derivatives facilitate risk transfer and enhance liquidity in the
marketplace, and the origination
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and trading of derivatives are often utilized to adjust risk profiles, such as
exposure to interest rate or currency risk, or to take proprietary positions.
In addition, the Company uses derivative products to assist in asset and
liability management and to reduce borrowing costs. All of the Company's
trading-related business units use derivative products as an integral part of
their respective trading strategies, and these products are also used
extensively to manage the market exposure that results from proprietary
trading activities. In addition, as a dealer in certain derivative products
(most notably interest rate and currency swaps), the Company structures and
enters into derivative contracts to meet a variety of investment, risk
management and other financial objectives of its clients. Through a triple-A
rated subsidiary of the Company (Morgan Stanley Derivative Products Inc.), the
Company also enters into swap and related derivative transactions with certain
clients seeking a triple-A rated counterparty.*
Trading Risk and Risk Management
The market for some of the securities in which the Company trades, invests
and makes markets, including high-yield debt securities, senior loans, real
estate loan products, securities or obligations of emerging market issuers or
counterparties and certain derivative instruments, has been, and may in the
future be, characterized by periods of illiquidity. In addition, the Company,
through its market-making and trading activities, may be the sole or principal
source of liquidity in certain issues and, as a result, may substantially
affect the prices at which such issues trade. To mitigate the potential impact
on the Company's operating results of the greater risks inherent in these
securities and other instruments, the Company monitors and manages its total
inventory positions in a manner consistent with its overall risk management
policies and procedures.
The Company's use of derivative products may subject the Company to various
additional risks, although in many cases derivatives serve to reduce, rather
than increase, the Company's exposure to losses from market, credit and other
risks. In times of market stress, liquidity in certain derivatives positions,
as well as in underlying cash instruments, may be reduced. The Company manages
the risks associated with derivative products in a manner consistent with its
overall risk management policies. Exposure to changes in interest rates,
foreign currencies and other factors are managed on an individual product
basis, generally through offsetting or other positions in a variety of
financial instruments and derivative products. In addition, in connection with
certain derivatives, the Company has agreements with customers and
counterparties that permit the Company to close out positions or require
additional (and, in many cases, excess) collateral if certain events occur. In
certain instances, the Company may also limit the types of derivative products
that may be traded in a particular account.
At any given point in time, the Company may hold, or be committed to
purchase, large positions in certain types of securities or securities of a
single issuer, sovereign governments, issuers located in a particular country
or geographic area, public and private issuers in developing countries or
issuers engaged in a particular industry. In addition, a large portion of the
collateral held by the Company for reverse repurchase agreements and bonds
borrowed consists of securities issued by the U.S. government, federal
agencies or non-U.S. governments.
See also "Risk Management" incorporated by reference in Part II, Item 7A of
this Report.
MSCI
Morgan Stanley Capital International Inc. ("MSCI"), a majority-owned
subsidiary of the Company, markets and distributes over 3,500 country,
industry and regional equity and fixed income benchmark indices (including The
World, EAFE(R) and Emerging Market Free Indices) covering 51 countries, and
has a 30-year historical database that includes fundamental and valuation data
on over 5,500 companies in developed and emerging market countries. Investment
professionals around the world use MSCI data for purposes such as performance
measurement, security valuation and asset allocation.
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* For a detailed discussion of the Company's use of derivatives, see "MD&A--
Derivative Financial Instruments" incorporated by reference in Part II,
Item 7 of this Report, "Notes to Consolidated Financial Statements, Note 9"
incorporated by reference in Part II, Item 8 of this Report and "Notes to
Consolidated Financial Statements, Note 6" incorporated by reference in
Part II, Item 8 of this Report.
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Principal Investing
The Company's principal investing activities include, among other things,
making commitments to purchase, and making negotiated investments in, equity
and debt securities in connection with merger, acquisition, restructuring,
private investment and leveraged capital transactions, either for the accounts
of private investment funds in which the Company participates or to a lesser
extent for its own account. These activities include venture capital
investments and investments in real estate assets, portfolios and operating
companies.
The Company generally acts as general partner of the private investment
funds through which certain of its principal investing activities are
conducted, and typically also contributes a minority of the capital of such
funds. Clients of the Company are limited partners in the funds. The Company
normally receives management fees for operating the private investment funds,
in addition to a share of profits when investment performance criteria have
been met.
The Company conducts a substantial portion of its private equity business
through three groups of investment funds, Capital Partners, Venture Partners
and Emerging Markets (collectively, the "Private Equity Funds"). The Private
Equity Funds invest on a global basis in private equity and equity-related
securities of companies in a wide range of industries. Collectively, the
Private Equity Funds currently have $4 billion in capital commitments. As of
November 30, 1999, the Private Equity Funds had investments with $1.7 billion
of cost basis related to 91 companies.
Morgan Stanley Real Estate Fund III, L.P. ("MSREF III") was formed in 1997
with approximately $2.1 billion in capital commitments to invest in U.S and
international real estate assets and companies. As of November 30, 1999, MSREF
III and its predecessor funds (which are no longer making new investments) had
$1.5 billion of cost basis in real estate assets in their portfolios relating
to 69 investments.
Morgan Stanley Real Estate Special Situations Investment Program ("Special
Situations") was created in 1997 as a series of separate accounts managed by
MSDW Investment Management with $375 million in capital commitments to invest
in private equity or equity-related securities of real estate companies
(primarily real estate investment trusts). As of November 30, 1999, Special
Situations had $294 million of cost basis in its portfolios related to 14 real
estate companies.
From time to time, the Company expects to sponsor additional private
investment funds and commit to invest in such funds.
Equity securities purchased in principal investment transactions generally
are held for appreciation, are not readily marketable and do not provide
dividend income. It is not possible to determine when or if the Company will
realize the value of the investments, including any appreciation, dividends or
other distributions thereon, since, among other factors, such investments are
generally subject to restrictions on such realization relating to the
circumstances of particular transactions. Moreover, estimates of the eventual
realizable value of the investments fluctuate significantly over time in light
of business, market, economic and financial conditions generally or in
relation to specific transactions or other factors, including the financial
leverage involved in the underlying transactions.
The Company may also underwrite, trade, invest and make markets in, and
publish research with respect to, securities and senior loans issued by
companies in which the Company or the private investment funds have invested.
In addition, the Company may provide financial advisory services to, and/or
have securities and commodity trading relationships with, these entities. From
time to time, the Company may provide loans, financing commitments or other
extensions of credit, including on a subordinated and interim basis, to
companies (which may otherwise be leveraged) associated with its principal
investing activities.
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Securities Services to Individual Investors
Private Client Group
The Company's individual securities business, the Private Client Group,
offers clients, principally through DWR, a broad range of securities and
investment products and services that are supported by the Company's
investment banking, research, asset management, execution and operational
resources. At November 30, 1999, the Company had the second largest financial
advisor sales organization in the United States and had 12,674 financial
advisors located in 475 securities branch offices globally. The Company
provided securities and investment services to approximately 4.5 million
client accounts having assets of $583 billion at November 30, 1999.
The Company focuses on providing its clients with comprehensive financial
planning services, tailored to meet individual investment goals and risk
profiles. The Company believes that knowledgeable investment professionals are
instrumental to effectively serving a large portion of its individual investor
client base and continually seeks to grow and train its financial advisor
sales organization.
The Company provides execution, trading and research services to its
individual clients for listed equity securities, OTC equity securities,
options and ADRs. The Company also provides execution, trading and research
services to individual clients for a broad range of fixed income securities,
including U.S. government obligations, mortgage and other asset-backed
securities, corporate bonds, preferred stocks, municipal securities and
certificates of deposit. The Company's fixed income trading activity on behalf
of individual investors focuses primarily on establishing and maintaining
inventory based upon actual and anticipated orders from its clients, rather
than risk-oriented proprietary trading. The Company's financial advisor sales
force works together with its institutional fixed income platform in order to
provide mid-sized institutions with greater access to the Company's
comprehensive products and research capabilities.
The Company also provides its clients with an extensive array of investment
and credit products and services, including mutual funds, unit investment
trusts, insurance products, financial planning, retirement planning, personal
trust and estate planning, tax planning, credit management and account
services. The Company's Active Assets Account(R) ("AAA Account") permits
clients to consolidate their financial assets into a single account, invest in
a wide variety of investment products and automatically invest funds daily in
a variety of money market options, including an account insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Company's AAA Account customers
have access to ClientServSM, the Company's Internet technology service, which
allows them to track their accounts on-line, access research reports and real-
time securities quotes, create customized personal portfolio monitors and
chart the performance of various securities over time. The Company also offers
customers a broad array of investment choices for individual retirement
planning, and provides individual annuities and complete defined contribution
plan services for businesses, including 401(k) plans.
The Company also provides investment consulting services that assist clients
in analyzing their investment objectives and in selecting investment advisory
services offered by unaffiliated investment advisors. Through its wholly-owned
insurance agency subsidiaries, the Company also acts as a national general
agency for leading insurance carriers to meet the insurance and annuity needs
of individual investors. The Company originates and services a broad range of
consumer loans secured by mortgages on residential properties. The Company
also offers trust and fiduciary services to both individual and corporate
clients, primarily trustee services for personal trusts and tax-qualified
retirement plans.
Through Morgan Stanley Dean Witter Online, Inc. (formerly known as Discover
Brokerage Direct Inc.) ("MSDW Online"), a wholly-owned subsidiary, the Company
provides services to the growing number of consumers utilizing alternatives to
the traditional brokerage channel to obtain financial and other investment
services. MSDW Online permits customers to invest and trade directly through
its Internet site, www.msdwonline.com, through automated telephone trading,
wireless trading or through a registered
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representative. The financial services provided by MSDW Online include a broad
range of investment options, detailed account information, real-time
securities price quotes, graphs and portfolio performance information and
trade execution at competitive rates. Clients can also subscribe to
proprietary equity research reports and analysts' ratings. MSDW Online also
offers customers extended trading hours through MarketXT, the ability to trade
U.S. treasury securities and certain municipal securities on-line every
weekday, 24 hours per day and, to qualified customers, access to initial
public offerings and other issues underwritten by the Company.
In October 1999, the Company launched ichoiceSM, the service platform for
individual investors that combines the products and services offered by the
Private Client Group with the technological capabilities of MSDW Online. The
Company's ichoice platform offers clients the ability to select the particular
financial service relationship that best suits their needs. Investors may
choose the traditional full-service relationship, including personalized
professional advice from a financial advisor and transactions on a per trade
basis, enhanced by the Internet technology services of ClientServ. Investors
who want to combine a full-service relationship with fee-based pricing and the
flexibility to trade on-line can select a Morgan Stanley Dean Witter ChoiceSM
account. This account offers clients virtually unlimited transactions for a
fee based on eligible assets and allows them to place trades either through
their financial advisor or on-line through ClientServ. Self-directed investors
who wish to make decisions independently, without professional advice, may
open an MSDW Online account and execute transactions on their own for a fixed
fee per trade. The Company expects the integration of its full-service and on-
line businesses to continue in subsequent phases of its ichoice platform
rollout.
Private Wealth Management
The Company's Private Wealth Management Group ("PWM") is a financial
advisory group that provides solutions to individuals, families and
foundations who control significant pools of wealth. PWM has offices in the
United States, Europe and Asia and provides access to the Company's trading
capabilities, fundamental research and analytical products, as well as to its
securities underwritings. PWM financial advisors manage specific financial
asset classes and provide tailored global asset allocation strategies for its
clients. PWM also offers private investors the opportunity to co-invest with
the Company in its principal investing activities and specialized funds.
Private banking services and other PWM financial advisory services are
provided to select international clients through Bank Morgan Stanley AG, the
Company's Swiss bank subsidiary.
International Private Client Group
The International Private Client Group encompasses all of the Company's
international activities relating to individual securities, asset management
and electronic commerce. These activities include all non-U.S. PWM efforts
detailed above. In 1999, the Company strengthened its initiative to expand its
businesses internationally with its acquisition of AB Asesores, the largest
independent financial services firm in Spain, and its agreement to acquire a
minority stake in Area S.p.A., a leading Italian independent retail financial
advisory firm. The Company also formed an alliance with Sanwa Bank to pursue
retail brokerage and asset management opportunities in Japan. See also "ASSET
MANAGEMENT."
Research
The Company's global research department ("Research"), comprised of
economists, industry analysts and strategists, is actively engaged in a wide
range of research activities. Research produces reports and studies on the
economy, financial markets, portfolio strategy, technical market analyses and
industry developments. It analyzes worldwide trends covering a broad range of
industries and more than 2,000 individual companies, half of which are located
outside of the United States. Research also provides analyses and forecasts
relating to economic and monetary developments affecting matters such as
interest rates, foreign currencies and securities and economic trends. Support
for the sales and trading of fixed income securities is also provided in the
form of quantitative and credit analyses and the development of research
products that are distributed to the Company's individual and institutional
clients. Timely data contained in Research's numerous publications, such as
the
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Investment Strategy Chartbook and The Competitive Edge, are disseminated to
both individual and institutional investors through a proprietary database
accessible via the Internet and through the Company's financial advisors. In
addition, Research provides analytical support and publishes reports on
mortgage-related securities and the markets in which they are traded and does
original research on valuation techniques.
Operations and Information Processing
The Company executes and clears all transactions conducted by its Securities
businesses (delivery and receipt of securities and transfer of related funds)
through its own facilities and through memberships in various clearing
corporations. In order to minimize the risks of systems failures, the Company
maintains redundant processing systems.
Competition and Regulation
Competition
The Company encounters intense competition in all aspects of its Securities
business and competes directly in the United States and on a worldwide basis
with other securities and financial services firms. Among the principal
competitive factors affecting the Company's Securities businesses are the
Company's reputation, the quality of its professionals and other personnel,
its products and services, relative pricing and its capability in originating
and marketing innovative products and services. The Company's private
investment funds compete for investors and for investment opportunities with
other private investment funds, some of which are sponsored by financial
institutions, and in specific industries with companies that operate in such
industries.
The Company has experienced increased competition for qualified employees in
recent years, including from companies engaged in Internet-related businesses
and private equity funds, in addition to the traditional competition for
employees in the financial services, insurance and management consulting
industries. The Company's ability to sustain or improve its competitive
position will substantially depend on its ability to continue to attract and
retain qualified employees. The Company's competitive position will also be
affected by its ability to access capital at competitive rates (which is
generally dependent on the Company's credit ratings) and to commit capital
efficiently, particularly in its capital-intensive investment banking and
sales, trading and market-making activities.
In addition to competition from firms traditionally engaged in the financial
services business, there has been increasing competition in recent years from
other sources, such as commercial banks, insurance companies, on-line
financial services providers, sponsors of mutual funds and other companies
offering financial services both in the United States and on a worldwide
basis. The financial services industry has also experienced consolidation and
convergence in recent years, as institutions involved in a broad range of
financial services industries, such as investment banking, brokerage, asset
management, commercial banking and insurance have merged. This convergence
trend is expected to continue, and could result in the Company's competitors
gaining greater capital and other resources, a broader range of products and
services and/or more geographic diversity. In November 1999, the Gramm-Leach-
Bliley Act was passed in the United States, effectively repealing certain
sections of the 1933 Glass-Steagall Act. Its passage allows commercial banks,
securities firms and insurance firms to affiliate, which may accelerate
consolidation and lead to increasing competition in markets traditionally
dominated by investment banks and retail securities firms.
The complementary trends in the financial services industry of consolidation
and globalization also present technological, risk management and other
infrastructure challenges that will require effective resource allocation in
order for the Company to remain competitive.
Regulation
The Company's Securities business is, and the securities, commodities and
financial services industries generally are, subject to extensive regulation
in the United States, at both the federal and state levels, and
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internationally. The Company is subject to the rules and regulations of the
various regulatory bodies that are charged with safeguarding the integrity of
the securities and other financial markets and with protecting the interests
of customers participating in those markets.
MS&Co., DWR and MSDW Online are registered as broker-dealers with the
Securities and Exchange Commission ("SEC") and in all 50 states, the District
of Columbia and Puerto Rico, and are members of the National Association of
Securities Dealers, Inc. ("NASD"). MS&Co. and DWR are also members of the New
York Stock Exchange ("NYSE"). Broker-dealers are subject to regulation by
securities administrators in those states in which they conduct business.
Broker-dealers are also subject to regulations that cover all aspects of the
securities business, including sales and trading practices, use and
safekeeping of customers' funds and securities, capital structure, record-
keeping and the conduct of directors, officers and employees. The SEC, other
governmental regulatory authorities, including state securities commissions,
and self-regulatory organizations may institute administrative proceedings
against broker-dealers or members, which could result in censure, fine, the
issuance of cease-and-desist orders, the suspension or expulsion from the
securities industry of such broker-dealer or member or its officers or
employees, or other similar consequences. Occasionally, the Company's
subsidiaries have been subject to investigations, other proceedings and fines
relating to infractions of various regulations relating to their activities as
broker-dealers, none of which, to date, has had a material adverse effect on
the Company or its business.
Margin lending by certain subsidiaries is subject to the margin rules of the
Federal Reserve Board that restrict the amount they may lend in connection
with certain purchases of securities by customers, and such subsidiaries are
also required by NYSE rules to impose maintenance requirements on the amount
of securities contained in margin accounts. These rules augment the Company's
margin policies, which in many cases are more stringent.
As futures commission merchants, MS&Co. and DWR are registered with the
Commodity Futures Trading Commission ("CFTC"), and their activities in the
futures and options-on-futures markets are subject to regulation by the CFTC
and various domestic boards of trade and other commodity exchanges. Certain
subsidiaries of the Company are registered as commodity trading advisers
and/or commodity pool operators with the CFTC. The Company's futures and
options-on-futures business is also regulated by the National Futures
Association, a not-for-profit membership corporation that has been designated
a registered futures association by the CFTC and of which MS&Co. and DWR are
members.
With respect to OTC derivatives, the Company is a member of the
International Swaps and Derivatives Association ("ISDA"), the Group of 30 and
the Derivatives Policy Group, a group of securities firms formed at the
request of the SEC and CFTC to address concerns regarding the OTC derivatives
activities of U.S. broker-dealer affiliates not subject to direct regulatory
oversight. The Derivatives Policy Group has agreed to adhere to a voluntary
oversight framework relating to reporting, capital, management controls and
counterparty relationships.
The Company is also a member of the Counterparty Risk Management Policy
Group that was formed in January 1999 by a group of twelve major international
commercial and investment banks. The group was formed with the objective of
strengthening practices relating to the management of market, counterparty
credit and liquidity risk. In June 1999, the group released its report and
recommendations, which include enhanced information sharing between
counterparties, improved internal risk transparency for senior managements and
regulators and stronger market-wide conventions for key credit documentation
practices.
Certain of the Company's government securities activities are conducted
through Morgan Stanley Market Products Inc., a member of the NASD and
registered as a government securities broker-dealer with the SEC and in
certain states. The Department of the Treasury has promulgated regulations
concerning, among other things, capital adequacy, custody and use of
government securities and transfers and control of government securities
subject to repurchase transactions. The rules of the Municipal Securities
Rulemaking Board, which are enforced by the NASD, govern the municipal
securities activities of the Company.
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The Company's Securities business is also subject to extensive regulation by
various non-U.S. governments, securities exchanges, central banks and
regulatory bodies, especially in those jurisdictions in which the Company
maintains an office. For example, the Company's Securities business in the
U.K. is regulated by the Securities and Futures Authority and a number of
exchanges, including the London Stock Exchange and the London International
Financial Futures and Options Exchange; the Deutsche Borse AG, the
Bundesaufsichtsamt fur das Kreditwesen (the Federal Banking Supervisory
Authority) and Eurex Deutschland, among others, regulate the Company's
activities in the Federal Republic of Germany; the Company's Securities
business in Japan is subject to Japanese law applicable to foreign securities
firms and related regulations of the Financial Supervisory Agency and the
Japanese Ministry of Finance and to the rules of the Bank of Japan, the
Japanese Securities Dealers Association and several Japanese securities and
futures exchanges, including the Tokyo Stock Exchange, the Osaka Securities
Exchange and the Tokyo International Financial Futures Exchange; the Monetary
Authority of Singapore and the Singapore International Monetary Exchange Ltd.
regulate the Company's business in Singapore; and the Company's Securities
operations in Hong Kong are regulated by the Securities and Futures
Commission, The Stock Exchange of Hong Kong Ltd. and the Hong Kong Futures
Exchange Ltd.
As registered broker-dealers and member firms of the NYSE, certain
subsidiaries of the Company, including MS&Co. and DWR, are subject to the
SEC's net capital rule, and, as futures commission merchants, MS&Co. and DWR
are subject to the net capital requirements of the CFTC and various commodity
exchanges. Many non-U.S. securities exchanges and regulatory authorities also
either have imposed or are imposing rules relating to capital requirements
that apply to subsidiaries of the Company (such as rules that have been
promulgated in connection with the European Union Capital Adequacy Directive),
including certain European subsidiaries that are considered banking
organizations under local law. These rules, which specify minimum capital
requirements, are designed to measure general financial integrity and
liquidity and require that at least a minimum amount of assets be kept in
relatively liquid form. Compliance with the capital requirements may limit
those operations of the Company that require the intensive use of capital,
such as underwriting, principal investing and trading activities, and the
financing of customer account balances. Such requirements also restrict the
Company's ability to withdraw capital from its subsidiaries, which in turn may
limit the Company's ability to pay dividends, repay debt or redeem or purchase
shares of its outstanding capital stock. A change in such rules or the
imposition of new rules affecting the scope, coverage, calculation or amount
of capital requirements, or a significant operating loss or any unusually
large charge against capital, could adversely affect the ability of the
Company to pay dividends or to expand or even maintain its present levels of
business.
New legislation or regulation, including any relating to the activities of
affiliates of broker-dealers, changes in rules promulgated by the SEC or other
U.S. or international governmental, regulatory or self-regulatory authorities
(such as changes to the U.S. Internal Revenue Code and related regulations or
rules promulgated by the Financial Accounting Standards Board) or changes in
the interpretation or enforcement of existing laws and regulations, may
materially adversely affect the financial condition or results of operation of
the Company.
The Company's subsidiaries which act as general partners of the private
investment funds are generally required to register as investment advisors
with the SEC. See also "ASSET MANAGEMENT--Competition and Regulation--
Regulation." By virtue of the Company's affiliation with the private
investment funds that own equity interests in companies that operate in
certain regulated industries (e.g., insurance or broadcasting), or that are
subject to regulation in non-U.S. jurisdictions, the Company could be subject
to additional regulation applicable to such industries or in such
jurisdictions.
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ASSET MANAGEMENT
The Company manages and administers a wide range of asset management
products for individual investors, primarily through MSDW Advisors and Van
Kampen, and provides global asset and portfolio management to a wide range of
institutional investors through MSDW Investment Management. At November 30,
1999, the Company had $425 billion of assets under management or supervision.
Morgan Stanley Dean Witter Advisors
MSDW Advisors develops, markets and manages a broad spectrum of proprietary
open- and closed-end mutual funds and provides professional money management
services on a customized basis to affluent individuals, institutional
investors and retirement plan sponsors. MSDW Advisors assets under management
include equities, taxable and tax-exempt fixed income securities and money
market instruments. At November 30, 1999, there were 127 funds and portfolios
with assets of approximately $142 billion for which MSDW Advisors and Morgan
Stanley Dean Witter Services Company Inc., a wholly-owned subsidiary of the
Company, served in various investment management and administrative
capacities.
Morgan Stanley Dean Witter Distributors Inc., a wholly-owned subsidiary of
the Company and a registered broker-dealer ("MSDW Distributors"), distributes
shares of MSDW Advisors products that are open-end investment companies. MSDW
Distributors has entered into agreements with DWR and other selected dealers
for the marketing and distribution of such products. DWR, its affiliates and
other selected dealers are compensated for their distribution-related expenses
through contingent deferred sales charges, front-end sales charges and fees
authorized pursuant to the provisions of Rule 12b-1 under the Investment
Company Act of 1940.
Van Kampen Investments
Van Kampen operates a family of open- and closed-end mutual funds for
individual and institutional shareholders, and markets and provides ongoing
evaluation and credit review for equity and fixed income unit investment
trusts ("UITs"). Sponsored fund assets cover a broad range of taxable and tax-
exempt domestic and international products. Sponsored UITs include portfolios
of equity securities and nationally diversified and single-state insured and
uninsured municipal securities and, depending on market demand, also include
portfolios of government securities, insured and uninsured corporate debt
securities and global fixed income securities. At November 30, 1999, Van
Kampen had more than 50 open-end funds and 39 closed-end funds and 2,700
series of UITs, and Van Kampen and its affiliates managed, administered or
supervised approximately $88 billion in assets.
Van Kampen distributes its investment products through a large and
diversified network of unaffiliated national and regional broker-dealers,
commercial banks and thrifts, insurance companies and their affiliated broker-
dealers and financial planners ("retail distribution firms"), as well as the
Company's financial advisors. A relatively small number of retail distribution
firms account for a substantial portion of sales of Van Kampen products, and
Van Kampen has proprietary and preferred distribution relationships with
several unaffiliated retail distribution firms.
Morgan Stanley Dean Witter Investment Management
MSDW Investment Management, through its various advisory entities, including
MAS, primarily manages financial assets for institutions around the world,
including pension funds, corporations, non-profit organizations and
governmental agencies. MSDW Investment Management offers product lines
covering a full range of equity, fixed income and alternative investments in
developed and emerging markets, and a variety of investment styles including
value, growth and blended; active and passive management; and diversified and
concentrated portfolios. Products are available through separate account
management, pooled vehicles, U.S. and non-U.S. mutual funds and variable
annuities. See also "International Private Client Group." A broad range of
fiduciary services for pension funds and trusts is also available through MSDW
Investment Management.
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At November 30, 1999, MSDW Investment Management had assets under management
or supervision of approximately $167 billion, including approximately $68
billion related to international products. Approximately $39 billion of these
assets related to mutual funds and approximately $128 billion related to
separate accounts, pooled vehicles and other arrangements.
The Company distributes certain domestic and international investment
products advised or sub-advised by MSDW Investment Management through the
distribution networks of MSDW Advisors and Van Kampen.
Competition and Regulation
Competition
The Company's Asset Management business competes in the highly competitive
investment management industry, in which approximately 7,932 open-end
investment management companies held over $6.4 trillion in assets as of
November 30, 1999. Competition in the sale of mutual funds is affected by a
number of factors, including investment objectives and performance,
advertising and sales promotion efforts, level of fees, distribution channels
and types and quality of services offered. In addition to fund products
offered by other broker-dealers, the funds offered by the Company compete with
funds sold directly by investment management firms and insurance companies, as
well as with other investment alternatives sold by such companies and by banks
and other financial institutions.
Regulation
The Company and certain subsidiaries, including MS&Co., DWR, and those
related to MSDW Advisors, Van Kampen and MSDW Investment Management, are
registered as investment advisers with the SEC and in certain states.
Virtually all aspects of the Company's investment advisory business are
subject to various federal and state laws and regulations. These laws and
regulations are primarily intended to benefit the investment product holder
and generally grant supervisory agencies and bodies broad administrative
powers, including the power to limit or restrict the Company from carrying on
its investment advisory business in the event that it fails to comply with
such laws and regulations. Possible sanctions which may be imposed for such
failure include the suspension of individual employees, limitations on the
Company's engaging in the investment advisory business for specified periods
of time, the revocation of registrations, other censures and fines.
The Company's Asset Management business is also subject to regulation
outside the United States. For example, the Investment Management Regulatory
Organization Limited regulates the Company's business in the United Kingdom;
the Japanese Ministry of Finance and the Japan Securities Investment Advisors
Association regulates the Company's business in Japan; the Securities and
Exchange Board of India regulates the Company's business in India; and the
Monetary Authority of Singapore regulates the Company's business in Singapore.
Morgan Stanley Dean Witter Trust FSB ("MSDWT"), a subsidiary of the Company
that provides trust, fiduciary and transfer agent services, is a federally
chartered savings bank and is subject to comprehensive regulation and periodic
examination by the federal Office of Thrift Supervision ("OTS") and by the
FDIC. MSDWT is also a registered transfer agent, subject to regulation and
examination in such capacity by the SEC. As a result of its ownership of
MSDWT, the Company is registered with the OTS as a unitary savings and loan
holding company ("SLHC") and subject to regulation and examination by the OTS
as a SLHC.
CREDIT SERVICES
Based on its approximately 38.5 million general purpose credit card accounts
as of November 30, 1999, the Company, through its Credit Services business,
was one of the largest single issuers of general purpose credit cards in the
United States. Credit Services' proprietary general purpose credit card
business is operated by the Company's Discover Financial Services business
unit, which also operates the Discover/Novus Network, the Company's
proprietary merchant and cash access network. The credit cards offered by
Discover Financial Services include the Discover Card, the Discover Platinum
Card ("Discover Platinum"), the MSDW Card, the Private Issue Card(R) by
Discover ("Private Issue"), and co-branded and affinity cards.
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Discover Financial Services
Discover Financial Services offers general purpose credit cards designed to
appeal to different market segments of consumers for use on the Discover/Novus
Network. The Discover/Novus Network is the largest independent credit card
network in the United States, consisting of more than 3.5 million merchant and
cash access locations accepting credit cards carrying the Discover/Novus logo.
Discover Financial Services offers several brands of proprietary cards,
including the Discover Card, Discover Platinum and Private Issue, as well as
co-branded and affinity cards.
MSDW Card, the Company's first credit card issued outside of the United
States, was introduced in the United Kingdom in the latter half of fiscal
1999. The MSDW Card is issued through the Company's wholly-owned subsidiary,
Morgan Stanley Dean Witter Bank Limited ("MSDW Bank Limited"), on the
Europay/MasterCard network.
Discover Financial Services offers cardmembers various other financial
services, including credit insurance and card registration to protect against
losses in connection with card theft or loss. Cardmembers are also offered
money market and time deposit accounts.
The Company records revenues from finance charges on cardmembers' revolving
balances, fees paid by merchants for transactions effected through the
Discover/Novus Network, transaction fees paid by cardmembers for cash
advances, late payment fees, over-limit fees, fees for returned checks and
fees from various product enhancements (e.g., credit life insurance).
Most of the Company's proprietary general purpose credit cards are issued by
Greenwood Trust Company ("Greenwood Trust"), an indirect wholly-owned
subsidiary of the Company that is a state chartered bank under the laws of the
State of Delaware. Because of certain banking law restrictions, most of the
Company's proprietary general purpose credit cards have been limited to use in
personal and household, as opposed to commercial, transactions. See
"Competition and Regulation--Regulation."
The Company has made recent enhancements in its customer services.
Cardmembers may register their account on-line with the Discover Card Account
Center which offers a menu of free e-mail notifications or reminders to
regularly inform cardmembers about the status of their accounts through the
Discover Inter@ctive feature. Types of notifications include reminders that a
cardmember's credit limit is being approached or that a minimum payment is
due. In addition, cardmembers may view detailed account information on-line,
such as recent transactions and account payments. Cardmembers may pay their
Discover Card bills on-line via the SmartCheckSM payment option at no cost and
receive exclusive discounts and special Cashback Bonus(R) awards by shopping
on-line at the Internet ShopCenterSM. Cardmembers may also use the Discover
Desk$hopSM virtual credit card to simplify shopping on-line and to access the
Discover Card Account Center.
Merchants
Discover Card, Discover Platinum and Private Issue, as well as the Company's
other proprietary general purpose credit cards (exclusive of the MSDW Card),
are accepted only by merchants who are members of the Discover/Novus Network.
Since its establishment in 1986, the Discover/Novus Network has expanded
rapidly and currently includes more than 3.5 million merchant and cash access
locations across the United States.
Discover Financial Services operates both the issuing and acquiring
businesses in the United States and accordingly retains the entire merchant
fee paid for transactions effected through the Discover/Novus Network. Because
of its independence from the bankcard associations, Discover Financial
Services has greater flexibility in its relationships with merchants than
members of bankcard associations. Discover Financial Services believes that
this enables it to better maintain and expand its merchant base by allowing it
to provide customized programs in such areas as processing and to otherwise
tailor program terms to meet specific merchant needs.
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Discover Financial Services employs its own national sales and support
force, as well as some independent sales agents, to increase and maintain its
merchant base. In addition, the Company conducts telemarketing operations for
the purpose of acquiring merchant business.
Marketing
The Company, operating through Greenwood Trust and other domestic banking
subsidiaries that issue its proprietary general purpose credit cards, is
distinguished from credit card issuers that are members of bankcard
associations in that it directly controls the brand image, features, service
level and pricing of the Discover Card and other proprietary general purpose
credit cards to both cardmembers and merchants. In contrast, bankcard
association credit card issuers compete directly with other issuers using the
same brands and sharing common processes. The Company believes that its
ability to control its proprietary credit cards provides competitive
advantages that are not available to issuers of bankcard association credit
cards, including efficiencies in operations, product positioning and marketing
execution. The Company also has the ability to direct and deliver a
consistent, nationwide message for Discover Card and its other proprietary
general purpose credit cards. Because the Company manages all aspects of both
the cardmember and merchant relationship with respect to its proprietary
credit card programs, it can determine and promote its advertising campaign
and control the campaign's content, timing and promotional features.
The Company promotes its proprietary general purpose credit cards through
the use of different and distinctive features that are designed to appeal to
different consumer bases. Discover Card, Discover Platinum and Private Issue
offer the Cashback Bonus award and no annual fee. Pursuant to the Cashback
Bonus award program, each year the Company pays cardmembers up to one percent
of their purchase amounts based upon their annual level of purchases. The
Cashback Bonus award is remitted to cardmembers in the form of a check or as a
credit to their accounts. If the Cashback Bonus award is five dollars or more,
Discover Platinum and Private Issue offer cardmembers the opportunity to
exchange their Cashback Bonus award checks for certificates from participating
merchants valued at double the check amounts. Private Issue cardmembers may
also elect a lower interest rate in lieu of participation in the Cashback
Bonus award program.
Credit
Credit reviews are conducted for all cardmembers in order to establish that
standards of ability and willingness to pay are met. Applications that are not
pre-selected are evaluated by using a credit scoring system (a statistical
evaluation model) that is based on information provided by applicants and by
the credit bureaus. Applications not approved under the credit scoring system
may be selectively reviewed and approved by the Company's credit analysts.
Applicants receiving pre-selected solicitations must satisfy criteria
specified by Discover Financial Services. All recipients of pre-selected
solicitations have been pre-screened through credit bureaus utilizing industry
and customized models. Pre-screening is a process by which an independent
credit reporting agency identifies individuals satisfying creditworthiness
criteria supplied by the Company (in the form of a point scoring model or
other screening factors) that are intended to provide a general indication,
based on available information, of such person's ability and willingness to
pay their financial obligations. Recipients who respond to the Company's pre-
selected solicitations are post-screened prior to enrollment in order to
confirm continued satisfaction of the Company's creditworthiness criteria.
Each cardmember's credit line is reviewed at least annually and may be
reviewed more frequently if requested by the cardmember or if the Company
deems more frequent review appropriate. Such reviews include scoring the
cardmember's payment behavior on the applicable account as well as reviewing
the cardmember's credit bureau record. Actions that may result from an account
review include raising or lowering the cardmember's credit line or closing the
account. In addition, the Company, on a portfolio basis, performs monthly
monitoring and review of consumer behavior and risk profiles.
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Operations
The Company performs the functions required to service and operate its
proprietary cards' accounts either by itself or through processing agreements
that the Company has with third parties. These functions include new account
solicitation, application processing, new account fulfillment, transaction
authorization and processing, cardmember billing, payment processing, fraud
prevention and investigation, cardmember service and collection of delinquent
accounts. The Company maintains several operations centers throughout the
United States and an operations center in the United Kingdom. Discover
Financial Services' operations are also supported by systems at computer
centers operated by an unaffiliated communication services provider.
Competition and Regulation
Competition
The Company's Credit Services business competes in the highly competitive
credit card industry. The credit card market includes other bank-issued credit
cards (the vast majority of which bear the MasterCard or Visa servicemark) and
charge cards and credit cards issued by travel and entertainment companies.
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 and
usage 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.
As new credit card issuers seek to enter the market and established issuers
seek to expand, sometimes through acquisitions of other credit card issuers or
portfolios, the credit card industry has seen increased use of advertising,
targeted marketing and pricing competition in interest rates, annual fees and
reward programs. More recently, issuers have increased their efforts to
attract balances from competing sources of credit via low-priced balance
transfer programs. In addition, issuers have aggressively marketed co-branded
credit cards, which offer various benefits relating to the business of the
issuer's co-branding partner. The Company believes its proprietary merchant
base enables it to promote its proprietary card brand names on a national
basis, thereby building customer acceptance and use of these cards.
Regulation
The Company conducts portions of its Credit Services business in the United
States through various wholly-owned indirect subsidiaries that are banking
institutions. Greenwood Trust and Bank of New Castle are state banks chartered
under the laws of the State of Delaware, and Morgan Stanley Dean Witter Bank,
Inc. ("MSDW Bank") is an industrial loan company chartered under the laws of
the State of Utah (each a "Domestic Bank" and, collectively, the "Domestic
Banks"). Each of the Domestic Banks has its deposits insured by the FDIC, pays
FDIC assessments and is subject to comprehensive regulation and periodic
examination by the state banking commissioner of the state in which it is
chartered and by the FDIC.
Generally, a company that controls a "bank," as defined in the Bank Holding
Company Act of 1956 (the "BHCA"), is required to register as a bank holding
company and is subject to regulation as a bank holding company by the Board of
Governors of the Federal Reserve System. Prior to Congress' passage of the
Competitive Equality Banking Act of 1987 ("CEBA"), a bank that engaged in less
than a full range of banking activities, such as Greenwood Trust, which does
not make commercial loans, was not considered a "bank" for purposes of the
BHCA. Under the CEBA amendments to the BHCA, Greenwood Trust is a "bank."
However, the CEBA amendments included grandfather provisions that allow the
Company to preserve its non-bank holding company status so long as certain
operational restrictions are followed. Favorable modifications to these
restrictions were recently enacted under the Gramm-Leach-Bliley Act (the
"GLBA"). These operational restrictions and the impact of the changes effected
by the GLBA are discussed below. The Company is permitted
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to own Bank of New Castle and MSDW Bank without registering as a bank holding
company because neither of these institutions is considered to be a "bank"
under the BHCA.
Pursuant to the CEBA amendments to the BHCA, Greenwood Trust is currently
prohibited from engaging in new activities in which it was not engaged as of
March 5, 1987. In addition, Greenwood Trust is also restricted with respect to
its ability to cross-market its products with those of its affiliates. On
March 11, 2000, the date on which the GLBA modifications to the BHCA will
become effective, both of these restrictions will be rescinded. However, even
after that date, Greenwood Trust will need to refrain from engaging either in
commercial lending or taking demand deposits (but not both), in order for the
Company to maintain its non-bank holding company status.
Federal and state consumer protection laws and regulations extensively
regulate the relationships among cardholders and credit card issuers. Under
federal law, each of the Domestic Banks may charge interest at the rate
allowed by the law of the state in which it is located and export such
interest rate to all other states. The states where the Domestic Banks are
domiciled do not limit the amount of interest that may be charged on loans of
the types offered by the Domestic Banks. As a result, each of the Domestic
Banks is permitted to export interest rates pursuant to federal law. The
application of federal and state bankruptcy and debtor relief laws affect the
Company to the extent such laws result in any loans being charged off as
uncollectible.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal bank regulatory agencies are required to take "prompt
corrective action" in respect of banks that do not meet minimum capital
requirements, and certain restrictions are imposed upon banks that meet
certain capital requirements but are not "well capitalized" for purposes of
FDICIA. A bank that is not well capitalized, as defined for purposes of
FDICIA, is, among other consequences, generally prohibited from accepting
brokered deposits and offering interest rates on any deposits significantly
higher than the prevailing rate in its normal market area or nationally
(depending upon where the deposits are solicited). Greenwood Trust and MSDW
Bank currently use brokered deposits as a funding source. If either of these
Domestic Banks were not able to do so, its funding costs would likely
increase.
Certain acquisitions of the Company's common stock may be subject to
regulatory approval and notice under federal and state banking law. In
addition, Greenwood Trust would no longer qualify for grandfather rights under
CEBA, as amended by the GLBA, if direct or indirect control of Greenwood Trust
were transferred to an unaffiliated third party. In that event, the third
party would have to operate in a manner permissible for a bank holding company
under the BHCA.
MSDW Bank Limited, the Company's recently chartered bank in the United
Kingdom, is governed primarily by the United Kingdom's Banking Act 1987. MSDW
Bank Limited is also subject to other regulation in the United Kingdom,
including regulation related to capital adequacy, consumer protection and
deposit protection. The activities of MSDW Bank Limited are supervised by the
Financial Services Authority, which conducts periodic examinations of MSDW
Bank Limited's operations and records. Morgan Stanley Dean Witter Card
Services Limited, a wholly-owned subsidiary of the Company, operates the day-
to-day credit card business of MSDW Bank Limited.
Item 2. Properties*
The Company's executive offices are located at 1585 Broadway, New York, New
York, where the Company occupies approximately 958,000 square feet as its New
York headquarters. The Company also occupies approximately 368,000 square feet
at 750 Seventh Avenue, New York, New York. The Company owns both the 1585
Broadway and 750 Seventh Avenue buildings. The Company also owns a 600,000
square foot building in Riverwoods, Illinois that houses Credit Services'
executive offices and an adjacent undeveloped 44 acre parcel.
- --------
* The indicated total aggregate square footage leased by the Company does not
include space occupied by the Company's securities branch offices.
17
<PAGE>
In 1999, construction began on a 1,100,000 square foot office tower at 745
Seventh Avenue, New York, New York, which will be owned by the Company. The
Company leases the land under the building pursuant to a 99-year ground lease.
The Company intends to occupy the building upon project completion, which is
anticipated in 2002.
The Company leases 864,000 square feet at Two World Trade Center, New York,
New York, under a lease expiring on May 31, 2006 and also occupies space
aggregating approximately 1,069,000 square feet at various other locations in
New York City under leases expiring between 2000 and 2013. In addition, the
Company leases space aggregating approximately 417,000 square feet in
Brooklyn, New York under a lease expiring in 2013.
The Company's London headquarters are located at 25 Cabot Square, Canary
Wharf, and occupy approximately 641,000 square feet (inclusive of common
areas) of a building constructed by the Company. The Company owns the ground
lease obligation and the freehold interest in the land and the building. The
Company also leases approximately 350,000 square feet at 20 Cabot Square,
Canary Wharf, under a lease arrangement expiring in 2020.
The Company's Tokyo headquarters are located in Sapporo's Yebisu Garden
Place, Ebisu, Shibuya-ku, where the Company occupies approximately 173,000
square feet of office space under a lease arrangement expiring in 2000, but
renewable at the Company's option in two-year increments.
The Company's subsidiaries have offices, operations and processing centers
and warehouse facilities located throughout the United States and certain
subsidiaries maintain offices and other facilities in international locations.
The Company's properties that are not owned are leased on terms and for
durations that are reflective of commercial standards in the communities where
these properties are located. Facilities owned or occupied by the Company and
its subsidiaries are believed to be adequate for the purposes for which they
are currently used and are well maintained.
Item 3. Legal Proceedings
The Company is involved in the following litigation matters:
I. Term Trust Class Actions. A putative class action, Thomas D. Keeley, et
al. v. Dean Witter Reynolds Inc. et al. (the "Keeley Action") was commenced in
the California Superior Court, Orange County, on October 27, 1994 and later
consolidated with three similar class actions. Defendants are the Company,
DWR, Dean Witter Distributors, Dean Witter InterCapital Inc., Dean Witter
Services Company Inc., TCW Management Co., Trust Company of the West, TCW
Asset Management Co., Inc., TCW Funds Management, Inc. and eight individuals,
including two DWR employees. Plaintiffs allege breach of fiduciary duty,
unjust enrichment, fraud, deceit and violation of the California Corporation
Code in the marketing and selling of the TCW/DW Term Trusts 2000, 2002 and
2003. Plaintiffs seek unspecified compensatory and punitive damages.
Defendants filed an answer to the first amended class complaint denying all
wrongdoing on December 6, 1995, and motions for judgment on the pleadings on
March 13, 1997. In the Keeley Action, defendants' motions for judgment on the
pleadings were denied on June 23, 1997. On June 1, 1998, the plaintiff's
motion to certify the class was granted as to a California statewide class and
denied as to a nationwide class. On October 13, 1998, three separate state
court actions were filed in Florida, New York and New Jersey. The Florida
action was removed to the U.S. District Court for the Middle District of
Florida on November 10, 1998. Motions to dismiss were filed by the defendants
in the Florida action on August 30, 1999, in the New Jersey action on July 26,
1999, and in the New York action on September 10, 1999. Defendants' motion to
dismiss the Florida action was denied January 28, 2000 and defendants filed an
answer denying all allegations of wrongdoing on February 22, 2000. Defendants'
motion to dismiss the New Jersey action was granted on February 2, 2000.
II. Morgan Stanley Dean Witter North American Government Income Trust
Litigation. Several purported class action lawsuits, which have been
consolidated, were instituted on January 11, 1995 in the U.S. District Court
for the Southern District of New York against the Morgan Stanley Dean Witter
North American
18
<PAGE>
Government Income Trust (formerly TCW/DW North American Government Income
Trust) (the "Trust"), DWR, some of the Trust's trustees and officers, its
underwriter and distributor, the Trust's sub-adviser, the Trust's former
manager and other defendants, by certain shareholders of the Trust. The
consolidated amended complaint asserts claims under the Securities Act of 1933
(the "Securities Act") and generally alleges that the defendants made
inadequate and misleading disclosures in the prospectuses for the Trust, in
particular as such disclosures related to the nature and risks of the Trust's
investments in mortgage-backed securities and Mexican securities. Plaintiffs
also challenge certain fees paid by the Trust as excessive. Damages are sought
in an unspecified amount. Defendants moved to dismiss the consolidated amended
complaint. Although on May 8, 1996 the motions to dismiss were denied, upon
reconsideration on August 28, 1996 the court dismissed several of plaintiffs'
claims and clarified its earlier opinion denying defendants' motion to
dismiss. In addition, on August 28, 1996, the court granted plaintiffs' motion
for class certification. On December 4, 1996, in light of a new decision by
the U.S. Court of Appeals for the Second Circuit, defendants filed a new
motion for reconsideration of the court's decision denying the motion to
dismiss, which was denied on November 20, 1997. On January 19, 2000, the court
gave preliminary approval of a stipulation of settlement disposing of the
litigation and authorized that notice be sent to class members regarding the
fairness hearing scheduled for April 2000.
III. In re Merrill Lynch, et al. Securities Litigation. On January 19, 1995,
a putative class action was filed in the U.S. District Court for the District
of New Jersey on behalf of all persons who placed market orders to purchase or
sell securities listed on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") with DWR between November 4, 1992 and
November 4, 1994. The complaint, consolidated with another action against
other brokerage firms, seeks unspecified damages and alleges that DWR failed
to provide best execution of customer market orders for NASDAQ securities. The
complaint asserts claims for violations of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder and state law claims for breach of fiduciary duty and unjust
enrichment. On December 15, 1995, the district court granted summary judgment
in favor of DWR and, on June 19, 1997, a three-judge panel of the U.S. Court
of Appeals for the Third Circuit affirmed. On January 30, 1998, the full Court
of Appeals, sitting en banc, reversed and remanded the action to the district
court for further proceedings. On April 30, 1998, a petition for a writ of
certiorari to the U.S. Supreme Court was filed by the defendants. On June 12,
1998, plaintiffs filed a motion for leave to file an amended complaint to
extend the end date for the class period from November 4, 1994 to August 28,
1996 and to name new class representatives. On July 21, 1998, the Magistrate
granted the plaintiffs' motion to file an amended complaint. Defendants have
appealed that ruling to the district court judge. On October 5, 1998, the U.S.
Supreme Court denied the petition for certiorari. On November 8, 1999, the
district court denied plaintiffs' motion for class certification.
IV. Penalty Bid Litigation. On or about August 21, 1998, a purported class
action complaint, Friedman, et al. v. Salomon Smith Barney, et al., was filed
in the U.S. District Court for the Southern District of New York against the
Company and nine other underwriters of securities. An amended complaint dated
February 15, 1999, was filed against the Company and sixteen other
underwriters of securities. The amended plaintiff class purports to consist of
all retail brokerage customers who purchased securities in public offerings
from defendants and their alleged co-conspirators at artificially inflated
prices. The amended complaint alleges that defendants and their co-
conspirators engaged in anti-competitive activity with respect to the
distribution of securities in public offerings by agreeing (i) to discourage
retail customers from "flipping" or selling shares purchased in public
offerings prior to the expiration of a purported "retail restricted period" (a
period alleged to have been arbitrarily set by the syndicate manager during
which restraints on retail accounts are imposed), and/or (ii) to penalize
retail customers who "flipped," and/or (iii) otherwise to prevent retail
customers from "flipping." The amended complaint also alleges that similar
restraints were not imposed on institutional purchasers of shares in public
offerings. The amended complaint alleges violations of Section 1 of the
Sherman Act and breach of fiduciary duty, and seeks compensatory, treble and
punitive damages in unspecified amounts, injunctive relief, costs and
expenses, including attorneys', accountants' and experts' fees. On May 7,
1999, defendants filed a motion to dismiss the amended complaint.
Another purported class action, captioned Myers v. Merrill Lynch & Co., Inc.
et al., was filed on or about August 17, 1998 in California Superior Court,
San Francisco County, against Merrill Lynch & Co., Inc., Paine
19
<PAGE>
Webber Group Incorporated, the Company, Travelers Group Inc., Legg Mason Inc.,
H.J. Meyers & Co., Inc. and The Bear Stearns Companies Inc. The complaint
alleges that defendants sold the stock of public companies to investors in
public offerings without disclosing the existence of restrictions on
"flipping" and serious conflicts of interest with investors resulting from
financial and other penalties imposed on brokers and clients for "flipping."
The complaint also alleges that similar restrictions were not imposed on
larger institutional purchasers of stock in those offerings. The complaint
asserts claims for unfair competition and false advertising under various
sections of the California Business and Professions Code (the "Business
Code"), negligent misrepresentations under the California Civil Code and
unfair, fraudulent and unlawful business practices under the Business Code.
The complaint seeks injunctive relief and an award of costs and expenses,
including attorneys' and experts' fees. On September 15, 1998, the action was
removed to the U.S. District Court for the Northern District of California. On
October 30, 1998, defendants filed a motion to dismiss the complaint. On March
25, 1999, the court held a hearing on defendants' motion to dismiss the
complaint and plaintiffs' motion to remand the action. On August 23, 1999, the
court denied plaintiffs' motion to remand the action and granted a motion
filed by certain defendants to dismiss the complaint on the grounds of
preemption. On September 23, 1999, plaintiffs appealed the decision to the
U.S. Court of Appeals for the Ninth Circuit.
V. IPO Fee Litigation. On or about November 3, 1998, a purported class
action complaint, Gillet v. Goldman, Sachs & Co., et al., was filed in the
U.S. District Court for the Southern District of New York against the Company
and 26 other underwriters of initial public offering ("IPO") securities. On
November 23, 1998 and December 2, 1998, two other substantially similar class
action complaints, captioned Prager v. Goldman, Sachs & Co. et al. and Holzman
v. Goldman, Sachs & Co. et al. were filed in the U.S. District Court for the
Southern District of New York against the same underwriter defendants. 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
costs, including reasonable attorneys' fees. On April 29, 1999, defendants
filed a motion to dismiss the amended complaint.
VI. Nenni, et al. v. Dean Witter Reynolds Inc. In December 1998, a putative
class action complaint was filed in the U.S. District Court for the District
of Massachusetts against DWR, Morgan Stanley Dean Witter Distributors Inc. and
the Company. The complaint, filed on behalf of all purchasers of certain of
the Company's mutual funds subject to a contingent deferred sales charge (the
"Mutual Funds"), alleges violations of Sections 11, 12 and 15 of the
Securities Act, Sections 10(b) and 20 of the Exchange Act and Rule 10b-5
promulgated thereunder, in that the Mutual Funds' prospectuses and
registration statements allegedly omitted certain disclosures concerning the
transferability of the Mutual Funds to brokerage accounts outside of DWR. The
complaint seeks unspecified compensatory and punitive damages, declaratory and
injunctive relief, interest and costs, including reasonable attorneys' fees.
On February 24, 1999, defendants filed a motion to dismiss the action. On
April 30, 1999, plaintiffs filed an amended complaint. On July 9, 1999,
defendants filed a motion to dismiss the amended complaint, and on September
29, 1999, the court granted defendants' motion to dismiss the amended
complaint. On October 28, 1999, the plaintiffs filed a notice of appeal to the
U.S. Court of Appeals for the First Circuit.
VII. Other. In addition to the matters described above, the Company,
including MS&Co. and DWR, has been named from time to time as a defendant in
various legal actions, including arbitrations, arising in connection with its
activities as a global diversified financial services institution, certain of
which include large claims for punitive damages. The Company, including MS&Co.
and DWR, is also involved, from time to time, in investigations and
proceedings by governmental and self-regulatory agencies. Some of these legal
actions, investigations and proceedings may result in adverse judgments,
penalties or fines.
20
<PAGE>
In view of the inherent difficulty of predicting the outcome of such
matters, particularly in cases such as some of those described above in which
substantial damages are sought, the Company cannot state what the eventual
outcome of pending matters will be. The Company is contesting the allegations
made in each pending matter and believes, based on current knowledge and after
consultation with counsel, that the outcome of such matters will not have a
material adverse effect on the consolidated financial condition of the
Company, but may be material to the Company's operating results for any
particular period, depending on the level of the Company's income for such
period.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers of the Company as of February 25, 2000. All of the executive officers
are members of the Company's Management Committee.
<TABLE>
<CAPTION>
Name and Age Present Title and Principal Occupation
------------ --------------------------------------
<C> <S>
Philip J. Purcell, 56..... Chairman of the Board of Directors and Chief
Executive Officer of the Company since the Merger.
Mr. Purcell was the Chairman of the Board of
Directors and Chief Executive Officer of Dean
Witter Discover from 1986 until the Merger. He is a
trustee or director of approximately 95 registered
investment companies for which MSDW Advisors serves
as investment manager or investment adviser.
Mr. Purcell is also a director of AMR Corporation.
John J. Mack, 55.......... President, Chief Operating Officer and Director of
the Company since the Merger. Mr. Mack was the
President of Morgan Stanley from June 1993 until
the Merger. He was a Director and a Managing
Director of Morgan Stanley from December 1987 until
the Merger.
Richard M. DeMartini, 47.. Head of the Company's International Private Client
Group since December 1998. Mr. DeMartini was head
of the Company's Individual Asset Management
Division from May 1997 until December 1998 and
President and Chief Operating Officer of Dean
Witter Capital from January 1989 until the Merger.
Kenneth M. deRegt, 44..... Head of the Company's Worldwide Fixed Income Group
since the Merger. Mr. deRegt was head of Morgan
Stanley's Fixed Income Division from January 1997
until the Merger and directed Morgan Stanley's
Global Fixed Income Trading and Risk Management
from July 1993 until the Merger.
James F. Higgins, 52...... Head of the Company's Private Client Group since
the Merger. Mr. Higgins was President and Chief
Operating Officer of Dean Witter Financial from
January 1989 until the Merger.
Peter F. Karches, 48...... Head of the Company's Institutional Securities
Group since the Merger. Mr. Karches was a Director
and Managing Director of Morgan Stanley from 1994
until the Merger. He was head of Morgan Stanley's
Securities Division from January 1997 until the
Merger and head of Morgan Stanley's Fixed Income
Division from 1992 until December 1996.
Donald G. Kempf, Jr., 62.. Executive Vice President, Chief Legal Officer and
Secretary of the Company since December 1999. Prior
to joining the Company, Mr. Kempf had been a
partner at the law firm of Kirkland & Ellis from
1971 and a member of its management committee from
1981 until 1998.*
</TABLE>
- --------
* Mr. Kempf became the Company's Chief Legal Officer at the beginning of
fiscal year 2000. Christine A. Edwards, the Company's former Chief Legal
Officer, stepped down effective June 10, 1999. Pursuant to a September 1,
1999 agreement, the Company paid Mrs. Edwards an amount equal to the sum of
her base salary through January 31, 2000, her above-base compensation for
fiscal 1998 and the amount she would have been entitled to under the
Company's Key Executive Employment Plan. Mrs. Edwards was a "full career"
employee, her equity compensation awards were vested, and the forfeiture
and transfer restrictions on her equity awards were removed. In addition,
she received certain fringe benefits (including health care coverage and
reimbursement of certain expenses).
21
<PAGE>
<TABLE>
<CAPTION>
Name and Age Present Title and Principal Occupation
------------ --------------------------------------
<C> <S>
Mitchell M. Merin, 46.... President and Chief Operating Officer of the Asset
Management Group since December 1998. Mr. Merin has
been President of MSDW Advisors since April 1997 and
its Chief Executive Officer since June 1998. He was
Executive Vice President and Chief Administrative
Officer of Dean Witter Discover from 1994 until the
Merger. He is a trustee or director of approximately
65 registered investment companies for which Van
Kampen (or a subsidiary thereof) serves as
investment manager or investment adviser.
David W. Nelms, 39....... President and Chief Operating Officer of Discover
Financial Services since September 1998. Mr. Nelms
was a senior executive from 1992 until 1998 at MBNA
America Bank where his last position was Vice
Chairman.
Stephan F. Newhouse, 52.. Deputy Head of the Company's Institutional
Securities Group since December 1997. Mr. Newhouse
has been a Director and Vice Chairman of MS&Co.
since December 1997 and a Managing Director of
MS&Co. since 1988.
Vikram S. Pandit, 43..... Head of the Company's Worldwide Institutional
Equities Group since the Merger. Mr. Pandit was head
of Morgan Stanley's Equity Division from January
1997 until the Merger and was head of Morgan
Stanley's Equity Derivatives business from May 1994
until December 1996.
Joseph R. Perella, 58.... Head of the Company's Worldwide Investment Banking
Group since the Merger. Mr. Perella was head of
Morgan Stanley's Investment Banking Division from
January 1997 until the Merger and was head of Morgan
Stanley's Corporate Finance Department from May 1995
until December 1996. He has been a Director of
MS&Co. since March 1994 and a Managing Director of
MS&Co. since November 1993.
John H. Schaefer, 48..... Executive Vice President and Chief Strategic and
Administrative Officer of the Company since June
1998. Mr. Schaefer was head of Corporate and
Strategic Planning for the Company from the Merger
until June 1998. Mr. Schaefer was Executive Vice
President and Director of Corporate Finance for Dean
Witter Discover from 1991 until the Merger.
Robert G. Scott, 54...... Executive Vice President and Chief Financial Officer
of the Company since the Merger. Mr. Scott was the
head of Morgan Stanley's Investment Banking Division
from 1994 to 1996 and has been a Director and a
Managing Director of MS&Co. since 1979.
Sir David A. Walker, 60.. Head of the Company's European business since
November 1994 and Chairman of Morgan Stanley
International Incorporated since December 1995. Sir
David was a Director of Morgan Stanley from November
1994 until the Merger and a Managing Director of
Morgan Stanley from May 1995 until the Merger. He is
also a non-executive director of Reuters Group PLC.
</TABLE>
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fiscal quarter ended November 30, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the principal market in which the Registrant's
Common Stock is traded, the high and low sales prices per share for each full
quarterly period within the two most recent fiscal periods, the approximate
number of holders of record of Common Stock and the frequency and amount of
any cash dividends declared for the two most recent fiscal periods is set
forth under the caption "Quarterly Results" on page 90 of the Registrant's
1999 Annual Report to Shareholders and such information is incorporated by
reference herein.
22
<PAGE>
To enhance its ongoing stock repurchase program, during the quarter ended
November 30, 1999, the Company sold European-style put options on an aggregate
of 1,000,000 shares of its Common Stock. These put options expired in February
2000. They entitled the holder to sell Common Stock to the Company at prices
ranging from $48.51 to $50.29 per share. The sale of these put options, which
was made as private placement to a third party, generated proceeds to the
Company of approximately $2.5 million.
Item 6. Selected Financial Data
Selected Financial Data for the Registrant and its subsidiaries for each of
the last five fiscal years is set forth under the same caption on page 4 of
the 1999 Annual Report to Shareholders. Such information is incorporated by
reference herein and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto contained on pages 55 to 90 of such
Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the same caption on pages 22 to 47 of the 1999
Annual Report to Shareholders. Such information is incorporated by reference
herein and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 55 to 90 of such Annual
Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is contained on pages 47 through 53 of
the 1999 Annual Report to Shareholders under the caption "Risk Management" and
is incorporated by reference herein.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Registrant and its
subsidiaries, together with the Notes thereto and Independent Auditors' Report
thereon, are contained in the 1999 Annual Report to Shareholders on pages 54
to 90, and such information is incorporated by reference herein, including the
information appearing under the caption "Quarterly Results" on page 90 of such
Annual Report.
The Combined Financial Statements for the years ended December 31, 1999 and
1998 of the Morgan Stanley U.K. Group Profit Sharing Scheme and Plan, together
with the Notes thereon and the Report of Independent Chartered Accountants,
appear as Exhibit 99.2.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to Directors and Nominees of the Registrant is set
forth under the caption "Election of Directors" on pages 4 to 6 of the Proxy
Statement of the Registrant for its 2000 Annual Meeting of Stockholders and is
incorporated by reference herein. Also incorporated by reference herein is the
information under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" that appears on page 19 of the Proxy Statement.
Item 11. Executive Compensation
Information relating to executive compensation is set forth under the
captions "Director Compensation" on page 7 and "Compensation of Executive
Officers" (excluding the information under the subheadings "Report of the
Compensation Committees on Executive Compensation" and "Stock Performance
Graph") on pages 10 to 20 of the Proxy Statement of the Registrant for its
2000 Annual Meeting of Stockholders and such information is incorporated by
reference herein.
23
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of management and certain
beneficial owners is set forth under the captions "Stock Ownership of
Management" and "Principal Stockholders" on pages 8 and 9, respectively, of
the Proxy Statement of the Registrant for its 2000 Annual Meeting of
Stockholders and such information is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is set
forth under the caption "Certain Transactions" on pages 19 and 20 of the Proxy
Statement of the Registrant for its 2000 Annual Meeting of Stockholders and
such information is incorporated by reference herein.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)Documents filed as part of this Report:
1. Financial Statements
The financial statements required to be filed hereunder are listed on page
S-1 hereof.
2. Financial Statement Schedules
The financial statement schedules required to be filed hereunder are listed
on page S-1 hereof.
3. Exhibits
An exhibit index has been filed as part of this report beginning on page E-1
hereto and is incorporated herein by reference.
(b) A Current Report on Form 8-K, dated September 22, 1999, was filed with the
Securities and Exchange Commission in connection with the announcement of
the Company's third fiscal quarter financial results.
A Current Report on Form 8-K, dated October 20, 1999, was filed with the
Securities and Exchange Commission in connection with the Company's launch
of ichoice.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on February 25,
2000.
Morgan Stanley Dean Witter & Co.
(Registrant)
By /s/ Philip J. Purcell
_____________________________________
Philip J. Purcell
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Morgan Stanley Dean
Witter & Co., hereby severally constitute Donald G. Kempf, Jr., Robert G.
Scott and Ronald T. Carman, and each of them singly, our true and lawful
attorneys with full power to them and each of them to sign for us, and in our
names in the capacities indicated below, any and all amendments to the Annual
Report on Form 10-K filed with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 25th day of February, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Philip J. Purcell Chairman of the Board and Chief Executive
___________________________________________ Officer
(Philip J. Purcell)
/s/ John J. Mack President, Chief Operating Officer and
___________________________________________ Director
(John J. Mack)
/s/ Robert G. Scott Executive Vice President and Chief
___________________________________________ Financial Officer (Principal Financial
(Robert G. Scott) Officer)
/s/ Joanne Pace Controller (Principal Accounting Officer)
___________________________________________
(Joanne Pace)
/s/ Robert P. Bauman Director
___________________________________________
(Robert P. Bauman)
/s/ Edward A. Brennan Director
___________________________________________
(Edward A. Brennan)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Daniel B. Burke Director
___________________________________________
(Daniel B. Burke)
/s/ C. Robert Kidder Director
___________________________________________
(C. Robert Kidder)
/s/ Charles F. Knight Director
___________________________________________
(Charles F. Knight)
/s/ Miles L. Marsh Director
___________________________________________
(Miles L. Marsh)
/s/ Michael A. Miles Director
___________________________________________
(Michael A. Miles)
/s/ Allen E. Murray Director
___________________________________________
(Allen E. Murray)
/s/ Clarence B. Rogers, Jr. Director
___________________________________________
(Clarence B. Rogers, Jr.)
/s/ Laura D'Andrea Tyson Director
___________________________________________
(Laura D'Andrea Tyson)
</TABLE>
26
<PAGE>
Morgan Stanley Dean Witter & Co.
Index to Financial Statements
and Financial Statement Schedules
Items (14)(a)(1) and (14)(a)(2)
<TABLE>
<CAPTION>
Page
-----------------------
Form 10-K Annual Report
--------- -------------
<S> <C> <C>
Financial Statements
- --------------------
Independent Auditors' Report.......................... 54
Consolidated Statements of Financial Condition at
November 30, 1999 and November 30, 1998.............. 55
Consolidated Statements of Income for Fiscal 1999,
1998, and 1997....................................... 57
Consolidated Statements of Comprehensive Income for
Fiscal 1999, 1998 and 1997........................... 58
Consolidated Statements of Cash Flows for Fiscal 1999,
1998 and 1997........................................ 59
Consolidated Statements of Changes in Shareholders'
Equity for Fiscal 1999, 1998 and 1997................ 60
Notes to Consolidated Financial Statements............ 62
Financial Statement Schedules
- -----------------------------
Schedule I--Condensed Financial Information of Morgan
Stanley Dean Witter & Co. (Parent Company Only)--at
November 30, 1999 and November 30, 1998 and
for each of the Three Fiscal Years in the Period
Ended November 30, 1999.............................. S-2--S-5
</TABLE>
S-1
<PAGE>
SCHEDULE I
MORGAN STANLEY DEAN WITTER & CO.
(Parent Company Only)
Condensed Statements of Financial Condition
(dollars in millions, except share data)
<TABLE>
<CAPTION>
November 30, November 30,
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents............................................. $ 1,914 $ 5,652
Financial instruments owned........................................... 2,446 451
Advances to subsidiaries.............................................. 50,121 43,686
Investment in subsidiaries, at equity................................. 17,129 14,484
Other assets.......................................................... 2,139 2,202
------- -------
Total assets........................................................ $73,749 $66,475
======= =======
Liabilities and Shareholders' Equity:
Short-term borrowings................................................. $25,360 $21,359
Payables to subsidiaries.............................................. 6,044 6,341
Other liabilities and accrued expenses................................ 730 579
Long-term borrowings.................................................. 24,601 24,077
------- -------
56,735 52,356
------- -------
Commitments and contingencies
Shareholders' equity:
Preferred stock....................................................... 670 674
Common stock (1) ($0.01 par value; 1,750,000,000 shares authorized,
1,211,685,904 and 1,211,685,904 shares issued, 1,104,630,098 and
1,131,341,616 shares outstanding at November 30, 1999 and November 30,
1998)................................................................ 12 12
Paid-in capital (1)................................................... 3,836 3,740
Retained earnings..................................................... 16,285 12,080
Employee stock trust.................................................. 2,426 1,913
Cumulative translation adjustments.................................... (27) (12)
------- -------
Subtotal............................................................ 23,202 18,407
Note receivable related to sale of preferred stock to ESOP............ (55) (60)
Common stock held in treasury, at cost (1) ($0.01 par value,
107,055,806 and 80,344,288 shares at November 30, 1999 and November
30, 1998)............................................................ (4,355) (2,702)
Common stock issued to employee trust................................. (1,778) (1,526)
------- -------
Total shareholders' equity.......................................... 17,014 14,119
------- -------
Total liabilities and shareholders' equity............................ $73,749 $66,475
======= =======
</TABLE>
- --------
(1) Amounts have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 2000.
See Notes to Condensed Financial Statements.
S-2
<PAGE>
SCHEDULE I
MORGAN STANLEY DEAN WITTER & CO.
(Parent Company Only)
Condensed Statements of Income and Comprehensive Income
(dollars in millions)
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and dividends................... $2,585 $3,098 $4,531
Principal transactions................... 55 60 6
Fiduciary fees........................... 16 16 23
Other.................................... 2 (1) 1
------ ------ ------
Total revenues......................... 2,658 3,173 4,561
------ ------ ------
Expenses:
Interest expense......................... 2,460 2,976 4,403
Non-interest expenses.................... 29 9 70
------ ------ ------
Total expenses......................... 2,489 2,985 4,473
------ ------ ------
Income before provision for income taxes
and equity in earnings of subsidiaries.. 169 188 88
Provision for income taxes............... 63 70 44
------ ------ ------
Income before equity in earnings of
subsidiaries............................ 106 118 44
Equity in earnings of subsidiaries, net
of tax.................................. 4,685 3,158 2,542
------ ------ ------
Net income............................... $4,791 $3,276 $2,586
====== ====== ======
Other comprehensive income, net of tax:
Foreign currency translation
adjustment............................ (15) (3) 2
------ ------ ------
Comprehensive income..................... $4,776 $3,273 $2,588
====== ====== ======
Net income............................... $4,791 $3,276 $2,586
====== ====== ======
Preferred stock dividend requirements.... $ 44 $ 55 $ 66
====== ====== ======
Earnings applicable to common shares..... $4,747 $3,221 $2,520
====== ====== ======
</TABLE>
See Notes to Condensed Financial Statements.
S-3
<PAGE>
SCHEDULE I
MORGAN STANLEY DEAN WITTER & CO.
(Parent Company Only)
Condensed Statements of Cash Flows
(dollars in millions)
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 4,791 $ 3,276 $ 2,586
Adjustments to reconcile net income to
net cash provided by operating
activities:
Non-cash charges (credits) included in
net income:
Compensation payable in common or
preferred stock..................... 675 334 374
Equity in subsidiaries' earnings, net
of dividends........................ (1,119) (1,300) (1,504)
Change in assets and liabilities:
Financial instruments owned.......... (2,126) (37) 69
Other assets......................... 242 (589) (724)
Other liabilities and accrued
expenses............................ 301 (161) 336
------- ------- -------
Net cash provided by operating
activities.............................. 2,764 1,523 1,137
------- ------- -------
Cash flows from investing activities:
Investments in and advances to
subsidiaries, at equity................. (8,193) 1,605 1,402
------- ------- -------
Net cash (used for) provided by investing
activities................................ (8,193) 1,605 1,402
------- ------- -------
Cash flows from financing activities:
Net proceeds from (payments for) short-
term borrowings......................... 4,001 4,614 (3,779)
Net proceeds from:
Issuance of common stock............... 270 186 194
Issuance of put options................ 9 -- --
Issuance of long-term borrowings....... 6,519 8,167 6,115
Payments for:
Repurchases of common stock............ (2,374) (2,925) (124)
Repayments of long-term borrowings..... (6,159) (6,944) (3,912)
Redemption of cumulative preferred
stock................................. -- (200) (345)
Cash dividends......................... (575) (519) (416)
------- ------- -------
Net cash provided by (used for) financing
activities................................ 1,691 2,379 (2,267)
------- ------- -------
Dean Witter, Discover & Co.'s (Parent
Company Only) net cash activity
for the month of December 1996............ -- -- (139)
------- ------- -------
Net (decrease) increase in cash and cash
equivalents............................... (3,738) 5,507 133
Cash and cash equivalents, at beginning of
period.................................... 5,652 145 12
------- ------- -------
Cash and cash equivalents, at end of
period.................................... $ 1,914 $ 5,652 $ 145
======= ======= =======
</TABLE>
See Notes to Condensed Financial Statements.
S-4
<PAGE>
MORGAN STANLEY DEAN WITTER & CO.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Introduction and Basis of Presentation
Basis of Financial Information
The accompanying condensed financial statements (the "Parent Company
Financial Statements") give retroactive effect to the May 1997 merger of
Morgan Stanley Group Inc. ("Morgan Stanley") with and into Dean Witter,
Discover & Co. ("Dean Witter Discover"), which was accounted for as a pooling
of interests. The pooling of interests method of accounting requires the
restatement of all periods presented as if Dean Witter Discover and Morgan
Stanley had always been combined.
The Parent Company Financial Statements, including the notes thereto, should
be read in conjunction with the consolidated financial statements of Morgan
Stanley Dean Witter & Co. (the "Company") and the notes thereto found on pages
55 to 90 of the Company's Annual Report to Shareholders which is incorporated
by reference in this Form 10-K.
Prior to the consummation of the merger, Dean Witter Discover's year ended
on December 31 and Morgan Stanley's fiscal year ended on November 30.
Subsequent to the merger, the Company adopted a fiscal year-end of November
30. The Company's results for the 12 months ended November 30, 1999 ("fiscal
1999"), November 30, 1998 ("fiscal 1998") and November 30, 1997 ("fiscal
1997") reflect the change in fiscal year-end. Fiscal 1997 includes the results
of Dean Witter Discover that were restated to conform with the new fiscal
year-end date.
Employee Stock Ownership Plan
The Company has a $140 million leveraged employee stock ownership plan,
funded through an independently managed trust. The Employee Stock Ownership
Plan ("ESOP") was established to broaden internal ownership of the Company and
to provide benefits to its employees in a cost-effective manner. Each of the
3,493,477 ESOP preferred shares outstanding at November 30, 1999 is held by
the ESOP trust, is convertible into 6.6 shares of the Company's common stock
and is entitled to annual dividends of $2.78 per preferred share.
In January 2000, all shares of the ESOP Convertible Preferred Stock were
converted into common shares of the Company.
Stock Split
On December 20, 1999, the Company declared a two-for-one common stock split,
effected in the form of a 100% stock dividend, payable to shareholders of
record on January 12, 2000 and distributable on January 26, 2000. All share
and shareholders' equity data have been retroactively restated to reflect this
split.
2. Transactions with Subsidiaries
The Company has transactions with its subsidiaries determined on an agreed-
upon basis and has guaranteed certain unsecured lines of credit and
contractual obligations of certain of its subsidiaries.
The Company received cash dividends from its consolidated subsidiaries
totaling $3,566 million, $1,858 million and $1,088 million in fiscal 1999,
1998 and 1997, respectively.
S-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Morgan Stanley Dean Witter & Co.:
We have audited the consolidated financial statements of Morgan Stanley Dean
Witter & Co. and subsidiaries as of fiscal years ended November 30, 1999 and
1998, and for each of the three fiscal years in the period ended November 30,
1999, and have issued our report thereon dated January 21, 2000; such
consolidated financial statements and report are included in your 1999 Annual
Report to Shareholders and are incorporated herein by reference. Our audits
also included Schedule I listed in the Index to Financial Statements and
Financial Statement Schedules. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, based on our audits, the
condensed financial statement schedules for Morgan Stanley Dean Witter & Co.
(Parent Company Only), when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth herein.
/s/ DELOITTE & TOUCHE LLP
New York, New York
January 21, 2000
S-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
For the fiscal year ended November 30, 1999
Commission File No. 1-11758
Morgan Stanley Dean Witter & Co.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
Certain of the following exhibits, as indicated parenthetically, were
previously filed as exhibits to registration statements filed by the
Registrant or its predecessor companies under the Securities Act of 1933, as
amended, or to reports or registration statements filed by the Registrant or
its predecessor companies under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), respectively, and are hereby incorporated by
reference to such statements or reports. The Exchange Act file number of the
Company is 1-11758. Prior to the Merger, the Exchange Act file number of
Morgan Stanley Group Inc. ("Morgan Stanley") was 1-9085. In addition, certain
of the following exhibits, as indicated parenthetically, were previously filed
as exhibits to a Schedule 13D, as amended (the "Schedule 13D"), filed by
certain senior officers of the Company under the Exchange Act and are hereby
incorporated by reference.
<TABLE>
<CAPTION>
Sequentially
Exhibit Number
No. Description Pages
------- ----------- ------------
<C> <S> <C>
3.1* Amended and Restated Certificate of Incorporation of
the Company, as amended to date.
3.2 By-Laws of the Company, as amended to date (Exhibit 3.4
to the Company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 1999).
4.1 Rights Agreement dated as of April 25, 1995 between the
Company and Chemical Bank, as rights agent, which
includes as Exhibit B thereto the Form of Rights
Certificate (Exhibit 1 to the Company's Registration
Statement on Form 8-A dated April 25, 1995).
4.2 Amendment dated as of February 4, 1997 to the Rights
Agreement between the Company and The Chase Manhattan
Bank, as rights agent (Exhibit 4.1 to the Company's
Current Report on Form 8-K dated February 4, 1997).
4.3 Second Amendment dated as of June 15, 1999 to the
Rights Agreement between the Company and The Chase
Manhattan Bank (as successor to Chemical Bank), as
rights agent (Exhibit 4.1 to the Company's Current
Report on Form 8-K dated June 15, 1999).
4.4 Stockholders' Agreement dated February 14, 1986, as
amended (Exhibit 4.2 to Morgan Stanley's Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
4.5 Form of Consent and Amendment dated as of January 31,
1996 among the Company and certain signatories to the
Stockholders' Agreement referred to in Exhibit 4.4
(Exhibit 4.3 to Morgan Stanley's Annual Report on Form
10-K for the fiscal year ended November 30, 1995).
4.6 Form of Consent and Amendment dated as of December 14,
1999 among the Company and certain signatories to the
Stockholders' Agreement referred to in Exhibit 4.4
(Exhibit O to Amendment No. 3 to the Schedule 13D dated
January 2, 2000).
4.7 Indenture dated as of February 24, 1993 between the
Company and The First National Bank of Chicago, as
trustee (Exhibit 4 to the Company's Registration
Statement on Form S-3 (No. 33-57202)).
4.8 Amended and Restated Senior Indenture dated as of May
1, 1999 between the Company and The Chase Manhattan
Bank, as trustee (Exhibit 4-e to the Company's
Registration Statement on Form S-3/A (No. 333-75289)).
4.9 Amended and Restated Subordinated Indenture dated as of
May 1, 1999 between the Company and The First National
Bank of Chicago, as trustee (Exhibit 4-f to the
Company's Registration Statement on Form S-3/A (No.
333-75289)).
4.10 Subordinated Indenture dated as of November 15, 1993
among Morgan Stanley Finance plc, The Company, as
guarantor, and The Chase Manhattan Bank (as successor
to Chemical Bank), as trustee (Exhibit 4.1 to Morgan
Stanley's Current Report on Form 8-K dated November 19,
1993).
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Number
No. Description Pages
------- ----------- ------------
<C> <S> <C>
4.11 First Supplemental Subordinated Indenture dated as of
June 1, 1997 among Morgan Stanley Finance plc, the
Company, as guarantor, and The Chase Manhattan Bank, as
trustee (Exhibit 4-f to the Company's Registration
Statement on Form S-3 (No. 333-27881)).
4.12 Amended and Restated Voting Agreement dated December
14, 1999 among the Company, State Street Bank and Trust
Company and Other Persons Signing Similar Voting
Agreements (Exhibit P to Amendment No. 3 to the
Schedule 13D dated January 2, 2000).
4.13 Instruments defining the Rights of Security Holders,
Including Indentures--Except as set Forth in Exhibits
4.1 through 4.12 above, the instruments defining the
rights of holders of Long-term debt securities of the
Company and its subsidiaries are omitted pursuant to
Section (b)(4)(iii) of Item 601 of regulation S-K. The
Company hereby agrees to furnish Copies of these
instruments to the Securities and Exchange Commission
upon request.
10.1 Services Agreement by and between the Company and
International Business Machines Corporation, Effective
as of July 1, 1999 (Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
August 31, 1999; confidential treatment has been
requested for portions of this exhibit).
10.2 Form of Pooling and Servicing Agreement used in
connection with the Discover Card Trust 1993B (Exhibit
4.2 to the Company's Registration Statement on Form S-1
(No. 33-57302)).
10.3 Pooling and Servicing Agreement dated as of October 1,
1993 between Greenwood Trust Company as master
servicer, servicer and seller and U.S. Bank National
Association, as trustee (Exhibit 4.1 to the Discover
Card Master Trust I Registration Statement on Form S-1
(No. 33-71502)).
10.4 First Amendment to Pooling and Servicing Agreement
dated as of August 15, 1994 between Greenwood Trust
Company, as master servicer, servicer and seller and
U.S. Bank National Association, as trustee (Exhibit 4.4
to the Discover Card Master Trust I Current Report on
Form 8-K dated August 1, 1995).
10.5 Second Amendment to Pooling and Servicing Agreement
dated as of February 29, 1996 between Greenwood Trust
Company, as master servicer, servicer and seller and
U.S. Bank National Association, as trustee (Exhibit 4.4
to the Discover Card Master Trust I Current Report on
Form 8-K dated April 30, 1996).
10.6 Third Amendment to Pooling and Servicing Agreement
dated as of March 30, 1998 between Greenwood Trust
Company, as master servicer, servicer and seller and
U.S. Bank National Association, as trustee (Exhibit
4.1(d) to the Discover Card Master Trust I Registration
Statement on Form 8-A dated April 9, 1998).
10.7 Fourth Amendment to Pooling and Servicing Agreement
dated as of November 30, 1998 between Greenwood Trust
Company, as master servicer, servicer and seller and
U.S. Bank National Association, as trustee (Exhibit 4.1
to the Discover Card Master Trust I Current Report on
Form 8-K dated November 30,1998).
10.8 Trust Agreement dated March 5, 1991 between the Company
and State Street Bank and Trust Company (Exhibit 10.15
to Morgan Stanley's Annual Report on Form 10-K for the
fiscal year ended January 31, 1993).
10.9 First Amendment to Trust Agreement dated April 3, 1996
between the Company and State Street Bank and Trust
Company (Exhibit 10.14 to Morgan Stanley's Annual
Report on Form 10-K for the fiscal year ended November
30, 1996).
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Number
No. Description Pages
------- ----------- ------------
<C> <S> <C>
10.10 Second Amendment to Trust Agreement dated May 31, 1997
between the Company and State Street Bank and Trust
Company (Exhibit O to Amendment No. 1 to the Schedule
13D dated May 31, 1997).
10.11 Third Amendment to Trust Agreement dated November 30,
1999 between the Company and State Street Bank and
Trust Company (Exhibit R to Amendment No. 3 to the
Schedule 13D dated January 2, 2000).
10.12 Amended and Restated Trust Agreement of MSDWD Capital
Trust I dated as of March 12, 1998 among the Company,
as depositor, The Bank of New York, as property
trustee, The Bank of New York (Delaware) as Delaware
trustee, and the administrators named thereon (Exhibit
4.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended February 28, 1998).
10.13+ Dean Witter Reynolds Inc. Supplemental Pension Plan
(formerly known as the Dean Witter Reynolds Financial
Services Inc. Supplemental Pension Plan for Executives)
(amended and restated as of December 14, 1993) (Exhibit
10.32 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993).
10.14+ Omnibus Equity Incentive Plan (Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (No. 33-
63024)).
10.15+ Employees Replacement Stock Plan (Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (No. 33-
63024)).
10.16+ Amendment to the Employees Replacement Stock Plan
(adopted June 18, 1993) (Exhibit 10.1 to the Company's
Current Report on Form 8-k dated November 18, 1993).
10.17+ Dean Witter START Plan (Saving Today Affords Retirement
Tomorrow) (amended and restated) (Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.18+ Amendment to Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow) (Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1997).
10.19+ Amendment to Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow) (Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998).
10.20+ Amendment to Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow) (Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1998).
10.21+ Amendment to Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow) (Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1998).
10.22*+ Amendments to Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow) (adopted December 22,
1999).
10.23+ 1993 Stock Plan for Non-Employee Directors (Exhibit 4.3
to the Company's Registration Statement on Form S-8
(No. 33-63024)).
10.24+ Amendment to the 1993 Stock Plan for Non-Employee
Directors (Exhibit 10.37 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993).
10.25+ Transferred Executives Pension Supplement (amended and
restated) (Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995).
10.26+ 1994 Omnibus Equity Plan (Exhibit 10.52 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Number
No. Description Pages
------- ----------- ------------
<C> <S> <C>
10.27+ Tax Deferred Equity Participation Plan (amended and
restated as of September 21, 1999) (Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1999).
10.28+ Key Executive Employment Plan, as amended April 19,
1996 (Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
10.29+ Directors' Equity Capital Accumulation Plan (Exhibit
10.19 to the Company's Annual Report on Form 10-K for
the year ended November 30, 1997).
10.30+ Employees Equity Accumulation Plan (Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.31+ Employee Stock Purchase Plan (Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1998).
10.32+* Amendment to Employee Stock Purchase Plan (adopted
December 14, 1999).
10.33+ Form of Agreement under the Morgan Stanley & Co.
Incorporated Owners' and Select Earners' Plan (Exhibit
10.1 to Morgan Stanley's Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
10.34+ Form of Agreement under the Officers' and Select
Earners' Plan (Exhibit 10.2 to Morgan Stanley's Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.35+ Morgan Stanley & Co. Incorporated Excess Benefit Plan
(Exhibit 10.31 to the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1998).
10.36+ Supplemental Executive Retirement Plan (Exhibit 10.32
to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1998).
10.37+* Amendment to Supplemental Executive Retirement Plan
(adopted December 22, 1999).
10.38+ Performance Unit Plan (amended and restated) (Exhibit
10.8 to Morgan Stanley's Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
10.39+ 1988 Equity Incentive Compensation Plan, as amended
(Exhibit 10.12 to Morgan Stanley's Annual Report on
Form 10-K for the fiscal year ended January 31, 1993).
10.40+ 1995 Equity Incentive Compensation Plan (Annex A to
Morgan Stanley's Proxy Statement for its 1996 Annual
Meeting of Stockholders).
10.41+ 1988 Capital Accumulation Plan, as amended (Exhibit
10.13 to Morgan Stanley's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.42+ Form of Deferred Compensation Agreement under the Pre-
Tax Incentive Program (Exhibit 10.12 to Morgan
Stanley's Annual Report on Form 10-K for the fiscal
year ended January 31, 1994).
10.43+ Form of Deferred Compensation Agreement under the Pre-
Tax Incentive Program 2 (Exhibit 10.12 to Morgan
Stanley's Annual Report for the fiscal year ended
November 30, 1996).
10.44+ Trust Deed and Rules of the Morgan Stanley
International Profit Sharing Scheme dated November 12,
1987 of the Company, Morgan Stanley International and
Noble Lowndes Settlement Trustees Limited (Exhibit
10.11 to Morgan Stanley's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
</TABLE>
E-4
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Number
No. Description Pages
------- ----------- ------------
<C> <S> <C>
10.45+ Trust Deed and Rules of the Morgan Stanley UK Group
Profit Sharing Plan dated November 3, 1997 of the
Company, Morgan Stanley UK Group, Morgan Stanley
International Incorporated and Noble Lowndes Settlement
Trustees Limited (Exhibit 10.40 to the Company's Annual
Report on Form 10-K for the fiscal year ended
November 30, 1998).
10.46+ Amendment to Trust Deed and Rules of Morgan Stanley UK
Group Profit Sharing Plan (Exhibit 10.41 to the
Company's Annual Report on Form 10-K for the fiscal
year ended November 30, 1998 ).
10.47+ Amendments to the Rules of the Morgan Stanley UK Group
Profit Sharing Plan (Exhibit 10.42 to the Company's
Annual Report on Form 10-K for the fiscal year ended
November 30, 1998).
11* Statement Re: Computation of Earnings Per Common Share.
12* Statement Re: Computation of Ratio of Earnings to Fixed
Charges and Computation of Earnings to Fixed Charges
and Preferred Stock Dividends.
13* The following portions of the Company's 1999 Annual
Report to Shareholders, which are incorporated by
reference in this Annual Report on Form 10-K, are filed
as an Exhibit:
13.1 "Quarterly Results" (page 90).
13.2 "Selected Financial Data" (page 4).
13.3 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (pages 22 to
47).
13.4 "Risk Management" (pages 47 to 53).
13.5 Consolidated Financial Statements of the Company
and its subsidiaries, together with the Notes
thereto and the Independent Auditors' Report
thereon (pages 54 to 90).
21* Subsidiaries of the Company.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of Deloitte & Touche LLP with respect to the
Combined Financial Statements for the fiscal year ended
December 31, 1999 for the Morgan Stanley U.K. Group
Profit Sharing Scheme and Plan.
24 Powers of Attorney (included on signature page).
27* Financial Data Schedule.
99.1* Change in Employment Status Agreement by and between
the Company and Christine A. Edwards dated September 1,
1999.
99.2* Combined Financial Statements for the years ended
December 31, 1999 and 1998 for the Morgan Stanley U.K.
Group Profit Sharing Scheme and Plan.
</TABLE>
- --------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
E-5
<PAGE>
[LOGO] Printed on Recycled Paper
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
MAY 31, 1997
ARTICLE I
NAME
----
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
Morgan Stanley, Dean Witter, Discover & Co.
ARTICLE II
ADDRESS
-------
The address of the Corporation's registered office in the State of Delaware is
The Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
PURPOSE
-------
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
CAPITALIZATION
--------------
The total number of shares of stock which the Corporation shall have authority
to issue is one billion seven hundred eighty million (1,780,000,000), consisting
of thirty million (30,000,000) shares of Preferred Stock, par value $0.01 per
share (hereinafter referred to as "Preferred Stock"), and one billion seven
hundred fifty million (1,750,000,000) shares of Common Stock, par value $0.01
per share (hereinafter referred to as "Common Stock").
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to provide for the issuance of
shares of Preferred Stock in series and, by filing a certificate pursuant to the
applicable law of the State of Delaware (hereinafter referred to as a "Preferred
Stock Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers,
<PAGE>
preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, determination
of the following:
(1) The designation of the series, which may be by distinguishing number,
letter or title.
(2) The number of shares of the series, which number the Board of Directors
may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding).
(3) The amounts payable on, and the preferences, if any, of shares of the
series in respect of dividends, and whether such dividends, if any, shall be
cumulative or noncumulative.
(4) Dates at which dividends, if any, shall be payable.
(5) The redemption rights and price or prices, if any, for shares of the
series.
(6) The terms and amount of any sinking fund provided for the purchase or
redemption of shares of the series.
(7) The amounts payable on, and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation.
(8) Whether the shares of the series shall be convertible into or
exchangeable for shares of any other class or series, or any other security,
of the Corporation or any other corporation, and, if so, the specification of
such other class or series of such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates
at which such shares shall be convertible or exchangeable and all other terms
and conditions upon which such conversion or exchange may be made.
(9) Restrictions on the issuance of shares of the same series or of any
other class or series.
(10) The voting rights, if any, of the holders of shares of the series.
The Common Stock shall be subject to the express terms of the Preferred Stock
and any series thereof. Except as may be provided in this Certificate of
Incorporation or in a Preferred Stock Designation or by applicable law, the
holders of shares of Common Stock shall be entitled to one vote for each such
share upon all questions presented to the stockholders, the Common Stock shall
have the exclusive right to vote for the election of directors and for all other
purposes, and holders of Preferred Stock shall not be entitled to receive notice
of any meeting of stockholders at which they are not entitled to vote. The
holders of the shares of Common Stock shall at all times, except as otherwise
provided in this Certificate of Incorporation or as required by law, vote as one
class, together with the holders of any other class or series of stock of the
Corporation accorded such general voting rights.
The Corporation shall be entitled to treat the person in whose name any share
of its stock is registered as the owner thereof for all purposes and shall not
be bound to recognize any
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equitable or other claim to, or interest in, such share on the part of any other
person, whether or not the Corporation shall have notice thereof, except as
expressly provided by applicable law.
ARTICLE V
BY-LAWS
-------
In furtherance of, and not in limitation of, the powers conferred by law, the
Board of Directors is expressly authorized and empowered:
(1) to adopt, amend or repeal the Bylaws of the Corporation; provided,
however, that the Bylaws adopted by the Board of Directors under the powers
hereby conferred may be amended or repealed by the Board of Directors or by
the stockholders having voting power with respect thereto, provided further
that, in the case of amendments by stockholders, the affirmative vote of the
holders of at least 80 percent of the voting power of the then outstanding
Voting Stock, voting together as a single class, shall be required in order
for the stockholders to alter, amend or repeal any provision of the Bylaws or
to adopt any additional Bylaw; and
(2) from time to time to determine whether and to what extent, and at what
times and places, and under what conditions and regulations, the accounts and
books of the Corporation, or any of them, shall be open to inspection of
stockholders; and, except as so determined or as expressly provided in this
Certificate of Incorporation or in any Preferred Stock Designation, no
stockholder shall have any right to inspect any account, book or document of
the Corporation other than such rights as may be conferred by applicable law.
The Corporation may in its Bylaws confer powers upon the Board of Directors in
addition to the foregoing and in addition to the powers and authorities
expressly conferred upon the Board of Directors by applicable law.
ARTICLE VI
ACTION OF STOCKHOLDERS
----------------------
Subject to the rights of the holders of any series of Preferred Stock or any
other series or class of stock as set forth in this Certificate of
Incorporation, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing in lieu of a meeting of such stockholders.
ARTICLE VII
BOARD OF DIRECTORS
------------------
Subject to the rights of the holders of any series of Preferred Stock, or any
other series or class of stock as set forth in this Certificate of
Incorporation, to elect additional directors under specified circumstances, the
number of directors of the Corporation shall be fixed in
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such manner as prescribed by the Bylaws of the Corporation and may be increased
or decreased from time to time in such manner as prescribed by the Bylaws.
Unless and except to the extent that the Bylaws of the Corporation shall so
require, the election of directors of the Corporation need not be by written
ballot.
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
this Certificate of Incorporation, shall be divided into three classes,
initially consisting of 6, 4 and 4 directors. One class of directors initially
consisting of 4 directors shall be initially elected for a term expiring at the
annual meeting of stockholders to be held in 1998, another class initially
consisting of 4 directors shall be initially elected for a term expiring at the
annual meeting of stockholders to be held in 1999, and another class initially
consisting of 6 directors shall be initially elected for a term expiring at the
annual meeting of stockholders to be held in 2000. Members of each class shall
hold office until their successors are elected and qualified. At each annual
meeting of the stockholders of the Corporation commencing with the 1998 annual
meeting, directors elected to succeed those directors whose terms then expire
shall be elected by a plurality vote of all votes cast at such meeting to hold
office for a term expiring at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until his
or her successor shall have been duly elected and qualified.
Subject to the rights of the holders of any series of Preferred Stock, or any
other series or class of stock as set forth in this Certificate of
Incorporation, to elect additional directors under specified circumstances,
vacancies resulting from death, resignation, retirement, disqualification,
removal from office or other cause, and newly created directorships resulting
from any increase in the authorized number of directors, may be filled only by
the affirmative vote of a majority of the remaining directors, though less than
a quorum of the Board of Directors, and directors so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
office of the class to which they have been elected expires and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of authorized directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Subject to the rights of the holders of any series of Preferred Stock, or any
other series or class of stock as set forth in this Certificate of
Incorporation, to elect additional directors under specified circumstances, any
director may be removed from office at any time, but only for cause and by the
affirmative vote of the holders of at least 80 percent of the voting power of
the then outstanding Voting Stock, voting together as a single class.
ARTICLE VIII
INDEMNIFICATION
---------------
Each person who is or was a director or officer of the Corporation shall be
indemnified 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. The Corporation may, by action of the
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Board of Directors, provide indemnification to employees and agents (other than
a director or officer) of the Corporation, to directors, officers, employees or
agents of a subsidiary, and to each person serving as a director, officer,
partner, member, employee or agent of another corporation, partnership, limited
liability company, joint venture, trust or other enterprise, at the request of
the Corporation, with the same scope and effect as the foregoing indemnification
of directors and officers of the Corporation. The Corporation shall be required
to indemnify any 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
Certificate of Incorporation or otherwise by the Corporation. Without limiting
the generality or the effect of the foregoing, the Corporation may enter into
one or more agreements with any person which provide for indemnification greater
or different than that provided in this Article VIII. Any amendment or repeal
of this Article VIII shall not adversely affect any right or protection existing
hereunder in respect of any act or omission occurring prior to such amendment or
repeal.
ARTICLE IX
DIRECTORS' LIABILITY
--------------------
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) under Section 174 of the General Corporation Law of the
State of Delaware, or (4) for any transaction from which the director derived an
improper personal benefit. Any amendment or repeal of this Article IX shall not
adversely affect any right or protection of a director of the Corporation
existing hereunder in respect of any act or omission occurring prior to such
amendment or repeal.
If the General Corporation Law of the State of Delaware shall be amended, to
authorize corporate action further eliminating or limiting the liability of
directors, then a director of the Corporation, in addition to the circumstances
in which he is not liable immediately prior to such amendment, shall be free of
liability to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended.
ARTICLE X
AMENDMENTS
----------
Except as may be expressly provided in this Certificate of Incorporation, the
Corporation reserves the right at any time and from time to time to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation or a Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by
applicable law, and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article X;
provided, however, that any amendment or repeal of Article VIII or Article IX of
this Certificate of Incorporation shall not adversely affect any right or
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<PAGE>
protection existing thereunder in respect of any act or omission occurring prior
to such amendment or repeal, and provided further that no Preferred Stock
Designation shall be amended after the issuance of any shares of the series of
Preferred Stock created thereby, except in accordance with the terms of such
Preferred Stock Designation and the requirements of applicable law.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, and in addition to approval by the Board of Directors, the affirmative
vote of the holders of at least 80 percent of the voting power of the then
outstanding Voting Stock, voting together as a single class, shall be required
to amend, repeal or adopt any provision inconsistent with paragraph (1) of
Article V, Article VI, Article VII or this second paragraph of this Article X.
For the purposes of this Certificate of Incorporation, "Voting Stock" shall mean
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors.
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<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
ESOP CONVERTIBLE PREFERRED STOCK
OF
DEAN WITTER, DISCOVER & CO.
------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of
Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 3,902,438 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Issuance.
-------------------------
(A) The shares of such series shall be designated ESOP CONVERTIBLE
PREFERRED STOCK (hereinafter referred to as the "ESOP Preferred Stock") and such
series shall consist of
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<PAGE>
3,902,438 shares. Such number of shares may be increased or decreased from time
to time by resolution of the Committee (as hereinafter defined), but no such
increase shall result in such series consisting of more than 4,000,000 shares,
and no decrease shall reduce the number of shares of ESOP Preferred Stock to a
number less than that of shares of ESOP Preferred Stock then outstanding plus
the number of shares issuable upon exercise of any rights, options or warrants
or upon conversion of outstanding securities issued by the Corporation relating
to such shares. Notwithstanding the preceding sentence, the Board may increase
the number of shares of ESOP Preferred Stock to a number greater than 4,000,000
shares, or may decrease the number of such shares, subject only to any
limitations imposed by applicable law or the Certificate of Incorporation. Any
shares of ESOP Preferred Stock redeemed or purchased by the Corporation shall
remain issued and outstanding for all purposes (except that as long as such
shares are held by the Corporation or its nominee, no dividends shall be paid on
such shares and they shall neither be entitled to vote nor counted for quorum
purposes) and may thereafter be transferred by the Corporation from time to time
to a trustee or trustees referred to in paragraph (B) of this Section 1
(whereupon the voting and dividend rights of such shares shall be restored);
provided that the Corporation may provide at the time of or at any time after
such redemption or purchase that any such shares then held by the Corporation or
its nominee shall be retired, and such shares shall then be restored to the
status of authorized but unissued shares of Preferred Stock of the Corporation.
For the purposes of this Certificate of Designation, the "Committee" shall mean
any committee of the Board to whom the Board, pursuant to Section 141(c) of the
General Corporation Law of the State of Delaware, delegates authority to perform
the functions of the Board set forth in this Certificate of Designation.
(B) Shares of ESOP Preferred Stock shall be issued only to a trustee
or trustees acting on behalf of an employee stock ownership trust or plan or
other employee benefit plan (a "Plan") of the Corporation. In the event of any
sale, transfer or other disposition (hereinafter a "transfer") of shares of ESOP
Preferred Stock to any person (including, without limitation, any participant in
the Plan) other than (x) any trustee or trustees of the Plan, (y) any pledgee of
such shares acquiring such shares as security for any loan or loans made to the
Plan or to any trustee or trustees acting on behalf of the Plan or (z) the
Corporation, the shares of ESOP Preferred Stock so transferred, upon such
transfer and without any further
8
<PAGE>
action by the Corporation or the holder, shall be automatically converted into
shares of Common Stock at the Conversion Price (as hereinafter defined) and on
the terms otherwise provided for the conversion of shares of ESOP Preferred
Stock into shares of Common Stock pursuant to Section 5 hereof and no such
transferee shall have any of the voting powers, preferences and relative,
participating, optional or special rights ascribed to shares of ESOP Preferred
Stock hereunder, but, rather, only the powers and rights pertaining to the
Common Stock into which such shares of ESOP Preferred Stock shall be so
converted; provided, however, that in the event of a foreclosure or other
realization upon shares of ESOP Preferred Stock pledged as security for any loan
or loans made to the Plan or to the trustee or the trustees acting on behalf of
the Plan, the pledged shares so foreclosed or otherwise realized upon shall be
converted automatically into shares of Common Stock at the Conversion Price and
on the terms otherwise provided for conversions of shares of ESOP Preferred
Stock into shares of Common Stock pursuant to Section 5 hereof. In the event of
such a conversion, such transferee shall be treated for all purposes as the
record holder of the shares of Common Stock into which the ESOP Preferred Stock
shall have been converted as of the date of such conversion. Certificates
representing shares of ESOP Preferred Stock shall be legended to reflect such
restrictions on transfer. Notwithstanding the foregoing Provisions of this
Section 1, shares of ESOP Preferred Stock (i) may be converted into shares of
Common Stock as provided by Section 5 hereof and the shares of Common Stock
issued upon such conversion may be transferred by the holder thereof as
permitted by law and (ii) be redeemable by the Corporation upon the terms and
conditions provided by Sections 6, 7 and 8 hereof.
2. Dividends and Distributions.
----------------------------
(A) (1) Subject to the provisions for adjustment hereinafter set
forth, the holders of shares of ESOP Preferred Stock (other than the Corporation
or its nominee) shall be entitled to receive, when and as declared by the Board
out of funds legally available therefor, cash dividends ("Preferred Dividends")
payable in accordance with either of the following elections, as the Board shall
elect from time to time in its absolute discretion:
(i) in an amount per share initially equal to $2.78 per share per
annum, and no more (such amount, as adjusted from time to time pursuant to
the terms hereof, including during any period in which a
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Semiannual Payment Election (as defined below) shall be in effect, the
"Annual Dividend Rate"), payable annually in arrears on December 31 (or
such later date not more than four business days thereafter as the Board
may from time to time elect in its absolute discretion; such date, the
"Annual Payment Date") of each year (such election, the "Annual Payment
Election") beginning on the Annual Payment Date occurring immediately after
the effective date of such Annual Payment Election; or
(ii) in an amount per share initially equal to $2.78 per share per
annum, and no more (such amount, as adjusted from time to time pursuant to
the terms hereof, including during any period in which an Annual Payment
Election is in effect, the "Semiannual Dividend Rate"; and the Semiannual
Dividend Rate and the Annual Dividend Rate, as in effect at any time, are
each hereinafter referred to as the "Preferred Dividend Rate"),
semiannually in arrears, one-half on each June 30 and December 31 (or, in
either case, such later date not more than four business days after either
of such dates as the Board may from time to time elect in its absolute
discretion; such dates, the "Semiannual Payment Dates") of each year (such
election, the "Semiannual Payment Election"), beginning on the Semiannual
Payment Date occurring immediately after the effective date of such
Semiannual Payment Election;
provided that any Semiannual Payment Election shall be made effective only
during the period beginning on January 5 and ending on June 29 in each year.
The Board shall give prompt notice to the holders of the ESOP Preferred Stock of
any Semiannual Payment Election or Annual Payment Election and any election to
alter any Dividend Payment Date pursuant to this Section 2(A)(1). Each Annual
Payment Date or Semiannual Payment Date, as applicable, is hereinafter referred
to as a "Dividend Payment Date", and each payment of a Preferred Dividend shall
be made to holders of record at the opening of business on such Dividend Payment
Date.
(2) Preferred Dividends shall begin to accrue on outstanding shares
of ESOP Preferred Stock from the date of issuance of such shares, except that
with respect to any shares of ESOP Preferred Stock redeemed or purchased by the
Corporation and then reissued, Preferred Dividends shall accrue on such shares
from their date of reissuance. Preferred Dividends shall accrue on a daily
basis, whether or not the Corporation shall then have earnings or surplus
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<PAGE>
(computed on the basis of a 360-day year of twelve 30-day months in case of any
period less than one year) based on the Preferred Dividend Rate in effect on
such date; provided however, that if a Semiannual Payment Election or an Annual
Payment Election becomes effective on or after such date and before the
immediately succeeding Dividend Payment Date, payments in respect of dividends
on the ESOP Preferred Stock made on or after the effective date of such
Semiannual Payment Election or Annual Payment Election and on or before such
Dividend Payment Date shall be computed using the Preferred Dividend Rate in
effect on the date of such payment; provided further, the dividends payable on
the first Dividend Payment Date following the issuance of the ESOP Preferred
Stock shall be in an amount equal to the Annual Dividend Rate for a full annum
or the Semiannual Dividend Rate for a full semiannum, as applicable. Accrued
but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on
which they first become payable, but no interest shall accrue on accumulated but
unpaid Preferred Dividends.
(B) So long as any shares of ESOP Preferred Stock shall be
outstanding, no dividend shall be declared or paid or set apart for payment on
any other series of stock ranking on a parity with the ESOP Preferred Stock as
to dividends, unless there shall also be or have been declared and paid or set
apart for payment on the ESOP Preferred Stock, like dividends for all dividend
payment periods of the ESOP Preferred Stock ending on or before the dividend
payment date of such parity stock, ratably in proportion to the respective
amounts of dividends (1) accumulated and unpaid or payable on such parity stock,
on the one hand, and (2) accumulated and unpaid through the dividend payment
period or periods of the ESOP Preferred Stock next preceding such dividend
payment date, on the other hand. If full cumulative dividends on the ESOP
Preferred Stock have not been declared and paid or set apart for payment when
due, the Corporation shall not declare or pay or set apart for payment any
dividends or make any other distributions on, or make any payment on account of
the purchase, redemption or other retirement of, any other class of stock or
series thereof of the Corporation ranking, as to dividends or upon dissolution,
junior to the ESOP Preferred Stock until full cumulative dividends on the ESOP
Preferred Stock shall have been paid or declared and set apart; provided,
however, that the foregoing shall not apply to (i) any dividend or distribution
payable solely in any shares of, or options, warrants or rights to subscribe for
or purchase shares of, any stock ranking, as to dividends and upon dissolution,
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<PAGE>
junior to the ESOP Preferred Stock or (ii) the acquisition of shares of any
stock ranking, as to dividends and upon dissolution, junior to the ESOP
Preferred Stock in exchange solely for or by conversion solely into shares of
any other stock ranking junior to the ESOP Preferred Stock as to dividends and
upon dissolution.
(C) Any dividend payment made on shares of ESOP Preferred Stock shall
first be credited against the earliest accumulated but unpaid dividend due with
respect to such shares.
3. Liquidation Preference.
-----------------------
(A) In the event of any dissolution or liquidation of the
Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of any series or class or classes of
stock of the Corporation ranking junior to ESOP Preferred Stock upon dissolution
or liquidation, the holders of ESOP Preferred Stock (other than the Corporation
or its nominee) shall be entitled to receive the Liquidation Price (as
hereinafter defined) per share in effect at the time of dissolution or
liquidation plus an amount equal to all dividends accrued (whether or not
accumulated) and unpaid on the ESOP Preferred Stock to the date of final
distribution to such holders; but such holders shall not be entitled to and
shall not otherwise receive any further payments. The Liquidation Price per
share that holders of ESOP Preferred Stock shall receive upon dissolution or
liquidation shall be $35.875, subject to adjustment as hereinafter provided.
If, upon any dissolution or liquidation of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of ESOP
Preferred Stock shall be insufficient to pay in full the preferential amount
aforesaid and liquidating payments on any other shares ranking, as to
dissolution or liquidation, on a parity with ESOP Preferred Stock, then such
assets, or the proceeds thereof, shall be distributed among the holders of ESOP
Preferred Stock and any such other shares ratably in accordance with the
respective amounts that would be payable on such shares of ESOP Preferred Stock
and any such other shares if all amounts payable thereon were paid in full. For
the purposes of this Section 3, neither a consolidation or merger of the
Corporation with or into one or more corporations, nor the sale, transfer, lease
or exchange (for cash, shares of equity stock, securities or other
consideration) of all or substantially all of the
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<PAGE>
assets of the Corporation, nor the distribution to the stockholders of the
Corporation of all or substantially all of the consideration for such sale,
unless such consideration (apart from assumption of liabilities) or the net
proceeds thereof consists substantially entirely of cash, shall be deemed to be
a dissolution or liquidation, voluntary or involuntary.
(B) Subject to the rights of the holders of shares of any series or
class or classes of stock ranking on a parity with or senior to ESOP Preferred
Stock upon dissolution or liquidation, upon any dissolution or liquidation of
the Corporation, after payment shall have been made in full to the holders of
ESOP Preferred Stock as provided in this Section 3, but not prior thereto, any
other series or class or classes of stock ranking junior to ESOP Preferred Stock
upon dissolution or liquidation shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
of the Corporation remaining to be paid or distributed, and the holders of ESOP
Preferred Stock shall not be entitled to share therein.
4. Ranking and Voting of Shares.
-----------------------------
(A) Each of (i) the Corporation's 7-3/8% Cumulative Preferred Stock,
with a liquidation value of $200.00 per share, (ii) the Corporation's 7-3/4%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii)
the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a
liquidation value of $200.00 per share, (iv) if issued, the Corporation's 7.82%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (v)
if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii)
if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (viii) if issued, the Corporation's
8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share
and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, shall rank on a parity with ESOP
Preferred Stock as to dividends and as to distribution of assets upon
dissolution or liquidation.
Unless otherwise provided in the Certificate of Incorporation of the
Corporation, as the same may be
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<PAGE>
amended, or in a Certificate of Designation of Rights and Preferences relating
to any subsequent series of Preferred Stock, the ESOP Preferred Stock shall rank
on a parity with all series of the Corporation's Preferred Stock, other than the
Corporation's Series A Junior Participating Preferred Stock to which the ESOP
Preferred Stock shall rank senior, as to dividends and as to the distribution of
assets upon dissolution or liquidation.
(B) The holders of shares of ESOP Preferred Stock (other than the
Corporation or its nominee) shall have the following voting rights:
(1) The holders of ESOP Preferred Stock shall be entitled to vote on
all matters submitted to a vote of the stockholders of the Corporation, voting
together with the holders of Common Stock as one class. The holder of each
share of ESOP Preferred Stock shall be entitled to a number of votes equal to
1.35 times the number of shares of Common Stock into which such share of ESOP
Preferred Stock could be converted on the record date for determining the stock
holders entitled to vote; it being understood that whenever the "Conversion
Price" (as defined in Section 5 hereof) is adjusted as provided in Section 9
hereof, the number of votes of the ESOP Preferred Stock shall also be corres
pondingly adjusted. Notwithstanding the immediately preceding sentence, if the
governing body of the New York Stock Exchange or any other securities listing
service or exchange (each, an "Exchange") or any relevant governmental or
regulatory entity (each such entity, and each governing body of an Exchange, a
"Regulating Entity") shall have disapproved of such voting power or taken or
threatened any action against the Corporation or in respect of any of its
securities in accordance with Rule 19c-4 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), or any other rule or listing standard
of any Regulating Entity regarding the voting power of securities, or if the
Board of Directors determines in its sole judgment that any Regulating Entity
may so disapprove or take or threaten any such action, the holder of each share
of ESOP Preferred Stock shall be entitled to a maximum number of votes
permissible (consistent with continued listing of the Corporation's securities
on any such Exchange) in accordance with the interpretations of any such rule or
listing standard by such Regulating Entity, as determined by the Board.
(2) Except as otherwise required by law or set forth herein, holders
of ESOP Preferred Stock shall have no
14
<PAGE>
special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for the taking of any corporate action, including the issuance of any
Preferred Stock now or hereafter authorized; provided, however, that the vote of
at least 66-2/3% of the outstanding shares of ESOP Preferred Stock, voting
separately as a series, shall be necessary to approve any alteration, amendment
or repeal of any provision of the Certificate of Incorporation or any
alteration, amendment or repeal of any provision of the resolutions relating to
the designation, preferences and rights of ESOP Preferred Stock (including any
such alteration, amendment or repeal effected by any merger or consolidation in
which the Corporation is the surviving or resulting corporation, but not
including any alteration or amendment of rights expressly provided for in
Section (B)(1) above or in Section 2(A)(1)), if such amendment, alteration or
repeal would alter or change the powers, preferences, or special rights of the
ESOP Preferred Stock so as to affect them adversely.
5. Conversion into Common Stock.
-----------------------------
(A) A holder of shares of ESOP Preferred Stock shall be entitled, at
any time prior to the close of business on the date fixed for redemption of such
shares pursuant to Section 6, 7 or 8 hereof, to cause any or all of such shares
to be converted into shares of Common Stock. The number of shares of Common
Stock into which each share of the ESOP Preferred Stock may be converted shall
be determined by dividing the Liquidation Price in effect at the time of
conversion by the Conversion Price (as hereinafter defined) in effect at the
time of conversion. The initial Conversion Price per share at which shares of
Common Stock shall be issuable upon conversion of any shares of ESOP Preferred
Stock shall be $10.871, subject to adjustment as hereinafter provided; that is,
a conversion rate initially equivalent to three and three-tenths (3-3/10) shares
of Common Stock for each share of ESOP Preferred Stock, which is subject to
adjustment as hereinafter provided.
(B) Any holder of shares of ESOP Preferred Stock desiring to convert
such shares into shares of Common Stock shall surrender, if certificated, the
certificate or certificates representing the shares of ESOP Preferred Stock
being converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock
15
<PAGE>
powers relating thereto), or if uncertificated, a duly executed stock power
relating thereto, at the principal executive office of the Corporation or the
offices of the transfer agent for the ESOP Preferred Stock or such office or
offices in the continental United States of an agent for conversion as may from
time to time be designated by notice to the holders of the ESOP Preferred Stock
by the Corporation or the transfer agent for the ESOP Preferred Stock,
accompanied by written notice of conversion. Such notice of conversion shall
specify (i) the number of shares of ESOP Preferred Stock to be converted and the
name or names in which such holder wishes the Common Stock and any shares of
ESOP Preferred Stock not to be so converted to be issued, and (ii) the address
to which such holder wishes delivery to be made of a confirmation of such
conversion, if uncertificated, or any new certificates which may be issued upon
such conversion, if certificated.
(C) Upon surrender, if certificated, of a certificate representing a
share or shares of ESOP Preferred Stock for conversion, or if uncertificated, of
a duly executed stock power relating thereto, the Corporation shall issue and
send by hand delivery (with receipt to be acknowledged) or by first class mail,
postage prepaid, to the holder thereof or to such holder's designee, at the
address designated by such holder, if certificated, a certificate or
certificates for, or if uncertificated, confirmation of, the number of shares of
Common Stock to which such holder shall be entitled upon conversion. If there
shall have been surrendered shares of ESOP Preferred Stock only part of which
are to be converted, the Corporation shall issue and deliver to such holder or
such holder's designee, if certificated, a new certificate or certificates
representing the number of shares of ESOP Preferred Stock that shall not have
been converted, or if uncertificated, confirmation of the number of shares of
ESOP Preferred Stock that shall not have been converted.
(D) The issuance by the Corporation of shares of Common Stock upon a
conversion of shares of ESOP Preferred Stock into shares of Common Stock made at
the option of the holder thereof shall be effective as of the earlier of (i) the
delivery to such holder or such holder's designee of the certificates
representing the shares of Common Stock issued upon conversion thereof, if
certificated, or confirmation, if uncertificated, and (ii) the commencement of
business on the second business day after the surrender of the certificate or
certificates, if certificated, or a duly executed stock power, if
uncertificated, for the shares of
16
<PAGE>
ESOP Preferred Stock to be converted. On and after the effective date of
conversion, the person or persons entitled to receive Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock, and no allowance or adjust ment shall be
made in respect of dividends payable to holders of Common Stock of record on any
date prior to such effective date. The Corporation shall not be obligated to
pay any dividend that may have accrued or have been declared but that is not
payable to holders of shares of ESOP Preferred Stock if the Dividend Payment
Date for such dividend is on or subsequent to the effective date of conversion
of such shares.
(E) The Corporation shall not be obligated to deliver to holders of
ESOP Preferred Stock any fractional share or shares of Common Stock issuable
upon any conversion of such shares of ESOP Preferred Stock, but in lieu thereof
may make a cash payment in respect thereof in any manner permitted by law.
(F) The Corporation shall at all times reserve and keep available out
of its authorized and unissued Common Stock or treasury Common Stock, solely for
issuance upon the conversion of shares of ESOP Preferred Stock as herein
provided, such number of shares of Common Stock as shall from time to time be
issuable upon the conversion of all the shares of ESOP Preferred Stock then
outstanding.
6. Redemption at the Option of the Corporation.
--------------------------------------------
(A) The ESOP Preferred Stock shall be redeemable, in whole or in
part, at the option of the Corporation at any time after September 19, 2000, out
of funds legally available therefor, at a redemption price per share equal to
100% of the Liquidation Price plus an amount equal to all accrued (whether or
not accumulated) and unpaid dividends thereon to the date fixed for redemption.
Payment of the redemption price shall be made by the Corporation in cash or
shares of Common Stock, or a combination thereof, as permitted by paragraph (E)
of this Section 6. From and after the date fixed for redemption, dividends on
shares of ESOP Preferred Stock called for redemption will cease to accrue and
all rights of the holder in respect of such shares shall cease, except the right
to receive the redemption price. Upon payment of the redemption price, such
shares shall be deemed to have been transferred to the Corporation, to be held
as treasurer shares or to be retired, in either case as provided in Sec-
tion 1(A). If less than all of the
17
<PAGE>
outstanding shares of ESOP Preferred Stock are to be redeemed, the Corporation
shall either redeem a portion of the shares of each holder determined pro rata
based on the number of shares held by each holder or shall select the shares to
be redeemed by lot, as may be determined by the Board.
(B) Notice of redemption will be sent to the holders of ESOP
Preferred Stock at the address on the books of the Corporation or any transfer
agent for ESOP Preferred Stock by first class mail, postage prepaid, mailed not
less than twenty (20) days nor more than sixty (60) days prior to the redemption
date or in any other manner provided by law. Each notice shall state: (i) the
redemption date; (ii) the total number of shares of ESOP Preferred Stock to be
redeemed and, if fewer than all the shares held by such
holder are to be redeemed, the number of such shares to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places where certificates,
if certificated, for such shares are to be surrendered for payment of the
redemption price; (v) that dividends on the shares to be redeemed will cease to
accrue on such redemption date; (vi) whether such redemption price should be
paid in cash or in shares of Common Stock; and (vii) the conversion rights of
the shares to be redeemed, the period within which conversion rights may be
exercised and the Conversion Price and number of shares of Common Stock issuable
upon conversion of a share of ESOP Preferred Stock at the time. Upon surrender
of the certificates, if certificated, for any shares so called for redemption,
or upon the date fixed for redemption, if uncertificated, such shares, if not
previously converted, shall be redeemed by the Corporation as of the close of
business on the date fixed for redemption and at the redemption price set forth
in this Section 6.
(C) The Corporation may, in its sole discretion and notwithstanding
anything to the contrary in paragraph (A) of this Section 6, at any time within
one year after either of the following events:
(i) there shall be a change in the federal tax law or regulations of
the United States of America or of an interpretation or application of such
law or regulations or of a determination by a court of competent
jurisdiction that in any case has the effect of precluding the Corporation
from claiming (other than for purposes of calculating any alternative
minimum tax) any of the tax deductions for dividends paid on
18
<PAGE>
the ESOP Preferred Stock when such dividends are used as provided under
Section 404(k)(2) of the Internal Revenue Code of 1986, as amended (the
"Code"), as in effect on December 31, 1995.
(ii) the Corporation shall certify to the holders of the ESOP
Preferred Stock that the Corporation has determined in good faith that the
Plan either is not qualified as a "stock bonus plan" within the meaning of
Section 401(a) of the Code or is not an "employee stock ownership plan"
within the meaning of Section 4975(e)(7) of the Code,
elect either to (a) redeem, out of funds legally available therefor, any or all
of such ESOP Preferred Stock for cash or, if the Corporation so elects, in
shares of Common Stock, or a combination of such shares of Common Stock and
cash, as permitted by paragraph (E) of this Section 6, at a redemption price
equal to (x) if the relevant event is as provided in clause (i) above, the
Liquidation Price per share on the date fixed for redemption, plus an amount
equal to accrued (whether or not accumulated) and unpaid dividends thereon to
the date fixed for redemption or (y) if the relevant event is as provided in
clause (ii) above, an amount calculated on the basis of the redemption prices
provided in paragraph (D) of this Section 6 on the date fixed for redemption or
(b) exchange any or all of such shares of ESOP Preferred Stock for securities of
at least equal value (as determined by an independent appraiser) that constitute
"qualifying employer securities" with respect to a holder of ESOP Preferred
Stock within the meaning of Section 409(l) of the Code and Section 407(d)(5) of
the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), or
any successor provisions of law. If the Corporation elects to redeem any or all
of the ESOP Preferred Stock pursuant to clause (a) of the preceding sentence,
notice of such redemption shall be given as required in paragraph (B) of this
Section 6, and if the Corporation elects to exchange any or all of the ESOP
Preferred Stock for securities of at least equal value pursuant to clause (b) of
the preceding sentence, it will cause notice of such election to be sent to the
holders of ESOP Preferred Stock at the address shown on the books of the
Corporation or any transfer agent for ESOP Preferred Stock by first class mail,
postage prepaid, mailed not less than twenty (20) days nor more than sixty (60)
days prior to the date of exchange or in any other manner required by law. Each
notice shall state: (i) the exchange date; (ii) the total number of shares of
ESOP Preferred Stock to be
19
<PAGE>
exchanged and, if fewer than all the shares held by such holder are to be
exchanged, the number of shares held by such holder to be exchanged; (iii) the
exchange rate; (iv) the place or places where certificates, if certificated, for
such shares are to be surrendered for exchange; and (v) that dividends on the
shares to be exchanged will cease to accrue an such exchange date.
(D) Notwithstanding anything to the contrary in paragraph (A) of this
Section 6, in the event that the Plan is, or contributions thereto are,
terminated, the Corporation may, in its sole discretion, call for redemption any
or all of the then outstanding ESOP Preferred Stock, upon notice as required in
paragraph (B) of this Section 6, out of funds legally available therefor, at a
redemption price per share equal to the following percentages of the Liquidation
Price in effect on the date fixed for redemption:
<TABLE>
<CAPTION>
During the Twelve-
Month Period Percentage of
Beginning September 19, Liquidation Price
------------------------- -----------------
<S> <C>
1996 103.10
1997 102.33
1998 101.55
1999 100.78
2000 100.00
</TABLE>
and thereafter at 100%, plus, in each case, an amount equal to all accrued
(whether or not accumulated) and unpaid dividends thereon to the date fixed for
redemption. Payment of the redemption price shall be made by the Corporation in
cash or shares of Common Stock, or a combination thereof, as permitted by
paragraph (E) of this Section 6. From and after the date fixed for redemption,
dividends on shares of ESOP Preferred Stock called for redemption will cease to
accrue and all rights of the holder in respect of such shares shall cease,
except the right to receive the redemption price. Upon payment of the
redemption price, such shares shall be deemed to have been transferred to the
Corporation, to be held as treasury shares or to be retired, in either case as
provided in Section 1(A).
(E) The Corporation, at its option, may make payment of the
redemption price required upon redemption of shares of ESOP Preferred Stock in
cash or in shares of Common Stock, or in a combination of such shares and cash,
any such shares of Common Stock to be valued for such purpose at their Fair
Market Value (as defined in paragraph 9(H)(2)); provided, however, that in
calculating
20
<PAGE>
their Fair Market Value the Adjustment Period (as defined in paragraph 9(H)(2))
shall be deemed to be the five (5) consecutive trading days preceding the date
of redemption.
7. Redemption at the Option of the Holder.
---------------------------------------
(A) Unless otherwise provided by law, shares of ESOP Preferred Stock
shall be redeemed by the Corporation at the option of the holder, at any time
and from time to time upon notice to the Corporation given not less than five
business days prior to the date fixed by the holder in such notice, when and to
the extent necessary for such holder to provide for distributions required to be
made under, or to satisfy an investment election provided to participants in
accordance with, the Plan or any successor plan or when the holder elects to
redeem shares of ESOP Preferred Stock in connection with any Preferred Dividend
(a "Dividend Redemption"), in shares of Common Stock legally available therefor,
at a redemption price equal to the higher of (x) the Liquidation Price per share
on the date fixed for redemption and (y) the Fair Market Value (as defined in
paragraph 9(H)(2)) of the number of shares of Common Stock into which each share
of ESOP Preferred Stock is convertible at the time the notice of such redemption
is given, plus in either case an amount equal to accrued (whether or not
accumulated) and unpaid dividends thereon to the date fixed for redemption (such
higher price on any date, together with such accrued and unpaid dividends, the
"Special Redemption Price"). At the election of the Corporation, such redemp-
tion may instead be made out of funds legally available therefor in cash or a
combination of Common Stock and cash. Any shares of Common Stock shall be valued
for the purposes of redemption pursuant to this paragraph (A) as provided by
paragraph (E) of Section 6. In the case of any Dividend Redemption, such holder
shall give the notice specified above on the fifth business day after the
related Dividend Payment Date and such redemption shall be effective as to such
number of shares of ESOP Preferred Stock as shall equal (x) the aggregate amount
of such Preferred Dividends paid with respect to shares of ESOP Preferred Stock
allocated or credited to the accounts of participants in the Plan or any
successor plan that are used to repay any loan associated with such allocated or
credited shares divided by (y) the Special Redemption Price specified above in
this paragraph (A).
(B) Unless otherwise provided by law, shares of ESOP Preferred
Stock shall be redeemed by the Corporation at the option of the holder, at any
time and from time to
21
<PAGE>
time upon notice to the Corporation given not less than five business days prior
to the date fixed by the holder in such notice, upon certification by such
holder to the Corporation of the following events: (i) when and to the extent
necessary for such holder to make any payments of principal, interest or premium
due and payable (whether voluntary, scheduled, upon acceleration or otherwise)
upon any obligations of the trust established under the Plan in connection with
the acquisition of ESOP Preferred Stock or any indebtedness, expenses or costs
incurred by the holder for the benefit of the Plan; or (ii) when and if it shall
be established to the satisfaction of the holder that the Plan has not initially
been determined by the Internal Revenue Service to be qualified as a "stock
bonus plan" and an "employee stock ownership plan" within the meaning of Section
401(a) or 4975(e)(7) of the Code, respectively, in shares of Common Stock
legally available therefor, at a redemption price equal to the Liquidation Price
plus an amount equal to accrued and unpaid dividends thereon to the date fixed
for redemption. At the election of the Corporation, such redemption may instead
be made out of funds legally available therefor in cash or a combination of
Common Stock and cash. Any shares of Common Stock shall be valued for the
purposes of redemption pursuant to this paragraph (B) as provided by paragraph
(E) of Section 6.
8. Consolidation, Merger, etc.
---------------------------
(A) If the Corporation shall consummate any consolidation or merger
or similar transaction, however named, pursuant to which the outstanding shares
of Common Stock are by operation of law exchanged solely for or changed,
reclassified or converted solely into securities of any successor or resulting
company (including the Corpora tion) that constitute "qualifying employer
securities" with respect to a holder of ESOP Preferred Stock within the meanings
of Section 409(l) of the Code and Section 407(d)(5) of ERISA, or any successor
provision of law, and, if applicable, for a cash payment in lieu of fractional
shares, if any, then, in such event, the terms of such consolidation or merger
or similar transaction shall provide that the shares of ESOP Preferred Stock of
such holder shall be converted into or exchanged for and shall become preferred
securities of such successor or resulting company, having in respect of such
company insofar as possible (taking into account, without limitation, any
requirements relating to the listing of such preferred securities on any
national securities exchange or the qualification of such preferred securities
for trading in any over-the-counter market) the
22
<PAGE>
same powers, preferences and relative, participating, optional or other special
rights (including the redemption rights provided by Sections 6, 7 and 8 hereof),
and the qualifications, limitations or restrictions thereon, that the ESOP
Preferred Stock had immediately prior to such transaction; provided, however,
that after such transaction each security into which the ESOP Preferred Stock is
so converted or for which it is exchanged shall be convertible, pursuant to the
terms and conditions provided by Section 5 hereof, into the number and kind of
qualifying employer securities receivable by a holder equivalent to the number
of shares of Common Stock into which such shares of ESOP Preferred Stock could
have been converted pursuant to Section 5 hereof immediately prior to such
transaction and provided further that if by virtue of the structure of such
transaction, a holder of Common Stock is required to make an election with
respect to the nature and kind of considera tion to be received in such
transaction, which election cannot practicably be made by the holders of the
ESOP Preferred Stock, then such election shall be deemed to be solely for
"qualifying employer securities" (together, if applicable, with a cash payment
in lieu of fractional shares) with the effect provided above on the basis of the
number and kind of qualifying employer securities receivable by a holder of the
number of shares of Common Stock into which the shares of ESOP Preferred Stock
could have been converted pursuant to Section 5 hereof immediately prior to such
transaction (it being understood that if the kind or amount of qualifying
employer securities receivable in respect of each share of Common Stock upon
such transaction is not the same for each such share, then the kind and amount
of qualifying employer securities deemed to be receivable in respect of each
share of Common Stock for purposes of this proviso shall be the kind and amount
so receivable per share of Common Stock by a plurality of such shares). The
rights of the ESOP Preferred Stock as preferred equity of such successor or
resulting company shall successively be subject to adjustments pursuant to
Section 9 hereof after any such transaction as nearly equivalent as practicable
to the adjustments provided for by such Section prior to such transaction. The
Corporation shall not consummate any such merger, consolidation or similar
transaction unless all the terms of this paragraph (A) are complied with.
(B) If the Corporation shall consummate any consolidation or merger
or similar transaction, however named, pursuant to which the outstanding shares
of Common Stock are by operation of law exchanged for or changed,
23
<PAGE>
reclassified or converted into other shares or securities or cash or any other
property, or any combination thereof, other than any such consideration which is
constituted solely of qualifying employer securities that are common stock or
common equity (as referred to in paragraph (A) of this Section 8) and cash
payments, if applicable, in lieu of fractional shares or other interests,
outstanding shares of ESOP Preferred Stock shall, without any action on the part
of the Corporation or any holder thereof (but subject to paragraph (C) of this
Section 8), be automatically converted immediately prior to the consummation of
such merger, consolidation or similar transaction into shares of Common Stock at
the Conversion Price then in effect.
(C) If the Corporation shall enter into any agreement providing for
any consolidation or merger or similar transaction described in paragraph (B) of
this Section 8, then the Corporation shall as soon as practicable thereafter
(and in any event at least ten (10) business days before consummation of such
transaction) give notice of such agreement and the material terms thereof to
each holder of ESOP Preferred Stock and each such holder shall have the right to
elect, by written notice to the Corporation, to receive, upon consummation of
such transaction (if and when such transaction is consummated), out of funds
legally available therefor, from the Corporation or the successor of the
Corporation, in redemption of such ESOP Preferred Stock, in lieu of any cash or
other securities which such holder would otherwise be entitled to receive under
paragraph (B) of this Section 8, a cash payment equal to the Liquidation Price
per share on the date fixed for such transaction, plus an amount equal to
accrued (whether or not accumulated) and unpaid dividends thereon to the date
fixed for such transaction. No such notice of redemption shall be effective
unless given to the Corporation prior to the close of business of the fifth
business day prior to consummation of such transaction, unless the Corporation
or the successor of the Corporation shall waive such prior notice, but any
notice or redemption so given prior to such time may be withdrawn by notice of
withdrawal given to the Corporation prior to the close of business on the fifth
business day prior to consummation of such transaction.
9. Anti-dilution Adjustments.
--------------------------
(A)(1) In the event the Corporation shall, at any time or from time
to time while any of the shares of the ESOP Preferred Stock are outstanding, (i)
pay a dividend or make a distribution in respect of the Common Stock in shares
24
<PAGE>
of Common Stock or (ii) subdivide the outstanding shares of Common Stock into a
greater number of shares, in each case whether by reclassification of shares,
recapitalization of the Corporation (excluding a recapitalization or reclass-
ification effected by a merger or consolidation to which Section 8 applies) or
otherwise, then, in such event, the Conversion Price shall, subject to the
provisions of paragraphs (E) and (F) of this Section 9, automatically be
adjusted by dividing such Conversion Price by a fraction (the "Section 9(A)
Fraction"), the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock outstanding immediately before such event.
Such adjustment to the Conversion Price shall be effective, upon payment of such
dividend or distribution in respect of the Common Stock, as of the record date
for the determination of stockholders entitled to receive such dividend or
distribution (on a retroactive basis), and in the case of a subdivision shall
become effective immediately as of the effective date thereof. An adjustment to
the Conversion Price pursuant to this Section 9(A)(1) shall have no effect on
the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred
Stock.
(2) In the event the Corporation shall, at any time or from time to
time while any of the shares of the ESOP Preferred Stock are outstanding,
combine the outstanding shares of Common Stock into a lesser number of
shares, whether by reclassification of shares, recapitalization of the
Corporation (excluding a recapitalization or reclassification effected by a
merger, consolidation or other transaction to which Section 8 applies) or
otherwise, then, in such event, the Conversion Price shall, subject to the
provisions of paragraph (F) of this Section 9, automatically be adjusted by
dividing the Conversion Price in effect immediately before such event by the
Section 9(A) Fraction. An adjustment to the Conversion Price made pursuant
to this paragraph 9(A)(2) shall be given effect immediately as of the
effective date of such combination and shall have no effect on the
Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred
Stock.
(B) In the event the Corporation shall, at any time or from time to
time while any of the shares of ESOP Preferred Stock are outstanding, issue
to holders of shares of Common Stock as a dividend or distribu tion,
including by way of a reclassification of shares
25
<PAGE>
or a recapitalization of the Corporation, any right or warrant to purchase
shares of Common Stock (but not including as a right or warrant for this
purpose any security convertible into or exchangeable for shares of Common
Stock) for a consideration having a Fair Market Value (as hereinafter
defined) per share less than the Fair Market Value of a share of Common
Stock on the date of issuance of such right or warrant (other than pursuant
to any employee or director incentive, compensation or benefit plan or
arrangement of the Corporation or any subsidiary of the Corporation
heretofore or hereafter adopted), then, in such event, the Conversion Price
shall, subject to the provisions of paragraphs (E) and (F) of this Sec-
tion 9, automatically be adjusted by dividing such Conversion Price by a
fraction (the "Section 9(B) Fraction"), the numerator of which is the number
of shares of Common Stock outstanding immediately before such issuance of
rights or warrants plus the maximum number of shares of Common Stock that
could be acquired upon exercise in full of all such rights and warrants and
the denominator of which is the number of shares of Common Stock
outstanding immediately before such issuance of warrants or rights plus the
number of shares of Common Stock that could be purchased at the Fair Market
Value of a share of Common Stock at the time of such issuance for the
maximum aggregate consideration payable upon exercise in full of all such
rights and warrants. Such adjustment to the Conversion Price shall be
effective upon such issuance of rights or warrants. An adjustment to the
Conversion Price pursuant to this Section 9(B) shall have no effect on the
Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred
Stock.
(C)(1) In the event the Corporation shall, at any time or from time
to time while any of the shares of ESOP Preferred Stock are outstanding,
issue, sell or exchange shares of Common Stock (other than pursuant to (x)
any right or warrant to purchase or acquire shares of Common Stock
(including as such a right or warrant for this purpose any security
convertible into or exchangeable for shares of Common Stock) or (y) any
employee or director incentive, compensation or benefit plan or arrangement
of the Corporation or any subsidiary of the Corporation heretofore or
hereafter adopted) at a purchase price per share less than the Fair Market
Value of a share of Common Stock on the date of such issuance, sale or
exchange, then, in such
26
<PAGE>
event, the Conversion Price shall, subject to the provisions of paragraphs
(E) and (F) of this Section 9, automatically be adjusted by dividing such
Conversion Price by a fraction (the "Section 9(C)(1) Fraction"), the
numerator of which is the number of shares of Common Stock outstanding
immediately before such issuance, sale or exchange plus the number of shares
of Common Stock so issued, sold or exchanged and the denominator of which is
the number of shares of Common Stock outstanding immediately before such
issuance, sale or exchange plus the number of shares of Common Stock that
could be purchased at the Fair Market Value of a share of Common Stock at
the time of such issuance, sale or exchange for the maximum aggregate
consideration paid therefor.
(2) In the event that the Corporation shall, at any time or from time
to time while any ESOP Preferred Stock is outstanding, issue, sell or
exchange any right or warrant to purchase or acquire shares of Common Stock
(including as such a right or warrant for this purpose any security
convertible into or exchangeable for shares of Common Stock other than
pursuant to any employee or director incentive, compensation or benefit plan
or arrangement of the Corporation or any subsidiary of the Corporation
heretofore or hereafter adopted) for a consideration having a Fair Market
Value, on the date of such issuance, sale or exchange, less than the Non-
Dilutive Amount (as hereinafter defined), then, in such event, the
Conversion Price shall, subject to the provisions of paragraphs (E) and (F)
of this Section 9, automatically be adjusted by dividing such Conversion
Price by a fraction (the "Section 9(C)(2) Fraction"), the numerator of which
is the number of shares of Common Stock outstanding immediately before such
issuance of rights or warrants plus the maximum number of shares of Common
Stock that could be acquired upon exercise in full of all such rights and
warrants and the denominator of which is the number of shares of Common
Stock outstanding immediately before such issuance of rights or warrants
plus the number of shares of Common Stock that could be purchased at the
Fair Market Value of a share of Common Stock at the time of such issuance
for the total of (x) the maximum aggregate consideration payable at the time
of the issuance, sale or exchange of such right or warrant and (y) the
maximum aggregate consideration payable upon exercise in full of all such
rights or warrants.
27
<PAGE>
(3) An adjustment to the Conversion Price pursuant to this Section
9(C) shall be effective upon the effective date of any issuance, sale or
exchange described in paragraph (1) or (2) above. Any such adjustment shall
have no effect on the Liquidation Price or the Preferred Dividend Rate of
the ESOP Preferred Stock.
(D) In the event the Corporation shall, at any time or from time to
time while any of the shares of ESOP Preferred Stock are outstanding, make
an Extraordinary Distribution (as hereinafter defined) in respect of the
Common Stock, whether by dividend, distribution, reclassification of shares
or recapitalization of the Corporation (including capitalization or
reclassification effected by a merger or consolidation to which Section 8
does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of
Common Stock, then, in such event, the Conversion Price shall, subject to
the provisions of paragraphs (E) and (F) of this Section 9, automatically be
adjusted by dividing such Conversion Price by a fraction (the "Section 9(D)
Fraction"), the numerator of which is the product of (a) the number of
shares of Common Stock outstanding immediately before such Extraordinary
Distribution or Pro Rata Repurchase minus, in the case of a Pro Rata
Repurchase, the number of shares of Common Stock repurchased by the
Corporation multiplied by (b) the Fair Market Value of a share of Common
Stock on the day before the ex-dividend date with respect to an Extra-
ordinary Distribution that is paid in cash and on the distribution date with
respect to an Extraordinary Distribution that is paid other than in cash, or
on the applicable expiration date (including all extensions thereof) of any
tender offer that is a Pro Rata Repurchase or on the date of purchase with
respect to any Pro Rata Repurchase that is not a tender offer, as the case
may be, and the denominator of which is (i) the product of (x) the number of
shares of Common Stock outstanding immediately before such Extraordinary
Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value
of a share of Common Stock on the day before the ex-dividend date with
respect to an Extraordinary Distribution that is paid in cash and on the
distribution date with respect to an Extraordinary Distribution that is paid
other than in cash, or on the applicable expiration date (including all
extensions thereof) of any tender offer that is a Pro Rata Repurchase, or on
the date of purchase with respect to
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<PAGE>
any Pro Rata Repurchase that is not a tender offer, as the case may be,
minus (ii) the Fair Market Value of the Extraordinary Distribution or the
aggregate purchase price of the Pro Rata Repurchase, as the case may be. The
Corporation shall send each holder of ESOP Preferred Stock (i) notice of its
intent to make any Extraordinary Distribution and (ii) notice of any offer
by the Corporation to make a Pro Rata Repurchase, in each case at the same
time as, or as soon as practicable after, such offer is first communicated
to holders of Common Stock or, in the case of an Extraordinary
Distribution, the announcement of a record date in accordance with the rules
of any stock exchange on which the Common Stock is listed or admitted to
trading. Such notice shall indicate the intended record date and the amount
and nature of such dividend or distribution, or the number of shares subject
to such offer for a Pro Rata Repurchase and the purchase price payable by
the Corporation pursuant to such offer, as well as the Conversion Price and
the number of shares of Common Stock into which a share of ESOP Preferred
Stock may be converted at such time. An adjustment to the Conversion Price
pursuant to this Section 9(D) shall be effective (i) in the case of an
Extraordinary Dividend as of the record date for the determination of
holders entitled to receive such Extraordinary Dividend (on a retroactive
basis) and (ii) in the case of a Pro Rata Repurchase upon the expiration
date thereof (if such Pro Rata Repurchase is a tender offer) or the
effective date thereof (if such Pro Rata Repurchase is not a tender offer).
Any such adjustment shall have no effect on the Liquidation Price or the
Preferred Dividend Rate of the ESOP Preferred Stock.
(E) The Board shall have the authority to determine that any
adjustment to the Conversion Price provided for in paragraph (A)(1), (B),
(C) or (D) of this Section 9 shall not be made (or if already made, to
determine that such adjustment shall be cancelled prospectively), and in
lieu thereof to declare a dividend in respect of the ESOP Preferred Stock in
shares of ESOP Preferred Stock (a "Special Dividend") in such a manner that
a holder of ESOP Preferred Stock will become a holder of that number of
shares of ESOP Preferred Stock equal to the product of the number of such
shares held prior to such event times the Section 9(A), Section 9(B),
Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as appli-
29
<PAGE>
cable. The declaration of such a Special Dividend shall be authorized, if at
all, by the Board no later than 30 calendar days following the authorization
by the Board (or by a committee duly authorized by the Board) of the
transaction or other event described in any of the foregoing paragraphs
(A)(1), (B), (C) or (D) that would otherwise result in an adjustment to the
Conversion Price being made pursuant to any such paragraphs, and if the
Board does not authorize the declaration of a Special Dividend by the end of
such 30-day period, then no such Special Dividend shall be declared and the
adjustment to the Conversion Price provided for in paragraph (A)(1), (B),
(C) or (D) of this Section 9 shall become final and binding on the
Corporation and all stockholders of the Corporation. Concurrently with the
declaration of any Special Dividend pursuant to this paragraph (E), the
Conversion Price, the Liquidation Price and the Preferred Dividend Rate of
all shares of ESOP Preferred Stock shall be adjusted by dividing the
Conversion Price, the Liquidation Price and the Preferred Dividend Rate,
respectively, in effect immediately before such event by the Section 9(A),
Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as
appli cable.
(F) Unless the Board determines otherwise, and notwithstanding any
other provision of this Section 9, any adjustment to the Conversion Price
provided for in any of paragraphs (A), (B), (C) or (D) of this Section 9
shall not be made unless such adjustment would require an increase or
decrease of at least one percent (1%) in the Conversion Price and,
similarly, the Board shall not declare any Special Dividend pursuant to
paragraph (E) of this Section 9 unless such Special Dividend or adjustment
would require an increase or decrease of at least one percent (1%) in the
number of shares of ESOP Preferred Stock outstanding. Any lesser adjustment
to the Conversion Price or Special Dividend shall be carried forward and
shall be made no later than the time of, and together with, the next
subsequent adjustment to the Conversion Price or Special Dividend which,
together with any adjustment or adjustments or Special Dividend or Dividends
so carried forward, shall amount to an increase or decrease of at least one
percent (1%) of the Conversion Price or an increase or decrease of at least
one percent (1%) in the number of shares of ESOP Preferred Stock
outstanding, whichever the case be.
30
<PAGE>
(G) If the Corporation shall make any dividend or distribution on the
Common Stock or issue any Common Stock, other capital stock or other
security of the Corporation or any rights or warrants to purchase or acquire
any such security, which transaction does not result in an adjustment to the
Conversion Price or to the number of shares of ESOP Preferred Stock out-
standing pursuant to the foregoing provisions of this Section 9, the Board
may, in its sole discretion, consider whether such action is of such a
nature that some type of equitable adjustment should be made in respect of
such transaction. If in such case the Board determines that some type of
adjustment should be made, an adjustment shall be made effective as of such
date as determined by the Board. The determination of the Board as to
whether some type of adjustment should be made pursuant to the foregoing
provisions of this Section 9(G), and, if so, as to what adjustment should be
made and when, shall be final and binding on the Corporation and all
stockholders of the Corporation. The Corporation shall be entitled, but not
required, to make such additional adjustments, in addition to those required
by the foregoing provisions of this Section 9, as shall be necessary in
order that any dividend or distribution in shares of capital stock of the
Corporation, subdivision, reclassification or combination of shares of the
Corporation or any reclassification of the Corporation shall not be taxable
to holders of the Common Stock.
(H) For purposes hereof, the following definitions shall apply:
(1) "Extraordinary Distribution" shall mean any dividend or other
distribution to holders of Common Stock (effected while any of the shares of
ESOP Preferred Stock are outstanding) of (i) cash or (ii) any shares of capital
stock of the Corporation (other than shares of Common Stock), other securities
of the Corporation (other than securities of the type referred to in paragraph
(B) of this Section 9), evidences of indebtedness of the Corporation or any
other person or any other property (including shares of any subsidiary of the
Corporation), or any combination of the foregoing, where the aggregate amount of
such cash dividend or other distribution together with the amount of all cash
dividends and other distributions made during the preceding period of twelve
months, when combined with the aggregate amount of all Pro Rata Repurchases (for
this purpose, including only that portion of the aggregate
31
<PAGE>
purchase price of such Pro Rata Repurchase that is in excess of the Fair Market
Value of the Common Stock repurchased as determined on the applicable expiration
date (including all extensions thereof) of any tender offer or exchange offer
that is a Pro Rata Repurchase, or the date of purchase with respect to any other
Pro Rata Repurchase that is not a tender offer or exchange offer) made during
such period, exceeds twelve and one-half percent (12-1/2%) of the aggregate Fair
Market Value of all shares of Common Stock outstanding on the day before the ex-
dividend date with respect to such Extraordinary Distribution that is paid in
cash and on the distribution date with respect to an Extraordinary Distribution
that is paid other than in cash. The Fair Market Value of an Extraordinary
Distribution for purposes of paragraph (D) of this Section 9 shall be the sum of
the Fair Market Value of such Extraordinary Distribution plus the aggregate
amount of any cash dividends or other distributions that are not Extraordinary
Distributions made during such twelve-month period and not previously included
in the calculation of an adjustment pursuant to paragraph (D) of this Sec-
tion 9, but shall exclude the aggregate amount of regular quarterly dividends
declared by the Board and paid by the Corporation in such twelve-month period.
(2) "Fair Market Value" shall mean, as to shares of Common Stock or
any other class of capital stock or securities of the Corporation or any other
issuer that are publicly traded, the average of the Current Market Prices (as
hereinafter defined) of such shares or securities for each day of the Adjustment
Period (as hereinafter defined). "Current Market Price" of publicly traded
shares of Common Stock or any other class of capital stock or other security of
the Corporation or any other issuer for a day shall mean the last reported sales
price, regular way, or, in case no sale takes place on such day, the average of
the reported closing bid and asked prices, regular way, in either case as
reported on the New York Stock Exchange Composite Tape or, if such security is
not listed or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which such security is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") National Market System or, if such security is not
quoted on such National Market System, the average of the closing bid and asked
prices on such day in the over-the-counter market as reported by NASDAQ or, if
bid and asked prices for such security on such day shall not have been reported
through NASDAQ, the average of the bid and
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<PAGE>
asked prices for such day as furnished by any New York Stock Exchange member
firm regularly making a market in such security selected for such purpose by the
Board. "Adjustment Period" shall mean the period of five consecutive trading
days, selected by the Board during the twenty (20) trading days preceding, and
including, the date as of which the Fair Market Value of a security is to be
determined. The "Fair Market Value" of any security that is not publicly traded
or of any other property shall mean the fair value thereof as determined by an
independent investment banking or appraisal firm experienced in the valuation of
such securities or property selected in good faith by the Board, or, if no such
investment banking or appraisal firm is in the good faith judgment of the Board
available to make such determination, as determined in good faith by the Board.
(3) "Non-Dilutive Amount" in respect of an issuance, sale or exchange
by the Corporation of any right or warrant to purchase, or acquire shares of
Common Stock (including any security convertible into or exchangeable for shares
of Common Stock) shall mean the difference between (i) the product of the Fair
Market Value of a share of Common Stock on the day preceding the first public
announcement of such issuance, sale or exchange multiplied by the maximum number
of shares of Common Stock that could be acquired on such date upon the exercise
in full of such rights or warrants (including upon the conversion or exchange of
all such convertible or exchangeable securities), whether or not exercisable (or
convertible or exchangeable) at such date, and (ii) the aggregate amount payable
pursuant to such right or warrant to purchase or acquire such maximum number of
shares of Common Stock; provided, however, that in no event shall the Non-
Dilutive Amount be less than zero. For purposes of the foregoing sentence, in
the case of a security convertible into or exchangeable for shares of Common
Stock, the amount payable pursuant to a right or warrant to purchase or acquire
shares of Common Stock shall be the Fair Market Value of such security on the
date of the issuance, sale or exchange of such security by the Corporation.
(4) "Pro Rata Repurchase" shall mean any purchase of shares or Common
Stock by the Corporation or any subsidiary thereof, whether for cash, shares of
capital stock of the Corporation, other securities of the Corporation,
evidences of indebtedness of the Corporation or any other person or any other
property (including shares of a subsidiary of the Corporation), or any
combination thereof,
33
<PAGE>
effected while any of the shares of ESOP Preferred Stock are outstanding,
pursuant to any tender offer or exchange offer subject to Section 13(e) of the
Exchange Act, or any successor provision of law, or pursuant to any other offer
available to substantially all holders of Common Stock; provided, however, that
no purchase of shares by the Corporation or any subsidiary thereof made in open
market transactions shall be deemed a Pro Rata Repurchase. For purposes of this
Section 9(H), shares shall be deemed to have been purchased by the Corporation
or any subsidiary thereof "in open market transactions" if they have been
purchased substantially in accordance with the requirements of Rule 10b-18 as in
effect under the Exchange Act on the date shares of ESOP Preferred Stock are
initially issued by the Corporation or on such other terms and conditions as the
Board shall have determined are reasonably designed to prevent such purchases
from having a material effect on the trading market for the Common Stock.
(I) Whenever an adjustment to the Conversion Price of the ESOP
Preferred Stock is required pursuant to this Section 9, the Corporation shall
forthwith place on file with the transfer agent for the Common Stock and the
ESOP Preferred Stock, if there be one, and with the Treasurer of the
Corporation, a statement signed by the Treasurer or any Assistant Treasurer of
the Corporation stating the adjusted Conversion Price determined as provided
herein. In addition, whenever a Special Dividend is declared pursuant to
paragraph (E) of this Section 9, (i) the maximum number of shares of ESOP
Preferred Stock shall be adjusted by multiplying 3,902,438 (or such other number
as shall be the maximum number of shares of ESOP Preferred Stock in effect prior
to the authorization of such Special Dividend) by the Section 9(A), Section
9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as the case may
be, (ii) the Board shall take action as is necessary so that a sufficient number
of shares of ESOP Preferred Stock are designated with respect to any increase in
the number of shares of ESOP Preferred Stock to be outstanding as a result of
such Special Dividend and (iii) the Corporation shall forthwith place on file
with the transfer agent for the Common Stock and the ESOP Preferred Stock, if
there be one, and with the Treasurer of the Corporation, a statement signed by
the Treasurer or any Assistant Treasurer of the Corporation stating the adjusted
maximum number of shares of ESOP Preferred Stock, Conversion Price, Liquidation
Price and Preferred Dividend Rate determined as provided herein. The statement
required by either of the two preceding sentences shall set forth in
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<PAGE>
reasonable detail such facts as shall be necessary to show the reason and the
manner of computing such adjustments, including any determination of Fair Market
Value involved in such computation. Promptly after each adjustment to the
maximum number of shares of ESOP Preferred Stock, Conversion Price, the
Liquidation Price, the Preferred Dividend Rate, or the number of shares of ESOP
Preferred Stock outstanding, the Corporation shall mail a notice thereof and of
the then prevailing maximum number of shares of ESOP Preferred Stock, Conversion
Price, Liquidation Price, Preferred Dividend Rate and number of shares of ESOP
Preferred Stock outstanding to each holder of shares of ESOP Preferred Stock.
10. Miscellaneous.
--------------
(A) All notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have given upon the earlier of receipt
thereof of three (3) business days after the mailing thereof if sent by
registered mail (unless first-class mail shall be specifically permitted for
such notice under the terms hereof) with postage prepaid, addressed: (i) if to
the Corporation, to its office at Two World Trade Center, New York, New York
10048 (Attention: Secretary) or to the transfer agent for the ESOP Preferred
Stock, or other agent of the Corporation designated as permitted hereof or (ii)
if to any holder of the ESOP Preferred Stock or Common Stock, as the case may
be, to such holder at the address of such holder as listed in the stock record
books of the Corporation (which may include the records of any transfer agent
for Common Stock) or (iii) to such other address as the Corporation or any such
holder, as the case may be, shall have designated by notice similarly given.
(B) The term "Common Stock" as used herein means the Corporation's
Common Stock, par value $0.01 per share, as the same exists at the date of
filing of this Certificate of Designation pursuant to Section 151 of the General
Corporation Law of the State of Delaware, or any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or par value to without par value, or from
without par value to par value. In the event that, at any time as a result of
an adjustment made pursuant to Section 9 hereof, the holder of any shares of the
ESOP Preferred Stock upon thereafter surrendering such shares for conversion
shall become entitled to receive any shares or other securities of the
Corporation other than shares of Common Stock, the anti-dilution provisions
contained in Section 9
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<PAGE>
hereof shall apply in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to Common Stock, and the provisions of Sections 1
through 8 and 10 hereof respect to the Common Stock shall apply on like or
similar terms to any such other shares or securities.
(C) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of ESOP Preferred Stock or shares of Common Stock or other
securities issued on account of ESOP Preferred Stock pursuant thereto or
certificates representing such shares or securities. The Corporation shall not,
however, be required to pay any such tax which may be payable in respect of any
transfer involved in the issuance or delivery of shares of ESOP Preferred Stock
or Common Stock or other securities in a name other than that in which the
shares of ESOP Preferred Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any shares or securities other than a payment to
the registered holder thereof, and shall not be required to make any such
issuance, delivery or payment unless and until the person otherwise entitled to
such issuance, delivery or payment has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable.
(D) In the event that a holder of shares of ESOP Preferred Stock
shall not by written notice designate the name in which shares of Common Stock
to be issued upon conversion or exchange of such shares should be registered or
to whom payment upon redemption of shares of ESOP Preferred Stock should be made
or the address to which the certificate or certificates representing such
shares, or such payment, should be sent, the Corporation shall be entitled to
register such shares, and make such payment, in the name of the holder of such
ESOP Preferred Stock as shown on the records of the Corporation and to send the
certificate or certificates or other documentation repre senting such shares, or
such payment, to the address of such other holder shown on the records of the
Corporation.
(E) The Corporation may appoint, and from time to time discharge and
change, a transfer agent for the ESOP Preferred Stock. Upon any such
appointment or discharge of a transfer agent, the Corporation, shall send notice
thereof by first-class mail, postage prepaid, to each holder of record of ESOP
Preferred Stock.
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<PAGE>
B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
---------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
37
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7-3/8% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
______________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
______________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 1,000,000 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
7-3/8%
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<PAGE>
Cumulative Preferred Stock, par value $0.01 per share, with a stated value of
$200.00 per share (the "Cumulative Preferred Stock"). The stated value per
share of Cumulative Preferred Stock shall not for any purpose be considered to
be a determination by the Board with respect to the capital and surplus of the
Corporation. The number of shares of Cumulative Preferred Stock shall be
1,000,000. The Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7-3/8% per annum.
Dividends on the Cumulative Preferred Stock, calculated as a percentage of the
stated value, will be payable quarterly on February 28, May 30, August 30 and
November 30 (each a "dividend payment date"). Dividends on shares of the
Cumulative Preferred Stock will be cumulative from the date of initial issuance
of such shares of Cumulative Preferred Stock. Dividends will be payable, in
arrears, to holders of record as they appear on the stock books of the
Corporation on such record dates, not more than 60 days nor less than 10 days
preceding the payment dates thereof, as shall be fixed by the Board or the
Committee. The amount of dividends payable for the initial dividend period or
any period shorter than a full dividend period shall be calculated on the basis
of a 360-day year of twelve 30-day months. No dividends may be declared or paid
or set apart for payment on any Parity Preferred Stock (as defined in paragraph
9(b) below) with regard to the payment of dividends unless there shall also be
or have been declared and paid or set apart for payment on the Cumulative
Preferred Stock, like dividends for all dividend payment periods of the
Cumulative Preferred Stock ending on or before the dividend payment date of such
Parity Preferred Stock, ratably in proportion to the respective amounts of
dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock,
on the one hand, and (y) accumulated and unpaid through the dividend payment
period or periods of the Cumulative Preferred Stock next preceding such dividend
payment date, on the other hand. For the purposes of this Certificate of
Designation, the "Committee" shall mean any committee of the Board to whom the
Board, pursuant to Section 141(c) of the General Corporation Law of the State of
Delaware, delegates authority to
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<PAGE>
perform the functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock)
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<PAGE>
plus an amount equal to all dividends (whether or not earned or declared)
accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock
to the date of final distribution. The holders of the Cumulative Preferred
Stock will not be entitled to receive the Liquidation Preference until the
liquidation preference of any other class of stock of the Corporation ranking
senior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. After payment of the full amount of
the Liquidation Preference and such dividends, the holders of shares of
Cumulative Preferred Stock will not be entitled to any further participation in
any distribution of assets by the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of shares of Parity Preferred
Stock shall be insufficient to pay in full the preferential amount aforesaid,
then such assets, or the proceeds thereof, shall be distributable among such
holders ratably in accordance with the respective amounts which would be payable
on such shares if all amounts payable thereon were paid in full. For the
purposes hereof, neither a consolidation or merger of the Corporation with or
into any other corporation, nor a merger of any other corporation with or into
the Corporation, nor a sale or transfer of all or any part of the Corporation's
assets for cash or securities shall be considered a liquidation, dissolution or
winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares
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<PAGE>
of Cumulative Preferred Stock shall have the right, with holders of shares of
any one or more other class or series of stock upon which like voting rights
have been conferred and are exercisable (voting together as a class), to elect
two of the authorized number of members of the Board at the Corporation's next
annual meeting of stockholders and at each subsequent annual meeting of
stockholders until such arrearages have been paid or set apart for payment, at
which time such right shall terminate, except as herein or by law expressly
provided, subject to revesting in the event of each and every subsequent default
of the character above mentioned. Upon any termination of the right of the
holders of shares of Cumulative Preferred Stock as a class to vote for directors
as herein provided, the term of office of all directors then in office elected
by the holders of shares of Cumulative Preferred Stock shall terminate
immediately.
Any director who shall have been so elected pursuant to this paragraph may be
removed at any time, either with or without cause. Any vacancy thereby created
may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the
42
<PAGE>
time and all other classes or series of stock upon which like voting rights have
been conferred and are exercisable (voting together as a class) given in person
or by proxy, either in writing or at any meeting called for the purpose, shall
be necessary to permit, effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger, consolidation
or otherwise, of any of the provisions of the Certificate of Incorporation
(including this resolution or any provision hereof) that would materially and
adversely affect any power, preference, or special right of the shares of
Cumulative Preferred Stock or of the holders thereof; provided, however, that
any increase in the amount of authorized Common Stock or authorized Preferred
Stock or any increase or decrease in the number of shares of any series of
Preferred Stock or the creation and issuance of other series of Common Stock
or Preferred Stock, in each case ranking on a parity with or junior to the
shares of Cumulative Preferred Stock with respect to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding up,
shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days'
43
<PAGE>
prior notice mailed to the holders of the shares to be redeemed at their
addresses as shown on the stock books of the Corporation; provided, however,
that shares of the Cumulative Preferred Stock shall not be redeemable prior to
August 30, 1998. Subject to the foregoing, on or after such date, shares of the
Cumulative Preferred Stock are redeemable at $200.00 per share together with an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside
44
<PAGE>
by the Corporation and unclaimed at the end of two years from the redemption
date shall revert to the general funds of the Corporation, after which reversion
the holders of such shares so called for redemption shall look only to the
general funds of the Corporation for the payment of the amounts payable upon
such redemption. Any interest accrued on funds so deposited shall be paid to
the Corporation from time to time.
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
45
<PAGE>
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up,
or both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from
those of the Cumulative Preferred Stock, if the holders of stock of such
class or classes shall be entitled by the terms thereof to the receipt
of dividends or of amounts distributed upon liquidation, dissolution or
winding up, as the case may be, in proportion to their respective
dividend rates or liquidation prices, without preference or priority of
one over the other as between the holders of such stock and the holders
of shares of Cumulative Preferred Stock (the term "Parity Preferred
Stock" being used to refer to any stock on a parity with the shares of
Cumulative Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both,
if such class shall be Common Stock or if the holders of the Cumulative
Preferred Stock shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of stock of
such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a
liquidation value of $35.88 per share, (ii) the Corporation's 7-3/4%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(iii) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a
liquidation value of $200.00 per share,(iv) if issued, the Corporation's 7.82%
Cumulative Preferred Stock, with a liquidation value of
46
<PAGE>
$200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative
Preferred Stock, with a liquidation value of $200.00 per share, (vi) if
issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's
8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share and (ix) if issued,
the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation
value of $200.00 per share.
47
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
48
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7.82% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 611,238 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
7.82% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the
49
<PAGE>
"Cumulative Preferred Stock"). The stated value per share of Cumulative
Preferred Stock shall not for any purpose be considered to be a determination by
the Board with respect to the capital and surplus of the Corporation. The
maximum number of shares of Cumulative Preferred Stock shall be 611,238. The
Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7.82% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
50
<PAGE>
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided, that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary of
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date
51
<PAGE>
of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the
shares of Cumulative Preferred Stock or on any Parity Preferred Stock
with respect to payment of dividends, shall be in arrears for an
aggregate number of days equal to six calendar quarters or more, whether
or not consecutive, the holders of the outstanding shares of Cumulative
Preferred Stock shall have the right, with holders of shares of any one
or more other class or series of stock upon which like
52
<PAGE>
voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given
53
<PAGE>
in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined in
paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock;
or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate
of Incorporation (including this resolution or any provision hereof)
that would materially and adversely affect any power, preference, or
special right of the shares of Cumulative Preferred Stock or of the
holders thereof; provided, however, that any increase in the amount of
authorized Common Stock or authorized Preferred Stock or any increase or
decrease in the number of shares of any series of Preferred Stock or the
creation and issuance of other series of Common Stock or Preferred
Stock, in each case ranking on a parity with or junior to the shares of
Cumulative Preferred Stock with respect to the payment of dividends and
the distribution of assets upon liquidation, dissolution or winding up,
shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the
54
<PAGE>
Cumulative Preferred Stock shall not be redeemable prior to November 30, 1998.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
55
<PAGE>
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if
the holders of stock of such class or classes shall be entitled by the
terms thereof to the receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
preference or priority to the holders of shares of the Cumulative
Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up,
or both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from
those of the Cumulative Preferred Stock, if the holders of stock of such
class or classes shall be entitled by the terms thereof to the receipt
of dividends or of amounts distributed upon liquidation, dissolution or
winding up, as the case may be, in proportion to their respective
dividend rates or
56
<PAGE>
liquidation prices, without preference or priority of one over the other
as between the holders of such stock and the holders of shares of
Cumulative Preferred Stock (the term "Parity Preferred Stock" being used
to refer to any stock on a parity with the shares of Cumulative
Preferred Stock, either as to dividends or upon liquidation, dissolution
or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both,
if such class shall be Common Stock or if the holders of the Cumulative
Preferred Stock shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of stock of
such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
57
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By:/s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
58
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7.80% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation"), the issuance of a series of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of
1,150,000 of the shares of Preferred Stock which the Corporation has authority
to issue, is authorized, and the Board hereby fixes the powers, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation which may be applicable to the Preferred Stock) as follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the 7.80%
Cumulative Preferred Stock, par value $0.01 per share, with a stated value of
$200.00 per share (the "Cumulative Preferred Stock"). The stated value per
59
<PAGE>
share of Cumulative Preferred Stock shall not for any purpose be considered to
be a determination by the Board with respect to the capital and surplus of the
Corporation. The maximum number of shares of Cumulative Preferred Stock shall
be 1,150,000. The Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7.80% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board forth in this Certificate of Designation.
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Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock
-----------------------
shall rank, as to liquidation, dissolution or winding up of the Corporation,
prior to the shares of Common Stock and any other class of stock of the
Corporation ranking junior to the Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding up of the Corporation, so that in the event
of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be
entitled to receive out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
before any distribution is made to holders of shares of Common Stock or any
other such junior stock, an amount equal to $200.00 per share (the "Liquidation
Preference" of a share of Cumulative Preferred Stock) plus an amount equal to
all dividends (whether or not earned or declared) accrued and accumulated and
unpaid on the shares of Cumulative Preferred Stock to the date
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of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series of
stock upon which like
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voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may be
removed at any time, either with or without cause. Any vacancy thereby created
may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
the Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class)
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given in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that would
materially and adversely affect any power, preference, or special right of
the shares of Cumulative Preferred Stock or of the holders thereof; provided,
however, that any increase in the amount of authorized Common Stock or
authorized Preferred Stock or any increase or decrease in the number of
shares of any series of Preferred Stock or the creation and issuance of other
series of Common Stock or Preferred Stock, in each case ranking on a parity
with or junior to the shares of Cumulative Preferred Stock with respect to
the payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such powers, preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stocks
books of the Corporation; provided, however, that shares of the
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Cumulative Preferred Stock shall not be redeemable prior to February 28, 1999.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declined) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
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<PAGE>
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase or decrease or change
in the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if
the holders of stock of such class or classes shall be entitled by the
terms thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up, or
both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from those
of the Cumulative Preferred Stock, if the holders of stock of such class or
classes shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributed upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
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<PAGE>
liquidation prices, without preference or priority of one over the other
as between the holders of such stock and the holders of shares of
Cumulative Preferred Stock (the term "Parity Preferred Stock" being used
to refer to any stock on a parity with the shares of Cumulative
Preferred Stock, either as to dividends or upon liquidation, dissolution
or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if
such class shall be Common Stock or if the holders of the Cumulative
Preferred Stock shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in preference or priority to the holders of stock in
such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
67
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
68
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
9.00% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
__________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
__________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 720,900 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
9.00% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the "Cumulative Preferred Stock"). The stated
value per share of Cumulative Preferred Stock shall not for any
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<PAGE>
purpose be considered to be a determination by the Board with respect to the
capital and surplus of the Corporation. The maximum number of shares of
Cumulative Preferred Stock shall be 720,900. The Cumulative Preferred Stock is
issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 9.00% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
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Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The Shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date
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<PAGE>
of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days equal
to six calendar quarters or more, whether or not consecutive, the holders of the
outstanding shares of Cumulative Preferred Stock shall have the right, with
holders of shares of any one or more other class or series of stock upon which
like
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<PAGE>
voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given
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in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger, consolidation
or otherwise, of any of the provisions of the Certificate of Incorporation
(including this resolution or any provision hereof) that would materially and
adversely affect any power, preference, or special right of the shares of
Cumulative Preferred Stock or of the holders thereof; provided, however, that
any increase in the amount of authorized Common Stock or authorized Preferred
Stock or any increase or decrease in the number of shares of any series of
Preferred Stock or the creation and issuance of other series of Common Stock
or Preferred Stock, in each case ranking on a parity with or junior to the
shares of Cumulative Preferred Stock with respect to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding up,
shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time, in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the
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<PAGE>
Cumulative Preferred Stock shall not be redeemable prior to February 28, 2000.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
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<PAGE>
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitation provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, whether or
not the dividend rates, dividend payment dates, or redemption or liquidation
prices per share thereof be different from those of the Cumulative Preferred
Stock, if the holders of stock of such class or classes shall be entitled by
the terms thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or
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liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of Cumulative
Preferred Stock (the term "Parity Preferred Stock" being used to refer to any
stock on a parity with the shares of Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, as the
context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in preference or priority to the holders of stock of such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/ Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
77
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B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
78
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
8.40% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of
Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 996,776 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
8.40% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the "Cumulative Preferred Stock"). The stated
value per share of Cumulative Preferred Stock shall not for any purpose be
considered to be a determination by the
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Board with respect to the capital and surplus of the Corporation. The total
number of shares of Cumulative Preferred Stock shall be 996,776. The Cumulative
Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 8.40% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or
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<PAGE>
declared and set aside for payment or other distribution made upon the Common
Stock or on any other stock of the Corporation ranking junior to or on a parity
with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or
any other stock of the Corporation ranking junior to or on a parity with the
Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise
acquired for any consideration (or any payment be made to or available for a
sinking fund for the redemption of any shares of such stock; provided, however,
that any moneys theretofore deposited in any sinking fund with respect to any
Preferred Stock of the Corporation in compliance with the provisions of such
sinking fund may thereafter be applied to the purchase or redemption of such
Preferred Stock in accordance with the terms of such sinking fund, regardless of
whether at the time of such application full cumulative dividends upon shares of
the Cumulative Preferred Stock outstanding to the last dividend payment date
shall have been paid or declared and set apart for payment) by the Corporation;
provided that any such junior or parity Preferred Stock or Common Stock may be
converted into or exchanged for stock of the Corporation ranking junior to the
Cumulative Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date of final distribution. The holders of
the Cumulative Preferred Stock will not be entitled to receive the Liquidation
Preference until the liquidation preference of any other class of stock of the
Corporation ranking senior to the Cumulative Preferred Stock as to rights
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upon liquidation, dissolution or winding up shall have been paid (or a sum set
aside therefor sufficient to provide for payment) in full. After payment of the
full amount of the Liquidation Preference and such dividends, the holders of
shares of Cumulative Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of shares of
Parity Preferred Stock shall be insufficient to pay in full the preferential
amount aforesaid, then such assets, or the proceeds thereof, shall be
distributable among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all amounts payable thereon
were paid in full. For the purposes hereof, neither a consolidation or merger
of the Corporation with or into any other corporation, nor a merger of any other
corporation with or into the Corporation, nor a sale or transfer of all or any
part of the Corporation's assets for cash or securities shall be considered a
liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares
of Cumulative Preferred Stock or on any Parity Preferred Stock with respect
to payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series of
stock upon which like voting rights have been conferred and are exercisable
(voting together as a class), to elect two of the authorized number of
members of the Board at the Corporation's next annual meeting of stockholders
and at each subsequent annual meeting of stockholders until such arrearages
have been
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<PAGE>
paid or set apart for payment, at which time such right shall terminate, except
as herein or by law expressly provided, subject to revesting in the event of
each and every subsequent default of the character above mentioned. Upon any
termination of the right of the holders of shares of Cumulative Preferred Stock
as a class to vote for directors as herein provided, the term of office of all
directors then in office elected by the holders of shares of Cumulative
Preferred Stock shall terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may be
removed at any time, either with or without cause. Any vacancy thereby created
may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given in person or by proxy, either in
writing or at any meeting called for the purpose, shall be necessary to permit,
effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any
class or series of
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<PAGE>
shares ranking prior (as that term is defined in paragraph 9(a) hereof) to
the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that
would materially and adversely affect any power, preference, or special
right of the shares of Cumulative Preferred Stock or of the holders
thereof; provided, however, that any increase in the amount of authorized
Common Stock or authorized Preferred Stock or any increase or decrease in
the number of shares of any series of Preferred Stock or the creation and
issuance of other series of Common Stock or Preferred Stock, in each case
ranking on a parity with or junior to the shares of Cumulative Preferred
Stock with respect to the payment of dividends and the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such powers, preferences or special
rights.
(c) The foregoing voting provisions shall not apply if, at or prior to
the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of Cumulative Preferred
Stock shall have been redeemed or called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the Cumulative
Preferred Stock shall not be redeemable prior to August 30, 2000. Subject to
the foregoing, on or after such date, shares of the Cumulative Preferred Stock
are redeemable at $200.00 per share together with an amount equal to all
dividends (whether or not earned or declared) accrued and accumulated and unpaid
to, but excluding, the date fixed for redemption.
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<PAGE>
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or
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<PAGE>
decrease in the amount of authorized Common Stock or any increase, decrease or
change in the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up, or
both, whether or not the dividend rates, dividend payment dates, or
redemption or liquidation prices per share thereof be different from those
of the Cumulative Preferred Stock, if the holders of stock of such class or
classes shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributed upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of Cumulative
Preferred Stock (the term "Parity Preferred Stock" being used to refer to
any stock on a parity with the shares of Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both, as
the context may require); and
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<PAGE>
(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may
be, in preference or priority to the holders of stock of such class or
classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/ Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
87
<PAGE>
B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By:/s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
88
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
8.20% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
______________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
______________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 847,500 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution shall
be the 8.20% Cumulative Preferred Stock, par value $0.01 per share,
89
<PAGE>
with a stated value of $200.00 per share (the "Cumulative Preferred Stock").
The stated value per share of Cumulative Preferred Stock shall not for any
purpose be considered to be a determination by the Board with respect to the
capital and surplus of the Corporation. The total number of shares of
Cumulative Preferred Stock shall be 847,500. The Cumulative Preferred Stock is
issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
----------
entitled to receive, when, as and if declared by the Board or the Committee (as
hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 8.20% per annum.
Dividends on the Cumulative Preferred Stock will be payable quarterly on
February 28, May 30, August 30 and November 30 (each a "dividend payment
date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative
from the date of initial issuance of such shares of Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to perform the
functions of the Board set forth in this Certificate of Designation.
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Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
-----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date
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of final distribution. The holders of the Cumulative Preferred Stock will not
be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding
up shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Cumulative Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
-----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred Stock
--------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series
of stock upon which like
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<PAGE>
voting rights have been conferred and are exercisable (voting together as a
class), to elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock as a class to
vote for directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given
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<PAGE>
in person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any class or
series of shares ranking prior (as that term is defined in paragraph 9(a)
hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that would
materially and adversely affect any power, preference, or special right of
the shares of Cumulative Preferred Stock or of the holders thereof;
provided, however, that any increase in the amount of authorized Common
Stock or authorized Preferred Stock or any increase or decrease in the
number of shares of any series of Preferred Stock or the creation and
issuance of other series of Common Stock or Preferred Stock, in each case
ranking on a parity with or junior to the shares of Cumulative Preferred
Stock with respect to the payment of dividends and the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such powers, preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
-----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the
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<PAGE>
Cumulative Preferred Stock shall not be redeemable prior to November 30, 2000.
Subject to the foregoing, on or after such date, shares of the Cumulative
Preferred Stock are redeemable at $200.00 per share together with an amount
equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for cancelation,
on the redemption date dividends shall cease to accrue on the shares to be
redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to such shares and shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect to such shares, except the
right to receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced thereby
shall no longer be outstanding. Subject to applicable escheat laws, any moneys
so set aside by the Corporation and unclaimed at the end of two years from the
redemption date shall revert to the general funds of the Corporation, after
which reversion the holders of such shares so called for redemption shall look
only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
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<PAGE>
7. Authorization and Issuance of Other Securities. No consent of the
-----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both whether
or not the dividend rates, dividend payment dates, or redemption or
liquidation prices per share thereof be different from those of the
Cumulative Preferred Stock, if the holders of stock of such class or classes
shall be entitled by the terms thereof to the receipt of dividends or of
amounts distributed upon liquidation, dissolution or winding up, as the case
may be, in proportion to their respective dividend rates or
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<PAGE>
liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of Cumulative
Preferred Stock (the term "Parity Preferred Stock" being used to refer to
any stock on a parity with the shares of Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both, as
the context may require); and
(c) junior to shares of the Cumulative Preferred stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may
be, in preference or priority to the holders of stock of such class or
classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
97
<PAGE>
B. This Certificate of Designation shall not become effective until, and
shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate
of Designation to be signed by Christine A. Edwards, its Executive Vice
President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
98
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
7-3/4% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 1,000,000 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
-----------------------------------------
series of the Preferred Stock authorized by this resolution shall be the
7-3/4% Cumulative Preferred Stock, par value $0.01 per share, with a stated
value of $200.00 per share (the
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<PAGE>
"Cumulative Preferred Stock"). The stated value per share of Cumulative
Preferred Stock shall not for any purpose be considered to be a determination by
the Board with respect to the capital and surplus of the Corporation. The
number of shares of Cumulative Preferred Stock shall be 1,000,000. The
Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. (a) Holders of shares of Cumulative Preferred Stock will
---------
be entitled to receive, when, as and if declared by the Board or the Committee
(as hereinafter defined) out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the rate of 7-3/4% per annum.
Dividends on the Cumulative Preferred Stock, calculated as a percentage of the
stated value, will be payable quarterly on February 28, May 30, August 30 and
November 30 (each a "dividend payment date"). Dividends on shares of the
Cumulative Preferred Stock will be cumulative from the date of initial issuance
of such shares of Cumulative Preferred Stock. Dividends will be payable, in
arrears, to holders of record as they appear on the stock books of the
Corporation on such record dates, not more than 60 days nor less than 10 days
preceding the payment dates thereof, as shall be fixed by the Board or the
Committee. The amount of dividends payable for the initial dividend period or
any period shorter than a full dividend period shall be calculated on the basis
of a 360-day year of twelve 30-day months. No dividends may be declared or paid
or set apart for payment on any Parity Preferred Stock (as such term is defined
in paragraph 9(b) below) with regard to the payment of dividends unless there
shall also be or have been declared and paid or set apart for payment on the
Cumulative Preferred Stock, like dividends for all dividend payment periods of
the Cumulative Preferred Stock ending on or before the dividend payment date of
such Parity Preferred Stock, ratably in proportion to the respective amounts of
dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock,
on the one hand, and (y) accumulated and unpaid through the dividend payment
period or periods of the Cumulative Preferred Stock next preceding such dividend
payment date, on the other hand. For the purposes of this Certificate of
Designation, the "Committee" shall mean any committee of the Board to whom the
Board, pursuant to Section 141(c) of the General Corporation Law of the State of
Delaware, delegates authority to perform the
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<PAGE>
functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
(b) If one or more amendments to the Internal Revenue Code of 1986, as
amended (the "Code"), are enacted that reduce the percentage of the dividends
received deduction as specified in Section 243(a)(1) of the Code or any
successor provision (the "Dividends Received Percentage") to below 70%, the
amount of each dividend payable per share of the Cumulative Preferred Stock for
dividend payments made on or after the date of enactment of such change will be
adjusted by multiplying the amount of the dividend payable determined as
described above (before adjustment) by a factor, which will be the number
determined in accordance with the following formula (the "DRD Formula"), and
rounding the result to the nearest cent:
1 - (.35(1 - .70))
------------------
1 - (.35(1 - DRP))
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<PAGE>
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the Code,
other than a change in the percentage of the dividends received deduction set
forth in Section 243(a)(1) of the Code or any successor provision, will give
rise to an adjustment. Notwithstanding the foregoing provisions, in the event
that, with respect to any such amendment, the Corporation will receive either an
unqualified opinion of nationally recognized independent tax counsel selected by
the Corporation or a private letter ruling or similar form of authorization from
the Internal Revenue Service to the effect that such an amendment would not
apply to dividends payable on the Cumulative Preferred Stock, then any such
amendment will not result in the adjustment provided for pursuant to the DRD
Formula. The opinion referenced in the previous sentence will be based upon a
specific exception in the legislation amending the DRP or upon a published
pronouncement of the Internal Revenue Service addressing such legislation.
Unless the context otherwise requires, references to dividends in this
Certificate of Designation will mean dividends as adjusted by the DRD Formula.
The Corporation's calculation of the dividends payable, as so adjusted and as
certified accurate as to calculation and reasonable as to method by the
independent certified public accountants then regularly engaged by the
Corporation, will be final and not subject to review absent manifest error.
If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on a dividend
payment date has been declared, the amount of dividend payable on such dividend
payment date will not be increased. Instead, an amount, equal to the excess of
(x) the product of the dividends paid by the Corporation on such dividend
payment date and the DRD Formula (where the DRP used in the DRD Formula would be
equal to the reduced Dividends Received Percentage) over (y) the dividends paid
by the Corporation on such dividend payment date, will be payable to holders of
record on the next succeeding dividend payment date in addition to any other
amounts payable on such date.
In the event that the amount of dividends payable per share of the
Cumulative Preferred Stock will be adjusted pursuant to the DRD Formula, the
Corporation will cause notice of each such adjustment to be sent to
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<PAGE>
the holders of record as they appear on the stock books of the Corporation on
such record dates, not more than 60 days nor less than 10 days preceding the
payment dates thereof as shall be fixed by the Board or the Committee.
In the event that the Dividends Received Percentage is reduced to 40% or
less, the Corporation may, at its option, redeem the Cumulative Preferred Stock,
in whole but not in part, as described in paragraph 6 hereof.
3. Liquidation Preference. The shares of Cumulative Preferred Stock shall
----------------------
rank, as to liquidation, dissolution or winding up of the Corporation, prior to
the shares of Common Stock and any other class of stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $200.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date of final distribution. The holders of
the Cumulative Preferred Stock will not be entitled to receive the Liquidation
Preference until the liquidation preference of any other class of stock of the
Corporation ranking senior to the Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding up shall have been paid (or a sum set aside
therefor sufficient to provide for payment) in full. After payment of the full
amount of the Liquidation Preference and such dividends, the holders of shares
of Cumulative Preferred Stock will not be entitled to any further participation
in any distribution of assets by the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of shares of Parity Preferred
Stock shall be insufficient to pay in full the preferential amount aforesaid,
then such assets, or the proceeds thereof,
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<PAGE>
shall be distributable among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were paid in full. For the purposes hereof, neither a consolidation or
merger of the Corporation with or into any other corporation, nor a merger of
any other corporation with or into the Corporation, nor a sale or transfer of
all or any part of the Corporation's assets for cash or securities shall be
considered a liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of Shares of Cumulative Preferred Stock
-------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of Cumulative Preferred Stock shall have
the right, with holders of shares of any one or more other class or series
of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class), to elect two of the authorized
number of members of the Board at the Corporation's next annual meeting of
stockholders and at each subsequent annual meeting of stockholders until
such arrearages have been paid or set apart for payment, at which time such
right shall terminate, except as herein or by law expressly provided,
subject to revesting in the event of each and every subsequent default of
the character above mentioned. Upon any termination of the right of the
holders of shares of Cumulative Preferred Stock as a class to vote for
directors as herein provided, the term of office of all directors then in
office elected by the holders of shares of Cumulative Preferred Stock shall
terminate immediately.
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Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares of
Cumulative Preferred Stock voting separately as a class (together with the
holders of shares of any other class or series of stock upon which like voting
rights have been conferred and are exercisable). If the office of any director
elected by the holders of shares of Cumulative Preferred Stock voting as a class
becomes vacant for any reason other than removal from office as aforesaid, the
remaining director elected pursuant to this paragraph may choose a successor who
shall hold office for the unexpired term in respect of which such vacancy
occurred. At elections for such directors, each holder of shares of Cumulative
Preferred Stock shall be entitled to one vote for each share held (the holders
of shares of any other class or series of preferred stock having like voting
rights being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the shares of
Cumulative Preferred Stock outstanding at the time and all other classes or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class) given in person or by proxy, either in
writing or at any meeting called for the purpose, shall be necessary to permit,
effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined in
paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise of any of the provisions of the Certificate of
Incorporation (including this resolution or any provision hereof) that
would materially and adversely affect any power, preference, or special
right of the shares of
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Cumulative Preferred Stock or of the holders thereof; provided,
however, that any increase in the amount of authorized Common
Stock or authorized Preferred Stock or any increase or decrease
in the number of shares of any series of Preferred Stock or the
creation and issuance of other series of Common Stock or
Preferred Stock, in each case ranking on a parity with or junior
to the shares of Cumulative Preferred Stock with respect to the
payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such powers, preferences or
special rights.
(c) The foregoing voting provisions shall not apply if, at or
prior to the time when the act with respect to which such vote would
otherwise be required shall be effected, all outstanding shares of
Cumulative Preferred Stock shall have been redeemed or called for
redemption and sufficient funds shall have been deposited in trust to
effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the Cumulative
Preferred Stock shall not be redeemable prior to August 30, 2001, except as
stated below. Subject to the foregoing, on or after such date, shares of the
Cumulative Preferred Stock are redeemable at $200.00 per share together with an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have not
been paid, the Cumulative Preferred Stock may not be redeemed in part and the
Corporation may not purchase or acquire any shares of the Cumulative Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Cumulative Preferred Stock. If fewer than all the
outstanding shares of Cumulative Preferred Stock are to be redeemed, the
Corporation
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<PAGE>
will select those to be redeemed by lot or a substantially equivalent method.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for
cancellation, on the redemption date dividends shall cease to accrue on the
shares to be redeemed, and at the close of business on the redemption date the
holders of such shares shall cease to be stockholders with respect to such
shares and shall have no interest in or claims against the Corporation by virtue
thereof and shall have no voting or other rights with respect to such shares,
except the right to receive the moneys payable upon surrender (and endorsement,
if required by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding. Subject to applicable escheat laws, any
moneys so set aside by the Corporation and unclaimed at the end of two years
from the redemption date shall revert to the general funds of the Corporation,
after which reversion the holders of such shares so called for redemption shall
look only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
Notwithstanding the foregoing provisions, if the Dividends Received
Percentage is equal to or less than 40% and, as a result, the amount of
dividends on the Cumulative Preferred Stock payable on any dividend payment date
will be or is adjusted upwards as described in paragraph 2(b) hereof, the
Corporation, at its option, may redeem all, but not less than all, of the
outstanding shares of the Cumulative Preferred Stock (and the Depositary Shares)
(a "Dividends Received Deduction Redemption"); provided that within sixty days
of the date on which an amendment to the Code is enacted which reduces the
Dividends Received Percentage to 40% or less, the Corporation sends notice to
holders of the Cumulative Preferred Stock relating to any Dividends Received
Deduction Redemption of such redemption. A redemption of the Cumulative
Preferred Stock will take place on the date specified in the
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notice, which shall be not less than thirty nor more than sixty days from the
date such notice is sent to holders of the Cumulative Preferred Stock. A
Dividends Received Deduction Redemption shall be at the applicable redemption
price set forth in the following table, in each case plus accrued and unpaid
dividends (whether or not declared) thereon to but excluding the date fixed for
redemption, including any changes in dividends payable due to changes in the
Dividends Received Percentage, if any:
Redemption Price
----------------
Per
Depositary
Redemption Period Per Share Share
- ------------------ --------- ---------
May 31, 1997 to August 29, 1997..... $210.00 $52.50
August 30, 1997 to August 29, 1998.. 208.00 52.00
August 30, 1998 to August 29, 1999.. 206.00 51.50
August 30, 1999 to August 29, 2000.. 204.00 51.00
August 30, 2000 to August 29, 2001.. 202.00 50.50
On or after August 30, 2001......... 200.00 50.00
7. Authorization and Issuance of Other Securities. No consent of the
----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves the
-----------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both,
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if the holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, whether or
not the dividend rates, dividend payment dates, or redemption or liquidation
prices per share thereof be different from those of the Cumulative Preferred
Stock, if the holders of stock of such class or classes shall be entitled by the
terms thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of such stock and the
holders of shares of Cumulative Preferred Stock (the term "Parity Preferred
Stock" being used to refer to any stock on a parity with the shares of
Cumulative Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such class
shall be Common Stock or if the holders of the Cumulative Preferred Stock shall
be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of stock of such class or classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and upon
liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per
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share, (iii) the Corporation's Series A Fixed/Adjustable Rate Preferred
Stock, with a liquidation value of $200.00 per share, (iv) if issued, the
Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of
$200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative
Preferred Stock, with a liquidation value of $200.00 per share, (vi) if
issued, the Corporation's 9.00% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's
8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock,
with a liquidation value of $200.00 per share and (ix) if issued, the
Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of
$200.00 per share.
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B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
--------------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
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CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
SERIES A FIXED/ADJUSTABLE RATE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of
Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 1,725,000 of the shares of Preferred Stock which the
Corporation has authority to issue, is authorized, and the Board hereby fixes
the powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers, designations,
preferences and relative participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
------------------------------------------
series of the Preferred Stock authorized by this resolution
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shall be the Series A Fixed/Adjustable Rate Cumulative Preferred Stock, par
value $0.01 per share, with a stated value of $200.00 per share (the "Series A
Fixed/Adjustable Rate Preferred Stock"). The stated value per share of Series A
Fixed/Adjustable Rate Preferred Stock shall not for any purpose be considered to
be a determination by the Board with respect to the capital and surplus of the
Corporation. The number of shares of Series A Fixed/Adjustable Rate Preferred
Stock shall be 1,725,000. The Series A Fixed/Adjustable Rate Preferred Stock is
issuable in whole shares only.
2. Dividends. (a) Holders of shares of Series A Fixed/Adjustable Rate
----------
Preferred Stock will be entitled to receive cash dividends, when, as and if
declared by the Board or the Committee (as hereinafter defined) out of assets of
the Corporation legally available for payment. Dividends on the Series A
Fixed/Adjustable Rate Preferred Stock, calculated as a percentage of the stated
value, will be payable quarterly on February 28, May 30, August 30 and November
30 (each a "dividend payment date"). From the date of issuance of the Series A
Fixed/Adjustable Rate Preferred Stock and continuing through November 30, 2001,
the rate of such dividend will be 5.91% per annum. For the purposes of this
Certificate of Designation, the "Committee" shall mean any committee of the
Board to whom the Board, pursuant to Section 141(c) of the General Corporation
Law of the State of Delaware, delegates authority to perform the functions of
the Board set forth in this Certificate of Designation.
After November 30, 2001, dividends on the Series A Fixed/Adjustable Rate
Preferred Stock will be payable quarterly on each dividend payment date at the
Applicable Rate (as defined in paragraph 3) from time to time in effect. The
Applicable Rate per annum for any dividend period beginning on or after November
30, 2001 will be equal to .37% plus the highest of the Treasury Bill Rate, the
Ten-Year Constant Maturity Rate and the Thirty-Year
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Constant Maturity Rate (each as defined in paragraph 3), as determined in
advance of such dividend period. The Applicable Rate per annum for any dividend
period beginning on or after November 30, 2001, will not be less then 6.41% nor
greater then 12.41% (without taking into account any adjustments set forth in
paragraph 2(b)).
Dividends on shares of the Series A Fixed/Adjustable Rate Preferred Stock
will be cumulative from the date of initial issuance of such shares of Series A
Fixed/Adjustable Rate Preferred Stock. Dividends will be payable, in arrears,
to holders of record as they appear on the stock books of the Corporation on
such record dates, not more than 60 days nor less than 10 days preceding the
payment dates thereof, as shall be fixed by the Board or the Committee. The
amount of dividends payable for the initial dividend period or any period
shorter than a full dividend period shall be calculated on the basis of a 360-
day year of twelve 30-day months. No dividends may be declared or paid or set
apart for payment on any Parity Preferred Stock (as defined in paragraph 10(b))
with regard to the payment of dividends unless there shall also be or have been
declared and paid or set apart for payment on the Series A Fixed/Adjustable Rate
Preferred Stock, like dividends for all dividend payment periods of the Series A
Fixed/Adjustable Rate Preferred Stock ending on or before the dividend payment
date of such Parity Preferred Stock ratably in proportion to the respective
amounts of dividends (x) accumulated and unpaid or payable on such Parity
Preferred Stock, on the one hand, and (y) accumulated and unpaid through the
dividend payment period or periods of the Series A Fixed/Adjustable Rate
Preferred Stock next preceding such dividend payment date, on the other hand.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Series A Fixed/Adjustable Rate Preferred Stock have been paid,
no dividends (other than in Common Stock of the Corporation) may be paid or
declared
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and set aside for payment or other distribution made upon the Common Stock or on
any other stock of the Corporation ranking junior to or on a parity with the
Series A Fixed/Adjustable Rate Preferred Stock as to dividends, nor may any
Common Stock or any other stock of the Corporation ranking junior to or on a
parity with the Series A Fixed/Adjustable Rate Preferred Stock as to dividends
be redeemed, purchased or otherwise acquired for any consideration (or any
payment be made to or available for a sinking fund for the redemption of any
shares of such stock; provided, however, that any moneys theretofore deposited
in any sinking fund with respect to any preferred stock of the Corporation in
compliance with the provisions of such sinking fund may thereafter be applied to
the purchase or redemption of such preferred stock in accordance with the terms
of such sinking fund, regardless of whether at the time of such application full
cumulative dividends upon shares of the Series A Fixed/Adjustable Rate Preferred
Stock outstanding to the last dividend payment date shall have been paid or
declared and set apart for payment) by the Corporation; provided that any such
junior or parity Preferred Stock or Common Stock may be converted into or
exchanged for stock of the Corporation ranking junior to the Series A
Fixed/Adjustable Rate Preferred Stock as to dividends.
(b) If one or more amendments to the Internal Revenue Code of 1986, as
amended (the "Code"), are enacted that reduce the percentage of the dividends
received deduction as specified in Section 243(a)(1) of the Code or any
successor provision (the "Dividends Received Percentage") to below 70%, the
amount of each dividend payable per share of the Series A Fixed/Adjustable Rate
Preferred Stock for dividend payments made on or after the date of enactment of
such change will be adjusted by multiplying the amount of the dividend payable
determined as described above (before adjustment) by a factor, which will be the
number determined in accordance with the following
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formula (the "DRD Formula"), and rounding the result to the nearest cent:
1 - (.35 (1 - .70))
-------------------
1 - (.35 (1 - DRP))
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the Code,
other than a change in the percentage of the dividends received deduction set
forth in Section 243(a)(1) of the Code or any successor provision, will give
rise to an adjustment. Notwithstanding the foregoing provisions, in the event
that, with respect to any such amendment, the Corporation will receive either an
unqualified opinion of nationally recognized independent tax counsel selected by
the Corporation or a private letter ruling or similar form of authorization from
the Internal Revenue Service to the effect that such an amendment would not
apply to dividends payable on the Series A Fixed/Adjustable Rate Preferred
Stock, then any such amendment will not result in the adjustment provided for
pursuant to the DRD Formula. The opinion referenced in the previous sentence
will be based upon a specific exception in the legislation amending the DRP or
upon a published pronouncement of the Internal Revenue Service addressing such
legislation. Unless the context otherwise requires, references to dividends in
this Certificate of Designation will mean dividends as adjusted by the DRD
Formula. The Corporation's calculation of the dividends payable, as so adjusted
and as certified accurate as to calculation and reasonable as to method by the
independent certified public accountants then regularly engaged by the
Corporation, will be final and not subject to review absent manifest error.
If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on a dividend
payment date has been declared, the amount of dividend payable on such dividend
payment date
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<PAGE>
will not be increased. Instead, an amount, equal to the excess of (x) the
product of the dividends paid by the Corporation on such dividend payment date
and the DRD Formula (where the DRP used in the DRD Formula would be equal to the
reduced Dividends Received Percentage) over (y) the dividends paid by the
Corporation on such dividend payment date, will be payable on the next
succeeding dividend payment date to holders of record in addition to any other
amounts payable on such date.
In addition, if prior to May 31, 1997, an amendment to the Code is enacted
that reduces the Dividends Received Percentage to below 70% and such reduction
retroactively applies to a dividend payment date of the Series A
Fixed/Adjustable Rate Cumulative Preferred Stock, no par value, with a stated
value of $200.00 per share ("Morgan Stanley Series A Fixed/Adjustable Rate
Preferred Stock") of Morgan Stanley Group Inc. ("Morgan Stanley") as to which
Morgan Stanley previously paid dividends on the Morgan Stanley Series A
Fixed/Adjustable Rate Preferred Stock (each an "Affected Dividend Payment
Date"), holders of the Series A Fixed/Adjustable Rate Preferred Stock shall be
entitled to receive when, as and if declared by the Board out of assets of the
corporation legally available for payment, additional dividends (the "Additional
Dividends") on the next succeeding dividend payment date (or if such amendment
is enacted after the dividend payable on such dividend payment date has been
declared and on or before such dividend is paid, on the second succeeding
dividend payment date following the date of enactment) payable on such
succeeding dividend payment date to holders of record in an amount equal to the
excess of (x) the product of the dividends paid by Morgan Stanley on each
Affected Dividend Payment Date and the DRD Formula (where the DRP used in the
DRD Formula would be equal to the reduced Dividends Received Percentage applied
to each Affected Dividend Payment Date) over (y) the dividends paid by Morgan
Stanley on each Affected Dividend Payment Date.
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<PAGE>
Additional Dividends will not be paid in respect of the enactment of
any amendment to the Code on or after May 31, 1997 which retroactively reduces
the Dividends Received Percentage to below 70%, or if prior to May 31, 1997,
such amendment would not result in an adjustment due to the Corporation having
received either an opinion of counsel or tax ruling referred to in the third
preceding paragraph. The Corporation will only make one payment of Additional
Dividends.
In the event that the amount of dividends payable per share of the Series A
Fixed/Adjustable Rate Preferred Stock will be adjusted pursuant to the DRD
Formula and/or Additional Dividends are to be paid, the Corporation will cause
notice of each such adjustment and, if applicable, any Additional Dividends, to
be sent to the holders of record as they appear on the stock books of the
Corporation on such record date, not more than 60 days nor less than 10 days
preceding the payment date thereof as shall be fixed by the Board or the
Committee.
In the event that the Dividends Received Percentage is reduced to 50% or
less, the Corporation may, at its option, redeem the Series A Fixed/Adjustable
Rate Preferred Stock, in whole but not in part, as described in paragraph 7
hereof.
3. Applicable Rate. Except as provided above in paragraph 2, the
----------------
"Applicable Rate" per annum for any dividend period beginning on or after
November 30, 2001 will be equal to .37% plus the Effective Rate (as defined
herein), but not less than 6.41% nor greater than 12.41% (without taking into
account any adjustments as described in paragraph 2(b)). The "Effective Rate"
for any dividend period beginning on or after November 30, 2001 will be equal to
the highest of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate and
the Thirty-Year Constant Maturity Rate (each as defined herein) for such
dividend period. If the Corporation determines in good faith that for any
reason: (i) any one of the Treasury Bill Rate, the
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Ten-Year Constant Maturity Rate or the Thirty-Year Constant Maturity Rate cannot
be determined for any dividend period beginning on or after November 30, 2001,
then the Effective Rate for such dividend period will be equal to the higher of
whichever two of such rates can be so determined; (ii) only one of the Treasury
Bill Rate, the Ten-Year Constant Maturity Rate or the Thirty-Year Constant
Maturity Rate can be determined for any dividend period beginning on or after
November 30, 2001, then the Effective Rate for such dividend period will be
equal to whichever such rate can be so determined; or (iii) none of the Treasury
Bill Rate, the Ten-Year Constant Maturity Rate or the Thirty-Year Constant
Maturity Rate can be determined for any dividend period beginning on or after
November 30, 2001, then the Effective Rate for the preceding dividend period
will be continued for such dividend period.
The "Treasury Bill Rate" for each dividend period will be the arithmetic
average of the two most recent weekly per annum market discount rates (or the
one weekly per annum market discount rate, if only one such rate is published
during the relevant Calendar Period (as defined herein) for three-month U.S.
Treasury bills, as published weekly by the Federal Reserve Board (as defined
herein) during the Calendar Period immediately preceding the tenth calendar day
preceding the dividend period for which the dividend rate on the Series A
Fixed/Adjustable Rate Preferred Stock is being determined.
The "Ten-Year Constant Maturity Rate" for each dividend period will be the
arithmetic average of the two most recent weekly per annum Ten-Year Average
Yields (as defined herein) (or the one weekly per annum Ten-Year Average Yield,
if only one such yield is published during the relevant Calendar Period), as
published weekly by the Federal Reserve Board during the Calendar Period
immediately preceding the tenth calendar day preceding the dividend period for
which the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is
being determined.
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The "Thirty-Year Constant Maturity Rate" for each dividend period will be
the arithmetic average of the two most recent weekly per annum Thirty-Year
Average Yields (as defined herein) the one weekly per annum Thirty-Year Average
Yield, if only one such yield is published during the relevant Calendar Period),
as published weekly by the Federal Reserve Board during the Calendar Period
immediately preceding the tenth calendar day preceding the dividend period for
which the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is
being determined.
If the Federal Reserve Board does not publish a weekly per annum market
discount rate, Ten-Year Average Yield or Thirty-Year Average Yield during any
applicable Calendar Period, then the Treasury Bill Rate, Ten-Year Constant
Maturity Rate or Thirty-Year Constant Maturity Rate, as the case may be, for
such dividend period will be the arithmetic average of the two most recent
weekly per annum market discount rates for three-month U.S. Treasury bills, Ten-
Year Average Yields or Thirty-Year Average Yields, as the case may be (or the
one weekly per annum rate, if only one such rate is published during the
relevant Calendar Period), as published weekly during such Calendar Period by
any Federal Reserve Bank or by any U.S. Government department or agency selected
by the Corporation. If any such rate is not published by the Federal Reserve
Board or by any Federal Reserve Bank or by any U.S. Government department or
agency during such Calendar Period, then the Treasury Bill Rate, Ten-Year
Constant Maturity Rate or Thirty-Year Constant Maturity Rate for such dividend
period will be the arithmetic average of the two most recent weekly per annum
(i) in the case of the Treasury Bill Rate, market discount rates (or the one
weekly per annum market discount rate, if only one such rate is published during
the relevant Calendar Period) for all of the U.S. Treasury bills then having
remaining maturities of not less than 80 nor more than 100 days, and (ii) in the
case of the Ten-Year Constant Maturity Rate, average yields to maturity (or the
one weekly per annum average yield to
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maturity, if only one such yield is published during the relevant Calendar
Period) for all of the actively traded marketable U.S. Treasury fixed interest
rate securities (other then Special Securities (as defined herein)) then having
remaining maturities of not less than eight nor more than twelve years, and
(iii) in the case of the Thirty-Year Constant Maturity Rate, average yields to
maturity (or the one weekly per annum average yield to maturity, if only one
such yield is published during the relevant Calendar Period) for all of the
actively traded marketable U.S. Treasury fixed interest rate securities (other
than Special Securities) then having remaining maturities of not less than
twenty-eight nor more than thirty years, in each case as published during such
Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board
does not publish such rates, by any Federal Reserve Bank or by any U.S.
Government department or agency selected by the Corporation. If the Corporation
determines in good faith that for any reason (i) no such U.S. Treasury bill
rates are published as provided above during such Calendar Period or (ii) the
Corporation cannot determine the Treasury Bill Rate for any dividend period;
then the Treasury Bill Rate for such dividend period will be the arithmetic
average of the per annum market discount rates based upon the closing bids
during such Calendar Period for each of the issues of marketable non-interest-
bearing U.S. Treasury securities with a remaining maturity of not less than 80
nor more than 100 days from the date of each such quotation, as chosen and
quoted daily for each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least three
recognized dealers in U.S. Government securities selected by the Corporation.
If the Corporation determines in good faith that for any reason the Corporation
cannot determine the Ten-Year Constant Maturity Rate or Thirty-Year Constant
Maturity Rate for any dividend period as provided above, then the applicable
rate for such dividend period will be the arithmetic average of the per annum
average yields to maturity based upon the closing
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bids during such Calendar Period for each of the issues of actively traded
marketable U.S. Treasury fixed interest rate securities (other then Special
Securities) with a final maturity date (i) in the case of the Ten-Year Constant
Maturity Rate, not less than eight nor more then twelve years from the date of
each such quotation, and (ii) in the case of the Thirty-Year Constant Maturity
Rate, no less than twenty-eight nor more than thirty years from the date of each
such quotation, in each case as chosen and quoted daily for each business day in
New York City (or less frequently if daily quotations are not generally
available) to the Corporation by at least three recognized dealers in the United
States.
The Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the Thirty-
Year Constant Maturity Rate will each be rounded to the nearest five hundredths
of a percent, with .025% being rounded upward.
The Applicable Rate with respect to each dividend period beginning on or
after November 30, 2001 will be calculated as promptly as practicable by the
Corporation according to the appropriate method described above. The
Corporation will cause notice of each Applicable Rate to be given to the holders
of Series A Fixed/Adjustable Rate Preferred Stock when payment is made of the
dividend for the immediately preceding dividend period.
As used in this paragraph 3, the term "Calendar Period" means a period of
fourteen calendar days; the term "Federal Reserve Board" means the Board of
Governors of the Federal Reserve System; the term "Special Securities" means
securities which can, at the option of the holder, be surrendered at face value
in payment of any Federal estate tax or which provide tax benefits to the holder
and are priced to reflect such tax benefits or which were originally issued at a
deep or substantial discount; the term "Ten-Year Average Yield" means the
average yield to maturity for actively traded marketable U.S.
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Treasury fixed interest rate securities (adjusted to constant maturities of ten
years); and the term "Thirty-Year Average Yield" means the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of thirty years).
4. Liquidation Preference. The shares of Series A Fixed/Adjustable Rate
-----------------------
Preferred Stock shall rank, as to liquidation, dissolution or winding up of the
Corporation, prior to the shares of Common Stock and any other class of stock of
the Corporation ranking junior to the Series A Fixed/Adjustable Rate Preferred
Stock as to rights upon liquidation, dissolution or winding up of the
Corporation, so that in the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the Series
A Fixed/Adjustable Rate Preferred Stock shall be entitled to receive out of the
assets of the Corporation available for distribution to its stockholders,
whether from capital, surplus or earnings, before any distribution is made to
holders of shares of Common Stock or any other such junior stock, an amount
equal to $200.00 per share (the "Liquidation Preference" of a share of Series A
Fixed/Adjustable Rate Preferred Stock) plus an amount equal to all dividends
(whether or not earned or declared) accrued and accumulated and unpaid on the
shares of Series A Fixed/Adjustable Rate Preferred Stock to the date of final
distribution. The holders of the Series A Fixed/Adjustable Rate Preferred Stock
will not be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of stock of the Corporation ranking senior to the
Series A Fixed/Adjustable Rate Preferred Stock as to rights upon liquidation,
dissolution or winding up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. After payment of the full amount of
the Liquidation Preference and such dividends, the holders of shares of Series A
Fixed/Adjustable Rate Preferred Stock will not be entitled to any further
participation in any distribution of
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assets by the Corporation. If, upon any liquidation, dissolution or winding up
of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of Parity Preferred Stock shall be
insufficient to pay in full the preferential amount aforesaid, then such assets,
or the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were paid in full. For the purposes hereof, neither
a consolidation or merger of the Corporation with or into any other corporation,
nor a merger of any other corporation with or into the Corporation, nor a sale
or transfer of all or any part of the Corporation's assets for cash or
securities shall be considered a liquidation, dissolution or winding up of the
Corporation.
5. Conversion. The Series A Fixed/Adjustable Rate Preferred Stock is not
-----------
convertible into shares of any other class or series of stock of the
Corporation.
6. Voting Rights. The holders of shares of Series A Fixed/Adjustable Rate
--------------
Preferred Stock shall have no voting rights whatsoever, except for any voting
rights to which they may be entitled under the laws of the State of Delaware,
and except as follows:
(a) Whenever, at any time or times, dividends payable on the
shares of Series A Fixed/Adjustable Rate Preferred Stock or on any
Parity Preferred Stock with respect to payment of dividends, shall be in
arrears for an aggregate number of days equal to six calendar quarters
or more, whether or not consecutive, the holders of the outstanding
shares of Series A Fixed/Adjustable Rate Preferred Stock shall have the
right, with holders of shares of any one or more other class or series
of stock upon which like voting rights have been conferred and are
exercisable (voting together as a class), to
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elect two of the authorized number of members of the Board at the
Corporation's next annual meeting of stockholders and at each subsequent
annual meeting of stockholders until such arrearages have been paid or
set apart for payment, at which time such right shall terminate, except
as herein or by law expressly provided, subject to revesting in the
event of each and every subsequent default of the character above
mentioned. Upon any termination of the right of the holders of shares of
Series A Fixed/Adjustable Rate Preferred Stock as a class to vote for
directors as herein provided, the term of office of all directors then
in office elected by the holders of shares of Series A Fixed/Adjustable
Rate Preferred Stock shall terminate immediately.
Any director who shall have been so elected pursuant to this
paragraph may be removed at any time, either with or without cause. Any
vacancy thereby created may be filled only by the affirmative vote of
the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock
voting separately as a class (together with the holders of shares of any
other class or series of stock upon which like voting rights have been
conferred and are exercisable). If the office of any director elected by
the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock
voting as a class becomes vacant for any reason other than removal from
office as aforesaid, the remaining director elected pursuant to this
paragraph may choose a successor who shall hold office for the unexpired
term in respect of which such vacancy occurred. At elections for such
directors, each holder of shares of Series A Fixed/Adjustable Rate
Preferred Stock shall be entitled to one vote for each share held (the
holders of shares of any other class or series of Preferred Stock having
like voting rights being entitled to such number of votes, if any, for
each share
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of such stock held as may be granted to them).
(b) So long as any shares of Series A Fixed/Adjustable Rate Preferred
Stock remain outstanding, the consent of the holders of at least two-thirds of
the shares of Series A Fixed/Adjustable Rate Preferred Stock outstanding at the
time and all other classes or series of stock upon which like voting rights have
been conferred and are exercisable (voting together as a class) given in person
or by proxy, either in writing or at any meeting called for the purpose, shall
be necessary to permit, effect or validate any one or more of the following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined in
paragraph 10(a) hereof) to the shares of the Series A Fixed/Adjustable
Rate Preferred Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate
of Incorporation (including this resolution or any provision hereof)
that would materially and adversely affect any power, preference, or
special right of the shares of Series A Fixed/Adjustable Rate Preferred
Stock or of the holders thereof; provided, however, that any increase in
the amount of authorized Common Stock or authorized Preferred Stock or
any increase or decrease in the number of shares of any series of
Preferred Stock or the creation and issuance of other series of Common
Stock or Preferred Stock, in each case ranking on a parity with or
junior to the shares of Series A Fixed/Adjustable Rate Preferred Stock
with respect to the
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<PAGE>
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and
adversely affect such powers, preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to
the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of Series A
Fixed/Adjustable Rate Preferred Stock shall have been redeemed or called
for redemption and sufficient funds shall have been deposited in trust to
effect such redemption.
7. Redemption. The shares of the Series A Fixed/Adjustable Rate Preferred
-----------
Stock may be redeemed at the option of the Corporation, as a whole, or from time
to time in part, at any time, upon not less than 30 days' prior notice mailed to
the holders of the shares to be redeemed at their addresses as shown on the
stock books of the Corporation; provided, however, that shares of the Series A
Fixed/Adjustable Rate Preferred Stock shall not be redeemable prior to November
30, 2001, except as stated below. Subject to the foregoing, on or after such
date, shares of the Series A Fixed/Adjustable Rate Preferred Stock are
redeemable at $200.00 per share together with an amount equal to all dividends
(whether or not earned or declared) accrued and accumulated and unpaid to, but
excluding, the date fixed for redemption.
If full cumulative dividends on the Series A Fixed/Adjustable Rate
Preferred Stock have not been paid, the Series A Fixed/Adjustable Rate Preferred
Stock may not be redeemed in part and the Corporation may not purchase or
acquire any shares of the Series A Fixed/Adjustable Rate Preferred Stock
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of the Series A Fixed/Adjustable Rate Preferred Stock. If fewer
than all the
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<PAGE>
outstanding shares of Series A Fixed/Adjustable Rate Preferred Stock are to be
redeemed, the Corporation will select those to be redeemed by lot or a
substantially equivalent method.
If a notice of redemption has been given pursuant to this paragraph 7 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Series A Fixed/Adjustable Rate Preferred Stock so called for redemption,
then, notwithstanding that any certificates for such shares have not been
surrendered for cancellation, on the redemption date dividends shall cease to
accrue on the shares to be redeemed, and at the close of business on the
redemption date the holders of such shares shall cease to be stockholders with
respect to such shares and shall have no interest in or claims against the
Corporation by virtue thereof and shall have no voting or other rights with
respect to such shares, except the right to receive the moneys payable upon
surrender (and endorsement, if required by the Corporation) of their
certificates, and the shares evidenced thereby shall no longer be outstanding.
Subject to applicable escheat laws, any moneys so set aside by the Corporation
and unclaimed at the end of two years from the redemption date shall revert to
the general funds of the Corporation, after which reversion the holders of such
shares so called for redemption shall look only to the general funds of the
Corporation for the payment of the amounts payable upon such redemption. Any
interest accrued on funds so deposited shall be paid to the Corporation from
time to time.
Notwithstanding the foregoing provisions, if the Dividends Received
Percentage is equal to or less than 50% and, as a result, the amount of
dividends on the Series A Fixed/Adjustable Rate Preferred Stock payable on any
dividend payment date will be or is adjusted upwards as described in paragraph
2(b) hereof, the Corporation, at its
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<PAGE>
option, may redeem all, but not less than all, of the outstanding shares of the
Series A Fixed/Adjustable Rate Preferred Stock (the Depositary Shares) (a
"Dividends Received Deduction Redemption") provided that within sixty days of
the date on which an amendment to the Code is enacted which reduces the
Dividends Received Percentage to 50% or less, the Corporation sends notice to
holders of the Series A Fixed/Adjustable Rate Preferred Stock of such
redemption. A Dividends Received Deduction Redemption, in accordance with this
paragraph, will take place on the date specified in the notice, which shall be
not less than thirty nor more then sixty days from the date such notice is sent
to holders of the Series A Fixed/Adjustable Rate Preferred Stock. A Dividends
Received Deduction Redemption shall be at the applicable redemption price set
forth in the following table, in each case plus accrued and unpaid dividends
(whether or not declared) thereon to but excluding the date fixed for
redemption, including any changes in dividends payable due to changes in the
Dividends Received Percentage and Additional Dividends, if any:
<TABLE>
<CAPTION>
Redeemable Price
----------------------
Per
Depositary
Redemption Period Per Share Share
- ----------------- --------- -----------
<S> <C> <C>
May 31, 1997 to November 29, 1997....... $210.00 $52.50
November 30, 1997 to November 29, 1998.. 208.00 52.00
November 30, 1998 to November 29, 1999.. 206.00 51.50
November 30, 1999 to November 29, 2000.. 204.00 51.00
November 30, 2000 to November 29, 2001.. 202.00 50.50
On or after November 30, 2001........... 200.00 50.00
</TABLE>
8. Authorization and Issuance of Other Securities. No consent of the holders
-----------------------------------------------
of the Series A Fixed/Adjustable Rate Preferred Stock shall be required for (a)
the creation of any indebtedness of any kind of the Corporation,
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<PAGE>
(b) the creation, or increase or decrease in the amount, of any class or series
of stock of the Corporation not ranking prior as to dividends or upon
liquidation, dissolution or winding up to the Series A Fixed/Adjustable Rate
Preferred Stock or (c) any increase or decrease in the amount of authorized
Common Stock or any increase, decrease or change in the par value thereof or in
any other terms thereof.
9. Amendment of Resolution. The Board and the Committee each reserves the
------------------------
right by subsequent amendment of this resolution from time to time to increase
or decrease the number of shares that constitute the Series A Fixed/Adjustable
Rate Preferred Stock (but not below the number of shares thereof then
outstanding) and in other respects to amend this resolution within the
limitations provided by law, this resolution and the Certificate of
Incorporation.
10. Rank. For the purposes of this resolution, any stock of any class or
-----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Series A Fixed/Adjustable Rate Preferred
Stock, either as to dividends or upon liquidation, dissolution or winding up,
or both, if the holders of stock of such class or classes shall be entitled by
the terms thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Series A Fixed/Adjustable Rate
Preferred Stock;
(b) on a parity with shares of the Series A Fixed/Adjustable Rate
Preferred Stock, either as to dividends or upon liquidation, dissolution or
winding up, or both, whether or not the dividend rates, dividend payment
dates, or redemption or liquidation prices per share thereof be
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<PAGE>
different from those of the Series A Fixed/Adjustable Rate Preferred Stock, if
the holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of such stock and the
holders of shares of Series A Fixed/Adjustable Rate Preferred Stock (the term
"Parity Preferred Stock" being used to refer to any stock on a parity with the
shares of Series A Fixed/Adjustable Preferred Stock, either as to dividends or
upon liquidation, dissolution or winding up, or both, as the context may
require); and
(c) junior to shares of the Series A Fixed/Adjustable Rate Preferred
Stock, either as to dividends or upon liquidation, dissolution or winding up,
or both, if such class shall be Common Stock or if the holders of the Series A
Fixed/Adjustable Rate Preferred Stock shall be entitled to the receipt of
dividends or of amounts distributable upon liquidation, dissolution or winding
up, as the case may be, in preference or priority to the holders of stock of
such class or classes.
The Series A Fixed/Adjustable Rate Preferred Stock shall rank prior, as to
dividends and upon liquidation, dissolution or winding up, to the Common Stock
and the Corporation's Series A Junior Participating Preferred Stock, and on a
parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a
liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative
Preferred Stock, with a liquidation value of $200.00 per share, (iii) the
Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of
$200.00 per share, (iv) if issued, the Corporation's 7.82% Cumulative
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<PAGE>
Preferred Stock, with a liquidation value of $200.00 per share, (v) if
issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vi) if issued, the
Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value
of $200.00 per share, (vii) if issued, the Corporation's 8.40%
Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share and (ix) if issued,
the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation
value of $200.00 per share.
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<PAGE>
B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
133
<PAGE>
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
8.03% CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
OF
DEAN WITTER, DISCOVER & CO.
___________________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
___________________________________
The undersigned DOES HEREBY CERTIFY:
A. The following resolution was duly adopted by the Board of Directors
(the "Board") of Dean Witter, Discover & Co., a Delaware corporation
(hereinafter called the "Corporation"), by unanimous vote thereof at a meeting
on May 28, 1997:
RESOLVED that, pursuant to authority expressly granted to and vested in the
Board by provisions of the Amended and Restated Certificate of Incorporation of
the Corporation (the "Certificate of Incorporation"), the issuance of a series
of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which
shall consist of 670,000 of the shares of Preferred Stock which the Corporation
has authority to issue, is authorized, and the Board hereby fixes the powers,
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, of the
shares of such series (in addition to the powers, designations, preferences and
relative participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Preferred Stock) as
follows:
1. Designation and Amount; Fractional Shares. The designation for such
-----------------------------------------
series of the Preferred Stock authorized by this resolution shall be the 8.03%
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<PAGE>
Cumulative Preferred Stock, par value $0.01 per share, with a stated value of
$200.00 per share (the "Cumulative Preferred Stock"). The stated value per
share of the Cumulative Preferred Stock shall not for any purpose be considered
to be a determination by the Board with respect to the capital and surplus of
the Corporation. The number of shares of the Cumulative Preferred Stock shall
be 670,000. The Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. (a) Holders of shares of the Cumulative Preferred Stock
---------
will be entitled to receive, when, as and if declared by the Board or the
Committee (as hereinafter defined) out of assets of the Corporation legally
available for payment cash dividends at the rate of 8.03% per annum. Dividends
on the Cumulative Preferred Stock will be payable quarterly on February 28, May
30, August 30 and November 30 of each year (each a "dividend payment date").
Dividends on shares of the Cumulative Preferred Stock will be cumulative from
the date of initial issuance of such shares of the Cumulative Preferred Stock.
Dividends will be payable, in arrears, to holders of record as they appear on
the stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be fixed by
the Board or the Committee. The amount of dividends payable for the initial
dividend period or any period shorter than a full dividend period shall be
calculated on the basis of a 360-day year of twelve 30-day months. No dividends
may be declared or paid or set apart for payment on any Parity Preferred Stock
(as defined in paragraph 9(b) below) with regard to the payment of dividends
unless there shall also be or have been declared and paid or set apart for
payment on the Cumulative Preferred Stock, like dividends for all dividend
payment periods of the Cumulative Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock ratably in proportion to
the respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Cumulative Preferred Stock
next preceding such dividend payment date, on the other hand. For the purposes
of this Certificate of Designation, the "Committee" shall mean any committee of
the Board to whom the Board, pursuant to Section 141(c) of the General
Corporation Law of the State of Delaware, delegates authority to
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<PAGE>
perform the functions of the Board set forth in this Certificate of Designation.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid, no dividends (other
than in Common Stock of the Corporation) may be paid or declared and set aside
for payment or other distribution made upon the Common Stock or on any other
stock of the Corporation ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends, nor may any Common Stock or any other stock of
the Corporation ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment be made to or available for a sinking fund for the
redemption of any shares of such stock; provided, however, that any moneys
theretofore deposited in any sinking fund with respect to any Preferred Stock of
the Corporation in compliance with the provisions of such sinking fund may
thereafter be applied to the purchase or redemption of such Preferred Stock in
accordance with the terms of such sinking fund, regardless of whether at the
time of such application full cumulative dividends upon shares of the Cumulative
Preferred Stock outstanding to the last dividend payment date shall have been
paid or declared and set apart for payment) by the Corporation; provided that
any such junior or parity Preferred Stock or Common Stock may be converted into
or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
(b) If one or more amendments to the Internal Revenue Code of 1986, as
amended (the "Code"), are enacted that reduce the percentage of the dividends
received deduction as specified in Section 243(a)(1) of the Code or any
successor provision (the "Dividends Received Percentage") to below 70%, the
amount of each dividend payable per share of the Cumulative Preferred Stock for
dividend payments made on or after the date of enactment of such change, and so
long as the Dividends Received Percentage remains below 70%, will be adjusted by
multiplying the amount of the dividend payable determined as described above
(before adjustment) by a factor, which will be the number determined in
accordance with the following formula
136
<PAGE>
(the "DRD Formula"), and rounding the result to the nearest cent:
1 - (.35 (1 - .70))
-------------------
1- (.35 (1 - DRP))
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the Code,
other than a change in the percentage of the dividends received deduction set
forth in Section 243(a)(1) of the Code or any successor provision, will give
rise to an adjustment. Notwithstanding the foregoing provisions, in the event
that, with respect to any such amendment, the Corporation will receive either an
unqualified opinion of nationally recognized independent tax counsel selected by
the Corporation or a private letter ruling or similar form of authorization from
the Internal Revenue Service to the effect that such an amendment would not
apply to dividends payable on the Cumulative Preferred Stock, then any such
amendment will not result in the adjustment provided for pursuant to the DRD
Formula. The opinion referenced in the previous sentence will be based upon a
specific exception in the legislation amending the DRP or upon a published
pronouncement of the Internal Revenue Service addressing such legislation.
Unless the context otherwise requires, references to dividends in this
Certificate of Designation will mean dividends as adjusted by the DRD Formula.
The Corporation's calculation of the dividends payable, as so adjusted and as
certified accurate as to calculation and reasonable as to method by the
independent certified public accountants then regularly engaged by the
Corporation, will be final and not subject to review absent manifest error.
If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on a dividend
payment date has been declared and on or before such dividend is paid, the
amount of dividend payable on such dividend payment date will not be increased.
Instead, an amount, equal to the excess of (x) the product of the dividends paid
by the Corporation on such dividend payment date and the DRD Formula (where the
DRP used in the DRD Formula would be equal to the reduced Dividends Received
Percentage) over (y) the dividends paid by the Corporation on such dividend
payment date, will be payable on the next succeeding dividend payment date to
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<PAGE>
holders of record on the record date for such next succeeding dividend payment
in addition to any other amounts payable on such date.
In the event that the amount of dividends payable per share of the
Cumulative Preferred Stock will be adjusted pursuant to the DRD Formula, the
Corporation will cause notice of each such adjustment to be sent to the holders
of record as they appear on the stock books of the Corporation on such record
date, not more than 60 days nor less than 10 days preceding the payment date
thereof as shall be fixed by the Board or the Committee.
In the event that the Dividends Received Percentage is reduced to 50% or
less, the Corporation may, at its option, redeem the Cumulative Preferred Stock,
in whole but not in part, as described in paragraph 6 hereof.
3. Liquidation Preference. The shares of the Cumulative Preferred Stock
----------------------
shall rank, as to liquidation, dissolution or winding up of the Corporation,
prior to the shares of Common Stock and any other class of stock of the
Corporation ranking junior to the Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding up of the Corporation, so that in the event
of any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be
entitled to receive out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
before any distribution is made to holders of shares of Common Stock or any
other such junior stock, an amount equal to $200.00 per share (the "Liquidation
Preference" of a share of the Cumulative Preferred Stock) plus an amount equal
to all dividends (whether or not earned or declared) accrued and accumulated and
unpaid on the shares of the Cumulative Preferred Stock to the date of final
distribution. The holders of the Cumulative Preferred Stock will not be
entitled to receive the Liquidation Preference until the liquidation preference
of any other class of stock of the Corporation ranking senior to the Cumulative
Preferred Stock as to rights upon liquidation, dissolution or winding up shall
have been paid (or a sum set aside therefor sufficient to provide for payment)
in full. After payment of the full amount of the Liquidation Preference and
such dividends, the
138
<PAGE>
holders of shares of the Cumulative Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Corporation. If,
upon any liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation, or proceeds thereof, distributable among the holders of
shares of Parity Preferred Stock shall be insufficient to pay in full the
preferential amount aforesaid, then such assets, or the proceeds thereof, shall
be distributable among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all amounts payable thereon
were paid in full. For the purposes hereof, neither a consolidation or merger
of the Corporation with or into any other corporation, nor a merger of any other
corporation with or into the Corporation, nor a sale or transfer of all or any
part of the Corporation's assets for cash or securities shall be considered a
liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible into
----------
shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of the Cumulative Preferred Stock
-------------
shall have no voting rights whatsoever, except for any voting rights to which
they may be entitled under the laws of the State of Delaware, and except as
follows:
(a) Whenever, at any time or times, dividends payable on the shares of
Cumulative Preferred Stock or on any Parity Preferred Stock with respect to
payment of dividends, shall be in arrears for an aggregate number of days
equal to six calendar quarters or more, whether or not consecutive, the
holders of the outstanding shares of the Cumulative Preferred Stock shall
have the right, with holders of shares of any one or more other class or
series of stock upon which like voting rights have been conferred and are
exercisable (voting together a class), to elect two of the authorized
number of members of the Board at the Corporation's next annual meeting of
stockholders and at each subsequent annual meeting of stockholders until
such arrearages have been paid or set apart for payment, at which time such
right shall terminate, except as herein or by law expressly provided,
subject to revesting in the
139
<PAGE>
event of each and every subsequent default of the character above
mentioned. Upon any termination of the right of the holders of shares of
the Cumulative Preferred Stock as a class to vote for directors as herein
provided, the term of office of all directors then in office elected by the
holders of shares of the Cumulative Preferred Stock shall terminate
immediately.
Any director who shall have been so elected pursuant to this paragraph may
be removed at any time, either with or without cause. Any vacancy thereby
created may be filled only by the affirmative vote of the holders of shares
of the Cumulative Preferred Stock voting separately as a class (together
with the holders of shares of any other class or series of stock upon which
like voting rights have been conferred and are exercisable). If the office
of any director elected by the holders of shares of the Cumulative
Preferred Stock voting as a class becomes vacant for any reason other than
removal from office as aforesaid, the remaining director elected pursuant
to this paragraph may choose a successor who shall hold office for the
unexpired term in respect of which such vacancy occurred. At elections for
such directors, each holder of shares of the Cumulative Preferred Stock
shall be entitled to one vote for each share held (the holders of shares of
any other class or series of preferred stock having like voting rights
being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
(b) So long as any shares of the Cumulative Preferred Stock remain
outstanding, the consent of the holders of at least two-thirds of the
shares of the Cumulative Preferred Stock outstanding at the time and all
other classes or series of stock upon which like voting rights have been
conferred and are exercisable (voting together as a class) given in person
or by proxy, either in writing or at any meeting called for the purpose,
shall be necessary to permit, effect or validate any one or more of the
following:
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined
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<PAGE>
in paragraph 9(a) hereof) to the shares of the Cumulative Preferred
Stock; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate
of Incorporation (including this resolution or any provision hereof)
that would materially and adversely affect any power, preference, or
special right of the shares of the Cumulative Preferred Stock or of the
holders thereof; provided, however, that any increase in the amount of
authorized Common Stock or authorized Preferred Stock or any increase
or decrease in the number of shares of any series of Preferred Stock or
the creation and issuance of other series of Common Stock or Preferred
Stock, in each case ranking on a parity with or junior to the shares of
the Cumulative Preferred Stock with respect to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding
up, shall not be deemed to materially and adversely affect such powers,
preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or prior to
the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of the Cumulative
Preferred Stock shall have been redeemed or called for redemption and
sufficient funds shall have been deposited in trust to effect such
redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the Cumulative
Preferred Stock shall not be redeemable prior to February 28, 2007, except as
stated below. Subject to the foregoing, on or after such date, shares of the
Cumulative Preferred Stock are redeemable at the option of the Corporation, in
whole or in part, upon not less than 30 days' notice at the redemption prices
set forth below, plus accrued and accumulated but unpaid dividends to but
excluding the date fixed for
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<PAGE>
redemption, if redeemed during the twelve-month period beginning on February 28
of the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price Per Share
- ---- --------------------------
<S> <C>
2007................... $205.354
2008................... 204.282
2009................... 203.212
2010................... 202.142
2011................... 201.070
On or after 2012....... 200.000
</TABLE>
If full cumulative dividends on the Cumulative Preferred Stock have
not been paid, the Cumulative Preferred Stock may not be redeemed in part and
the Corporation may not purchase or acquire any share of the Cumulative
Preferred Stock otherwise than pursuant to a purchase or exchange offer made on
the same terms to all holders of the Cumulative Preferred Stock. If fewer than
all the outstanding shares of the Cumulative Preferred Stock are to be redeemed,
the Corporation will select those to be redeemed by lot or a substantially
equivalent method.
Notwithstanding the foregoing provisions, if the Dividends Received
Percentage is equal to or less than 50% and, as a result, the amount of
dividends on the Cumulative Preferred Stock payable on any dividend payment date
will be or is adjusted upwards as described in paragraph 2(b) hereof, the
Corporation, at its option, may redeem all, but not less than all, of the
outstanding shares of the Cumulative Preferred Stock (a "Dividends Received
Deduction Redemption"); provided that within sixty days of the date of the date
on which an amendment to the Code is enacted which reduces the Dividends
Received Percentage to 50% or less and the date on which notice of issuance of
the Cumulative Preferred Stock is given, the Corporation sends notice to holders
of the Cumulative Preferred Stock of such redemption. A Dividends Received
Deduction Redemption, in accordance with this paragraph, will take place on the
date specified in the notice, which shall be not less than thirty nor more than
sixty days from the date such notice is sent to holders of the Cumulative
Preferred Stock. A Dividends Received Deduction Redemption shall be at the
applicable redemption price set forth in the following table, in each case plus
accrued and accumulated but unpaid dividends thereon to but excluding the date
fixed for redemption, including any changes in
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<PAGE>
dividends payable due to changes in the Dividends Received Percentage and
Additional Dividends, if any:
<TABLE>
<CAPTION>
Redemption period Redemption price per share
- ----------------- --------------------------
<S> <C>
February 28, 1998 to February 27, 1999 $210.000
February 28, 1999 to February 27, 2000 208.889
February 28, 2000 to February 27, 2001 207.778
February 28, 2001 to February 27, 2002 206.667
February 28, 2002 to February 27, 2003 205.556
February 28, 2003 to February 27, 2004 204.444
February 28, 2004 to February 27, 2005 203.333
February 28, 2005 to February 27, 2006 202.222
February 28, 2006 to February 27, 2007 201.111
</TABLE>
If a Dividends Received Deduction Redemption occurs on or after February 28,
2007, the redemption prices shall be as set forth in the first paragraph of this
paragraph 6.
If a notice of redemption has been given pursuant to this paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of the Cumulative Preferred Stock so called for redemption, then,
notwithstanding that any certificates for such shares have not been surrendered
for cancellation, on the redemption date dividends shall cease to accrue on the
shares to be redeemed, and at the close of business on the redemption date the
holders of such shares shall cease to be stockholders with respect to such
shares and shall have no interest in or claims against the Corporation by virtue
thereof and shall have no voting or other rights with respect to such shares,
except the right to receive the moneys payable upon surrender (and endorsement,
if required by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding. Subject to applicable escheat laws, any
moneys so set aside by the Corporation and unclaimed at the end of two years
from the redemption date shall revert to the general funds of the Corporation,
after which reversion the holders of such shares so called for redemption shall
look only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
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7. Authorization and Issuance of Other Securities. No consent of the
----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of the
Corporation not ranking prior as to dividends or upon liquidation, dissolution
or winding up to the Cumulative Preferred Stock or (c) any increase or decrease
in the amount of authorized Common Stock or any increase, decrease or change in
the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board and the Committee each reserves
-----------------------
the right by subsequent amendment of this resolution from time to time to
increase or decrease the number of shares that constitute the Cumulative
Preferred Stock (but not below the number of shares thereof then outstanding)
and in other respects to amend this resolution within the limitations provided
by law, this resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this resolution, any stock of any class or
----
classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms
thereof to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference
or priority to the holders of shares of the Cumulative Preferred Stock;
(b) on a parity with shares of the Cumulative Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both,
whether or not the dividend rates, dividend payment dates, or redemption or
liquidation prices per share thereof be different from those of the
Cumulative Preferred Stock, if the holders of stock of such class or
classes shall be entitled by the terms thereof to the receipt of dividends
or of amounts distributed upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
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<PAGE>
liquidation prices, without preference or priority of one over the other as
between the holders of such stock and the holders of shares of the
Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to
refer to any stock on a parity with the shares of the Cumulative Preferred
Stock, either as to dividends or upon liquidation, dissolution or winding
up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may
be, in preference or priority to the holders of stock of such class or
classes.
The Cumulative Preferred Stock shall rank prior, as to dividends and
upon liquidation, dissolution or winding up, to the Common Stock and the
Corporation's Series A Junior Participating Preferred Stock, and on a parity
with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation
value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred
Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's
7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per
share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock,
with a liquidation value of $200.00 per share, (v) if issued, the Corporation's
7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00%
Cumulative Preferred Stock, with a liquidation value of $200.00 per share,
(viii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a
liquidation value of $200.00 per share and (ix) if issued, the Corporation's
8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share.
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B. This Certificate of Designation shall not become effective until,
and shall become effective at, 12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this
Certificate of Designation to be signed by Christine A. Edwards, its Executive
Vice President, General Counsel and Secretary, this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
----------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
146
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
of
DEAN WITTER, DISCOVER & CO.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
The undersigned officer of Dean Witter, Discover & Co., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Amended and Restated Certificate of Incorporation of the said Corporation, the
said Board of Directors on April 21, 1995 adopted the following resolution
creating a series of 220,000 shares of Preferred Stock designated as Series A
Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Amended and
Restated Certificate of Incorporation, a series of Preferred Stock of the
Corporation be and it hereby is created, and that the designation and amount
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "SERIES A JUNIOR PARTICIPATING PREFERRED STOCK" and the number of
shares constituting such series shall be 220,000.
Section 2. Dividends and Distributions.
---------------------------
(A) The holders of shares of Series A Junior Participating Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
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<PAGE>
Directors out of funds legally available for the purposes, quarterly
dividends payable in cash on the last day of March, June, September and
December in each year (each such date being referred to herein as a
"QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00 or
(b) subject to the provision for adjustment hereinafter set forth, 1,000
times the aggregate per share amount of all cash dividends, and 1,000 times
the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock, par value
$0.01 per share, of the Corporation (the "COMMON STOCK") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Junior Participating Preferred
Stock. In the event the Corporation shall at any time after April 21, 1995
(the "RIGHTS DECLARATION DATE") (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii subdivide the outstanding Common
Stock, or (ii combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount to which holders of shares of
Series A Junior Participating Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A
Junior Participating Preferred Stock as provided in Paragraph (A) above
immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$0.01 per share on the Series A Junior Participating Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of
Series A Junior Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Junior Participating Preferred Stock, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue form the
date of issue of such
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shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares
of Series A Junior Participating Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Junior Participating Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares
shall be allocated pro rata on a share-by-share basis among all such shares
at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to
the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
-------------
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Junior Participating Preferred Stock shall entitle the holder
thereof to 1,000 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the number of votes per share to which holders of shares of
Series A Junior Participating Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares
of Series A Junior Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "DEFAULT PERIOD") which shall extend until such
time when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Junior Participating
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<PAGE>
Preferred Stock then outstanding shall have been declared and paid or set apart
for payment. During each default period, all holders of Preferred Stock
(including holders of the Series A Junior participating Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly dividends thereon,
voting as a class, irrespective of series, shall have the right to elect two (2)
directors.
(ii) During any default period, such voting right of the holders of Series
A Junior Participating Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of ten percent (10%) in number of shares of Preferred Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
directors or, if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting does
not amount to the required number, the holders of the Preferred Stock shall have
the right to make such increase in the number of directors as shall be necessary
to permit the election by them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect directors in any
default period and during the continuance of such period, the number of
directors shall not be increased or decreased except by vote of the holders of
Preferred Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Junior
---- -----
Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect directors, the
Board of Directors may order, or any stockholder or stockholders owning in the
aggregate not less than ten percent (10%) of the total number of shares of
Preferred Stock outstanding, irrespective of series, may request, the calling of
special meeting of the holders of Preferred Stock, which meeting shall thereupon
be called by the President, a Vice-President or the Secretary of the
Corporation. Notice of such meeting and of any annual meeting at which holders
of Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii)
shall be given to each holder of record of Preferred Stock by mailing a copy of
such notice to him or her at his or her last address as the same appears on the
books of the Corporation. Such
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<PAGE>
meeting shall be called for a time not earlier than 20 days and not later than
60 days after such order or request or in default of the calling of such meeting
within 60 days after such order or request, such meeting may be called on
similar notice by any stockholder or stockholders owning in the aggregate not
less than ten percent (10%) of the total number of shares of Preferred Stock
outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such
special meeting shall be called during the period within 60 days immediately
preceding the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other classes
of stock of the Corporation if applicable, shall continue to be entitled to
elect the whole number of directors until the holders of Preferred Stock shall
have exercised their right to elect two (2) directors voting as a class, after
the exercise of which right (x) the directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in Paragraph
(C)(ii) of this Section 3) be filled by vote of a majority of the remaining
directors theretofore elected by the holders of the class of stock which elected
the director whose office shall have become vacant. References in this
Paragraph (C) to directors elected by the holders of a particular class of stock
shall include directors elected by such directors to fill vacancies as provided
in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right of
the holders of Preferred Stock as a class to elect directors shall cease, (y)
the term of any directors elected by the holders of Preferred Stock as a class
shall terminate, and (z) the number of directors shall be such number as may be
provided for in the certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3
(such number being subject, however, to change thereafter in any manner provided
by law or in the certificate of incorporation or by-laws). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining directors.
(D) Except as set forth herein, holders of Series A Junior Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
151
<PAGE>
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Junior Participating Preferred
Stock, except dividends paid ratably on the Series A Junior Participating
Preferred Stock and all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Junior Participating Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of any
stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series a Junior Participating
Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series
A Junior Participating Preferred Stock, or any shares of stock ranking on a
parity with the Series A Junior Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
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<PAGE>
Corporation unless the Corporation could, under Paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Participating
-----------------
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding up. (A) Upon any
--------------------------------------
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received an amount equal to 1,000 times the Exercise Price, plus an
amount equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment (the "Series A Liquidation
Preference"). Following the payment of the full amount of he Series A
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Common Stock shall have received an amount per
share (the "Common Adjustment") equal to the quotient obtained by dividing (i)
the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as
set forth in subparagraph (C) below to reflect such events as stock splits,
stock dividends and recapitalizations with respect to the Common Stock) (such
number in clause (ii), the "Adjustment Number"). following the payment of the
full amount of the Series A Liquidation Preference and the Common Adjustment in
respect of all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not
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<PAGE>
sufficient assets available to permit payment in full of the Common Adjustment,
then such remaining assets shall be distributed ratably to the holders of Common
Stock.
(C) In the event the Corporation shall at any time after the rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, Etc. In case the Corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Junior Participating
-------------
Preferred Stock shall not be redeemable.
Section 9. Amendment. The Amended and Restated Certificate of
---------
Incorporation of the Corporation shall not be further amended in any manner
which would materially alter or change the powers, preferences or special rights
of the Series A Junior Participating Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of a majority or more of
the outstanding
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<PAGE>
shares of Series A Junior Participating Preferred Stock, voting separately as a
class.
Section 10. Fractional Shares. Series A Junior Participating Preferred
-----------------
Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holders fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this 25th day of
April, 1995.
DEAN WITTER, DISCOVER & CO.
/s/ Ronald T. Carman
------------------------------------------------
Name: Ronald T. Carman
Title: Senior vice President and
Associate General Counsel
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<PAGE>
CERTIFICATE OF INCREASE
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
DEAN WITTER, DISCOVER & CO.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
Dean Witter, Discover & Co. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with Section 103 thereof, does hereby certify:
1. Pursuant to a Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock filed in the office of the
Secretary of State of Delaware on April 26, 1995, the Board of Directors of the
Corporation created a series of 220,000 shares of Series A Junior Participating
Preferred Stock, and as of the date hereof no shares of such series have been
issued.
2. The Board of Directors, on April 18, 1997, adopted the following
resolution authorizing an increase in the authorized number of shares of Series
A Junior Participating Preferred Stock from 220,000 to 450,000:
RESOLVED, that the number of shares constituting the series of the
Corporation's Series A Junior Participating Preferred Stock be increased to
450,000.
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<PAGE>
3. This Certificate of Increase and the increase in the authorized
number of shares of Series A Junior Participating Preferred Stock provided for
herein shall not become effective until, and shall become effective at,
12:01 a.m. on May 31, 1997.
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate of Increase this 30th day of May, 1997.
DEAN WITTER, DISCOVER & CO.
By: /s/ Christine A. Edwards
---------------------------------
Name: Christine A. Edwards
Title: Executive Vice President,
General Counsel & Secretary
157
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STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 03:00 PM 03/24/1998
981113145 - 0923632
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
Pursuant to Section 242 of the
General Corporation Law of
the State of Delaware
Morgan Stanley, Dean Witter, Discover & Co. (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, does hereby certify that:
FIRST: The Board of Directors of the Corporation, by unanimous
written consent pursuant to Section 141 of the General Corporation Law of the
State of Delaware, duly adopted resolutions setting forth a proposed amendment
to the Amended and Restated Certificate of Incorporation of the Corporation,
declaring said amendment to be advisable and authorizing the officers of the
Corporation to submit such amendment to the stockholders of the Corporation for
approval at the Corporation's 1998 annual meeting of stockholders. The
resolution setting forth the proposed amendment is as follows:
RESOLVED, that the Board of Directors declares it advisable that
Article I of the Corporation's Amended and Restated Certificate of Incorporation
be amended to read in its entirety as follows:
ARTICLE I
NAME
----
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
Morgan Stanley Dean Witter & Co.
SECOND: Thereafter, pursuant to resolution of its Board of Directors,
the 1998 annual meeting of stockholders of the Corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number of shares as
required by the Corporation's Amended and Restated Certificate of Incorporation
were voted in favor of the amendment.
THIRD: Said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
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FOURTH: This Certificate of Amendment shall not become effective until,
and shall become effective at, 5:00 p.m. on March 24, 1998.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Ronald T. Carman, its Assistant Secretary, this 24th day of March,
1998.
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
BY: /s/ Ronald T. Carman
---------------------------------------
Ronald T. Carman, Assistant Secretary
159
<PAGE>
CERTIFICATE OF ELIMINATION
OF PREFERRED STOCK
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
Incorporation authorizes the issuance of 1,000,000 shares of a series of
Preferred Stock designated 7-3/8% Cumulative Preferred Stock, par value $0.01
per share, with a stated value of $200.00 per share (the "7-3/8% Preferred
Stock").
SECOND: The Preferred Stock Financing Committee of the Board of
Directors of the Corporation (the "Preferred Stock Financing Committee")
redeemed and retired all issued and outstanding shares of the 7-3/8% Preferred
Stock, which constituted all authorized shares of the 7-3/8% Preferred Stock.
THIRD: Pursuant to the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware (the "GCL"), the Preferred
Stock Financing Committee adopted the following resolutions:
RESOLVED FURTHER, that upon redemption of the 7-3/8% Preferred Stock and
corresponding Depositary Shares, all of the shares of 7-3/8% Preferred
Stock so redeemed shall be retired; and
RESOLVED FURTHER, that upon redemption and retirement of the 7-3/8%
Preferred Stock in accordance with the foregoing resolutions, none of the
authorized shares of such series of Preferred Stock will be outstanding and
no shares of such series thereafter 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 GCL in accordance with Section 103 of the GCL, 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 GCL 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
160
<PAGE>
effective, all references to the 7-3/8% Preferred Stock in the Amended and
Restated Certificate of Incorporation of the Corporation shall be
eliminated and the shares of 7-3/8% Preferred Stock so redeemed and retired
shall resume the status of authorized and unissued shares of Preferred
Stock of the Corporation, without designation as to series.
FOURTH: Pursuant to the provisions of Section 151(g) of the GCL, all
references to 7-3/8% 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 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 21 day of October,
1998.
MORGAN STANLEY DEAN WITTER & CO.
By: /s/ Martin M. Cohen
----------------------------
Title: Assistant Secretary
161
<PAGE>
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
162
<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
163
<PAGE>
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
164
<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
165
<PAGE>
Exhibit 10.22
AMENDMENT TO THE
DEAN WITTER START PLAN
----------------------
WHEREAS, Dean Witter Reynolds Inc. ("DWR"), a Delaware corporation,
maintains the Dean Witter START Plan (the "START Plan");
WHEREAS, DWR desires that the START Plan be amended as set forth herein;
NOW, THEREFORE, the START Plan is hereby amended as follows:
1. Effective January 1, 2000, Section 11(c) of the START Plan shall be
amended by adding two new sentences immediately following the third sentence
thereof to read as follows:
"Effective January 1, 2000, if a Participant whose vested Accounts exceed
the amount described in Section 411(a)(11) of the Code on the date the
distribution commences does not consent to the distribution of the
Participant's Plan Benefit under Section 11(b), then payment of the
Participant's Plan Benefit shall, subject to Section 13(a), be deferred to
such date as the Participant shall elect. Notwithstanding the foregoing,
effective January 1, 2000, if the Participant's vested Accounts do not
exceed $5,000 as of January 1 (or such other date(s) as the Plan
Administrator shall designate from time to time), then the deferral of the
Participant's Plan Benefit shall end, and distribution of the Participant's
Plan Benefit shall be made approximately 90 days thereafter, provided,
however, that at the time of distribution the Participant's vested Accounts
do not, in fact, exceed $5,000."
2. Effective January 1, 1999, Morgan Stanley International Incorporated
("MSII") shall be a Participating Company, as defined in the START Plan, with
respect to MSII employees primarily servicing business units or cost centers
of otherwise Participating Companies;
3. Effective as of January 1, 1999, the first sentence of Section
4(b)(i)(3) of the START Plan is hereby amended by inserting the words ",
determined with regard to the Participant's Earnings while an Eligible
Employee" within the parenthetical and immediately following the words "up to
6% of Earnings."
<PAGE>
4. Effective July 1, 1999, the fifth sentence of Section 6(d) of the START
Plan is amended by adding the words ", is fully (100%) vested" after the
words "who has attained age 55" and after the words "who has attained age
60."
IN WITNESS WHEREOF, the undersigned had hereunder set his hand as of the
22nd day of December, 1999.
DEAN WITTER REYNOLDS INC.
By: /s/ Michael T Cunningham
------------------------
<PAGE>
Exhibit 10.22
AMENDMENT TO THE
DEAN WITTER START PLAN
----------------------
WHEREAS, pursuant to a Stock Purchase Agreement between SPS
Transaction Services, Inc. ("SPS") and Associates First Capital Corporation
("Associates"), SPS has sold substantially all of its assets to Associates and
all of the common stock of SPS held by the Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow) (the "Plan") has been converted into cash; and
WHEREAS, the Compensation Committee of Dean Witter Reynolds Inc. (the
"Company") has determined that, as a result of the closing of the transaction
between SPS and Associates, it is necessary and appropriate to amend the Plan as
hereinafter set forth and has authorized an officer of the Company to execute
this amendment.
NOW, THEREFORE, BE IT RESOLVED:
1. Section 3(f) of the Plan is amended in its entirety to read as
follows:
Transferred Employees. If a Participant transfers employment to SPS
---------------------
Transaction Services, Inc. (or any of its subsidiaries) ("SPS") before
October 15, 1998 or Nations-Securities, A Dean Witter/Nations Bank Company
("Nations"), such transferred Participant's Period of Service shall include
service with SPS before October 15, 1998 or Nations but not more than the
lesser of such transferred Participant's service with SPS before October
15, 1998 or Nations or the service necessary for such transferred
Participant to fully vest in the Matching Contribution Account, such post-
transfer service to be determined in accordance with this Section 3.
2. Section 3(g) of the Plan is amended in its entirety to read as
follows:
Service with SPS. In the case of any individual who was an employee
----------------
of SPS and who either transferred employment to a member of the Affiliated
Group before October 15, 1998 or severed employment with SPS before October
15, 1998 and is hired as an Employee by a member of the Affiliated Group
within 12 months of such severance, such Employee's Service used to
determine a Year of Service under this Section 3 shall include service with
SPS before October 15, 1998 determined by applying the rules set forth in
this Section 3 to such Employee's
<PAGE>
employment by SPS as if such employment was employment by a member of the
Affiliated Group.
3. Section 6(c) of the Plan is amended by inserting the following new
sentence at the end thereof:
Notwithstanding any provision of the Plan to the contrary, a Participant
shall not be permitted to make a Fund Balance Transfer into the SPS Stock
Fund on or after October 15, 1998.
4. Section 7(b) of the Plan is amended by inserting the following new
sentence at the end thereof:
Notwithstanding any provision of the Plan to the contrary, any amounts that
are attributable to employer contributions and that are held in the SPS
Stock Fund on October 15, 1998 shall be transferred to the Morgan Stanley
Dean Witter Stock Fund as soon as practicable after such date.
5. Section 7(c)(v) of the Plan is amended by inserting the following
new sentence at the end thereof:
Notwithstanding any provision of the Plan to the contrary, as soon as
practicable after the SPS Stock Conversion Date, the assets of the SPS
Stock Fund (other than those attributable to employer contributions) shall
be invested in a U.S. Government money market Investment Fund available
under the Plan or in such other similar Investment Fund as the Trustee
deems suitable, and thereafter the SPS Stock Fund shall terminate and cease
to be an Investment Fund under the Plan.
6. Section 9(a) of the Plan is amended by inserting the following new
sentence at the end thereof:
Notwithstanding any provision of the Plan to the contrary, an Employee
shall not be permitted to make such a contribution on or after October 15,
1998 in the form of Stock received from a plan maintained by SPS or a note
evidencing a participant loan under the SPS Transaction Services, Inc.
START Plan.
7. The first sentence of Section 12(h)(ix) of the Plan is amended by
inserting the phrase "before October 15, 1998" at the end thereof.
<PAGE>
8. The first sentence of Section 12(h)(x) of the Plan is amended by
inserting the phrase "before October 15, 1998" at the end thereof.
9. Section 21 of the Plan is amended by inserting the following new
definition immediately after the definition of "SPS Stock":
"SPS Stock Conversion Date" means the date upon which SPS Stock is
-------------------------
converted into cash in accordance with the Stock Purchase Agreement between
SPS and Associates First Capital Corporation.
10. The Plan is further amended by inserting the following new
Supplement E immediately after Supplement D:
SUPPLEMENT E
SALE OF SPS
Pursuant to a Stock Purchase Agreement between SPS and Associates
First Capital Corporation ("Associates"), SPS has sold substantially all of
the stock of its subsidiaries to Associates, and all of the SPS Stock held
by the Plan was converted into cash. Accordingly, except where the context
clearly requires otherwise, all of the references in the Plan to SPS, the
SPS START Plan, SPS Stock and the SPS Stock Fund shall be deemed to be
deleted effective as of the SPS Stock Conversion Date. Following such sale
there were no employees of SPS, the SPS START Plan was transferred to
Associates, and the SPS Stock Fund was terminated.
11. The foregoing amendments to the Plan shall be effective as of
October 15, 1998.
IN WITNESS WHEREOF, the undersigned had hereunder set his hand as of the
22nd day of December, 1999.
DEAN WITTER REYNOLDS INC.
By: /s/ Michael T Cunningham
-------------------------
<PAGE>
Exhibit 10.32
MORGAN STANLEY DEAN WITTER & CO.
EMPLOYEE STOCK PURCHASE PLAN
Amended December 14, 1999
SECTION 1 - PURPOSE
- -------------------
The purpose of the Plan is to secure for the Company and its stockholders the
benefits of the incentive inherent in the ownership of Common Stock by current
and future Eligible Employees. The Plan is intended to comply with the
provisions of Code Section 423 and shall be administered, interpreted and
construed in accordance with such provisions.
SECTION 2 - DEFINITIONS
- -----------------------
When used herein, the following terms shall have the following meanings:
2.1 "Board of Directors" means the Board of Directors of the Company, or any
------------------
committee of such Board of Directors, as the Board of Directors may
determine from time to time.
2.2 "Code" means the Internal Revenue Code of 1986, as amended from time to
----
time, or any successor statute thereto.
2.3 "Committee" means the committee appointed by the Board of Directors to
---------
administer the Plan pursuant to Section 12.
2.4 "Common Stock" means common stock, par value $0.01 per share, of the
------------
Company.
2.5 "Common Stock Account" means the account established with, and maintained
--------------------
by, the Custodian for the purpose of holding Common Stock purchased
pursuant to this Plan.
2.6 "Company" means Morgan Stanley Dean Witter & Co., a Delaware corporation,
-------
and its successors and assigns.
2.7 "Custodian" means the agent selected by the Company to hold Common Stock
---------
purchased under the Plan.
2.8 "Disability" means disability as defined under any qualified, defined
----------
benefit plan sponsored by the Company or any Subsidiary in which an
Eligible Employee is a participant on the date such Eligible Employee
terminates employment with the Company or any Subsidiary.
2.9 "Eligible Compensation" means the sum of the types and amounts of
---------------------
compensation determined from time to time by the Committee in its sole
discretion to be eligible to be taken into account under the Plan, provided
that no such determination shall include or exclude any type or amount of
compensation contrary to the requirements of Section 423 of the Code and
any regulations promulgated thereunder.
1
<PAGE>
2.10 "Eligible Employee" means all employees of the Company and its
-----------------
Subsidiaries that have been designated as eligible to participate in the
Plan pursuant to and in accordance with rules prescribed by the Committee
from time to time, which rules, however, shall neither permit nor deny
participation in the Plan contrary to the requirements of the Code
(including, but not limited to, Section 423(b)(3), (4), (5), and (8)
thereof) and the regulations promulgated thereunder.
2.11 "Fair Market Value" means the average of the high and low sales prices of
-----------------
a share of Common Stock as reported on the New York Stock Exchange
Composite Tape on the date in question or, if the Common Stock shall not
have been traded on such date, the average of the high and low sales
prices on the first day prior thereto on which the Common Stock was so
traded or, if the Common Stock was not so traded, such other amount as may
be determined by the Committee in its sole discretion.
2.12 "Investment Date" means for each Eligible Employee, each date on which he
---------------
receives his Eligible Compensation in each Plan Year, or such other dates
as may be determined by the Committee in its sole discretion.
2.13 "Participant" means an Eligible Employee who has met the requirements of
-----------
Section 3 and has elected to participate in the Plan pursuant to Section
4.1.
2.14 "Payroll Deduction Account" means the bookkeeping entry established by the
-------------------------
Company for each Participant pursuant to Section 4.3.
2.15 "Plan" means the Morgan Stanley Dean Witter & Co. Employee Stock Purchase
----
Plan as set forth herein and as amended from time to time.
2.16 "Plan Year" means a calendar year.
---------
2.17 "Retirement" means retirement as defined by any qualified or non-qualified
----------
defined benefit plan sponsored by the Company or a Subsidiary in which an
Eligible Employee is a participant on the date such Eligible Employee
terminates employment with the Company or any Subsidiary.
2.18 "Subsidiary" means any corporation designated by the Committee which
----------
constitutes a "subsidiary" of the Company, within the meaning of Code
Section 424(f).
SECTION 3 - ELIGIBILITY
- -----------------------
3.1 General Rule. Subject to Section 3.3, each Eligible Employee shall be
- -----------------
eligible to participate in the Plan beginning on the later of (i) the
Eligible Employee's date of hire by the Company or any Subsidiary and (ii)
the date such employee becomes an Eligible Employee.
3.2 Leave of Absence. Unless the Committee otherwise determines, a Participant
- ---------------------
on a paid leave of absence shall continue to be a Participant in the Plan
so long as such Participant is on such paid leave of absence. Unless
otherwise determined by the Committee, a Participant on an unpaid leave of
absence shall not be entitled to participate in any offering commencing
after such unpaid leave has begun but shall not be deemed to have
terminated employment for purposes of the Plan. A Participant who, upon
failing to return to work following a leave of absence, is deemed not to be
an employee, shall not be entitled to participate in any offering
commencing after such termination of employment, and such Participant's
Payroll Deduction Account shall be paid out in accordance with Section 6.2.
3.3 Common Stock Account. As a condition to participation in this Plan, each
- -------------------------
Eligible Employee shall be required to hold shares purchased hereunder in a
Common Stock Account and such employee's decision to participate in the
Plan shall constitute the appointment of the Custodian as custodial agent
for the purpose of holding such shares. Such Common Stock Account will be
governed by, and subject to, the terms and conditions of a written
agreement between the Company and the Custodian.
2
<PAGE>
SECTION 4 - PARTICIPATION AND PAYROLL DEDUCTIONS
- ------------------------------------------------
4.1 Enrollment. Each Eligible Employee may elect to participate in the Plan
- ---------------
for a Plan Year by completing a Company-specified enrollment process. Upon
completing the enrollment process, an Eligible Employee shall commence
participation in the Plan on the next practicable Investment Date. Each
Eligible Employee shall be advised of the purchase price (expressed as a
percentage of Fair Market Value) determined under Section 5.2(b) before
enrolling in the Plan.
4.2 Amount of Deduction. When enrolling, the Eligible Employee shall specify a
- ------------------------
payroll deduction amount of a percentage (in whole numbers) of Eligible
Compensation which shall be withheld from such Eligible Employee's regular
paychecks, including bonus paychecks, for the Plan Year, provided, however,
-----------------
that the Committee may determine and specify, from time to time, (i) the
range of permissible percentages of Eligible Compensation an Eligible
Employee may specify to be withheld and (ii) the maximum amount, if any, of
Eligible Compensation that may be deducted for an Eligible Employee in any
Plan Year, and provided further, that no such determination shall be
contrary to the requirements of Code Section 423 and the regulations
promulgated thereunder. The Committee, in its sole discretion, may
authorize payment in respect of any option exercised hereunder by personal
check.
4.3 Payroll Deduction Accounts. Each Participant's payroll deduction shall be
- -------------------------------
credited, as soon as practicable following the relevant pay date, to a
Payroll Deduction Account, pending the purchase of Common Stock in
accordance with the provisions of the Plan. All such amounts shall be
assets of the Company and may be used by the Company for any corporate
purpose. No interest shall accrue or be paid on amounts credited to a
Payroll Deduction Account.
4.4 Subsequent Plan Years. Unless otherwise specified prior to the beginning
- --------------------------
of any Plan Year by completing a Company-specified process, a Participant
shall be deemed to have elected to participate in each subsequent Plan Year
for which the Participant is eligible to the same extent and in the same
manner as at the end of the prior Plan Year.
4.5 Changes in Participation.
- -----------------------------
(a) At any time during a Plan Year, a Participant may cease
participation in the Plan by completing a Company-specified process. Such
cessation will become effective as soon as practicable following completion
of such process, whereupon no further payroll deductions will be made and
the Company shall pay to such Participant an amount equal to the balance in
the Participant's Payroll Deduction Account as soon as practicable
thereafter. To the extent then an Eligible Employee, any Participant who
ceased to participate may elect to participate again as of any subsequent
Investment Date in any calendar quarter after the quarter in which such
Participant ceased to participate.
(b) At any time during a Plan Year (but not more than once in any
calendar quarter), a Participant may increase or decrease the percentage of
Eligible Compensation subject to payroll deduction within the limits
approved by the Committee pursuant to Section 4.2 by completing a Company-
specified process. Such increase or decrease shall become effective with
the first pay period following the completion of such process to which it
may be practically applied. Notwithstanding any increase in the percentage
of Eligible Compensation subject to pay deduction pursuant to this Section
4.5(b), in no event may the amount of Eligible Compensation deducted for an
Eligible Employee for any Plan Year exceed the maximum amount authorized to
be deducted pursuant to Section 4.2.
3
<PAGE>
(c) Notwithstanding anything herein to the contrary, in the event the
Committee determines under Section 5.2(b) to change the purchase price of a
share of Common Stock, each Participant shall be advised in advance of the
effective date of such change and afforded the opportunity to make a change
in participation under Section 4.5(a) or 4.5(b) before such change in the
purchase price takes effect.
SECTION 5 - OFFERINGS
---------------------
5.1 Maximum Number of Shares. The Plan will be implemented by making offerings
- -----------------------------
of Common Stock on each Investment Date until the maximum number of shares
of Common Stock available under the Plan have been issued pursuant to the
exercise of options.
5.2 Grant and Exercise of Options
- ----------------------------------
(a) Subject to Section 5.3, on each Investment Date, each Participant
shall be deemed, subject to Section 5.4, to have been granted an option to
purchase, and shall be deemed, without any further action, to have
exercised such option and purchased the number of shares of Common Stock
determined by dividing the amount credited to the Participant's Payroll
Deduction Account on such date by the purchase price (as determined in
paragraph (b) below). All such shares shall be credited to the
Participant's Common Stock Account.
(b) The purchase price for each share of Common Stock shall be expressed
as a percentage of Fair Market Value on the Investment Date and shall be
determined from time to time by the Committee, but in no event shall such
purchase price be less than 85 percent of the Fair Market Value of such
share on the Investment Date.
5.3 Oversubscription of Shares. If the total number of shares for which
- -------------------------------
options are exercised on any Investment Date exceeds the maximum number of
shares available for the applicable offering, the Company shall make an
allocation of the shares available for delivery and distribution among the
Participants in as nearly a uniform manner as shall be practicable, and the
balance of all amounts credited to the Payroll Deduction Accounts shall be
applied to the next offering.
5.4 Limitations on Grant and Exercise of Options
- -------------------------------------------------
(a) No option granted under this Plan shall permit a Participant to
purchase stock under all employee stock purchase plans (as defined by Code
Section 423(b)) of the Company and any Subsidiary in an amount which, in
the aggregate, would exceed $25,000 based on the Fair Market Value of such
stock (determined at the time the option is granted) for each calendar year
in which the option is outstanding at any time.
(b) No employee who would own, immediately after the option is granted,
stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or any Subsidiary (a
"5% Owner") shall be granted an option. For purposes of determining whether
an employee is a 5% Owner, the rules of Code Section 424(d) shall apply in
determining the stock ownership of an individual and stock which the
employee may purchase under outstanding options shall be treated as stock
owned by the employee.
SECTION 6 - DISTRIBUTIONS OF COMMON STOCK ACCOUNT
- -------------------------------------------------
6.1 Restrictions on Distributions. Shares of Common Stock purchased hereunder
- --- (other than shares of Common Stock acquired upon the automatic investment
of dividends pursuant to Section 7) cannot be withdrawn from the Plan by a
Participant, or a former Participant who has terminated employment with the
Company and its Subsidiaries, for a period of 24 months immediately
4
<PAGE>
following the Investment Date on which such shares were purchased, unless
otherwise determined by the Company consistent with the requirements of
Section 423 of the Code.
6.2 Termination of Employment. If a Participant's employment with the Company
- ------------------------------
and its Subsidiaries terminates for any reason during a Plan Year, shares
credited to the Participant's Common Stock Account may be withdrawn by the
Participant from the Plan, subject to the provisions of Section 6.1, or may
be sold by the Participant through the Plan. Shares not otherwise withdrawn
from or sold through the Plan will be distributed to the Participant as
soon as practicable following the expiration of a 24 month period beginning
on the Investment Date on which the last share was purchased under the
Plan. Additionally, any amount credited to the Participant's Payroll
Deduction Account shall be refunded to the Participant or, in the event of
the Participant's death, to the Participant's estate, as soon as
practicable.
6.3 During Employment. Prior to the Participant's termination of employment
- ----------------------
with the Company and its Subsidiaries, a Participant may withdraw some or
all of the whole shares credited to the Participant's Common Stock Account,
subject to the provisions of Section 6.1, or may sell through the Plan some
or all of the whole shares credited to the Participant's Common Stock
Account, subject to the provisions of Section 10.3.
6.4 Sales through the Plan. Subject to the provisions of Section 10.3, a
- ---------------------------
Participant or a former Participant who has terminated employment with the
Company and its Subsidiaries may sell his shares of Common Stock acquired
under the Plan pursuant to procedures established from time to time by the
Company.
SECTION 7 - DIVIDENDS ON SHARES
- -------------------------------
All cash dividends paid with respect to shares of Common Stock held in a
participant's Common Stock Account shall be invested automatically in shares of
Common Stock purchased at 100 percent of Fair Market Value on the date such
dividend is paid. All non-cash distributions paid on Common Stock held in a
Participant's Common Stock Account shall be paid to the Participant as soon as
practicable.
SECTION 8 - RIGHTS AS A STOCKHOLDER
- -----------------------------------
When a Participant purchases Common Stock pursuant to the Plan or when Common
Stock is credited to a Participant's Common Stock Account, subject to the
restrictions set forth in Sections 6 and 10.3, the Participant shall have all of
the rights and privileges of a stockholder of the Company with respect to the
shares so purchased or credited, whether or not certificates representing shares
shall have been issued.
SECTION 9 - OPTIONS NOT TRANSFERABLE
- ------------------------------------
Neither a Participant's Payroll Deduction Account nor any options granted under
the Plan to a Participant may be transferred, pledged or otherwise disposed of
in any way (other than by will or the laws of descent and distribution) by a
Participant and such options are exercisable during the Participant's lifetime
only by the Participant. Any attempt at such assignment, transfer, pledge or
other disposition shall be without effect.
SECTION 10 - COMMON STOCK
- -------------------------
10.1 Reserved Shares. There shall be reserved for issuance and purchase under
- ---------------------
the Plan an aggregate of 25,404,187 shares of Common Stock (as of October
31, 1999), subject to adjustment as provided in Section 11. Shares subject
to the Plan may be shares now or hereafter authorized but unissued,
treasury shares, or both.
5
<PAGE>
10.2 Restrictions on Exercise. In its sole discretion, the Board of Directors
- ------------------------------
may require as conditions to the exercise of any option that shares of
Common Stock reserved for issuance upon the exercise of an option shall
have been duly listed on any recognized national securities exchange, and
that either a registration statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective, or the
Participant shall have represented at the time of purchase, in form and
substance satisfactory to the Company, that it is the Participant's
intention to purchase the shares for investment only and not for resale or
distribution.
10.3 Restriction on Sale. Shares of Common Stock purchased hereunder (other
- -------------------------
than shares of Common Stock acquired upon the automatic investment of
dividends pursuant to Section 7) shall not be transferable by a
Participant for a period of 12 months immediately following the Investment
Date on which such shares were purchased.
SECTION 11 - ADJUSTMENT UPON CHANGES IN CAPITALIZATION
- ------------------------------------------------------
In the event of a subdivision or consolidation of the outstanding shares of
Common Stock, or the payment of a stock dividend thereon, the number of shares
reserved or authorized to be reserved under this Plan shall be increased or
decreased, as the case may be, proportionately, and such other adjustments shall
be made as may be deemed necessary or equitable by the Board of Directors. In
the event of any other change affecting the Common Stock, such adjustments shall
be made as may be deemed equitable by the Board of Directors, in its sole
discretion, to give proper effect to such event, subject to the limitations of
Code Section 424.
SECTION 12 - ADMINISTRATION
- ---------------------------
12.1 Appointment. The Plan shall be administered by the Committee. The
- -----------------
Committee shall consist of two or more members who shall serve at the
pleasure of the Board of Directors. The Board of Directors may from time
to time appoint members of the Committee in substitution for, or in
addition to, members previously appointed and may fill vacancies, however
caused, in the Committee.
12.2 Authority. Subject to the express provisions of the Plan, the Committee
- ---------------
shall have authority to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to it, and to make all other
determinations necessary or advisable in administering the Plan, all of
which determinations shall be final and binding upon all persons. If and
to the extent required by Securities and Exchange Commission Rule 16b-3 or
any successor exemption under which the Committee believes it is
appropriate for the Plan to qualify, the Committee may restrict a
Participant's ability to participate in the Plan or sell any Common Stock
received under the Plan for such period as the Committee deems appropriate
or may impose such other conditions in connection with participation or
distributions under the Plan as the Committee deems appropriate.
12.3 Duties of Committee. The Committee shall provide for the establishment
- -------------------------
and maintenance of records of the Plan and of each Payroll Deduction
Account and Common Stock Account established for any Participant
hereunder.
12.4 Plan Expenses. The Company shall pay the fees and expenses of accounts
- -------------------
and counsel to the Company or the Committee, agents and other personnel
and all other costs of administration of the Plan.
12.5 Indemnification. To the maximum extent permitted by law, no member of the
- ---------------------
Committee shall be personally liable by reason of any contract or other
instrument executed by such member or on such member's behalf in such
member's capacity as a member of the Committee or for any mistake of
judgment made in good faith, and the Company shall indemnify and hold
harmless, directly from its own assets (including the proceeds of any
insurance policy the premiums of
6
<PAGE>
which are paid from the Company's own assets), each member of the
Committee and each other officer, employee or director of the Company to
whom any duty or power relating to the administration or interpretation of
the Plan or to the management or control of the assets of the Plan may be
delegated or allocated, against any cost or expense (including fees,
disbursements and other charges of legal counsel) or liability (including
any sum paid in settlement of a claim with the approval of the Company)
arising out of any act or omission to act in connection with the Plan
unless arising out of such person's own fraud, willful misconduct or bad
faith. The foregoing shall not be deemed to limit the Company's obligation
to indemnify any member of the Committee under the Company's Certificate
of Incorporation or By-laws, or any other agreement between the Company
and such member.
SECTION 13 - AMENDMENT AND TERMINATION
- --------------------------------------
13.1 Amendment. Subject to the provisions of Code Section 423, the Board of
- ---------------
Directors may amend the Plan in any respect; provided, however, that the
-----------------
Plan may not be amended in any manner that will retroactively impair or
otherwise adversely affect the rights of any person to benefits under the
Plan which have accrued prior to the date of such action.
13.2 Termination. The Plan will terminate on the Investment Date that
- -----------------
Participants become entitled to purchase a number of shares greater than
the number of shares remaining available for purchase. In addition, the
Plan may be terminated at any prior time, at the sole discretion of the
Board of Directors.
SECTION 14 - GOVERNMENTAL AND OTHER REGULATIONS
- -----------------------------------------------
The Plan and the grant and exercise of options to purchase shares hereunder, and
the Company's obligation to sell and deliver shares upon the exercise of options
to purchase shares, shall be subject to all applicable Federal, state and
foreign laws, rules and regulations, and to such approvals by any regulatory or
governmental agency as, in the opinion of counsel to the Company, may be
required.
SECTION 15 - NO EMPLOYMENT RIGHTS
- ---------------------------------
The Plan does not create, directly or indirectly, any right for the benefit of
any employee or class of employees to purchase any shares from the Company
(other than as expressly provided in, and subject to the terms and conditions
of, the Plan), or create in any employee or class of employees any right with
respect to continuation of employment by the Company or any Subsidiary, and it
shall not be deemed to interfere in any way with the Company's or any
Subsidiary's right to terminate, or otherwise modify, an employee's employment
at any time.
SECTION 16 - WITHHOLDING
- ------------------------
As a condition to receiving shares hereunder, the Company may require the
Participant to make a cash payment to the Company of, or the Company may
withhold from any shares distributable under the Plan, an amount necessary to
satisfy all Federal, state, city or other taxes required to be withheld in
respect of such payments pursuant to any law or governmental regulation or
ruling.
SECTION 17 - OFFSETS
- --------------------
To the extent permitted by law, the Company shall have the absolute right to
withhold any amounts payable to any Participant under the terms of the Plan to
the extent of any amount owed for any reason by such Participant to the Company
or any Subsidiary and to set off and apply the amounts so withheld to payment of
any such amount owed to the Company or any Subsidiary, whether or not such
amount shall then be immediately due and payable and in such order or priority
as among such amounts owed as the Committee, in its sole discretion, shall
determine.
7
<PAGE>
SECTION 18 - NOTICES, ETC.
- --------------------------
All elections, designations, requests, notices, instructions and other
communications from a Participant to the Committee or the Company required or
permitted under the Plan shall be in Company-specified form, and if required to
be in writing shall be mailed by first-class mail or delivered to such Company-
specified location and shall be deemed to have been given and delivered only
upon actual receipt thereof at such location.
SECTION 19 - CAPTIONS, ETC.
- ---------------------------
The captions of the sections and paragraphs of this Plan have been inserted
solely as a matter of convenience and in no way define or limit the scope or
intent of any provision of the Plan. References to sections herein are to the
specified sections of this Plan unless another reference is specifically stated.
Wherever used herein, a singular number shall be deemed to include the plural
unless a different meaning is required by the context.
SECTION 20 - EFFECT OF PLAN
- ---------------------------
The provisions of the Plan shall be binding upon, and inure to the benefit of,
all successors of the Company and each Participant, including, without
limitation, such Participant's estate and the executors, administrators or
trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or
representative of creditors of such Participant.
SECTION 21 - GOVERNING LAW
- --------------------------
The internal laws of the State of New York shall govern all matters relating to
this Plan except to the extent superseded by the laws of the United States.
8
<PAGE>
Exhibit 10.37
AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Morgan Stanley Dean Witter & Co. (the "Company") hereby amends the Morgan
Stanley Dean Witter & Co. Supplemental Executive Retirement Plan, as amended
(the "SERP"), as follows:
1. The second sentence of Paragraph I of the SERP is amended, effective as of
January 1, 1999, by adding the following clause, immediately prior to the end
thereof:
"; and provided further, that effective January 1, 1999, the term "Firm"
shall not include Morgan Stanley International Incorporated ("MSII") to the
extent of MSII employees primarily servicing business units and/or cost
centers of subsidiaries of the former Dean Witter, Discover & Co.,
determined immediately prior to its merger with Morgan Stanley Group Inc.
and no employment in such an excluded position shall count as "Credited
Service" under the Plan, except as specifically provided in Appendix C."
1. The third paragraph of Appendix C of the SERP is amended, effective as
of January 1, 1999, by adding the following sentence to the end thereof:
"Effective January 1, 1999, the provisions of this paragraph shall be
applied to an employee in an excluded position at MSII who transfers
directly from MSII to the Firm as if the prior service with MSII in an
excluded position had been service with DWD."
3. The last paragraph of Appendix C of the SERP is further amended, effective
as of January 1, 1999, by adding the following sentence at the end thereof:
"Notwithstanding anything herein to the contrary, for former Kearny
employees, the term "Salary" shall mean only base compensation earned for
any period while employed with the Firm, whether or not paid during such
period and Salary shall be limited to an annual base compensation rate of
$200,000."
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed on
its behalf as of January 1, 1999.
MORGAN STANLEY DEAN WITTER & CO.
By: /s/ Michael T. Cunningham
-------------------------
<PAGE>
Morgan Stanley Dean Witter & Co.
Computation of Earnings Per Share
(In millions, except share and per share data)
EXHIBIT 11
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------
November 30 November 30 November 30
1999 1998 1997
------------------------ ---------------------- ---------------------
Basic:
<S> <C> <C> <C>
Weighted-average shares outstanding 1,096,789,720 1,151,645,450 1,149,636,466
======================== ====================== =====================
Earnings:
Income before cumulative effect
of accounting change $4,791 $3,393 $2,586
Cumulative effect of accounting change - (117) -
Less: Preferred stock dividend
requirements (44) (55) (66)
------------------------ ---------------------- ---------------------
Earnings applicable to common shares $4,747 $3,221 $2,520
======================== ====================== =====================
Basic EPS before cumulative effect
of accounting change $4.33 $2.90 $2.19
Cumulative effect of accounting change - (0.10) -
------------------------ ---------------------- ---------------------
Basic earnings per share $4.33 $2.80 $2.19
======================== ====================== =====================
Diluted:
Weighted-average shares outstanding 1,096,789,720 1,151,645,450 1,149,636,466
Average common shares issuable
under employee benefit plans 39,347,870 37,079,530 38,729,302
Average common shares issuable upon
conversion of ESOP preferred stock 23,363,080 23,863,150 24,247,182
------------------------ ---------------------- ---------------------
Total weighted-average diluted shares 1,159,500,670 1,212,588,130 1,212,612,950
======================== ====================== =====================
Earnings:
Income before cumulative effect
of accounting change $4,791 $3,393 $2,586
Cumulative effect of accounting change - (117) -
Less: Preferred stock dividend
requirements (36) (47) (61)
------------------------ ---------------------- ---------------------
Earnings applicable to common shares $4,755 $3,229 $2,525
======================== ====================== =====================
Diluted EPS before cumulative effect
of accounting change $4.10 $2.76 $2.08
Cumulative effect of accounting change - (0.09) -
------------------------ ---------------------- --------------------
Diluted earnings per share $4.10 $2.67 $2.08
======================== ====================== ====================
</TABLE>
<PAGE>
Exhibit 12
Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
(Dollars in millions)
<TABLE>
<CAPTION>
Fiscal Year
1999 1998 1997
------------------- -------------------- --------------------
Ratio of Earnings to Fixed Charges
Earnings:
<S> <C> <C> <C> <C>
Income before income taxes/1/ $7,728 $5,385 $4,274
Add: Fixed charges, net 11,499 13,614 10,898
------------------- -------------------- --------------------
Income before income taxes and
fixed charges, net $19,227 $18,999 $15,172
=================== ==================== ====================
Fixed charges:
Total interest expense $11,390 $13,514 $10,806
Interest factor in rents 109 100 92
------------------- -------------------- --------------------
Total fixed charges $11,499 $13,614 $10,898
=================== ==================== ====================
Ratio of earnings to fixed charges 1.7 1.4 1.4
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
Earnings:
Income before income taxes/1/ $7,728 $5,385 $4,274
Add: Fixed charges, net 11,499 13,614 10,898
------------------- -------------------- --------------------
Income before income taxes and
fixed charges, net $19,227 $18,999 $15,172
=================== ==================== ====================
Fixed charges:
Total interest expense $11,390 $13,514 $10,806
Interest factor in rents 109 100 92
Preferred stock dividends 72 87 110
------------------- -------------------- --------------------
Total fixed charges and preferred
stock dividends $11,571 $13,701 $11,008
=================== ==================== ====================
Ratio of earnings to fixed charges and
preferred stock dividends 1.7 1.4 1.4
</TABLE>
/1/ 1998 Income before income taxes does not include a cumulative effect
of accounting change.
"Earnings" consist of income before income taxes and fixed charges. "Fixed
charges" consist of interest costs, including interest on deposits, and that
portion of rent expense estimated to be representative of the interest factor.
The preferred stock dividend amounts represent pre-tax earnings required to
cover dividends on preferred stock.
<PAGE>
Exhibit 13.1
<TABLE>
<CAPTION>
1999 FISCAL QUARTER(2) 1998 FISCAL QUARTER
------------------------------------------ --------------------------------------------
(dollars in millions, except share
and per share data) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 8,405 $ 8,529 $ 8,370 $ 8,624 $ 7,585 $ 8,428 $ 7,498 $ 7,620
Interest expense 2,877 2,753 2,914 2,846 3,145 3,554 3,377 3,438
Provision for consumer
loan losses 177 119 113 120 405 275 280 213
- -------------------------------------------------------------------------------- --------------------------------------------
Net revenues 5,351 5,657 5,343 5,658 4,035 4,599 3,841 3,969
- -------------------------------------------------------------------------------- --------------------------------------------
Total non-interest
expenses 3,679 3,799 3,780 3,023 2,903 3,202 2,931 2,708
Gain on sale of
businesses -- -- -- -- -- -- -- 685
- -------------------------------------------------------------------------------- --------------------------------------------
Income before
income taxes and
cumulative effect of
accounting change 1,672 1,858 1,563 2,635 1,132 1,397 910 1,946
Provision for income taxes 635 707 593 1,002 441 545 284 722
- -------------------------------------------------------------------------------- --------------------------------------------
Income before
cumulative effect of
accounting change 1,037 1,151 970 1,633 691 852 626 1,224
Cumulative effect of
accounting change -- -- -- -- (117) -- -- --
- -------------------------------------------------------------------------------- --------------------------------------------
Net income $ 1,037 $ 1,151 $ 970 $ 1,633 $ 574 $ 852 $ 626 $ 1,224
- -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings
per share(1) (3):
Income before
cumulative effect
of accounting change $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.58 $ 0.72 $0.54 $ 1.08
Cumulative effect of
accounting change -- -- -- -- (0.10) -- -- --
- -------------------------------------------------------------------------------- --------------------------------------------
Net income $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.48 $ 0.72 $ 0.54 $ 1.08
Diluted earnings
per share(1) (3):
Income before
cumulative effect
of accounting change $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.55 $ 0.69 $ 0.51 $ 1.04
Cumulative effect of
accounting change -- -- -- -- (0.09) -- -- --
- -------------------------------------------------------------------------------- --------------------------------------------
Net income $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.46 $ 0.69 $ 0.51 $ 1.04
Dividends to common
shareholders(1) $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.10 $ 0.10 $ 0.10 $ 0.10
Book value(1) $ 12.47 $ 13.00 $ 13.27 $ 14.85 $ 11.24 $ 10.98 $ 11.07 $ 11.94
Stock price range(1) (4) $31.16- $44.53- $41.07- $43.19- $26.13- $34.88- $29.03- $19.22-
48.50 57.10 51.78 63.63 35.25 42.22 42.22 37.38
- -------------------------------------------------------------------------------- --------------------------------------------
</TABLE>
(1) Amounts have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 2000.
(2) Certain reclassifications have been made to previously reported fiscal 1999
quarterly amounts.
(3) Summation of the quarters' earnings per common share may not equal the
annual amounts due to the averaging effect of the number of shares and
share equivalents throughout the year.
(4) Closing prices represent the range of sales per share on the New York Stock
Exchange for the periods indicated. The number of stockholders of record at
November 30, 1999 approximated 152,000. The number of beneficial owners of
common stock is believed to exceed this number.
<PAGE>
SELECTED FINANCIAL DATA Exhibit 13.2
<TABLE>
<CAPTION>
fiscal year/(1)/ (dollars in millions, except share and per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Investment banking $ 4,523 $ 3,340 $ 2,694
Principal transactions:
Trading 5,983 3,283 3,191
Investments 725 89 463
Commissions 2,921 2,321 2,066
Fees:
Asset management, distribution and administration 3,170 2,889 2,525
Merchant and cardmember 1,492 1,647 1,704
Servicing 1,194 928 762
Interest and dividends 13,755 16,436 13,583
Other 165 198 144
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 33,928 31,131 27,132
Interest expense 11,390 13,514 10,806
Provision for consumer loan losses 529 1,173 1,493
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues 22,009 16,444 14,833
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 8,398 6,636 6,019
Other 5,883 5,108 4,466
Merger-related expenses -- -- 74
Relocation charge -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 14,281 11,744 10,559
- -----------------------------------------------------------------------------------------------------------------------------------
Gain on sale of businesses -- 685 --
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 7,728 5,385 4,274
Provision for income taxes 2,937 1,992 1,688
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 4,791 3,393 2,586
Cumulative effect of accounting change -- (117) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,791 $ 3,276 $ 2,586
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings applicable to common shares/(2)/ $ 4,747 $ 3,221 $ 2,520
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA/(3)/:
Earnings per common share:
Basic before cumulative effect of accounting change $ 4.33 $ 2.90 $ 2.19
Cumulative effect of accounting change -- (0.10) --
- -----------------------------------------------------------------------------------------------------------------------------------
Basic $ 4.33 $ 2.80 $ 2.19
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted before cumulative effect of accounting change $ 4.10 $ 2.76 $ 2.08
Cumulative effect of accounting change -- (0.09) --
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted $ 4.10 $ 2.67 $ 2.08
- -----------------------------------------------------------------------------------------------------------------------------------
Book value per common share $ 14.85 $ 11.94 $ 11.06
Dividends per common share $ 0.48 $ 0.40 $ 0.28
BALANCE SHEET AND OTHER
OPERATING DATA:
Total assets $ 366,967 $ 317,590 $302,287
Consumer loans, net 20,229 15,209 20,033
Total capital/(4)/ 39,699 37,922 33,577
Long-term borrowings/(4)/ 22,685 23,803 19,621
Shareholders' equity 17,014 14,119 13,956
Return on average common shareholders' equity 32.6% 24.5% 22.0%
Average common and equivalent shares/(2)(3)/ 1,096,789,720 1,151,645,450 1,149,636,466
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
fiscal year/(1)/ (dollars in millions, except share and per share data) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Investment banking $ 2,190 $ 1,556
Principal transactions:
Trading 2,659 1,685
Investments 86 121
Commissions 1,776 1,533
Fees:
Asset management, distribution and administration 1,732 1,377
Merchant and cardmember 1,505 1,135
Servicing 809 680
Interest and dividends 11,288 10,530
Other 126 115
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 22,171 18,732
Interest expense 8,934 8,190
Provision for consumer loan losses 1,214 722
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues 12,023 9,820
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 5,071 4,005
Other 3,835 3,464
Merger-related expenses -- --
Relocation charge -- 59
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 8,906 7,528
- --------------------------------------------------------------------------------------------------------------------------
Gain on sale of businesses -- --
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 3,117 2,292
Provision for income taxes 1,137 827
- --------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 1,980 1,465
Cumulative effect of accounting change -- --
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 1,980 $ 1,465
- --------------------------------------------------------------------------------------------------------------------------
Earnings applicable to common shares/(2)/ $ 1,914 $ 1,400
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA/(3)/:
Earnings per common share:
Basic before cumulative effect of accounting change $ 1.67 $ 1.19
Cumulative effect of accounting change -- --
- --------------------------------------------------------------------------------------------------------------------------
Basic $ 1.67 $ 1.19
- --------------------------------------------------------------------------------------------------------------------------
Diluted before cumulative effect of accounting change $ 1.58 $ 1.13
Cumulative effect of accounting change -- --
- --------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.58 $ 1.13
- --------------------------------------------------------------------------------------------------------------------------
Book value per common share $ 9.22 $ 7.82
Dividends per common share $ 0.22 $ 0.16
BALANCE SHEET AND OTHER
OPERATING DATA:
Total assets $ 238,860 $ 181,961
Consumer loans, net 21,262 19,733
Total capital/(4)/ 31,152 24,644
Long-term borrowings/(4)/ 19,450 14,636
Shareholders' equity 11,702 10,008
Return on average common shareholders' equity 20.0% 16.4%
Average common and equivalent shares/(2)(3)/ 1,146,713,860 1,180,288,434
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1995 and fiscal 1996 represent the combination of Morgan Stanley
Group Inc.'s financial statements for the fiscal years ended November 30
with Dean Witter, Discover & Co.'s financial statements for the years ended
December 31.
(2) Amounts shown are used to calculate basic earnings per common share.
(3) Amounts have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 2000.
(4) These amounts exclude the current portion of long-term borrowings and
include Capital Units and Preferred Securities Issued by Subsidiaries.
<PAGE>
EXHIBIT 13.3
Management's Discussion and Analysis of Financial Condition and Results of
Operations
99 AR page 22
INTRODUCTION
THE COMPANY
Morgan Stanley Dean Witter & Co. (the "Company") is a pre-eminent global
financial services firm that maintains leading market positions in each of its
three business segments -- Securities, Asset Management and Credit Services. The
Company combines global strength in investment banking and institutional sales
and trading with strength in providing full-service and online brokerage
services, investment and global asset management services and, primarily through
its Discover/(R) /Card brand, quality consumer credit products. The Company
provides its products and services to a large and diversified group of clients
and customers, including corporations, governments, financial institutions and
individuals.
The Company's results for the 12 months ended November 30, 1999 ("fiscal
1999"), November 30, 1998 ("fiscal 1998") and November 30, 1997 ("fiscal 1997")
are discussed below. All share and per share information presented herein have
been retroactively adjusted to reflect a two-for-one common stock split,
effected in the form of a 100% stock dividend, declared December 20, 1999 and
payable January 26, 2000 to shareholders of record as of January 12, 2000.
RESULTS OF OPERATIONS
CERTAIN FACTORS AFFECTING RESULTS OF OPERATIONS*
The Company's results of operations may be materially affected by market
fluctuations and by 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 and cost 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 to conduct electronic
commerce and the emergence of electronic communication trading networks); the
availability and cost of credit; inflation; investor sentiment; and legislative
and regulatory developments. Such factors also may have an impact on the
Company's ability to achieve its strategic objectives on a global basis,
including (without limitation) continued increased market share in its
securities activities, growth in assets under management and the expansion of
its Credit Services business.
The Company's Securities 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 around the world, which, among other things,
affects the size, number and timing of investment banking client assignments and
transactions and the realization of returns from the Company's private equity
and other principal investments. The level of global market activity also could
impact the flow of investment capital into mutual funds and the way in which
such capital is allocated among money market, equity, fixed income or other
investment alternatives which also could cause fluctuations to occur in the
Company's Asset Management business. In the Company's Credit Services business,
changes in economic variables, such as the number and size of personal
bankruptcy filings, the rate of unemployment and the level of consumer debt, may
substantially affect consumer loan levels and credit quality, which, in turn,
could impact overall Credit Services results.
The Company's results of operations also may be materially affected by
competitive factors. Included among the principal competitive factors affecting
the Securities business are the quality of its professionals and other
personnel, its products and services, relative pricing and innovation.
Competition in the Company's Asset Management business is affected by a number
of factors, including investment objectives and performance; advertising and
sales promotion efforts; and the level of fees, distribution channels and types
and quality of services offered. In Credit Services, competition centers on
merchant acceptance of credit cards, credit card acquisition and customer
utilization of credit cards, all of which are impacted by the type of fees,
interest rates and other features offered.
In addition to competition from firms traditionally engaged in the financial
services business, there has been increased competition in recent years from
other sources, such as commercial banks, insurance companies, online service
providers, sponsors of mutual funds and other companies offering financial
services both in the U.S. and globally. The financial services industry also has
experi-
- --------------------------------------------------------------------------------
* 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 businesses that
could affect the matters referred to in such statements.
<PAGE>
enced consolidation and convergence in recent years, as financial institutions
involved in a broad range of financial services industries have merged. This
convergence trend is expected to continue and could result in the Company's
competitors gaining greater capital and other resources, such as a broader range
of products and services and geographic diversity. In November 1999, the Gramm-
Leach-Bliley Act was passed in the U.S., effectively repealing certain sections
of the 1933 Glass-Steagall Act. Its passage allows commercial banks, securities
firms and insurance firms to affiliate, which may accelerate consolidation and
lead to increasing competition in markets which traditionally have been
dominated by investment banks and retail securities firms.
The Company also has experienced increased competition for qualified
employees in recent years, including from companies engaged in Internet-related
businesses and private equity funds, in addition to the traditional competition
for employees from the financial services, insurance and management consulting
industries.
For a detailed discussion of the competitive factors in the Company's
Securities, Asset Management and Credit Services businesses, see the Company's
Annual Report on Form 10-K for the fiscal year ended November 30, 1999.
As a result of the above economic and competitive factors, net income and
revenues in any particular period may not be representative of full-year results
and may vary significantly from year to year and from quarter to quarter. The
Company intends to manage its business for the long term and to mitigate the
potential effects of market downturns by strengthening its competitive position
in the global financial services industry through diversification of its revenue
sources and enhancement of its global franchise. The Company's overall financial
results will continue to be affected by its ability and success in maintaining
high levels of profitable business activities, emphasizing fee-based assets that
are designed to generate a continuing stream of revenues, managing risks in the
Securities, Asset Management and Credit Services businesses, evaluating credit
product pricing and monitoring costs. In addition, the complementary trends in
the financial services industry of consolidation and globalization present,
among other things, technological, risk management and other infrastructure
challenges that will require effective resource allocation in order for the
Company to remain competitive.
The Company believes that technological advancements in the Internet and the
growth of electronic commerce will continue to present both challenges and
opportunities to the Company and could lead to significant changes and
innovations in the financial markets and financial services industry as a whole.
The Company's initiatives in this area have included Web-enabling existing
businesses or enhancing client communication and access to information and
services and making investments, or otherwise participating, in alternative
trading systems, electronic communication networks and related businesses or
technologies. The Company expects to continue to augment these initiatives in
the future.
GLOBAL MARKET AND ECONOMIC CONDITIONS IN FISCAL 1999
Global market and economic conditions were generally favorable during much of
fiscal 1999. Financial markets within many regions exhibited improved
performance and, although experiencing periods of volatility, benefited from a
succession of global interest rate cuts which were made in late 1998. These
interest rate actions helped stabilize economies throughout the world and
contributed to the global recovery from the extremely turbulent and uncertain
conditions that existed during the latter half of fiscal 1998. During that
period, severe economic turmoil in Russia, Asia and certain emerging market
nations adversely affected investor confidence and led to periods of high
volatility, low levels of liquidity and increased credit spreads, creating
difficult conditions in the global financial markets. The improved global market
and economic environment contributed to the Company's record results in fiscal
1999. The Company's Securities business generated record levels of net income
and net revenues and ended the fiscal year with record levels of financial
advisors, customer accounts and assets. The Company's Credit Services business
also achieved record operating results in fiscal 1999, reflecting a continued
improvement in the credit quality of customer receivables as well as increased
customer transaction volume. In the Company's Asset Management business,
customer assets under management or supervision increased to record levels at
fiscal year-end.
In the U.S., market conditions benefited from robust corporate earnings and
the strong performance of the domestic economy, which continued to exhibit
positive fundamentals and a high rate of growth. During much of fiscal 1999, the
U.S. economy was characterized by several favorable trends, such as historically
low levels of unemployment, high levels of consumer confidence and spending, and
a high demand for imports. The domestic economy also was positively impacted by
the overall improvement in global
page 23
<PAGE>
99 AR page 24
market and economic conditions, as many non-U.S. regions continued to recover
from the difficult conditions that existed during the end of fiscal 1998.
However, throughout fiscal 1999, there were persistent indications that U.S.
economic growth was proceeding at a brisk pace and at a higher rate than
anticipated. Such indications, coupled with the tight domestic labor market,
increasing wage pressures and the renewed vigor in international markets, led to
fears of accelerating inflation. In an effort to slow the U.S. economy and to
mitigate inflationary pressures, during fiscal 1999 the Federal Reserve
Board(the "Fed") raised the overnight lending rate by 0.25% on three separate
occasions and also raised the discount rate by 0.25% on two separate occasions.
Such increases reversed the Fed's interest rate actions that occurred in the
fourth quarter of fiscal 1998, when it lowered the overnight lending rate by a
total of 0.75%. At the conclusion of fiscal 1999, the Fed announced that it was
adopting a neutral bias toward interest rates. However, there still remained
much uncertainty as to whether additional interest rate actions would be
necessary in the event that indications of inflationary pressures continue to
persist in the future.
Conditions in European financial markets also demonstrated signs of recovery
in fiscal 1999. 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 (the "ECB") assumed
control of monetary policy for the 11 European Union (the "EU") countries
participating in the EMU. Since its inception, the euro has emerged as a new
funding alternative for many issuers. During the first half of fiscal 1999,
European financial markets were adversely affected by the severe economic and
financial turmoil that developed in Russia, Asia and certain emerging market
nations in late 1998. These developments contributed to lower levels of exports
and a sluggish rate of economic growth within the region. In response to these
conditions, both the ECB and the Bank of England lowered interest rates in an
effort to stimulate economic activity. During the latter half of fiscal 1999,
the prospects for improved economic performance within Europe increased due to
indications of recovery in the levels of manufacturing output and exports in
Germany, the region's largest economy. European economic prospects also improved
due to increased consolidation and restructuring activity across the region, the
ongoing recovery of global financial markets and a lower interest rate
environment, although concerns of accelerating inflation led both the ECB and
the Bank of England to raise interest rates in the fourth quarter of fiscal
1999.
Economic and financial difficulties have existed in the Far East region
since the latter half of fiscal 1997. The Japanese economy has suffered from its
worst recession since the end of World War II and has been adversely affected by
shrinking consumer demand, declining corporate profits, deflation and rising
unemployment. However, during fiscal 1999, there were indications that the steps
taken by Japan's government to mitigate these conditions, including bank
bailouts, emergency loans and stimulus packages, were beginning to have a
favorable impact on the nation's economic performance. Certain financial markets
elsewhere in the Far East, such as in Hong Kong, Singapore and Korea, also began
to demonstrate signs of recovery during fiscal 1999 and have experienced a
marked rebound in economic activity. Although uncertainty still remains,
investor interest in the Far East region has generally increased as a result of
these improved prospects.
The worldwide market for mergers and acquisitions continued to be robust
during fiscal 1999. The volume of global merger and acquisition transactions
achieved record levels and contributed to record levels of revenues by the
Company's investment banking business. The merger and acquisition market
reflected ongoing consolidation and globalization across many industries,
particularly in the technology and telecommunications sectors. During fiscal
1999, there also was a significant increase in the volume of cross-border
transactions, primarily driven by higher levels of activity in the European
merger and acquisition markets. In addition, fiscal 1999 included some of the
largest merger and acquisition transactions ever completed. The markets for the
underwriting of securities also were positively impacted by the generally
favorable market and economic conditions which existed during much of fiscal
1999.
<PAGE>
In fiscal 1999, U.S. consumer demand and retail sales continued to increase
at a strong pace. The relatively favorable interest rate environment that
continued to exist in the U.S. for much of the year enabled consumers to manage
finances advantageously while still allowing for steady growth in consumer
credit. In addition, the level of loan losses and personal bankruptcies
continued to decline. The Company continued to invest in the growth of its
credit card business through the expansion of its Discover/NOVUS/(R) /Network,
as evidenced by a record number of new merchant enrollments in fiscal 1999. The
Company also increased its marketing and solicitation activities with respect to
the Discover Card brand and the launch of the Morgan Stanley Dean Witter/SM
/Card in the United Kingdom.
FISCAL 1999 AND FISCAL 1998 RESULTS FOR THE COMPANY
The Company achieved record net income of $4,791 million in fiscal 1999, a 46%
increase from fiscal 1998. Fiscal 1998's net income included a net gain of $345
million from the sale of the Company's Global Custody business, its interest in
the operations of SPS Transaction Services, Inc. ("SPS") and certain BRAVO/(R)
/Card receivables ("BRAVO") (see "Results of Operations -- Business Acquisition
and Dispositions" herein). Fiscal 1998's net income also included a $117 million
charge resulting from the cumulative effect of an accounting change. This charge
represents the effect of an accounting change adopted in the fourth quarter of
fiscal 1998 (effective December 1, 1997) 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 (see Note 2
to the consolidated financial statements). Excluding the net gain from the sale
of the businesses noted above and the charge resulting from the cumulative
effect of an accounting change, fiscal 1999's net income increased 57%. In
fiscal 1998, net income was $3,276 million, an increase of 27% from fiscal 1997.
Excluding the net gain from the sale of the businesses noted above and the
charge resulting from the cumulative effect of an accounting change, fiscal 1998
net income was $3,048 million, an increase of 18%.
The Company's income tax rate was 38.0%, 37.0% and 39.5% in fiscal 1999,
1998 and 1997, respectively. The increase in fiscal 1999 reflects an increase in
provisions for certain tax matters, partially offset by reduced state and local
taxes resulting from the resolution of certain audit issues. The decrease in
fiscal 1998 primarily reflects lower tax rates applicable to non-U.S. earnings.
Basic earnings per common share increased 55% to $4.33 in fiscal 1999 and
28% to $2.80 in fiscal 1998. Excluding the net gain from the sale of the
businesses noted above and the impact of the cumulative effect of an accounting
change, fiscal 1999's basic earnings per common share increased 67%, and fiscal
1998's basic earnings per common share increased 19%. Diluted earnings per
common share increased 54% to $4.10 in fiscal 1999 and 28% to $2.67 in fiscal
1998. Excluding the net gain from the sale of the businesses noted above and the
impact of the cumulative effect of an accounting change, fiscal 1999's diluted
earnings per common share increased 65%, and fiscal 1998's diluted earnings per
common share increased 19%.
The Company's return on average shareholders' equity was 33%, 25% and 22% in
fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Excluding the net gain
from the sale of the businesses noted above and the impact of the cumulative
effect of an accounting change, fiscal 1998's return on average shareholders'
equity was 23%.
BUSINESS ACQUISITION AND DISPOSITIONS
During the second quarter of fiscal 1999, the Company completed its acquisition
of AB Asesores, the largest independent financial services firm in Spain. AB
Asesores has leading positions in personal investment, asset management,
institutional research and brokerage, and investment banking. Through its
approximately 300 financial advisors, it offers its individual investors
proprietary mutual funds and other financial products. This acquisition reflects
the Company's strategic initiative to build its international Securities and
Asset Management businesses to serve the needs of individual investors. The
Company's fiscal 1999 results include the operations of AB Asesores since March
25, 1999, the date of acquisition.
In fiscal 1998, the Company entered into several transactions reflecting its
strategic decision to focus on growing its core Asset Management and Credit
Services businesses.
page 25
<PAGE>
99 AR page 26
In the fourth quarter of fiscal 1998, the Company completed the sale of its
Global Custody business. The Company also sold its interest in the operations of
SPS, a 73%-owned, publicly held subsidiary of the Company. In addition, the
Company sold certain credit card receivables relating to its discontinued BRAVO
Card. The Company's aggregate net pre-tax gain resulting from these transactions
was $685 million.
In addition, during fiscal 1998 the Company sold its Prime Option/SM
/MasterCard/(R) /portfolio ("Prime Option"), a business it had operated with
NationsBank of Delaware, N.A., and its Correspondent Clearing business. The
gains resulting from the sale of these businesses were not material to the
Company's results of operations or financial condition.
BUSINESS SEGMENTS
The remainder of Results of Operations is presented on a business segment basis.
With the exception of fiscal 1997's merger-related expenses, substantially all
of the operating revenues and operating expenses of the Company can be directly
attributed to its three business segments: Securities, Asset Management and
Credit Services. Certain revenues and expenses have been allocated to each
business segment, generally in proportion to their respective revenues or other
relevant measures. The accompanying business segment information includes the
operating results of Morgan Stanley Dean Witter Online ("MSDW Online"), the
Company's provider of electronic brokerage services, within the Securities
segment. Previously, the Company had included MSDW Online's results within its
Credit Services segment. In addition, the segment data presented below reflect
the Company's adoption of Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Prior to the adoption of SFAS No. 131, the Company had presented the results of
its Securities and Asset Management segments on a combined basis. The segment
data of all periods presented have been restated to reflect these changes. The
following discussion excludes the cumulative effect of the accounting change in
references to fiscal 1998 net income. Certain reclassifications have been made
to prior-period amounts to conform to the current year's presentation.
SECURITIES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Investment banking $ 4,430 $ 3,314 $ 2,660
Principal transactions:
Trading 5,983 3,283 3,191
Investments 712 390 473
Commissions 2,904 2,288 2,024
Asset management,
distribution and
administration fees 1,240 998 783
Interest and dividends 11,448 13,455 10,233
Other 158 166 130
- --------------------------------------------------------
Total revenues 26,875 23,894 19,494
Interest expense 10,500 12,355 9,470
- --------------------------------------------------------
Net revenues 16,375 11,539 10,024
- --------------------------------------------------------
Compensation and benefits 7,225 5,428 4,825
Occupancy and equipment 493 419 388
Brokerage, clearing and
exchange fees 378 354 318
Information processing and
communications 756 591 514
Marketing and business
development 511 414 280
Professional services 578 445 290
Other 570 447 383
- --------------------------------------------------------
Total non-interest expenses 10,511 8,098 6,998
- --------------------------------------------------------
Income before income taxes 5,864 3,441 3,026
Provision for income taxes 2,183 1,199 1,185
- --------------------------------------------------------
Net income $ 3,681 $ 2,242 $ 1,841
</TABLE>
Securities provides a wide range of financial products, services and investment
advice to individual and institutional investors. Securities business activities
are conducted in the U.S. and throughout the world and include investment
banking, institutional sales and trading, full-service and online brokerage
services, and principal investing activities. At November 30, 1999, the
Company's financial advisors provided investment services to more than 4.5
million client accounts with assets of $583 billion. The Company had the second
largest financial advisor sales organization in the U.S. and had 12,674
professional financial advisors and 475 branches globally at November 30, 1999.
Securities achieved record net revenues and net income of $16,375 million
and $3,681 million in fiscal 1999, increases of 42% and 64%, respectively, from
fiscal 1998. In fiscal 1998,
<PAGE>
Securities net revenues and net income increased 15% and 22%, respectively, from
fiscal 1997. In both fiscal 1999 and fiscal 1998, the levels of net revenues and
net income in the Company's Securities business reflected a strong global market
for mergers and acquisitions and securities underwritings, higher principal
trading and commission revenues primarily driven by generally favorable market
and economic conditions, high levels of customer trading volume and the
continued increase in the level of client accounts and asset balances. The
results of both years were partially offset by increased costs for incentive-
based compensation, as well as increased non-compensation expenses associated
with the Company's higher level of global business activities.
Investment Banking
Investment banking revenues are derived from the underwriting of securities
offerings and fees from advisory services. Investment banking revenues were as
follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- -------------------------------------------------------
<S> <C> <C> <C>
Advisory fees from merger,
acquisition and restructuring
transactions $1,886 $1,322 $ 920
Equity underwriting revenues 1,272 815 888
Fixed income underwriting
revenues 1,272 1,177 852
- -------------------------------------------------------
Total investment banking
revenues $4,430 $3,314 $2,660
- -------------------------------------------------------
</TABLE>
Investment banking revenues increased 34% to record levels in fiscal 1999,
surpassing the Company's previous record attained in fiscal 1998. Revenues in
fiscal 1999 reflect higher advisory fees from merger, acquisition and
restructuring transactions, as well as increased revenues from underwriting both
equity and fixed income securities. In fiscal 1998, higher revenues from merger,
acquisition and restructuring transactions and fixed income underwritings were
partially offset by lower equity underwriting revenues.
The worldwide merger and acquisition markets remained robust for the fifth
consecutive year with more than $3.4 trillion of transactions (per Thomson
Financial Securities Data) announced during calendar year 1999, including record
volume in the U.S., Europe and the Far East. During calendar year 1999, the
Company's dollar volume of announced merger and acquisition transactions
surpassed $1.1 trillion, an increase of more than 77% over the comparable period
of 1998. The high level of transaction activity reflected the continuing trends
of consolidation and globalization across many industry sectors, as companies
attempted to expand into new markets and businesses through strategic
combinations. In fiscal 1999, merger and acquisition transaction volume was
particularly strong in the telecommunications and technology sectors and also
reflected a significant increase in the level of European merger and acquisition
activity. The sustained growth of the merger and acquisition markets, coupled
with the Company's global presence and strong market share, had a positive
impact on advisory fees, which increased 43% in fiscal 1999. Higher advisory
fees from real estate transactions also contributed to the increase. The 44%
increase in advisory fees in fiscal 1998 was primarily due to high transaction
volumes resulting from the strong global market for merger, acquisition and
restructuring activities, as well as increased revenues from real estate
advisory transactions.
Equity underwriting revenues increased 56% in fiscal 1999 and continued to
reflect a high volume of equity offerings and the Company's strong global market
share. In fiscal 1999, the Company's equity underwriting revenues benefited from
favorable global economic conditions, which led major equity market indices
higher and new issue activity to record levels. The primary market for equity
issuances was particularly strong in the U.S. and in Europe and reflected the
Company's participation in some of the year's largest transactions and its
leadership in the underwriting of technology-related issuances. Equity
underwriting revenues decreased 8% in fiscal 1998, reflecting reduced activity
in the primary market in the second half of the fiscal year due to the
significant uncertainty and volatility in global financial markets that existed
during that period.
Revenues from fixed income underwriting increased 8% in fiscal 1999. The
volume of fixed income underwriting transactions was generally strong during
much of fiscal 1999, reflecting favorable global market conditions. In addition,
the relatively low levels of interest rates in the U.S. during much of the year
allowed issuers to take advantage of lower borrowing costs. EMU, which has
permitted many corporate issuers to access the euro-denominated credit market,
and the need for strategic financing in light of the robust global market for
mergers and acquisitions also had a favorable impact on the volume of fixed
income underwriting transactions. Higher revenues from underwriting derivative
fixed income products also contributed to the increase. Fixed income
underwriting revenues increased 38% in fiscal 1998, primarily driven by higher
revenues from issuances of global high-yield and investment grade fixed income
securities. The primary market for these securities benefited from relatively
low nominal interest rates which
page 27
<PAGE>
99 AR page 28
existed throughout the year and attracted many issuers to the market, as well as
from periods of strong investor demand. During the latter part of fiscal 1998,
the primary market was less active, as increased volatility in global financial
markets caused an unprecedented widening of credit spreads and a shift of
investor preferences toward financial instruments with higher credit ratings.
Principal Transactions
Principal transactions include revenues from customers' purchases and sales of
securities in which the Company acts as principal and gains and losses on
securities held for resale. 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 and the
interest income or expense associated with financing or hedging the Company's
positions.
Principal transaction trading revenues were as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ----------------------------------------------------
<S> <C> <C> <C>
Equities $3,065 $2,048 $1,310
Fixed income 2,090 455 1,187
Foreign exchange 397 587 500
Commodities 431 193 194
- ----------------------------------------------------
Total principal transaction
trading revenues $5,983 $3,283 $3,191
- ----------------------------------------------------
</TABLE>
Principal transaction trading revenues increased 82% in fiscal 1999, primarily
reflecting higher fixed income, equity and commodity trading revenues, partially
offset by a decline in foreign exchange trading revenues. Principal transaction
trading revenues increased 3% in fiscal 1998, as higher equity and foreign
exchange trading revenues were partially offset by a decline in fixed income
trading revenues.
Equity trading revenues increased 50% in fiscal 1999, primarily reflecting
higher revenues from equity cash products. The increase was primarily driven by
higher levels of customer trading volumes in both listed and over-the-counter
securities, particularly in the U.S. and Europe, as generally favorable global
market and economic conditions increased investor demand for equity securities.
Higher revenues from trading equity derivative products, which benefited from
strong trading volumes and periods of market volatility, and certain proprietary
trading activities also contributed significantly to the increase. Equity
trading revenues increased 56% in fiscal 1998, primarily reflecting higher
revenues from equity cash and derivative products. The increase in revenues from
equity cash products was primarily attributable to higher trading volumes in
European markets, which benefited from the Company's increased sales and
research coverage of the region that began in mid-1997. European equity trading
revenues also benefited from generally favorable market conditions and positive
investor sentiment regarding EMU. Revenues from trading equity derivative
products also increased in fiscal 1998, primarily due to increased transaction
volume and the high levels of market volatility that existed throughout the
year, particularly in technology-related securities.
Fixed income trading revenues increased 359% in fiscal 1999, primarily
reflecting higher revenues from investment grade, high-yield and securitized
fixed income securities, as well as swap transactions. Fiscal 1999's revenues
benefited from significantly improved conditions in the global fixed income
markets as compared with the periods of extreme volatility and illiquidity that
existed at the end of fiscal 1998. During the first half of fiscal 1999, the
continuing recovery of global economic and market conditions led to strong
investor demand for fixed income products and contributed to high transaction
volume. In addition, fears of accelerating inflation in the U.S. and the
interest rate actions taken by the Fed and the ECB resulted in periods of
volatility in the global fixed income markets, which resulted in increased
trading opportunities. Market conditions and trading volumes were more moderate
during the latter half of fiscal 1999, primarily reflecting a rising interest
rate environment in the U.S. and Europe. Fixed income trading revenues decreased
62% in fiscal 1998, reflecting significantly lower revenues from investment
grade, high-yield and securitized fixed income securities. Revenues from
investment grade fixed income securities were adversely affected by the severe
economic and financial turmoil in the Far East, Russia and emerging markets that
occurred during the year. These difficult conditions caused investor preferences
to shift toward higher quality financial instruments, principally to U.S.
treasury securities. This negatively affected the trading of credit-sensitive
fixed income securities by widening credit spreads, reducing market liquidity
and de-coupling the historical price relationships between credit-sensitive
securities and government securities. Revenues from high-yield fixed income
securities also were impacted by the turbulent conditions in the
<PAGE>
global financial markets due to investors' concerns about the impact of a
prolonged economic downturn on high-yield issuers. Revenues from securitized
fixed income securities also declined, as the relatively low interest rate
environment in the U.S. increased prepayment concerns and resulted in increased
spreads.
Foreign exchange revenues declined 32% in fiscal 1999 from the record level
of revenues achieved in fiscal 1998. The decrease primarily reflects reduced
customer trading volumes and lower levels of volatility in the global foreign
exchange markets as compared with the prior year. During much of fiscal 1999,
the U.S. dollar strengthened against the euro, reflecting the strong economic
performance of the U.S., coupled with a slower growth rate across much of
Europe. The U.S. dollar also appreciated against the Japanese yen in the
beginning of fiscal 1999, although the yen strengthened later in the year due to
the prospects of improved economic growth in the Far East and increased investor
demand for yen-denominated assets. Revenues from foreign exchange trading
increased 17% to record levels in fiscal 1998. The increase was primarily
attributable to high levels of customer trading volume and volatility in the
foreign exchange markets. During fiscal 1998, the U.S. dollar fluctuated against
major currencies due to concerns about the U.S. economy's exposure to the
financial crises in the Far East and emerging markets, as well as from the Fed's
decision to lower the overnight lending rate on three occasions during the
fourth quarter. Certain European currencies also experienced periods of
volatility, resulting from expectations of interest rate fluctuations in
anticipation of EMU and the collapse of the Russian ruble. Difficult political
and economic conditions in certain Asian nations, coupled with the continued
recession in Japan, also contributed to periods of high volatility in the
currency markets.
Commodities trading revenues rose 123% to record levels in fiscal 1999,
primarily driven by higher revenues from energy-related products, including
crude oil, refined energy products and natural gas. Revenues from trading
energy-related products benefited from the sharp rise in energy prices that
occurred during the latter half of fiscal 1999. The upward trend of energy
prices was primarily attributable to strong demand for energy products,
relatively low inventory levels and reduced production volumes. Revenues from
natural gas trading benefited from periods of price volatility during the year,
which was primarily attributable to changing weather conditions and varying
levels of demand. Higher revenues from electricity and metals trading also
contributed to the increase. In fiscal 1998, commodities trading revenues were
comparable to those recorded in fiscal 1997, as higher revenues from energy-
related products and electricity were partially offset by lower revenues from
natural gas trading. Revenues from trading energy-related products were impacted
by energy prices that fell during much of fiscal 1998. Diminished demand for
these products, partially due to the economic crisis in the Far East, coupled
with high inventory levels, contributed to the decline in prices. Electricity
trading revenues benefited from higher electricity prices, primarily during the
summer months when the demand for electric power increased. Revenues from
natural gas trading decreased as unseasonably warm weather in certain regions of
the U.S. during the winter months reduced the demand for home heating oil,
leading to a decline in prices. In both fiscal 1999 and fiscal 1998, commodities
trading revenues benefited from the expansion of the customer base for
commodity-related products, including derivatives, and the use of such products
for risk management purposes.
Principal transaction investment revenues aggregating $712 million were
recognized in fiscal 1999 as compared with $390 million in fiscal 1998. Fiscal
1999's revenues reflected the highest level of revenues recorded by the
Company's private equity business and included realized and unrealized gains
from the Company's positions in Equant N.V., a Netherlands-based data
communications company, and Knight/Trimark Group Inc., a U.S.-based broker-
dealer. Net gains from increases in the value of certain other private equity
and venture capital investments also contributed to fiscal 1999's results.
Fiscal 1998's principal transaction investment revenues primarily resulted from
gains on certain positions that were sold during the year and increases in the
value of certain of the Company's private equity investments. Such increases
included gains from the initial public offering of Equant N.V. and from the sale
of positions in Fort James Corporation and Jefferson Smurfit Corporation.
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. Commissions also include revenues from customer securities
transactions associated with MSDW Online. Commission revenues increased 27% in
fiscal 1999, primarily reflecting higher revenues from equity cash products in
markets located in the U.S., Europe and the Far East.
page 29
<PAGE>
99 AR page 30
In the U.S., favorable market conditions and strong investor demand for equity
products contributed to a high volume of customer securities transactions,
including listed and over-the-counter equity securities. Revenues from markets
in Europe also benefited from strong customer transaction volume, as improved
economic and market conditions in the region increased investor demand for
European equity securities. Commission revenues from markets in Japan and
elsewhere in the Far East increased, as improved economic prospects within the
region increased investor interest and led to higher transaction volumes.
Commission revenues increased 13% in fiscal 1998, reflecting higher revenues
from equity cash products, primarily from markets in the U.S. and Europe, as
well as higher revenues from derivative products. Revenues from U.S. markets
benefited from high levels of market volatility, which contributed to increased
customer trading volumes. Revenues from European markets benefited from strong
customer trading volumes, which were positively impacted by the generally
favorable performances of certain European equity markets and from the Company's
increased sales and research activities in the region. Commissions on derivative
products increased as the high levels of market volatility contributed to
increased customer hedging activities and trading volumes. In both fiscal 1999
and fiscal 1998, commission revenues also benefited from higher sales of mutual
funds and the continued growth in the number of the Company's financial
advisors.
In October 1999, the Company launched ichoice/SM/, a new service and
technology platform available to individual investors. ichoice provides each of
the Company's individual investor clients with the choice of self-directed
investing online; a traditional full-service brokerage relationship through a
financial advisor; or some combination of both. ichoice provides a range of
pricing options, including fee-based pricing. In future periods, the amount of
revenues recorded within the "Commissions" and "Asset Management, distribution
and administration fees" income statement categories will be affected by the
number of the Company's clients electing a fee-based pricing arrangement.
Net Interest
Interest and dividend revenues and interest 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 activities, customer margin loans and the
prevailing level, term structure and volatility of interest rates. Interest and
dividend revenues and interest expense are integral components of trading
activities. In assessing the profitability of trading activities, the Company
views net interest and principal trading revenues in the aggregate. In addition,
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 and the interest income or expense
associated with financing or hedging the Company's positions. Net interest
revenues decreased 14% in fiscal 1999, reflecting the level and mix of interest
bearing assets and liabilities during the period, including liabilities
associated with the Company's aircraft financing activities, as well as certain
trading strategies utilized in the Company's institutional securities business.
Net interest revenues increased 44% in fiscal 1998, primarily attributable to
higher levels of revenues from net interest earning assets, including financial
instruments owned and customer margin loans. In both periods, higher levels of
securities lending transactions also had a positive impact on net interest
revenues.
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration fees include revenues from
asset management services, including fees for promoting and distributing mutual
funds ("12b-1 fees") and fees from investment management services provided to
segregated customer accounts pursuant to various contractual arrangements in
connection with the Company's Investment Consulting Services ("ICS") business.
The Company receives 12b-1 fees for services it provides in promoting and
distributing certain open-ended mutual 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 or supervision.
Asset management, distribution and administration fees increased 24% in
fiscal 1999 and 27% in fiscal 1998. The increase in both periods was primarily
attributable to higher 12b-1 fees from promoting and distributing mutual funds
to individual investors through the Company's financial advisors. Higher
revenues from investment management services and the continued growth in the
level of client asset balances, which rose to $583 billion at November 30, 1999
from $438 billion at November 30, 1998, also contributed to the increase.
<PAGE>
Non-Interest Expenses
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ------------------------------------------------------
Compensation and benefits $ 7,225 $5,428 $4,825
Occupancy and equipment 493 419 388
Brokerage, clearing and
exchange fees 378 354 318
Information processing and
communications 756 591 514
Marketing and business
development 511 414 280
Professional services 578 445 290
Other 570 447 383
- ------------------------------------------------------
Total non-interest expenses $10,511 $8,098 $6,998
- ------------------------------------------------------
Fiscal 1999's total non-interest expenses increased 30% to $10,511 million.
Within the non-interest expense category, employee compensation and benefits
expense increased 33%, reflecting increased levels of incentive compensation
based on record fiscal 1999 revenues and earnings, as well as an increase in the
number of employees. Excluding compensation and benefits expense, non-interest
expenses increased $616 million. Occupancy and equipment expense increased 18%,
principally reflecting additional office space in New York and certain other
locations, as well as incremental rent attributable to the opening of 37
securities branch locations. Brokerage, clearing and exchange fees increased 7%,
primarily attributable to higher brokerage expenses due to higher levels of
trading volume in the global securities markets. Information processing and
communications costs increased 28%, primarily due to increased costs associated
with the Company's information technology infrastructure, including server and
data center costs. A higher number of employees utilizing communications systems
and certain data services also contributed to the increase. Marketing and
business development expense increased 23%, reflecting higher advertising
expenses associated with the Company's individual securities business, including
MSDW Online. Increased travel and entertainment costs associated with the high
levels of activity in the global financial markets also contributed to the
increase. Professional services expense increased 30%, primarily reflecting
higher consulting costs as a result of certain information technology
initiatives, including the Company's preparations for the Year 2000 (see also
"Year 2000" herein). Higher legal costs associated with increased levels of
business activity and higher temporary staffing fees also contributed to the
increase. Other expenses increased 28%, primarily reflecting the impact of a
higher level of business activity on various operating expenses. An increase in
charitable donations and the amortization of goodwill associated with the
Company's acquisition of AB Asesores in March 1999 also contributed to the
increase.
Fiscal 1998's total non-interest expenses increased 16% to $8,098 million.
Within the non-interest expense category, employee compensation and benefits
expense increased 12%, reflecting increased levels of incentive compensation
based on higher fiscal 1998 revenues and earnings, as well as an increase in the
number of employees. Excluding compensation and benefits expense, non-interest
expenses increased $497 million. Occupancy and equipment expense increased 8%,
principally reflecting additional office space and higher occupancy costs in New
York and Hong Kong, as well as incremental rent attributable to the opening of
27 securities branch locations. Brokerage, clearing and exchange fees increased
11%, primarily reflecting increased expenses related to higher levels of trading
volume in the global securities markets. Information processing and
communications costs increased 15% due to higher data services and
communications costs related to an increased number of employees and continued
enhancements and maintenance associated with the Company's information
technology infrastructure. Marketing and business development expense increased
48%, reflecting higher advertising expenses associated with the Company's
individual securities business, primarily MSDW Online, as well as higher travel
and entertainment costs relating to increased levels of business activity.
Professional services expense increased 53%, primarily reflecting higher
consulting costs as a result of certain information technology initiatives,
including the Company's preparations for EMU and Year 2000. Higher levels of
temporary staff and employment fees due to the increased level of overall
business activity also contributed to the increase. Other expenses increased
17%, reflecting the impact of a higher level of business activity on various
operating expenses.
page 31
<PAGE>
99 AR page 32
ASSET MANAGEMENT
STATEMENTS OF INCOME
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ---------------------------------------------------------
Revenues:
Investment banking $ 93 $ 26 $ 34
Principal transactions:
Investments 13 (301) (10)
Commissions 17 33 42
Asset management, distribution
and administration fees 1,930 1,891 1,742
Interest and dividends 61 252 227
Other 7 27 9
- ---------------------------------------------------------
Total revenues 2,121 1,928 2,044
Interest expense 9 165 163
- ---------------------------------------------------------
Net revenues 2,112 1,763 1,881
- ---------------------------------------------------------
Compensation and benefits 648 659 659
Occupancy and equipment 96 97 77
Brokerage, clearing and
exchange fees 107 198 142
Information processing and
communications 92 87 95
Marketing and business
development 127 125 119
Professional services 137 135 88
Other 138 91 136
- ---------------------------------------------------------
Total non-interest expenses 1,345 1,392 1,316
- ---------------------------------------------------------
Gain on sale of businesses -- 323 --
- ---------------------------------------------------------
Income before income taxes
and cumulative effect of
accounting change 767 694 565
Provision for income taxes 319 264 230
- ---------------------------------------------------------
Income before cumulative
effect of accounting change 448 430 335
- ---------------------------------------------------------
Cumulative effect of
accounting change -- (117) --
- ---------------------------------------------------------
Net income $ 448 $ 313 $ 335
- ---------------------------------------------------------
Asset Management ranks among the top five global active asset managers and
provides a wide range of investment advisory products through both proprietary
and non-proprietary distribution channels. Morgan Stanley Dean Witter Advisors
and Van Kampen Investments ("VK") offer individual investors a broad array of
mutual fund and wealth management tools that cover the full spectrum of
investment categories, including growth, income, sector and global. Morgan
Stanley Dean Witter Investment Management and Miller Anderson & Sherrerd serve
the specialized needs of global institutional and high net worth investors.
Asset Management's product breadth includes mutual funds, closed-end funds,
managed accounts, managed futures funds, pooled vehicles, variable annuities and
unit investment trusts. In fiscal 1999, Asset Management's assets under
management or supervision increased $49 billion to $425 billion at November 30,
1999.
Asset Management achieved net revenues and net income of $2,112 million and
$448 million in fiscal 1999, increases of 20% and 43%, respectively, from fiscal
1998. Fiscal 1998's net income included a net gain of $182 million from the sale
of the Company's Global Custody business (see "Results of Operations -- Business
Acquisition and Dispositions" herein). Fiscal 1998 net income also included a
$117 million charge resulting from the cumulative effect of an accounting
change. This charge represents the effect of an accounting change adopted in the
fourth quarter of fiscal 1998 (effective December 1, 1997) 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 (see Note 2 to the consolidated financial statements). Excluding the
net gain from the sale of the Global Custody business and the charge resulting
from the cumulative effect of an accounting change, fiscal 1999's net income
increased 81%. In fiscal 1998, Asset Management net revenues and net income
decreased 6% and 7%, respectively, from fiscal 1997. Excluding the net gain from
the sale of the Global Custody business and the charge resulting from the
cumulative effect of an accounting change, fiscal 1998's net income decreased
26%.
The fiscal 1999 and fiscal 1998 levels of net revenues and net income in the
Company's Asset Management business primarily reflected strong growth in
customer assets under management or supervision. In fiscal 1998, net revenues
and net income were adversely affected by losses from an institutional leveraged
emerging market debt portfolio.
Investment Banking
Asset Management primarily generates investment banking revenues from the
underwriting of Unit Investment Trust products. Investment banking revenues
increased 258% in fiscal 1999 and decreased 24% in fiscal 1998. In both periods,
the fluctuations were primarily associated with changes in the level of Unit
Investment Trust sales volumes.
Principal Transactions
Asset Management primarily generates principal transaction revenues from gains
and losses resulting from the Company's capital investments in certain of its
funds and other investments.
Principal transaction investment revenues aggregating $13 million were
recognized in fiscal 1999 as compared with losses of $(301) million in fiscal
1998. Fiscal 1999's revenues primarily consist of net gains from the Company's
capital investments in certain of its funds, reflecting generally favorable
market condi-
<PAGE>
tions. Fiscal 1998's results primarily reflect losses from an institutional
leveraged emerging market debt portfolio that occurred during the third quarter
of fiscal 1998.
Commissions
Asset Management primarily generates commission revenues from dealer and
distribution concessions on sales of certain funds, as well as certain allocated
commission revenues.
Commission revenues decreased 48% in fiscal 1999 and 21% in fiscal 1998. In
both periods, the fluctuations primarily reflected lower levels of transaction
volume and allocated commission revenues.
Net Interest
Asset Management generates net interest revenues from certain investment
positions, as well as from certain allocated interest revenues and expenses. Net
interest revenues in fiscal 1998 and fiscal 1997 also include revenues from
global custody and correspondent clearing services.
Net interest revenues decreased 40% in fiscal 1999, primarily reflecting the
Company's sale of its Global Custody and Correspondent Clearing businesses in
fiscal 1998. Net interest revenues increased 36% in fiscal 1998, primarily
reflecting higher net revenues from certain investment positions.
Asset Management, Distribution and Administration Fees
Asset management, distribution and administration fees primarily include
revenues from the management and administration of assets. These fees arise from
investment management services the Company provides to investment vehicles (the
"Funds") pursuant to various contractual arrangements. Generally, the Company
receives fees based upon the Fund's average net assets. Revenues in fiscal 1998
and fiscal 1997 also include other administrative fees and non-interest revenues
earned from global custody and correspondent clearing services. Asset
management, distribution and administration fees were as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset management, distribution
and administration fees $1,930 $1,891 $1,742
- ---------------------------------------------------------------------------------------
The Company's customer assets under management or supervision
were as follows:
FISCAL FISCAL FISCAL
(dollars in billions) 1999 1998 1997
- ---------------------------------------------------------------------------------------
Products offered primarily to
individuals $ 258 $ 219 $ 193
Products offered primarily to
institutional clients 167 157 145
- ---------------------------------------------------------------------------------------
Total assets under management
or supervision at fiscal
year-end/(1)/ $ 425 $ 376 $ 338
- ---------------------------------------------------------------------------------------
</TABLE>
(1) These amounts include assets associated with the Company's ICS business.
Revenues generated by ICS are included in the Company's Securities segment.
ICS assets were $23 billion, $19 billion and $14 billion at November 30
1999, 1998 and 1997, respectively.
In fiscal 1999, asset management, distribution and administration fees increased
2%. The increase in revenues primarily reflects higher fund management fees as
well as other revenues resulting from a higher level of assets under management
or supervision. These increases were partially offset by the absence of revenues
from global custody and correspondent clearing activities, attributable to the
Company's sale of its Global Custody business in the fourth quarter of fiscal
1998 and its Correspondent Clearing business in the third quarter of fiscal
1998. In fiscal 1998, asset management, distribution and administration fees
increased 9%. The increase in revenues primarily reflects higher fund management
fees as well as other revenues resulting from a higher level of assets under
management or supervision, including revenues from developed country global
equity and fixed income products. Such increases were partially offset by the
impact of market depreciation in certain of the Company's products resulting
from the downturn in certain global financial markets which occurred during the
latter half of the year. Fiscal 1998's revenues also were negatively impacted by
the Company's sale of its Global Custody and Correspondent Clearing businesses.
As of November 30, 1999, assets under management or supervision increased
$49 billion from fiscal year-end 1998. In fiscal 1999, approximately 25% of the
increase in assets under management or supervision was attributable to net
inflows of new customer assets, while the remaining 75% reflected market
appreciation. In fiscal 1998, approximately 50% of the increase in assets under
management or supervision was attributable to net inflows of new customer
assets, while the remaining 50% reflected market appreciation.
page 33
<PAGE>
99 AR page 34
Non-Interest Expenses
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- -----------------------------------------------------
Compensation and benefits $ 648 $ 659 $ 659
Occupancy and equipment 96 97 77
Brokerage, clearing and
exchange fees 107 198 142
Information processing and
communications 92 87 95
Marketing and business
development 127 125 119
Professional services 137 135 88
Other 138 91 136
- -----------------------------------------------------
Total non-interest expenses $1,345 $1,392 $1,316
- -----------------------------------------------------
Fiscal 1999's total non-interest expenses decreased 3% to $1,345 million. Within
the non-interest expense category, employee compensation and benefits expense
decreased 2%, reflecting lower costs due to the sale of the Company's Global
Custody business in fiscal 1998, partially offset by higher incentive
compensation costs based on higher fiscal 1999 revenues and earnings. Excluding
compensation and benefits expense, non-interest expenses decreased $36 million.
Occupancy and equipment expense was comparable to the prior year, as higher
occupancy costs at certain office locations were offset by lower costs due to
the Company's sale of its Global Custody business. Brokerage, clearing and
exchange fees decreased 46%, primarily attributable to commissions paid in
fiscal 1998 in connection with the Company's launch of the Van Kampen Senior
Income Trust mutual fund and lower sales of closed-end funds through the non-
proprietary distribution channel. In addition, lower agent bank costs were
incurred in fiscal 1999 due to the Company's sale of its Global Custody
business. These decreases were partially offset by a higher level of deferred
commission amortization. Information processing and communications costs
increased 6%, primarily due to increased costs associated with the Company's
information technology infrastructure, as well as higher market data costs.
These increases were partially offset by lower costs due to the Company's sale
of its Global Custody business. Marketing and business development expenses
increased 2%, as higher costs due to business growth, including new product
launches, were partially offset by lower costs due to the Company's sale of its
Global Custody business. Professional services expense increased 1%, as higher
consulting fees were partially offset by lower legal expenses and lower costs
due to the Company's sale of its Global Custody business. Other expenses
increased 52%, reflecting the impact of a higher level of business activity on
various operating expenses, as well as costs associated with the consolidation
of certain office locations.
Fiscal 1998's total non-interest expenses increased 6% to $1,392 million.
Within the non-interest expense category, employee compensation and benefits
expense was comparable to the prior year. Occupancy and equipment expense
increased 26%, principally reflecting the reclassification of certain expenses
associated with VK, as well as additional office space and higher occupancy
costs at certain locations. Brokerage, clearing and exchange fees increased 39%,
primarily reflecting commissions paid in connection with the Company's launch of
the Van Kampen Senior Income Trust mutual fund, higher closed-end fund sales
through the non-proprietary distribution channel, and a higher level of deferred
commission amortization. Information processing and communications costs
decreased 8% due to the reclassification of certain expenses associated with VK,
as well as lower allocated communications costs. Marketing and business
development expense increased 5%, primarily reflecting higher costs due to
business growth, including new product launches. Professional services expense
increased 53%, primarily reflecting higher consulting and subadvisory costs.
Other expenses decreased 33%, which primarily reflects a lower level of
allocated expenses.
<PAGE>
CREDIT SERVICES
STATEMENTS OF INCOME
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- -----------------------------------------------------
Fees:
Merchant and cardmember $1,492 $1,647 $1,704
Servicing 1,194 928 762
Other -- 5 5
- -----------------------------------------------------
Total non-interest revenues 2,686 2,580 2,471
- -----------------------------------------------------
Interest revenue 2,246 2,729 3,123
Interest expense 881 994 1,173
- -----------------------------------------------------
Net interest income 1,365 1,735 1,950
Provision for consumer
loan losses 529 1,173 1,493
- -----------------------------------------------------
Net credit income 836 562 457
- -----------------------------------------------------
Net revenues 3,522 3,142 2,928
- -----------------------------------------------------
Compensation and benefits 525 549 535
Occupancy and equipment 54 67 61
Information processing and
communications 477 462 471
Marketing and business
development 1,041 872 780
Professional services 121 97 73
Other 207 207 251
- -----------------------------------------------------
Total non-interest expenses 2,425 2,254 2,171
- -----------------------------------------------------
Gain on sale of businesses -- 362 --
- -----------------------------------------------------
Income before income taxes 1,097 1,250 757
Provision for income taxes 435 529 284
- -----------------------------------------------------
Net income $ 662 $ 721 $ 473
- -----------------------------------------------------
The Company's Credit Services business is operated by its Discover Financial
Services business unit, which also operates the Discover/ NOVUS Network, a
proprietary network of merchant and cash access locations. The credit cards
offered by the Company include the Discover Card, the Discover Platinum Card,
the Morgan Stanley Dean Witter Card and other proprietary general purpose credit
cards.
Fiscal 1999 does not include the results from Prime Option, the operations
of SPS and certain receivables associated with the discontinued BRAVO Card, all
of which were sold during fiscal 1998. Prime Option, a business the Company had
operated with NationsBank of Delaware, N.A., was sold during the second 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. The Company discontinued its BRAVO Card in fiscal 1998 and sold
certain credit card receivables associated with the BRAVO Card in the fourth
quarter of fiscal 1998. Fiscal 1998's net after-tax gain on the sale of these
businesses was $163 million.
The sale of Prime Option, the operations of SPS and certain BRAVO
receivables reflect the Company's strategic decision to focus on the growth of
its existing Discover Card and Morgan Stanley Dean Witter brand names.
Reflecting this focus, the Company introduced the Discover Platinum Card and the
Morgan Stanley Dean Witter Card in fiscal 1999.
In fiscal 1999, Credit Services net income decreased 8% to $662 million,
primarily due to fiscal 1998's inclusion of the $163 million net gain on the
sale of the above-mentioned businesses. Excluding this gain, net income
increased 19% in fiscal 1999. The increase was primarily attributable to a lower
provision for loan losses and increased servicing fees, partially offset by
lower net interest income and merchant and cardmember fees and higher marketing
and business development expenses. In fiscal 1998, net income increased 52% to
$721 million from $473 million in fiscal 1997. Excluding the net gain on the
sale of the businesses mentioned above, net income increased 18% in fiscal 1998.
The increase was primarily attributable to a reduction in the provision for loan
losses primarily resulting from the sale of Prime Option and the operations of
SPS as well as higher servicing fees. The increase in net income was partially
offset by lower net interest income and increases in marketing and business
development expenses and incremental taxes associated with the sale of the
operations of SPS.
As a result of enhancements made to certain of the Company's operating
systems in the fourth quarter of fiscal 1997, the Company began recording
charged-off cardmember fees and interest revenue directly against the income
statement line items to which they were originally recorded. Prior to the
enhancements, charged-off cardmember fees and interest revenue both were
recorded as a reduction of interest revenue. While this change had no impact on
net revenues, the Company believes the revised presentation better reflects the
manner in which charge-offs affect the Credit Services statements of income.
However, since prior periods have not been restated to reflect this change, the
comparability of merchant and cardmember fees and interest revenue between
fiscal 1998 and fiscal 1997 has been affected. Accordingly, the following
sections also will discuss the changes in these income statement categories
excluding the impact of this reclassification.
page 35
<PAGE>
99 AR page 36
Credit Services statistical data were as follows:
FISCAL FISCAL FISCAL
(dollars in billions) 1999 1998 1997
- -----------------------------------------------------------
Consumer loans at fiscal year-end:
Owned $21.0 $16.0 $20.9
Managed $38.0 $32.5 $36.0
General purpose credit card
transaction volume $70.6 $58.0 $55.8
- -----------------------------------------------------------
The higher level of consumer loans at November 30, 1999 was primarily
attributable to growth in the Company's Discover Platinum Card. The lower level
of consumer loans at November 30, 1998 reflects the Company's sale of Prime
Option, the operations of SPS and certain BRAVO receivables during fiscal 1998.
Merchant and Cardmember Fees
Merchant and cardmember fees include revenues from fees charged to merchants on
credit card sales, late payment fees, over-limit fees, insurance fees, cash
advance fees, and fees for the administration of credit card programs and
transaction processing services.
Merchant and cardmember fees decreased 9% to $1,492 million during fiscal
1999 and decreased 3% to $1,647 million during fiscal 1998. The decrease in
fiscal 1999 was primarily due to the Company's sale of the operations of SPS and
the sale of Prime Option. Fiscal 1999 also was impacted by higher merchant
discount revenue offset by lower levels of overlimit fees and cash advance fees.
The increase in merchant discount revenue was associated with record levels of
sales volume. Overlimit fees decreased primarily due to a lower level of
overlimit fee occurrences. Cash advance fees decreased due to lower cash advance
transaction volume, primarily attributable to the Company's actions to limit
cash advances in an effort to improve credit quality. The 3% decrease in
merchant and cardmember fees in fiscal 1998 primarily reflects the
reclassification of charged-off cardmember fees discussed above. Excluding the
effect of the reclassification of charged-off cardmember fees, merchant and
cardmember fees would have increased 2% in fiscal 1998. This increase was
attributable to higher merchant discount revenue primarily associated with
increased growth of general purpose credit card transaction volume related to
the Discover Card, offset by lower revenues due to the sale of the operations of
SPS in October 1998. In addition, merchant and cardmember fees benefited from
higher overlimit and late fees attributable to a fee increase introduced during
fiscal 1998 and an increase in occurrences of overlimit accounts and delinquent
payments. Partially offsetting these increases was a decrease in cash advance
fees as a result of lower cash advance transaction volume, primarily
attributable to limits on cash advances imposed by the Company in an effort to
improve credit quality.
Servicing Fees
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 the investors for losses of principal resulting from
charged-off loans and to pay the Company a fee for servicing the loans. Any
excess cash flows remaining are paid to the Company. The servicing fees and
excess net cash flows paid to the Company are reported as servicing fees in the
consolidated statements of income. The sale of consumer loans through asset
securitizations therefore has the effect of converting portions of net credit
income and fee income to servicing fees. The Company completed asset
securitizations of $3.0 billion in fiscal 1999 and $4.5 billion in fiscal 1998.
The asset securitizations in fiscal 1999 and 1998 have expected maturities
ranging from three to 10 years from the date of issuance.
The table below presents the components of servicing fees:
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ----------------------------------------------------------
Merchant and cardmember fees $ 552 $ 505 $ 436
Interest revenue 2,694 2,598 2,116
Interest expense (996) (1,010) (829)
Provision for consumer
loan losses (1,056) (1,165) (961)
- ----------------------------------------------------------
Servicing fees $ 1,194 $ 928 $ 762
- ----------------------------------------------------------
Servicing fees are affected by the level of securitized loans, the spread
between the interest yield on the securitized loans and the yield paid to the
investors, the rate of credit losses on securitized loans and the level of
cardmember fees earned from securitized loans. Servicing fees also include the
effects of interest rate contracts entered into by the Company as part of its
interest rate risk management program. Servicing fees increased 29% in fiscal
1999 and 22% in fiscal 1998. The increase in fiscal 1999 was due to higher
levels of net interest income primarily resulting from higher levels of average
securitized loans. The increase also reflects a
<PAGE>
decline in credit losses from securitized consumer loans resulting from a lower
level of charge-offs related to the Discover Card portfolio and the positive
impact of the sale of the operations of SPS, partially offset by an increase in
the level of average securitized loans. The increase in servicing fees in fiscal
1998 was due to higher levels of net interest cash flows and increased fee
revenue, partially offset by increased credit losses from securitized consumer
loans, which were primarily a result of higher levels of average securitized
loans.
Net Interest Income
Net interest income is equal to the difference between interest revenue derived
from consumer loans and short-term investment assets and interest expense
incurred to finance those assets. Credit Services assets, consisting primarily
of consumer loans, currently earn interest revenue at fixed rates and, to a
lesser extent, market-indexed variable rates. The Company incurs interest
expense at fixed and floating rates. Interest expense also includes the effects
of interest rate contracts entered into by the Company as part of its interest
rate risk management program. This program is designed to reduce the volatility
of earnings resulting from changes in interest rates and is accomplished
primarily through matched financing, which entails matching the repricing
schedules of consumer loans and the related financing.
The following tables present analyses of Credit Services average balance
sheets and interest rates in fiscal 1999, fiscal 1998 and fiscal 1997 and
changes in net interest income during those fiscal years:
AVERAGE BALANCE SHEET ANALYSIS
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998/(3)/ FISCAL 1997/(3)/
AVERAGE AVERAGE AVERAGE
(dollars in millions) BALANCE RATE INTEREST BALANCE RATE INTEREST BALANCE RATE INTEREST
- ------------------------------------------------------------ --------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
General purpose credit
card loans $16,173 13.10% $2,118 $17,184 13.87% $2,383 $19,512 14.03% $2,738
Other consumer loans 4 8.98 -- 1,374 16.70 229 1,773 15.73 279
Investment securities 672 5.16 35 496 6.25 31 176 5.45 10
Other 1,656 5.61 93 1,465 5.88 86 1,680 5.75 96
- ------------------------------------------------------------ --------------------------------- --------------------------------
Total interest earning assets 18,505 12.14 2,246 20,519 13.30 2,729 23,141 13.49 3,123
Allowance for loan losses (774) (847) (828)
Non-interest earning assets 1,544 1,517 1,529
- ------------------------------------------------------------ --------------------------------- --------------------------------
Total assets $19,275 $21,189 $23,842
- ------------------------------------------------------------ --------------------------------- --------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings $ 1,492 4.51% $ 67 $ 1,073 4.79% $ 51 $ 963 4.27% $ 41
Brokered 5,609 6.37 357 5,656 6.62 375 4,589 6.66 306
Other time 1,927 5.61 108 2,189 6.16 135 2,212 6.12 135
- ------------------------------------------------------------ --------------------------------- --------------------------------
Total interest bearing
deposits 9,028 5.90 532 8,918 6.29 561 7,764 6.21 482
Other borrowings 6,046 5.76 349 7,162 6.05 433 11,371 6.07 691
- ------------------------------------------------------------ --------------------------------- --------------------------------
Total interest bearing
liabilities 15,074 5.84 881 16,080 6.18 994 19,135 6.13 1,173
Shareholder's equity/other
liabilities 4,201 5,109 4,707
- ------------------------------------------------------------ --------------------------------- --------------------------------
Total liabilities and
shareholder's equity $19,275 $21,189 $23,842
- ------------------------------------------------------------ --------------------------------- --------------------------------
Net interest income $ 1,365 $1,735 $1,950
- ------------------------------------------------------------ --------------------------------- --------------------------------
Net interest margin/(1)/ 7.38% 8.46% 8.43%
Interest rate spread/(2)/ 6.30% 7.12% 7.36%
- ------------------------------------------------------------ --------------------------------- --------------------------------
</TABLE>
(1) Net interest margin represents net interest income as a percentage of total
interest earning assets.
(2) Interest rate spread represents the difference between the rate on total
interest earning assets and the rate on total interest bearing liabilities.
(3) Certain prior-year information has been reclassified to conform to the
current year's presentation.
page 37
<PAGE>
99 AR page 38
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
INCREASE/(DECREASE) DUE TO CHANGES IN: FISCAL 1999 VS. FISCAL 1998 FISCAL 1998 VS. FISCAL 1997
(dollars in millions) VOLUME RATE TOTAL VOLUME RATE TOTAL
- -------------------------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST REVENUE
General purpose credit card loans $(140) $(125) $(265) $(327) $(28) $(355)
Other consumer loans (229) -- (229) (63) 13 (50)
Investment securities 11 (7) 4 17 4 21
Other 11 (4) 7 (12) 2 (10)
-------- ----------
Total interest revenue (268) (215) (483) (355) (39) (394)
- -------------------------------------------------------------------------- ---------------------------------------------
INTEREST EXPENSE
Interest bearing deposits:
Savings 20 (4) 16 5 5 10
Brokered (3) (15) (18) 71 (2) 69
Other time (16) (11) (27) (1) 1 ----
-------- ----------
Total interest bearing deposits 7 (36) (29) 72 7 79
Other borrowings (67) (17) (84) (256) (2) (258)
-------- ----------
Total interest expense (62) (51) (113) (187) 8 (179)
-------- ----------
Net interest income $(206) $(164) $(370) $(168) $(47) $(215)
- -------------------------------------------------------------------------- ---------------------------------------------
</TABLE>
Net interest income decreased 21% in fiscal 1999 and 11% in fiscal 1998. The
decrease in fiscal 1999 was primarily due to lower average levels of owned
consumer loans and a lower yield on these loans. The decrease in average owned
consumer loans was due to the sale of the operations of SPS, the sale of Prime
Option and the discontinuance of the BRAVO Card in fiscal 1998, as well as a
higher level of securitized Discover Card loans. The lower yield in fiscal 1999
was due to a lower yield on Discover Card loans, coupled with the exclusion of
SPS loans from the Company's portfolio. The lower yield on Discover Card loans
was primarily due to the more competitive interest rates offered to both
existing and new cardmembers. The lower yield reflected an increase in consumer
loans from balance transfers, which often are offered at below-market interest
rates for an introductory period. In fiscal 1998, excluding the effect of the
reclassification of charged-off cardmember fees discussed previously, net
interest income would have decreased 15%. The decrease in fiscal 1998 was due to
lower average levels of owned consumer loans and a lower yield on general
purpose credit card loans. The decrease in average owned consumer loans was
primarily due to an increase in securitized loans and the sale of the Prime
Option and SPS portfolios. The lower yield on general purpose credit card loans
in fiscal 1998 was due to a larger number of cardmembers taking advantage of
promotional rates. In both years, the Company believes that the effect of
changes in market interest rates on net interest income was mitigated as a
result of its liquidity and interest rate risk management policies.
<PAGE>
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 INFORMATION
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
AVERAGE AVERAGE AVERAGE
(dollars in millions) BALANCE RATE BALANCE RATE BALANCE RATE
- ------------------------------------------------------------ ----------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans $33,534 14.23% $34,619 14.86% $34,619 14.83%
General purpose credit card loans 33,530 14.23 32,684 14.72 32,176 14.72
Total interest earning assets 35,862 13.66 36,580 14.38 36,475 14.37
Total interest bearing liabilities 32,431 5.74 32,141 6.15 32,469 6.17
Consumer loan interest rate spread 8.49 8.71 8.66
Interest rate spread 7.92 8.23 8.20
Net interest margin 8.47 8.98 8.88
- ------------------------------------------------------------ ----------------------- -------------------
</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 that the Company believes is adequate to
absorb estimated losses in its consumer loan portfolio at the balance sheet
date. The Company's allowance for loan losses is regularly evaluated by
management for adequacy and was $769 million at November 30, 1999 and $787
million at November 30, 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 55% in fiscal 1999 and 21% in fiscal 1998. The decrease
in fiscal 1999 was primarily due to a lower level of charge-offs related to the
Discover Card portfolio and the positive impact of the sale of the operations of
SPS, the sale of Prime Option and the discontinuance of the BRAVO Card. This
decrease was reflective of the Company's continuing efforts to improve the
credit quality of its portfolio. The provision for consumer loan losses also was
positively impacted by a decline in the loan loss allowance in connection with
securitization transactions entered into prior to the third quarter of 1996.
This loan loss allowance was fully amortized by the end of fiscal 1999. The
decrease in fiscal 1998 was due to a decrease in net charge-offs resulting from
lower average levels of owned consumer loans, primarily attributable to an
increased level of securitized loans and reduced levels of charge-offs
associated with the sale of Prime Option and SPS receivables, partially offset
by a small increase in the net charge-off rate of the Discover Card portfolio.
The provision for consumer loan losses also was positively impacted by a
decline in the loan loss allowance in connection with securitization
transactions entered into prior to the third quarter of 1996 as discussed above.
The Company's future charge-off rates and credit quality are subject to
uncertainties that could cause actual results to differ materially from what has
been discussed above. Factors that influence the provision for consumer loan
losses include the level and direction of consumer loan delinquencies and
charge-offs, changes in consumer spending and payment behaviors, bankruptcy
trends, the seasoning of the Company's loan portfolio, interest rate movements
and their impact on consumer behavior, and the rate and magnitude of changes in
the Company's consumer loan portfolio, including the overall mix of accounts,
products and loan balances within the portfolio.
Consumer loans are considered delinquent when interest or principal payments
become 30 days past due. Consumer loans are charged-off 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. The net charge-off
rate decreased in fiscal 1999 as compared with fiscal 1998, reflecting the
Company's increased focus on credit quality and account collections, as well as
the sale of Prime Option, the operations of SPS and the discontinuance of the
BRAVO Card.
page 39
<PAGE>
99 AR page 40
The following table presents delinquency and net charge-off rates with
supplemental managed loan information:
ASSET QUALITY
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
(dollars in millions) OWNED MANAGED OWNED MANAGED OWNED MANAGED
- ----------------------------------------------------------------- ------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer loans at period-end $20,998 $37,975 $15,996 $32,502 $20,917 $35,950
Consumer loans contractually
past due as a percentage of
period-end consumer loans:
30 to 89 days 3.35% 3.79% 3.54% 3.69% 3.96% 3.91%
90 to 179 days 2.20% 2.53% 2.67% 2.84% 3.11% 3.07%
Net charge-offs as a percentage of
average consumer loans 4.78% 5.42% 6.75% 6.90% 6.78% 6.95%
- ----------------------------------------------------------------- ------------------------ --------------------
</TABLE>
Non-Interest Expenses
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits $ 525 $ 549 $ 535
Occupancy and equipment 54 67 61
Information processing and
communications 477 462 471
Marketing and business
development 1,041 872 780
Professional services 121 97 73
Other 207 207 251
- ---------------------------------------------------------------------------------------------
Total non-interest expenses $ 2,425 $ 2,254 $ 2,171
- ---------------------------------------------------------------------------------------------
</TABLE>
Total non-interest expenses increased 8% to $2,425 million in fiscal
1999 and increased 4% to $2,254 million in fiscal 1998.
Employee compensation and benefits expense decreased 4% in fiscal 1999 and
increased 3% in fiscal 1998. The decrease in fiscal 1999 was primarily due to
lower compensation costs resulting from the sale of Prime Option and the
operations of SPS. These decreases were partially offset by higher employment
costs at Discover Financial Services associated with increased employment levels
due to increased levels of transaction volume. The increase in fiscal 1998 was
due to an increased number of employees and higher executive compensation costs
associated with Discover Financial Services, offset by lower compensation costs
associated with the sale of Prime Option and the operations of SPS.
Occupancy and equipment expense decreased 19% in fiscal 1999 and increased
10% in fiscal 1998. The decrease in fiscal 1999 was primarily due to the
exclusion of the results of Prime Option and SPS, partially offset by higher
occupancy costs associated with Discover Financial Services. The increase in
fiscal 1998 was primarily due to higher rent and other occupancy costs at
certain of the Company's facilities, including payment processing centers.
Information processing and communications expense increased 3% in fiscal
1999 and decreased 2% in fiscal 1998. The increase in fiscal 1999 was due to
higher external data processing costs at Discover Financial Services, including
cardmember data analysis associated with increased portfolio activity, partially
offset by the exclusion of the results of Prime Option and SPS in fiscal 1999.
In fiscal 1998, lower transaction processing costs resulting from the sale of
the operations of SPS were partially offset by higher external data processing
costs related to the Year 2000 project and increased cardmember data analysis
associated with credit risk management activity.
Marketing and business development expense increased 19% in fiscal 1999 and
12% in fiscal 1998. In fiscal 1999, the Company continued to invest in the
growth of its credit card business, including the introduction of the Discover
Platinum Card during the first quarter of 1999 and the launch of the Morgan
Stanley Dean Witter Card in the United Kingdom during the latter half of fiscal
1999. Marketing and business development expense increased in fiscal 1999 due to
direct mailing and other promotional activities related to the launch and
continued promotion of the Discover Platinum and Morgan Stanley Dean Witter
Cards, higher cardmember rewards expense and a new advertising campaign for the
Discover Card. Higher cardmember rewards expense was due to increased sales
volume. Cardmember rewards expense includes the Cashback Bonus/(R) /award
program, pursuant to which the Company annually pays Discover Cardmembers, and
Private Issue/(R) /Cardmembers electing this feature, a percentage of their
purchase amounts ranging up to 1% based upon a cardmember's
<PAGE>
level of annual purchases. The increase in fiscal 1998 was attributable to
higher advertising and promotional expenses associated with increased direct
mail and other promotional activities related to the Discover Card, Private
Issue Card and partnership programs, as well as higher cardmember rewards
expense. The Company increased marketing and promotional spending significantly
in the third and fourth quarters of fiscal 1998 in an effort to renew and
increase growth in the Discover Card brand.
Professional services expense increased 25% in fiscal 1999 and 33% in fiscal
1998. The increase in fiscal 1999 was due to higher costs associated with
account collections and consumer credit counseling, partially offset by a
decrease in expenses associated with the sale of the operations of SPS. The
increase in fiscal 1998 was due to services related to increased partnership
program activity, higher expenditures for consumer credit counseling,
collections services and consulting fees.
Other expenses primarily include fraud losses, credit inquiry fees and other
administrative costs. Other expenses remained unchanged in fiscal 1999 as
compared with fiscal 1998. In fiscal 1999, increased operational costs
associated with higher application and transaction volumes and costs associated
with the launch of the Morgan Stanley Dean Witter Card in the United Kingdom
were offset by a decrease in expenses associated with the sale of the operations
of SPS. In fiscal 1998, other expenses decreased 18%, reflecting a decline in
the level of fraud losses as well as a lower level of expenses resulting from
the sale of Prime Option and the operations of SPS.
Seasonal Factors
The credit card lending activities of Credit Services are affected by seasonal
patterns of retail purchasing. Historically, a substantial percentage of credit
card loan growth occurs in the fourth calendar quarter, followed by a flattening
or decline of consumer loans in the following calendar quarter. Merchant fees,
therefore, have historically tended to increase in the first fiscal quarter,
reflecting higher sales activity in the month of December. Additionally, higher
card-member rewards expense is accrued in the first fiscal quarter, reflecting
seasonal growth in retail sales volume.
LIQUIDITY AND CAPITAL RESOURCES
The Balance Sheet
The Company's total assets increased to $367.0 billion at November 30, 1999 from
$317.6 billion at November 30, 1998, primarily reflecting higher financial
instruments owned, securities borrowed, consumer loans and customer receivables,
partially offset by lower levels of securities purchased under agreements to
resell. 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.
Funding and Capital Policies
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.
Many of the Company's businesses are capital-intensive. Capital is required
to finance, among other things, the Company's securities inventories,
underwritings, principal investments, private equity activities, consumer loans
and investments in fixed assets. As a policy, the Company attempts to maintain
sufficient capital and funding sources in order to have the capacity to finance
itself on a fully collateralized basis at all times, including periods of
financial stress. Currently, the Company believes it has sufficient capital to
meet its needs. In addition, the Company attempts to maintain total equity, on a
consolidated basis, at least equal to the sum of all of its subsidiaries'
equity. Subsidiary equity capital requirements are determined by regulatory
requirements (if applicable), asset mix, leverage considerations and earnings
volatility.
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
page 41
<PAGE>
99 AR page 42
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's liquidity policies emphasize diversification of funding
sources. The Company also follows a funding strategy which is designed to ensure
that the tenor of the Company's liabilities equals or exceeds the expected
holding period of the assets being financed. Short-term funding generally is
obtained at rates related to U.S., Euro or Asian money market rates for the
currency borrowed. Repurchase transactions are effected at negotiated rates.
Other borrowing costs are negotiated depending upon prevailing market conditions
(see Notes 5 and 6 to the consolidated financial statements). Maturities of both
short-term and long-term financings are designed to minimize exposure to
refinancing risk in any one period.
The volume of the Company's borrowings generally fluctuates in response to
changes in the amount of repurchase transactions outstanding, the level of the
Company's securities inventories and consumer loans receivable, and overall
market conditions. Availability and cost of financing to the Company can vary
depending upon market conditions, the volume of certain trading activities, the
Company's credit ratings and the overall availability of credit. The Company,
therefore, maintains a surplus of unused short-term funding sources at all times
to withstand any unforeseen contraction in credit capacity. In addition, the
Company attempts to maintain cash and unhypothecated marketable securities equal
to at least 110% of its outstanding short-term unsecured borrowings. The Company
has in place a contingency funding strategy, which provides a comprehensive one-
year action plan in the event of a severe funding disruption.
The Company views long-term debt as a stable source of funding for core
inventories, consumer loans and illiquid assets and, therefore, maintains a
long-term debt-to-capitalization ratio at a level appropriate for the current
composition of its balance sheet. In general, fixed assets are financed with
fixed rate long-term debt, and securities inventories and the majority of
current assets are financed with a combination of short-term funding, floating
rate long-term debt or fixed rate long-term debt swapped to a floating basis.
Both fixed rate and floating rate long-term debt (in addition to sources of
funds accessed directly by the Company's Credit Services business) are used to
finance the Company's consumer loan portfolio. Consumer loan financing is
targeted to match the repricing and duration characteristics of the loans
financed. The Company uses derivative products (primarily interest rate,
currency and equity swaps) to assist in asset and liability management, reduce
borrowing costs and hedge interest rate risk (see Note 6 to the consolidated
financial statements).
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 can have a significant impact on certain trading
revenues, particularly in those businesses where longer term counter-party
performance is critical, such as over-the-counter derivative transactions.
As of January 31, 2000, the Company's credit ratings were
as follows:
COMMERCIAL PAPER SENIOR DEBT
- -------------------------------------------------------------------------------
Dominion Bond Rating Service Limited R-1 (middle) AA (low)
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 Financial BankWatch TBW-1 AA+
- -------------------------------------------------------------------------------
During fiscal 1999, Duff & Phelps Credit Rating Co. upgraded the Company's
senior debt rating from AA- to AA, Japan Rating & Investment Information, Inc.
upgraded the Company's senior debt rating from AA- to AA, Standard & Poor's
placed the Company's senior debt ratings on Positive Outlook, Thomson Financial
BankWatch upgraded the Company's senior debt rating from AA to AA+ and Fitch
IBCA, Inc. upgraded the Company's senior debt rating from AA- to AA. On January
27, 2000, Dominion Bond Rating Service Limited established a senior debt rating
of AA (low) for the Company.
As the Company continues its global expansion and derives revenues
increasingly 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
often is offset by strength in another currency. The Company closely monitors
its exposure to fluctuations in currencies and, where cost-justified,
<PAGE>
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.
Principal Sources of Funding
The Company funds its balance sheet on a global basis. The Company's funding for
its Securities and Asset Management businesses 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 reinvestments; 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 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 consolidated
financial statements, issues asset-backed commercial paper.
The Company's bank subsidiaries solicit deposits from consumers, purchase
Federal Funds and issue short-term bank notes. Interest bearing deposits are
classified by type as savings, brokered and other time deposits. Savings
deposits consist primarily of money market deposits and certificates of deposit
accounts sold directly to cardmembers and savings deposits from individual
securities clients. Brokered deposits consist primarily of certificates of
deposits issued by the Company's bank subsidiaries. Other time deposits include
institutional certificates of deposits. The Company, through Greenwood Trust
Company, an indirect subsidiary of the Company, sells notes under a short-term
bank note program.
The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others from which it draws funds in a
variety of currencies. The volume of the Company's borrowings generally
fluctuates in response to changes in the amount of repurchase transactions
outstanding, the level of the Company's securities inventories and consumer
loans receivable, and overall market conditions. Availability and cost of
financing to the Company can vary depending upon market conditions, the volume
of certain trading activities, the Company's credit ratings and the overall
availability of credit.
The Company 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 $5.5 billion. The MSDW Facility contains restrictive
covenants which require, among other things, that the Company maintain
shareholders' equity of at least $9.1 billion at all times. The Company believes
that the covenant restrictions will not impair the Company's ability to pay its
current level of dividends. At November 30, 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. The credit
agreement contains restrictive covenants which require, among other things, that
MS&Co. maintain specified levels of consolidated shareholder's equity and Net
Capital, as defined. At November 30, 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
London-based broker-dealer subsidiary, to secure committed funding from a
syndicate of banks by providing a broad range of collateral under repurchase
agreements (the "MSIL Facility"). Such banks are committed to provide up to an
aggregate of $1.91 billion, available in six major currencies. The facility
agreement contains restrictive covenants which require, among other things, that
MSIL maintain specified levels of Shareholder's Equity and Financial Resources,
each as defined. At
page 43
<PAGE>
99 AR page 44
November 30, 1999, no borrowings were outstanding under the MSIL Facility.
On June 7, 1999, Morgan Stanley Dean Witter Japan Limited ("MSDWJL"), the
Company's Tokyo-based broker-dealer subsidiary, entered into a committed
revolving credit facility, guaranteed by the Company, that provides funding to
support general liquidity needs, including support of MSDWJL's unsecured
borrowings (the "MSDWJL Facility"). Under the terms of the MSDWJL Facility, a
syndicate of banks is committed to provide up to 60 billion Japanese yen. At
November 30, 1999, no borrowings were outstanding under the MSDWJL Facility.
RFC maintains a senior bank credit facility to support the issuance of
asset-backed commercial paper in the amount of $2.6 billion. Under the terms of
the asset-backed commercial paper program, certain assets of RFC were subject to
a lien in the amount of $2.6 billion at November 30, 1999. RFC has never
borrowed from its senior bank credit facility.
The Company anticipates that it will utilize the MSDW Facility, the MS&Co.
Facility, the MSIL Facility or the MSDWJL Facility for short-term funding from
time to time (see Note 5 to the consolidated financial statements).
Fiscal 1999 and Subsequent Activity
During fiscal 1999, the Company issued senior notes aggregating $7,626 million,
including non-U.S. dollar currency notes aggregating $2,490 million, primarily
pursuant to its public debt shelf registration statements. These notes have
maturities from 2000 to 2029 and a weighted average coupon interest rate of 4.8%
at November 30, 1999; the Company has entered into certain transactions to
obtain floating interest rates based primarily on short-term LIBOR trading
levels. At November 30, 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 $49.9 billion. Between November 30,
1999 and January 31, 2000, the Company issued additional debt obligations
aggregating approximately $5,093 million. These notes have maturities from 2000
to 2014.
Effective December 1999, the Company's Board of Directors authorized the
Company to purchase, subject to market conditions and certain other factors, an
additional $1 billion of the Company's common stock for capital management
purposes. The Company also has a separate ongoing repurchase authorization in
connection with awards granted under its equity-based compensation plans. During
fiscal 1999, the Company purchased $2,374 million of its common stock.
Subsequent to November 30, 1999 and through January 31, 2000, the Company
purchased an additional $406 million of its common stock; the unused portion of
the capital management common stock repurchase authorization at January 31, 2000
was approximately $1,098 million (without giving effect to any outstanding put
options).
In an effort to enhance its ongoing stock repurchase program, the Company
may sell put options on shares of its common stock to third parties. These put
options entitle the holder to sell shares of the Company's common stock to the
Company on certain dates at specified prices. As of November 30, 1999, put
options were outstanding on an aggregate of 1,000,000 shares of the Company's
common stock. These put options expire in February 2000. The Company may elect
cash settlement of the put options instead of taking delivery of the stock.
Effective March 1, 1999, the Company redeemed all of the outstanding 7.82%
Capital Units and 7.80% Capital Units. The aggregate principal amount of the
Capital Units redeemed was $352 million. During fiscal 1999, the Company
repurchased in a series of transactions in the open market $64 million of the
$134 million outstanding 8.03% Capital Units. The Company has retired these
repurchased Capital Units.
In January 2000, the Company and Morgan Stanley Finance, plc, a U.K.
subsidiary, called for redemption all of the outstanding 9.00% Capital Units on
February 28, 2000. The aggregate principal amount of the Capital Units to be
redeemed is $144 million.
On May 5, 1999, the Company's shelf registration statement for the issuance
of an additional $12 billion of debt securities, units, warrants or purchase
contracts, or any combination thereof in the form of units or preferred stock,
became effective.
At November 30, 1999, certain assets of the Company, such as real property,
equipment and leasehold improvements of $2.2 billion and goodwill and other
intangible assets of $1.3 billion, were illiquid. In addition, included in other
assets are approximately $1.9 billion of aircraft that the Company has acquired
in connection with its aircraft financing activities. 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
<PAGE>
and mortgage-related loan products, bridge financings, and certain senior
secured loans and positions are not highly liquid. The Company also has
commitments to fund certain fixed assets and other less liquid investments,
including at November 30, 1999 approximately $417 million in connection with its
private equity and other principal investment activities. Additionally, the
Company has provided and will continue to provide financing, including margin
lending and other extensions of credit to clients.
At November 30, 1999, the aggregate value of high-yield debt securities and
emerging market loans and securitized instruments held in inventory was $2,128
million (a substantial portion of which was subordinated debt). These
securities, loans and instruments were not attributable to more than 3% to any
one issuer, 16% to any one industry or 22% 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, therefore, are more sensitive to
adverse economic conditions. In addition, the market for non-investment grade
securities and emerging market loans and securitized instruments has been, and
may in the future be, characterized by periods of volatility and illiquidity.
The Company has 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 "Risk Management" following "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
The Company has contracted to develop a one million-square-foot office tower
in New York City. Pursuant to this agreement, the Company will own the building
and has entered into a 99-year lease for the land at the development site.
Construction began in 1999 and the Company intends to occupy the building upon
project completion, which is anticipated in 2002. The total investment in this
project (which will be incurred over the next several years) is estimated to be
approximately $650 million.
In connection with certain of its business activities, the Company provides
financing or financing commitments (on a secured and unsecured basis) to
companies in the form of senior and subordinated debt, including bridge
financing on a selective basis. The borrowers may be rated investment grade or
non-investment grade, and the loans may have varying maturities. As part of
these activities, the Company may syndicate and trade certain positions of these
loans. At November 30, 1999, the aggregate value of loans and positions was $1.3
billion. The Company also has provided additional commitments associated with
these activities aggregating $7.3 billion at November 30, 1999. These
commitments are generally agreements to lend to counterparties, have fixed
termination dates and are contingent on all conditions to borrowing set forth in
the contract having been met. At January 31, 2000, the Company had loans and
positions outstanding of $2.4 billion and aggregate commitments of $8.2 billion.
The higher level of the Company's commitments as compared with prior periods is
primarily attributable to increased merger and acquisition activities,
particularly in Europe. However, there can be no assurance that the level of
such activities will continue in future periods.
In September 1998, the Company made an investment of $300 million in the
Long-Term Capital Portfolio, L.P. ("LTCP"). The Company is a member of a
consortium of 14 financial institutions participating in an equity
recapitalization of LTCP. The objectives of this investment were 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. During fiscal 1999, a
substantial portion of this investment was returned to the Company.
The gross notional and fair value amounts of derivatives used by the Company
for asset and liability management and as part of its trading activities are
summarized in Notes 6 and 9, respectively, to the consolidated financial
statements (see also "Derivative Financial Instruments" herein).
REGULATORY CAPITAL REQUIREMENTS
Dean Witter Reynolds Inc. ("DWR") and MS&Co. 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
("SEC"), the New York Stock Exchange and the Commodity Futures Trading
Commission. MSIL, a London-based broker-dealer subsidiary, is regulated by the
Securities and Futures Authority ("SFA") in the United Kingdom and, accordingly,
is subject to the Financial Resources Requirements of the SFA. MSDWJL, a Tokyo-
based broker-dealer, is regulated by the Japanese Ministry of Finance with
respect to regulatory capital requirements. DWR, MS&Co., MSIL and MSDWJL
page 45
<PAGE>
99 AR page 46
have consistently operated in excess of their respective regulatory
requirements (see Note 11 to the consolidated financial statements).
Certain of the Company's subsidiaries are Federal Deposit Insurance
Corporation ("FDIC") insured financial institutions. Such subsidiaries,
therefore, are subject to the regulatory capital requirements adopted by the
FDIC. These subsidiaries have consistently operated in excess of these and other
regulatory requirements.
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 applicable local capital adequacy requirements. In addition,
Morgan Stanley Derivative Products Inc., a triple-A rated subsidiary through
which the Company conducts some of its derivative activities, has established
certain operating restrictions which have been reviewed by various rating
agencies.
EFFECTS OF INFLATION AND CHANGES
IN FOREIGN EXCHANGE RATES
Because the Company's assets to a large extent are liquid in nature, they are
not significantly affected by inflation. However, inflation may result in
increases in the Company's expenses, which may not be readily recoverable in the
price of services offered. To the extent inflation results in rising interest
rates and has other adverse effects upon the securities markets, upon the value
of financial instruments and upon the markets for consumer credit services, it
may adversely affect the Company's financial position and profitability.
A portion of the Company's business is conducted in currencies other than
the U.S. dollar. Non-U.S. dollar assets typically are financed by direct
borrowing or swap-based funding in the same currency. Changes in foreign
exchange rates affect non-U.S. dollar revenues as well as non-U.S. dollar
expenses. Those foreign exchange exposures that arise and are not hedged by an
offsetting foreign currency exposure are actively managed by the Company to
minimize risk of loss due to currency fluctuations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company actively offers to clients and trades for its own account a variety
of financial instruments described as "derivative products" or "derivatives."
These products generally take the form of futures, forwards, options, 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. All of the Company's trading-related divisions
use derivative products as an integral part of their respective trading
strategies, and such products are used extensively to manage the market exposure
that results from a variety of proprietary trading activities (see Note 9 to the
consolidated financial statements). In addition, as a dealer in certain
derivative products, most notably interest rate and currency swaps, the Company
enters into derivative contracts to meet a variety of risk management and other
financial needs of its clients. Given the highly integrated nature of derivative
products and related cash instruments in the determination of overall trading
division profitability and the context in which the Company manages its trading
areas, it is not meaningful to allocate trading revenues between the derivative
and underlying cash instrument components. Moreover, 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
(see "Risk Management" following "Management's Discussion and Analysis of
Financial Condition and Results of Operations"). It should be noted that while
particular risks may be associated with the use of derivatives, in many cases
derivatives serve to reduce, rather than increase, the Company's exposure to
market, credit and other risks.
The total notional value of derivative trading contracts outstanding at
November 30, 1999 was $3,404 billion (as compared with $2,860 billion at
November 30, 1998). While these amounts are an indication of the degree of the
Company's use of derivatives for trading purposes, they do not represent the
Company's market or credit exposure and may be more indicative of customer
utilization of derivatives. The Company's exposure to market risk relates to
changes in interest rates, foreign currency exchange rates, or the fair value of
the underlying financial instruments or commodities. The Company's exposure to
credit risk at any point in time is represented by the fair value of such
contracts reported as assets. Such total fair value outstanding as of November
30, 1999 was $22.8 billion. Approximately $18.4 billion of that credit risk
exposure was with counterparties rated single-A or better (see Note 9 to the
consolidated financial statements).
The Company also uses derivative products (primarily interest rate, currency
and equity swaps) to assist in asset and lia-
<PAGE>
bility management, reduce borrowing costs and hedge interest rate risk (see Note
6 to the consolidated financial statements).
The Company believes that derivatives are valuable tools that can provide
cost-effective solutions to complex financial problems and remains committed to
providing its clients with innovative financial products. The Company
established Morgan Stanley Derivative Products Inc. to offer derivative products
to clients who will enter into derivative transactions only with triple-A rated
counterparties. In addition, the Company, through its continuing involvement
with regulatory, self-regulatory and industry activities, provides leadership in
the development of policies and practices in order to maintain confidence in the
markets for derivative products, which is critical to the Company's ability to
assist clients in meeting their overall financial needs.
YEAR 2000
The Year 2000 issue arose since many of the world's computer systems (including
those in non-information technology systems) traditionally recorded years in a
two-digit format. If not addressed, such computer systems may have been unable
to properly interpret dates beyond the year 1999, which may have led to business
disruptions in the U.S. and internationally. Accordingly, the Company
established a firmwide initiative to address issues associated with the Year
2000. As part of this initiative, the Company reviewed its global software and
hardware infrastructure for mainframe, server and desktop computing environments
and engaged in extensive remediation and testing. The Year 2000 initiative also
encompassed the review of agencies, vendors and facilities for Year 2000
compliance.
Since 1995, the Company prepared actively for the Year 2000 issue to ensure
that it would have the ability to respond to any critical business process
failure, to prevent the loss of work-space and technology, and to mitigate any
potential financial loss or damage to its global franchise. Where necessary,
contingency plans were expanded or developed to address specific Year 2000 risk
scenarios, supplementing existing business policies and practices.
During fiscal 1999, in its preparation for the millennial changeover, the
Company established a global Command, Control and Communication Network (the "C3
Network"). The purpose of the C3 Network was to enable the Company's management,
on both a global and regional basis, to monitor and manage any Year 2000-related
issues and their potential impact on the Company's business activities. Using a
variety of tools developed for this purpose, the C3 Network monitored business
verification points as well as internal issues and external events. The Company
also maintained communications with clients and regulators and coordinated
global communications between senior management and all of the Company's
business areas.
The Company considers the transition into the Year 2000 successful from the
perspective of both its internal systems and global external interactions. Over
the millennial changeover period, no material issues were encountered, and the
Company conducted business as usual.
Based upon current information, the Company estimates that the total cost
associated with implementing its Year 2000 initiative, including the review,
remediation and testing of all internal systems, review of vendors, and event
management will be approximately $240 million. Substantially all of such costs
were incurred by the end of fiscal 1999, although approximately $15 million in
costs are expected to be incurred during fiscal 2000. These costs are funded
through operating cash flow and expensed in the period in which they are
incurred.
page 47
<PAGE>
Exhibit 13.4
RISK MANAGEMENT
RISK MANAGEMENT POLICY AND CONTROL STRUCTURE
Risk is an inherent part of the Company's business and activities. The extent to
which the Company properly and effectively identifies, assesses, monitors and
manages each of the various types of risk involved in its activities is critical
to its soundness and profitability. The Company's broad-based portfolio of
business activities helps reduce the impact that volatility in any particular
area or related areas may have on its net revenues as a whole. The Company seeks
to identify, assess, monitor and manage, in accordance with defined policies
and procedures, the following principal risks involved in the Company's business
activities: market risk, credit risk, operational risk, legal risk and funding
risk. Funding risk is discussed in the "Liquidity and Capital Resources" section
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 22.
Risk management at the Company is a multi-faceted process with
independent oversight that requires constant communication, judgment and
knowledge of specialized products and markets. The Company's senior management
takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions to
assist in the identification, assessment and control of various risks. In
recognition of the increasingly varied and complex nature of the global
financial services business, the Company's risk management policies,
procedures and methodologies are evolutionary in nature and are subject to
ongoing review and modification.
The Management Committee, composed of the Company's most senior
officers, establishes the overall risk management policies for the Company and
reviews the Company's performance relative to these policies. The Management
Committee has created several Risk Committees to assist it in monitoring and
reviewing the Company's risk management practices. These Risk Committees, as
well as other committees established to manage and monitor specific risks,
review the risk monitoring and risk management policies and procedures relating
to the Company's market and credit risk profile, sales practices, pricing of
consumer loans and reserve adequacy, legal enforceability, and operational and
systems risks.
The Firm Risk Management, Controllers, Treasury and Law, Compliance and
Governmental Affairs Departments, which are all independent of the Company's
business units, also assist senior management and the Risk Committees in
monitoring and controlling the Company's risk profile. The Firm Risk
Management Department is responsible for risk policy development, risk analysis
and risk reporting to senior management and the Risk Committees and has
operational responsibility for measuring and monitoring aggregate market and
credit risk with respect to institutional trading activities. In addition, the
Internal Audit Department, which also reports to senior management, periodically
examines and evaluates the Company's operations and control environment. The
Company continues to be committed to employing qualified personnel with
appropriate expertise in each of its various administrative and business areas
to implement effectively the Company's risk management and monitoring systems
and processes.
The following is a discussion of the Company's risk management
policies and procedures for its principal risks (other than funding risk). The
discussion focuses on the Company's securities trading (primarily its
institutional trading activities) and consumer lending and related activities.
The Company believes that these activities generate a substantial portion of its
principal risks. This discussion and the estimated amounts of the Company's
market risk exposure generated by the Company's statistical analyses are
forward-looking statements. However, the analyses used to assess such risks are
not predictions of future events, and actual results may vary significantly from
such analyses due to events in the markets in which the Company operates and
certain other factors described below.
MARKET RISK
Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, volatilities, correlations or other market factors, such
as liquidity, will result in losses for a specified position or portfolio. For a
discussion of the Company's currency exposure relating to its net monetary
investments in non-U.S. dollar functional currency subsidiaries, see Note 11
to the consolidated financial statements.
TRADING AND RELATED ACTIVITIES
Primary Market Risk Exposures and Market Risk Management
During fiscal 1999, the Company had exposures to a wide range of interest rates,
equity prices, foreign exchange rates and commodity prices -- and associated
volatilities and spreads -- related to a broad spectrum of global markets in
which it conducts its trading activities. The Company is exposed to interest
rate risk as a result of maintaining market-making activities and proprietary
trading in interest rate sensitive financial instruments (e.g., risk arising
from changes in the level or volatility of interest rates, the timing of
mortgage prepayments, the shape of the yield curve and credit spreads for
corporate bonds and emerging market debt). The Company is exposed to equity
price risk as a result of making markets in equity securities and equity
derivatives and maintaining proprietary positions. The Company is exposed to
foreign exchange rate risk in connection with making markets in foreign
currencies and foreign currency options and with maintaining foreign exchange
positions. The Company's currency trading covers many foreign currencies,
including the yen, euro and pound sterling. The Company is exposed to commodity
price risk as a result of trading in commodity-related derivatives and physical
commodities.
The Company manages its trading positions by employing a variety of
strategies, which include diversification of risk exposures
Page 48
<PAGE>
and the purchase or sale of positions in related securities and financial
instruments, including a variety of derivative products (e.g., swaps, options,
futures and forwards). The Company manages the market risk associated with its
trading activities on a Company-wide basis, on a trading division level
worldwide and on an individual product basis. The Company manages and monitors
its market risk exposures in such a way as to maintain a portfolio that the
Company believes is well-diversified with respect to market risk factors.
Market risk limits have been approved for the Company and each major
trading division of the Company worldwide (equity, fixed income, foreign
exchange and commodities). Discrete market risk limits are assigned to trading
desks and, as appropriate, products and regions. Trading division risk managers,
desk risk managers and the Firm Risk Management Department monitor market risk
measures against limits and report major market and position events to senior
management.
The Firm Risk Management Department independently reviews the Company's
trading portfolios on a regular basis from a market risk perspective utilizing
Value-at-Risk and other quantitative and qualitative risk measurements and
analyses. The Company may use measures, such as rate sensitivity, convexity,
volatility and time decay measurements, to estimate market risk and to assess
the sensitivity of positions to changes in market conditions. Stress testing,
which measures the impact on the value of existing portfolios of specified
changes in market factors, for certain products is performed periodically and
reviewed by trading division risk managers, desk risk managers and the Firm Risk
Management Department.
Value-at-Risk
The statistical technique known as Value-at-Risk ("VaR") is one of the tools
used by management to measure, monitor and review the market risk exposures of
the Company's trading portfolios. The Firm Risk Management Department calculates
and distributes daily VaR-based risk measures to various levels of management.
VaR Methodology, Assumptions and Limitations
The Company estimates VaR using a model based on historical simulation for major
market risk factors and Monte Carlo simulation for name-specific risk in certain
equity and fixed income exposures. Historical simulation involves constructing a
distribution of hypothetical daily changes in trading portfolio value based on
historical observation of daily changes in key market indices or other market
factors ("market risk factors") and on information on the sensitivity of the
portfolio values to these market risk factor changes. In the case of the
Company's VaR, approximately four years of historical data are used to
characterize potential changes in market risk factors. The Company's one-day 99%
VaR corresponds to the negative change in portfolio value that, based on
observed market risk factor movements, would have been exceeded with a frequency
of 1%, or once in 100 trading days.
The VaR model generally takes into account linear and non-linear
exposures to price and interest rate risk and linear exposure to implied
volatility risks. Market risks that are incorporated in the VaR model include
equity and commodity prices, interest rates, foreign exchange rates and
associated volatilities. As of November 30, 1999, a total of approximately 500
market risk factor benchmark data series was incorporated in the Company's VaR
model covering interest rates, equity prices, foreign exchange rates, commodity
prices and associated volatilities. As a supplement to the use of historical
simulation for major market risk factors, the Company's VaR model uses Monte
Carlo simulation to capture name-specific risk in global equities and in U.S.
corporate and high-yield bonds. The model includes measures of name-specific
risk for approximately 8,000 equity names and 55 classes of corporate and
high-yield bonds.
VaR models such as the Company's should be expected to evolve over time
in response to changes in the composition of trading portfolios and to
improvements in modeling techniques and systems capabilities. During fiscal
1999, as part of the Company's ongoing program of VaR model enhancement,
position and risk coverage were broadened, and risk measurement methodologies
were refined. Equity enhancements included improved capture of name-specific
implied volatility risk for equity options of different maturities, which tended
to decrease measured VaR, and name-specific equity price risk with respect to
certain private equity positions, which tended to increase VaR. Fixed income
enhancements included: improved modeling of implied volatility risk, improved
capture of interest rate related risks in mortgage-backed and emerging market
financial instruments, and a change, related to EMU, from multiple to a single
set of yield curve risk factors for euro currencies, all of which tended to
decrease measured VaR.
Among their benefits, VaR models permit estimation of a
portfolio's aggregate market risk exposure, incorporating a range of varied
market risks; reflect risk reduction due to portfolio diversifi-
page 49
<PAGE>
Page 50
cation; and can cover a wide range of portfolio assets yet are relatively easy
to interpret. However, VaR risk measures should be interpreted in light of the
methodology's limitations, which include the following: past changes in market
risk factors will not always yield accurate predictions of the distributions and
correlations of future market movements; changes in portfolio value in response
to market movements may differ from the responses calculated by a VaR model;
published VaR results reflect past trading positions while future risk depends
on future positions; VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged within one day; and
the historical market risk factor data used for VaR estimation may provide only
limited insight into losses that could be incurred under market conditions that
are unusual relative to the historical period used in estimating the VaR. The
Company is aware of these and other limitations and therefore uses VaR as only
one component in its risk management review process. This process also
incorporates stress testing and extensive risk monitoring and control at the
trading desk, division and Company levels.
VaR for Fiscal 1999
The table below presents the results of the Company's VaR for each of the
Company's primary market risk exposures and on an aggregate basis at November
30, 1999 and November 30, 1998, incorporating substantially all financial
instruments generating market risk (including funding liabilities related to
trading positions, retail trading activities and private equity positions).
However, a small proportion of trading positions generating market risk was not
covered, and the modeling of the risk characteristics of some positions involved
approximations which could be significant under certain circumstances. Market
risks that are in the VaR values shown in the following table, but that the
Company has found particularly difficult to model, include certain fixed income
instruments (such as aspects of prepayment behavior of mortgage-backed
securities and credit derivatives price risk), name-specific equity price risk
in private or newly public companies, certain commodity price risks (such as
electricity price risk) and certain liquidity risks.
Since VaR is based on historical data and changes in market risk factor
returns, VaR should not be viewed as predictive of the Company's future
financial performance or its ability to monitor and manage risk, and there can
be no assurance that the Company's actual losses on a particular day will not
exceed the VaR amounts indicated below or that such losses will not occur more
than once in 100 trading days.
99%/ONE-DAY VaR
PRIMARY MARKET RISK CATEGORY AT NOVEMBER 30,
(dollars in millions, pre-tax) 1999 1998(1)
- --------------------------------------------------------------------
Interest rate $33 $28
Equity price 32 17
Foreign exchange rate 3 5
Commodity price 16 6
- --------------------------------------------------------------------
Subtotal 84 56
Less diversification benefit(2) 33 18
- --------------------------------------------------------------------
Aggregate Value-at-Risk $51 $38
- --------------------------------------------------------------------
(1) The Interest rate Value-at-Risk for fiscal 1998 has been restated to
reflect the estimated impact of enhancements to the Company's VaR model
made during fiscal 1999 described above.
(2) Equals the difference between Aggregate VaR and the sum of the VaRs for
the four risk categories. This benefit arises because the simulated
99%/one-day losses for each of the four primary market risk categories
occur on different days; similar diversification benefits also are
taken into account within each such category.
The change in Interest rate VaR from November 30, 1998 to November 30, 1999
reflected, in part, an increase in certain high-yield and emerging market
interest rate risk positions. The change in Equity price VaR from November 30,
1998 to November 30, 1999 reflected, in part, an increase in the market value of
certain private equity positions, a substantial portion of which was sold by the
Company shortly after the end of the fiscal year. The change in Commodity price
VaR reflected, in part, higher market values of commodities positions arising
from increases in energy prices throughout the year.
In order to facilitate comparisons with other global financial services
firms, the Company notes that its Aggregate VaR at November 30, 1999 for other
confidence levels and time horizons was as follows: $32 million for 95%/one-day
VaR and $151 million for 99%/two-week VaR.
<PAGE>
The table below presents the high, low and average 99%/one-day VaR
over the course of fiscal 1999 for substantially all of the Company's
institutional trading activities. This measure of VaR incorporates most of the
Company's trading-related market risks. Certain market risks included in the
year-end VaR discussed above are excluded from this measure (i.e., equity price
risk in private equity positions and funding liabilities related to trading
positions).
DAILY 99%/ONE-DAY VaR
PRIMARY MARKET RISK CATEGORY FOR FISCAL 1999
(dollars in millions, pre-tax) HIGH LOW AVERAGE
- --------------------------------------------------------------------
Interest rate $62 $17 $29
Equity price 38 14 21
Foreign exchange rate 13 2 5
Commodity price 19 6 11
Aggregate Value-at-Risk $60 $27 $36
- --------------------------------------------------------------------
The histogram below presents the Company's daily 99%/one-day VaR for its
institutional trading activities during fiscal 1999:
Description of Histogram: The horizontal axis of the chart categorizes the 99%/
one-day Value-At-Risk into numerical ranges. The vertical axis of the chart
indicates the number of trading days that VaR fell into a given numerical range.
The histogram shows that distribution of daily 99%/one-day Value-at-Risk during
fiscal year 1999 was:
Value -at - Risk Number of Days
- ------------------------------------------------------------------------------
less than 28 9
- ------------------------------------------------------------------------------
28 - 30 28
- ------------------------------------------------------------------------------
30 - 32 47
- ------------------------------------------------------------------------------
32 - 34 29
- ------------------------------------------------------------------------------
34 - 36 21
- ------------------------------------------------------------------------------
36 - 38 38
- ------------------------------------------------------------------------------
38 - 40 30
- ------------------------------------------------------------------------------
40 - 42 20
- ------------------------------------------------------------------------------
42 - 44 11
- ------------------------------------------------------------------------------
44 - 46 7
- ------------------------------------------------------------------------------
46 - 48 3
- ------------------------------------------------------------------------------
48 - 50 3
- ------------------------------------------------------------------------------
50 - 52 3
- ------------------------------------------------------------------------------
52 - 54 1
- ------------------------------------------------------------------------------
54 - 56 2
- ------------------------------------------------------------------------------
56 - 58 5
- ------------------------------------------------------------------------------
greater than 58 3
- ------------------------------------------------------------------------------
The histogram below shows the distribution of daily revenues during
fiscal 1999 for the Company's institutional trading businesses (net of interest
expense and including commissions and primary revenue credited to the trading
businesses):
Description of Histogram: The horizontal axis of the chart categorizes daily net
revenue of the Institutional Securities Business into numerical ranges. The
vertical axis of the chart indicates the number of trading days that revenue
fell into a given numerical range. The histogram shows that distribution of
daily institutional trading revenue during the fiscal year 1999 was:
Daily Institutional Trading Number of Days
Revenue
- --------------------------------------------------------------------------------
less than 5 4
- --------------------------------------------------------------------------------
less than 5 - less than 2.5 4
- --------------------------------------------------------------------------------
less than 2.5 - 0 2
- --------------------------------------------------------------------------------
0 - 2.5 3
- --------------------------------------------------------------------------------
2.5 - 5 7
- --------------------------------------------------------------------------------
5 - 7.5 9
- --------------------------------------------------------------------------------
7.5 - 10 6
- --------------------------------------------------------------------------------
10 - 12.5 6
- --------------------------------------------------------------------------------
12.5 - 15 13
- --------------------------------------------------------------------------------
15 - 17.5 11
- --------------------------------------------------------------------------------
17.5 - 20 13
- --------------------------------------------------------------------------------
20 - 22.5 13
- --------------------------------------------------------------------------------
22.5 - 25 17
- --------------------------------------------------------------------------------
25 - 27.5 23
- --------------------------------------------------------------------------------
27.5 - 30 15
- --------------------------------------------------------------------------------
30 - 32.5 13
- --------------------------------------------------------------------------------
32.5 - 35 20
- --------------------------------------------------------------------------------
35 - 37.5 9
- --------------------------------------------------------------------------------
37.5 - 40 11
- --------------------------------------------------------------------------------
40 - 42.5 10
- --------------------------------------------------------------------------------
42.5 - 45 4
- --------------------------------------------------------------------------------
45 - 47.5 5
- --------------------------------------------------------------------------------
47.5 - 50 7
- --------------------------------------------------------------------------------
50 - 52.5 7
- --------------------------------------------------------------------------------
52.5 - 55 5
- --------------------------------------------------------------------------------
55 - 57.5 4
- --------------------------------------------------------------------------------
57.5 - 60 2
- --------------------------------------------------------------------------------
greater than 60 14
- --------------------------------------------------------------------------------
The Company evaluates the reasonableness of its VaR model by comparing
the potential declines in portfolio values generated by the model with actual
trading results. There were no days during fiscal 1999 in which the Company
incurred daily mark-to-market losses (trading revenue net of interest income and
expense and excluding commissions and primary revenue credited to the trading
businesses) in its institutional trading business in excess of the 99%/one-day
VaR which incorporates the enhancements to the Company's VaR model made during
fiscal 1999.
CONSUMER LENDING AND RELATED ACTIVITIES
Interest Rate Risk and Management
In its consumer lending activities, the Company is exposed to market
risk primarily from changes in interest rates. Such changes in interest rates
impact interest earning assets, principally credit card and other consumer loans
and net servicing fees received in connection with consumer loans sold through
asset securitizations, as well as the interest-sensitive liabilities which
finance these assets, including asset securitizations, commercial paper,
medium-term notes, long-term borrowings, deposits, asset-backed commercial
paper, Federal Funds and short-term bank notes.
The Company's interest rate risk management policies are designed to
reduce the potential volatility of earnings which may arise from changes in
interest rates. This is accomplished primarily by matching the repricing of
credit card and consumer loans and the related financing. To the extent that
asset and related financing repricing characteristics of a particular portfolio
are not matched effectively, the Company utilizes interest rate derivative
contracts, such as swap, cap and collar agreements, to achieve its matched
financing objectives. Interest rate swap agreements effectively convert the
underlying asset or financing from fixed to variable repricing, from variable to
fixed repricing or, in more limited circumstances, from variable to variable
repricing. Interest rate cap agreements effectively establish a maximum interest
rate on certain variable rate financings. Interest rate collar agreements
effectively establish a range of interest rates on certain variable rate
financings.
Sensitivity Analysis Methodology, Assumptions and Limitations
For its consumer lending activities, the Company uses a variety of techniques to
assess its interest rate risk exposure, one of which is interest rate
sensitivity simulation. For purposes of presenting the possible earnings effect
of a hypothetical, adverse change in
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<PAGE>
Page 52
interest rates over the 12-month period from its fiscal year-end, the Company
assumes that all interest rate sensitive assets and liabilities will be impacted
by a hypothetical, immediate 100-basis-point increase in interest rates as of
the beginning of the period.
Interest rate sensitive assets are assumed to be those for which the
stated interest rate is not contractually fixed for the next 12-month period. In
fiscal 1999, a substantial portion of the Company's credit card receivables was
repriced to a fixed interest rate, although the Company has the right, with
notice to cardmembers, to reprice the receivables to a new fixed interest rate.
The Company considers such receivables to be interest rate sensitive, consistent
with its policy of matching the repricing of its credit card receivables and the
related financing. The Company measured the earnings sensitivity for these
assets from the expected repricing date, which takes into consideration the
required notice period and billing cycles. In addition, assets which have a
market-based index, such as the prime rate, which will reset before the end of
the 12-month period, or assets with rates that are fixed at fiscal year-end but
which will mature, or otherwise contractually reset to a market-based indexed or
other fixed rate prior to the end of the 12-month period, are rate-sensitive.
The latter category includes certain credit card loans which may be offered at
below-market rates for an introductory period, such as for balance transfers and
special promotional programs, after which the loans will contractually reprice
in accordance with the Company's normal market-based pricing structure. For
purposes of measuring rate-sensitivity for such loans, only the effect of the
hypothetical 100-basis-point change in the underlying market-based indexed or
other fixed rate has been considered rather than the full change in the rate to
which the loan would contractually reprice. For assets which have a fixed rate
at fiscal year-end but which contractually will, or are assumed to, reset to a
market-based indexed or other fixed rate during the next 12 months, earnings
sensitivity is measured from the expected repricing date. In addition, for all
interest rate sensitive assets, earnings sensitivity is calculated net of
expected loan losses.
Interest rate sensitive liabilities are assumed to be those for which
the stated interest rate is not contractually fixed for the next 12-month
period. Thus, liabilities which have a market-based index, such as the prime,
commercial paper, or LIBOR rates, which will reset before the end of the
12-month period, or liabilities whose rates are fixed at fiscal year-end but
which will mature and be replaced with a market-based indexed rate prior to the
end of the 12-month period, are rate-sensitive. For liabilities which have a
fixed rate at fiscal year-end, but which are assumed to reset to a market-based
index during the next 12 months, earnings sensitivity is measured from the
expected repricing date.
Assuming a hypothetical, immediate 100-basis-point increase in the
interest rates affecting all interest rate sensitive assets and liabilities as
of November 30, 1999, it is estimated that the pre-tax income of consumer
lending and related activities over the following 12-month period would be
reduced by approximately $10 million. The comparable reduction of pre-tax income
for the 12-month period following November 30, 1998 was estimated to be
approximately $65 million. The decrease at November 30, 1999 as compared with
the prior year was primarily the result of the Company's consumer loan repricing
actions made during fiscal 1999 and the related impact of the funding supporting
the Company's consumer loans.
The hypothetical model assumes that the balances of interest rate
sensitive assets and liabilities at fiscal year-end will remain constant over
the next 12-month period. It does not assume any growth, strategic change in
business focus, change in asset pricing philosophy or change in asset/liability
funding mix. Thus, this model represents a static analysis which cannot
adequately portray how the Company would respond to significant changes in
market conditions. Furthermore, the analysis does not necessarily reflect the
Company's expectations regarding the movement of interest rates in the near
term, including the likelihood of an immediate 100-basis-point change in market
interest rates nor necessarily the actual effect on earnings if such rate
changes were to occur.
CREDIT RISK
The Company's exposure to credit risk arises from the possibility that a
customer or counterparty to a transaction might fail to perform under its
contractual commitment, which could result in the Company incurring losses. With
respect to its institutional securities activities, the Company has credit
guidelines which limit the Company's current and potential credit exposure to
any one counterparty and to each type of counterparty (by rating category). The
Credit Department that is responsible for the Company's institutional securities
activities administers and monitors these credit limits on a worldwide basis. In
addition to monitoring credit limits, the Company manages the credit exposure
relating to its trading activities by reviewing periodically counterparty
financial soundness, by entering into master netting agreements and collateral
arrangements with counterparties in appropriate circumstances, and by limiting
the duration of exposure. In certain cases, the Company also may close out
transactions, assign them to other
<PAGE>
counterparties or purchase credit protection to mitigate credit risk. With
respect to the leveraged lending business, the Leveraged Financing Commitment
Committee, which is composed of senior managers from various departments within
the Company, including the Credit Department, reviews each leveraged loan
request.
With respect to its consumer lending activities, potential credit card
holders undergo credit reviews by the Credit Department of Discover Financial
Services to establish that they meet standards of ability and willingness to
pay. Credit card applications are evaluated using scoring models (statistical
evaluation models) based on information obtained from credit bureaus. The
Company's credit scoring systems include both industry and customized models
using the Company's criteria and historical data. Each cardmember's credit line
is reviewed at least annually, and actions resulting from such review may
include raising or lowering a cardmember's credit line or closing the account.
In addition, the Company, on a portfolio basis, performs monthly monitoring and
review of consumer behavior and risk profiles. The Company also reviews the
creditworthiness of prospective Discover/NOVUS Network merchants and conducts
annual reviews of merchants, with the greatest scrutiny given to merchants with
substantial sales volume.
The Company is subject to concentration risk by holding large positions
in certain types of securities or commitments to purchase securities of a single
issuer, including sovereign governments and other entities, issuers located in a
particular country or geographic area, public and private issuers involving
developing countries or issuers engaged in a particular industry (see Note 9 to
the consolidated financial statements).
OPERATIONAL RISK
Operational risk refers generally to the risk of loss resulting from the
Company's operations, including, but not limited to, improper or unauthorized
execution and processing of transactions, deficiencies in the Company's
operating systems, and inadequacies or breaches in the Company's control
processes. The Company operates different businesses in diverse markets and is
reliant on the ability of its employees and systems to process high numbers of
transactions. These transactions may cross multiple markets and involve
different currencies. In the event of a breakdown or improper operation of
systems or improper action by employees, the Company could suffer financial
loss, regulatory sanctions and damage to its reputation.
In order to mitigate and control operational risk, the Company has
developed and continues to enhance specific policies and procedures that are
designed to identify and manage operational risk at appropriate levels. For
example, the Company's securities business has procedures that require that all
transactions are accurately recorded and properly reflected in the Company's
books and records and are confirmed on a timely basis; that position valuations
are subject to periodic independent review procedures; and that collateral and
adequate documentation (e.g., master agreements) are obtained from
counterparties in appropriate circumstances. With respect to its consumer
lending activities, the Company manages operational risk through its system of
internal controls which provides checks and balances to ensure that transactions
and other account-related activity (e.g., new account solicitation, transaction
authorization and processing, billing and collection of delinquent accounts) are
properly approved, processed, recorded and reconciled. Disaster recovery plans
are in place for critical systems on a Company-wide basis, and redundancies are
built into the systems as deemed appropriate. The Company also uses periodic
self-assessments and Internal Audit reviews as a further check on operational
risk.
<PAGE>
LEGAL RISK
Legal risk includes the risk of non-compliance with applicable legal and
regulatory requirements and the risk that a counterparty's performance
obligations will be unenforceable. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts its business. The
Company has established procedures based on legal and regulatory requirements on
a worldwide basis that are designed to ensure compliance with all applicable
statutory and regulatory requirements. The Company, principally through the Law,
Compliance and Governmental Affairs Department, also has established procedures
that are designed to ensure that senior management's policies relating to
conduct, ethics and business practices are followed globally. In connection with
its business, the Company has various procedures addressing issues, such as
regulatory capital requirements, sales and trading practices, new products, use
and safekeeping of customer funds and securities, credit granting, collection
activities, money-laundering and recordkeeping. The Company also has established
procedures to mitigate the risk that a counterparty's performance obligations
will be unenforceable, including consideration of counterparty legal authority
and capacity, adequacy of legal documentation, the permissibility of a
transaction under applicable law and whether applicable bankruptcy or insolvency
laws limit or alter contractual remedies.
Page 53
<PAGE>
Exhibit 13.5
report of independent auditors
99 AR: page 54
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MORGAN STANLEY DEAN
WITTER & CO.
We have audited the accompanying consolidated statements of financial condition
of Morgan Stanley Dean Witter & Co. and subsidiaries as of fiscal years ended
November 30, 1999 and 1998, and the related consolidated statements of income,
comprehensive income, cash flows and changes in shareholders' equity for each of
the three fiscal years in the period ended November 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements
present fairly, in all material respects, the consolidated financial position of
Morgan Stanley Dean Witter & Co. and subsidiaries at fiscal years ended November
30, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three fiscal years in the period ended November 30,
1999, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in
fiscal 1998, Morgan Stanley Dean Witter & Co. changed its method of accounting
for certain offering costs of closed-end funds.
/s/ Deloitte & Touche LLP
New York, New York
January 21, 2000
<PAGE>
consolidated statements of financial condition
<TABLE>
<CAPTION>
(dollars in millions, except share data) NOVEMBER 30, 1999 NOVEMBER 30, 1998
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 12,325 $ 16,878
Cash and securities deposited with clearing organizations or
segregated under federal and other regulations (including
securities at fair value of $6,925 at November 30, 1999
and $7,518 at November 30, 1998) 9,713 10,531
Financial instruments owned:
U.S. government and agency securities 25,646 12,350
Other sovereign government obligations 17,522 15,050
Corporate and other debt 30,443 22,388
Corporate equities 14,843 14,289
Derivative contracts 22,769 21,442
Physical commodities 819 416
Securities purchased under agreements to resell 70,366 79,570
Receivable for securities provided as collateral 9,007 4,388
Securities borrowed 85,064 69,338
Receivables:
Consumer loans (net of allowances of $769 at November 30, 1999
and $787 at November 30, 1998) 20,229 15,209
Customers, net 29,299 18,785
Brokers, dealers and clearing organizations 2,252 4,432
Fees, interest and other 5,371 3,359
Office facilities, at cost (less accumulated depreciation and amortization of
$1,667 at November 30, 1999 and $1,375 at
November 30, 1998) 2,204 1,834
Other assets 9,095 7,331
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $366,967 $317,590
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
page 55
<PAGE>
99 AR: page 56
<TABLE>
<CAPTION>
(dollars in millions, except share data) NOVEMBER 30, 1999 NOVEMBER 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and other short-term borrowings $ 38,242 $ 28,137
Deposits 10,397 8,197
Financial instruments sold, not yet purchased:
U.S. government and agency securities 12,285 11,305
Other sovereign government obligations 7,812 13,899
Corporate and other debt 2,322 3,093
Corporate equities 15,402 11,501
Derivative contracts 23,228 21,198
Physical commodities 919 348
Securities sold under agreements to repurchase 104,450 92,327
Obligation to return securities received as collateral 14,729 6,636
Securities loaned 30,080 23,152
Payables:
Customers 45,775 40,606
Brokers, dealers and clearing organizations 1,335 5,244
Interest and dividends 2,951 371
Other liabilities and accrued expenses 10,439 8,623
Long-term borrowings 28,604 27,435
- -----------------------------------------------------------------------------------------------------------------------------------
348,970 302,072
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Units 583 999
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Securities Issued by Subsidiaries 400 400
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock 670 674
Common stock(1)($0.01 par value, 1,750,000,000 shares
authorized, 1,211,685,904 and 1,211,685,904 shares issued,
1,104,630,098 and 1,131,341,616 shares outstanding at
November 30, 1999 and November 30, 1998) 12 12
Paid-in capital(1) 3,836 3,740
Retained earnings 16,285 12,080
Employee stock trust 2,426 1,913
Cumulative translation adjustments (27) (12)
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 23,202 18,407
Note receivable related to sale of preferred stock to ESOP (55) (60)
Common stock held in treasury, at cost(1)($0.01 par value, 107,055,806 and
80,344,288 shares at November 30, 1999
and November 30, 1998) (4,355) (2,702)
Common stock issued to employee trust (1,778) (1,526)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 17,014 14,119
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 366,967 $ 317,590
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 2000.
See Notes to Consolidated Financial Statements.
<PAGE>
consolidated statements of income
<TABLE>
<CAPTION>
fiscal year (dollars in millions, except share and per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Investment banking $ 4,523 $ 3,340 $ 2,694
Principal transactions:
Trading 5,983 3,283 3,191
Investments 725 89 463
Commissions 2,921 2,321 2,066
Fees:
Asset management, distribution and administration 3,170 2,889 2,525
Merchant and cardmember 1,492 1,647 1,704
Servicing 1,194 928 762
Interest and dividends 13,755 16,436 13,583
Other 165 198 144
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 33,928 31,131 27,132
Interest expense 11,390 13,514 10,806
Provision for consumer loan losses 529 1,173 1,493
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues 22,009 16,444 14,833
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 8,398 6,636 6,019
Occupancy and equipment 643 583 526
Brokerage, clearing and exchange fees 485 552 460
Information processing and communications 1,325 1,140 1,080
Marketing and business development 1,679 1,411 1,179
Professional services 836 677 451
Other 915 745 770
Merger-related expenses -- -- 74
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 14,281 11,744 10,559
- -----------------------------------------------------------------------------------------------------------------------------------
Gain on sale of businesses -- 685 --
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting change 7,728 5,385 4,274
Provision for income taxes 2,937 1,992 1,688
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 4,791 3,393 2,586
Cumulative effect of accounting change -- (117) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,791 $ 3,276 $ 2,586
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividend requirements $ 44 $ 55 $ 66
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings applicable to common shares(1) $ 4,747 $ 3,221 $ 2,520
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share(2):
Basic before cumulative effect of accounting change $ 4.33 $ 2.90 $ 2.19
Cumulative effect of accounting change -- (0.10) --
- -----------------------------------------------------------------------------------------------------------------------------------
Basic $ 4.33 $ 2.80 $ 2.19
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted before cumulative effect of accounting change $ 4.10 $ 2.76 $ 2.08
Cumulative effect of accounting change -- (0.09) --
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted $ 4.10 $ 2.67 $ 2.08
- -----------------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding(2):
Basic 1,096,789,720 1,151,645,450 1,149,636,466
Diluted 1,159,500,670 1,212,588,130 1,212,612,950
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts shown are used to calculate basic earnings per common share.
(2) Amounts have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 2000.
See Notes to Consolidated Financial Statements.
page 57
<PAGE>
consolidated statements of comprehensive income
99 AR: page 58
<TABLE>
<CAPTION>
fiscal year (dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 4,791 $ 3,276 $ 2,586
Other comprehensive income, net of tax:
Foreign currency translation adjustment (15) (3) 2
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 4,776 $ 3,273 $ 2,588
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
consolidated statements of cash flows
<TABLE>
<CAPTION>
fiscal year (dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 4,791 $ 3,276 $ 2,586
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Non-cash charges included in net income:
Cumulative effect of accounting change -- 117 --
Gain on sale of businesses -- (685) --
Deferred income taxes (160) (55) (77)
Compensation payable in common or preferred stock 675 334 374
Depreciation and amortization 541 575 338
Provision for consumer loan losses 529 1,173 1,493
Changes in assets and liabilities:
Cash and securities deposited with clearing organizations or
segregated under federal and other regulations 839 (3,641) (1,691)
Financial instruments owned, net of financial instruments sold,
not yet purchased (22,081) 11,127 1,730
Securities borrowed, net of securities loaned (8,798) (5,061) (10,561)
Receivables and other assets (11,276) 2,114 (13,808)
Payables and other liabilities 5,669 6,095 19,058
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by operating activities (29,271) 15,369 (558)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (payments for) proceeds from:
Office facilities (656) (358) (301)
Sale of businesses, net of disposal costs -- 1,399 --
Purchase of AB Asesores, net of cash acquired (223) -- --
Net principal disbursed on consumer loans (8,769) (2,314) (4,994)
Purchases of consumer loans -- -- (11)
Sales of consumer loans 2,997 4,466 2,783
Other investing activities -- -- (5)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (6,651) 3,193 (2,528)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for) short-term borrowings 9,994 5,620 (1,336)
Securities sold under agreements to repurchase, net of securities
purchased under agreements to resell 21,327 (14,407) 3,080
Net proceeds from (payments for):
Deposits 2,200 (796) 2,113
Issuance of common stock 270 186 194
Issuance of put options 9 -- --
Issuance of long-term borrowings 7,552 9,771 6,619
Issuance of Preferred Securities Issued by Subsidiaries -- 400 --
Issuance of Capital Units -- -- 134
Payments for:
Repayments of long-term borrowings (6,618) (7,069) (3,964)
Redemption of cumulative preferred stock -- (200) (345)
Redemption of Capital Units (416) -- --
Repurchases of common stock (2,374) (2,925) (124)
Cash dividends (575) (519) (416)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 31,369 (9,939) 5,955
- --------------------------------------------------------------------------------------------------------------------------
Dean Witter, Discover & Co.'s net cash activity for the month of
December 1996 -- -- (1,158)
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,553) 8,623 1,711
Cash and cash equivalents, at beginning of period 16,878 8,255 6,544
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $ 12,325 $ 16,878 $ 8,255
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
page 59
<PAGE>
consolidated statements of
changes in shareholders' equity
99 AR: page 60
<TABLE>
<CAPTION>
EMPLOYEE
PREFERRED COMMON PAID-IN RETAINED STOCK
(dollars in millions) STOCK STOCK(1) CAPITAL(1) EARNINGS TRUST
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FISCAL
YEAR-END 1996 $1,223 $12 $3,583 $7,477 $1,495
Net income -- -- -- 2,586 --
Dividends -- -- -- (387) --
Redemption of 8.88%
Cumulative Preferred
Stock (195) -- -- -- --
Redemption of 8-3/4%
Cumulative Preferred
Stock (150) -- -- -- --
Conversion of ESOP
Preferred Stock (2) -- (1) -- --
Issuance of common stock -- -- (22) -- --
Repurchases of common
stock -- -- -- -- --
Compensation payable in
common stock -- -- 243 -- 186
ESOP shares allocated,
at cost -- -- -- -- --
Retirement of treasury stock -- -- (6) (265) --
Translation adjustments -- -- -- -- --
Issuance of common stock
in connection with
Discover Brokerage Direct
acquisition -- -- 14 -- --
Adjustment for change in
Dean Witter Discover's
year-end -- -- (90) (81) --
- ------------------------------------------------------------------------------------------
BALANCE AT
NOVEMBER 30, 1997 $876 $12 $3,721 $9,330 $1,681
Net income -- -- -- 3,276 --
Dividends -- -- -- (526) --
Redemption of 7-3/8%
Cumulative Preferred Stock (200) -- -- -- --
Conversion of ESOP
Preferred Stock (2) -- (12) -- --
Issuance of common stock -- -- (210) -- --
Repurchases of common
stock -- -- -- -- --
Compensation payable in
common stock -- -- 241 -- 232
ESOP shares allocated,
at cost -- -- -- -- --
Translation adjustments -- -- -- -- --
- ------------------------------------------------------------------------------------------
<CAPTION>
NOTE
RECEIVABLE COMMON COMMON
RELATED TO STOCK STOCK
SALE OF HELD ISSUED
CUMULATIVE PREFERRED IN TO
TRANSLATION STOCK TO TREASURY, EMPLOYEE
(dollars in millions) ADJUSTMENTS ESOP AT COST TRUST TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FISCAL
YEAR-END 1996 $(11) $(78) $(1,005) $(994) $11,702
Net income -- -- -- -- 2,586
Dividends -- -- -- -- (387)
Redemption of 8.88%
Cumulative Preferred
Stock -- -- -- -- (195)
Redemption of 8-3/4%
Cumulative Preferred
Stock -- -- -- -- (150)
Conversion of ESOP
Preferred Stock -- -- 3 -- --
Issuance of common stock -- -- 246 -- 224
Repurchases of common
stock -- -- (124) -- (124)
Compensation payable in
common stock -- -- 278 (343) 364
ESOP shares allocated,
at cost -- 10 -- -- 10
Retirement of treasury stock -- -- 271 -- --
Translation adjustments 2 -- -- -- 2
Issuance of common stock
in connection with
Discover Brokerage Direct
acquisition -- -- 49 -- 63
Adjustment for change in
Dean Witter Discover's
year-end -- -- 32 -- (139)
- ------------------------------------------------------------------------------------------
BALANCE AT
NOVEMBER 30, 1997 $(9) $(68) $(250) $(1,337) $13,956
Net income -- -- -- -- 3,276
Dividends -- -- -- -- (526)
Redemption of 7-3/8%
Cumulative Preferred Stock -- -- -- -- (200)
Conversion of ESOP
Preferred Stock -- -- 14 -- --
Issuance of common stock -- -- 417 -- 207
Repurchases of common
stock -- -- (2,925) -- (2,925)
Compensation payable in
common stock -- -- 42 (189) 326
ESOP shares allocated,
at cost -- 8 -- -- 8
Translation adjustments (3) -- -- -- (3)
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMPLOYEE
PREFERRED COMMON PAID-IN RETAINED STOCK
(dollars in millions) STOCK STOCK(1) CAPITAL(1) EARNINGS TRUST
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
NOVEMBER 30, 1998 $674 $12 $3,740 $12,080 $1,913
Net income -- -- -- 4,791 --
Dividends -- -- -- (586) --
Conversion of ESOP
Preferred Stock (4) -- (18) -- --
Issuance of common stock -- -- (134) -- --
Repurchases of common
stock -- -- -- -- --
Compensation payable in
common stock -- -- 223 -- 513
ESOP shares allocated,
at cost -- -- -- -- --
Issuance of common stock
in connection with
AB Asesores acquisition -- -- 16 -- --
Issuance of put options -- -- 9 -- --
Translation adjustments -- -- -- -- --
- ------------------------------------------------------------------------------------------
BALANCE AT
NOVEMBER 30, 1999 $670 $12 $3,836 $16,285 $2,426
- ------------------------------------------------------------------------------------------
<CAPTION>
NOTE
RECEIVABLE COMMON COMMON
RELATED TO STOCK STOCK
SALE OF HELD ISSUED
CUMULATIVE PREFERRED IN TO
TRANSLATION STOCK TO TREASURY, EMPLOYEE
(dollars in millions) ADJUSTMENTS ESOP AT COST TRUST TOTAL
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT
NOVEMBER 30, 1998 $(12) $(60) $(2,702) $(1,526) $14,119
Net income -- -- -- -- 4,791
Dividends -- -- -- -- (586)
Conversion of ESOP
Preferred Stock -- -- 22 -- --
Issuance of common stock -- -- 465 -- 331
Repurchases of common
stock -- -- (2,374) -- (2,374)
Compensation payable in
common stock -- -- 186 (252) 670
ESOP shares allocated,
at cost -- 5 -- -- 5
Issuance of common stock
in connection with
AB Asesores acquisition -- -- 48 -- 64
Issuance of put options -- -- -- -- 9
Translation adjustments (15) -- -- -- (15)
- ------------------------------------------------------------------------------------------
BALANCE AT
NOVEMBER 30, 1999 $(27) $(55) $(4,355) $(1,778) $17,014
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 2000.
See Notes to Consolidated Financial Statements.
page 61
<PAGE>
notes to consolidated financial statements
99 AR: page 62
1 INTRODUCTION AND BASIS OF PRESENTATION
THE COMPANY
Morgan Stanley Dean Witter & Co. (the "Company") is a pre-eminent global
financial services firm that maintains leading market positions in each of its
three business segments -- Securities, Asset Management and Credit Services. Its
Securities business includes securities underwriting, distribution and trading;
merger, acquisition, restructuring, real estate, project finance and other
corporate finance advisory activities; full-service and online brokerage
services; research services; the trading of foreign exchange and commodities, as
well as derivatives on a broad range of asset categories, rates and indices;
securities lending; and private equity activities. The Company's Asset
Management business provides global asset management advice and services to
investors through a variety of product lines and brand names, including Morgan
Stanley Dean Witter Advisors, Van Kampen Investments, Morgan Stanley Dean Witter
Investment Management and Miller Anderson & Sherrerd. The Company's Credit
Services business includes the issuance of the Discover(R) Card and the Morgan
Stanley Dean Witter (SM) Card; and the operation of the Discover/NOVUS(R)
Network, a proprietary network of merchant and cash access locations.
The consolidated financial statements include the accounts of the
Company and its U.S. and international subsidiaries, including Morgan
Stanley & Co. Incorporated ("MS&Co."), Morgan Stanley & Co. International
Limited ("MSIL"), Morgan Stanley Dean Witter Japan Limited ("MSDWJL"), Dean
Witter Reynolds Inc. ("DWR"), Morgan Stanley Dean Witter Advisors Inc. and
NOVUS Credit Services Inc.
BASIS OF FINANCIAL INFORMATION
The consolidated financial statements give retroactive effect to the May 1997
merger of Morgan Stanley Group Inc. ("Morgan Stanley") with and into Dean
Witter, Discover & Co. ("Dean Witter Discover"), which was accounted for as a
pooling of interests. The pooling of interests method of accounting requires the
restatement of all periods presented as if Dean Witter Discover and Morgan
Stanley had always been combined. The consolidated statement of changes in
shareholders' equity reflects the accounts of the Company as if the preferred
and additional common stock issued in connection with the merger had been issued
during all of the periods presented.
Prior to the consummation of the merger, Dean Witter Discover's year
ended on December 31 and Morgan Stanley's fiscal year ended on November 30.
Subsequent to the merger, the Company adopted a fiscal year-end of November 30.
The Company's results for the 12 months ended November 30, 1999 ("fiscal 1999"),
November 30, 1998 ("fiscal 1998") and November 30, 1997 ("fiscal 1997") reflect
the change in fiscal year-end. Fiscal 1997 includes the results of Dean Witter
Discover that were restated to conform with the new fiscal year-end date.
The 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 consolidated financial statements and related disclosures.
Management believes that the estimates utilized in the preparation of the
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 inter-company balances and
transactions have been eliminated.
STOCK SPLIT
On December 20, 1999, the Company declared a two-for-one common stock split,
effected in the form of a 100% stock dividend, payable to shareholders of record
on January 12, 2000 and distributable on January 26, 2000. All share, per share
and shareholders' equity data have been retroactively restated to reflect this
split.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of these statements, cash and cash equivalents consist of cash and
highly liquid investments not held for resale with maturities, when purchased,
of three months or less.
In connection with the fiscal 1999 purchase of AB Asesores, the Company
issued 1.4 million shares of common stock having a fair value on the date of
acquisition of $64 million. In connection with the fiscal 1997 purchase of
Morgan Stanley Dean Witter Online (formerly Discover Brokerage Direct, Inc.),
the Company issued 3.8 million shares of common stock having a fair value on the
date of acquisition of approximately $63 million.
<PAGE>
CONSUMER LOANS
Consumer loans, which consist primarily of credit card and consumer installment
loans, are reported at their principal amounts outstanding, less applicable
allowances. Interest on consumer loans is credited to income as earned.
Interest is accrued on credit card loans until the date of charge-off,
which generally occurs at the end of the month during which an account becomes
180 days past due, except in the case of bankruptcies and fraudulent
transactions, which are charged off earlier. The interest portion of charged-off
credit card loans is written off against interest revenue. Origination costs
related to the issuance of credit cards are charged to earnings over periods not
exceeding 12 months.
ALLOWANCE FOR CONSUMER LOAN LOSSES
The allowance for consumer loan losses is a significant estimate that is
regularly evaluated by management for adequacy and is established through a
charge to the provision for loan losses. The evaluations take into consideration
factors such as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrower's ability to pay.
The Company uses the results of these evaluations to provide an
allowance for loan losses. The exposure for credit losses for owned loans is
influenced by the performance of the portfolio and other factors discussed
above, with the Company absorbing all related losses.
SECURITIZATION OF CONSUMER LOANS
The Company periodically sells consumer loans through asset securitizations and
continues to service these loans. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"), the
present value of the future net servicing revenues which the Company estimates
that it will receive over the term of the securitized loans is recognized in
income as the loans are securitized. A corresponding asset also is recorded and
then amortized as a charge to income over the term of the securitized loans,
with actual net servicing revenues continuing to be recognized in income as they
are earned. The impact of recognizing the present value of estimated future net
servicing revenues as loans are securitized has not been material to the
Company's consolidated statements of income. The exposure for credit losses for
securitized loans is limited to the Company's retained contingent risk, which
represents the Company's retained interest in securitized loans and any credit
enhancement provided.
FINANCIAL INSTRUMENTS USED FOR TRADING AND INVESTMENT
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 consolidated statements of income as interest and dividend
revenue or interest expense. The fair values of the trading positions generally
are based on listed market prices. If listed market prices are not available or
if liquidating the Company's positions would reasonably be expected to impact
market prices, fair value is determined based on other relevant factors,
including dealer price quotations and price quotations for similar instruments
traded in different markets, including markets located in different geographic
areas. Fair values for certain derivative contracts are derived from pricing
models which consider current market and contractual prices for the underlying
financial instruments or commodities, as well as time value and yield curve or
volatility factors underlying the positions. Purchases and sales of financial
instruments are recorded in the accounts on trade date. Unrealized gains and
losses arising from the Company's dealings in over-the-counter ("OTC") financial
instruments, including derivative contracts related to financial instruments and
commodities, are presented in the accompanying 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 initially are carried in the 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
page 63
<PAGE>
99 AR: page 64
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.
FINANCIAL INSTRUMENTS USED FOR ASSET AND
LIABILITY MANAGEMENT
The Company has entered into various contracts as hedges against specific
assets, liabilities or anticipated transactions. These contracts include
interest rate swaps, foreign exchange forwards and foreign currency swaps. The
Company uses interest rate and currency swaps to manage the interest rate and
currency exposure arising from certain borrowings and to match the repricing
characteristics of consumer loans with those of the borrowings that fund these
loans. For contracts that are designated as hedges of the Company's assets and
liabilities, gains and losses are deferred and recognized as adjustments to
interest revenue or expense over the remaining life of the underlying assets or
liabilities. For contracts that are hedges of asset securitizations, gains and
losses are recognized as adjustments to servicing fees. Gains and losses
resulting from the termination of hedge contracts prior to their stated maturity
are recognized ratably over the remaining life of the instrument being hedged.
The Company also uses foreign exchange forward contracts to manage the currency
exposure relating to its net monetary investment in non-U.S. dollar functional
currency operations. The gain or loss from revaluing these contracts is deferred
and reported within cumulative translation adjustments in shareholders' equity,
net of tax effects, with the related unrealized amounts due from or to
counterparties included in receivables from or payables to brokers, dealers and
clearing organizations.
SECURITIES TRANSACTIONS
Clients' securities transactions are recorded on a settlement date basis with
related commission revenues and expenses recorded on the trade date. Securities
purchased under agreements to resell ("reverse repurchase agreements") and
securities sold under agreements to repurchase ("repurchase agreements"),
principally government and agency securities, are treated as financing
transactions and are carried at the amounts at which the securities subsequently
will be resold or reacquired as specified in the respective agreements; such
amounts include accrued interest. Reverse repurchase and repurchase agreements
are presented on a net-by-counterparty basis, when appropriate. It is the
Company's policy to take possession of securities purchased under agreements to
resell. The Company monitors the fair value of the underlying securities as
compared with the related receivable or payable, including accrued interest,
and, as necessary, requests additional collateral. Where deemed appropriate, the
Company's agreements with third parties specify its rights to request additional
collateral.
Securities borrowed and securities loaned are carried at the amounts of
cash collateral advanced and received in connection with the transactions. The
Company measures the fair value of the securities borrowed and loaned against
the collateral on a daily basis. Additional collateral is obtained as necessary
to ensure such transactions are adequately collateralized.
Collateral received under securities financing transactions, such as
reverse repurchase agreements, is recognized, together with a corresponding
obligation to return the collateral, if the collateral provider does not have
the contractual right to substitute collateral or redeem collateral on short
notice. Collateral transferred under securities financing transactions, such as
repurchase agreements, is reclassified from financial instruments owned to
receivable for securities provided as collateral if the Company does not have
the contractual right to substitute collateral or redeem collateral on short
notice. At November 30, 1999 and 1998, the Company recorded obligations to
return securities received as collateral of $14,729 million and $6,636 million,
respectively. The related assets received as collateral were recorded among
several captions included in the Company's consolidated statements of financial
condition. At November 30, 1999 and 1998, after giving
<PAGE>
effect to reclassifications, the net increase in total assets and total
liabilities was $10,256 million and $2,089 million, respectively.
INVESTMENT BANKING
Underwriting revenues and fees for mergers and acquisitions and advisory
assignments are recorded when services for the transaction are substantially
completed. Transaction-related expenses are deferred and later expensed to match
revenue recognition.
OFFICE FACILITIES
Office facilities are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of buildings and leasehold
improvements are provided principally by the straight-line method, while
depreciation and amortization of furniture, fixtures and equipment are provided
by both straight-line and accelerated methods. Property and equipment are
depreciated over the estimated useful lives of the related assets, while
leasehold improvements are amortized over the lesser of the economic useful life
of the asset or, where applicable, the remaining term of the lease.
INCOME TAXES
Income tax expense is provided for using the asset and liability method, under
which deferred tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income tax bases of
assets and liabilities, using currently enacted tax rates.
EARNINGS PER SHARE
The calculations of earnings per common share are based on the weighted average
number of common shares and share equivalents outstanding and give effect to
preferred stock dividend requirements.
As of December 1, 1997, the Company adopted SFAS No. 128, "Earnings per
Share" ("SFAS No. 128"). SFAS No. 128 replaced the previous earnings per share
("EPS") categories of primary and fully diluted with "basic EPS," which reflects
no dilution from common stock equivalents, and "diluted EPS," which reflects
dilution from common stock equivalents and other dilutive securities based on
the average price per share of the Company's common stock during the period. The
EPS amounts of prior periods have been restated in accordance with SFAS No. 128.
The adoption of SFAS No. 128 has not had a material effect on the Company's EPS
calculations.
CARDMEMBER REWARDS
Cardmember rewards, primarily the Cashback Bonus(R) award, pursuant to which the
Company annually pays Discover Cardmembers, and Private Issue(R) Cardmembers
electing this feature, a percentage of their purchase amounts ranging up to 1%,
are based upon a cardmember's level of annual purchases. The liability for
cardmember rewards expense, included in other liabilities and accrued expenses,
is accrued at the time that qualified cardmember transactions occur and is
calculated on an individual cardmember basis.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to account
for its stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under the provisions of APB No. 25,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of grant over the
amount an employee must pay to acquire the stock.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations having non-U.S. dollar functional
currencies are translated at year-end rates of exchange, and the income
statements are translated at weighted average rates of exchange for the year. In
accordance with SFAS No. 52, "Foreign Currency Translation," gains or losses
resulting from translating foreign currency financial statements, net of hedge
gains or losses and related tax effects, are reflected in cumulative translation
adjustments, a separate component of shareholders' equity. Gains or losses
resulting from foreign currency transactions are included in net income.
page 65
<PAGE>
99 AR: page 66
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis over
periods from five to 40 years, generally not exceeding 25 years, and are
periodically evaluated for impairment. At November 30, 1999 and 1998, goodwill
and other intangible assets of approximately $1.3 billion and $1.2 billion,
respectively, were included in the Company's consolidated statements of
financial condition as a component of other assets.
ACCOUNTING CHANGE
In the fourth quarter of fiscal 1998, the Company adopted American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), with respect to
the accounting for offering costs paid by investment advisors of closed-end
funds where such costs are not specifically reimbursed through separate advisory
contracts. In accordance with SOP 98-5 and per an announcement by the Financial
Accounting Standards Board ("FASB") staff in September 1998, such costs are to
be considered start-up costs and expensed as incurred. Prior to the adoption of
SOP 98-5, the Company deferred such costs and amortized them over the life of
the fund. The Company recorded a charge to earnings for the cumulative effect of
the accounting change as of December 1, 1997, of $117 million, net of taxes of
$79 million. The effect of adopting these provisions on the Company's income
before the cumulative effect of the accounting change for fiscal year 1998 was a
decrease of $24 million, net of taxes. The effect on basic and diluted earnings
per share was $0.02. The pro forma effect on net income for fiscal 1997 would
not have been material.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements, which are effective for fiscal years beginning
after December 15, 1997, establish standards for the reporting and presentation
of comprehensive income and the disclosure requirements related to segments. The
Company adopted SFAS No. 130 and SFAS No. 131 in fiscal 1999.
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 benefits. The Company adopted SFAS No. 132 in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As issued,
SFAS No. 133 was effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement
No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 for one year to
fiscal years beginning after June 15, 2000. The Company is in the process of
evaluating the impact of adopting SFAS No. 133.
In July 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF
97-14"). Under EITF 97-14, assets of the rabbi trust are to be consolidated with
those of the employer, and the value of the employer's stock held in the rabbi
trust should be classified in shareholders' equity and generally accounted for
in a manner similar to treasury stock. The Company therefore has included its
obligations under certain deferred compensation plans in employee stock trust.
Shares that the Company has issued to the rabbi trusts are recorded in common
stock issued to employee trust. Both employee stock trust and common stock
issued to employee trust are components of shareholders' equity. The adoption of
EITF 97-14 did not result in any change to the Company's consolidated statements
of income, total assets, total liabilities or total shareholders' equity.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is effective
for financial statements for fiscal years beginning after December 15, 1998 and
provides specif-
<PAGE>
ic guidance as to when certain costs incurred in connection with an internal-use
software project should be capitalized and when they should be expensed. The
Company has adopted SOP 98-1 effective December 1, 1999. The adoption of SOP
98-1 is not expected to have a material impact on the Company's consolidated
financial statements.
3 CONSUMER LOANS
Consumer loans were as follows:
(dollars in millions) NOV. 30, 1999 NOV. 30, 1998
- ---------------------------------------------------------------------
Credit card and consumer installment $20,998 $15,996
Less:
Allowance for loan losses 769 787
- ---------------------------------------------------------------------
Consumer loans, net $20,229 $15,209
- ---------------------------------------------------------------------
Activity in the allowance for consumer loan losses was as follows:
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------
Balance beginning of period $ 787 $ 884 $ 781
Additions:
Provision for loan losses 529 1,173 1,493
Purchase of loan portfolios -- 1 --
- ---------------------------------------------------------------------
Total additions 529 1,174 1,493
- ---------------------------------------------------------------------
Deductions:
Charge-offs 893 1,423 1,639
Recoveries (120) (170) (196)
- ---------------------------------------------------------------------
Net charge-offs 773 1,253 1,443
- ---------------------------------------------------------------------
Other(1) 226 (18) 53
- ---------------------------------------------------------------------
Balance end of period $ 769 $ 787 $ 884
- ---------------------------------------------------------------------
(1) These amounts primarily reflect transfers related to asset securitizations
and the fiscal 1998 sale of consumer loans associated with SPS, Prime
Option and BRAVO (see Note 16).
Interest accrued on loans subsequently charged off, recorded as a reduction of
interest revenue, was $116 million, $199 million and $301 million in fiscal
1999, 1998 and 1997, respectively. The amounts charged off in fiscal 1999 and
1998 include only interest, whereas fiscal 1997 also includes cardmember fees.
At November 30, 1999 and 1998, $5,248 million and $3,999 million of the
Company's consumer loans had minimum contractual maturities of less than one
year. Because of the uncertainty regarding consumer loan repayment patterns,
which historically have been higher than contractually required minimum
payments, this amount may not necessarily be indicative of the Company's actual
consumer loan repayments.
At November 30, 1999, the Company had commitments to extend credit in
the amount of $204 billion. Commitments to extend credit arise from agreements
to extend to customers unused lines of credit on certain credit cards, provided
there is no violation of conditions established in the related agreement. These
commitments, substantially all of which the Company can terminate at any time
and which do not necessarily represent future cash requirements, are
periodically reviewed based on account usage and customer creditworthiness.
The Company received net proceeds from asset securitizations of
$2,997 million, $4,466 million and $2,783 million in fiscal 1999, 1998 and
1997, respectively. The uncollected balances of consumer loans sold through
asset securitizations were $16,977 million and $16,506 million at November 30,
1999 and 1998, respectively.
The Company uses interest rate exchange agreements to hedge the risk
from changes in interest rates on servicing fee revenues (which are derived
from loans sold through asset securitizations). Gains and losses from these
agreements are recognized as adjustments to servicing fees.
The estimated fair value of the Company's consumer loans approximated
carrying value at November 30, 1999 and 1998. The Company's consumer loan
portfolio, including securitized loans, is geographically diverse, with a
distribution approximating that of the population of the U.S.
page 67
<PAGE>
99 AR: page 68
4 DEPOSITS
Deposits were as follows:
(dollars in millions) NOV. 30, 1999 NOV. 30, 1998
- ---------------------------------------------------------------------
Demand, passbook and money
market accounts $ 1,458 $1,355
Consumer certificate accounts 1,698 1,635
$100,000 minimum certificate
accounts 7,241 5,207
- ---------------------------------------------------------------------
Total $10,397 $8,197
- ---------------------------------------------------------------------
The weighted average interest rates of interest bearing deposits outstanding
during fiscal 1999 and 1998 were 5.9% and 6.2%, respectively.
At November 30, 1999 and 1998, the notional amounts of interest rate
exchange agreements that hedged deposits outstanding were $473 million and
$650 million and had fair values of $6 million and $15 million, respectively.
Under these interest rate exchange agreements, the Company primarily pays
floating rates and receives fixed rates. At November 30, 1999, the weighted
average interest rate of the Company's deposits, including the effect of
interest rate exchange agreements, was 5.9%.
At November 30, 1999, certificate accounts maturing over the next five
years were as follows:
(dollars in millions)
- ---------------------------------------------------------------------
2000 $2,473
2001 2,706
2002 1,407
2003 1,042
2004 940
- ---------------------------------------------------------------------
The estimated fair value of the Company's deposits, using current rates for
deposits with similar maturities, approximated carrying value at November 30,
1999 and 1998.
5 SHORT-TERM BORROWINGS
At November 30, 1999 and 1998, commercial paper in the amount of $27,072 million
and $19,643 million, with weighted average interest rates of 5.3% for both
years, was outstanding.
At November 30, 1999 and 1998, the notional amounts of interest rate
and currency swaps that hedged commercial paper outstanding were $2,865 million
and $208 million and had fair values of $(3) million and $(6) million. These
contracts had no material effect on the weighted average interest rates of
commercial paper.
At November 30, 1999 and 1998, other short-term borrowings of $11,170
million and $8,494 million were outstanding. These borrowings included bank
loans, Federal Funds and bank notes.
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 $5.5 billion. The MSDW Facility
contains restrictive covenants which require, among other things, that the
Company maintain shareholders' equity of at least $9.1 billion at all times. The
Company believes that the covenant restrictions will not impair the Company's
ability to pay its current level of dividends. At November 30, 1999, no
borrowings were outstanding under the MSDW Facility.
The Company maintains a master collateral facility that enables MS&Co.
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. The credit agreement
contains restrictive covenants which require, among other things, that MS&Co.
maintain specified levels of consolidated shareholder's equity and Net
Capital, as defined. At November 30, 1999, no borrowings were outstanding under
the MS&Co. Facility.
The Company also maintains a revolving committed financing facility
that enables MSIL to secure committed funding from a syndicate of banks by
providing a broad range of collateral under repurchase agreements (the "MSIL
Facility"). Such banks are committed to provide up to an aggregate of $1.91
billion, available in six major currencies. The facility agreement contains
<PAGE>
restrictive covenants which require, among other things, that MSIL maintain
specified levels of Shareholder's Equity and Financial Resources, each as
defined. At November 30, 1999, no borrowings were outstanding under the MSIL
Facility.
On June 7, 1999, MSDWJL, the Company's Tokyo-based broker-dealer
subsidiary, entered into a committed revolving credit facility, guaranteed by
the Company, that provides funding to support general liquidity needs, including
support of MSDWJL's unsecured borrowings (the "MSDWJL Facility"). Under the
terms of the MSDWJL Facility, a syndicate of banks is committed to provide up to
60 billion Japanese yen. At November 30, 1999, no borrowings were outstanding
under the MSDWJL Facility.
Riverwoods Funding Corporation ("RFC"), an entity included in the
consolidated financial statements of the Company, maintains a senior bank
credit facility to support the issuance of asset-backed commercial paper in
the amount of $2.6 billion. Under the terms of the asset-backed commercial
paper program, certain assets of RFC were subject to a lien in the amount
of $2.6 billion at November 30, 1999. RFC has never borrowed from its
senior bank credit facility.
The Company anticipates that it will utilize the MSDW Facility,
the MS&Co. Facility, the MSIL Facility or the MSDWJL Facility for
short-term funding from time to time.
6 LONG-TERM BORROWINGS
MATURITIES AND TERMS
Long-term borrowings at fiscal year-end consist of the following:
<TABLE>
<CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR(1) AT NOVEMBER 30
------------------------------ -------------------- -------------------
INDEX/
FIXED FLOATING EQUITY FIXED FLOATING 1999 1998
(dollars in millions) RATE RATE(2) LINKED RATE RATE(2) TOTAL TOTAL
- ------------------------------------------------------------------ -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in fiscal 1999 $ -- $-- $ -- $ -- $ -- $ -- $ 5,031
Due in fiscal 2000 1,619 3,081 928 62 1,212 6,902 6,863
Due in fiscal 2001 1,947 2,217 536 139 782 5,621 3,899
Due in fiscal 2002 1,440 1,260 156 115 1,070 4,041 2,501
Due in fiscal 2003 1,093 1,034 137 347 207 2,818 2,895
Due in fiscal 2004 2,306 465 293 113 28 3,205 580
Thereafter 4,113 741 238 643 282 6,017 5,666
- ------------------------------------------------------------------ -------------------- -------------------
Total $12,518 $ 8,798 $ 2,288 $ 1,419 $ 3,581 $28,604 $27,435
- ------------------------------------------------------------------ -------------------- -------------------
Weighted average coupon at fiscal
year-end 6.5% 6.0% n/a 5.4% 3.2% 5.9% 6.1%
- ------------------------------------------------------------------ -------------------- -------------------
</TABLE>
(1) Weighted average coupon was calculated utilizing non-U.S. dollar interest
rates.
(2) U.S. dollar contractual floating rate borrowings bear interest based on a
variety of money market indices, including London Interbank Offered Rates
("LIBOR") and Federal Funds rates. Non-U.S. dollar contractual floating rate
borrowings bear interest based on euro floating rates.
MEDIUM-TERM NOTES
Included in the table above are medium-term notes of $15,724 million and $17,011
million at November 30, 1999 and 1998. The effective weighted average interest
rate on all medium-term notes was 5.3% in fiscal 1999 and 5.7% in fiscal 1998.
Maturities of these notes range from fiscal 2000 through fiscal 2028.
STRUCTURED BORROWINGS
U.S. dollar index/equity linked borrowings include various structured
instruments whose payments and redemption values are linked to the performance
of a specific index (e.g., Standard & Poor's 500), a basket of stocks or a
specific equity security. To minimize the exposure resulting from movements in
the underlying equity position or index, the Company has entered into various
page 69
<PAGE>
99 AR: page 70
equity swap contracts and purchased options which effectively convert the
borrowing costs into floating rates based upon LIBOR. These instruments are
included in the preceding table at their redemption values based on the
performance of the underlying indices, baskets of stocks or specific equity
securities at November 30, 1999 and 1998.
OTHER BORROWINGS
Included in the Company's long-term borrowings are subordinated notes of $1,356
million and $1,309 million at November 30, 1999 and 1998, respectively. The
effective weighted average interest rate on these subordinated notes was 7.0% in
fiscal 1999 and 7.1% in fiscal 1998. Maturities of the subordinated notes range
from fiscal 2001 to fiscal 2016.
Certain of the Company's long-term borrowings are redeemable prior to
maturity at the option of the holder. These notes contain certain provisions
which effectively enable noteholders to put the notes back to the Company and
therefore are scheduled in the foregoing table to mature in fiscal 2000 through
fiscal 2001. The stated maturities of these notes, which aggregate $2,081
million, are from fiscal 2001 to fiscal 2014.
MS&Co., a U.S. broker-dealer subsidiary of the Company, has outstanding
$357 million of 8.22% fixed rate subordinated Series A notes, $243 million of
8.51% fixed rate subordinated Series B Notes, $313 million of 6.81% fixed rate
subordinated Series C notes, $96 million of 7.03% fixed rate subordinated Series
D notes, $82 million of 7.28% fixed rate subordinated Series E notes and $25
million of 7.82% fixed rate subordinated Series F notes. These notes have
maturities from fiscal 2001 to fiscal 2016. The terms of such notes contain
restrictive covenants which require, among other things, that MS&Co. maintain
specified levels of Consolidated Tangible Net Worth and Net Capital, each as
defined.
ASSET AND LIABILITY MANAGEMENT
A portion of the Company's fixed rate long-term borrowings is used to fund
highly liquid marketable securities and short-term receivables arising from
securities transactions. The Company uses interest rate swaps to more closely
match the duration of these borrowings to the duration of the assets being
funded and to manage interest rate risk. These swaps effectively convert certain
of the Company's fixed rate borrowings into floating rate obligations. In
addition, for non-U.S. dollar currency borrowings that are not used to fund
assets in the same currency, the Company has entered into currency swaps which
effectively convert the borrowings into U.S. dollar obligations. The Company's
use of swaps for asset and liability management reduced its interest expense
and effective average borrowing rate as follows:
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ---------------------------------------------------------------------
Net reduction in interest
expense from swaps for
the fiscal year $22 $48 $21
- ---------------------------------------------------------------------
Weighted average coupon
of long-term borrowings
at fiscal year-end(1) 5.9% 6.1% 6.1%
- ---------------------------------------------------------------------
Effective average borrowing
rate for long-term borrowings
after swaps at fiscal
year-end(1) 5.8% 5.9% 6.0%
- ---------------------------------------------------------------------
(1) Included in the weighted average and effective average calculations are
non-U.S. dollar interest rates.
The effective weighted average interest rate on the Company's index/equity
linked notes, which is not included in the table above, was 5.8% and 5.2% in
fiscal 1999 and fiscal 1998, respectively, after giving effect to the related
hedges.
<PAGE>
The table below summarizes the notional or contract amounts of the swaps
utilized by the Company for asset and liability management by maturity and
weighted average interest rates to be received and paid at November 30, 1999.
Swaps utilized to hedge the Company's structured borrowings are presented at
their redemption values:
<TABLE>
<CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR(1)
----------------------------------------- --------------------
RECEIVE RECEIVE RECEIVE RECEIVE RECEIVE
FIXED FLOATING FLOATING INDEX/ FIXED FLOATING NOV. 30, NOV. 30,
PAY PAY PAY EQUITY PAY PAY 1999 1998
(dollars in millions) FLOATING FIXED FLOATING LINKED FLOATING FLOATING(2) TOTAL TOTAL
- --------------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturing in fiscal 1999 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 2,181
Maturing in fiscal 2000 1,180 300 420 928 62 226 3,116 2,241
Maturing in fiscal 2001 1,834 -- 85 536 134 360 2,949 2,181
Maturing in fiscal 2002 1,075 200 -- 156 111 3 1,545 979
Maturing in fiscal 2003 500 -- -- 137 347 199 1,183 1,252
Maturing in fiscal 2004 2,131 200 -- 293 113 28 2,765 537
Thereafter 3,165 200 -- 238 638 282 4,523 3,730
- --------------------------------------------------------------------------------- -------------------- --------------------
Total $ 9,885 $ 900 $ 505 $ 2,288 $ 1,405 $ 1,098 $16,081 $13,101
- --------------------------------------------------------------------------------- -------------------- --------------------
Weighted average at fiscal year-end(3)
Receive rate 6.4% 5.4% 5.8% n/a 5.5% 4.0%
Pay rate 6.1% 6.2% 5.9% n/a 4.8% 5.3%
- --------------------------------------------------------------------------------- -------------------- --------------------
</TABLE>
(1) The differences between the receive rate and the pay rate may reflect
differences in the rate of interest associated with the underlying
currency.
(2) These amounts include currency swaps used to effectively convert borrowings
denominated in one currency into obligations denominated in another
currency.
(3) The table was prepared under the assumption that interest rates remain
constant at year-end levels. The variable interest rates to be received or
paid will change to the extent that rates fluctuate. Such changes may be
substantial. Variable rates presented generally are based on LIBOR or
Treasury bill rates.
The above table does not include interest rate floor agreements that are
utilized by the Company to manage interest rate risk. At November 30, 1999,
interest rate floor agreements with an aggregate notional value of $610 million
were outstanding. These agreements have expiration dates from fiscal 2000 to
fiscal 2014 and an aggregate fair value of $0.2 million at November 30, 1999.
There were no interest rate floor agreements outstanding at November 30, 1998.
As noted above, the Company uses interest rate and currency swaps to
modify the terms of its existing borrowings. Activity during the periods in the
notional value of the swap contracts used by the Company for asset and liability
management (and the unrecognized (loss) gain at fiscal year-end) is summarized
in the table below:
FISCAL FISCAL
(dollars in millions) 1999 1998
- -------------------------------------------------------------------------
Notional value at beginning of period $ 13,101 $ 11,707
Additions 5,372 4,520
Matured (1,804) (2,305)
Terminated (848) (868)
Effect of foreign currency translation on
non-U.S. dollar notional values and
changes in redemption values on
structured borrowings 260 47
- -------------------------------------------------------------------------
Notional value at fiscal year-end $ 16,081 $ 13,101
- -------------------------------------------------------------------------
Unrecognized (loss) gain at fiscal year-end $ (243) $ 279
- -------------------------------------------------------------------------
The Company also uses interest rate swaps and swap options to modify certain
of its repurchase financing agreements. The Company had interest rate swaps and
swap options with notional values of approximately $6.0 billion and $5.1
billion at November 30, 1999 and 1998 and unrecognized losses of approximately
$(38) million and $(10) million at November 30, 1999 and 1998, for such purpose.
The unrecognized losses on these swaps and swap options were offset by
unrecognized gains on certain of the Company's repurchase financing agreements.
The estimated fair value of the Company's long-term borrowings
approximated carrying value based on rates available to the Company at year-end
for borrowings with similar terms and maturities.
Cash paid for interest for the Company's borrowings and deposits
approximated interest expense in fiscal 1999, 1998 and 1997.
page 71
<PAGE>
99 AR: page 72
7 COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases covering office space and
equipment. At November 30, 1999, future minimum rental commitments under such
leases (net of subleases, principally on office rentals) were as follows:
(dollars in millions)
- -----------------------------------------------------------------
2000 $392
2001 346
2002 275
2003 225
2004 200
Thereafter 1,027
- -----------------------------------------------------------------
Occupancy lease agreements, in addition to base rentals, generally provide for
rent and operating expense escalations resulting from increased assessments for
real estate taxes and other charges. Total rent expense, net of sublease rental
income, was $296 million, $274 million and $262 million in fiscal 1999, 1998 and
1997, respectively.
The Company has an agreement with IBM Corporation, under which the
Company receives information processing, data networking and related services.
Under the terms of the agreement, the Company has an aggregate minimum annual
commitment of $120 million subject to annual cost-of-living adjustments.
The Company has contracted to develop a one million square-foot office
tower in New York City. Pursuant to this agreement, the Company will own the
building and has entered into a 99-year lease for the land at the development
site. Construction began in 1999 and the Company intends to occupy the building
upon project completion, which is anticipated in 2002. The total investment in
this project (which will be incurred over the next several years) is estimated
to be approximately $650 million.
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 counsel, that the
resolution of such matters will not have a material adverse effect on the
consolidated financial condition of the Company but may be material to the
Company's operating results for any particular period, depending upon the level
of the Company's income for such period.
At November 30, 1999 and 1998, the Company had approximately $6.3
billion and $5.7 billion, respectively, of letters of credit outstanding to
satisfy various collateral requirements.
Financial instruments sold, not yet purchased represent obligations of
the Company to deliver specified financial instruments at contracted prices,
thereby creating commitments to purchase the financial instruments in the market
at prevailing prices. Consequently, the Company's ultimate obligation to satisfy
the sale of financial instruments sold, not yet purchased may exceed the amounts
recognized in the consolidated statements of financial condition.
The Company also has commitments to fund certain fixed assets and other
less liquid investments, including at November 30, 1999 approximately $417
million in connection with its private equity and other principal investment
activities. Additionally, the Company has provided and will continue to provide
financing, including margin lending and other extensions of credit to clients
(including subordinated loans on an interim basis to leveraged companies
associated with its investment banking and its private equity and other
principal investment activities), that may subject the Company to increased
credit and liquidity risks.
<PAGE>
8 EARNINGS PER SHARE
Earnings per share was calculated as follows (in millions, except for per share
data):
FISCAL FISCAL FISCAL
BASIC EPS: 1999 1998 1997
- --------------------------------------------------------------------------------
Income before cumulative
effect of accounting change $ 4,791 $ 3,393 $ 2,586
Cumulative effect of
accounting change -- (117) --
Preferred stock dividend
requirements (44) (55) (66)
- --------------------------------------------------------------------------------
Net income available to
common shareholders $ 4,747 $ 3,221 $ 2,520
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding 1,097 1,152 1,150
Basic EPS before cumulative
effect of accounting change $ 4.33 $ 2.90 $ 2.19
Cumulative effect of
accounting change -- (0.10) --
- --------------------------------------------------------------------------------
Basic EPS $ 4.33 $ 2.80 $ 2.19
- --------------------------------------------------------------------------------
FISCAL FISCAL FISCAL
DILUTED EPS: 1999 1998 1997
- --------------------------------------------------------------------------------
Income before cumulative
effect of accounting change $ 4,791 $ 3,393 $ 2,586
Cumulative effect of
accounting change -- (117) --
Preferred stock dividend
requirements (36) (47) (61)
- --------------------------------------------------------------------------------
Net income available to
common shareholders $ 4,755 $ 3,229 $ 2,525
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding 1,097 1,152 1,150
Effect of dilutive securities:
Stock options 39 37 39
ESOP convertible
preferred stock 24 24 24
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding and
common stock equivalents 1,160 1,213 1,213
- --------------------------------------------------------------------------------
Diluted EPS before cumulative
effect of accounting change $ 4.10 $ 2.76 $ 2.08
Cumulative effect of
accounting change -- (0.09) --
- --------------------------------------------------------------------------------
Diluted EPS $ 4.10 $ 2.67 $ 2.08
- --------------------------------------------------------------------------------
9 TRADING ACTIVITIES
TRADING REVENUES
The Company's trading activities include providing securities brokerage,
derivatives dealing and underwriting services to clients. While trading
activities are generated by client order flow, the Company also takes
proprietary positions based on expectations of future market movements and
conditions. The Company's trading strategies rely on the integrated management
of its client-driven and proprietary transactions, along with the hedging and
financing of these positions.
The Company manages its trading businesses by product groupings and
therefore has established distinct, worldwide trading divisions having
responsibility for equity, fixed income, foreign exchange and commodities
products. Because of the integrated nature of the markets for such products,
each product area trades cash instruments as well as related derivative products
(e.g., options, swaps, futures, forwards and other contracts with respect to
such underlying instruments or commodities). Revenues related to principal
trading are summarized below by trading division:
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ------------------------------------------------------------------
Equities $3,065 $2,048 $1,310
Fixed income 2,090 455 1,187
Foreign exchange 397 587 500
Commodities 431 193 194
- ------------------------------------------------------------------
Total principal transaction
trading revenues $5,983 $3,283 $3,191
- ------------------------------------------------------------------
Interest revenue and expense are integral components of trading activities. In
assessing the profitability of trading activities, the Company views net
interest and principal trading revenues in the aggregate.
The Company's trading portfolios are managed with a view toward the
risk and profitability of the portfolios to the Company. The nature of the
equities, fixed income, foreign exchange and commodities activities conducted by
the Company, including the use of derivative products in these businesses, and
the market, credit and concentration risk management policies and procedures
covering these activities are discussed below.
page 73
<PAGE>
99 AR: page 74
EQUITIES
The Company makes markets and trades in the global secondary markets for
equities and convertible debt and is a dealer in equity warrants, exchange
traded and OTC equity options, index futures, equity swaps and other
sophisticated equity derivatives. The Company's activities as a dealer primarily
are client-driven, with the objective of meeting clients' needs while earning a
spread between the premiums paid or received on its contracts with clients and
the cost of hedging such transactions in the cash or forward market or with
other derivative transactions. The Company limits its market risk related to
these contracts, which stems primarily from underlying equity/index price and
volatility movements, by employing a variety of hedging strategies, such as
delta hedging (delta is a measure of a derivative contract's price movement
based on the movement of the price of the security or index underlying the
contract). The Company also takes proprietary positions in the global equity
markets by using derivatives, most commonly futures and options, in addition to
cash positions, intending to profit from market price and volatility movements
in the underlying equities or indices positioned.
Equity option contracts give the purchaser of the contract the right to
buy (call) or sell (put) the equity security or index underlying the contract at
an agreed-upon price (strike price) during or at the conclusion of a specified
period of time. The seller (writer) of the contract is subject to market risk,
and the purchaser is subject to market risk (to the extent of the premium paid)
and credit risk. Equity swap contracts are contractual agreements whereby one
counterparty receives the appreciation (or pays the depreciation) on an equity
investment in return for paying another rate, often based upon equity index
movements or interest rates.
The counterparties to the Company's equity transactions include
commercial banks, investment banks, broker-dealers, investment funds and
industrial companies.
FIXED INCOME
The Company is a market-maker for U.S. and non-U.S. government securities,
corporate bonds, money market instruments, medium-term notes and Eurobonds,
high-yield securities, emerging market securities, mortgage- and other
asset-backed securities, preferred stock and tax-exempt securities. In
addition, the Company is a dealer in interest rate and currency swaps and
other related derivative products, OTC options on U.S. and non-U.S.
government bonds and mortgage-backed forward agreements ("TBA"), options and
swaps. In this capacity, the Company facilitates asset and liability management
for its customers in interest rate and currency swaps and related products and
OTC government bond options.
Swaps used in fixed income trading are, for the most part, contractual
agreements to exchange interest payment streams (i.e., an interest rate swap may
involve exchanging fixed for floating interest payments) or currencies (i.e., a
currency swap may involve exchanging yen for U.S. dollars in one year at an
agreed-upon exchange rate). The Company profits by earning a spread between the
premium paid or received for these contracts and the cost of hedging such
contracts. The Company seeks to manage the market risk of its swap portfolio,
which stems from interest rate and currency movements and volatility, by using
modeling that quantifies the sensitivity of its portfolio to movements in
interest rates and currencies and by adding positions to or selling positions
from its portfolio as needed to minimize such sensitivity. Typically, the
Company adjusts its positions by entering into additional swaps or interest rate
and foreign currency futures or foreign currency forwards and by purchasing or
selling additional underlying government bonds. The Company manages the risk
related to its option portfolio by using a variety of hedging strategies such as
delta hedging, which includes the use of futures and forward contracts to hedge
market risk. The Company also is involved in using debt securities to structure
products with multiple risk/return factors designed to suit investor objectives.
The Company is an underwriter of and a market-maker in commercial and
residential mortgage-backed securities and asset-backed securities as well as
commercial, residential and real estate loan products. The Company provides
financing to customers for commercial, residential and real estate loan
products. The Company also uses TBA contracts in its role as a dealer in
mortgage-backed securities and facilitates customer trades by taking positions
in the TBA market. Typically, these positions are hedged by offsetting TBA
contracts or underlying cash positions. The Company profits by earning the
bid-offer spread on such transactions. As is the case with all mortgage-backed
products, market risk associated with these instruments results from interest
rate fluctuations and changes in mortgage prepayment speeds. The Company also
acts as principal and agent in aircraft finance transactions. Acting as
principal, the Company acquires aircraft outright or under
<PAGE>
leases and finances these assets by issuance of non-recourse debt in the
securitization market and other similar financing arrangements.
The counterparties to the Company's fixed income transactions include
investment advisors, commercial banks, insurance companies, investment funds and
industrial companies.
FOREIGN EXCHANGE
The Company is a market-maker in a number of foreign currencies. In this
business, it actively trades currencies in the spot and forward markets
earning a dealer spread. The Company seeks to manage its market risk by
entering into offsetting positions. The Company conducts an arbitrage business
in which it seeks to profit from inefficiencies between the futures, spot and
forward markets. The Company also makes a market in foreign currency options.
This business largely is client-driven and involves the purchasing and writing
of European and American style options and certain sophisticated products to
meet specific client needs. The Company profits in this business by earning
spreads between the options' premiums and the cost of hedging such positions.
The Company limits its market risk by using a variety of hedging strategies,
including the buying and selling of the currencies underlying the options based
upon the options' delta equivalent. Foreign exchange option contracts give the
purchaser of the contract the right to buy (call) or sell (put) the currency
underlying the contract at an agreed-upon strike price at or over a specified
period of time. Forward contracts and futures represent commitments to purchase
or sell the underlying currencies at a specified future date at a specified
price. The Company also takes proprietary positions in currencies to profit from
market price and volatility movements in the currencies positioned.
The majority of the Company's foreign exchange business relates to
major foreign currencies such as yen, euro, pound sterling, Swiss francs and
Canadian dollars. The balance of the business covers a broad range of other
currencies.
The counterparties to the Company's foreign exchange transactions
include commercial banks, investment banks, broker-dealers, investment funds
and industrial companies.
COMMODITIES
The Company, as a major participant in the world commodities markets, trades
in physical precious, base and platinum group metals, electricity, energy
products (principally oil, refined oil products and natural gas) as well as a
variety of derivatives related to these commodities such as futures, forwards
and exchange traded and OTC options and swaps. Through these activities, the
Company provides clients with a ready market to satisfy end users' current raw
material needs and facilitates their ability to hedge price fluctuations
related to future inventory needs. The former activity at times requires the
positioning of physical commodities. Derivatives on those commodities, such as
futures, forwards and options, often are used to hedge price movements in the
underlying physical inventory. The Company profits as a market-maker in physical
commodities by earning the bid-offer spread inherent in the physical markets.
To facilitate hedging for its clients, the Company often is required to
take positions in the commodity markets in the form of forward, option and swap
contracts involving oil, natural gas, precious and base metals, and
electricity. The Company generally hedges these positions by using a variety of
hedging techniques such as delta hedging, whereby the Company takes positions in
the physical markets and/or positions in other commodity derivatives such as
futures and forwards to offset the market risk in the underlying derivative.
The Company profits from this business by earning a spread between the premiums
paid or received for these derivatives and the cost of hedging such
derivatives.
The Company also maintains proprietary trading positions in commodity
derivatives, including futures, forwards and options in addition to physical
commodities, to profit from price and volatility movements in the underlying
commodities markets.
Forward, option and swap contracts on commodities are structured
similarly to like-kind derivative contracts for cash financial instruments.
The counterparties to OTC commodity contracts include precious metals producers,
refiners and consumers as well as shippers, central banks, and oil, gas and
electricity producers.
The following discussions of risk management, market risk, credit risk,
concentration risk and customer activities relate to the Company's trading
activities.
page 75
<PAGE>
99 AR: page 76
RISK MANAGEMENT
Risk management at the Company is a multi-faceted process with independent
oversight that requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to assist
in the identification, assessment and control of various risks. In recognition
of the increasingly varied and complex nature of the global financial services
business, the Company's risk management policies, procedures and methodologies
are evolutionary in nature and are subject to ongoing review and modification.
Many of the Company's risk management and control practices are subject to
periodic review by the Company's internal auditors as well as to interactions
with various regulatory authorities.
The Management Committee, composed of the Company's most senior
officers, establishes the overall risk management policies for the Company and
reviews the Company's performance relative to these policies. The Management
Committee has created several Risk Committees to assist it in monitoring and
reviewing the Company's risk management practices. These Risk Committees, as
well as other committees established to manage and monitor specific risks,
review the risk monitoring and risk management policies and procedures relating
to the Company's market and credit risk profile, sales practices, legal
enforceability, and operational and systems risks. The Controllers, Treasury,
Law, Compliance and Governmental Affairs and Firm Risk Management Departments,
which are all independent of the Company's business units, assist senior
management and the Risk Committees in monitoring and controlling the Company's
risk profile. In addition, the Internal Audit Department, which also reports to
senior management, periodically examines and evaluates the Company's operations
and control environment. The Company continues to be committed to employing
qualified personnel with appropriate expertise in each of its various
administrative and business areas to implement effectively the Company's risk
management and monitoring systems and processes.
MARKET RISK
Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, volatilities, correlations or other market factors, such
as liquidity, will result in losses for a specified position or portfolio.
The Company manages the market risk associated with its trading
activities on a Company-wide basis, on a trading division level worldwide and on
an individual product basis. Market risk limits have been approved for the
Company and each major trading division of the Company worldwide. Discrete
market risk limits are assigned to trading desks and, as appropriate, products
and regions. Trading division risk managers, desk risk managers and the Firm
Risk Management Department all monitor market risk measures against limits and
report major market and position events to senior management.
The Firm Risk Management Department independently reviews the Company's
trading portfolios on a regular basis from a market risk perspective utilizing
Value-at-Risk and other quantitative and qualitative risk measurements and
analyses. The Company may use measures, such as rate sensitivity, convexity,
volatility and time decay measurements, to estimate market risk and to assess
the sensitivity of positions to changes in market conditions. Stress testing,
which measures the impact on the value of existing portfolios of specified
changes in market factors, for certain products is performed periodically and
is reviewed by trading division risk managers, desk risk managers and the Firm
Risk Management Department.
CREDIT RISK
The Company's exposure to credit risk arises from the possibility that a
counterparty to a transaction might fail to perform under its contractual
commitment, which could result in the Company incurring losses. The Company
has credit guidelines which limit the Company's current and potential credit
exposure to any one counterparty. Specific credit risk limits based on these
credit guidelines also are in place for each type of counterparty (by rating
category).
<PAGE>
The Credit Department administers and monitors the credit limits
among trading divisions on a worldwide basis. In addition to monitoring credit
limits, the Company manages the credit exposure relating to the Company's
trading activities by reviewing counterparty financial soundness periodically,
by entering into master netting agreements and collateral arrangements with
counterparties in appropriate circumstances and by limiting the duration of
exposure. In certain cases, the Company also may close out transactions or
assign them to other counterparties to mitigate credit risk.
CONCENTRATION RISK
The Company is subject to concentration risk by holding large positions in
certain types of securities or commitments to purchase securities of a single
issuer, including sovereign governments and other entities, issuers located in a
particular country or geographic area, public and private issuers involving
developing countries or issuers engaged in a particular industry. Financial
instruments owned by the Company include U.S. government and agency securities
and securities issued by other sovereign governments (principally Japan,
Italy, Canada and Germany), which, in the aggregate, represented approximately
12% of the Company's total assets at November 30, 1999. In addition,
substantially all of the collateral held by the Company for resale agreements or
bonds borrowed, which together represented approximately 29% of the Company's
total assets at November 30, 1999, consists of securities issued by the U.S.
government, federal agencies or other sovereign government obligations.
Positions taken and commitments made by the Company, including positions taken
and underwriting and financing commitments made in connection with its private
equity and 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
through the use of the systems and procedures described in the preceding
discussions of market and credit risk.
CUSTOMER ACTIVITIES
The Company's customer activities involve the execution, settlement and
financing of various securities and commodities transactions on behalf of
customers. Customer securities activities are transacted on either a cash or
margin basis. Customer commodities activities, which include the execution of
customer transactions in commodity futures transactions (including options on
futures), are transacted on a margin basis.
The Company's customer activities may expose it to off-balance sheet
credit risk. The Company may have to purchase or sell financial instruments at
prevailing market prices in the event of the failure of a customer to settle a
trade on its original terms or in the event cash and securities in customer
margin accounts are not sufficient to fully cover customer losses. The Company
seeks to control the risks associated with customer activities by requiring
customers to maintain margin collateral in compliance with various regulations
and Company policies.
NOTIONAL/CONTRACT AMOUNTS AND
FAIR MARKET VALUES OF DERIVATIVES
The gross notional or contract amounts of derivative instruments and fair value
(carrying amount) of the related assets and liabilities at November 30, 1999 and
1998, as well as the average fair value of those assets and liabilities for
fiscal 1999 and 1998, are presented in the table which follows. Fair value
represents the cost of replacing these instruments and is further described in
Note 2. 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 consolidated statements of financial condition. Assets
represent unrealized gains on purchased exchange traded and OTC options and
other contracts (including interest rate, foreign exchange, and other forward
contracts and swaps), net of any unrealized losses owed to the
page 77
<PAGE>
99 AR: page 78
counterparties on offsetting positions in situations where netting is
appropriate. Similarly, liabilities represent net amounts owed to
counterparties. These amounts will vary based on changes in the fair values of
underlying financial instruments and/or the volatility of such underlying
instruments:
<TABLE>
<CAPTION>
FISCAL YEAR-END
GROSS NOTIONAL/CONTRACT AMOUNT(1) (2) FISCAL YEAR-END FAIR VALUES(3) AVERAGE FAIR VALUES(3) (4)
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in billions at fiscal year-end) ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, floors and swap options) and
$2,689 $1,719 other fixed income securities contracts $ 9.5 $ 10.1 $ 9.4 $ 10.4 $ 9.0 $ 9.5 $ 6.2 $ 8.6
Foreign exchange forward and futures contracts
405 903 and options 3.7 3.7 3.6 4.1 3.3 4.6 3.5 4.4
Equity security contracts (including equity
swaps, futures contracts, and warrants and
110 107 options) 7.1 5.2 7.3 4.8 5.9 4.8 5.4 4.6
170 91 Commodity forwards, futures, options and swaps 2.4 2.2 2.9 1.9 2.3 2.0 2.6 1.7
Mortgage-backed securities forward contracts,
30 40 swaps and options 0.1 0.2 -- -- 0.1 0.2 0.1 --
$3,404 $2,860 Total $ 22.8 $ 21.4 $ 23.2 $ 21.2 $ 20.6 $ 21.1 $ 17.8 $ 19.3
</TABLE>
(1) The notional amounts of derivatives have been adjusted to reflect the
effects of leverage, where applicable.
(2) Notional amounts include purchased and written options of $399 billion and
$401 billion, respectively, at November 30, 1999, and $485 billion and $442
billion, respectively, at November 30, 1998.
(3) These amounts represent carrying value (exclusive of collateral) at
November 30, 1999 and 1998, respectively, and do not include receivables or
payables related to exchange traded futures contracts.
(4) Amounts are calculated using a monthly average.
The gross notional or contract amounts of these instruments are indicative of
the Company's degree of use of derivatives for trading purposes but do not
represent the Company's exposure to market or credit risk. Credit risk arises
from the failure of a counterparty to perform according to the terms of the
contract. The Company's exposure to credit risk 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. The Company
monitors the creditworthiness of counterparties to these transactions on an
ongoing basis and requests additional collateral when deemed necessary. The
Company believes the ultimate settlement of the transactions outstanding at
November 30, 1999 will not have a material effect on the Company's financial
condition.
<PAGE>
The remaining maturities of the Company's swaps and other derivative products
at November 30, 1999 and 1998 are summarized in the following table, showing
notional values by year of expected maturity:
<TABLE>
<CAPTION>
LESS THAN 1 TO 3 3 TO 5 MORE THAN
(dollars in billions) 1 YEAR YEARS YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1999
<S> <C> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, floors and swap options) and
other fixed income securities contracts $ 664 $ 662 $ 531 $ 832 $2,689
Foreign exchange forward and futures contracts
and options 397 8 -- -- 405
Equity securities contracts (including equity
swaps, futures contracts, and warrants and
options) 77 22 8 3 110
Commodity forwards, futures, options and swaps 97 47 19 7 170
Mortgage-backed securities forward contracts,
swaps and options 21 1 3 5 30
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,256 $ 740 $ 561 $ 847 $3,404
- ------------------------------------------------------------------------------------------------------------------------------
Percent of total 37% 22% 16% 25% 100%
- ------------------------------------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1998
Interest rate and currency swaps and options
(including caps, floors and swap options) and
other fixed income securities contracts $ 457 $ 479 $ 371 $ 412 $1,719
Foreign exchange forward and futures contracts
and options 892 11 -- -- 903
Equity securities contracts (including equity
swaps, futures contracts, and warrants and
options) 82 17 7 1 107
Commodity forwards, futures, options and swaps 53 22 8 8 91
Mortgage-backed securities forward contracts,
swaps and options 25 1 2 12 40
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,509 $ 530 $ 388 $ 433 $2,860
- ------------------------------------------------------------------------------------------------------------------------------
Percent of total 53% 19% 13% 15% 100%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
page 79
<PAGE>
99 AR: page 80
The credit quality of the Company's trading-related derivatives at November 30,
1999 and 1998 is summarized in the table below, showing the fair value of the
related assets by counterparty credit rating. The actual credit ratings are
determined by external rating agencies or by equivalent ratings used by the
Company's Credit Department:
<TABLE>
<CAPTION>
COLLATERALIZED OTHER
NON- NON-
INVESTMENT INVESTMENT
(dollars in millions) AAA AA A BBB GRADE GRADE TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, floors and swap options) and
other fixed income securities contracts $ 1,569 $ 3,842 $ 2,896 $ 884 $ 117 $ 174 $ 9,482
Foreign exchange forward contracts and options 556 1,551 1,285 170 -- 140 3,702
Equity securities contracts (including equity
swaps, warrants and options) 1,742 2,310 1,109 260 1,308 320 7,049
Commodity forwards, options and swaps 164 571 660 469 52 508 2,424
Mortgage-backed securities forward contracts,
swaps and options 41 33 35 1 1 1 112
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 4,072 $ 8,307 $ 5,985 $ 1,784 $ 1,478 $ 1,143 $22,769
- --------------------------------------------------------------------------------------------------------------------------------
Percent of total 18% 37% 26% 8% 6% 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>
The Company also has obtained assets posted as collateral by investment grade
counterparties amounting to $2.7 billion and $2.5 billion at November 30, 1999
and November 30, 1998, respectively.
10 PREFERRED STOCK, CAPITAL UNITS AND
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
Preferred stock of the Company is composed of the following issues:
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT BALANCE AT
NOVEMBER 30 NOVEMBER 30
(dollars in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ESOP Convertible Preferred Stock, liquidation preference $35.88 3,493,477 3,581,964 $125 $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 $670 $674
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Each issue of outstanding preferred stock ranks in parity with all other
outstanding preferred stock of the Company.
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.
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 2015 to 2017 and (b) a related Purchase
Contract issued by the Company, which may be accelerated by the Company
beginning approximately one year after the issuance of each Capital Unit,
requiring the holder to purchase one Depositary Share representing shares (or
fractional shares) of the Company's Cumulative Preferred Stock. The aggregate
amount of Capital Units outstanding was $583 million and $999 million at
November 30, 1999 and 1998, respectively.
Effective March 1, 1999, the Company redeemed all of the outstanding
7.82% Capital Units and 7.80% Capital Units. The aggregate principal amount of
the Capital Units redeemed was $352 million. During fiscal 1999, the Company
repurchased in a series of transactions in the open market $64 million of the
$134 million outstanding 8.03% Capital Units. During fiscal 1999, the Company
retired these repurchased Capital Units.
The estimated fair value of the Capital Units approximated carrying
value at November 30, 1999 and November 30, 1998.
In January 2000, the Company and MS plc called for redemption all of
the outstanding 9.00% Capital Units on February 28, 2000. The aggregate
principal amount of the Capital Units to be redeemed is $144 million.
In January 2000, all shares of the ESOP Convertible Preferred Stock
were converted into common shares of the Company (see Note 12).
11 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 requirements. MS&Co.'s net capital totaled $3,515 million at
November 30, 1999, which exceeded the amount required by $2,906 million. DWR's
net capital totaled $765 million at November 30, 1999, which exceeded the amount
required by $631 million. MSIL, a London-based broker-dealer subsidiary, is
subject to the capital requirements of the Securities and Futures Authority, and
MSDWJL, a Tokyo-based broker-dealer, is subject to the capital requirements of
the Japanese Ministry of Finance. MSIL and MSDWJL have consistently operated in
excess of their respective regulatory capital requirements.
Under regulatory capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other bank regulatory agencies, FDIC-insured
financial institutions must maintain (a) 3% to 5% of Tier 1 capital, as
defined, to average assets ("leverage ratio") (b) 4% of Tier 1 capital, as
defined, to risk-weighted assets ("Tier 1 risk-weighted capital ratio") and (c)
8% of total capital, as defined, to risk-weighted assets ("total risk-weighted
capital ratio"). At November 30, 1999, the leverage ratio, Tier 1 risk-weighted
capital ratio and total risk-weighted capital ratio of each of the Company's
FDIC-insured financial institutions exceeded these regulatory minimums.
Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their local capital adequacy requirements. Morgan Stanley
Derivative Products Inc., the Company's triple-A rated derivative products
subsidiary, also has established certain operating restrictions which have been
reviewed by various rating agencies.
The regulatory capital requirements referred to above, and certain
covenants contained in various agreements governing
page 81
<PAGE>
99 AR: page 82
indebtedness of the Company, may restrict the Company's ability to withdraw
capital from its subsidiaries. At November 30, 1999, approximately $5.6 billion
of net assets of consolidated subsidiaries may be restricted as to the payment
of cash dividends and advances to the Company.
The Company repurchased approximately 50 million and 86 million shares
of its common stock in fiscal 1999 and fiscal 1998, respectively. In an effort
to enhance its ongoing stock repurchase program, the Company may sell put
options on shares of its common stock to third parties. These put options
entitle the holder to sell shares of the Company's common stock to the Company
on certain dates at specified prices. As of November 30, 1999, put options were
outstanding on an aggregate of 1.0 million shares of the Company's common stock.
These put options expire in February 2000. The Company may elect cash settlement
of the put options instead of taking delivery of the stock.
Cumulative translation adjustments include gains or losses resulting
from translating foreign currency financial statements from their respective
functional currencies to U.S. dollars, net of hedge gains or losses and related
tax effects. The Company uses foreign currency contracts and designates certain
non-U.S. dollar currency debt as hedges to manage the currency exposure relating
to its net monetary investments in non-U.S. dollar functional currency
subsidiaries. Increases or decreases in the value of the Company's net foreign
investments generally are tax-deferred for U.S. purposes, but the related hedge
gains and losses are taxable currently. Therefore, the gross notional amounts of
the contracts and debt designated as hedges exceed the Company's net foreign
investments to result in effective hedging on an after-tax basis. The Company
attempts to protect its net book value from the effects of fluctuations in
currency exchange rates on its net monetary investments in non-U.S. dollar
subsidiaries by selling the appropriate non-U.S. dollar currency in the forward
market. However, under some circumstances, the Company may elect not to hedge
its net monetary investments in certain foreign operations due to market
conditions, including the availability of various currency contracts at
acceptable costs. Information relating to the hedging of the Company's net
monetary investments in non-U.S. dollar functional currency subsidiaries and
their effects on cumulative translation adjustments is summarized below:
AT NOVEMBER 30
(dollars in millions) 1999 1998
- -----------------------------------------------------------------------------
Net monetary investments in non-U.S.
dollar functional currency subsidiaries $ 1,972 $ 1,364
- -----------------------------------------------------------------------------
Gross notional amounts of foreign exchange
transactions and non-U.S. dollar debt
designated as hedges(1) $ 3,309 $ 2,239
- -----------------------------------------------------------------------------
Cumulative translation adjustments
resulting from net investments in
subsidiaries with a non-U.S. dollar
functional currency $ 57 $ 29
Cumulative translation adjustments
resulting from realized or unrealized
gains or losses on hedges, net of tax (84) (41)
- -----------------------------------------------------------------------------
Total cumulative translation adjustments $ (27) $ (12)
- -----------------------------------------------------------------------------
(1) Notional amounts represent the contractual currency amount translated at
respective fiscal year-end spot rates.
12 EMPLOYEE COMPENSATION PLANS
The Company has adopted a variety of compensation plans for certain of its
employees as well as the Company's non-employee directors. These plans are
designed to facilitate a pay-for-performance policy, provide compensation
commensurate with other leading financial services companies and provide for
internal ownership in order to align the interests of employees with the
long-term interests of the Company's shareholders. These plans are summarized
below.
EQUITY-BASED COMPENSATION PLANS
The Company is authorized to issue up to approximately 590 million shares of
its common stock in connection with awards under its equity-based compensation
plans. At November 30, 1999, approximately 320 million shares were available for
future grant under these plans.
STOCK OPTION AWARDS
Stock option awards have been granted pursuant to several equity-based
compensation plans. Historically, these plans have generally provided for the
granting of stock options having an exercise price not less than the fair value
of the Company's common stock (as defined in the plans) on the date of grant.
Such options generally become exercisable over a one-to-five-year period and
expire seven to 10 years from the date of grant.
<PAGE>
The following table sets forth activity relating to the Company's stock option
awards (share data in millions):
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
----------------- ----------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
- ---------------------------------------------------------------------------- ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of period 126.6 $20.04 128.2 $13.93 120.6 $ 8.52
Granted 23.2 56.65 31.2 34.39 40.4 24.08
Exercised (15.5) 17.12 (30.6) 9.12 (29.8) 5.84
Forfeited (3.0) 23.88 (2.2) 19.70 (3.0) 13.33
- ---------------------------------------------------------------------------- ------------------------ --------------------------
Options outstanding at end of period 131.3 $26.76 126.6 $20.04 128.2 $13.93
- ---------------------------------------------------------------------------- ------------------------ --------------------------
Options exercisable at end of period 93.6 $25.21 81.2 $19.69 88.6 $13.34
- ---------------------------------------------------------------------------- ------------------------ --------------------------
</TABLE>
The following table presents information relating to the Company's stock options
outstanding at November 30, 1999 (share data in millions):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
NUMBER EXERCISE LIFE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
- -------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$4.00-$9.99 40.1 $ 8.75 5.1 33.5 $ 8.69
$10.00-$19.99 13.8 15.21 3.9 5.8 14.54
$20.00-$29.99 33.5 26.43 7.2 25.8 26.36
$30.00-$39.99 19.2 35.54 8.8 13.5 35.52
$40.00-$49.99 5.0 44.19 6.9 4.4 44.12
$50.00-$63.00 19.7 59.01 9.8 10.6 59.45
- -------------------------------------------------------------------------------------- ----------------------------
Total 131.3 6.8 93.6
- -------------------------------------------------------------------------------------- ----------------------------
</TABLE>
Deferred Compensation Awards
The Company has made deferred compensation awards pursuant to several
equity-based compensation plans. These plans provide for the deferral of a
portion of certain key employees' compensation with payments made in the form of
the Company's common stock or in the right to receive unrestricted shares
(collectively, "Restricted Stock"). Compensation expense for all such awards
(including those subject to forfeiture) amounted to $699 million, $415 million
and $347 million in fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
Compensation expense for Restricted Stock awards was determined based on the
fair value of the Company's common stock (as defined in the plans). The number
of Restricted Stock shares outstanding was 115 million at November 30, 1999, 118
million at November 30, 1998 and 124 million at November 30, 1997.
Restricted Stock awarded under these plans are subject to restrictions
on sale, transfer or assignment until the end of a specified restriction
period, generally five to 10 years from the date of grant. Holders of
Restricted Stock generally may forfeit ownership of a portion of their award if
employment is terminated before the end of the relevant restriction period.
Holders of vested Restricted Stock generally will forfeit ownership in certain
limited situations, including termination for cause during the restriction
period.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, eligible employees may purchase shares
of the Company's common stock at not less than 85% of the fair value on the date
of purchase. Employees of the Company purchased 1.4 million shares of common
stock in fiscal 1999, 1.2 million shares in fiscal 1998 and 1.0 million shares
in fiscal 1997.
The discount to fair value was $9 million for fiscal 1999, $6 million
for fiscal 1998 and $3 million for fiscal 1997. The plan is "non-compensatory"
under APB No. 25, and, accordingly, no charge to earnings has been recorded for
the amount of the discount to fair value.
page 83
<PAGE>
99 AR: page 84
Non-Employee Director Awards
The Company sponsors an equity-based plan for non-employee directors under which
shares of the Company's common stock have been authorized for issuance in the
form of option grants, stock awards or deferred compensation. The effect of
these grants on results of operations was not material.
OTHER COMPENSATION PLANS
Carried Interest Plans
Under various Carried Interest Plans, certain key employees effectively
participate in a portion of the Company's realized gains from certain of its
investments in private equity transactions. Compensation expense for fiscal
1999, 1998 and 1997 related to these plans aggregated $5 million, $33 million
and $38 million, respectively.
Real Estate Fund Plans
Under various plans, select employees and consultants to certain partnerships
may participate in certain gains realized by the Company's real estate funds.
Compensation expense relating to these plans aggregated $10 million, $3 million
and $8 million for fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
Profit Sharing Plans
The Company sponsors qualified profit sharing plans covering substantially all
U.S. employees and also provides cash payment of profit sharing to employees of
its international subsidiaries. Contributions are made to eligible employees at
the discretion of the Board of Directors based upon the financial performance of
the Company. Profit sharing expense for fiscal 1999, fiscal 1998 and fiscal 1997
was $153 million, $115 million and $113 million, respectively.
Employee Stock Ownership Plan
The Company has a $140 million leveraged employee stock ownership plan, funded
through an independently managed trust. The Employee Stock Ownership Plan
("ESOP") was established to broaden internal ownership of the Company and to
provide benefits to its employees in a cost-effective manner. Each of the
3,493,477 ESOP preferred shares outstanding at November 30, 1999 is held by the
ESOP trust, is convertible into 6.6 shares of the Company's common stock and is
entitled to annual dividends of $2.78 per preferred share. The ESOP trust
funded its stock purchase through a loan of $140 million from the Company. The
ESOP trust note, due September 19, 2005 (extendible at the option of the ESOP
trust to September 19, 2010), bears a 10-3/8% interest rate per annum with
principal payable without penalty on or before the due date. The ESOP trust
expects to make principal and interest payments on the note from funds provided
by dividends on the shares of convertible preferred stock and contributions
from the Company, if required. The note receivable from the ESOP trust is
reflected as a reduction in the Company's shareholders' equity. Shares allocated
to employees generally may not be withdrawn until the employee's death,
disability, retirement or termination.
Contributions to the ESOP by the Company and allocation of ESOP shares
to employees are made annually at the discretion of the Board of Directors based
on the financial performance of the Company. The cost of shares allocated to
participants' accounts amounted to $5 million in fiscal 1999, $8 million in
fiscal 1998 and $10 million in fiscal 1997. The ESOP debt service costs for
fiscal 1999, fiscal 1998 and fiscal 1997 were paid from dividends received on
preferred stock held by the plan and from Company contributions.
In January 2000, all shares of the ESOP Convertible Preferred Stock
were converted into common shares of the Company.
PRO FORMA EFFECT OF SFAS NO. 123
Had the Company elected to recognize compensation cost pursuant to SFAS No. 123
for its stock option plans and the Employee Stock Purchase Plan, net income
would have been reduced by $415 million, $214 million and $196 million for
fiscal 1999, 1998 and 1997, respectively. Basic and diluted earnings per common
share would have been reduced by $0.38, $0.19 and $0.17 for fiscal 1999, 1998
and 1997, respectively.
<PAGE>
The weighted average fair value at date of grant for stock options
granted during fiscal 1999, 1998 and 1997 was $29.76, $11.19 and $8.38 per
option, respectively. The fair value of stock options at date of grant was
estimated using the Black-Scholes option pricing model utilizing the following
weighted average assumptions:
FISCAL FISCAL FISCAL
1999 1998 1997
- -------------------------------------------------------------------
Risk-free interest rate 5.9% 4.9% 6.0%
Expected option life in years 5.6 4.8 6.0
Expected stock price volatility 38.6% 33.2% 28.0%
Expected dividend yield 1.1% 1.3% 1.3%
- -------------------------------------------------------------------
13 EMPLOYEE BENEFIT PLANS
The Company sponsors various pension plans for the majority of its worldwide
employees. The Company provides certain other postretirement benefits,
primarily health care and life insurance, to eligible employees. The Company
also provides certain benefits to former or inactive employees prior to
retirement. The following summarizes these plans:
PENSION PLANS
Substantially all of the U.S. employees of the Company and its U.S. affiliates
are covered by non-contributory pension plans that are qualified under Section
401(a) of the Internal Revenue Code (the "Qualified Plans"). Unfunded
supplementary plans (the "Supplemental Plans") cover certain executives. In
addition to the Qualified Plans and the Supplemental Plans (collectively, the
"U.S. Plans"), 10 of the Company's international subsidiaries also have pension
plans covering substantially all of their employees. These pension plans
generally provide pension benefits that are based on each employee's years of
credited service and on compensation levels specified in the plans. For the
Qualified Plans and the other international plans, the Company's policy is to
fund at least the amounts sufficient to meet minimum funding requirements under
applicable employee benefit and tax regulations. Liabilities for benefits
payable under the Supplemental Plans are accrued by the Company and are funded
when paid to the beneficiaries.
The following tables present information for the Company's pension
plans on an aggregate basis.
Pension expense includes the following components:
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------
U.S. Plans:
Service cost, benefits earned
during the period $ 98 $ 72 $ 54
Interest cost on projected
benefit obligation 80 78 67
Expected return on plan assets (86) (87) (66)
Net amortization 8 1 1
- -------------------------------------------------------------------
Total U.S. plans 100 64 56
Total international plans 18 12 9
- -------------------------------------------------------------------
Net pension expense $ 118 $ 76 $ 65
- -------------------------------------------------------------------
The following table provides the assumptions used in determining
the Company's benefit obligation for the U.S. Plans:
FISCAL FISCAL
1999 1998
- -------------------------------------------------------------------
Weighted average discount rate 7.50% 6.75%
Rate of increase in future
compensation levels 5.00% 5.00%
Expected long-term rate of
return on plan assets 9.00% 9.00%
- -------------------------------------------------------------------
page 85
<PAGE>
99 AR: page 86
The following table provides a reconciliation of the changes in the U.S. Plans'
benefit obligation and fair value of plan assets for fiscal 1999 and fiscal
1998, as well as a summary of the U.S. Plans' funded status at November 30,
1999 and 1998:
FISCAL FISCAL
(dollars in millions) 1999 1998
- ---------------------------------------------------------------------------
Reconciliation of benefit obligation:
Benefit obligation at beginning of year $ 1,213 $ 1,089
Service cost 98 72
Interest cost 80 78
Plan amendments -- 4
Actuarial (gain) or loss (77) 38
Benefits paid (100) (59)
Curtailment -- (9)
- ---------------------------------------------------------------------------
Benefit obligation at end of year $ 1,214 $ 1,213
- ---------------------------------------------------------------------------
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year $ 981 $ 994
Actual return on plan assets 185 7
Employer contributions 88 39
Benefits paid (100) (59)
- ---------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,154 $ 981
- ---------------------------------------------------------------------------
Funded status:
Funded status $ (60) $ (232)
Unrecognized transition obligation 5 8
Unrecognized prior-service cost 27 28
Unrecognized (gain) or loss (44) 136
- ---------------------------------------------------------------------------
Net amount recognized $ (72) $ (60)
- ---------------------------------------------------------------------------
Amounts recognized in the consolidated
statements of financial condition consist of:
Prepaid benefit cost $ 44 $ 17
Accrued benefit liability (117) (107)
Intangible asset 1 30
- ---------------------------------------------------------------------------
Net amount recognized $ (72) $ (60)
- ---------------------------------------------------------------------------
For the Supplemental Plans, the aggregate accumulated benefit obligation was $90
million and $82 million at November 30, 1999 and 1998, respectively.
The Company also maintains a separate defined contribution pension
plan which covers substantially all employees of the Company's U.K. subsidiaries
(the "U.K. Plan"). Under the U.K. Plan, benefits are determined by the
purchasing power of the accumulated value of contributions paid. In fiscal 1999,
1998 and 1997, the Company's expense related to the U.K. Plan was $25 million,
$17 million and $15 million, respectively.
POSTRETIREMENT BENEFITS
The Company has unfunded postretirement benefit plans that provide medical and
life insurance for eligible retirees, employees and dependents. At November 30,
1999 and 1998, the Company's accrued postretirement benefit costs were $99
million and $95 million, respectively.
POSTEMPLOYMENT BENEFITS
Postemployment benefits include, but are not limited to, salary continuation,
supplemental unemployment benefits, severance benefits, disability-related
benefits, and continuation of health care and life insurance coverage provided
to former or inactive employees after employment but before retirement. These
benefits were not material to the consolidated financial statements in fiscal
1999, 1998 and 1997.
14 INCOME TAXES
The provision for income taxes consists of:
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
- ----------------------------------------------------------------
Current:
U.S. federal $1,868 $1,199 $1,079
U.S. state and local 491 372 348
Non-U.S. 738 476 338
- ----------------------------------------------------------------
3,097 2,047 1,765
- ----------------------------------------------------------------
Deferred:
U.S. federal 37 (26) (45)
U.S. state and local (11) 1 (17)
Non-U.S. (186) (30) (15)
- ----------------------------------------------------------------
(160) (55) (77)
- ----------------------------------------------------------------
Provision for income taxes $2,937 $1,992 $1,688
- ----------------------------------------------------------------
The following table reconciles the provision to the U.S. federal statu-
tory income tax rate:
FISCAL FISCAL FISCAL
1999 1998 1997
- --------------------------------------------------------------------
U.S. federal statutory
income tax rate 35.0% 35.0% 35.0%
U.S. state and local income
taxes, net of U.S. federal
income tax benefits 3.6 4.6 5.1
Lower tax rates applicable to
non-U.S. earnings (2.3) (2.4) (1.1)
Other 1.7 (0.2) 0.5
- --------------------------------------------------------------------
Effective income tax rate 38.0% 37.0% 39.5%
- --------------------------------------------------------------------
<PAGE>
As of November 30, 1999, the Company had approximately $3.1 billion of
earnings attributable to foreign subsidiaries for which no provisions have
been recorded for income tax that could occur upon repatriation. Except to the
extent such earnings can be repatriated tax efficiently, they are permanently
invested abroad. It is not practicable to determine the amount of income taxes
payable in the event all such foreign earnings are repatriated, since such
liability, if any, is dependent on circumstances existing if and when
remittance occurs.
Deferred income taxes reflect the net tax effects of temporary
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when such differences are expected to reverse. Significant components
of the Company's deferred tax assets and liabilities at November 30, 1999 and
1998 are as follows:
NOV. 30, NOV. 30,
(dollars in millions) 1999 1998
- --------------------------------------------------------------------
Deferred tax assets:
Employee compensation and benefit plans $1,486 $1,289
Loan loss allowance 282 371
Other valuation and liability allowances 593 604
Deferred expenses 163 --
Other 303 167
- --------------------------------------------------------------------
Total deferred tax assets 2,827 2,431
- --------------------------------------------------------------------
Deferred tax liabilities:
Prepaid commissions 217 239
Valuation of inventory, investments
and receivables 188 127
Other 194 237
- --------------------------------------------------------------------
Total deferred tax liabilities 599 603
- --------------------------------------------------------------------
Net deferred tax assets $2,228 $1,828
- --------------------------------------------------------------------
Cash paid for income taxes was $1,736 million, $1,591 million and $1,251 million
in fiscal 1999, 1998 and 1997, respectively.
15 SEGMENT AND GEOGRAPHIC INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The adoption of this statement did not
have an effect on the Company's financial position, results of operations,
earnings per share or cash flows. This statement establishes new standards for
disclosures that relate to business operating segments ("segments"). The segment
data for prior periods has been restated to reflect the adoption of SFAS No.
131. In addition, the operating results of Morgan Stanley Dean Witter Online
("MSDW Online"), the Company's provider of electronic brokerage services, is
included within the Securities segment. Previously, the Company had included
MSDW Online's results within its Credit Services segment.
The Company structures its segments primarily based upon the nature of
the financial products and services provided to customers and the Company's
management organization. The Company operates in three business segments:
Securities, Asset Management and Credit Services through which it provides a
wide range of financial products and services to its customers.
The Company's Securities business includes securities underwriting,
distribution and trading; merger, acquisition, restructuring, real estate,
project finance and other corporate finance advisory activities; full-service
and online brokerage services; research services; the trading of foreign
exchange and commodities, as well as derivatives on a broad range of asset
categories, rates and indices; securities lending; and private equity
activities. The Company's Asset Management business provides global asset
management advice and services to investors through a variety of product lines
and brand names, including Morgan Stanley Dean Witter Advisors, Van Kampen
Investments, Morgan Stanley Dean Witter Investment Management and Miller
Anderson & Sherrerd. The Company's Credit Services business includes the
issuance of the Discover Card, the Discover Platinum Card, the Morgan Stanley
Dean Witter Card, the Private Issue Card and co-branded and affinity cards; and
the operation of the Discover/NOVUS Network, a proprietary network of merchant
and cash access locations.
page 87
<PAGE>
99 AR: page 88
Revenues and expenses directly associated with each respective segment are
included in determining their operating results. Other revenues and expenses
that are not directly attributable to a particular segment are allocated based
upon the Company's allocation methodologies, generally based on each segment's
respective revenues or other relevant measures. Selected financial information
for the Company's segments is presented in the table below.
<TABLE>
<CAPTION>
FISCAL 1999
(dollars in millions) SECURITIES ASSET MANAGEMENT CREDIT SERVICES TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
All other revenues $15,427 $2,060 $2,157 $19,644
Net interest 948 52 1,365 2,365
- ---------------------------------------------------------------------------------------------------------------------
Net revenues 16,375 2,112 3,522 22,009
- ---------------------------------------------------------------------------------------------------------------------
Income before taxes 5,864 767 1,097 7,728
Provision for income taxes 2,183 319 435 2,937
- ---------------------------------------------------------------------------------------------------------------------
Net income 3,681 448 662 4,791
- ---------------------------------------------------------------------------------------------------------------------
Total assets(1) $336,890 $4,927 $25,150 $366,967
- ---------------------------------------------------------------------------------------------------------------------
FISCAL 1998
(dollars in millions) SECURITIES ASSET MANAGEMENT CREDIT SERVICES TOTAL
- ---------------------------------------------------------------------------------------------------------------------
All other revenues $10,439 $1,676 $1,407 $13,522
Net interest 1,100 87 1,735 2,922
- ---------------------------------------------------------------------------------------------------------------------
Net revenues 11,539 1,763 3,142 16,444
- ---------------------------------------------------------------------------------------------------------------------
Gain on sale of businesses -- 323 362 685
- ---------------------------------------------------------------------------------------------------------------------
Income before taxes and cumulative effect
of accounting change 3,441 694 1,250 5,385
Provision for income taxes 1,199 264 529 1,992
Cumulative effect of accounting change -- (117) -- (117)
- ---------------------------------------------------------------------------------------------------------------------
Net income 2,242 313 721 3,276
- ---------------------------------------------------------------------------------------------------------------------
Total assets(1) $292,867 $4,537 $20,186 $317,590
- ---------------------------------------------------------------------------------------------------------------------
FISCAL 1997
(dollars in millions) SECURITIES ASSET MANAGEMENT CREDIT SERVICES TOTAL
- ---------------------------------------------------------------------------------------------------------------------
All other revenues $9,261 $1,817 $978 $12,056
Net interest 763 64 1,950 2,777
- ---------------------------------------------------------------------------------------------------------------------
Net revenues 10,024 1,881 2,928 14,833
- ---------------------------------------------------------------------------------------------------------------------
Income before taxes(2) 3,026 565 757 4,274
Provision for income taxes(2) 1,185 230 284 1,688
- ---------------------------------------------------------------------------------------------------------------------
Net income(2) 1,841 335 473 2,586
- ---------------------------------------------------------------------------------------------------------------------
Total assets(1) $272,761 $5,117 $24,409 $302,287
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Corporate assets have been fully allocated to the Company's business
segments.
(2) Fiscal 1997 total income before taxes, provision for income taxes and net
income includes merger-related expenses of $74 million ($63 million net of
taxes), which were not allocated to the respective segments.
<PAGE>
The Company operates in both U.S. and non-U.S. markets. The Company's non-U.S.
business activities are principally conducted through European and Asian
locations. The following table presents selected income statement information
and the total assets of the Company's operations by geographic area. The
principal methodologies used in preparing the geographic area data are as
follows: commission revenues are recorded based on the location of the sales
force; trading revenues are principally recorded based on location of the
trader; investment banking revenues are based on location of the client; and
asset management and portfolio service fees are recorded based on the location
of the portfolio manager.
<TABLE>
<CAPTION>
FISCAL 1999
(dollars in millions) U.S. EUROPE ASIA OTHER ELIMINATIONS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 17,430 $ 3,741 $ 1,203 $ (42) $ (323) $ 22,009
Income before taxes 6,297 1,275 250 (94) -- 7,728
Total assets 364,852 164,410 37,626 17,698 (217,619) 366,967
- ----------------------------------------------------------------------------------------------------------------------------
FISCAL 1998
(dollars in millions) U.S. EUROPE ASIA OTHER ELIMINATIONS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net revenues $ 12,837 $ 2,787 $ 1,023 $ 95 $ (298) $ 16,444
Income before taxes and cumulative
effect of accounting change 3,955 1,089 287 54 -- 5,385
Total assets 328,450 139,923 25,712 9,138 (185,633) 317,590
- ----------------------------------------------------------------------------------------------------------------------------
FISCAL 1997
(dollars in millions) U.S. EUROPE ASIA OTHER ELIMINATIONS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net revenues $ 12,464 $ 1,757 $ 866 $ 55 $ (309) $ 14,833
Income before taxes 3,617 399 240 18 -- 4,274
Total assets 298,923 126,138 30,656 8,805 (162,235) 302,287
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
16 BUSINESS ACQUISITION AND DISPOSITIONS
During the second quarter of fiscal 1999, the Company completed its acquisition
of AB Asesores, the largest independent financial services firm in Spain. AB
Asesores has leading positions in personal investment, asset management,
institutional research and brokerage, and investment banking. Through its
approximately 300 financial advisors, it offers its individual investors
proprietary mutual funds and other financial products. This acquisition reflects
the Company's strategic initiative to build international Securities and Asset
Management businesses to serve the needs of individual investors. The Company's
fiscal 1999 results include the operations of AB Asesores since March 25, 1999,
the date of acquisition.
In fiscal 1998, the Company entered into several transactions
reflecting its strategic decision to focus on growing its core Asset Management
and Credit Services businesses.
In the fourth quarter of fiscal 1998, the Company completed the sale
of its Global Custody business. The Company also sold its interest in the
operations of SPS Transaction Services, Inc., a 73%-owned, publicly held
subsidiary of the Company. In addition, the Company sold certain credit card
receivables relating to its discontinued BRAVO/(R)/ Card. The Company's
aggregate net pre-tax gain resulting from these transactions was $685 million.
In addition, during fiscal 1998 the Company sold its Prime Option/SM/
MasterCard/(R)/ portfolio, a business it had operated with NationsBank of
Delaware, N.A., and its Correspondent Clearing business. The gains resulting
from the sale of these businesses were not material to the Company's results
of operations or financial condition.
page 89
<PAGE>
99 AR: page 90
17 QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1999 FISCAL QUARTER(2) 1998 FISCAL QUARTER
------------------------------------------ --------------------------------------------
(dollars in millions, except share
and per share data) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 8,405 $ 8,529 $ 8,370 $ 8,624 $ 7,585 $ 8,428 $ 7,498 $ 7,620
Interest expense 2,877 2,753 2,914 2,846 3,145 3,554 3,377 3,438
Provision for consumer
loan losses 177 119 113 120 405 275 280 213
- -------------------------------------------------------------------------------- --------------------------------------------
Net revenues 5,351 5,657 5,343 5,658 4,035 4,599 3,841 3,969
- -------------------------------------------------------------------------------- --------------------------------------------
Total non-interest
expenses 3,679 3,799 3,780 3,023 2,903 3,202 2,931 2,708
Gain on sale of
businesses -- -- -- -- -- -- -- 685
- -------------------------------------------------------------------------------- --------------------------------------------
Income before
income taxes and
cumulative effect of
accounting change 1,672 1,858 1,563 2,635 1,132 1,397 910 1,946
Provision for income taxes 635 707 593 1,002 441 545 284 722
- -------------------------------------------------------------------------------- --------------------------------------------
Income before
cumulative effect of
accounting change 1,037 1,151 970 1,633 691 852 626 1,224
Cumulative effect of
accounting change -- -- -- -- (117) -- -- --
- -------------------------------------------------------------------------------- --------------------------------------------
Net income $ 1,037 $ 1,151 $ 970 $ 1,633 $ 574 $ 852 $ 626 $ 1,224
- -------------------------------------------------------------------------------- --------------------------------------------
Basic earnings
per share(1) (3):
Income before
cumulative effect
of accounting change $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.58 $ 0.72 $0.54 $ 1.08
Cumulative effect of
accounting change -- -- -- -- (0.10) -- -- --
- -------------------------------------------------------------------------------- --------------------------------------------
Net income $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.48 $ 0.72 $ 0.54 $ 1.08
Diluted earnings
per share(1) (3):
Income before
cumulative effect
of accounting change $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.55 $ 0.69 $0.51 $ 1.04
Cumulative effect of
accounting change -- -- -- -- (0.09) -- -- --
Net income $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.46 $ 0.69 $ 0.51 $ 1.04
- -------------------------------------------------------------------------------- --------------------------------------------
Dividends to common
shareholders(1) $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.10 $ 0.10 $ 0.10 $ 0.10
Book value(1) $ 12.47 $ 13.00 $ 13.27 $ 14.85 $ 11.24 $ 10.98 $ 11.07 $ 11.94
Stock price range(1) (4) $31.16-48.50 $44.53-57.10$41.07-51.78 $43.19-63.63 $26.13-35.25 $34.88-42.22$29.03-48.44 $19.22-37.38
- -------------------------------------------------------------------------------- --------------------------------------------
</TABLE>
(1) Amounts have been retroactively adjusted to give effect for a two-for-one
common stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 2000.
(2) Certain reclassifications have been made to previously reported fiscal 1999
quarterly amounts.
(3) Summation of the quarters' earnings per common share may not equal the
annual amounts due to the averaging effect of the number of shares and
share equivalents throughout the year.
(4) Closing prices represent the range of sales per share on the New York Stock
Exchange for the periods indicated. The number of stockholders of record at
November 30, 1999 approximated 152,000. The number of beneficial owners of
common stock is believed to exceed this number.
<PAGE>
Exhibit 21
MORGAN STANLEY DEAN WITTER & CO. /1/,/2/
---------------------------------
Subsidiaries
As on February 1, 2000
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
Dean Witter Alliance Capital Corporation Delaware 1993
Dean Witter Asset Corporation Delaware 1992
Dean Witter Capital Corporation Delaware 1987
Dean Witter Advisers Inc. Delaware 1989
Dean Witter Capital Advisers Inc. Delaware 1989
DW Administrators Inc. Delaware 1989
DW Window Coverings Holding, Inc. Delaware 1988
Dean Witter Futures and Currency Management Inc. Delaware 1987
Dean Witter Realty Inc. Delaware 1982
Dean Witter Global Realty Inc. Delaware 1995
Dean Witter Holding Corporation Delaware 1983
Civic Center Leasing Corporation Delaware 1983
Lee Leasing Corporation Delaware 1982
Lewiston Leasing Corporation Delaware 1983
Sartell Leasing Corporation Delaware 1982
Dean Witter Leasing Corporation Delaware 1982
Dean Witter Realty Credit Corporation Delaware 1982
Dean Witter Realty Fourth Income Properties Inc. Delaware 1986
Dean Witter Realty Growth Properties Inc. Delaware 1985
Dean Witter Realty Income Associates I Inc. Delaware 1983
Dean Witter Realty Income Associates II Inc. Delaware 1984
Dean Witter Realty Income Properties I Inc. Delaware 1983
Dean Witter Realty Income Properties II Inc. Delaware 1984
Dean Witter Realty Income Properties III Inc. Delaware 1985
Dean Witter Realty Yield Plus Assignor Inc. Delaware 1987
Dean Witter Realty Yield Plus Inc. Delaware 1987
Dean Witter Realty Yield Plus II Inc. Delaware 1988
DW Arboretum Plaza Inc. Delaware 1992
DW Bennington Property Inc. Delaware 1993
DW Chesterbrook Investors Inc. Delaware 1992
DW Duportail Investors Inc. Delaware 1992
DW Greycoat Inc. Delaware 1993
Green Orchard Inc. Massachusetts 1991
LLJV Funding Corporation Massachusetts 1984
Realty Management Services Inc. Delaware 1982
Dean Witter Reynolds Inc. Delaware 1968
Dean Witter Reynolds Insurance Agency (Massachusetts) Inc. Massachusetts 1975
Dean Witter Reynolds Insurance Agency (Ohio) Inc. Ohio 1977
Dean Witter Reynolds Insurance Agency (Oklahoma) Inc. Oklahoma 1976
Dean Witter Reynolds Insurance Agency (Texas) Inc. Texas 1978
Dean Witter Reynolds Insurance Services (Alabama) Inc. Alabama 1991
Dean Witter Reynolds Insurance Services (Arkansas) Inc. Arkansas 1977
Dean Witter Reynolds Insurance Services (Illinois) Inc. Illinois 1975
Dean Witter Reynolds Insurance Services, Inc. (Puerto Rico) Puerto Rico 1987
Dean Witter Reynolds Insurance Services (Maine) Inc. Maine 1995
Dean Witter Reynolds Insurance Services (Montana) Inc. Montana 1977
Dean Witter Reynolds Insurance Services (New Hampshire) Inc. New Hampshire 1977
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
-------------------- --------
<S> <C> <C>
(Dean Witter Reynolds Inc., continued)
Dean Witter Reynolds Insurance Services (South Dakota) Inc. South Dakota 1977
Dean Witter Reynolds Insurance Services (Wyoming) Inc. Wyoming 1977
DWR Special Partners Inc. Delaware 1982
Morgan Stanley Dean Witter Insurance Services (Arizona) Inc. Arizona 1974
Morgan Stanley Dean Witter Insurance Services Inc. Delaware 1972
Dean Witter Reynolds Insurance Agency (Indiana) Inc. Indiana 1975
FD Insurance Services, Inc. Delaware 1997
FD Insurance Services of Nevada, Inc. Nevada 1997
FD Insurance Services of New Mexico, Inc. New Mexico 1997
FD Insurance Services of Texas, Inc. Texas 1997
Dean Witter Reynolds Partners Inc. Delaware 1982
Dean Witter Reynolds Venture Equities Inc. Delaware 1981
Dean Witter Venture Management Inc. Delaware 1986
Dean Witter Venture Inc. Delaware 1993
Demeter Management Corporation Delaware 1977
DWD Electronic Financial Services Inc. Delaware 1997
Morgan Stanley Dean Witter Online Inc. California 1992
Bay One Technologies Group, Inc. California 1996
DWR Partnership Administrators Inc. Delaware 1989
Early Adopter Fund Manager Inc. Delaware 1999
Jolter Investments Inc. Delaware 1989
Morgan Rundle Inc. Delaware 1978
MR Ventures Inc. Delaware 1982
Morgan Stanley & Co. Incorporated Delaware 1969
Graystone Wealth Management Services LLC Delaware 1999
Morgan Stanley Flexible Agreements Inc. Delaware 1992
MS Securities Services Inc. Delaware 1981
Prime Dealer Services Corp. Delaware 1994
Morgan Stanley ABS Capital I Inc. Delaware 1997
Morgan Stanley ABS Capital II Inc. Delaware 1997
Morgan Stanley Advisory Partnership Inc. Delaware 1985
Morgan Stanley Asset Funding Inc. Delaware 1997
Morgan Stanley Baseball, Inc. Delaware 1989
Morgan Stanley Capital Group Inc. Delaware 1984
South Eastern Electric Development Corporation Delaware 1998
South Eastern Energy Corporation Delaware 1999
South Eastern Generating Corporation Delaware 2000
Morgan Stanley Capital International Inc. * Delaware 1998
Morgan Stanley Capital International S.A. Switzerland 1998
Morgan Stanley Capital (Jersey) Limited Jersey, Channel Is. 1987
Morgan Stanley Capital Partners III, Inc. Delaware 1993
Morgan Stanley Capital Services Inc. Delaware 1985
Morgan Stanley Commercial Mortgage Capital, Inc. Delaware 1994
Morgan Stanley Credit Products Ltd. Cayman Islands 1998
Morgan Stanley Dean Witter Advisors Inc. Delaware 1992
Morgan Stanley Dean Witter Services Company Inc. Delaware 1994
Morgan Stanley Dean Witter Capital I Inc. Delaware 1985
Morgan Stanley Dean Witter Commodities Management Inc. Delaware 1992
Morgan Stanley Dean Witter Distributors Inc. Delaware 1992
Morgan Stanley Dean Witter Equity Funding, Inc. Delaware 1998
Morgan Stanley Dean Witter HK RAV IV, LLC Delaware 1999
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
Morgan Stanley Dean Witter International Incorporated Delaware 1978
Dean Witter Reynolds GmbH Germany 1974
Dean Witter Reynolds (Hong Kong) Limited Hong Kong 1979
Dean Witter Reynolds International, Inc. Panama 1959
Dean Witter Reynolds (Geneva) S.A. Switzerland 1991
Dean Witter International Ltd. England 1988
Dean Witter Capital Markets International Ltd. (U.K.) England 1987
Dean Witter Futures Limited England 1977
Dean Witter Reynolds Limited England 1968
Dean Witter Reynolds International, S.A. France 1979
Dean Witter Reynolds (Lausanne) S.A. Switzerland 1973
Dean Witter Reynolds (Lugano) S.A. Switzerland 1989
Dean Witter Reynolds S.p.A. Italy 1978
Morgan Stanley Dean Witter Trust Company (Cayman) Ltd. Cayman Islands 1998
Morgan Stanley Dean Witter Nominees Limited Cayman Islands 1999
Tate Limited Cayman Islands 1999
Morgan Stanley Dean Witter Investment Group Inc. Delaware 1999
Morgan Stanley Dean Witter Investment Management Inc. Delaware 1980
Morgan Stanley Dean Witter Global Franchise Inc. Delaware 1997
Morgan Stanley Dean Witter Investment Management Holdings Inc. Delaware 1995
Miller Anderson & Sherrerd, LLP Pennsylvania 1971
MAS Fixed Income Partnership I, L.P. Delaware 1995
MAS Fixed Income I, LLC Delaware 1995
MAS Fixed Income Partnership II, LP Delaware 1995
MAS Fixed Income II, LLC Delaware 1995
MAS Fund Distribution, Inc. Pennsylvania 1992
Morgan Stanley Dean Witter Municipal Funding, Inc. Delaware 1998
Morgan Stanley Dean Witter Principal Funding, Inc. Delaware 1998
Morgan Stanley Dean Witter Trust FSB Federal Charter 1996
Morgan Stanley Dean Witter Wealth Management, Inc. Delaware 1998
Morgan Stanley Derivative Products Inc. Delaware 1994
Morgan Stanley Developing Country Debt II, Inc. Delaware 1991
Morgan Stanley Emerging Markets Inc. Delaware 1990
Morgan Stanley Equity (C.I.) Limited Jersey, Channel Is. 1995
Morgan Stanley Equity Finance Limited England 1997
Morgan Stanley Equity Investors Inc. Delaware 1988
Morgan Stanley Finance (Jersey) Limited Jersey, Channel Is. 1990
Morgan Stanley Funding, Inc. Delaware 1997
Morgan Stanley Global Emerging Markets, Inc. Delaware 1996
Morgan Stanley Insurance Agency Inc. Delaware 1985
Morgan Stanley International Incorporated Delaware 1963
AB Asesores Morgan Stanley Dean Witter, S.V., S. A. Spain 1999
AB Asesores Alicante, S.A. Spain 1996
AB Asesores Baleares, S.A. * Spain 1997
AB Asesores Bursatiles Aragon, S.A. * Spain 1988
AB Asesores Bursatiles Cordoba, S.A. * Spain 1992
AB Asesores Bursatiles Murcia, S.A. * Spain 1993
AB Asesores Bursatiles Sur, S.A. * Spain 1989
AB Asesores Ceuta, S.L. * Spain 1998
AB Asesores Castilla, S.A. * Spain 1996
AB Asesores CFMB Almeria, S.A. * Spain 1998
AB Asesores Girona, S.A. Spain 1996
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
(Morgan Stanley International Incorporated, continued)
(AB Asesores Morgan Stanley Dean Witter, S.V., S. A., continued)
AB Asesores Gran Canaria, S.A. Spain 1995
AB Asesores Leon, S.A. Spain 1994
AB Asesores Tenerife, S.A. Spain 1996
AB Asesores Gestion Fondos, SGIIC, S.A. Spain 1987
AB Asesores Gestion Pensiones EGFP, S.A. Spain 1992
AB Asesores Wellesley, S.A. Spain 1998
Inversiones Tosas, S.A. Spain 1987
Bank Morgan Stanley AG Switzerland 1973
Cabot Aircraft Services Limited Ireland 1997
Morgan Stanley AB Sweden 1999
Morgan Stanley AOZT Russia 1994
Morgan Stanley Asia Holdings I Inc. Delaware 1990
Morgan Stanley Asia Holdings II Inc. Delaware 1990
Morgan Stanley Asia Holdings III Inc. Delaware 1990
Morgan Stanley Asia Holdings IV Inc. Delaware 1990
Morgan Stanley Asia Holdings V Inc. Delaware 1990
Morgan Stanley Asia Holdings VI Inc. Delaware 1990
Morgan Stanley Asia Pacific (Holdings) Limited Cayman Islands 1995
Fosbury Investments Cooperatieve U.A. The Netherlands 1998
Morgan Stanley Asia Regional (Holdings) II LLC Cayman Islands 1995
Morgan Stanley Asia Regional (Holdings) III LLC Cayman Islands 1995
Morgan Stanley Dean Witter (Singapore) Holdings Pte Ltd Rep. of Singapore 1999
Morgan Stanley Dean Witter Asia (Singapore) Pte Rep. of Singapore 1992
Morgan Stanley Dean Witter Capital Group (Singapore) Pte Rep. of Singapore 1990
Morgan Stanley Dean Witter Futures (Singapore) Pte Rep. of Singapore 1992
Morgan Stanley Dean Witter Private Equity (Asia) Pte Ltd Rep. of Singapore 1999
Morgan Stanley Dean Witter Investment Management Company Rep. of Singapore 1990
Morgan Stanley Asia Regional (Holdings) IV LLC Cayman Islands 1995
Morgan Stanley Dean Witter (Hong Kong) Holdings Hong Kong 1998
MSDW Asia Securities Products LLC Cayman Islands 1995
Morgan Stanley Dean Witter Asia Limited Hong Kong 1984
Morgan Stanley Dean Witter Futures (Hong Kong) Limited Hong Kong 1988
Morgan Stanley Dean Witter Hong Kong Securities Limited Hong Kong 1988
Morgan Stanley Dean Witter Pacific Limited Hong Kong 1987
MSDW-JL Holdings I Limited Cayman Islands 1998
Morgan Stanley Japan (Holdings) Ltd. Cayman Islands 1984
Morgan Stanley Japan Limited Hong Kong 1993
Morgan Stanley Dean Witter Japan Limited Cayman Islands 1999
Morgan Stanley Asset & Investment Trust Management Co., Limited Japan 1987
Morgan Stanley Asset Management S.A. Luxembourg 1988
Morgan Stanley Canada Limited Canada 1982
Morgan Stanley Capital SA France 1989
Morgan Stanley Capital (Luxembourg) S.A. Luxembourg 1993
Morgan Stanley Dean Witter Asia (China) Limited Hong Kong 1991
Morgan Stanley Dean Witter Asia (Taiwan) Ltd. Rep. of China 1990
Morgan Stanley Dean Witter Australia Limited Australia 1989
Morgan Stanley Dean Witter Australia Finance Limited Australia 1999
Morgan Stanley Dean Witter Australia Securities Limited Australia 1997
Morgan Stanley Dean Witter Australia Securities (Nominee) Pty Limited Australia 1999
Morgan Stanley Dean Witter (Espana) SA Spain 1998
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
(Morgan Stanley International Incorporated, continued)
Morgan Stanley Dean Witter (Europe) Limited England 1998
Morgan Stanley Dean Witter Financial Holdings, LLC Delaware 1999
Morgan Stanley Dean Witter Hong Kong Finance Limited Hong Kong 1999
Morgan Stanley Dean Witter Fixed Income Limited Jersey, Channel Is. 1999
Narib Limited Jersey, Channel Is. 1999
Willow Capital Limited Jersey, Channel Is. 1999
Woburn Investments Cooperatieve UA The Netherlands 1999
Morgan Stanley Dean Witter UK Capital Limited England 1999
Morgan Stanley Funding Limited Jersey, Channel Is. 1997
Morgan Stanley Funding II Limited Jersey, Channel Is. 1999
Morgan Stanley Group (Europe) England 1988
Delta AB 1 General Partner Limited England 1996
Morgan Stanley Capital Group Limited England 1993
Morgan Stanley Dean Witter Bank Limited England 1999
Morgan Stanley Dean Witter Card Services Limited England 1999
Morgan Stanley Dean Witter Investment Management Limited England 1986
Morgan Stanley (Europe) Limited England 1993
Morgan Stanley Finance plc England 1993
MSDW Corporate Holdings Limited England 2000
MSDW Corporate Holdings I Limited Jersey, Channel Is. 1999
Sunningdale Investments Cooperatieve UA The Netherlands 1999
MSDW Corporate Holdings II Limited Jersey, Channel Is. 1999
Morgan Stanley Property Management (UK) Limited England 1987
Morgan Stanley Services (UK) Limited England 1993
Morgan Stanley (Structured Products) Jersey Limited Jersey, Channel Is. 1994
Morgan Stanley UK Group England 1976
Morgan Stanley & Co. International Limited England 1986
Morgan Stanley International Nominees Limited England 1994
Morgan Stanley & Co. Limited England 1986
Morgan Stanley Securities Limited England 1986
Morstan Nominees Limited England 1986
MSDW Equity (UK) Plc England 1998
MS Leasing UK Limited England 1991
Morgan Stanley Dean Witter Hong Kong Nominees Limited Hong Kong 1988
Morgan Stanley Dean Witter Mauritius Company Limited Mauritius 1993
Morgan Stanley Dean Witter Investment Management Private Limited India 1993
Morgan Stanley India Securities Limited India 1995
JM Morgan Stanley Securities Limited * India 1998
Morgan Stanley Dean Witter (Thailand) Limited Thailand 1997
Morgan Stanley Holding (Deutschland) GmbH Germany 1990
Morgan Stanley Bank AG Germany 1986
Morgan Stanley International Insurance Ltd. Bermuda 1995
Morgan Stanley Latin America Incorporated Delaware 1994
Morgan Stanley Administadora de Carteiras S.A. Brazil 1996
Morgan Stanley Dean Witter do Brasil Ltda. Brazil 1995
Morgan Stanley Dean Witter Distributidora de Titulos e Valores Mobilarios SA Brazil 1998
Morgan Stanley Financial Products Ltd. Cayman Islands 1997
MSLA Advisors Incorporated Delaware 1995
Morgan Stanley Middle East Inc. Delaware 1997
Morgan Stanley Mortgage Servicing Ltd. England 1997
Morgan Stanley Offshore Investment Company Ltd. Cayman Islands 1987
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
(Morgan Stanley International Incorporated, continued)
Morgan Stanley S.A. France 1992
Morgan Stanley Dean Witter (France) SA France 1998
Morgan Stanley Services (Jersey) Limited Jersey, Channel Is. 1997
Morgan Stanley South Africa (Pty) Limited South Africa 1994
Morgan Stanley SPV I (Cayman Islands) LLC Cayman Islands 1996
Farlington Corporation Ireland 1996
ITALSEC S.r.l. Italy 1996
Morgan Stanley SPV II (Cayman Islands) LLC Cayman Islands 1996
Morgan Stanley Trading Beteiligungs-GmbH Germany 1993
Morgan Stanley Trading GmbH & Co. KG Germany 1994
Morgan Stanley Wertpapiere GmbH Germany 1989
MS Italy (Holdings) Inc. Delaware 1990
Banca Morgan Stanley SpA Italy 1990
MS LDC, Ltd. Delaware 1991
MSDW Capital Investments Inc. Delaware 1999
MSAM/Kokusai (Cayman Islands), Inc. Cayman Islands 1996
MSAM/Kokusai II (Cayman Islands), Inc. Cayman Islands 1997
MSDW Investment Holdings Limited Cayman Islands 1999
Cabot 2 Limited England 1978
MS Cabot Inc. Delaware 1995
MSDW Investment Holdings (US) Inc. Delaware 1999
MSDW Investment Holdings (UK) Ltd. England 1999
Acorn Group plc England 1983
Applied Risc Technologies Limited England 1995
Cabot 7 Limited England 1994
Cabot 3 Limited England 1982
Cabot 4 Limited England 1997
Cabot 5 Limited England 1980
Cabot 6 Limited England 1983
MSL Incorporated Delaware 1976
Morgan Stanley (Jersey) Limited Jersey, Channel Is. 1986
Morgan Stanley LEF I, Inc. Delaware 1989
Morgan Stanley Leveraged Capital Fund Inc. Delaware 1985
Morgan Stanley Leveraged Equity Fund II, Inc. Delaware 1987
Morgan Stanley Dean Witter Private Equity Asia Limited Hong Kong 1992
Morgan Stanley Leveraged Equity Holdings Inc. Delaware 1987
Morgan Stanley Market Products Inc. Delaware 1987
Morgan Stanley Mortgage Capital Inc. New York 1984
Morgan Stanley Overseas Finance Ltd. Cayman Islands 1997
Morgan Stanley Overseas Services (Jersey) Limited Jersey, Channel Is. 1986
Morgan Stanley Real Estate Investment Management Inc. Delaware 1990
Morgan Stanley Real Estate Fund, Inc. Delaware 1989
MSREF I, L.L.C. Delaware 1995
MSREF I-CO, L.L.C. Delaware 1995
Morgan Stanley Real Estate Investment Management II, Inc. Delaware 1994
MSREF II-CO, L.L.C. Delaware 1995
Morgan Stanley Realty Incorporated Delaware 1969
BH-MS Realty Inc. Delaware 1983
BH-MS Leasing Inc. Delaware 1983
BH-Sartell Inc. Delaware 1983
Brooks Harvey & Co., Inc. Delaware 1971
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
(Morgan Stanley Realty Incorporated, continued)
Japan Realty Finance Company Cayman Islands 1998
Kearny Global, Inc. Delaware 1998
Corzo Venezia S.R.L. Italy 1999
Kearny Germany GmbH Germany 1999
Kearny Real Estate Company Delaware 1998
Kearny Global Investors, K.K. Japan 1998
Lombard Servicing Inc. Japan 1999
Morgan Stanley Realty of California Inc. California 1970
Morgan Stanley Realty of Illinois Inc. Delaware 1989
Morgan Stanley Realty Japan Ltd. Japan 1998
MSDW Canary Wharf, L.L.C. Delaware 1999
Tokyo Realty Investment Company Cayman Islands 1998
The Morgan Stanley Scholarship Fund Inc. (Not-For-Profit) Delaware 1985
Morgan Stanley Securitization Funding Inc. Delaware 1998
Morgan Stanley Senior Funding, Inc. Delaware 1996
Morgan Stanley Services Inc. Delaware 1988
Morgan Stanley Structured Products (Cayman) I Limited Cayman Islands 1997
Morgan Stanley Structured Products (Cayman) II Limited Cayman Islands 1997
Morgan Stanley Technical Services Inc. Delaware 1989
Morgan Stanley Technical Services MB/VC Inc. Delaware 1993
Morgan Stanley Venture Capital Inc. Delaware 1984
Morgan Stanley Venture Capital II, Inc. Delaware 1992
Morgan Stanley Venture Capital III, Inc. Delaware 1996
Morgan Stanley Ventures Inc. Delaware 1984
Morstan Development Company, Inc. Delaware 1971
Moranta, Inc. Georgia 1979
Porstan Development Company, Inc. Oregon 1982
MS 10020, Inc. Delaware 1994
MS 10036, Inc. Delaware 1996
MS Capital Cayman Ltd. Cayman Islands 1997
MS Capital Holdings Inc. Delaware 1997
Morgan Stanley Capital (Delaware) L.L.C. Delaware 1997
MS Financing Inc. Delaware 1986
G.H.Y. Capital II B.V. The Netherlands 1999
Corso Marconi Immobiliare Limited Liability Company Delaware 1998
Corso Marconi Immobiliare S.a.r.l. Luxembourg 1998
Octavian S.a.r.l. Luxembourg 1999
Luxco France S.a.r.l. Luxembourg 1999
Luxco Germany S.a.r.l. Luxembourg 1999
Alfa Romeo Vertriebsgesellschaft mbH * Germany 1969
Goliath 89.Beteiligungs-Und Verwaltungesellschaft mbH Germany 1999
Luxco Spain S.a.r.l. Luxembourg 1999
Luxco UK S.a.r.l. Luxembourg 1999
Inmap 2000 (U.K.) Limited England 1996
Saigarage Genova SpA Italy 1992
Corso Marconi Immobiliare 2 Limited Liability Company Delaware 1999
Morgan Stanley 750 Building Corp. Delaware 1994
G.H.Y. Capital B.V. The Netherlands 1998
MS Tokyo Properties Ltd. Japan 1989
MSDW LTCP, L.L.C. Delaware 1998
MSDW 745, LLC Delaware 1998
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
MS Holdings Incorporated Delaware 1995
MS Real Estate Special Situations Inc. Delaware 1997
MS Real Estate Special Situations GP Inc. Delaware 1997
MS Synfuels, Inc. Delaware 1998
MS Technology Holdings, Inc. Delaware 1997
MS Venture Capital (Japan) Inc. Delaware 1989
MSAM Holdings II, Inc. Delaware 1996
Van Kampen Investments Inc. Delaware 1992
American Capital Contractual Services, Inc. New York 1957
Riverview International Inc. Delaware 1998
Van Kampen Advisors Inc. Delaware 1974
Van Kampen Asset Management Inc. Delaware 1936
Van Kampen Funds Inc. Delaware 1974
Van Kampen Exchange Corp. California 1975
Van Kampen Insurance Agency of Illinois Inc. Illinois 1996
Van Kampen Insurance Agency of Texas Inc. Texas 1996
Van Kampen Investment Advisory Corp. Delaware 1982
Van Kampen Investor Services Inc. Delaware 1987
Van Kampen Management Inc. Delaware 1990
Van Kampen Recordkeeping Services Inc. Delaware 1997
Van Kampen System Inc. Delaware 1996
Van Kampen Trust Co. Texas 1986
VKAC Cayman Limited Cayman Islands 1995
MSBF Inc. Delaware 1995
MSCP III Holdings, Inc. Delaware 1994
MSDW Capital Partners IV, Inc. Delaware 1998
MSDW Capital Trust I Delaware 1998
MSDW CPIV Holdings, Inc. Delaware 1998
MSDW European Real Estate Special Situations Inc. Delaware 1999
MSDW International Employee Services LLC Delaware 1998
MSDW Offshore Equity Services Inc. Delaware 1998
JJ&J Investments Limited Cayman Islands 1999
MSDW May PERC I Limited Cayman Islands 1999
MSDW Equity Finance Services I (Cayman) Ltd. Cayman Islands 1998
MSDW Equity Investments Limited Cayman Islands 1999
MSDW Offshore Equity Services (Korea) Inc. Delaware 1999
MSDW Structured Asset Corp. Delaware 1998
MSDW Synfuels II, Inc. Delaware 1998
MSDW Synfuels III, Inc. Delaware 1998
MSDW Venture Partners IV, Inc. Delaware 1999
MSDW VP IV Holdings, Inc. Delaware 1999
MSIT Holdings, Inc. Delaware 1996
SL Partners MD Side Fund, LLC Delaware 1999
MSREF II, Inc. Delaware 1994
MSREF II, L.L.C. Delaware 1995
MSREF III, Inc. Delaware 1997
MSUH Holdings I, Inc. Delaware 1996
MSUH Holdings II, Inc. Delaware 1996
MS SP Urban Horizons, Inc. Delaware 1996
MS Urban Horizons, Inc. Delaware 1994
NOVUS Credit Services Inc. Delaware 1960
Bank of New Castle Delaware 1988
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Year of
Jurisdiction of Inc./
Incorporation Form.
------------- -----
<S> <C> <C>
(NOVUS Credit Services Inc., continued)
Discover Brokerage Direct, Inc. Delaware 1999
Discover Card Limited Gibraltar 1992
Discover Financial Services, Inc. Delaware 1985
Discover Services Corporation Delaware 1990
Greenwood Trust Company Delaware 1911
GTC Insurance Agency, Inc. Delaware 1999
GTC Insurance Agency, Inc. of Alabama Alabama 1999
Morgan Stanley Dean Witter Bank, Inc. Utah 1990
MWF Insurance Agency, Inc. Delaware 1999
MWF Insurance Agency, Inc. of Alabama Alabama 1999
Mountain Receivables Corp. Delaware 1996
NCL Investments, Inc. Delaware 1997
Morgan Stanley Dean Witter Credit Corporation of Pennsylvania Pennsylvania 1967
Morgan Stanley Dean Witter Credit Corporation Delaware 1969
Morgan Stanley Dean Witter Credit Corporation of Iowa Iowa 1977
Morgan Stanley Dean Witter Credit Corporation of Minnesota Minnesota 1994
Morgan Stanley Dean Witter Credit Corporation of Tennessee Tennessee 1975
NOVUS Financial Corporation of Washington Washington 1991
Discover Financial Services (Canada), Inc. Canada 1985
SCFC Receivables Corp. Delaware 1989
Discover Receivables Financing Corporation Delaware 1989
Discover Receivables Financing Group, Inc. Delaware 1990
SCFC Receivables Financing Corporation Delaware 1988
SPS Transaction Services, Inc. Delaware 1991
Utah Receivables Financing Corporation Delaware 1997
One Water Corporation Massachusetts 1985
Open Road Airways, Inc. Delaware 1998
PG Holdings, Inc. Delaware 1991
PG Investors, Inc. Delaware 1991
PG Investors II, Inc. Delaware 1996
PG Investors III, Inc. Delaware 2000
Pierpont Power, Inc. New York 1987
Reynolds Securities Inc. Delaware 1978
Romley Computer Leasing Inc. Delaware 1985
Strategic Investments I, Inc. Delaware 1996
Tempo-GP, Inc. Delaware 1986
Tempo-LP, Inc. Delaware 1986
Zephyr (Cayman) Limited Cayman Islands 1999
</TABLE>
/1/ Morgan Stanley Dean Witter & Co. was incorporated in Delaware in 1981.
/2/ "*" indicates that one or more minority shareholders are non-affiliates.
-9-
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Morgan Stanley Dean Witter & Co. of our reports dated January 21,
2000, included in and incorporated by reference in this Annual Report on Form
10-K of Morgan Stanley Dean Witter & Co. for the fiscal year ended November 30,
1999:
Filed on Form S-3:
Registration Statement No. 33-57202
Registration Statement No. 33-60734
Registration Statement No. 33-89748
Registration Statement No. 33-92172
Registration Statement No. 333-07947
Registration Statement No. 333-22409
Registration Statement No. 333-27881
Registration Statement No. 333-27893
Registration Statement No. 333-27919
Registration Statement No. 333-46403
Registration Statement No. 333-46935
Registration Statement No. 333-76111
Registration Statement No. 333-75289
Filed on Form S-4:
Registration Statement No. 333-25003
Filed on Form S-8:
Registration Statement No. 33-62374
Registration Statement No. 33-63024
Registration Statement No. 33-63026
Registration Statement No. 33-78038
Registration Statement No. 33-79516
Registration Statement No. 33-82240
Registration Statement No. 33-82242
Registration Statement No. 33-82244
Registration Statement No. 333-04212
Registration Statement No. 333-28141
Registration Statement No. 333-25003
Registration Statement No. 333-28263
Registration Statement No. 333-62869
Registration Statement No. 333-78081
Registration Statement No. 333-95303
/s/ Deloitte & Touche LLP
New York, New York
February 24, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
TO THE DIRECTORS OF MORGAN STANLEY DEAN WITTER & CO.
We consent to the incorporation by reference in the Registration Statement No.
333-28263 of Morgan Stanley Dean Witter & Co. on Form S-8 of our report dated 22
February 2000 relating to the Morgan Stanley UK Group Profit Sharing Schemes,
appearing in the Annual Report on Form 10-K of Morgan Stanley Dean Witter & Co.
for the fiscal year ended 30 November 1999.
/s/ DELOITTE & TOUCHE
DELOITTE & TOUCHE
Chartered Accountants
22 February 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Financial Condition at November 30, 1999 and the
Consolidated Statements of Income for the Twelve Months Ended November 30, 1999
and is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 22,038
<RECEIVABLES> 66,158
<SECURITIES-RESALE> 70,366
<SECURITIES-BORROWED> 85,064
<INSTRUMENTS-OWNED> 112,042
<PP&E> 2,204
<TOTAL-ASSETS> 366,967
<SHORT-TERM> 48,639
<PAYABLES> 64,790
<REPOS-SOLD> 104,450
<SECURITIES-LOANED> 30,080
<INSTRUMENTS-SOLD> 61,968
<LONG-TERM> 28,604
0
670
<COMMON> 12
<OTHER-SE> 16,332
<TOTAL-LIABILITY-AND-EQUITY> 366,967
<TRADING-REVENUE> 5,983
<INTEREST-DIVIDENDS> 13,755
<COMMISSIONS> 2,921
<INVESTMENT-BANKING-REVENUES> 4,523
<FEE-REVENUE> 5,856
<INTEREST-EXPENSE> 11,390
<COMPENSATION> 8,398
<INCOME-PRETAX> 7,728
<INCOME-PRE-EXTRAORDINARY> 7,728
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,791
<EPS-BASIC> 4.33
<EPS-DILUTED> 4.10
</TABLE>
<PAGE>
Exhibit 99.1
CHANGE IN EMPLOYMENT STATUS AGREEMENT ("Agreement")
I, Christine A. Edwards, and Morgan Stanley Dean Witter & Co., a
Delaware corporation (the "Company"), agree to resolve all issues regarding my
employment status as follows:
Section 1 -- Change in Employment Status
------------- ---------------------------
(a) I resigned as the Executive Vice President, Chief Legal Officer
and Secretary of the Company and, except as provided in Section 1(b), all other
officer positions, offices and directorships with the Company and its affiliates
effective on June 10, 1999.
(b) The Company and I acknowledge and agree that I will remain an
active employee of the Company until January 31, 2000 (the "Retirement Date"),
however, I will report to the office on an "as needed" basis.
(c) The Company and I acknowledge and agree that following my
retirement, I will be available as an Advisory Director of Morgan Stanley Dean
Witter ("MSDW") to provide such consulting services as the Company may
reasonably require from such retirement for such period of time and on such
terms as the Company and I may mutually agree. Such consulting services shall
relate to financial services modernization, antitrust issues relating to the
credit card industry, changes in national trading marketplaces, corporate
governance, employment practices issues and such other matters as we may
mutually agree.
(d) The Company and I acknowledge that we entered into a separate
release agreement contemporaneously herewith (the "Release Agreement").
Section 2 -- Payments and Benefits
------------- ---------------------
(a) In General: I may revoke the Release Agreement within seven days
after I sign it. If I do not revoke the Release Agreement, the Company will pay
me the amounts and provide me with the benefits set forth in this Section in
consideration for my acceptance of the terms of this Agreement and the Release
Agreement. I acknowledge that if I fail to comply with the terms and conditions
of this Agreement or the Release Agreement, the Company is not required to pay
me any amount or provide me with any benefit set forth in Section 2(d) that
becomes payable or effective on or after the date of such failure, subject to
the requirement to arbitrate such matters as provided in Section 4.
(b) Continuation of Base Salary and Employee Benefits: The Company
will pay me my base salary, at the rate currently in effect (which the parties
acknowledge is $300,000 per year), less any applicable withholding and
deductions, until the Retirement Date, notwithstanding my earlier death or
disability. If I voluntarily terminate my employment with the Company prior to
the Retirement Date, within 30 days after such voluntary termination, the
Company will pay me a lump sum cash payment equal to the amount of base salary
payable to
<PAGE>
me pursuant to the preceding sentence that remains unpaid and that would
otherwise have been payable to me had I remained employed with the Company until
the Retirement Date. The Company also will continue to provide or make available
to me all employee benefits currently provided or made available (other than
incentive compensation or stock-based benefits), subject to my payment of any
applicable premium or contribution, until the earliest of the date I voluntarily
terminate my employment, the Retirement Date or the date of my death,
notwithstanding my earlier disability.
(c) Reimbursement of Legal Fees: Except for disputes arising after
this Agreement is executed that are covered by Section 4, the Company will
reimburse me for all legal fees and expenses incurred by me in connection with
my change of employment status with the Company promptly following my submission
of written documentation (in reasonable detail) of such fees and expenses.
(d) Annual Bonus and Severance Payment: The Company will pay me a
cash bonus for 1999 in an amount not less than seven-twelfths (7/12ths) of the
value of my above base compensation (defined as my total reward less my base
salary) for the Company's fiscal year 1998. Such bonus will be reduced by any
applicable withholding and deductions and paid at the same time that bonuses for
1999 are paid to other senior executives of the Company, notwithstanding my
earlier death, disability, termination of or retirement from employment. In
addition, the Company will pay me a severance payment in an amount equal to the
sum of (1) the amount I would have received under Section 4.2(a) of the Morgan
Stanley Dean Witter & Co. Key Executive Employment Plan, as amended, and (2)
five-twelfths (5/12ths) of the value of my above base compensation for the
Company's fiscal year 1998. Such severance payment will be reduced by any
applicable withholding and deductions and paid within 30 days of my signing this
Agreement, notwithstanding my earlier death, disability, termination of or
retirement from employment.
(e) Stock Option and Restricted Stock Unit Awards: Any awards of
stock options and restricted stock units granted to me that by their terms were
not previously vested have been vested. All forfeiture provisions applicable to,
and transfer restrictions imposed by the Company on, any of my stock option
awards and any shares of the Company's common stock underlying any of my stock
option awards have been removed. All forfeiture provisions applicable to any
restricted stock units held by me have been removed. All restricted stock units
held by me shall become payable in accordance with their terms. To the extent
not inconsistent with the preceding, the termination of my employment is
considered to be and will be treated by the Company as (i) a "full career
retirement" for purposes of any awards granted to me in December 1997 and
December 1998 and (ii) a "retirement" for purposes of all other outstanding
options and restricted stock units granted to me.
(f) Restoration Option Rights: The restoration option rights granted
to me in connection with awards of stock options will not terminate upon the
termination of my employment and instead will remain in effect until the earlier
of the expiration of the underlying stock options or my election to terminate my
status as an Advisory Director of MSDW.
(g) Continuation of Medical Plan Coverage: The Company will continue
to provide medical plan coverage to me at the level in effect upon the
termination of my
2
<PAGE>
employment with the Company (provided that I continue to timely make any
regularly required contributions under such plan) until the earliest of (i) my
attainment of age 65, (ii) my eligibility for coverage under another group
medical plan, or (iii) the termination of the Company's group medical plan and
failure of the Company to adopt a replacement plan; provided that if the other
group medical plan referred to in clause (ii) above contains any exclusion or
limitation with respect to any preexisting condition I or any of the members of
my family have, the Company will continue to provide medical plan coverage to me
as provided herein.
(h) D&O Coverage: The Company will continue to provide to me at the
level provided to other senior executive officers of the Company directors' and
officers' insurance coverage with respect to all ongoing outside activities
originally undertaken by me on behalf of the Company, including, without
limitation, my membership on the boards of directors and committees of
exchanges, self-regulatory organizations and trade associations.
(i) Retirement and Deferred Compensation Benefits: Any retirement
and/or deferred compensation benefits payable to me under the qualified and non-
qualified retirement and deferred compensation plans of the Company and its
predecessors will be calculated and become payable in accordance with the terms
and conditions of such plans, it being understood that the termination of my
employment with the Company is considered to be and will be treated by the
Company as a "full career retirement" or "retirement", as applicable, under any
retirement plan where relevant to determine my eligibility for benefits but not
the amount of or time of commencement of such benefits.
(j) Riverwoods Office: Continuing for so long as I am an Advisory
Director of MSDW, the Company will provide an appropriate office and secretarial
support to me at its offices in Riverwoods, Illinois.
Section 3 -- Miscellaneous
------------- -------------
(a) Entire Agreement: This Agreement and the Release Agreement
constitute the entire agreement between the parties regarding the matters which
are the subject hereof and supersede and are in full substitution for any and
all prior agreements and understandings among them relating to such matters, and
no party shall be liable or bound to the other party hereto in any manner with
respect to such subject matter by any warranties, representations, covenants or
agreements except as specifically set forth herein. This Agreement may not be
modified or cancelled in any manner except by a writing signed by both me and an
authorized officer of the Company. If any provision in this Agreement is found
to be unenforceable, all other provisions will remain fully enforceable.
(b) Successors: This Agreement inures to the benefit of and binds my
heirs, administrators, representatives, executors, successors, and assigns, and
will inure to the benefit of all Released Parties (as defined in the Release
Agreement) and their respective heirs, administrators, representatives,
executors, successors, and assigns. This Agreement also binds the Company and
its related entities, subsidiaries, affiliates and successors.
(c) Interpretation: This Agreement shall be construed as a whole
according to its fair meaning. It shall not be construed strictly for or against
me or any Released Party.
3
<PAGE>
Unless the context indicates otherwise, the term "or" shall be deemed to include
the term "and" and the singular or plural number shall be deemed to include the
other. Captions are intended solely for convenience of reference and shall not
be used in the interpretation of this Agreement. This Agreement shall be
governed by the statutes and common law of the State of New York, excluding its
statutes or common law regarding choice of laws.
(d) Taxes: I acknowledge that I am responsible for paying any taxes
with respect to payments and benefits that I receive pursuant to this Agreement.
Section 4 -- Arbitration of Disputes
------------- -----------------------
The Company and I agree to be bound by the arbitration provisions in
Section 7 of the Release Agreement for resolution of any dispute with respect to
this Agreement. This arbitration agreement applies to, among others, disputes
about the validity, interpretation, or effect of this Agreement or alleged
violations of it, or other statutory violation claims.
EXECUTED at Lake Forest, Illinois, this 1st day of September, 1999.
/s/ Christine A. Edwards
------------------------
Christine A. Edwards
EXECUTED at New York, New York, this 1st day of September, 1999.
MORGAN STANLEY DEAN WITTER & CO.
BY: /s/ John H. Schaefer
---------------------
Name: John H. Schaefer
Title: Executive Vice President
4
<PAGE>
Exhibit 99.2
MORGAN STANLEY UK GROUP PROFIT
SHARING SCHEME AND MORGAN
STANLEY UK GROUP PROFIT SHARING
PLAN
Combined Financial Statements for the years
31 December 1999 and 1998
Deloitte & Touche
Stonecutter Court
1 Stonecutter Street
London
EC4A 4TR
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
REPORT AND COMBINED FINANCIAL STATEMENTS 1999 AND 1998
CONTENTS Page
Report of the Independent Chartered Accountants 1
Statement of the financial condition 2
Statement of income and changes in Schemes equity 3
Notes to the financial statements 4
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
REPORT OF THE INDEPENDENT CHARTERED ACCOUNTANTS
TO THE TRUSTEE OF THE MORGAN STANLEY UK GROUP PROFIT SHARING SCHEMES
(incorporating the Morgan Stanley UK Group Profit Sharing Scheme and the Morgan
Stanley UK Group Profit Sharing Plan)
We have audited the accompanying combined statements of financial condition of
the Morgan Stanley UK Group Profit Sharing Scheme ("the Scheme") and the Morgan
Stanley UK Group Profit Sharing Plan ("the Plan"), (collectively "the Schemes"),
as of 31 December 1999 and 1998 and the related statements of income and changes
in schemes' equity for the years then ended. These combined financial statements
are the responsibility of the Scheme's and the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the combined financial condition of the Schemes as of 31
December 1999 and 1998 and the combined results of operations and the changes in
Schemes' equity for the years then ended in conformity with accounting
principles generally accepted in the United States.
/s/ Deloitte & Touche
Deloitte & Touche
Chartered Accountants
Stonecutter Court
1 Stonecutter Street
London, EC4A 4TR
England
22 February 2000
1
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
COMBINED STATEMENTS OF FINANCIAL CONDITION
31 December 1999 and 1998
<TABLE>
<CAPTION>
Notes 1999 1998
$ $
<S> <C> <C> <C>
ASSETS
Investments at market value
Morgan Stanley Dean Witter & Co.
Common Stock 2,3 89,739,502 42,678,171
Amounts due from Trustee 64,237 59,109
Employee contributions receivable 10,399,802 9,397,520
----------- ----------
TOTAL ASSETS 100,203,541 52,134,800
=========== ==========
LIABILITIES AND COMBINED SCHEMES' EQUITY
Dividend income, net of withholding taxes, payable to
participants 26,778 20,724
Taxes withheld in respect of dividend income 37,456 38,382
Combined Schemes' equity 100,139,307 52,075,694
----------- ----------
TOTAL LIABILITIES AND COMBINED SCHEMES' EQUITY 100,203,541 52,134,800
=========== ==========
</TABLE>
See Notes accompanying Combined Financial Statements
2
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
COMBINED STATEMENTS OF INCOME AND CHANGES IN SCHEMES' EQUITY
Years ended 31 December 1999 and 1998
<TABLE>
<CAPTION>
Notes 1999 1998
$ $
<S> <C> <C> <C>
CASH DIVIDENDS
Distribution from Morgan Stanley Dean Witter
& Co. 607,514 472,521
Less: United States tax withheld (35,387) (70,876)
----------- ------------
572,127 401,645
GAINS ON INVESTMENTS
Gain on sale of Morgan Stanley Dean Witter &
Co. Common Stock 2 4,554,978 2,849,581
Change in unrealised appreciation of
investments 3 40,229,585 5,283,698
EMPLOYEE CONTRIBUTIONS
Current year 10,399,802 9,397,520
Less : over provision in prior year (92,800)
----------- ------------
INCOME FOR THE YEAR 55,663,692 17,932,444
Less:
Dividend income payable to participants (509,400) (378,019)
Income tax payable (62,727) (23,624)
Withdrawals disbursed to employees (5,781,651) (3,822,395)
Value of shares transferred to employees (1,246,301) (894,770)
----------- ------------
INCREASE IN COMBINED SCHEMES' EQUITY 48,063,613 12,813,636
COMBINED SCHEMES' EQUITY AT 1 JANUARY 52,075,694 39,262,058
----------- ------------
COMBINED SCHEMES' EQUITY AT 31 DECEMBER 100,139,307 52,075,694
=========== ============
</TABLE>
See Notes accompanying Combined Financial Statements
3
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years ended 31 December 1999 and 1998
Description of the Schemes
The financial statements show the combined results of the Morgan Stanley UK
Group Profit Sharing Scheme and Morgan Stanley UK Group Profit Sharing
Plan.
On 12 November 1987 the Morgan Stanley International Profit Sharing Scheme
was established in the United Kingdom by a trust deed made between Morgan
Stanley Group Inc., its subsidiary Morgan Stanley International and Noble
Lowndes Settlement Trustees Limited. After the merger between Morgan
Stanley Group Inc. and Dean Witter, Discover & Co. on 31 May 1997 a new
scheme, the Morgan Stanley UK Group Profit Sharing Plan, was established in
the United Kingdom on 3 November 1998 by a trust deed made between Morgan
Stanley, Dean Witter, Discover & Co., its subsidiary Morgan Stanley UK
Group and Noble Lowndes Settlement Trustees Limited.
On 2 November 1999, a change was made to the Plan trust deed amending the
parent company name to Morgan Stanley Dean Witter & Co.
The Schemes allow employees of Morgan Stanley UK Group to accumulate pre-
tax profit share contributions in the form of shares of Morgan Stanley Dean
Witter & Co. Common Stock, with all contributions after 1998 being paid
into the Plan.
Eligibility
Full time employees of Morgan Stanley UK Group with at least one year of
service, commencing from the first of the month after the date of joining,
are eligible to participate in a scheme. Employees may elect to participate
in the Schemes, for the full amount of their profit share, up to a maximum
of the lesser of 10% of UK base salary or (pound)8,000.
Funding Policy
Amounts invested by employees are invested by Noble Lowndes Settlement
Trustees Limited, as Trustee, in Morgan Stanley Dean Witter & Co. shares
which are held by the Trustee in their name on the employee's behalf.
Shares in respect of the previous qualifying period are appropriated to
employees within two weeks of 31 December (the qualifying date). The
Trustee's fees and brokerage commissions are borne by Morgan Stanley UK
Group, the employer.
During the first two years after appropriation (the Retention Period)
certain statutory restrictions apply limiting members' ability to deal in
or withdraw their shares. After the Retention Period, members may withdraw
their shares or instruct the Trustee to sell their shares and withdraw the
cash proceeds. The cost of withdrawals from the Schemes is determined on a
first in first out basis within the relevant employee allocation.
Taxation
The United Kingdom Board of Inland Revenue have approved both the Scheme
and the Plan under Schedule 9, Income & Corporation Taxes Act 1988 and the
Scheme and the Plan are thus exempt from taxation. Employee contributions
to the Schemes are not liable to income tax if shares are held by the
Trustee for at least five years after appropriation. If employees' shares
are sold prior to the end of the three year period, some or all of the
income tax benefits are lost.
4
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years ended 31 December 1999 and 1998
1. ACCOUNTING POLICIES
Presentation of the Accounts
The Trustee, being the same for both the Scheme and the Plan, has resolved
that the results of the Scheme and the Plan should be combined as this
appropriately represents the similar nature of the schemes and the intent
of the employer, Morgan Stanley UK Group to continue benefits under the
Scheme after the merger.
Foreign Currencies
Monetary assets and liabilities denominated in foreign currencies are
translated at the rate of exchange ruling at the balance sheet date except
for employee contributions receivable, which are translated at the rate
ruling at the time of share purchase, which occurs shortly after balance
sheet date. Transactions in foreign currencies are translated at the
approximate rate of exchange ruling at the date of the transaction.
Valuation of Investments
The investments are recorded at market value based on the closing market
price on the New York Stock Exchange.
Dividend Income
Dividend income is recorded when the applicable dividends are declared.
Dividends are received net of US withholding tax and are allocated to
participants according to their shareholdings.
Stock Split
On 20 December 1999, Morgan Stanley Dean Witter & Co. declared a
two-for-one common stock split, effected in the form of a 100% stock
dividend payable to shareholders of record on 12 January 2000 and
distributable on 26 January 2000. All share data has been retroactively
restated to reflect this split.
5
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years ended 31 December 1999 and 1998
2. CHANGES IN COMBINED HOLDINGS OF MORGAN STANLEY DEAN WITTER & CO. COMMON STOCK
<TABLE>
<CAPTION>
Number of Total
Shares Cost
(restated) $
<S> <C> <C>
At 1 January 1998 1,094,674 10,704,860
Add:Purchase January 1998 248,694 6,907,738
------------ ------------
1,343,638 17,612,598
Less: Sales of shares during the year (111,514) (979,795)
Less: Transfers of shares during the year (29,922) (894,770)
------------ ------------
At 31 December 1998 1,202,202 15,738,033
Add: Purchases January 1999 222,258 9,304,720
Less: Sales of shares during the year (130,834) (1,226,673)
Less: Transfers of shares during the year (36,330) (1,246,301)
------------ ------------
At 31 December 1999 1,257,296 22,569,779
============ ============
</TABLE>
Each stock purchase was made in January 1999 in one transaction
representing more than 5% of the current value of the plan at the
beginning of the year.
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Aggregate proceeds of sales 5,781,651 3,829,376
Aggregate cost of sales (1,226,673) (979,795)
------------ ------------
Net gain on sales 4,554,978 2,849,581
------------ ------------
Aggregate proceeds of transfers 1,246,301 894,770
Aggregate cost of transfers (1,246,301) (894,770)
------------ ------------
Net gain on transfers - -
------------ ------------
4,554,978 2,849,581
============ ============
</TABLE>
6
<PAGE>
MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND
MORGAN STANLEY UK GROUP PROFIT SHARING PLAN
NOTES TO THE COMBINED FINANCIAL STATEMENTS Years ended 31 December 1999 and 1998
3. CHANGE IN UNREALISED APPRECIATION OF INVESTMENTS
At 31 December 1999 the closing price on the New York Stock Exchange for
Morgan Stanley Dean Witter, & Co. common stock
was $71.375 per share.
<TABLE>
<CAPTION>
Number Total
of shares $
(restated)
<S> <C> <C>
Market value at 31 December 1999 1,257,296 89,739,502
Average cost at 31 December 1999 1,257,296 22,569,779
----------- ------------
Unrealised appreciation at 31 December 1999 67,169,723
Unrealised appreciation at 1 January 1999 26,940,138
------------
Increase in unrealised appreciation 40,229,585
============
Market value at 31 December 1998 1,202,202 42,678,171
Average cost at 31 December 1998 1,202,202 15,738,033
----------- ------------
Unrealised appreciation at 31 December 1998 26,940,138
Unrealised appreciation at 1 January 1998 21,656,440
------------
Increase in unrealised appreciation 5,283,698
============
</TABLE>
4. Subsequent eVents
A stock split of 2 to 1 which was declared on 20 December 1999 became
effective on the 26 January 2000.
7
