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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, 1997
COMMISSION FILE NUMBER 1-11758
MORGAN STANLEY, DEAN WITTER, DISCOVER & 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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Rights to Purchase Series A Junior Participating
Preferred Stock New York Stock Exchange
Pacific Stock Exchange
Depositary Shares, each representing 1/4 of a share New York Stock Exchange
of 7 3/4%
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/8 of a share New York Stock Exchange
of 7 3/8%
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/4 of a share New York Stock Exchange
of Series A Fixed/Adjustable Rate
Cumulative Preferred Stock, $200 stated value
7.82% Capital Units; 7.80% Capital Units; 9.00% New York Stock Exchange
Capital Units;
8.40% Capital Units; 8.20% Capital Units; 8.03%
Capital Units*
6% PERQSSM Due February 16, 1999; 10% PERQS due American Stock Exchange
April 15, 1999+
Exchangeable Notes Due September 30, 2000; New York Stock Exchange
Exchangeable Notes Due
December 31, 2001; Exchangeable Notes Due March
29, 2002;
Exchangeable Notes Due July 31, 2003++
PEEQSSM Due May 1, 2001+++ American Stock Exchange
Nikkei 225 Protection Step-Up Exchangeable Notes New York Stock Exchange
Due July 31, 2003
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* Each Capital Unit consists of (a) a Subordinated Debenture (of the same
rate) of Morgan Stanley Finance plc guaranteed by the Registrant and (b) a
related purchase contract of the Registrant requiring the holder to
purchase one Depositary Share representing shares (or fractional shares) of
the Registrant's Cumulative Preferred Stock (of the same rate), $200 stated
value. The Capital Units and the Depositary Shares are registered on the
New York Stock Exchange.
+ ""Performance Equity-linked Redemption Quarterly-pay Securities." The issue
price and amount payable at maturity with respect to the PERQS are based on
the share price of certain non-affiliated companies.
++ Notes which are exchangeable on a defined date for equity securities of
certain non-affiliated companies.
+++ ""Protected Exchangeable Equity-linked Securities." Principal protected
notes which are exchangeable for cash based on the value of the S&P 500
Index.
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. [_]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 26, 1998 was approximately $28,428,925,812. 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 26, 1998, there were 605,394,651 shares of Common Stock, $.01
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Morgan Stanley, Dean Witter, Discover & Co. 1997 Annual Report to
Shareholders--Incorporated in part in Form 10-K, Parts I, II and IV.
(2) Morgan Stanley, Dean Witter, Discover & Co. Proxy Statement for its 1998
Annual Meeting of Stockholders--Incorporated in part in Form 10-K, Parts I
and III.
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PART I
ITEM 1. BUSINESS
A. GENERAL
BACKGROUND AND OVERVIEW
Morgan Stanley, Dean Witter, Discover & 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 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 in
which Morgan Stanley was merged with and into Dean Witter Discover (the
"Merger"). The Company combines three well recognized brands in the financial
services industry: Morgan Stanley, Dean Witter and Discover(R) Card. The
Company combines global strength in investment banking (including in the
origination of quality underwritten public offerings and in mergers and
acquisitions advice) and institutional sales and trading, with strength in
providing investment and global asset management products and services to its
customers and in providing quality consumer credit products to its customers,
primarily through its Discover Card brand.
At November 30, 1997, the Company had the third largest account executive
sales organization in the United States, with 9,946 professional account
executives and 399 branches, and one of the largest global asset management
operations of any full-service securities firm, with total assets under
management and administration of $338 billion. In addition, based on its
approximately 40 million general purpose credit card accounts as of November
30, 1997, the Company was the nation's largest credit card issuer as measured
by number of accounts and cardmembers.
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 throughout the world. Dean
Witter Discover was incorporated under the laws of the State of Delaware in
1981, and its predecessor companies date back to 1924. Morgan Stanley was
incorporated under the laws of the State of Delaware in 1975, and its
predecessor companies date back to 1935. At November 30, 1997, the Company had
47,277 employees. None of the Company's employees is covered by a collective
bargaining agreement.
The Company, through its subsidiaries, provides a wide range of financial
and securities services on a global basis and provides credit and transaction
services nationally. Its securities businesses ("Securities") include
securities underwriting, distribution and trading; merger, acquisition,
restructuring, real estate, project finance and other corporate finance
advisory activities; full-service brokerage; research services; the trading of
foreign exchange and commodities as well as derivatives on a broad range of
asset categories, rates and indices; and securities lending. The Company's
asset management businesses ("Asset Management") include providing global
asset management advice and services to individual and institutional investors
through well-recognized brand names, including Dean Witter InterCapital
("InterCapital"), Van Kampen American Capital ("VKAC"), Morgan Stanley Asset
Management ("MSAM") and Miller Anderson & Sherrerd ("MAS"); global custody and
securities clearance; and principal investment activities. The Company's
credit and transaction services
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*Unless the context otherwise requires, the term "Company" means Morgan
Stanley, Dean Witter, Discover & Co. and its consolidated subsidiaries. At
the Company's 1998 Annual Meeting of Stockholders, stockholders will be
requested to approve a proposal to change the Company's name to "Morgan
Stanley Dean Witter & Co."
**Except for the historical information contained in this Form 10-K, certain
items herein, including (without limitation) certain matters discussed
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 and other
risks and uncertainties detailed in the MD&A and in "Competition and
Regulation" herein.
businesses ("Credit Services") include the operation of the NOVUS(R) Network,
a proprietary network of merchant and cash access locations, and the issuance
of the Discover Card and other proprietary general purpose credit cards. The
Company's services are provided to a large and diversified group of clients
and customers, including corporations, governments, financial institutions and
individuals.
The Company conducts its worldwide business 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 periods ended
November 30, 1997, November 30, 1996 and November 30, 1995, including the
amount of total revenue contributed by classes of similar products or services
that accounted for 10% or more of the Company's consolidated revenue in any
one of those periods and information with respect to the Company's operations
by geographic area, is set forth in the Consolidated Financial Statements and
the Notes thereto in the 1997 Annual Report to Shareholders and is
incorporated herein by reference.*
A discussion of the Company's preparations to address the potential effects
on its operations resulting from the Year 2000 computer code issue appears on
pages 56 and 57 of "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" in the
1997 Annual Report to Shareholders and is incorporated herein by reference.
B. SECURITIES
OVERVIEW
The Company is a leading global financial services firm which provides
financial services and advice to, and raises capital worldwide for, a broad
group of domestic and international corporate clients through Morgan Stanley &
Co. Incorporated (U.S.) ("MS&Co."), Morgan Stanley & Co. International Limited
(U.K.), Morgan Stanley Japan Limited (Japan), Morgan Stanley Asia Limited
(non-Japan Asia) and other direct and indirect subsidiaries. The Company also
conducts sales and trading activities both as principal and agent on behalf of
a wide range of domestic and international institutional investors. The
Company offers individual investors a broad range of securities and savings
products primarily through Dean Witter Reynolds Inc. ("DWR") and other direct
and indirect subsidiaries.
INVESTMENT BANKING
Underwriting
The Company manages and participates in public offerings and private
placements of debt, equity and other securities denominated in U.S. dollars
and other currencies in the U.S. and international capital markets. The
Company is a leading underwriter of common stock, preferred stock and other
equity-related securities, including American Depositary Receipts ("ADRs"),
Preferred Equity Redemption Cumulative Stock ("PERCS(R)"), Performance Equity-
linked Redemption Quarterly-pay Securities ("PERQSSM") and capital securities.
The Company also underwrites taxable fixed income securities and tax exempt
securities, mortgage-related securities, including private pass-throughs and
collateralized mortgage obligations ("CMOs"), and other asset-backed
securities. The Company is active as an underwriter and distributor of
commercial paper and other short-term and medium-term securities. The Company
is also involved in tender offers, repurchase programs, consent solicitations,
rights offerings and exchange offers on behalf of clients.
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, acquisitions, joint ventures, privatizations, defenses,
divestitures, spin-offs, restructurings, proxy mechanisms and leveraged
buyouts as well as long-range financial
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* Prior to the Merger, Dean Witter Discover's year ended on December 31 and
Morgan Stanley's fiscal year ended on November 30. Subsequent to the
Merger, the Company adopted a fiscal year ending on November 30. See "Notes
to Consolidated Financial Statements, Note 1" incorporated by reference in
Part II, Item 8 of this Report.
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planning. Other such services provided to clients include advice with respect
to recapitalizations, dividend policy, valuations, foreign exchange exposures
and financial risk management strategies. The Company furnishes advice and
other services relating to a wide variety of project financings, including
infrastructure, electric power and natural resource projects. In addition, the
Company provides advisory services in connection with the purchase, sale and
financing of real estate and lease transactions.
Financing
The Company may, from time to time, also provide financing or financing
commitments to companies in connection with its investment banking activities.
The Company may provide extensions of credit to leveraged companies in the
form of senior or subordinated debt, as well as bridge financing on a select
basis. The Company conducts senior lending activities, including the
origination and syndication of senior secured loans of non-investment grade
companies.
A subsidiary of the Company also acts as general partner of Princes Gate
Investors II, L.P. ("Princes Gate"), a limited partnership with $975 million
in aggregate investment capacity that was formed to invest in special
situation opportunities. Princes Gate generally makes minority equity and
equity-related investments which are short to medium-term in duration and
which arise out of the Company's worldwide investment banking activities. See
also "ASSET MANAGEMENT--Principal Investing."
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 securities (both exchange
traded and over-the-counter ("OTC")), including ADRs, World Equity Benchmark
Shares ("WEBSSM") and restricted/control stock; convertible debt and preferred
securities, including PERCS(R), PERQSSM and warrants; equity index products,
equity swaps, options and other structured products; and international index
arbitrage, equity repurchases, and program and block trade execution. The
Company also engages in a variety of proprietary trading activities including
risk arbitrage, which involves, among other things, investing for the
Company's own account in securities of companies involved in publicly
announced corporate transactions in which the Company is not, at the time of
investment, acting as adviser or agent.
The Company 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
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. A subsidiary of the Company is also engaged in the clearance of
securities for its preferred shareholders who are registered broker-dealers.
Morgan Stanley Capital International ("MSCI"), a joint venture between the
Company and Capital International Perspective, S.A., markets and distributes
over 3,500 country, industry and regional benchmark indices covering 51
countries (including The World, EAFE(R) and Emerging Market Indices), and a
28-year historical database, including fundamental and valuation data on over
5,500 companies in developed and emerging market countries.
Fixed Income
The Company distributes and trades domestic and international debt
securities, including preferred stock and corporate debt instruments (bonds,
medium-term notes and commercial paper), offers investment strategies to
institutional accounts, develops swap and other risk management strategies for
customers, and assists corporations in their repurchase of debt. In addition,
the Company trades a full range of money market and other short-term
instruments, including certificates of deposit, bankers' acceptances,
floating-rate certificates of deposit and floating-rate notes. The Company is
an active dealer and market-maker in a broad range of long-term and
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short-term tax exempt securities. The Company is also involved in structuring
debt securities with multiple risk/return factors designed to suit investor
objectives and repackaged asset vehicles ("RAVs") through which investors can
restructure asset portfolios to provide liquidity or recharacterize risk
profiles.
MS&Co. is one of 37 primary dealers of U.S. government securities currently
recognized by the Federal Reserve Bank of New York. As such, it is among the
firms with which the Federal Reserve conducts its open market operations and
is required to submit bids in Treasury auctions, make secondary markets in
U.S. government securities, provide the Federal Reserve Bank of New York with
market information and maintain certain capital standards. The Company is also
a member of a number of selling groups responsible for the distribution of
various issues of U.S. agency and other debt securities. As such, it is
required to make secondary markets in these securities and to provide market
information to the U.S. agency issuers. The Company is also a member of the
primary syndicate that issues German government bonds, a member of the
Japanese government bond syndicate and a primary dealer in Canadian, French
and Italian government bonds. The Company also makes secondary markets in
various foreign government bonds and corporate bonds issued in the Eurobond
market and in the U.S.
The Company's daily trading inventory positions in government and agency
securities are financed substantially through the use of repurchase
agreements. The Company also borrows and lends fixed income securities. In
addition, the Company acts as an intermediary between borrowers and lenders of
short-term funds utilizing repurchase and reverse repurchase agreements. At
any given point in time, the Company may hold large positions in certain types
of securities or commitments to purchase securities of a single issuer,
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. In addition,
substantially all 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.
The Company trades and distributes mortgage and other asset-backed
securities. The Company makes markets and trades in Government National
Mortgage Association ("GNMA") securities, Federal Home Loan Mortgage Corp.
("FHLMC") participation certificates and Federal National Mortgage Association
("FNMA") obligations. The Company enters into commitments, such as forward
contracts, standby arrangements and OTC options contracts, for GNMA, FHLMC and
FNMA securities. The Company also acts as an underwriter of and market-maker
in mortgage-backed securities, CMOs and related instruments, and a market-
maker in commercial, residential and real estate loan products. In this
capacity, the Company takes positions in market segments where liquidity can
vary greatly from time to time.
The Company also underwrites, trades, invests and makes markets in high-
yield debt securities and emerging market loans and securitized instruments.
"High-yield" refers to companies or sovereigns whose debt is rated as non-
investment grade. Securities owned by the Company in connection with its high-
yield trading activities typically rank subordinate to bank debt of the issuer
and may rank subordinate to other debt of the issuer. The market for these
securities 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 risk inherent in high-yield debt securities and emerging market
loans and securitized instruments, the Company has policies to control total
inventory positions in these securities and instruments. Additionally, the
Company has credit policies to manage exposures to individual high-yield
issuers and emerging market counterparties.
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 or liabilities. In connection with its market-making
activities, the Company takes open positions in the foreign exchange market
for its own account. The Company, on a more limited basis, enters into forward
currency transactions as agent and principal. The Company is a
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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 on a worldwide basis. 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 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 relating to production, consumption and reserve/inventory management.
The Company is also an electricity power marketer in the U.S.
Derivatives
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, some of which may be complex in structure,
generally take the form of exchange traded futures and options and OTC
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 business units 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 proprietary
trading activities. 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. Through the Company's triple-A rated subsidiary (Morgan
Stanley Derivative Products Inc.), the Company also enters into swap and
related derivative transactions with certain clients seeking a triple-A rated
counterparty.*
Derivatives facilitate risk transfer and enhance liquidity in the
marketplace, and the origination and trading of derivatives have been utilized
as efficient and cost effective tools that enable users to adjust risk
profiles, such as interest rate or currency risk, or to take proprietary
trading positions. Widespread acceptance of derivatives has contributed to the
development of more complex OTC products structured for particular clients to
address specific financing and risk management needs. Derivative transactions
may have both on- and off-balance sheet implications, depending on the nature
of the contract. The Company's use of derivative products may subject the
Company to various 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
risks associated with derivative products are managed in a manner consistent
with the Company's overall risk management policies. The Company manages its
exposure to changes in interest rates, foreign currencies and other factors on
an individual product basis, generally by entering into offsetting or other
positions in a variety of financial instruments and derivative products. In
addition, with respect to certain derivatives, the Company has agreements with
customers that permit the Company to close out positions or require additional
collateral (and in many cases require 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. See also "Risk
Management" incorporated by reference in Part II, Item 7A of this Report.
SECURITIES SERVICES TO INDIVIDUAL INVESTORS
Brokerage Activities
DWR is a full-service retail broker-dealer that offers clients a broad range
of securities and savings products that are supported by the Company's
underwriting, research, execution and operational capabilities. At November
30, 1997, DWR had the third largest account executive sales organization in
the domestic securities industry, with 9,946 account executives located in 399
branch offices providing investment services to more than 3.5 million client
accounts with assets of $302 billion. DWR is among the largest members of the
New York Stock Exchange ("NYSE") and is a member of all other major U.S.
securities exchanges.
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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 and "Notes to Consolidated Financial Statements, Note
8" incorporated by reference in Part II, Item 8 of this Report. In
addition, the Company uses derivative products (primarily interest rate and
currency swaps) to assist in asset and liability management and to reduce
borrowing costs. See also "Notes to Consolidated Financial Statements, Note
6" incorporated by reference in Part II, Item 8 of this Report.
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The Company has implemented a strategy that focuses on serving the
investment needs of individual clients through its account executive sales
force. To implement this strategy, the Company has undertaken an aggressive
campaign focusing on the growth of its account executive sales organization
and the accumulation of client assets. Through internal training, retention of
existing account executives and recruiting, the Company has increased its
account executive sales organization by over 40% over the past five years.
Client assets have increased by 95% over the same five-year period.
Two of the Company's products designed to help clients manage their assets
are the Active Assets(R) Account ("AAA-Account") and the IRA-2000(R)
Individual Retirement Account (the "IRA-2000 Account"). Through the AAA-
Account, DWR clients can consolidate their financial assets into a single
account at DWR. Clients can invest AAA-Account funds in a wide variety of
investment products and can ensure that funds are automatically invested in
any of four different money market funds and a money market account insured by
the Federal Deposit Insurance Corporation ("FDIC"). The AAA-Account offers
clients additional features and benefits such as increased insurance, check
writing, direct deposit, automated bill payment, a Visa debit card that draws
directly from the AAA-Account and a year-end summary statement detailing
annual purchases, sales and other AAA-Account transactions. Total client
assets in AAA-Accounts were $117.6 billion as of November 30, 1997.
Clients planning for their retirement have access through the IRA-2000
Account to a broad array of investment choices. Total client assets in IRA-
2000 Accounts were $67.3 billion as of November 30, 1997. DWR also offers
defined contribution plan services for businesses, including 401(k) plans.
Equity and Fixed Income Securities
The Company provides execution, trading and research services to its
individual clients on listed equity securities, OTC equity securities, options
and ADRs. The Company acts as a market-maker in many equity securities traded
on the NASDAQ and in a number of ADRs. The Company also acts as a specialist
in many securities listed on regional securities exchanges.
The Company provides trading and execution 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. DWR is a
primary dealer in U.S. government securities. 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.
Financial Institutions Group
The Company's Financial Institutions Group offers comprehensive securities
products and services to banks across the country. The services include
investment products, technological support, branch network workstations, and
operations and processing systems. The Company currently provides such
services to NationsSecurities, an affiliate of NationsBank Corp., and Banc One
Securities Corporation, an affiliate of Banc One Corporation.
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 U.S. 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 institutional and retail clients. Timely data
contained in Research's numerous publications, such as the Investment Strategy
6
Chartbook and The Competitive Edge, are disseminated to both individual and
institutional investors through a proprietary database accessible via the
Internet and through DWR's account executives. 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
In its Securities business, the Company executes and clears all of its
transactions (delivery of securities sold, receipt of securities purchased 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 the financial
services business and competes worldwide directly with other firms, a number
of which have greater capital and other resources. The Company and its
competitors also employ advertising and direct solicitation of potential
customers as methods of increasing business, and many of the Company's
competitors engage in more extensive advertising programs than does the
Company. Among the principal competitive factors affecting the Company's
business are the Company's general reputation, the overall quality of its
professionals, its ability to maintain existing client relationships and
develop new ones, the relative prices of services and products offered and its
capability in originating and marketing innovative products and services.
Moreover, the Company's ability to access capital at competitive rates (which
is generally dependent on the Company's credit ratings) and to efficiently
commit capital are important competitive factors in relation not only to
generating potentially higher sales and trading revenues, but also attracting
business opportunities involving the facilitation of major transactions by
clients.
In addition to competition from firms traditionally engaged in the financial
services business, there has been increased competition from other sources,
such as commercial banks, insurance companies and other companies offering
financial services both in the U.S. and globally. As a result of recent and
pending legislative and regulatory initiatives in the U.S. to remove or
relieve certain restrictions on commercial banks, competition in some markets
which have traditionally been dominated by investment banks and retail
securities firms has increased and may continue to increase in the near
future. In addition, recent convergence and consolidation in the financial
services industry will lead to increased competition from larger diversified
financial services organizations. Such competition, among other things,
affects the Company's ability to attract and retain highly skilled
individuals. 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.
Regulation
The Company's securities business is, and the securities, commodities and
financial services industries generally are, subject to extensive regulation
in the U.S. at both the federal and state levels and internationally. Various
regulatory bodies 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 certain other subsidiaries of the Company are broker-
dealers. MS&Co. and DWR 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") and the 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
7
administrative proceedings, which may result in censure, fine, the issuance of
cease-and-desist orders, the suspension or expulsion of a broker-dealer or
member, its officers or employees or other similar consequences. Occasionally,
the Company's subsidiaries have been subject to investigations and proceedings
and fines have been imposed for infractions of various regulations relating to
their activities as a broker-dealer, none of which, to date, has had a
material adverse effect on the Company or its business.
Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by
the SEC or other governmental regulatory and 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 rules, may directly affect
the manner of operation and profitability of the Company.
The Company's U.S. broker-dealer subsidiaries, including MS&Co. and DWR, are
members of the Securities Investor Protection Corporation ("SIPC"), which
provides, in the event of the liquidation of a broker-dealer, protection for
customers' accounts held by the firm of up to $500,000 for each customer,
subject to a limitation of $100,000 for claims for cash balances. Margin
lending by certain subsidiaries is subject to the margin rules of the Federal
Reserve Board as to 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.*
As broker-dealers, MS&Co. and DWR are subject to the SEC's temporary risk
assessment rules which require, among other things, that a broker-dealer
maintain and preserve certain information, describe risk management policies
and procedures and report on the financial condition of certain affiliates
whose financial activities are reasonably likely to have a material impact on
the financial and operational condition of the broker-dealer.
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, which 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.
Certain of the Company's government securities activities are conducted
through Morgan Stanley Market Products Inc., which is a member of the NASD and
is 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.
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 business in the United Kingdom
is regulated by The Securities and Futures Authority Limited and the Bank of
England, and a number of exchanges, including the London Stock Exchange and
the London International Financial Futures and Options Exchange. The Deutsche
Bundesbank,
- --------
* These rules augment the Company's margin policies, which are in many cases
more stringent.
8
the Bundesaufsichtsamt fur das Kreditwesen (the Federal Banking Supervisory
Authority), the Bundesaufsichtsamt fur den Wertpapierhandel (the Federal
Supervisory Authority for Securities Trading), the Deutsche Terminboerse (the
German Futures Exchange) and the Frankfurt Stock Exchange regulate the
Company's activities in the Federal Republic of Germany. The Company's
business in Japan is subject to Japanese law applicable to foreign securities
firms and related regulations of 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 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, and also restricts 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, would adversely affect the ability of the Company to pay
dividends or to expand or even maintain present levels of business.
C. ASSET MANAGEMENT
The Company, primarily through InterCapital and VKAC, manages a wide range
of asset management products for individual investors. Through MSAM and MAS,
the Company provides global portfolio management to a wide range of
institutional investors. Through its Morgan Stanley Services division, the
Company provides a full range of global custody and correspondent clearing
services to institutional clients. The Company also sponsors, acts as general
partner for and invests in several limited partnerships which conduct a
variety of activities broadly described as principal investing.
DEAN WITTER INTERCAPITAL INC.
InterCapital markets and provides investment advisory and administrative
services to proprietary open- and closed-end funds and to certain individual
and institutional clients. InterCapital fund assets include equities, taxable
and tax-exempt fixed income securities and money market instruments. At
November 30, 1997, there were 143 InterCapital funds and portfolios with
assets of approximately $102 billion for which InterCapital and its wholly
owned subsidiary, Dean Witter Services Company Inc., served in various
investment management and administrative capacities.
Shares of InterCapital products that are open-end investment companies are
distributed by Dean Witter Distributors Inc., a wholly owned subsidiary of the
Company and a registered broker-dealer ("Distributors"), which has entered
into selected dealer agreements with DWR, NationsSecurities and Banc One
Securities Corporation. DWR and its affiliates are compensated for their
distribution related expenses through fees authorized pursuant to the
provisions of Rule 12b-1 under the Investment Company Act of 1940, contingent
deferred sales charges and front-end sales charges.
9
VAN KAMPEN AMERICAN CAPITAL, INC.
VKAC markets and provides investment advisory and administrative services to
open- and closed-end funds and to certain individual and institutional
clients, and markets and provides ongoing evaluation and credit surveillance
for 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 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, global fixed income securities and equity securities. At November
30, 1997, VKAC had more than 60 open-end funds and 37 closed-end funds and
2,500 series of tax exempt and equity UITs and VKAC and its affiliates
managed, administered or supervised approximately $68 billion of assets.
VKAC 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 DWR account
executives. A relatively small number of Retail Distribution Firms account for
a substantial portion of sales of VKAC's products and VKAC has proprietary and
preferred distribution relationships with several of its unaffiliated Retail
Distribution Firms.
MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
MSAM and MAS primarily manage assets for institutions around the world,
including pension funds, corporations, non-profit organizations and
governmental agencies, investing in domestic and international equities and
fixed income securities (including emerging markets). MSAM and MAS sponsor
open- and closed-end funds with assets that include equities, taxable and tax-
exempt fixed income securities and balanced and multi-asset-class products.
MSAM and MAS also manage assets through separate accounts and pooled vehicles.
MSAM provides a broad range of fiduciary and named fiduciary services for
pension funds and trusts.
At November 30, 1997, MSAM and MAS had assets under management or
supervision of approximately $145 billion, of which approximately $46 billion
related to international products. Institutional assets under management or
supervision were composed of approximately $30 billion related to mutual funds
and approximately $115 billion related to separate accounts, pooled vehicles
and other arrangements.
The Company has begun and expects to continue distributing certain domestic
and international investment products advised or sub-advised by MSAM and MAS
through its InterCapital and VKAC distribution networks.
MORGAN STANLEY SERVICES
Through its Morgan Stanley Services division, the Company provides global
custody ("Global Custody") and correspondent clearing ("Correspondent
Clearing") services to institutional clients.
Global Custody provides custody, clearance and settlement, agency securities
lending, foreign exchange, valuation and cash management services, and
maintains a network of 78 agent banks in 71 countries. Global Custody supports
mutual funds, investment limited partnerships, investment managers, investment
funds, insurance companies, banks, foundations, endowments, family trusts,
government agencies and public and private pension funds. In April 1997, the
Company acquired the institutional global custody business of Barclays PLC
("Barclays"). At November 30, 1997, Global Custody had approximately $377
billion in global assets under custody, including approximately $150 billion
of assets from the Barclays acquisition that remain subject to such Barclays'
clients agreeing to become clients of Global Custody.
Correspondent Clearing provides execution, clearance and settlement, margin
lending and cash management services primarily to U.S. broker-dealers and
other institutional clients.
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 merger, acquisition, restructuring,
10
private investment and leveraged capital transactions. Such activities also
include venture capital investments and investments in real estate assets,
portfolios and operating companies. Such activities are generally conducted
through private investment funds in which the Company acts as general partner
and clients of the Company are limited partners. The Company typically
contributes a minority of the capital of the principal investment funds, and
clients of the Company contribute the remaining capital. The Company also
typically receives management fees for operating the principal investment
funds, as well as a share of the profits of the funds when investment
performance criteria have been met.
In the private equity area, Morgan Stanley Capital Partners III, L.P. ("MSCP
III") was formed in 1994 with $1.9 billion in capital commitments to invest in
private equity or equity-related securities of operating and financial
services companies. As of November 30, 1997, MSCP III, and its predecessor
funds (which are no longer making new investments) had $1.6 billion of cost
basis in their portfolios related to 31 companies in a wide range of
industries.
In the venture capital area, Morgan Stanley Venture Partners III, L.P.
("MSVP III") was formed in 1996 with $275 million in capital commitments to
invest in private equity or equity-related securities of U.S. emerging growth
companies, primarily in the healthcare and information technology sectors. As
of November 30, 1997, MSVP III, and its predecessor funds (which are no longer
making new investments), had $155 million of cost basis remaining in their
portfolios related to 29 companies.
In the real estate area, The Morgan Stanley Real Estate Fund II, L.P.
("MSREF II") was formed in 1994 with approximately $1 billion in capital
commitments to invest in real estate assets. As of November 30, 1997, MSREF II
and its predecessor fund (which is no longer making new investments) had $788
million of cost basis in real estate assets remaining in their portfolios
relating to 38 investments. A successor fund to MSREF II is in the process of
being formed, which had its initial closing in December 1997 and additional
closings are scheduled for 1998.
In the emerging markets area, Morgan Stanley Global Emerging Markets Private
Investment Fund, L.P. ("MSGEM") was formed in 1997 with approximately $204
million in capital commitments (as of its first closing) to invest in private
equity or equity-related securities of emerging markets companies. MSGEM
expects to consummate its first investment in the first quarter of 1998.
In the investment management area, Morgan Stanley Real Estate Special
Situations Investment Program ("Special Situations") was created in 1997 as a
series of separate accounts managed by MSAM with approximately $325 million in
capital commitments to invest in private equity or equity-related securities
of real estate companies (including real estate investment trusts). As of
November 30, 1997, Special Situations had $157.1 million of cost basis in its
portfolios related to 9 real estate companies.
From time to time, the Company expects to sponsor additional 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. As of November 30, 1997, the aggregate carrying value of the
Company's investments (directly and indirectly through the above-referenced
funds and Princes Gate and its affiliates and predecessors) in 101 privately
held companies was $128 million and in 35 publicly held companies was $547
million. At November 30, 1997, the Company had aggregate commitments of
approximately $150 million to make future investments in connection with its
principal investment activities (including Princes Gate). The Company's future
commitments extend until November 2007. For a discussion of Princes Gate, see
"SECURITIES--Investment Banking."
It is not possible to determine whether or when the Company will realize the
value of the investments, including any appreciation, dividends or other
distributions thereon, since, among other things, 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.
11
The Company may also underwrite, trade, invest and make markets in, and
publish research with respect to, the securities and senior loans of issuers
in which the Company or the principal investment funds have an investment.
Such securities may include equity and high-yield debt securities of such
issuers. In addition, the Company may provide financial advisory services to,
and have securities and commodity trading relationships with these issuers.
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
investment activities.
OTHER ASSET MANAGEMENT ACTIVITIES
NOVUS Financial
NOVUS Financial Corporation ("NOVUS Financial") is a consumer finance
organization engaged in the business of originating and servicing consumer
loans, with a broad range of products designed to meet the needs of its
customer base. Most of its loans are secured by mortgages on residential
properties, or by automobiles, boats or recreational vehicles. For
distribution of its products, NOVUS Financial utilizes DWR account executives
and direct mail solicitations.
Investment Consulting Services
The Company provides investment consulting services ("ICS") that assist
clients in analyzing their investment objectives and in selecting investment
advisory services offered by unaffiliated investment advisers. Through ICS,
the Company's clients can obtain professional money management services that
are not typically available to individual investors. Such combined services
are commonly referred to as "wrap accounts." Total ICS assets as of November
30, 1997 amounted to $14 billion.
Insurance Services
The Company, through its wholly owned insurance agency subsidiaries, acts as
a national general agency for leading insurance carriers to meet the insurance
and annuity needs of individual investors. The Company receives commissions
with respect to the sale of such products. The Company maintains a strategic
alliance with Allstate Life Insurance Company ("Allstate Life") pursuant to
which the Company and Northbrook Life Insurance Company, a wholly owned
subsidiary of Allstate Life, manufacture, market and distribute proprietary
insurance products. The insurance products are sold exclusively by DWR's
account executives. The Company has a separate agreement with ITT Hartford
Life Insurance Companies to manufacture, market and distribute proprietary
products through DWR account executives.
Unit Investment Trusts
The Company, through DWR, is the sponsor of a diversified series of UITs
which provide clients with portfolios of pre-selected securities. DWR UITs
offer municipal, corporate and government bond portfolios as well as domestic
and global equity portfolios. Total UIT assets as of November 30, 1997
amounted to $6.1 billion.
Managed Futures
The Company's wholly owned subsidiary, Demeter Management Corporation
("Demeter"), acts as general partner of 21 commodity pools (including a family
of open-ended partnerships) organized as limited partnerships whose limited
partners are individual and institutional investors. These commodity pools
trade futures and forward contracts on organized futures exchanges and in the
interbank foreign exchange market. Demeter retains and monitors commodity
trading advisers registered under the Commodity Exchange Act to manage the
assets of these partnerships. As of November 30, 1997, commodity pools
operated by Demeter had approximately $1.2 billion under management.
Real Estate
Dean Witter Realty Inc. ("Realty"), a wholly owned subsidiary of the
Company, has been engaged principally in real estate asset management. During
the 1980's, the Company raised capital for both public and
12
private limited partnerships. As of November 30, 1997, Realty managed $1.3
billion of real estate (at cost) consisting of office, retail, industrial,
research and development, and residential properties. The Company is currently
in the process of arranging for the sale of most of these properties.
Fiduciary Services
Dean Witter Trust FSB ("DWT"), a federal savings bank that is a wholly owned
subsidiary of the Company, offers trust and other fiduciary services to both
individual and corporate clients, primarily trustee services for personal
trusts and tax-qualified retirement plans. DWT markets these trustee services
nationwide through DWR's account executives. DWT also provides transfer agent
and dividend disbursing services for the Company, the InterCapital funds and
certain other entities.
COMPETITION AND REGULATION
Competition
The investment management industry is highly competitive, with approximately
6,700 open-end management investment companies holding over $4.4 trillion in
assets as of November 30, 1997. Competition in the sale of mutual funds is
affected by a number of factors including investment objectives and
performance, advertising and sales promotion efforts, the level of fees,
distribution channels and the types and quality of services offered. In
addition to fund products offered by other broker-dealers, the funds offered
by the Company are in competition 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, InterCapital,
MSAM, MAS and certain affiliates of VKAC, 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. In such
event, the possible sanctions which may be imposed 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 under applicable laws or other censures and fines.
The Company's asset management business is also subject to regulation
outside the U.S. 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 Trust Company, the Company's principal subsidiary that
engages in Global Custody, is subject to regulation by the New York State
Banking Department and in the United Kingdom by the Securities and Futures
Authority Limited.
Companies in the principal investment portfolio that are in certain
regulated industries (e.g., insurance or broadcasting) or subject to
regulation in non-U.S. jurisdictions could subject the Company to additional
regulation by virtue of the Company's affiliation with the principal
investment funds that own equity interests in such companies or otherwise.
DWT is subject to comprehensive regulation and periodic examination by the
federal Office of Thrift Supervision ("OTS") and by the FDIC. DWT has its
deposits insured by the FDIC and pays FDIC assessments to the Savings
Association Insurance Fund. DWT is also a registered transfer agent, subject
to regulation in such capacity by the SEC.
13
As a result of its ownership of DWT, the Company is registered with the OTS
as a savings and loan holding company ("SLHC") and subject to regulation and
examination by the OTS as a SLHC. The Company is classified as a unitary SLHC,
and will continue to be so classified as long as it and DWT continue to comply
with certain conditions. Unitary SLHCs are exempt from the material
restrictions imposed upon the activities of SLHCs that are not unitary SLHCs.
SLHCs other than unitary SLHCs are generally prohibited from engaging in
activities other than conducting business as a savings association, managing
or controlling savings associations, providing services to subsidiaries or
engaging in activities permissible for bank holding companies (as to the
regulation of bank holding companies, see "CREDIT AND TRANSACTION SERVICES--
Competition and Regulation"). Should the Company fail to continue to qualify
as a unitary SLHC, the Company, in order to continue in those of its present
businesses that would not be permissible for a SLHC, could be required to
divest control of DWT. Certain acquisitions of the Company's common stock may
be subject to regulatory approval and notice by virtue of its status as a
SLHC.
D. CREDIT AND TRANSACTION SERVICES
As of November 30, 1997, Credit Services was the largest single issuer of
general purpose credit cards in the United States as measured by the number of
accounts and cardmembers. Credit Services' proprietary general purpose credit
cards are issued by the Company's NOVUS Services business unit, which operates
the NOVUS Network, the Company's proprietary merchant and cash access network
(the "NOVUS Network"). These cards include the Discover Card, the Private
Issue(R) Card and co-branded and affinity cards.
NOVUS SERVICES
Overview
NOVUS Services offers general purpose credit cards designed to appeal to
different market segments of consumers for use on the NOVUS Network. The NOVUS
Network is the third largest domestic credit card network and consists of
merchant and cash locations that accept credit cards that carry the NOVUS
logo. NOVUS Services issues several brands of proprietary cards, including the
Discover Card, the Private Issue Card and certain co-branded and affinity
cards, including the Smithsonian Card (an affinity program in conjunction with
the Smithsonian Institution) and the Universal Studios Card (a co-branded
credit card in conjunction with Universal Studios that offers cardmembers the
opportunity to participate in a variety of entertainment options).
NOVUS Services promotes its proprietary cards through the use of different
and distinctive features that are designed to appeal to different consumer
bases. These include the Discover Card, which is designed to appeal to the
value-conscious consumer with the Cashback Bonus(R) award, no annual fee and
interest rates indexed to the prime rate; and the Private Issue Card, which
offers consumers a choice of three sets of terms, based on their specific
interests, and four card designs, three designed by celebrity artists.
Cardmembers use the Discover Card as well as other general purpose credit
cards issued by the Company bearing the NOVUS logo to purchase goods and
services at participating merchant locations and to obtain cash advances at
certain merchant and bank locations and at automated teller machines or by
means of checks drawn against their lines of credit. NOVUS Services also
offers cardmembers various financial services, including a revolving line of
credit, credit insurance, and card registration to protect against losses in
connection with card theft or loss. Discover and Private Issue cardmembers are
also offered money market deposit accounts and time deposits.
Cardmembers receive account statements monthly and may elect to pay all or
part of the outstanding balance each month. The unpaid portion of the
outstanding balance is carried over to the next month, and finance charges are
assessed on the revolving balance. A late fee is charged if less than a
required minimum portion of the outstanding balance is paid each month.
Cardmembers are assessed other fees if their credit card use violates other
terms of the cardmember agreement. NOVUS Services accrues revenues through
finance charges on cardmembers' revolving balances, the fees paid by merchants
to the Company for transactions effected through the NOVUS Network,
transaction fees paid by cardmembers for cash advances, late payment fees,
overlimit fees,
14
fees from providing product enhancements to cardmembers (e.g., credit life
insurance and card registration), merchant fees for processing transactions on
other networks, and proceeds from the sale of point-of-sale terminals and
related equipment to merchants.
Cardmember rewards, primarily the Cashback Bonus award, pursuant to which
the Company annually pays Private Issue cardmembers electing this feature and
Discover cardmembers a percentage of their purchase amounts ranging up to one
percent (up to two percent for the Private Issue Card), are based upon a
cardmember's level of annual purchases. The Cashback Bonus award is remitted
to cardmembers in the form of a check or as a credit to their accounts in the
anniversary month of the account opening.
Cardmembers enter into agreements governing the terms and conditions of
their accounts. Cardmember agreements for each type of card are generally
uniform from state to state. 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. Because of certain banking
law restrictions, most of the Company's proprietary general purpose credit
cards may be used only for personal and household (as opposed to commercial)
transactions.
Merchants
Discover Cards, as well as the Company's other proprietary general purpose
credit cards, are accepted only by merchants who are members of the NOVUS
Network. Since its introduction in 1986, the NOVUS Network has expanded
rapidly and currently includes merchants and cash access locations across the
U.S.
Acting as both the issuing and acquiring entity, NOVUS Services retains the
entire merchant fee paid to the NOVUS Network in a given transaction. Because
of its independence from the bankcard associations, NOVUS Services has greater
flexibility than MasterCard or Visa participants in dealing with merchants.
The Company believes that this gives the Company greater opportunities to
provide customized programs to merchants in such areas as processing
arrangements and to attract certain merchants by tailoring program terms to
meet their specific needs.
NOVUS Services employs its own national sales and support force to increase
and maintain its merchant base. In contrast, MasterCard's and Visa's marketing
efforts to merchants are generally indirect and rely largely on the
unaffiliated sales forces of participating acquiring banks and their agents.
In addition, the Company conducts telemarketing operations for the purpose of
acquiring merchant business.
Marketing
NOVUS Services, as the issuer of the Discover Card and other cards for use
on the NOVUS Network, is distinguished from MasterCard and Visa card issuers
in that it directly controls the brand image, features, service level and
pricing of its cards to both cardmembers and merchants. MasterCard and Visa
issuers compete directly with each other using the same brands and sharing
common processes. The ability to control its products provides NOVUS Services
with competitive advantages that are not available to any single MasterCard or
Visa issuer, including efficiencies in operations, product positioning and
marketing execution. NOVUS Services has the ability to direct and deliver a
consistent, nationwide message for the Discover Card and the Company's other
general purpose proprietary credit cards. Because the Company manages all
aspects of both the cardmember and merchant relationship, it can determine and
promote its advertising campaign and control the campaign's content, timing
and promotional features.
Credit
Cardmembers undergo credit reviews to establish that they meet standards of
ability and willingness to pay. Cardmember applications are evaluated using a
credit scoring system. The Company's credit scoring system is based on credit
scoring systems developed by scoring-model vendors and is customized using the
Company's criteria and historical data. Applications not approved under the
credit scoring system may be reviewed and approved by the Company's credit
analysts.
15
Applicants receiving pre-selected solicitations must satisfy criteria
specified by NOVUS Services. All recipients of pre-selected solicitations have
been pre-screened through credit bureaus utilizing a custom model. 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 obligations. Recipients
who respond to the Company's pre-selected solicitations are post-screened by
the Company 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 resulting from account review
may include raising or lowering a cardmember's credit line or closing the
account.
During fiscal 1996 and continuing in fiscal 1997, the Company, including
NOVUS Services, experienced an increase in its net charge-off rate which was
consistent with the industry-wide trend of increasing credit loss rates that
the Company believes is related, in part, to increased consumer debt levels
and bankruptcy rates. In response to this environment and as part of its
ongoing review of cardmember credit quality, the Company implemented
initiatives in fiscal 1996 and fiscal 1997, including raising credit quality
standards for new accounts, selectively reducing credit limits, increasing
collection efforts and closing accounts.*
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,
cardmember service and collection of delinquent accounts. NOVUS Services
maintains several operations centers throughout the country. Additionally,
NOVUS Services operations are supported by systems at computer centers
operated by an unaffiliated communication services provider.
SPS TRANSACTION SERVICES, INC.
SPS Transaction Services, Inc. ("SPS"), a 74% owned, publicly held
subsidiary of the Company, provides technology-based outsourcing services.
SPS' primary services include electronic processing of non-cash point-of-sale
transactions (primarily credit card transactions), consumer private label
credit card program administration, commercial accounts receivable processing
and call center teleservices.
In its network transaction processing business, SPS provides electronic
point-of-sale data capture, data transport for authorization or verification
purposes, file delivery for payment settlement and full reporting services.
SPS typically markets these services directly to large regional and national
merchants and competes with other large networks and merchant acquirers for
this business.
Consumer private label credit card programs are offered to large merchants
and service providers. Services for this business include new account
processing, statement and remittance processing, cardholder customer service,
collections and marketing services. SPS may also act as the card issuer and
own the credit card loans outstanding through Hurley State Bank ("Hurley
Bank"), a wholly owned subsidiary.
SPS also offers commercial account processing services which feature a
billing and account receivable management system for clients with businesses
as customers. Services are customized to client requirements and include
monthly revolving account statements or invoice-based billing.
- --------
* For additional information regarding credit losses and the Company's
response, see "MD&A" incorporated by reference in Part II, Item 7 of this
Report.
16
SPS provides call-center based inbound teleservicing programs that focus on
customer service solutions. Services include on-line technical help desk
support via telephone or Internet/E-mail, catalog order entry and a variety of
customer service applications.
PRIME OPTION SERVICES
Prime Option Services is an organization that, together with NationsBank of
Delaware, N.A. ("NationsBank"), markets a co-branded MasterCard general
purpose credit card under the brand name Prime OptionSM. Issued by NationsBank
under an agreement with MountainWest Financial Corporation ("MountainWest"),
an indirect wholly owned subsidiary of the Company, which participates in the
marketing, funding and servicing of the accounts, Prime Option MasterCard
offers special value and flexibility to consumers through targeted offers of
features and pricing based on behavioral and demographic characteristics.
DISCOVER BROKERAGE DIRECT INC.
In January 1997, the Company acquired Lombard Brokerage, Inc. (which
subsequently changed its name to Discover Brokerage Direct Inc. ("Discover
Brokerage")), a San Francisco-based company that offers financial services
nationwide through its Internet site, an automated telephone system and a core
group of registered account representatives. The financial services provided
by Discover Brokerage, principally to individual investors, include detailed
account information, real-time securities price quotes, trade execution, third
party research data and news stories, graphs and real-time portfolio
performance.
Through Discover Brokerage, the Company focuses on the growing number of
consumers utilizing alternatives to the traditional brokerage channel to plan
their financial future. Discover Brokerage's principal strengths include
providing these customers direct access to financial data to make decisions
and then execute value priced transactions. The Company plans to grow Discover
Brokerage by expanding its product line. Discover Brokerage is also initiating
a marketing campaign to the holders of the Company's Discover and Private
Issue Cards. The Company believes that Discover Brokerage will enhance the
Company's ability to market financial services and products to the holders of
the Discover Card and through distribution channels not reached by full-
service brokers.
COMPETITION AND REGULATION
Competition
Credit Services competes in highly competitive businesses. In particular,
the Company's credit cards compete in a highly competitive industry. The
market includes other bank-issued credit cards (the vast majority of which
bear the MasterCard or Visa service mark) and charge cards issued by travel
and entertainment companies. In the Credit Services business, 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.
The credit card industry has experienced increased competitive use of
advertising, targeted marketing and pricing competition in interest rates,
annual fees and reward programs as new credit card issuers seek to enter the
market and established credit card issuers seek to expand. More recently,
issuers have increased their efforts to attract balances from competing
sources of credit via low-priced balance transfer programs. In addition, banks
have issued and aggressively marketed co-branded credit cards, which offer
certain benefits relating to the business of the bank's co-branding partner.
The Company believes its proprietary merchant base enables it to promote the
Discover Card and its other proprietary card brand names on a national basis,
thereby building customer acceptance and use.
17
Regulation
The Company conducts portions of its Credit Services businesses through
banking institutions. Greenwood Trust is a state bank chartered under the laws
of the State of Delaware. Hurley Bank is a state bank chartered under the laws
of the State of South Dakota. Bank of New Castle, an indirect wholly owned
subsidiary of the Company, is a state bank chartered under the laws of the
State of Delaware. MountainWest is an industrial loan company chartered under
the laws of the State of Utah. Greenwood Trust, Hurley Bank, Bank of New
Castle and MountainWest (each a "Bank" and, collectively, the "Banks") each
have their deposits insured by the FDIC and pay FDIC assessments. Each Bank is
subject to comprehensive regulations and periodic examinations by the state
banking commissioner of the state in which it is chartered and by the FDIC.
Generally, a company which controls a "bank," as defined in the Bank Holding
Company Act of 1956 (the "BHCA"), is required to register as a bank holding
company under that act and becomes subject to regulation and examination as a
bank holding company by the Federal Reserve Board. Greenwood Trust is a "bank"
as defined in the BHCA. However, because Greenwood Trust did not come within
the BHCA's definition of the term "bank" prior to the amendment of the BHCA by
the Competitive Equality Banking Act of 1987 ("CEBA"), under certain
grandfathering provisions of CEBA the Company is not treated as a bank holding
company as long as the Company and Greenwood Trust comply with certain
restrictions set forth in CEBA. Hurley Bank, Bank of New Castle and
MountainWest are not "banks" under the BHCA as long as each complies with
certain other restrictions set forth in CEBA. Under the BHCA, a bank holding
company is generally prohibited from engaging in any activities other than
those of banking, managing or controlling banks, or providing services for its
subsidiaries. Should Greenwood Trust fail to continue to qualify for
grandfather rights under CEBA or should any of the other Banks fail to
continue to be operated so as to maintain its exempt status as a non-bank
under the BHCA, the Company, in order to continue to engage in those of its
present businesses that would not be permissible for a bank holding company
under the BHCA, could be required to divest control of those institutions or,
in the case of Greenwood Trust, to change the activities of the institution
significantly.
The relationships among cardholders, credit card issuers and sellers of
merchandise in transactions financed by the extension of credit under credit
accounts are extensively regulated by federal and state consumer protection
laws and regulations. Under federal law, each of the Banks may charge interest
at the rate allowed by the law of the state in which it is located. The states
where the Banks are domiciled do not limit the amount of interest that may be
charged on loans of the types offered by the Banks. As a result, each of the
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,
MountainWest and Hurley Bank currently use brokered deposits as a funding
source. If Greenwood Trust, MountainWest or Hurley Bank were unable to use
brokered deposits as a funding source, the funding costs of the institution,
particularly those of Greenwood Trust, 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 if direct or indirect control of Greenwood Trust were transferred to a
third party. In that event, the third party would either have to operate as a
bank holding company under the BHCA or significantly modify the activities of
Greenwood Trust. The Merger did not affect Greenwood Trust's qualification for
grandfather rights under CEBA.
18
Discover Brokerage is a registered broker-dealer and a member of the NASD.
See "SECURITIES--Competition and Regulation" for a discussion of the
regulations covering the Company's broker-dealers.
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. Both the 1585 Broadway and 750
Seventh Avenue buildings are owned by the Company. The Company also owns a
600,000 square foot building in Riverwoods, Illinois that houses Credit
Services' executive offices, and an adjacent undeveloped 43 acre parcel.
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 829,000 square feet at various other locations in
Manhattan under leases expiring between 1998 and 2006. In addition, the
Company leases space aggregating approximately 383,000 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 at Yebisu GPT, Ebisu, Shibuya-
ku, where the Company occupies approximately 152,000 square feet of office
space under a lease arrangement expiring in 1998, but renewable at the
Company's option in two-year increments.
The Company's subsidiaries have offices, operations centers and warehouse
facilities located throughout the United States and certain subsidiaries
maintain offices in international locations. The Company's properties are
leased on terms and for durations which are reflective of commercial standards
in the communities where these offices and other 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. The National Commercial Bank v. Morgan Stanley Asset Management Inc., et
al. On May 2, 1994, a complaint was filed in the United States District Court
for the Southern District of New York by The National Commercial Bank ("NCB")
against Morgan Stanley Asset Management Inc. ("MSAM Inc.") and three present
and former MSAM Inc. employees. The complaint alleged that NCB established a
managed account at MSAM Inc. in or about February 1993 to trade United States
Treasury securities and that in August 1993 that account suffered substantial
losses. The complaint alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and Rule 10b-5
promulgated thereunder, common law fraud, common law constructive fraud,
breach of fiduciary duty, breach of contract, negligence and negligent
misrepresentation, and sought compensatory damages in excess of $39 million,
punitive damages in an unspecified amount, costs, attorneys' fees and
interest. On June 28, 1994, defendants filed answers to the complaint. On July
11, 1994, defendants filed third-party complaints against two employees of
NCB, asserting claims over and for contribution and indemnity in the event
defendants are determined to be liable to NCB. The
- --------
* The totals for aggregate square footage leased by the Company do not
include space occupied by the Company's branch securities offices in New
York and throughout the U.S.
19
complaint, answers and third-party complaints were thereafter amended. The
claims against MSAM Inc.'s two present employees were thereafter dismissed
without prejudice as were the claims against the two employees of NCB. On
October 15, 1997, summary judgment was granted to MSAM Inc. on the securities
law fraud claims and as to certain of the common law fraud and negligent
misrepresentation claims. On February 13, 1998, the parties reached an
agreement to settle the matter.
II. Term Trust Class Actions. A putative class action, Thomas D. Keeley, et
al. v. DWR 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, Distributors,
InterCapital, 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. Plaintiff's motion
to certify the class is pending.
III. NASDAQ Antitrust Litigation. On December 16, 1994, a consolidated
amended complaint was filed in the United States District Court for the
Southern District of New York against a total of 33 defendants, including
MS&Co. and DWR. The consolidated amended complaint alleged that MS&Co., DWR
and other participants and market makers on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") engaged in a
conspiracy to fix the "spread" between bid and ask prices for securities
traded on the NASDAQ in violation of Section 1 of the Sherman Act. The
plaintiff class was alleged to include persons throughout the United States
who are customers of the defendants or their affiliates and who traded
securities on the NASDAQ between May 1, 1989 and May 27, 1994. Plaintiffs were
alleged to have been damaged in that they paid more for securities purchased
on the NASDAQ, or received less for securities sold, than they would have but
for the alleged conspiracy. The consolidated amended complaint sought
compensatory damages, treble damages, declaratory and injunctive relief,
attorneys' fees and costs. Judgment against each of the defendants was sought
on a joint and several basis.
On February 2, 1995, MS&Co., DWR and the other named defendants filed a
motion to dismiss, which was granted on August 10, 1995 with leave to replead.
On August 22, 1995, plaintiffs filed a Refiled Consolidated Complaint which
was identical in substance to the dismissed pleading except that it listed by
name the stocks that plaintiffs contended were the subject of the alleged
conspiracy. On December 18, 1995, MS&Co. and DWR filed their answers. On
December 10, 1996, four institutional investors filed a new complaint making
the same allegations made in the consolidated amended complaint; this action
was automatically consolidated with the pending action. On December 26, 1996,
the court granted, in part, plaintiffs' motion for class certification. On
April 14, 1997, the district court granted plaintiffs' motion to include
institutional investors in the previously certified class. On December 23,
1997, the parties reached an agreement in principle to settle the action. The
agreement was preliminarily approved by the court on December 31, 1997.
IV. Department of Justice NASDAQ Investigation. On July 17, 1996, MS&Co.,
DWR and 22 other dealers who make markets in securities traded on NASDAQ
entered into an Order and Stipulation with the United States Department of
Justice which simultaneously filed a civil complaint in the United States
District Court for the Southern District of New York alleging that the 24
market makers had violated Section 1 of the Sherman Act. The complaint
asserted, and MS&Co. and DWR deny, that the various market makers had entered
into a so-called "quoting convention" under which the market makers avoided
the use of odd-eighth quotes when the spread between the bid and ask price was
at least 3/4. The Order and Stipulation commits the 24 market makers to avoid
engaging in certain practices which could support the existence of a purported
"quoting convention" and to adopt various procedures to assure compliance with
their agreement. The Order and
20
Stipulation is subject to court approval and, if approved, will result in the
dismissal of the complaint. On May 21, 1997, certain intervenors appealed a
portion of the Order and Stipulation, and the district court entered an order
staying certain portions of the Order and Stipulation pending the appeal.
V. TCW/DW North American Government Income Trust Litigation. Several
purported class action lawsuits, which have been consolidated for pretrial
purposes (together, the "TNORA Action"), were instituted in January 11, 1995
in the United States District Court for the Southern District of New York
against the 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 unaffiliated adviser, the Trust's manager, and other defendants,
by certain shareholders of the Trust. The consolidated amended complaint
asserts claims under the Securities Act of 1933 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 United States 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.
VI. Global Opportunity Fund Litigation. On December 19, 1995, 20 investors
in a Cayman Islands investment fund named The Global Opportunity Fund (the
"Fund") brought an action against Morgan Stanley Bank Luxembourg, S.A.
("MSBL") in Luxembourg Commercial Court seeking damages in the amount of $44
million and costs. The apparent core of plaintiffs' complaint is that MSBL was
responsible for providing certain net asset valuations to the Fund and
performed that function in a negligent manner. On August 14, 1997, MSBL
applied to the Luxembourg Commercial Court to join Barclays de Zoete Weld
Incorporated ("BZW") into the proceedings in order to assert a claim for
indemnity against BZW in the event that MSBL is held liable. A consolidated
hearing of both matters is scheduled for November 25-26, 1998.
VII. County of Orange and Moorlach v. Morgan Stanley & Co., Inc. On June 11,
1996, an adversary proceeding was commenced by Orange County and its
Treasurer-Tax Collector against MS&Co. The proceeding was originally filed in
the United States Bankruptcy Court for the Central District of California,
where Orange County's Chapter 9 bankruptcy proceeding was then pending. The
action is now pending before the United States District Court for the Central
District of California. The complaint asserts that Orange County, acting
through its former Treasurer-Tax Collector, entered into various reverse
repurchase agreements and other transactions with MS&Co. which were beyond the
County's authority or ultra vires, and, therefore, void. The complaint also
asserts that MS&Co. allowed Orange County to enter into unsuitable
transactions. In addition, the complaint alleges that MS&Co. violated the
automatic stay provisions of the Bankruptcy Code when it liquidated the
County's collateral and closed out certain reverse repurchase transactions
subsequent to the County's December 6, 1994 bankruptcy filing. The complaint
asserts claims for ultra vires, setoff, equitable subordination, restitution,
enforcement of the automatic stay, avoidance of post-petition transfers and
negligence, and seeks compensatory damages in an unspecified amount,
declaratory and injunctive relief, restitution, interest, various costs and
attorneys' fees. On August 29, 1996, MS&Co. filed its answer to the complaint.
Discovery is proceeding. MS&Co. has joined in a motion by a defendant in a
related case to dismiss all of the ultra vires claims asserted in that matter,
which are essentially identical to those asserted in the complaint against
MS&Co. A hearing on that motion is presently scheduled for March 30, 1998.
DWR was also named in a similar action. A stipulation to stay proceedings
was entered into by the parties.
VIII. Litigation Regarding Merger. On February 12, 1997, certain
stockholders of the Company filed a putative class action complaint (the
"Brody Action") in the Delaware Court of Chancery, New Castle County, against
the Company and certain of its directors. The complaint alleges certain
breaches of fiduciary duty owed
21
to the Company's stockholders by the Company and the named directors in
connection with entering into the Agreement and Plan of Merger between Dean
Witter, Discover & Co. and Morgan Stanley Group Inc. dated as of February 4,
1997, and seeks a variety of equitable relief. The defendants have not yet
responded to the complaint, but intend to contest the Brody Action vigorously.
IX. In re Sumitomo Copper Litigation. On April 10, 1997, a consolidated
amended class action complaint was filed in the United States District Court
for the Southern District of New York against Sumitomo Corporation, Sumitomo
Corporation of America (together, "Sumitomo"), Global Minerals and Metals
Corp. ("Global"), Winchester (USA) Inc., Winchester Holdings USA Inc.
(together, "Winchester"), certain individuals associated with Sumitomo, Global
and Winchester, Merrill Lynch & Co., Merrill Lynch Commodity Financing Inc.,
Merrill Lynch Pierce Fenner & Smith (Brokers & Dealers) Limited and MS&Co. The
amended complaint alleges that Sumitomo, Global and certain individuals
associated with each of them, conspired to manipulate and artificially inflate
the price of copper futures contracts on the Comex Division of the New York
Mercantile Exchange, and that the other defendants, including MS&Co., aided
and abetted the manipulation. The plaintiff class purportedly consists of all
persons who purchased copper futures contracts between February 6, 1995 and
June 15, 1996 or between June 24, 1993 and September 9, 1993. MS&Co. had a
counterparty trading relationship in the copper market with Sumitomo during
part of the purported class period. The amended complaint asserts a
manipulation claim under the Commodity Exchange Act against certain of the
defendants other than MS&Co. The amended complaint seeks compensatory damages
in an unspecified amount, treble damages for the RICO claim, interest, costs
and attorneys' fees. On October 31, 1997, MS&Co. filed its answer. Discovery
is proceeding.
X. In re Merrill Lynch, et al. Securities Litigation. On January 19, 1995, a
putative class action was filed in the United States District Court in New
Jersey on behalf of all persons who placed market orders to purchase or sell
NASDAQ securities 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 Exchange Act, Rule 10b-5
promulgated thereunder and state law claims for breach of fiduciary duty and
unjust enrichment. On December 15, 1995, the Court granted summary judgment in
favor of DWR and on June 19, 1997 a three judge panel of the Third Circuit
Court of Appeals affirmed. On January 30, 1998, the full Court of Appeals,
sitting en banc, reversed and remanded the case to district court for further
proceedings.
XI. 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.
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.
22
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers of the Company as of January 29, 1998.
NAME AND AGE PRESENT TITLE AND PRINCIPAL OCCUPATION
------------ --------------------------------------
Philip J. Purcell, 54.... 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 87 registered
investment companies for which InterCapital serves
as investment manager or investment adviser. Mr.
Purcell is also a Director of SPS.
John J. Mack, 53......... 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. From March 1992 until the Merger, he was
also Chairman of Morgan Stanley's Operating
Committee. Mr. Mack was a Director and a Managing
Director of Morgan Stanley from December 1987 until
the Merger.
Thomas C. Schneider, 60.. Executive Vice President, Chief Strategic and
Administrative Officer and Director of the Company
since the Merger. Mr. Schneider was Executive Vice
President and Chief Financial Officer of Dean Witter
Discover from 1987 until the Merger. He served as a
Director of Dean Witter Discover until February
1993. Mr. Schneider is also the Chairman of the
Board of Directors and Chief Financial Officer of
SPS.
Robert G. Scott, 52...... Executive Vice President and Chief Financial Officer
of the Company since the Merger. Mr. Scott was a
Managing Director of MS&Co. from 1979 until the
Merger. He was the head of Investment Banking for
MS&Co. from 1994 to 1996. Mr. Scott was the head of
Worldwide Corporate Finance for MS&Co. from 1992 to
1994 and was the head of Worldwide Capital Market
Services of MS&Co. from 1985 until 1992.
Christine A. Edwards, 45. Executive Vice President, Chief Legal Officer and
Secretary of the Company since the Merger. Mrs.
Edwards was Executive Vice President, General
Counsel and Secretary of Dean Witter Discover from
January 1991 until the Merger. She served as a
Director of Dean Witter Discover until February
1993. Mrs. Edwards is also a Director of SPS.
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, 1997.
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 98 of the Registrant's
1997 Annual Report to Shareholders and such information is incorporated by
reference herein.
23
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 2 of
the 1997 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 66 to 98 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 36 to 58 of the 1997
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 66 to 98 of such Annual
Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is contained on pages 59 through 64 of
the 1997 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 1997 Annual Report to Shareholders on pages 65
to 98, and such information is incorporated by reference herein, including the
information appearing under the caption "Quarterly Results" on page 98 of such
Annual Report.
The Statements of Financial Condition at December 31, 1997 and 1996 for the
Morgan Stanley U.K. Group Profit Sharing Scheme (the "Plan"), the Statements
of Changes in Plan Equity for the Years Ended December 31, 1997, 1996 and 1995
together with the Notes thereon and the Report of Independent Chartered
Accountants appear as Exhibit 99.1.
The report of Ernst & Young LLP, independent auditors, on the consolidated
statement of financial condition of Morgan Stanley as of November 30, 1996 and
the related consolidated statements of income, cash flows and changes in
shareholder's equity for the fiscal years ended November 30, 1996 and 1995,
appears 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 1998 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 24 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
captions "Director Compensation" on pages 7 and 8 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 11 to 24 of the Proxy Statement of the Registrant
for its 1998 Annual Meeting of Stockholders and such information is
incorporated by reference herein.
24
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 9 and 10, respectively, of
the Proxy Statement of the Registrant for its 1998 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 "Interest of Management in Certain Transactions" on
page 24 of the Proxy Statement of the Registrant for its 1998 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 on page E-1 hereto
and is incorporated herein by reference.
(b) A Current Report on Form 8-K, dated September 23, 1997, was filed with the
Securities and Exchange Commission in connection with the announcement of
the Company's third fiscal quarter financial results.
25
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 20,
1998.
Morgan Stanley, Dean Witter,
Discover & 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, Discover & Co., hereby severally constitute Christine A. Edwards,
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 20TH DAY OF FEBRUARY, 1998.
SIGNATURE TITLE
--------- -----
/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/ Thomas C. Schneider Executive Vice President, Chief Strategic
___________________________________________ and Administrative Officer and Director
(Thomas C. Schneider)
/s/ Richard B. Fisher Chairman of the Executive Committee of
___________________________________________ Board of Directors and Director
(Richard B. Fisher)
/s/ Robert G. Scott Executive Vice President and Chief
___________________________________________ Financial Officer (Principal Financial
(Robert G. Scott) Officer)
/s/ Eileen K. Murray Controller (Principal Accounting Officer)
___________________________________________
(Eileen K. Murray)
26
SIGNATURE TITLE
--------- -----
/s/ Robert P. Bauman Director
___________________________________________
(Robert P. Bauman)
/s/ Edward A. Brennan Director
___________________________________________
(Edward A. Brennan)
/s/ Diana D. Brooks Director
___________________________________________
(Diana D. Brooks)
/s/ Daniel B. Burke Director
___________________________________________
(Daniel B. Burke)
/s/ C. Robert Kidder Director
___________________________________________
(C. Rober Kidder)
/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)
27
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS (14)(A)(1) AND (14)(A)(2)
PAGE
-----------------------
FORM 10-K ANNUAL REPORT
--------- -------------
FINANCIAL STATEMENTS
- --------------------
Independent Auditors' Report........................... 65
Consolidated Statements of Financial Condition at
November 30, 1997 and Fiscal Year-End 1996............ 66
Consolidated Statements of Income for the Fiscal Year
Ended November 30, 1997, Fiscal Year-End 1996 and
Fiscal Year-End 1995.................................. 68
Consolidated Statements of Cash Flows for the Fiscal
Year Ended November 30, 1997, Fiscal Year-End 1996 and
Fiscal Year-End 1995.................................. 69
Consolidated Statements of Changes in Shareholders'
Equity for the Fiscal Year Ended November 30, 1997,
Fiscal Year-End 1996 and Fiscal Year-End 1995......... 70
Notes to Consolidated Financial Statements............. 72
FINANCIAL STATEMENT SCHEDULES
- -----------------------------
Schedule I--Condensed Financial Information of Morgan
Stanley, Dean Witter, Discover & Co. (Parent Company
Only)--at November 30, 1997 and Fiscal Year-End 1996
and for each of the Three Fiscal Years in the Period
Ended November 30, 1997............................... S-2--S-5
S-1
SCHEDULE I
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
NOVEMBER 30, FISCAL YEAR-END
1997 1996
------------ ---------------
ASSETS:
Cash and cash equivalents....................... $ 145 $ 12
Financial instruments owned..................... 632 700
Advances to subsidiaries........................ 44,047 53,821
Investment in subsidiaries, at equity........... 12,650 10,343
Other assets.................................... 1,383 988
------- -------
Total assets.................................. $58,857 $65,864
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings........................... $16,745 $20,458
Payables to subsidiaries........................ 4,433 12,001
Other liabilities and accrued expenses.......... 853 720
Long-term borrowings............................ 22,870 20,983
------- -------
44,901 54,162
------- -------
Commitments and contingencies
Shareholders' equity:
Preferred stock................................. 876 1,223
Common stock (1) ($0.01 par value, 1,750,000,000
shares authorized, 602,829,994 and 611,314,509
shares issued, 594,708,971 and 572,682,876
shares outstanding at November 30, 1997 and
fiscal year-end 1996).......................... 6 6
Paid-in capital (1)............................. 3,952 4,007
Retained earnings............................... 9,330 7,477
Cumulative translation adjustments.............. (9) (11)
------- -------
Subtotal...................................... 14,155 12,702
Note receivable related to sale of preferred
stock to ESOP.................................. (68) (78)
Common stock held in treasury, at cost (1)
($0.01 par value, 8,121,023 and 38,631,633
shares at November 30, 1997 and fiscal year-end
1996).......................................... (250) (1,005)
Stock compensation related adjustments.......... 119 83
------- -------
Total shareholders' equity.................... 13,956 11,702
------- -------
Total liabilities and shareholders' equity........ $58,857 $65,864
======= =======
- --------
(1) Amounts have been restated to reflect the Company's two-for-one stock
split.
See Notes to Condensed Financial Statements.
S-2
SCHEDULE I
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
FISCAL 1997 FISCAL 1996 FISCAL 1995
----------- ----------- -----------
REVENUES:
Interest and dividends................... $ 4,531 $ 3,751 $ 2,404
Principal transactions................... 6 (64) 30
Fiduciary fees........................... 23 21 17
Other.................................... 1 5 3
------- ------- -------
Total revenues......................... 4,561 3,713 2,454
------- ------- -------
EXPENSES:
Interest expense......................... 4,403 3,624 2,345
Non-interest expenses.................... 70 5 14
------- ------- -------
Total expenses......................... 4,473 3,629 2,359
------- ------- -------
Income before provision for income taxes
and equity in earnings of subsidiaries.. 88 84 95
Provision for income taxes............... 44 24 26
------- ------- -------
Income before equity in earnings of
subsidiaries............................ 44 60 69
Equity in earnings of subsidiaries, net
of tax.................................. 2,542 1,920 1,396
------- ------- -------
Net income............................... $ 2,586 $ 1,980 $ 1,465
======= ======= =======
Preferred stock dividend requirements.... $ 66 $ 66 $ 65
======= ======= =======
Earnings applicable to common shares..... $ 2,520 $ 1,914 $ 1,400
======= ======= =======
See Notes to Condensed Financial Statements.
S-3
SCHEDULE I
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
FISCAL 1997 FISCAL 1996 FISCAL 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income................................ $ 2,586 $ 1,980 $ 1,465
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........................ 374 513 353
Equity in subsidiaries' earnings, net of
dividends.............................. (1,504) (864) (370)
Changes in assets and liabilities:
Financial instruments owned............. 69 (157) 99
Other assets............................ (724) (335) (597)
Other liabilities and accrued expenses.. 306 113 304
------- -------- -------
Net cash (provided by) operating
activities................................ 1,107 1,250 1,254
------- -------- -------
Cash flows from investing activities:
Net payments for:
Investments in and advances to
subsidiaries, at equity................ 1,402 (11,526) (7,691)
Purchase of Miller Anderson & Sherrerd,
LLP, net of cash acquired.............. -- (200) --
Purchase of Van Kampen American Capital,
Inc., net of cash acquired............. -- (986) --
------- -------- -------
Net cash provided by (used for) investing
activities................................ 1,402 (12,712) (7,691)
------- -------- -------
Cash flows from financing activities:
Net (payments for) proceeds from short-
term borrowings.......................... (3,779) 6,369 4,666
Proceeds from:
Issuance of common stock................. 224 156 122
Issuance of cumulative preferred stock... -- 540 --
Issuance of long-term borrowings......... 6,115 8,561 3,749
Payments for:
Repurchases of common stock.............. (124) (1,133) (267)
Repayments of long-term borrowings....... (3,912) (2,629) (1,603)
Redemption of cumulative preferred stock. (345) (138) --
Cash dividends........................... (416) (313) (235)
------- -------- -------
Net cash (used for) provided by financing
activities................................ (2,237) 11,413 6,432
------- -------- -------
Dean Witter, Discover & Co.'s (Parent
Company Only) net cash activity for the
month of December 1996.................... (139) -- --
------- -------- -------
Net increase (decrease) in cash and cash
equivalents............................... 133 (49) (5)
Cash and cash equivalents, at beginning of
period.................................... 12 61 66
------- -------- -------
Cash and cash equivalents, at end of
period.................................... $ 145 $ 12 $ 61
======= ======== =======
See Notes to Condensed Financial Statements.
S-4
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. INTRODUCTION AND BASIS OF PRESENTATION
The Merger
On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the
"Merger"). At that time, Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. (the "Company"). In conjunction
with the Merger, the Company issued 260,861,078 shares of its common stock, as
each share of Morgan Stanley common stock then outstanding was converted into
1.65 shares of the Company's common stock. In addition, each share of Morgan
Stanley preferred stock was converted into one share of a corresponding series
of preferred stock of the Company. The Merger was treated as a tax-free
exchange.
Basis of Financial Information
The accompanying condensed financial statements (the "Parent Company
Financial Statements") give retroactive effect to the Merger, which was
accounted for as a pooling of interests. The pooling of interests method of
accounting requires the restatement of all periods presented as if Dean Witter
Discover and Morgan Stanley had always been combined. The fiscal year end 1996
shareholders' equity data reflects the accounts of the Company as if the
preferred and additional common stock had been issued during all of the
periods presented.
The Parent Company Financial Statements, including the notes thereto, should
be read in conjunction with the consolidated financial statements of the
Company and the notes thereto found on pages 66 to 98 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. In recording the pooling of interests combination, Dean Witter Discover's
financial statements for the years ended December 31, 1996 and 1995 were
combined with Morgan Stanley's financial statements for the fiscal years ended
November 30, 1996 and 1995 (on a combined basis, "fiscal 1996" and "fiscal
1995", respectively). The Company's results for the twelve months ended
November 30, 1997 ("fiscal 1997") include the results of Dean Witter Discover
that were restated to conform with the new fiscal year-end date. The Company's
results of operations for fiscal 1997 and fiscal 1996 include the month of
December 1996 for Dean Witter Discover.
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 $1,088 million, $1,056 million and $892 million in fiscal 1997, 1996
and 1995, respectively.
S-5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Morgan Stanley, Dean Witter, Discover & Co.:
We have audited the consolidated financial statements of Morgan Stanley,
Dean Witter, Discover & Co. and subsidiaries at fiscal years ended November
30, 1997 and 1996, and for each of the three fiscal years in the period ended
November 30, 1997, and have issued our report thereon dated January 23, 1998;
such consolidated financial statements and report are included in your 1997
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. The consolidated financial statements give
retroactive effect to the merger of Morgan Stanley Group Inc. and Dean Witter,
Discover & Co., which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the condensed financial statement schedules of Morgan Stanley Group Inc.
(Parent Company Only) as of November 30, 1996, and for the fiscal years ended
November 30, 1996 and 1995, which statements reflect total assets of $48,143
million as of November 30, 1996, and total revenues of $2,997 million and
$1,802 million for the fiscal years ended November 30, 1996 and 1995,
respectively. Those financial statement schedules were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Morgan Stanley Group Inc. (Parent Company
Only) for such periods, is based solely on the report of such other auditors.
In our opinion, based on our audits and the report of the other auditors, the
condensed financial statement schedules for Morgan Stanley, Dean Witter,
Discover & 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.
DELOITTE & TOUCHE LLP
New York, New York
January 23, 1998
S-6
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. Prior to the Merger, the Exchange Act
file number of Morgan Stanley Group Inc. ("Morgan Stanley") was 1-9085.
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
3.1 Amended and Restated Certificate of Incorporation of
the Company (Exhibit 3.1 to the Company's Current
Report on Form 8-K dated May 31, 1997).
3.2* By-Laws of the Company, as amended to date.
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 successor to Chemical Bank), as rights agent
(Exhibit 4.1 to the Company's Current Report on Form 8-
K dated February 4, 1997).
4.3 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).
4.4 Form of Consent and Amendment dated as of January 31,
1996 between the Company and certain signatories to the
Stockholders' Agreement referred to in Exhibit 4.3
(Exhibit 4.3 to Morgan Stanley's Annual Report on Form
10-K for the fiscal year ended November 30, 1995).
4.5 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)).
4.6 Senior Indenture dated as of April 15, 1989 between the
Company and The Chase Manhattan Bank (as successor to
Chemical Bank), as trustee (Exhibit 4.12 to Morgan
Stanley's Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
4.7 First Supplemental Senior Indenture dated as of May 15,
1991 between the Company and The Chase Manhattan Bank
(as successor to Chemical Bank), as trustee (Exhibit
4.13 to Morgan Stanley's Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
4.8 Second Supplemental Senior Indenture dated as of April
15, 1996 between the Company and The Chase Manhattan
Bank (as successor to Chemical Bank), as trustee
(Exhibit 4-b to Morgan Stanley's Current Report on Form
8-K dated May 6, 1996).
4.9 Third Supplemental Senior Indenture dated as of June 1,
1997 between the Company and The Chase Manhattan Bank,
as trustee (Exhibit 4-h to the Company's Registration
Statement on Form S-3 (No. 333-27919)).
4.10 Subordinated Indenture dated as of April 15, 1989
between the Company and The First National Bank of
Chicago, as trustee (Exhibit 4.10 to Morgan Stanley's
Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.11 First Supplemental Subordinated Indenture dated as of
May 15, 1991 between the Company and The First National
Bank of Chicago, as trustee (Exhibit 4.11 to Morgan
Stanley's Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
4.12 Second Supplemental Subordinated Indenture dated as of
April 15, 1996 between the Company and The First
National Bank of Chicago, as trustee (Exhibit 4-c to
Morgan Stanley's Current Report on Form 8-K dated May
6, 1996).
E-1
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
4.13 Third Supplemental Subordinated Indenture dated as of
June 1, 1997 between the Company and The First National
Bank of Chicago, as trustee (Exhibit 4-l to the
Company's Registration Statement on Form S-3 (No. 333-
27919)).
4.14 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).
4.15 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)).
4.16 Voting Agreement dated March 5, 1991 among the Company,
State Street Bank and Trust Company and Other Persons
Signing Similar Voting Agreements (Exhibit 4.14 to
Morgan Stanley's Annual Report on Form 10-K for the
fiscal year ended January 31, 1993).
4.17 Instruments defining the Rights of Security Holders,
Including Indentures--In addition to Exhibits 4.1
through 4.16 herein, pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Company hereby undertakes to furnish to the Securities
and Exchange Commission upon request copies of the
instruments defining the rights of holders of long-term
debt securities of the Company and its subsidiaries,
none of which instruments authorizes the issuance of an
amount of securities that exceeds 10% of the total
assets of the Company and its subsidiaries on a
consolidated basis.
10.1 Amended Agreement for Systems Operations Services dated
as of January 1, 1996 by and between the Company and
Advantis, a New York general partnership (Exhibit 10.4
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996).
10.2 Form of Pooling and Servicing Agreement used in
connection with the securitization of Discover Card
receivables (Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (No. 33-56104)).
10.3 Pooling and Servicing Agreement dated as of October 1,
1993 between Greenwood Trust Company as master
servicer, servicer and seller and Continental 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
Bank of America Illinois (formerly, Continental 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
First Bank National Association (successor trustee to
Bank of America Illinois, formerly Continental 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+ 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).
E-2
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
10.7+ Omnibus Equity Incentive Plan (Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (No. 33-
63024)).
10.8+ Employees Replacement Stock Plan (Exhibit 4.2 to the
Company's Registration Statement on Form S-8 (No. 33-
63024)).
10.9+ 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).
10.10+ 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).
10.11*+ Amendment to Dean Witter START Plan (Saving Today
Affords Retirement Tomorrow) (adopted December 10,
1997).
10.12+ 1993 Stock Plan for Non-Employee Directors (Exhibit 4.3
to the Company's Registration Statement on Form S-8
(No. 33-63024)).
10.13+ 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).
10.14+ 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).
10.15+ 1994 Omnibus Equity Plan (Exhibit 10.52 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
10.16+ Tax Deferred Equity Participation Plan (amended and
restated October 21, 1994) (Exhibit 4.1 to Post-
Effective Amendment No. 1 to the Company's Registration
Statement on Form S-8 (33-82240)).
10.17*+ Amendment to Tax Deferred Equity Participation Plan
(adopted October 3, 1997).
10.18+ 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).
10.19*+ Directors' Equity Capital Accumulation Plan (amended
and restated).
10.20+ Employees Equity Accumulation Plan (Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.21+ Sears Consumer Financial Corporation Supplemental
Retirement Income Plan (currently known as the NOVUS
Credit Services Inc. Supplemental Retirement Income
Plan (Exhibit 10.36 to the Company's Registration
Statement on Form S-1 (No. 33-56104)).
10.22+ First Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (Exhibit 10.41 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1993).
10.23+ Second Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (Exhibit 10.42 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1993).
10.24+ Third Amendment to the NOVUS Credit Services Inc.
Supplemental Retirement Income Plan (Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.25+ Employee Stock Purchase Plan (amended and restated)
(Exhibit 10.42 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
E-3
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
10.26*+ Amendment to Employee Stock Purchase Plan (adopted
December 19, 1997).
10.27+ 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).
10.28+ 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).
10.29+ Morgan Stanley & Co. Incorporated Excess Benefit Plan
(amended and restated) (Exhibit 10.5 to Morgan
Stanley's Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
10.30+ Morgan Stanley & Co. Incorporated Supplemental
Executive Retirement Plan, as amended (Exhibit 10.6 to
Morgan Stanley's Annual Report on Form 10-K for the
fiscal year ended January 31, 1993).
10.31+ 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).
10.32+ 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).
10.33+ 1995 Equity Incentive Compensation Plan (Annex A to
Morgan Stanley's Proxy Statement for its 1996 Annual
Meeting of Stockholders).
10.34+ 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).
10.35+ 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).
10.36+ 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).
10.37 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).
10.38 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).
10.39 Lease Agreement dated July 8, 1985 by and between Fund
for Regional Development acting by and through The
Port Authority of New York and New Jersey and Dean
Witter Reynolds Inc. (Exhibit 10.41 to the Company's
Registration Statement on Form S-l (No. 33-56104)).
10.40 Agreement of Lease dated May 13, 1986 between Morgan
Stanley & Co. Incorporated and Forest City Pierrepont
Associates, as amended (Exhibit 10.18 to Morgan
Stanley's Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
10.41 Agreement of Sublease between McGraw-Hill, Inc. and
Morgan Stanley & Co. Incorporated, as amended (Exhibit
10.19 to Morgan Stanley's Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.42 Lease dated January 22, 1993 between Rock-McGraw, Inc.
and Morgan Stanley & Co. Incorporated (Exhibit 10.22
to Morgan Stanley's Annual Report on Form 10-K for the
fiscal year ended January 31, 1993).
E-4
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
10.43 Agreement of Lease dated February 10, 1995 among Canary
Wharf Limited, Morgan Stanley UK Group and the Company
(Exhibit 10.18 to Morgan Stanley's Annual Report on
Form 10-K for the fiscal year ended January 31, 1995).
10.44 Amended and Restated Agreement and Plan of Merger dated
as of April 10, 1997 (Annex I to the Joint Proxy
Statement/Prospectus included as part of the Company's
Registration Statement on Form S-4 (No. 333-25003)).
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 1997 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 98).
13.2 "Selected Financial Data" (page 2).
13.3 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (pages 36 to 58).
13.4 "Risk Management" (pages 59 to 64)
13.5 Consolidated Financial Statements of the Company and
its subsidiaries, together with the Notes thereto and
the Independent Auditor's Report thereon (pages 65 to
98).
21* Subsidiaries of the Company.
23.1* Consent of Deloitte & Touche LLP.
23.2* Consent of Ernst & Young LLP.
23.3* Consent of Deloitte & Touche with respect to the
Financial Statements for the fiscal year ended
December 31, 1997 for the Morgan Stanley U.K. Group
Profit Sharing Scheme.
24 Powers of Attorney (included on signature page).
27* Financial Data Schedule.
99.1* Financial Statements for the year ended December 31,
1997 for the Morgan Stanley U.K. Group Profit Sharing
Scheme.
99.2* Report of Ernst & Young LLP.
- --------
* 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
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