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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, 1998
Commission File Number 1-11758
Morgan Stanley Dean Witter & Co.
(Exact name of Registrant as specified in its charter)
Delaware 36-3145972
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1585 Broadway 10036
New York, N.Y. (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (212) 761-4000
Securities registered pursuant to Section 12(b) of the Act:
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/1/ 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.
/2/ "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.
/3/ Notes which are exchangeable for equity securities of certain non-
affiliated companies.
/4/ "Protected Exchangeable Equity-linked Securities." Principal protected
notes that are exchangeable for cash based on the value of the S&P 500
Index.
/5/ "Currency Protected Securities." Currency protected notes that pay at
maturity equity securities of certain non-affiliated companies or the
equivalent value in cash.
/6/ "BRoad InDex Guarded Equity-linked Securities." Principal protected notes
that pay at maturity a cash amount based on the value of certain broad
equity indices.
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 19, 1999 was approximately $41,925,493,769. 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 19, 1999, there were 571,113,010 shares of Common Stock, $.01
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Morgan Stanley Dean Witter & Co. 1998 Annual Report to Shareholders--
Incorporated in part in Form 10-K, Parts I, II and IV.
(2) Morgan Stanley Dean Witter & Co. Proxy Statement for its 1999 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 & 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 and
transaction services.** The Company combines global strength in investment
banking (including the origination of underwritten public offerings and
mergers and acquisitions advice) and institutional sales and trading with
strength in providing investment and global asset management products and
services and, primarily through its Discover(R) Card brand, quality consumer
credit products.
As of November 30, 1998, the Company had the second largest financial
advisor sales organization in the U.S., with 11,238 professional financial
advisors and 438 securities branch offices. The Company also had one of the
largest global asset management operations of any full-service securities
firm, with total assets under management and supervision of $376 billion. In
addition, based on its approximately 38 million general purpose credit card
accounts as of November 30, 1998, the Company was the nation's third largest
credit card issuer as measured by number of accounts, with the largest
proprietary merchant and cash access network in the U.S.
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 services; 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 a variety of product lines and brand names, including Morgan
Stanley Dean Witter Advisors (formerly known as Dean Witter InterCapital)
("MSDW Advisors"), Van Kampen Investments ("Van Kampen"), Morgan Stanley Dean
Witter Investment Management ("MSDW Investment Management") and Miller
Anderson & Sherrerd ("MAS"); and principal investment activities. The
Company's credit and transaction services businesses ("Credit Services")
include the issuance of the Discover Card and other proprietary general
purpose credit cards, the operation of the Discover/NOVUS(R) Network, a
proprietary network of merchant and cash access locations, and direct-marketed
activities such as the on-line securities services offered by Discover
Brokerage Direct Inc. ("Discover Brokerage"). The Company's products and
services are provided to a large and diversified group of clients and
customers, including corporations, governments, financial institutions and
individuals.
The Company conducts its business from its headquarters in New York City,
its regional offices and branches throughout the U.S., and its principal
offices in London, Tokyo, Hong Kong and other financial centers throughout the
world. At November 30, 1998, the Company had 45,712 employees. None of the
Company's employees is covered by a collective bargaining agreement. The
Company is a combination of Dean Witter, Discover & Co. ("Dean Witter
Discover") and Morgan Stanley Group Inc. ("Morgan Stanley") and was formed
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* Unless the context otherwise requires, the term "Company" means Morgan
Stanley Dean Witter & Co. and its consolidated subsidiaries.
** Certain statements contained herein, including (without limitation) certain
statements made under "Legal Proceedings" in Part I, Item 3 of this Report;
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in Part II, Item 7 of this Report
("MD&A"); and "Quantitative and Qualitative Disclosure about Market Risk"
incorporated by reference in Part II, Item 7A of this Report, are forward-
looking statements. The matters referred to in such statements could be
affected by the risks and uncertainties involved in the Company's
businesses, including (without limitation) the effect of economic and
market conditions, the level and volatility of interest rates and currency
values and equity and commodity prices, the actions undertaken by both
current and potential new competitors, the impact of current, pending or
future legislation and regulation both in the U.S. and throughout the
world, the potential effects of technological changes such as the Year 2000
computer code issue and other risks and uncertainties detailed in the MD&A
and in "Competition and Regulation" under "Securities," "Asset Management"
and "Credit and Transaction Services" herein.
pursuant to a merger of equals that was effected on May 31, 1997 (the
"Merger"). The Company was originally incorporated under the laws of the State
of Delaware in 1981, and its predecessor companies date back to 1924.
The Company conducts its worldwide businesses through several highly
integrated subsidiaries and affiliates, which frequently participate together
in the facilitation and consummation of a single transaction. Because of the
increasing integration of the international financial markets, the Company
manages its principal operating subsidiaries on a coordinated global basis
with a view to the profitability of the enterprise as a whole. Financial
information concerning the Company for each of the three fiscal years ended
November 30, 1998, November 30, 1997 and November 30, 1996, 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 1998 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 43 through 45 of "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" in the
1998 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 diverse
group of domestic and international corporate and institutional 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 as 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 and services, primarily through Dean Witter
Reynolds Inc. ("DWR"). The Company offers services on a global basis under the
brand name "Morgan Stanley Dean Witter."
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 ("PERQS(SM)") 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
2
planning. Other services provided to clients include advice with respect to
recapitalizations, dividend policy, valuations, foreign exchange exposures and
financial risk management strategies. The Company also furnishes advice and
other services in connection with project financings, including
infrastructure, electric power and natural resource projects. In addition, the
Company provides advisory services in connection with the purchase, sale and
financing of real estate and lease transactions.
Financing
In connection with its investment banking activities, the Company from time
to time also provides financing or financing commitments to certain companies.
For example, the Company may provide extensions of credit to leveraged
companies in the form of senior or subordinated debt, as well as bridge
financing on a select basis. The Company also conducts senior lending
activities, including the origination and syndication of senior secured loans
of non-investment grade companies.
A subsidiary of the Company also acts as general partner of Princes Gate
Investors II, L.P. ("Princes Gate"), a limited partnership with $1 billion 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.
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 ("WEBS(SM)") and restricted/control stock; convertible debt and preferred
securities, including PERCS(R), PERQS(SM) 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
arbitrage transactions for its own account.
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.
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 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 30 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.
3
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 Belgian, Canadian,
French, Italian and U.K. 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, a large
portion of the collateral held by the Company for reverse repurchase
agreements and bonds borrowed consists of securities issued by the U.S.
government, federal agencies or non-U.S. governments.
The Company trades and distributes mortgage-backed 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 for which 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. The Company also engages in trading senior loans of non-investment
grade companies. Such loans are generally made on a secured basis and are
senior to the non-investment grade securities of these issuers that trade in
the capital markets. To mitigate the potential impact on the Company's
operating results of the greater risks inherent in high-yield debt securities
and emerging market loans and securitized instruments, the Company monitors
and controls its total inventory positions in these securities and instruments
in a manner consistent with its overall risk management policies and
procedures. The Company also maintains credit policies designed 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. On a more limited basis, the Company also enters into
forward currency transactions both as agent and as principal. The Company is a
leading participant in currency futures trading at the International Monetary
Market division of the Chicago Mercantile Exchange and is a leading dealer in
OTC and exchange-traded currency options on a worldwide basis.
4
The Company also trades as principal in the spot, forward and futures
markets in a variety of commodities, including precious metals, base metals,
crude oil, oil products, natural gas, electric power and related energy
products. The Company is an active market-maker in swaps and OTC options on
commodities such as metals, crude oil, oil products, natural gas and
electricity, and offers a range of hedging programs relating to production,
consumption and reserve/inventory management. The Company is an electricity
power marketer in the U.S. and owns a majority equity interest in an exempt
wholesale generator from which the Company is the exclusive purchaser of
electric power.
Derivatives
The Company 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 are 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 objectives and other
financial needs of its clients. Through a triple-A rated subsidiary of the
Company (Morgan Stanley Derivative Products Inc.), the Company also enters
into swap and related derivative transactions with certain clients seeking a
triple-A rated counterparty.*
Derivatives facilitate risk transfer and enhance liquidity in the
marketplace, and the origination and trading of derivatives are often utilized
to adjust risk profiles, such as exposure to 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 Company manages the risks associated with
derivative products in a manner consistent with its overall risk management
policies. Exposure to changes in interest rates, foreign currencies and other
factors are managed on an individual product basis, generally through
offsetting or other positions in a variety of financial instruments and
derivative products. In addition, with respect to certain derivatives, the
Company has agreements with customers and counterparties that permit the
Company to close out positions or require additional (and, in many cases,
excess) collateral if certain events occur. In certain instances, the Company
may also limit the types of derivative products that may be traded in a
particular account. See also "Risk Management" incorporated by reference in
Part II, Item 7A of this Report.
MSCI
Morgan Stanley Capital International Inc. ("MSCI"), a majority-owned
subsidiary of the Company, markets and distributes over 3,500 country,
industry and regional equity and fixed income benchmark indices (including The
World, EAFE(R) and Emerging Market Free Indices) covering 51 countries, and
has a 29-year historical database that includes fundamental and valuation data
on over 5,500 companies in developed and emerging market countries. Investment
professionals around the world use MSCI data for purposes such as performance
measurement, security valuation and asset allocation.
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* For a detailed discussion of the Company's use of derivatives, see "MD&A --
Derivative Financial Instruments" incorporated by reference in Part II,
Item 7 of this Report and "Notes to Consolidated Financial Statements, Note
9" 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 9 of this Report.
5
Securities Services to Individual Investors
Financial Advisory Activities
Principally through DWR, a full-service retail broker-dealer, the Company
offers clients a broad range of securities and investment products and
services that are supported by the Company's investment banking, research,
asset management, execution and operational resources. At November 30, 1998,
the Company had the second largest financial advisor sales organization in the
domestic securities industry, with 11,238 financial advisors located in 438
securities branch offices, providing investment services to more than 3.9
million client accounts having assets of $438 billion.
The Company focuses on providing its clients with comprehensive financial
planning services, tailored to meet individual investment goals and risk
profiles. The Company believes that employing knowledgeable investment
professionals is a key factor in serving the individual investor and has
undertaken an aggressive campaign to grow and train its financial advisor
sales organization. Through retention of existing financial advisors and
extensive recruiting, the Company has increased its financial advisor sales
organization by over 40% over the past five years. Client assets have
increased by over 100% over the same five-year period.
The Company provides execution, trading and research services to its
individual clients for listed equity securities, OTC equity securities,
options and ADRs. The Company also provides execution, trading and research
services to individual clients for a broad range of fixed income securities,
including U.S. government obligations, mortgage and other asset-backed
securities, corporate bonds, preferred stocks, municipal securities and
certificates of deposit. The Company's fixed income trading activity on behalf
of individual investors focuses primarily on establishing and maintaining
inventory based upon actual and anticipated orders from its clients, rather
than risk-oriented proprietary trading. In December 1998, the Company
implemented a strategy to pair its financial advisor sales force with its
institutional fixed income platform in order to provide mid-sized institutions
with greater access to the Company's comprehensive products and research
capabilities.
The Company also provides its clients with an extensive array of investment
and credit products and services, including mutual funds, unit investment
trusts, insurance products, financial planning, retirement planning, personal
trust and estate planning, tax planning, credit management and account
services. One of the Company's products designed to help clients manage their
assets is the Active Assets Account(R) ("AAA Account"). Through the AAA
Account, clients can consolidate their financial assets into a single account,
invest funds in a wide variety of investment products and ensure that funds
are automatically invested daily, either in a money market account insured by
the Federal Deposit Insurance Corporation ("FDIC") or in one of four different
money market funds. In addition, the AAA Account offers dividend reinvestment,
check writing, direct deposit and electronic funds transfer and bill payment
services. The Company also offers its Internet technology service,
ClientServ(SM), to its AAA Account customers, which allows them to track their
accounts on-line, obtain research reports and real-time securities quotes,
create customized personal portfolio monitors and chart the performance of
various securities over time. Total client assets in AAA Accounts were $144.7
billion as of November 30, 1998.
Clients planning for their retirement have access through the Company's IRA-
2000(R) Individual Retirement Account ("IRA-2000 Account") to a broad array of
investment choices. Total client assets in IRA-2000 Accounts were $80.3
billion as of November 30, 1998. The Company also provides individual
annuities and complete defined contribution plan services for businesses,
including 401(k) plans.
Other Activities
The Company provides investment consulting services that assist clients in
analyzing their investment objectives and in selecting investment advisory
services offered by unaffiliated investment advisors. Through its wholly-owned
insurance agency subsidiaries, the Company also acts as a national general
agency for leading insurance carriers to meet the insurance and annuity needs
of individual investors. The Company originates and
6
services a broad range of consumer loans secured by mortgages on residential
properties. The Company also offers trust and fiduciary services to both
individual and corporate clients, primarily trustee services for personal
trusts and tax-qualified retirement plans.
Private Wealth Management
The Company's Private Wealth Management group (formerly known as Private
Client Services) ("PWM") is a financial advisory group that provides solutions
to individuals, families and foundations who control significant pools of
wealth. PWM has offices in the U.S., Europe and Asia and provides access to
the Company's trading capabilities, fundamental research and analytical
products, as well as to its securities underwritings. PWM financial advisors
manage specific financial asset classes and provide tailored global asset
allocation strategies for its clients. PWM also offers private investors the
opportunity to co-invest with the Company in its principal investing
activities and specialized funds. Private banking services and other PWM
financial advisory services are provided to select international clients
through the Company's Swiss bank subsidiary, Bank Morgan Stanley AG.
International Private Client Group
Because of the strategic opportunities that the Company believes are
presented by the further development of an international individual securities
and asset management business, the International Private Client Group was
formed as a new business unit in December 1998. The International Private
Client Group will encompass all of the Company's international activities
relating to individual securities and asset management (including
international PWM activities) and electronic commerce businesses, as well as
future international expansion in such businesses. See also "ASSET
MANAGEMENT."
Research
The Company's global research department ("Research"), comprised of
economists, industry analysts and strategists, is actively engaged in a wide
range of research activities. Research produces reports and studies on the
economy, financial markets, portfolio strategy, technical market analyses and
industry developments. It analyzes worldwide trends covering a broad range of
industries and more than 2,000 individual companies, half of which are located
outside of the 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 individual and institutional clients. Timely
data contained in Research's numerous publications, such as the Investment
Strategy Chartbook and The Competitive Edge, are disseminated to both
individual and institutional investors through a proprietary database
accessible via the Internet and through the Company's financial advisors. In
addition, Research provides analytical support and publishes reports on
mortgage-related securities and the markets in which they are traded and does
original research on valuation techniques.
Operations and Information Processing
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 its Securities
business and competes worldwide directly with other firms, a number of which
may have greater capital and other resources. The
7
Company and its competitors 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
Securities business are the Company's general reputation, the overall quality
of its professionals and other personnel, 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 commit capital efficiently are important competitive factors,
particularly for its capital-intensive investment banking and sales, trading
and market-making activities.
In addition to competition from firms traditionally engaged in the financial
services business, there has been increasing competition in recent years from
other sources, such as commercial banks, insurance companies, on-line service
providers, sponsors of mutual funds 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 relax certain
restrictions on commercial banks, competition in some markets which have
traditionally been dominated by investment banks and retail securities firms
has increased and is likely to increase in the future. In addition, recent
convergence and consolidation in the financial services industry has led to
increased competition from larger diversified financial services
organizations. Increased competition affects, among other things, the
Company's ability to attract and retain highly skilled individuals. The
complementary trends in the financial services industry of consolidation and
globalization also present technological, risk management and other
infrastructure challenges that will require effective resource allocation in
order for the Company to remain competitive.
Regulation
The Company's Securities business is, and the securities, commodities and
financial services industries generally are, subject to extensive regulation
in the U.S., at both the federal and state levels, as well as internationally.
The Company is subject to the rules and regulations of the various regulatory
bodies that are charged with safeguarding the integrity of the securities and
other financial markets and with protecting the interests of customers
participating in those markets.
MS&Co., DWR and 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 New York Stock Exchange ("NYSE"). Broker-
dealers are subject to regulation by securities administrators in those states
in which they conduct business. Broker-dealers are also subject to regulations
that cover all aspects of the securities business, including sales and trading
practices, use and safekeeping of customers' funds and securities, capital
structure, record-keeping and the conduct of directors, officers and
employees. The SEC, other governmental regulatory authorities, including state
securities commissions, and self-regulatory organizations may institute
administrative proceedings against broker-dealers or members, which could
result in censure, fine, the issuance of cease-and-desist orders, the
suspension or expulsion of such broker-dealer or member or its officers or
employees, or other similar consequences. Occasionally, the Company's
subsidiaries have been subject to investigations, other proceedings and fines
relating to infractions of various regulations relating to their activities as
broker-dealers, none of which, to date, has had a material adverse effect on
the Company or its business.
New legislation or regulations, including any relating to the activities of
affiliates of broker-dealers, changes in rules promulgated by the SEC or other
governmental regulatory or self-regulatory authorities (such as changes to the
U.S. Internal Revenue Code and related regulations or rules promulgated by the
Financial Accounting Standards Board) or changes in the interpretation or
enforcement of existing laws and regulations, may 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, which provides, in
the event of the liquidation of a broker-dealer,
8
protection for customer 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 that restrict the amount they may lend in connection
with certain purchases of securities by customers, and such subsidiaries are
also required by NYSE rules to impose maintenance requirements on the amount
of securities contained in margin accounts. These rules augment the Company's
margin policies, which in many cases are more stringent.
As 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 that has been designated
a registered futures association by the CFTC and of which MS&Co. and DWR are
members.
With respect to OTC derivatives, the Company is a member of the
International Swaps and Derivatives Association ("ISDA"), the Group of 30 and
the Derivatives Policy Group, a group of securities firms formed at the
request of the SEC and CFTC to address concerns regarding the OTC derivatives
activities of U.S. broker-dealer affiliates not subject to direct regulatory
oversight. The Derivatives Policy Group has agreed to adhere to a voluntary
oversight framework relating to reporting, capital, management controls and
counterparty relationships.
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 Securities business in the
U.K. is regulated by the Securities and Futures Authority and a number of
exchanges, including the London Stock Exchange and the London International
Financial Futures and Options Exchange; The Deutsche Bundesbank, the
Bundesaufsichtsamt fur das Kreditwesen (the Federal Banking Supervisory
Authority), the Bundesaufsichtsamt fur den Wertpapierhandel (the Federal
Supervisory Authority for Securities Trading), Eurex Deutschland and the
Deutsche Borse AG regulate the Company's activities in the Federal Republic of
Germany; the Company's Securities business in Japan is subject to Japanese law
applicable to foreign securities firms and related regulations of the Japanese
Ministry of Finance and to the rules of the Bank of Japan, the Japanese
Securities Dealers Association and several Japanese securities and futures
exchanges, including the Tokyo Stock Exchange, the Osaka Securities Exchange
and the Tokyo International Financial Futures Exchange; the Monetary Authority
of Singapore and the Singapore International Monetary Exchange Ltd. regulate
the Company's business in Singapore; and the Company's Securities operations
in Hong Kong are regulated by the Securities and Futures Commission, The Stock
Exchange of Hong Kong Ltd. and the Hong Kong Futures Exchange Ltd.
As registered broker-dealers and member firms of the NYSE, certain
subsidiaries of the Company, including MS&Co. and DWR, are subject to the
SEC's net capital rule, and as futures commission merchants, MS&Co.
9
and DWR are subject to the net capital requirements of the CFTC and various
commodity exchanges. Many non-U.S. securities exchanges and regulatory
authorities also either have imposed or are imposing rules relating to capital
requirements that apply to subsidiaries of the Company (such as rules that
have been promulgated in connection with the European Union Capital Adequacy
Directive), including certain European subsidiaries that are considered
banking organizations under local law. These rules, which specify minimum
capital requirements, are designed to measure general financial integrity and
liquidity and require that at least a minimum amount of assets be kept in
relatively liquid form. Compliance with the capital requirements may limit
those operations of the Company that require the intensive use of capital,
such as underwriting, principal investing and trading activities, and the
financing of customer account balances. Such requirements also restrict the
Company's ability to withdraw capital from its subsidiaries, which in turn may
limit the Company's ability to pay dividends, repay debt or redeem or purchase
shares of its outstanding capital stock. A change in such rules or the
imposition of new rules affecting the scope, coverage, calculation or amount
of capital requirements, or a significant operating loss or any unusually
large charge against capital, could adversely affect the ability of the
Company to pay dividends or to expand or even maintain its present levels of
business.
C. ASSET MANAGEMENT
The Company manages a wide range of asset management products for individual
investors, primarily through MSDW Advisors and Van Kampen, and provides global
portfolio management to a wide range of institutional investors through MSDW
Investment Management. The Company also sponsors, acts as general partner for
and invests in several limited partnerships that conduct a variety of
activities broadly described as principal investing.
Morgan Stanley Dean Witter Advisors
MSDW Advisors develops, markets and manages a broad spectrum of proprietary
open- and closed-end mutual funds and provides professional money management
services on a customized basis to affluent individuals, institutional
investors and retirement plan sponsors. MSDW Advisors assets include equities,
taxable and tax-exempt fixed income securities and money market instruments.
At November 30, 1998, there were 138 funds and portfolios with assets of
approximately $121 billion for which MSDW Advisors, through Morgan Stanley
Dean Witter Services Company Inc., a wholly-owned subsidiary of the Company,
served in various investment management and administrative capacities.
Morgan Stanley Dean Witter Distributors Inc., a wholly-owned subsidiary of
the Company and a registered broker-dealer ("MSDW Distributors"), distributes
shares of MSDW Advisors products that are open-end investment companies. MSDW
Distributors has entered into agreements with DWR and other selected dealers
for the marketing and distribution of such products. DWR, its affiliates and
other selected dealers are compensated for their distribution-related expenses
through contingent deferred sales charges, front-end sales charges and fees
authorized pursuant to the provisions of Rule 12b-1 under the Investment
Company Act of 1940.
Van Kampen Investments
Van Kampen operates a family of open- and closed-end mutual funds for
individual and institutional shareholders, and markets and provides ongoing
evaluation and credit surveillance for fixed income and equity 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, 1998, Van
Kampen had more than 50 open-end funds and 39 closed-end funds and 2,500
series of UITs, and Van Kampen and its affiliates managed, administered or
supervised approximately $72 billion in assets.
10
Van Kampen distributes its investment products through a large and
diversified network of unaffiliated national and regional broker-dealers,
commercial banks and thrifts, insurance companies and their affiliated broker-
dealers and financial planners ("retail distribution firms"), as well as the
Company's financial advisors. A relatively small number of retail distribution
firms account for a substantial portion of sales of Van Kampen's products, and
Van Kampen has proprietary and preferred distribution relationships with
several of its unaffiliated retail distribution firms.
Morgan Stanley Dean Witter Investment Management
MSDW Investment Management, through its various advisory entities, including
MAS, primarily manages financial assets for institutions around the world,
including pension funds, corporations, non-profit organizations and
governmental agencies. MSDW Investment Management offers product lines
covering a full range of equity, fixed income and alternative investments in
developed and emerging markets, and a variety of investment styles including
value, growth and blended; active and passive management; and diversified and
concentrated portfolios. Products are available through separate account
management, pooled vehicles, U.S. and non-U.S. mutual funds and variable
annuities. A broad range of fiduciary and named fiduciary services for pension
funds and trusts is also available through MSDW Investment Management.
At November 30, 1998, MSDW Investment Management had assets under management
or supervision of approximately $157 billion, including approximately $45
billion related to international products. Approximately $54 billion of these
assets related to mutual funds and approximately $103 billion related to
separate accounts, pooled vehicles and other arrangements.
The Company distributes certain domestic and international investment
products advised or sub-advised by MSDW Investment Management through the
distribution networks of MSDW Advisors and Van Kampen.
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, 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 private investment funds, and clients of the Company
contribute the remaining capital. The Company also typically receives
management fees for operating the private investment funds, as well as a share
of the profits of the funds when investment performance criteria have been
met.
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, 1998, MSCP III, and its predecessor funds (which are only making
follow-on investments), had $1.2 billion of cost basis in their portfolios
related to 38 companies in a wide range of industries.
Morgan Stanley Venture Partners III, L.P. ("MSVP III") was formed in 1996
with $275 million in capital commitments to invest in private equity and
equity-related securities of emerging growth companies, in the healthcare and
information technology sectors based primarily in the U.S. As of November 30,
1998, MSVP III, and its predecessor funds (which are no longer making new
investments), had $208 million of cost basis in their portfolios related to 34
companies.
Morgan Stanley Global Emerging Markets Private Investment Fund, L.P.
("MSGEM") was formed in 1997 with approximately $330 million in capital
commitments to invest in private equity or equity-related securities of
emerging markets companies. As of November 30, 1998, MSGEM had $32 million of
cost basis in its portfolio related to two emerging markets companies.
11
The Morgan Stanley Real Estate Fund III, L.P. ("MSREF III") was formed in
1997 and currently has approximately $2.1 billion in capital commitments to
invest in real estate assets. As of November 30, 1998, MSREF III and its
predecessor funds (which are no longer making new investments), had $2.1
billion of cost basis in real estate assets in their portfolios relating to 52
investments.
Morgan Stanley Real Estate Special Situations Investment Program ("Special
Situations") was created in 1997 as a series of separate accounts managed by
MSDW Investment Management with $375 million in capital commitments to invest
in private equity or equity-related securities of real estate companies
(primarily real estate investment trusts). As of November 30, 1998, Special
Situations had $298 million of cost basis in its portfolios related to 14 real
estate companies.
From time to time, the Company expects to sponsor additional private
investment funds and commit to invest in such funds.
Equity securities purchased in principal investment transactions generally
are held for appreciation, are not readily marketable and do not provide
dividend income. It is not possible to determine whether, when or if 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.
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 private 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.
Competition and Regulation
Competition
The Company's Asset Management business competes in the highly competitive
investment management industry, in which approximately 7,336 open-end
investment management companies held over $5.4 trillion in assets as of
November 30, 1998. Competition in the sale of mutual funds is affected by a
number of factors, including investment objectives and performance,
advertising and sales promotion efforts, level of fees, distribution channels
and types and quality of services offered. In addition to fund products
offered by other broker-dealers, the funds offered by the Company 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. The Company's
private investment funds compete for investors and for investment
opportunities with other private investment funds, some of which are sponsored
by financial institutions. The Company's private investment funds also compete
for investment opportunities in specific industries with companies that
operate in such industries.
Regulation
The Company and certain subsidiaries, including MS&Co., DWR, and those
related to MSDW Advisors, Van Kampen and MSDW Investment Management, are
registered as investment advisers with the SEC and in certain states.
Virtually all aspects of the Company's investment advisory business are
subject to various federal and state laws and regulations. These laws and
regulations are primarily intended to benefit the investment
12
product holder and generally grant supervisory agencies and bodies broad
administrative powers, including the power to limit or restrict the Company
from carrying on its investment advisory business in the event that it fails
to comply with such laws and regulations. Possible sanctions which may be
imposed for such failure include the suspension of individual employees,
limitations on the Company's engaging in the investment advisory business for
specified periods of time, the revocation of registrations, other censures and
fines.
The Company's Asset Management business is also subject to regulation
outside the U.S. For example, the Investment Management Regulatory
Organization Limited regulates the Company's business in the U.K.; 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.
By virtue of the Company's affiliation with the private investment funds
that own equity interests in companies that operate in certain regulated
industries (e.g., insurance or broadcasting), or that are subject to
regulation in non-U.S. jurisdictions, the Company could be subject to
additional regulation applicable to such industries or in such jurisdictions.
Morgan Stanley Dean Witter Trust FSB ("MSDWT"), a subsidiary of the Company
that provides trust, fiduciary and transfer agent services, is a federally
chartered savings bank and is subject to comprehensive regulation and periodic
examination by the federal Office of Thrift Supervision ("OTS") and by the
FDIC. MSDWT is also a registered transfer agent, subject to regulation and
examination in such capacity by the SEC. As a result of its ownership of
MSDWT, the Company is registered with the OTS as a unitary savings and loan
holding company ("SLHC") and subject to regulation and examination by the OTS
as a SLHC.
D. CREDIT AND TRANSACTION SERVICES
As of November 30, 1998, the Company, through its Credit Services business,
was the third largest single issuer of general purpose credit cards in the
U.S. as measured by number of accounts. Credit Services' proprietary general
purpose credit card business is operated by the Company's Discover Financial
Services business unit, which also operates the Discover/NOVUS Network, the
Company's proprietary merchant and cash access network. The credit cards
offered by Discover Financial Services include the Discover Card, the Discover
Platinum Card ("Discover Platinum"), which was launched in December 1998, the
Private Issue(R) Card by Discover ("Private Issue"), and co-branded and
affinity cards.
Discover Financial Services
Overview
Discover Financial Services offers general purpose credit cards designed to
appeal to different market segments of consumers for use on the Discover/NOVUS
Network. The Discover/NOVUS Network is the largest independent credit card
network in the U.S., consisting of more than three million merchant and cash
access locations accepting credit cards carrying the Discover/NOVUS logo.
Discover Financial Services offers several brands of proprietary cards,
including the Discover Card, Discover Platinum, Private Issue, the Smithsonian
Card (an affinity program that allows cardmembers to support the Smithsonian
Institution) and the Universal Studios Card (a co-branded credit card that
allows cardmembers to earn entertainment rewards from Universal Studios).
Discover Financial Services promotes its proprietary cards through the use
of different and distinctive features that are designed to appeal to different
consumer bases. The Discover Card offers the Cashback Bonus(R) award and no
annual fee. Discover Platinum is a premium credit card offering opportunities
to double Cashback Bonus awards, no annual fee, low balance transfer and
annual percentage rates, higher credit lines and advanced fraud protection for
on-line banking.
Cardmembers use the Discover Card as well as other general purpose credit
cards issued by subsidiaries of the Company bearing the Discover/NOVUS logo to
purchase goods and services at participating merchant
13
locations and to obtain cash advances at merchant and bank locations and
automated teller machines or by writing checks drawn against their lines of
credit. Discover Financial 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, Discover Platinum 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. Discover Financial Services accrues
revenues through finance charges on cardmembers' revolving balances, the fees
paid by merchants to the Company for transactions effected through the
Discover/NOVUS Network, transaction fees paid by cardmembers for cash
advances, late payment fees, over-limit fees, fees for checks returned due to
insufficient funds, 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.
Pursuant to the Cashback Bonus award, the Company annually pays cardmembers
up to one percent (up to two percent for participating Private Issue
cardmembers, subject to a maximum of $500) of their purchase amounts based
upon their 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 that is a state chartered bank
under the laws of the State of Delaware. Because of certain banking law
restrictions, most of the Company's proprietary general purpose credit cards
may be used only for personal and household (as opposed to commercial)
transactions.
Merchants
The Discover Card, Discover Platinum and Private Issue, as well as the
Company's other proprietary general purpose credit cards, are accepted only by
merchants who are members of the Discover/NOVUS Network. Since its
introduction in 1986, the Discover/NOVUS Network has expanded rapidly and
currently includes more than three million merchants across the U.S.
Discover Financial Services operates both the issuing and acquiring
businesses and accordingly retains the entire merchant fee paid to the
Discover/NOVUS Network in a given transaction. Because of its independence
from the bankcard associations, Discover Financial Services has greater
flexibility than MasterCard or Visa participants in dealing with merchants.
The Company believes that this enables it to better maintain and expand its
merchant base by allowing it to provide customized programs in such areas as
processing arrangements and to otherwise tailor program terms to meet specific
merchant needs.
Discover Financial 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
Discover Financial Services 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.
14
MasterCard and Visa issuers compete directly with other issuers using the same
brands and sharing common processes. The ability to control its products
provides Discover Financial Services with competitive advantages that are not
available to any single MasterCard or Visa issuer, including efficiencies in
operations, product positioning and marketing execution. Discover Financial
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
Credit reviews are conducted for all cardmembers in order to establish that
standards of ability and willingness to pay are met. Cardmember applications
are evaluated using a credit scoring system which utilizes the information
customers provide on their applications and credit bureau information to
establish creditworthiness. Applications not approved under the credit scoring
system may be selectively reviewed and approved by the Company's credit
analysts.
Applicants receiving pre-selected solicitations must satisfy criteria
specified by Discover Financial Services. All recipients of pre-selected
solicitations have been pre-screened through credit bureaus utilizing industry
and customized models. Pre-screening is a process by which an independent
credit reporting agency identifies individuals satisfying creditworthiness
criteria supplied by the Company (in the form of a point scoring model or
other screening factors) that are intended to provide a general indication,
based on available information, of such person's ability and willingness to
pay their financial obligations. Recipients who respond to the Company's pre-
selected solicitations are post-screened prior to enrollment in order to
confirm continued satisfaction of the Company's creditworthiness criteria.
Each cardmember's credit line is reviewed at least annually, and may be
reviewed more frequently if requested by the cardmember or if the Company
deems more frequent review appropriate. Such reviews include scoring the
cardmember's payment behavior on the applicable account as well as reviewing
the cardmember's credit bureau record. Actions that may result from an account
review include raising or lowering the cardmember's credit line or closing the
account.
Operations
The Company performs the functions required to service and operate its
proprietary cards' accounts either by itself or through processing agreements
that the Company has with third parties. These functions include new account
solicitation, application processing, new account fulfillment, transaction
authorization and processing, cardmember billing, payment processing, fraud
prevention and investigation, cardmember service and collection of delinquent
accounts. Discover Financial Services maintains several operations centers
throughout the country. Additionally, Discover Financial Services operations
are supported by systems at computer centers operated by an unaffiliated
communication services provider.
Direct-Marketed Businesses
The Company believes that direct-marketed businesses will become
increasingly important in the financial services industry as new technologies
develop and client demands change over time. As a result, the Company formed
the Direct Business Group in 1998 in order to develop and implement a global
strategy for its direct-marketed activities.
Discover Brokerage, a wholly-owned subsidiary of the Company that was
acquired in 1997, provides financial services and investment information
nationwide via the Internet, offering customers three ways to invest-
through its Internet site, via an automated telephone system or with a
registered representative. The financial services provided by Discover
Brokerage, principally to individual investors, include detailed account
15
information, real-time securities price quotes, graphs and portfolio
performance information, trade execution at competitive rates and access to
research reports and news stories.
Through Discover Brokerage, the Company focuses on the growing number of
consumers utilizing alternatives to the traditional brokerage channel to
obtain financial and other investment services. Discover Brokerage provides
its customers with direct access to financial data and other information,
including through a fee-based subscription service for proprietary equity
research reports and analysts' ratings, as well as a broad range of investment
options such as equities, options, bonds, U.S. Treasury securities and mutual
funds. The Company plans to grow Discover Brokerage by further expanding its
product line. In June 1998, Discover Brokerage began offering customers the
ability to trade U.S. Treasury securities on-line every weekday, 24 hours per
day. In February 1999, Discover Brokerage also began offering customers the
ability to trade certain municipal securities on-line. The Company believes
that Discover Brokerage will enhance its ability to market financial services
and products through its on-line distribution arrangements with Yahoo!, and
with leading providers of Internet financial sites such as CNNfn and Quicken.
Competition and Regulation
Competition
The Company's Credit Services business competes in highly competitive
industries, including the credit card industry. The credit card market
includes other bank-issued credit cards (the vast majority of which bear the
MasterCard or Visa servicemark) and charge cards and credit cards issued by
travel and entertainment companies. Competition centers on merchant acceptance
of credit cards, credit card account acquisition and customer utilization of
credit cards. Merchant acceptance is based on both competitive transaction
pricing and the volume and usage of credit cards in circulation. Credit card
account acquisition and customer utilization are driven by the offering of
credit cards with competitive and appealing features, such as no annual fees,
low introductory interest rates and other customized features targeting
specific consumer groups.
As new credit card issuers seek to enter the market and established issuers
seek to expand, sometimes through acquisitions of other credit card issuers or
portfolios, the credit card industry has seen increased use of advertising,
targeted marketing and pricing competition in interest rates, annual fees and
reward programs. More recently, issuers have increased their efforts to
attract balances from competing sources of credit via low-priced balance
transfer programs. In addition, issuers have aggressively marketed co-branded
credit cards, which offer various benefits relating to the business of the
issuer's co-branding partner. The Company believes its proprietary merchant
base enables it to promote its proprietary card brand names on a national
basis, thereby building customer acceptance and use.
Discover Brokerage competes with other providers of on-line brokerage
services, as well as other firms offering financial and other investment
services. Discover Brokerage competes primarily on the basis of price,
convenience, direct access to information and the breadth of its product line.
In addition, Discover Brokerage is subject to the same competitive factors
that are applicable to the highly-competitive financial services industry
generally (see "SECURITIES--Competition and Regulation").
Regulation
The Company conducts portions of its Credit Services business through
various wholly-owned indirect subsidiaries that are banking institutions.
Greenwood Trust and Bank of New Castle are state banks chartered under the
laws of the State of Delaware, and Morgan Stanley Dean Witter Bank, Inc.
(formerly MountainWest Financial Corporation, "MSDW Bank") is an industrial
loan company chartered under the laws of the State of Utah (each a "Bank" and,
collectively, the "Banks"). Each Bank has its deposits insured by the FDIC,
pays FDIC assessments and 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
16
and examination as a bank holding company by the Board of Governors of the
Federal Reserve System. 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. Bank
of New Castle and MSDW Bank 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 the other Banks fail to
be operated so as to maintain their exempt status as non-banks 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 the Banks or, in the case of Greenwood Trust,
to change the activities of the Bank significantly.
Federal and state consumer protection laws and regulations extensively
regulate the relationships among cardholders and credit card issuers. 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 and export such interest rate to all
other states. 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 and MSDW
Bank currently use brokered deposits as a funding source. If either Bank were
not able to do so, its funding costs would likely increase.
Certain acquisitions of the Company's common stock may be subject to
regulatory approval and notice under Federal and state banking law. In
addition, Greenwood Trust would no longer qualify for grandfather rights under
CEBA if direct or indirect control of Greenwood Trust were transferred to an
unaffiliated third party. In that event, the third party would either have to
operate in a manner permissible for a bank holding company under the BHCA or
significantly modify the activities of Greenwood Trust.
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. The Company owns both the 1585
Broadway and 750 Seventh Avenue buildings. The Company also owns a 600,000
square foot building in Riverwoods, Illinois that houses Credit Services'
executive offices and an adjacent undeveloped 43 acre parcel.
On November 20, 1998, the Company announced its agreement with The
Rockefeller Group ("RGI") for the joint development of a 1,000,000 square foot
office tower at 745 Seventh Avenue, New York, New York. The building will be
owned by the Company and managed by a subsidiary of RGI, and is intended to be
occupied by the Company. The Company leases the land under the building from
RGI pursuant to a 99-year ground lease. Construction is expected to begin in
1999, with project completion and occupancy anticipated in 2001.
17
The Company leases 864,000 square feet at Two World Trade Center, New York,
New York, under a lease expiring on May 31, 2006 and also occupies space
aggregating approximately 1,037,000 square feet at various other locations in
New York City under leases expiring between 2000 and 2013. In addition, the
Company leases space aggregating approximately 417,000 square feet in
Brooklyn, New York under a lease expiring in 2013.*
The Company's London headquarters are located at 25 Cabot Square, Canary
Wharf, and occupy approximately 641,000 square feet (inclusive of common
areas) of a building constructed by the Company. The Company owns the ground
lease obligation and the freehold interest in the land and the building. The
Company also leases approximately 350,000 square feet at 20 Cabot Square,
Canary Wharf, under a lease arrangement expiring in 2020.
The Company's Tokyo headquarters are located in Sapporo's Yebisu Garden
Place, Ebisu, Shibuya-ku, where the Company occupies approximately 173,000
square feet of office space under a lease arrangement expiring in 2000, but
renewable at the Company's option in two-year increments.
The Company's subsidiaries have offices, operations and processing centers
and warehouse facilities located throughout the U.S. and certain subsidiaries
maintain offices in international locations. The Company's properties that are
not owned are leased on terms and for durations that are reflective of
commercial standards in the communities where these properties are located.
Facilities owned or occupied by the Company and its subsidiaries are believed
to be adequate for the purposes for which they are currently used and are well
maintained.
Item 3. LEGAL PROCEEDINGS
(a) The Company is involved in the following litigation matters:
I. Term Trust Class Actions. A putative class action, Thomas D. Keeley, et
al. v. Dean Witter Reynolds Inc. et al. (the "Keeley Action") was commenced in
the California Superior Court, Orange County, on October 27, 1994 and later
consolidated with three similar class actions. Defendants are the Company,
DWR, Dean Witter Distributors, Dean Witter InterCapital, Dean Witter Services
Company Inc., TCW Management Co., Trust Company of the West, TCW Asset
Management Co., Inc., TCW Funds Management, Inc. and eight individuals,
including two DWR employees. Plaintiffs allege breach of fiduciary duty,
unjust enrichment, fraud, deceit and violation of the California Corporation
Code in the marketing and selling of the TCW/DW Term Trusts 2000, 2002 and
2003. Plaintiffs seek unspecified compensatory and punitive damages.
Defendants filed an answer to the first amended class complaint denying all
wrongdoing on December 6, 1995, and motions for judgment on the pleadings on
March 13, 1997. In the Keeley Action, defendants' motions for judgment on the
pleadings were denied on June 23, 1997. On June 1, 1998, the plaintiff's
motion to certify the class was granted as to a California statewide class and
denied as to a nationwide class. On October 13, 1998, three separate state
court actions were filed in Florida, New York and New Jersey. The Florida
action was removed to the U.S. District Court for the Middle District of
Florida on November 10, 1998.
II. TCW/DW North American Government Income Trust Litigation. Several
purported class action lawsuits, which have been consolidated for pretrial
purposes, were instituted in January 11, 1995 in the U.S. 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,
--------
* The indicated total aggregate square footage leased by the Company does not
include space occupied by the Company's securities branch offices in New
York and throughout the U.S.
18
1996 the motions to dismiss were denied, upon reconsideration on August 28,
1996 the court dismissed several of plaintiffs' claims and clarified its
earlier opinion denying defendants' motion to dismiss. In addition, on August
28, 1996, the court granted plaintiffs' motion for class certification. On
December 4, 1996, in light of a new decision by the U.S. Court of Appeals for
the Second Circuit, defendants filed a new motion for reconsideration of the
court's decision denying the motion to dismiss, which was denied on November
20, 1997.
III. 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. On November 15,
1998, the hearing for both matters was adjourned to November 24-25, 1999.
On March 11, 1998, The Growth Fund, which was a sub fund of the Fund, and 14
investors in The Growth Fund (12 of whom are also plaintiffs in the Luxembourg
litigation against MSBL) brought an action against Morgan Stanley & Co.
International Limited ("MSIL") in New York Supreme Court, New York County. The
complaint asserts purported claims for fraud, aiding and abetting fraud,
negligent misrepresentation and violation of a duty of good faith and fair
dealing and seeks compensatory damages of approximately $7.25 million,
punitive damages, interest, costs, expenses and attorneys' fees. Plaintiffs
assert that MSIL induced them to enter into margin loans for the purpose of
investing in another sub fund of the Fund at a time when MSIL knew that MSBL
was not complying with its purported duty to monitor the Fund and the Fund's
manager was fraudulently inflating the value of certain of its assets, which
resulted in the investors' reliance on false net asset values in making and
continuing their investments in the Fund. The action was removed to the U.S.
District Court for the Southern District of New York but thereafter remanded
to state court. On July 2, 1998, MSIL filed a motion to dismiss the action.
IV. In re Merrill Lynch, et al. Securities Litigation. On January 19, 1995,
a putative class action was filed in the U.S. District Court for the District
of New Jersey on behalf of all persons who placed market orders to purchase or
sell securities listed on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") with DWR between November 4, 1992 and
November 4, 1994. The complaint, consolidated with another action against
other brokerage firms, seeks unspecified damages and alleges that DWR failed
to provide best execution of customer market orders for NASDAQ securities. The
complaint asserts claims for violations of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act"), 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 action to district court for further proceedings. On
April 30, 1998, a petition for certiorari in the U.S. Supreme Court was filed
by the defendants. On June 12, 1998, the plaintiffs filed a motion for leave
to file an amended complaint to extend the end date for the class period from
November 4, 1994 to August 28, 1996 and to name new class representatives. On
July 21, 1998, the Magistrate granted the plaintiffs' motion to file an
amended complaint. Defendants have appealed that ruling to the district court
judge. On October 5, 1998, the U.S. Supreme Court denied the petition for
certiorari.
V. Penalty Bid Litigation. On or about August 21, 1998, a purported class
action complaint, Friedman, et al. v. Salomon Smith Barney, et al., was filed
in the U.S. District Court for the Southern District of New York against the
Company and nine other underwriters of securities. An amended complaint dated
February 15, 1999, was filed against the Company and 16 other underwriters of
securities. The amended plaintiff class purports to consist of all retail
brokerage customers who purchased securities in public offerings from
defendants and their alleged co-conspirators at artificially inflated prices.
The amended complaint alleges that defendants and their co-conspirators
engaged in anti-competitive activity with respect to the distribution of
securities in public offerings by agreeing (i) to discourage retail customers
from "flipping" or selling shares purchased in public
19
offerings prior to the expiration of a purported "Retail Restricted Period" (a
period alleged to have been arbitrarily set by the syndicate manager during
which restraints on retail accounts are imposed), and/or (ii) to penalize
retail customers who "flipped", and/or (iii) otherwise to prevent retail
customers from "flipping". The amended complaint also alleges that similar
restraints were not imposed on institutional purchasers of shares in public
offerings. The amended complaint alleges violations of Section 1 of the Sherman
Act and breach of fiduciary duty, and seeks compensatory, treble and punitive
damages in unspecified amounts, injunctive relief, costs and expenses,
including attorneys', accountants' and experts' fees.
Another purported class action, captioned Myers v. Merrill Lynch & Co., Inc.
et al., was filed on or about August 17, 1998 in California Superior Court, San
Francisco County, against Merrill Lynch & Co., Inc., Paine Webber Group
Incorporated, the Company, Travelers Group Inc., Legg Mason Inc., H.J. Meyers &
Co., Inc. and The Bear Stearns Companies Inc. The complaint alleges that
defendants sold the stock of public companies to investors in public offerings
without disclosing the existence of restrictions on "flipping" and serious
conflicts of interest with investors resulting from financial and other
penalties imposed on brokers and clients for "flipping." The complaint also
alleges that similar restrictions were not imposed on larger institutional
purchasers of stock in those offerings. The complaint asserts claims for unfair
competition and false advertising under various sections of the California
Business and Professions Code, negligent misrepresentations under the Civil
Code and unfair, fraudulent and unlawful business practices under the Business
Code. The complaint seeks injunctive relief and an award of costs and expenses,
including attorneys' and experts' fees. On September 15, 1998, the action was
removed to the U.S. District Court for the Northern District of California. On
October 30, 1998, defendants filed a motion to dismiss the complaint.
VI. IPO Fee Litigation. On or about November 3, 1998, a purported class
action complaint, Gillet v. Goldman, Sachs & Co., et al., was filed in the U.S.
District Court for the Southern District of New York against the Company and 26
other underwriters of initial public offering ("IPO") securities. The complaint
alleges that defendants conspired to fix the "fee" paid by purported class
members to buy and sell IPO securities of U.S. companies by invariably setting
the underwriters' spread at 7% in issuances of $20 to $80 million in violation
of the federal antitrust laws, particularly Sections 4 and 16 of the Clayton
Act and Section 1 of the Sherman Act. The complaint seeks treble damages and
injunctive relief, as well as reasonable attorneys' fees and costs. On November
23, 1998 and December 2, 1998, two other substantially similar class action
complaints, captioned Prager v. Goldman, Sachs & Co. et al. and Holzman v.
Goldman, Sachs & Co. et al. were filed in the U.S. District Court for the
Southern District of New York against the same underwriter defendants.
VII. Nenni, et al. v. Dean Witter Reynolds Inc. In December 1998, a putative
class action complaint was filed in the U.S. District Court for the District of
Massachusetts against DWR, Morgan Stanley Dean Witter Distributors Inc. and the
Company. The complaint, filed on behalf of all purchasers of certain of the
Company's mutual funds subject to a contingent deferred sales charge (the
"Mutual Funds"), alleges violations of Sections 11, 12 and 15 of the Securities
Act of 1933 and Sections 10(b) and 20 of the Exchange Act and Rule 10b-5
promulgated thereunder, in that the Mutual Funds' prospectuses and registration
statements allegedly omitted certain disclosures concerning the transferability
of the Mutual Funds to brokerage accounts outside of DWR. The complaint seeks
unspecified compensatory and punitive damages, declaratory and injunctive
relief, attorneys' fees, interest and costs.
VIII. 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
20
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.
(b) The following matter was terminated subsequent to November 30, 1998:
In re: Certain Market-Making Activities on the NASDAQ. On January 11, 1999,
the SEC brought an action against 28 NASDAQ market makers, including DWR and
MS&Co., and 51 individuals, including one current and one former trader
employed by MS&Co., for certain conduct during 1994. The core of the charges
against DWR and MS&Co. concerns improper or undisclosed coordination of price
quotes with other broker-dealers and related reporting, record-keeping and
supervisory deficiencies in violation of Sections 15(b)(4)(E), 15(c)(1) and
(2) and 17(a) of the Exchange Act and Rules 15c1-2, 15c2-7 and 17a-3
promulgated thereunder. Without admitting or denying the charges, DWR
consented to the entry of a cease and desist order and to the payment of a
civil penalty of $185,000 and disgorgement of $2,311, and MS&Co. consented to
the entry of a cease and desist order and to the payment of a civil penalty of
$350,000, disgorgement of $4,170 and to submit certain of its procedures to an
independent consultant for review. In addition, one current and one former
trader employed by MS&Co. accepted suspensions of less than two months each
and were fined $25,000 and $30,000, respectively.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive
officers of the Company as of February 23, 1999.
21
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, 1998.
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 88 of the Registrant's
1998 Annual Report to Shareholders and such information is incorporated by
reference herein.
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 6 of
the 1998 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 54 to 88 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 23 to 47 of the 1998
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 54 to 88 of such Annual
Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is contained on pages 47 through 52 of
the 1998 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 1998 Annual Report to Shareholders on pages 53
to 88, and such information is incorporated by reference herein, including the
information appearing under the caption "Quarterly Results" on page 88 of such
Annual Report.
The Combined Financial Statements for the years ended December 31, 1998 and
1997 of the Morgan Stanley U.K. Group Profit Sharing Scheme and Plan, together
with the Notes thereon and the Report of Independent Chartered Accountants,
appear as Exhibit 99.1.
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
shareholders' 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.
22
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 1999 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 21 of the Proxy Statement.
Item 11. Executive Compensation
Information relating to executive compensation is set forth under the
captions "Director Compensation" on page 7 and "Compensation of Executive
Officers" (excluding the information under the subheadings "Report of the
Compensation Committees on Executive Compensation" and "Stock Performance
Graph") on pages 10 to 22 of the Proxy Statement of the Registrant for its
1999 Annual Meeting of Stockholders and such information is incorporated by
reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of management and certain
beneficial owners is set forth under the captions "Stock Ownership of
Management" and "Principal Stockholders" on pages 8 and 9, respectively, of
the Proxy Statement of the Registrant for its 1999 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
pages 21 and 22 of the Proxy Statement of the Registrant for its 1999 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 1, 1998, was filed with the
Securities and Exchange Commission in connection with the impact of market
conditions on the Company's consolidated net income for the third fiscal
quarter.
A Current Report on Form 8-K, dated September 24, 1998, was filed with the
Securities and Exchange Commission in connection with the announcement of
the Company's third fiscal quarter financial results.
23
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 23,
1999.
Morgan Stanley Dean Witter & Co.
(Registrant)
By /s/ Philip J. Purcell
_____________________________________
Philip J. Purcell
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Morgan Stanley Dean
Witter & Co., hereby severally constitute 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 23rd day of February, 1999.
24
25
Morgan Stanley Dean Witter & Co.
Index to Financial Statements
and Financial Statement Schedules
Items (14)(a)(1) and (14)(a)(2)
S-1
SCHEDULE I
MORGAN STANLEY DEAN WITTER & CO.
(Parent Company Only)
Condensed Statements of Financial Condition
(dollars in millions, except share data)
See Notes to Condensed Financial Statements.
S-2
SCHEDULE I
MORGAN STANLEY DEAN WITTER & CO.
(Parent Company Only)
Condensed Statements of Income
(dollars in millions)
See Notes to Condensed Financial Statements.
S-3
SCHEDULE I
MORGAN STANLEY DEAN WITTER & CO.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
(dollars in millions)
See Notes to Condensed Financial Statements.
S-4
MORGAN STANLEY DEAN WITTER & 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. ("MSDWD"). In conjunction with the
Merger, MSDWD issued 260,861,078 shares of its common stock, as each share of
Morgan Stanley common stock then outstanding was converted into 1.65 shares of
MSDWD's common stock. In addition, each share of Morgan Stanley preferred
stock was converted into one share of a corresponding series of preferred
stock of MSDWD. The Merger was treated as a tax-free exchange.
On March 24, 1998, MSDWD changed its corporate name to Morgan Stanley Dean
Witter & Co. (the "Company").
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 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 54 to 88 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 year ended December 31, 1996 were combined with
Morgan Stanley's financial statements for the fiscal year ended November 30,
1996 (on a combined basis, "fiscal 1996"). The Company's results for the
twelve months ended November 30, 1998 ("fiscal 1998") and November 30, 1997
("fiscal 1997") reflect the change in fiscal year-end. Fiscal 1997 includes
the results of Dean Witter Discover that were restated to conform with the new
fiscal year-end date. The 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 $1,858 million, $1,088 million and $1,056 million in fiscal 1998,
1997 and 1996, respectively.
S-5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Morgan Stanley Dean Witter & Co.:
We have audited the consolidated financial statements of Morgan Stanley Dean
Witter & Co. and subsidiaries as of fiscal years ended November 30, 1998 and
1997, and for each of the three fiscal years in the period ended November 30,
1998, and have issued our report thereon dated January 22, 1999; such
consolidated financial statements and report are included in your 1998 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) for the fiscal year ended November 30, 1996, which
statements reflect total revenues of $2,997 million for the fiscal year then
ended. 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 period, 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 & Co.
(Parent Company Only), when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth herein.
/s/ DELOITTE & TOUCHE LLP
New York, New York
January 22, 1999
S-6
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--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
For the fiscal year ended November 30, 1998
Commission File No. 1-11758
Morgan Stanley Dean Witter & Co.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EXHIBIT INDEX
Certain of the following exhibits, as indicated parenthetically, were
previously filed as exhibits to registration statements filed by the
Registrant or its predecessor companies under the Securities Act of 1933, as
amended, or to reports or registration statements filed by the Registrant or
its predecessor companies under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), respectively, and are hereby incorporated by
reference to such statements or reports. The Exchange Act file number of the
Company is 1-11758. Prior to the Merger, the Exchange Act file number of
Morgan Stanley Group Inc. ("Morgan Stanley") was 1-9085.
E-1
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* 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).
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