-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MR+swQP6RD41kvDpUFmkkex6CWNFrK/jfeM81VjI3h8IpwT5DPTHTCu0GZ+e88jT bz1z7Df6JYLv11jAdoQSmg== 0000950130-00-000882.txt : 20000228 0000950130-00-000882.hdr.sgml : 20000228 ACCESSION NUMBER: 0000950130-00-000882 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY DEAN WITTER & CO CENTRAL INDEX KEY: 0000895421 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 363145972 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11758 FILM NUMBER: 553676 BUSINESS ADDRESS: STREET 1: 1585 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2127614000 MAIL ADDRESS: STREET 1: 1585 BROADWAY STREET 2: 38TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER DISCOVER & CO DATE OF NAME CHANGE: 19960315 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999 Commission File Number 1-11758 Morgan Stanley Dean Witter & Co. (Exact name of Registrant as specified in its charter) Delaware 36-3145972 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1585 Broadway 10036 New York, N.Y. (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (212) 761-4000 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $.01 par value New York Stock Exchange Pacific Exchange Rights to Purchase Series A Junior Participating Preferred Stock New York Stock Exchange Pacific Exchange Depositary Shares, each representing 1/4 of a share of 7 3/4% Cumulative Preferred Stock, $200 stated value New York Stock Exchange Depositary Shares, each representing 1/4 of a share of Series A Fixed/Adjustable Rate Cumulative Preferred Stock, $200 stated value New York Stock Exchange 8.40% Capital Units; 8.20% Capital Units; 8.03% Capital Units New York Stock Exchange 6% Reset PERQS /SM/ Due May 15, 2000; 6% Reset PERQS Due March 15, 2001; 6% Reset PERQS Due May 30, 2001; 6% Reset PERQS Due August 1, 2001; 7% Reset PERQS Due August 15, 2001; 6% Reset PERQS Due December 15, 2001; 7.5% Currency Protected PERQS Due May 8, 2000; 7.0% Currency Protected PERQS Due May 22, 2000 American Stock Exchange Exchangeable Notes Due September 30, 2000; Exchangeable Notes Due July 31, 2003; Exchangeable Notes Due December 30, 2005; Exchangeable Notes Due August 15, 2006; Exchangeable Notes Due March 2, 2006 (2 issuances); Exchangeable Notes Due May 30, 2006; Exchangeable Notes Due June 5, 2006; Exchangeable Notes Due July 7, 2006; Exchangeable Notes Due August 6, 2006; Exchangeable Notes Due August 17, 2005; Exchangeable Notes Due October 19, 2006; Exchangeable Notes Due December 13, 2004 New York Stock Exchange Exchangeable Notes Due July 29, 2005 (two issuances); Exchangeable Notes Due April 15, 2005 American Stock Exchange PEEQS/SM/ Due May 1, 2001 American Stock Exchange 3% CPS/SM/ Due August 8, 2000; 3% CPS Due May 17, 2000 American Stock Exchange Nikkei 225 Protection Step-Up Exchangeable Notes Due July 31, 2003 New York Stock Exchange Dow Jones Industrial Average BRIDGES/SM/ Due April 30, 2004; Standard & Poor's 500 BRIDGES Due December 31, 2003; Dow Jones Euro Stoxx 50 BRIDGES Due July 30, 2004; Redeemable BRIDGES Due May 30, 2005 (based on Morgan Stanley High-Tech 35 Index) New York Stock Exchange 5 5/8% Notes Due January 20, 2004; 7.25% Notes Due June 17, 2029 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the Registrant at January 12, 2000 was approximately $66,689,313,224. For purposes of this information, the outstanding shares of common stock owned by (1) directors and executive officers of the Registrant and (2) certain senior officers of certain wholly-owned subsidiaries of the Registrant who are subject to certain restrictions on voting and disposition, were deemed to be shares of common stock held by affiliates. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: As of January 12, 2000, there were 1,139,379,666 shares of Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Morgan Stanley Dean Witter & Co. 1999 Annual Report to Shareholders-- Incorporated in part in Form 10-K, Parts I, II and IV. (2) Morgan Stanley Dean Witter & Co. Proxy Statement for its 2000 Annual Meeting of Stockholders--Incorporated in part in Form 10-K, Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Item 1. Business Background and Overview Morgan Stanley Dean Witter & Co. (the "Company"*) is a preeminent global financial services firm that maintains leading market positions in each of its three primary businesses: . securities; . asset management; and . credit services. The Company combines global strength in investment banking and institutional sales and trading with strength in providing full-service and on-line brokerage services, investment and global asset management services and, primarily through its Discover(R) Card brand, quality consumer credit products. The Company provides its products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals.** As of November 30, 1999, the Company had the second largest financial advisor sales organization in the United States and had 12,674 professional financial advisors and 475 securities branch offices globally. The Company also had one of the largest global asset management operations of any full- service securities firm, with total assets under management or supervision of $425 billion. In addition, based on its approximately 38.5 million general purpose credit card accounts as of November 30, 1999, the Company was one of the nation's largest credit card issuers, with the largest proprietary merchant and cash access network in the United States. The Company's securities businesses ("Securities") include: . Securities underwriting and distribution; . Financial advisory services, including advice on mergers and acquisitions, restructurings, real estate and project finance; . Sales, trading and market-making activities in equity and fixed income securities, foreign exchange, commodities and derivatives, including proprietary trading and arbitrage activities and securities lending; . Full-service and online brokerage services for individual investors and financial advisory services for high net worth clients; and . Principal investing, including private equity activities. - -------- * Unless the context otherwise requires, the term "Company" means Morgan Stanley Dean Witter & Co. and its consolidated subsidiaries. ** Certain statements contained herein, including (without limitation) certain statements made under "Legal Proceedings" in Part I, Item 3 of this Report; "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated by reference in Part II, Item 7 of this Report ("MD&A"); and "Quantitative and Qualitative Disclosure about Market Risk" incorporated by reference in Part II, Item 7A of this Report, are forward- looking statements. The matters referred to in such statements could be affected by the risks and uncertainties involved in the Company's businesses, including (without limitation) the effect of economic and market conditions, the level and volatility of interest rates and currency values and equity and commodity prices, the actions undertaken by both current and potential new competitors, the impact of current, pending or future legislation and regulation both in the United States and throughout the world, the potential effects of technological changes and other risks and uncertainties detailed in the MD&A and in "Competition and Regulation" under "Securities," "Asset Management" and "Credit Services" herein. The Company's asset management businesses ("Asset Management") include: . Asset management products and services for individual investors, primarily through Morgan Stanley Dean Witter Advisors ("MSDW Advisors") and Van Kampen Investments ("Van Kampen"); and . Global asset and portfolio management for institutional investors, primarily through Morgan Stanley Dean Witter Investment Management ("MSDW Investment Management") and Miller Anderson & Sherrerd ("MAS"). The Company's credit services businesses ("Credit Services") include: . Discover Card, other proprietary general purpose credit cards and the Morgan Stanley Dean Witter CardSM ("MSDW Card"); and . Discover/Novus(R) Network, a proprietary network of merchant and cash access locations. The Company conducts its worldwide businesses through several highly integrated subsidiaries and affiliates, which frequently participate together in the facilitation and consummation of a single transaction. Because of the increasing integration of the international financial markets, the Company manages its principal operating subsidiaries on a coordinated global basis with a view to the profitability of the enterprise as a whole. Financial information concerning the Company for each of the three fiscal years ended November 30, 1999, November 30, 1998 and November 30, 1997 is set forth in the Consolidated Financial Statements and the Notes thereto in the 1999 Annual Report to Shareholders and incorporated herein by reference. The Company believes that technological advancements on the Internet and the growth of electronic commerce will continue to present both challenges and opportunities to the Company and could lead to significant changes and innovations. The Company's initiatives in this area have included Web-enabling existing businesses and enhancing client communication and access to information and services. For example, ClientLinkSM, the focal point of the Company's institutional client connectivity strategy, provides clients with a private, secure Internet platform that delivers browser-based information, products and services across many of the Company's business units. The Company has also been making investments or otherwise participating in alternative trading systems, electronic communication networks and related businesses or technologies. The Company conducts its business from its headquarters in New York City, its regional offices and branches throughout the United States, and its principal offices in London, Tokyo, Hong Kong and other financial centers throughout the world. At November 30, 1999, the Company had 55,288 employees. The Company is a combination of Dean Witter, Discover & Co. ("Dean Witter Discover") and Morgan Stanley Group Inc. ("Morgan Stanley") and was formed pursuant to a merger of equals that was effected on May 31, 1997 (the "Merger"). The Company was originally incorporated under the laws of the State of Delaware in 1981, and its predecessor companies date back to 1924. SECURITIES The Company provides worldwide financial advisory and capital-raising services to a diverse group of domestic and international corporate and institutional clients, primarily through Morgan Stanley & Co. Incorporated ("MS&Co."), Morgan Stanley & Co. International Limited, Morgan Stanley Dean Witter Japan Limited and Morgan Stanley Dean Witter Asia Limited, among other subsidiaries. These subsidiaries also conduct sales and trading activities around the world, both as principal and as agent on behalf of a wide range of domestic and international institutional investors. The Company also sponsors, acts as general partner for and invests in several limited partnerships that conduct a variety of activities broadly described as principal investing. In addition, the Company provides individual investors with a broad range of securities and savings products and services, primarily through Dean Witter Reynolds Inc. ("DWR"). The Company offers its Securities services on a global basis under the brand name "Morgan Stanley Dean Witter." 2 Investment Banking Underwriting The Company manages and participates in public offerings and private placements of debt, equity and other securities worldwide. The Company is a leading underwriter of common stock, preferred stock and other equity-related securities, including convertible securities and American Depositary Receipts ("ADRs"). The Company is also a leading underwriter of debt and other fixed income securities, including investment grade debt, high-yield securities (debt issued by non-investment grade issuers), tax-exempt securities, mortgage-related and other asset-backed securities and commercial paper and other short-term securities. Financial Advisory Services The Company provides domestic and international corporate and institutional clients with a wide range of advisory services on key strategic matters such as mergers and acquisitions, divestitures, corporate defense strategies, joint ventures, privatizations, spin-offs, restructurings, proxy and consent solicitations, tender offers, exchange offers and leveraged buyouts. Other services include advice with respect to recapitalizations, rights offerings, dividend policy, valuations, foreign exchange exposure, financial risk management strategies and long-range financial planning. The Company also furnishes advice and services in connection with project financings, including infrastructure, electric power and natural resource projects. In addition, the Company provides advisory services in connection with the purchase, sale, leasing and financing of real estate. Financing and Investing In connection with its investment banking activities, the Company from time to time also provides financing or financing commitments to certain companies. For example, the Company may provide extensions of credit to leveraged companies in the form of senior or subordinated debt, as well as bridge financing on a select basis. The Company also conducts senior lending activities, including the origination and syndication of senior secured loans of non-investment grade companies. The Company also makes equity and equity-related investments that arise out of its worldwide investment banking activities through Princes Gate Investors II, L.P. ("Princes Gate"), the general partner of which is a subsidiary of the Company. Princes Gate is a limited partnership with $1 billion in aggregate investment capacity that was formed to invest in special situation opportunities. Princes Gate generally makes minority investments that are short to medium-term in duration. Princes Gate will not make new investments after February 2000. In January 2000, the Company launched fund-raising for Princes Gate Investors III, L.P., a successor investment partnership, to continue Princes Gate's investment focus. Sales, Trading and Market-Making Activities Equity The Company's equity sales, trading and market-making activities cover domestic and foreign equity and equity-related products, including ADRs, World Equity Benchmark Shares ("WEBSSM") and restricted/control stock; convertible debt and preferred securities, including Preferred Equity Redemption Cumulative Stock ("PERCS(R)"), Performance Equity-linked Redemption Quarterly- pay Securities ("PERQSSM") and warrants; equity index products; equity swaps; and options and other structured products. The Company also advises clients in connection with international index arbitrage, equity repurchases (including put strategies) and program and block trade execution. In addition, the Company engages in a variety of proprietary trading and arbitrage activities in equity securities and equity-related products for its own account. The Company's equity sales, trading and market-making activities are conducted both on stock exchanges and in over-the-counter ("OTC") transactions. The Company is a member of most major stock exchanges around the world, including the New York Stock Exchange, the London Stock Exchange, the Frankfurt Stock Exchange, the Tokyo Stock Exchange and the Stock Exchange of Hong Kong. 3 The Company also provides various equity financing services, including prime brokerage, which offers consolidated clearance and settlement of securities trades, custody, financing and portfolio reporting services. The Company acts both as principal and agent in stock borrowing and stock loan transactions in support of its domestic and international trading and brokerage, asset management and clearing activities, and as an intermediary between broker- dealers. Fixed Income The Company trades and makes markets in a variety of domestic and international debt and other fixed income securities and related products, including non-convertible preferred stock, investment grade corporate debt, high-yield securities, senior loans, government securities, municipal securities, mortgage-related and other asset-backed securities, real estate loan products, commercial paper, money market and other short-term securities, and interest rate and other swaps. The Company also advises institutional accounts and other clients on investment strategies, develops swap and other risk management strategies for its customers, and assists corporations in their repurchases of debt. The Company is also involved in structuring debt securities and derivatives with multiple risk/return factors designed to suit investor objectives, including using repackaged asset vehicles through which investors can restructure asset portfolios to provide liquidity or recharacterize risk profiles. The Company also borrows and lends fixed income securities, and acts as an intermediary between borrowers and lenders of short-term funds utilizing repurchase and reverse repurchase agreements. The Company is one of 30 primary dealers of U.S. government securities currently recognized by the Federal Reserve Bank of New York and a member of the selling groups responsible for distributing various U.S. agency and other debt securities. The Company is also a member of the primary syndicates that underwrite German government bonds and Japanese government bonds and a primary dealer in Belgian, Canadian, French, Italian and U.K. government bonds. Foreign Exchange and Commodities The Company actively trades numerous foreign currencies on a spot and forward basis with its customers, for its own account and to hedge its securities positions, assets or liabilities. In connection with its market- making activities, the Company takes open positions in the foreign exchange market for its own account. On a more limited basis, the Company also enters into forward currency transactions both as agent and as principal. The Company is a leading participant in currency futures trading at the International Monetary Market division of the Chicago Mercantile Exchange and is a leading dealer in OTC and exchange-traded currency options worldwide. The Company also trades as principal in the spot, forward and futures markets in a variety of commodities, including precious metals, base metals, crude oil, oil products, natural gas, electric power and related energy products. The Company is an active market-maker in swaps and OTC options on commodities such as metals, crude oil, oil products, natural gas and electricity, and offers a range of hedging programs to customers relating to production, consumption and reserve/inventory management. The Company is an electricity power marketer in the United States and owns a majority equity interest in an exempt wholesale generator from which the Company is the exclusive purchaser of electric power. Derivatives The Company offers to clients and takes proprietary positions in a variety of financial instruments known as "derivative products" or "derivatives." These products may be in the form of exchange-traded futures and options or OTC forwards, options, swaps, caps, collars, floors, swap options or similar instruments which derive their value from underlying interest rates, foreign exchange rates, commodities, equity instruments, equity indices or other assets. Derivatives facilitate risk transfer and enhance liquidity in the marketplace, and the origination 4 and trading of derivatives are often utilized to adjust risk profiles, such as exposure to interest rate or currency risk, or to take proprietary positions. In addition, the Company uses derivative products to assist in asset and liability management and to reduce borrowing costs. All of the Company's trading-related business units use derivative products as an integral part of their respective trading strategies, and these products are also used extensively to manage the market exposure that results from proprietary trading activities. In addition, as a dealer in certain derivative products (most notably interest rate and currency swaps), the Company structures and enters into derivative contracts to meet a variety of investment, risk management and other financial objectives of its clients. Through a triple-A rated subsidiary of the Company (Morgan Stanley Derivative Products Inc.), the Company also enters into swap and related derivative transactions with certain clients seeking a triple-A rated counterparty.* Trading Risk and Risk Management The market for some of the securities in which the Company trades, invests and makes markets, including high-yield debt securities, senior loans, real estate loan products, securities or obligations of emerging market issuers or counterparties and certain derivative instruments, has been, and may in the future be, characterized by periods of illiquidity. In addition, the Company, through its market-making and trading activities, may be the sole or principal source of liquidity in certain issues and, as a result, may substantially affect the prices at which such issues trade. To mitigate the potential impact on the Company's operating results of the greater risks inherent in these securities and other instruments, the Company monitors and manages its total inventory positions in a manner consistent with its overall risk management policies and procedures. The Company's use of derivative products may subject the Company to various additional risks, although in many cases derivatives serve to reduce, rather than increase, the Company's exposure to losses from market, credit and other risks. In times of market stress, liquidity in certain derivatives positions, as well as in underlying cash instruments, may be reduced. The Company manages the risks associated with derivative products in a manner consistent with its overall risk management policies. Exposure to changes in interest rates, foreign currencies and other factors are managed on an individual product basis, generally through offsetting or other positions in a variety of financial instruments and derivative products. In addition, in connection with certain derivatives, the Company has agreements with customers and counterparties that permit the Company to close out positions or require additional (and, in many cases, excess) collateral if certain events occur. In certain instances, the Company may also limit the types of derivative products that may be traded in a particular account. At any given point in time, the Company may hold, or be committed to purchase, large positions in certain types of securities or securities of a single issuer, sovereign governments, issuers located in a particular country or geographic area, public and private issuers in developing countries or issuers engaged in a particular industry. In addition, a large portion of the collateral held by the Company for reverse repurchase agreements and bonds borrowed consists of securities issued by the U.S. government, federal agencies or non-U.S. governments. See also "Risk Management" incorporated by reference in Part II, Item 7A of this Report. MSCI Morgan Stanley Capital International Inc. ("MSCI"), a majority-owned subsidiary of the Company, markets and distributes over 3,500 country, industry and regional equity and fixed income benchmark indices (including The World, EAFE(R) and Emerging Market Free Indices) covering 51 countries, and has a 30-year historical database that includes fundamental and valuation data on over 5,500 companies in developed and emerging market countries. Investment professionals around the world use MSCI data for purposes such as performance measurement, security valuation and asset allocation. - -------- * For a detailed discussion of the Company's use of derivatives, see "MD&A-- Derivative Financial Instruments" incorporated by reference in Part II, Item 7 of this Report, "Notes to Consolidated Financial Statements, Note 9" incorporated by reference in Part II, Item 8 of this Report and "Notes to Consolidated Financial Statements, Note 6" incorporated by reference in Part II, Item 8 of this Report. 5 Principal Investing The Company's principal investing activities include, among other things, making commitments to purchase, and making negotiated investments in, equity and debt securities in connection with merger, acquisition, restructuring, private investment and leveraged capital transactions, either for the accounts of private investment funds in which the Company participates or to a lesser extent for its own account. These activities include venture capital investments and investments in real estate assets, portfolios and operating companies. The Company generally acts as general partner of the private investment funds through which certain of its principal investing activities are conducted, and typically also contributes a minority of the capital of such funds. Clients of the Company are limited partners in the funds. The Company normally receives management fees for operating the private investment funds, in addition to a share of profits when investment performance criteria have been met. The Company conducts a substantial portion of its private equity business through three groups of investment funds, Capital Partners, Venture Partners and Emerging Markets (collectively, the "Private Equity Funds"). The Private Equity Funds invest on a global basis in private equity and equity-related securities of companies in a wide range of industries. Collectively, the Private Equity Funds currently have $4 billion in capital commitments. As of November 30, 1999, the Private Equity Funds had investments with $1.7 billion of cost basis related to 91 companies. Morgan Stanley Real Estate Fund III, L.P. ("MSREF III") was formed in 1997 with approximately $2.1 billion in capital commitments to invest in U.S and international real estate assets and companies. As of November 30, 1999, MSREF III and its predecessor funds (which are no longer making new investments) had $1.5 billion of cost basis in real estate assets in their portfolios relating to 69 investments. Morgan Stanley Real Estate Special Situations Investment Program ("Special Situations") was created in 1997 as a series of separate accounts managed by MSDW Investment Management with $375 million in capital commitments to invest in private equity or equity-related securities of real estate companies (primarily real estate investment trusts). As of November 30, 1999, Special Situations had $294 million of cost basis in its portfolios related to 14 real estate companies. From time to time, the Company expects to sponsor additional private investment funds and commit to invest in such funds. Equity securities purchased in principal investment transactions generally are held for appreciation, are not readily marketable and do not provide dividend income. It is not possible to determine when or if the Company will realize the value of the investments, including any appreciation, dividends or other distributions thereon, since, among other factors, such investments are generally subject to restrictions on such realization relating to the circumstances of particular transactions. Moreover, estimates of the eventual realizable value of the investments fluctuate significantly over time in light of business, market, economic and financial conditions generally or in relation to specific transactions or other factors, including the financial leverage involved in the underlying transactions. The Company may also underwrite, trade, invest and make markets in, and publish research with respect to, securities and senior loans issued by companies in which the Company or the private investment funds have invested. In addition, the Company may provide financial advisory services to, and/or have securities and commodity trading relationships with, these entities. From time to time, the Company may provide loans, financing commitments or other extensions of credit, including on a subordinated and interim basis, to companies (which may otherwise be leveraged) associated with its principal investing activities. 6 Securities Services to Individual Investors Private Client Group The Company's individual securities business, the Private Client Group, offers clients, principally through DWR, a broad range of securities and investment products and services that are supported by the Company's investment banking, research, asset management, execution and operational resources. At November 30, 1999, the Company had the second largest financial advisor sales organization in the United States and had 12,674 financial advisors located in 475 securities branch offices globally. The Company provided securities and investment services to approximately 4.5 million client accounts having assets of $583 billion at November 30, 1999. The Company focuses on providing its clients with comprehensive financial planning services, tailored to meet individual investment goals and risk profiles. The Company believes that knowledgeable investment professionals are instrumental to effectively serving a large portion of its individual investor client base and continually seeks to grow and train its financial advisor sales organization. The Company provides execution, trading and research services to its individual clients for listed equity securities, OTC equity securities, options and ADRs. The Company also provides execution, trading and research services to individual clients for a broad range of fixed income securities, including U.S. government obligations, mortgage and other asset-backed securities, corporate bonds, preferred stocks, municipal securities and certificates of deposit. The Company's fixed income trading activity on behalf of individual investors focuses primarily on establishing and maintaining inventory based upon actual and anticipated orders from its clients, rather than risk-oriented proprietary trading. The Company's financial advisor sales force works together with its institutional fixed income platform in order to provide mid-sized institutions with greater access to the Company's comprehensive products and research capabilities. The Company also provides its clients with an extensive array of investment and credit products and services, including mutual funds, unit investment trusts, insurance products, financial planning, retirement planning, personal trust and estate planning, tax planning, credit management and account services. The Company's Active Assets Account(R) ("AAA Account") permits clients to consolidate their financial assets into a single account, invest in a wide variety of investment products and automatically invest funds daily in a variety of money market options, including an account insured by the Federal Deposit Insurance Corporation ("FDIC"). The Company's AAA Account customers have access to ClientServSM, the Company's Internet technology service, which allows them to track their accounts on-line, access research reports and real- time securities quotes, create customized personal portfolio monitors and chart the performance of various securities over time. The Company also offers customers a broad array of investment choices for individual retirement planning, and provides individual annuities and complete defined contribution plan services for businesses, including 401(k) plans. The Company also provides investment consulting services that assist clients in analyzing their investment objectives and in selecting investment advisory services offered by unaffiliated investment advisors. Through its wholly-owned insurance agency subsidiaries, the Company also acts as a national general agency for leading insurance carriers to meet the insurance and annuity needs of individual investors. The Company originates and services a broad range of consumer loans secured by mortgages on residential properties. The Company also offers trust and fiduciary services to both individual and corporate clients, primarily trustee services for personal trusts and tax-qualified retirement plans. Through Morgan Stanley Dean Witter Online, Inc. (formerly known as Discover Brokerage Direct Inc.) ("MSDW Online"), a wholly-owned subsidiary, the Company provides services to the growing number of consumers utilizing alternatives to the traditional brokerage channel to obtain financial and other investment services. MSDW Online permits customers to invest and trade directly through its Internet site, www.msdwonline.com, through automated telephone trading, wireless trading or through a registered 7 representative. The financial services provided by MSDW Online include a broad range of investment options, detailed account information, real-time securities price quotes, graphs and portfolio performance information and trade execution at competitive rates. Clients can also subscribe to proprietary equity research reports and analysts' ratings. MSDW Online also offers customers extended trading hours through MarketXT, the ability to trade U.S. treasury securities and certain municipal securities on-line every weekday, 24 hours per day and, to qualified customers, access to initial public offerings and other issues underwritten by the Company. In October 1999, the Company launched ichoiceSM, the service platform for individual investors that combines the products and services offered by the Private Client Group with the technological capabilities of MSDW Online. The Company's ichoice platform offers clients the ability to select the particular financial service relationship that best suits their needs. Investors may choose the traditional full-service relationship, including personalized professional advice from a financial advisor and transactions on a per trade basis, enhanced by the Internet technology services of ClientServ. Investors who want to combine a full-service relationship with fee-based pricing and the flexibility to trade on-line can select a Morgan Stanley Dean Witter ChoiceSM account. This account offers clients virtually unlimited transactions for a fee based on eligible assets and allows them to place trades either through their financial advisor or on-line through ClientServ. Self-directed investors who wish to make decisions independently, without professional advice, may open an MSDW Online account and execute transactions on their own for a fixed fee per trade. The Company expects the integration of its full-service and on- line businesses to continue in subsequent phases of its ichoice platform rollout. Private Wealth Management The Company's Private Wealth Management Group ("PWM") is a financial advisory group that provides solutions to individuals, families and foundations who control significant pools of wealth. PWM has offices in the United States, Europe and Asia and provides access to the Company's trading capabilities, fundamental research and analytical products, as well as to its securities underwritings. PWM financial advisors manage specific financial asset classes and provide tailored global asset allocation strategies for its clients. PWM also offers private investors the opportunity to co-invest with the Company in its principal investing activities and specialized funds. Private banking services and other PWM financial advisory services are provided to select international clients through Bank Morgan Stanley AG, the Company's Swiss bank subsidiary. International Private Client Group The International Private Client Group encompasses all of the Company's international activities relating to individual securities, asset management and electronic commerce. These activities include all non-U.S. PWM efforts detailed above. In 1999, the Company strengthened its initiative to expand its businesses internationally with its acquisition of AB Asesores, the largest independent financial services firm in Spain, and its agreement to acquire a minority stake in Area S.p.A., a leading Italian independent retail financial advisory firm. The Company also formed an alliance with Sanwa Bank to pursue retail brokerage and asset management opportunities in Japan. See also "ASSET MANAGEMENT." Research The Company's global research department ("Research"), comprised of economists, industry analysts and strategists, is actively engaged in a wide range of research activities. Research produces reports and studies on the economy, financial markets, portfolio strategy, technical market analyses and industry developments. It analyzes worldwide trends covering a broad range of industries and more than 2,000 individual companies, half of which are located outside of the United States. Research also provides analyses and forecasts relating to economic and monetary developments affecting matters such as interest rates, foreign currencies and securities and economic trends. Support for the sales and trading of fixed income securities is also provided in the form of quantitative and credit analyses and the development of research products that are distributed to the Company's individual and institutional clients. Timely data contained in Research's numerous publications, such as the 8 Investment Strategy Chartbook and The Competitive Edge, are disseminated to both individual and institutional investors through a proprietary database accessible via the Internet and through the Company's financial advisors. In addition, Research provides analytical support and publishes reports on mortgage-related securities and the markets in which they are traded and does original research on valuation techniques. Operations and Information Processing The Company executes and clears all transactions conducted by its Securities businesses (delivery and receipt of securities and transfer of related funds) through its own facilities and through memberships in various clearing corporations. In order to minimize the risks of systems failures, the Company maintains redundant processing systems. Competition and Regulation Competition The Company encounters intense competition in all aspects of its Securities business and competes directly in the United States and on a worldwide basis with other securities and financial services firms. Among the principal competitive factors affecting the Company's Securities businesses are the Company's reputation, the quality of its professionals and other personnel, its products and services, relative pricing and its capability in originating and marketing innovative products and services. The Company's private investment funds compete for investors and for investment opportunities with other private investment funds, some of which are sponsored by financial institutions, and in specific industries with companies that operate in such industries. The Company has experienced increased competition for qualified employees in recent years, including from companies engaged in Internet-related businesses and private equity funds, in addition to the traditional competition for employees in the financial services, insurance and management consulting industries. The Company's ability to sustain or improve its competitive position will substantially depend on its ability to continue to attract and retain qualified employees. The Company's competitive position will also be affected by its ability to access capital at competitive rates (which is generally dependent on the Company's credit ratings) and to commit capital efficiently, particularly in its capital-intensive investment banking and sales, trading and market-making activities. In addition to competition from firms traditionally engaged in the financial services business, there has been increasing competition in recent years from other sources, such as commercial banks, insurance companies, on-line financial services providers, sponsors of mutual funds and other companies offering financial services both in the United States and on a worldwide basis. The financial services industry has also experienced consolidation and convergence in recent years, as institutions involved in a broad range of financial services industries, such as investment banking, brokerage, asset management, commercial banking and insurance have merged. This convergence trend is expected to continue, and could result in the Company's competitors gaining greater capital and other resources, a broader range of products and services and/or more geographic diversity. In November 1999, the Gramm-Leach- Bliley Act was passed in the United States, effectively repealing certain sections of the 1933 Glass-Steagall Act. Its passage allows commercial banks, securities firms and insurance firms to affiliate, which may accelerate consolidation and lead to increasing competition in markets traditionally dominated by investment banks and retail securities firms. The complementary trends in the financial services industry of consolidation and globalization also present technological, risk management and other infrastructure challenges that will require effective resource allocation in order for the Company to remain competitive. Regulation The Company's Securities business is, and the securities, commodities and financial services industries generally are, subject to extensive regulation in the United States, at both the federal and state levels, and 9 internationally. The Company is subject to the rules and regulations of the various regulatory bodies that are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. MS&Co., DWR and MSDW Online are registered as broker-dealers with the Securities and Exchange Commission ("SEC") and in all 50 states, the District of Columbia and Puerto Rico, and are members of the National Association of Securities Dealers, Inc. ("NASD"). MS&Co. and DWR are also members of the New York Stock Exchange ("NYSE"). Broker-dealers are subject to regulation by securities administrators in those states in which they conduct business. Broker-dealers are also subject to regulations that cover all aspects of the securities business, including sales and trading practices, use and safekeeping of customers' funds and securities, capital structure, record- keeping and the conduct of directors, officers and employees. The SEC, other governmental regulatory authorities, including state securities commissions, and self-regulatory organizations may institute administrative proceedings against broker-dealers or members, which could result in censure, fine, the issuance of cease-and-desist orders, the suspension or expulsion from the securities industry of such broker-dealer or member or its officers or employees, or other similar consequences. Occasionally, the Company's subsidiaries have been subject to investigations, other proceedings and fines relating to infractions of various regulations relating to their activities as broker-dealers, none of which, to date, has had a material adverse effect on the Company or its business. Margin lending by certain subsidiaries is subject to the margin rules of the Federal Reserve Board that restrict the amount they may lend in connection with certain purchases of securities by customers, and such subsidiaries are also required by NYSE rules to impose maintenance requirements on the amount of securities contained in margin accounts. These rules augment the Company's margin policies, which in many cases are more stringent. As futures commission merchants, MS&Co. and DWR are registered with the Commodity Futures Trading Commission ("CFTC"), and their activities in the futures and options-on-futures markets are subject to regulation by the CFTC and various domestic boards of trade and other commodity exchanges. Certain subsidiaries of the Company are registered as commodity trading advisers and/or commodity pool operators with the CFTC. The Company's futures and options-on-futures business is also regulated by the National Futures Association, a not-for-profit membership corporation that has been designated a registered futures association by the CFTC and of which MS&Co. and DWR are members. With respect to OTC derivatives, the Company is a member of the International Swaps and Derivatives Association ("ISDA"), the Group of 30 and the Derivatives Policy Group, a group of securities firms formed at the request of the SEC and CFTC to address concerns regarding the OTC derivatives activities of U.S. broker-dealer affiliates not subject to direct regulatory oversight. The Derivatives Policy Group has agreed to adhere to a voluntary oversight framework relating to reporting, capital, management controls and counterparty relationships. The Company is also a member of the Counterparty Risk Management Policy Group that was formed in January 1999 by a group of twelve major international commercial and investment banks. The group was formed with the objective of strengthening practices relating to the management of market, counterparty credit and liquidity risk. In June 1999, the group released its report and recommendations, which include enhanced information sharing between counterparties, improved internal risk transparency for senior managements and regulators and stronger market-wide conventions for key credit documentation practices. Certain of the Company's government securities activities are conducted through Morgan Stanley Market Products Inc., a member of the NASD and registered as a government securities broker-dealer with the SEC and in certain states. The Department of the Treasury has promulgated regulations concerning, among other things, capital adequacy, custody and use of government securities and transfers and control of government securities subject to repurchase transactions. The rules of the Municipal Securities Rulemaking Board, which are enforced by the NASD, govern the municipal securities activities of the Company. 10 The Company's Securities business is also subject to extensive regulation by various non-U.S. governments, securities exchanges, central banks and regulatory bodies, especially in those jurisdictions in which the Company maintains an office. For example, the Company's Securities business in the U.K. is regulated by the Securities and Futures Authority and a number of exchanges, including the London Stock Exchange and the London International Financial Futures and Options Exchange; the Deutsche Borse AG, the Bundesaufsichtsamt fur das Kreditwesen (the Federal Banking Supervisory Authority) and Eurex Deutschland, among others, regulate the Company's activities in the Federal Republic of Germany; the Company's Securities business in Japan is subject to Japanese law applicable to foreign securities firms and related regulations of the Financial Supervisory Agency and the Japanese Ministry of Finance and to the rules of the Bank of Japan, the Japanese Securities Dealers Association and several Japanese securities and futures exchanges, including the Tokyo Stock Exchange, the Osaka Securities Exchange and the Tokyo International Financial Futures Exchange; the Monetary Authority of Singapore and the Singapore International Monetary Exchange Ltd. regulate the Company's business in Singapore; and the Company's Securities operations in Hong Kong are regulated by the Securities and Futures Commission, The Stock Exchange of Hong Kong Ltd. and the Hong Kong Futures Exchange Ltd. As registered broker-dealers and member firms of the NYSE, certain subsidiaries of the Company, including MS&Co. and DWR, are subject to the SEC's net capital rule, and, as futures commission merchants, MS&Co. and DWR are subject to the net capital requirements of the CFTC and various commodity exchanges. Many non-U.S. securities exchanges and regulatory authorities also either have imposed or are imposing rules relating to capital requirements that apply to subsidiaries of the Company (such as rules that have been promulgated in connection with the European Union Capital Adequacy Directive), including certain European subsidiaries that are considered banking organizations under local law. These rules, which specify minimum capital requirements, are designed to measure general financial integrity and liquidity and require that at least a minimum amount of assets be kept in relatively liquid form. Compliance with the capital requirements may limit those operations of the Company that require the intensive use of capital, such as underwriting, principal investing and trading activities, and the financing of customer account balances. Such requirements also restrict the Company's ability to withdraw capital from its subsidiaries, which in turn may limit the Company's ability to pay dividends, repay debt or redeem or purchase shares of its outstanding capital stock. A change in such rules or the imposition of new rules affecting the scope, coverage, calculation or amount of capital requirements, or a significant operating loss or any unusually large charge against capital, could adversely affect the ability of the Company to pay dividends or to expand or even maintain its present levels of business. New legislation or regulation, including any relating to the activities of affiliates of broker-dealers, changes in rules promulgated by the SEC or other U.S. or international governmental, regulatory or self-regulatory authorities (such as changes to the U.S. Internal Revenue Code and related regulations or rules promulgated by the Financial Accounting Standards Board) or changes in the interpretation or enforcement of existing laws and regulations, may materially adversely affect the financial condition or results of operation of the Company. The Company's subsidiaries which act as general partners of the private investment funds are generally required to register as investment advisors with the SEC. See also "ASSET MANAGEMENT--Competition and Regulation-- Regulation." By virtue of the Company's affiliation with the private investment funds that own equity interests in companies that operate in certain regulated industries (e.g., insurance or broadcasting), or that are subject to regulation in non-U.S. jurisdictions, the Company could be subject to additional regulation applicable to such industries or in such jurisdictions. 11 ASSET MANAGEMENT The Company manages and administers a wide range of asset management products for individual investors, primarily through MSDW Advisors and Van Kampen, and provides global asset and portfolio management to a wide range of institutional investors through MSDW Investment Management. At November 30, 1999, the Company had $425 billion of assets under management or supervision. Morgan Stanley Dean Witter Advisors MSDW Advisors develops, markets and manages a broad spectrum of proprietary open- and closed-end mutual funds and provides professional money management services on a customized basis to affluent individuals, institutional investors and retirement plan sponsors. MSDW Advisors assets under management include equities, taxable and tax-exempt fixed income securities and money market instruments. At November 30, 1999, there were 127 funds and portfolios with assets of approximately $142 billion for which MSDW Advisors and Morgan Stanley Dean Witter Services Company Inc., a wholly-owned subsidiary of the Company, served in various investment management and administrative capacities. Morgan Stanley Dean Witter Distributors Inc., a wholly-owned subsidiary of the Company and a registered broker-dealer ("MSDW Distributors"), distributes shares of MSDW Advisors products that are open-end investment companies. MSDW Distributors has entered into agreements with DWR and other selected dealers for the marketing and distribution of such products. DWR, its affiliates and other selected dealers are compensated for their distribution-related expenses through contingent deferred sales charges, front-end sales charges and fees authorized pursuant to the provisions of Rule 12b-1 under the Investment Company Act of 1940. Van Kampen Investments Van Kampen operates a family of open- and closed-end mutual funds for individual and institutional shareholders, and markets and provides ongoing evaluation and credit review for equity and fixed income unit investment trusts ("UITs"). Sponsored fund assets cover a broad range of taxable and tax- exempt domestic and international products. Sponsored UITs include portfolios of equity securities and nationally diversified and single-state insured and uninsured municipal securities and, depending on market demand, also include portfolios of government securities, insured and uninsured corporate debt securities and global fixed income securities. At November 30, 1999, Van Kampen had more than 50 open-end funds and 39 closed-end funds and 2,700 series of UITs, and Van Kampen and its affiliates managed, administered or supervised approximately $88 billion in assets. Van Kampen distributes its investment products through a large and diversified network of unaffiliated national and regional broker-dealers, commercial banks and thrifts, insurance companies and their affiliated broker- dealers and financial planners ("retail distribution firms"), as well as the Company's financial advisors. A relatively small number of retail distribution firms account for a substantial portion of sales of Van Kampen products, and Van Kampen has proprietary and preferred distribution relationships with several unaffiliated retail distribution firms. Morgan Stanley Dean Witter Investment Management MSDW Investment Management, through its various advisory entities, including MAS, primarily manages financial assets for institutions around the world, including pension funds, corporations, non-profit organizations and governmental agencies. MSDW Investment Management offers product lines covering a full range of equity, fixed income and alternative investments in developed and emerging markets, and a variety of investment styles including value, growth and blended; active and passive management; and diversified and concentrated portfolios. Products are available through separate account management, pooled vehicles, U.S. and non-U.S. mutual funds and variable annuities. See also "International Private Client Group." A broad range of fiduciary services for pension funds and trusts is also available through MSDW Investment Management. 12 At November 30, 1999, MSDW Investment Management had assets under management or supervision of approximately $167 billion, including approximately $68 billion related to international products. Approximately $39 billion of these assets related to mutual funds and approximately $128 billion related to separate accounts, pooled vehicles and other arrangements. The Company distributes certain domestic and international investment products advised or sub-advised by MSDW Investment Management through the distribution networks of MSDW Advisors and Van Kampen. Competition and Regulation Competition The Company's Asset Management business competes in the highly competitive investment management industry, in which approximately 7,932 open-end investment management companies held over $6.4 trillion in assets as of November 30, 1999. Competition in the sale of mutual funds is affected by a number of factors, including investment objectives and performance, advertising and sales promotion efforts, level of fees, distribution channels and types and quality of services offered. In addition to fund products offered by other broker-dealers, the funds offered by the Company compete with funds sold directly by investment management firms and insurance companies, as well as with other investment alternatives sold by such companies and by banks and other financial institutions. Regulation The Company and certain subsidiaries, including MS&Co., DWR, and those related to MSDW Advisors, Van Kampen and MSDW Investment Management, are registered as investment advisers with the SEC and in certain states. Virtually all aspects of the Company's investment advisory business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit the investment product holder and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict the Company from carrying on its investment advisory business in the event that it fails to comply with such laws and regulations. Possible sanctions which may be imposed for such failure include the suspension of individual employees, limitations on the Company's engaging in the investment advisory business for specified periods of time, the revocation of registrations, other censures and fines. The Company's Asset Management business is also subject to regulation outside the United States. For example, the Investment Management Regulatory Organization Limited regulates the Company's business in the United Kingdom; the Japanese Ministry of Finance and the Japan Securities Investment Advisors Association regulates the Company's business in Japan; the Securities and Exchange Board of India regulates the Company's business in India; and the Monetary Authority of Singapore regulates the Company's business in Singapore. Morgan Stanley Dean Witter Trust FSB ("MSDWT"), a subsidiary of the Company that provides trust, fiduciary and transfer agent services, is a federally chartered savings bank and is subject to comprehensive regulation and periodic examination by the federal Office of Thrift Supervision ("OTS") and by the FDIC. MSDWT is also a registered transfer agent, subject to regulation and examination in such capacity by the SEC. As a result of its ownership of MSDWT, the Company is registered with the OTS as a unitary savings and loan holding company ("SLHC") and subject to regulation and examination by the OTS as a SLHC. CREDIT SERVICES Based on its approximately 38.5 million general purpose credit card accounts as of November 30, 1999, the Company, through its Credit Services business, was one of the largest single issuers of general purpose credit cards in the United States. Credit Services' proprietary general purpose credit card business is operated by the Company's Discover Financial Services business unit, which also operates the Discover/Novus Network, the Company's proprietary merchant and cash access network. The credit cards offered by Discover Financial Services include the Discover Card, the Discover Platinum Card ("Discover Platinum"), the MSDW Card, the Private Issue Card(R) by Discover ("Private Issue"), and co-branded and affinity cards. 13 Discover Financial Services Discover Financial Services offers general purpose credit cards designed to appeal to different market segments of consumers for use on the Discover/Novus Network. The Discover/Novus Network is the largest independent credit card network in the United States, consisting of more than 3.5 million merchant and cash access locations accepting credit cards carrying the Discover/Novus logo. Discover Financial Services offers several brands of proprietary cards, including the Discover Card, Discover Platinum and Private Issue, as well as co-branded and affinity cards. MSDW Card, the Company's first credit card issued outside of the United States, was introduced in the United Kingdom in the latter half of fiscal 1999. The MSDW Card is issued through the Company's wholly-owned subsidiary, Morgan Stanley Dean Witter Bank Limited ("MSDW Bank Limited"), on the Europay/MasterCard network. Discover Financial Services offers cardmembers various other financial services, including credit insurance and card registration to protect against losses in connection with card theft or loss. Cardmembers are also offered money market and time deposit accounts. The Company records revenues from finance charges on cardmembers' revolving balances, fees paid by merchants for transactions effected through the Discover/Novus Network, transaction fees paid by cardmembers for cash advances, late payment fees, over-limit fees, fees for returned checks and fees from various product enhancements (e.g., credit life insurance). Most of the Company's proprietary general purpose credit cards are issued by Greenwood Trust Company ("Greenwood Trust"), an indirect wholly-owned subsidiary of the Company that is a state chartered bank under the laws of the State of Delaware. Because of certain banking law restrictions, most of the Company's proprietary general purpose credit cards have been limited to use in personal and household, as opposed to commercial, transactions. See "Competition and Regulation--Regulation." The Company has made recent enhancements in its customer services. Cardmembers may register their account on-line with the Discover Card Account Center which offers a menu of free e-mail notifications or reminders to regularly inform cardmembers about the status of their accounts through the Discover Inter@ctive feature. Types of notifications include reminders that a cardmember's credit limit is being approached or that a minimum payment is due. In addition, cardmembers may view detailed account information on-line, such as recent transactions and account payments. Cardmembers may pay their Discover Card bills on-line via the SmartCheckSM payment option at no cost and receive exclusive discounts and special Cashback Bonus(R) awards by shopping on-line at the Internet ShopCenterSM. Cardmembers may also use the Discover Desk$hopSM virtual credit card to simplify shopping on-line and to access the Discover Card Account Center. Merchants Discover Card, Discover Platinum and Private Issue, as well as the Company's other proprietary general purpose credit cards (exclusive of the MSDW Card), are accepted only by merchants who are members of the Discover/Novus Network. Since its establishment in 1986, the Discover/Novus Network has expanded rapidly and currently includes more than 3.5 million merchant and cash access locations across the United States. Discover Financial Services operates both the issuing and acquiring businesses in the United States and accordingly retains the entire merchant fee paid for transactions effected through the Discover/Novus Network. Because of its independence from the bankcard associations, Discover Financial Services has greater flexibility in its relationships with merchants than members of bankcard associations. Discover Financial Services believes that this enables it to better maintain and expand its merchant base by allowing it to provide customized programs in such areas as processing and to otherwise tailor program terms to meet specific merchant needs. 14 Discover Financial Services employs its own national sales and support force, as well as some independent sales agents, to increase and maintain its merchant base. In addition, the Company conducts telemarketing operations for the purpose of acquiring merchant business. Marketing The Company, operating through Greenwood Trust and other domestic banking subsidiaries that issue its proprietary general purpose credit cards, is distinguished from credit card issuers that are members of bankcard associations in that it directly controls the brand image, features, service level and pricing of the Discover Card and other proprietary general purpose credit cards to both cardmembers and merchants. In contrast, bankcard association credit card issuers compete directly with other issuers using the same brands and sharing common processes. The Company believes that its ability to control its proprietary credit cards provides competitive advantages that are not available to issuers of bankcard association credit cards, including efficiencies in operations, product positioning and marketing execution. The Company also has the ability to direct and deliver a consistent, nationwide message for Discover Card and its other proprietary general purpose credit cards. Because the Company manages all aspects of both the cardmember and merchant relationship with respect to its proprietary credit card programs, it can determine and promote its advertising campaign and control the campaign's content, timing and promotional features. The Company promotes its proprietary general purpose credit cards through the use of different and distinctive features that are designed to appeal to different consumer bases. Discover Card, Discover Platinum and Private Issue offer the Cashback Bonus award and no annual fee. Pursuant to the Cashback Bonus award program, each year the Company pays cardmembers up to one percent of their purchase amounts based upon their annual level of purchases. The Cashback Bonus award is remitted to cardmembers in the form of a check or as a credit to their accounts. If the Cashback Bonus award is five dollars or more, Discover Platinum and Private Issue offer cardmembers the opportunity to exchange their Cashback Bonus award checks for certificates from participating merchants valued at double the check amounts. Private Issue cardmembers may also elect a lower interest rate in lieu of participation in the Cashback Bonus award program. Credit Credit reviews are conducted for all cardmembers in order to establish that standards of ability and willingness to pay are met. Applications that are not pre-selected are evaluated by using a credit scoring system (a statistical evaluation model) that is based on information provided by applicants and by the credit bureaus. Applications not approved under the credit scoring system may be selectively reviewed and approved by the Company's credit analysts. Applicants receiving pre-selected solicitations must satisfy criteria specified by Discover Financial Services. All recipients of pre-selected solicitations have been pre-screened through credit bureaus utilizing industry and customized models. Pre-screening is a process by which an independent credit reporting agency identifies individuals satisfying creditworthiness criteria supplied by the Company (in the form of a point scoring model or other screening factors) that are intended to provide a general indication, based on available information, of such person's ability and willingness to pay their financial obligations. Recipients who respond to the Company's pre- selected solicitations are post-screened prior to enrollment in order to confirm continued satisfaction of the Company's creditworthiness criteria. Each cardmember's credit line is reviewed at least annually and may be reviewed more frequently if requested by the cardmember or if the Company deems more frequent review appropriate. Such reviews include scoring the cardmember's payment behavior on the applicable account as well as reviewing the cardmember's credit bureau record. Actions that may result from an account review include raising or lowering the cardmember's credit line or closing the account. In addition, the Company, on a portfolio basis, performs monthly monitoring and review of consumer behavior and risk profiles. 15 Operations The Company performs the functions required to service and operate its proprietary cards' accounts either by itself or through processing agreements that the Company has with third parties. These functions include new account solicitation, application processing, new account fulfillment, transaction authorization and processing, cardmember billing, payment processing, fraud prevention and investigation, cardmember service and collection of delinquent accounts. The Company maintains several operations centers throughout the United States and an operations center in the United Kingdom. Discover Financial Services' operations are also supported by systems at computer centers operated by an unaffiliated communication services provider. Competition and Regulation Competition The Company's Credit Services business competes in the highly competitive credit card industry. The credit card market includes other bank-issued credit cards (the vast majority of which bear the MasterCard or Visa servicemark) and charge cards and credit cards issued by travel and entertainment companies. Competition centers on merchant acceptance of credit cards, credit card account acquisition and customer utilization of credit cards. Merchant acceptance is based on both competitive transaction pricing and the volume and usage of credit cards in circulation. Credit card account acquisition and customer utilization are driven by the offering of credit cards with competitive and appealing features, such as no annual fees, low introductory interest rates and other customized features targeting specific consumer groups. As new credit card issuers seek to enter the market and established issuers seek to expand, sometimes through acquisitions of other credit card issuers or portfolios, the credit card industry has seen increased use of advertising, targeted marketing and pricing competition in interest rates, annual fees and reward programs. More recently, issuers have increased their efforts to attract balances from competing sources of credit via low-priced balance transfer programs. In addition, issuers have aggressively marketed co-branded credit cards, which offer various benefits relating to the business of the issuer's co-branding partner. The Company believes its proprietary merchant base enables it to promote its proprietary card brand names on a national basis, thereby building customer acceptance and use of these cards. Regulation The Company conducts portions of its Credit Services business in the United States through various wholly-owned indirect subsidiaries that are banking institutions. Greenwood Trust and Bank of New Castle are state banks chartered under the laws of the State of Delaware, and Morgan Stanley Dean Witter Bank, Inc. ("MSDW Bank") is an industrial loan company chartered under the laws of the State of Utah (each a "Domestic Bank" and, collectively, the "Domestic Banks"). Each of the Domestic Banks has its deposits insured by the FDIC, pays FDIC assessments and is subject to comprehensive regulation and periodic examination by the state banking commissioner of the state in which it is chartered and by the FDIC. Generally, a company that controls a "bank," as defined in the Bank Holding Company Act of 1956 (the "BHCA"), is required to register as a bank holding company and is subject to regulation as a bank holding company by the Board of Governors of the Federal Reserve System. Prior to Congress' passage of the Competitive Equality Banking Act of 1987 ("CEBA"), a bank that engaged in less than a full range of banking activities, such as Greenwood Trust, which does not make commercial loans, was not considered a "bank" for purposes of the BHCA. Under the CEBA amendments to the BHCA, Greenwood Trust is a "bank." However, the CEBA amendments included grandfather provisions that allow the Company to preserve its non-bank holding company status so long as certain operational restrictions are followed. Favorable modifications to these restrictions were recently enacted under the Gramm-Leach-Bliley Act (the "GLBA"). These operational restrictions and the impact of the changes effected by the GLBA are discussed below. The Company is permitted 16 to own Bank of New Castle and MSDW Bank without registering as a bank holding company because neither of these institutions is considered to be a "bank" under the BHCA. Pursuant to the CEBA amendments to the BHCA, Greenwood Trust is currently prohibited from engaging in new activities in which it was not engaged as of March 5, 1987. In addition, Greenwood Trust is also restricted with respect to its ability to cross-market its products with those of its affiliates. On March 11, 2000, the date on which the GLBA modifications to the BHCA will become effective, both of these restrictions will be rescinded. However, even after that date, Greenwood Trust will need to refrain from engaging either in commercial lending or taking demand deposits (but not both), in order for the Company to maintain its non-bank holding company status. Federal and state consumer protection laws and regulations extensively regulate the relationships among cardholders and credit card issuers. Under federal law, each of the Domestic Banks may charge interest at the rate allowed by the law of the state in which it is located and export such interest rate to all other states. The states where the Domestic Banks are domiciled do not limit the amount of interest that may be charged on loans of the types offered by the Domestic Banks. As a result, each of the Domestic Banks is permitted to export interest rates pursuant to federal law. The application of federal and state bankruptcy and debtor relief laws affect the Company to the extent such laws result in any loans being charged off as uncollectible. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal bank regulatory agencies are required to take "prompt corrective action" in respect of banks that do not meet minimum capital requirements, and certain restrictions are imposed upon banks that meet certain capital requirements but are not "well capitalized" for purposes of FDICIA. A bank that is not well capitalized, as defined for purposes of FDICIA, is, among other consequences, generally prohibited from accepting brokered deposits and offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited). Greenwood Trust and MSDW Bank currently use brokered deposits as a funding source. If either of these Domestic Banks were not able to do so, its funding costs would likely increase. Certain acquisitions of the Company's common stock may be subject to regulatory approval and notice under federal and state banking law. In addition, Greenwood Trust would no longer qualify for grandfather rights under CEBA, as amended by the GLBA, if direct or indirect control of Greenwood Trust were transferred to an unaffiliated third party. In that event, the third party would have to operate in a manner permissible for a bank holding company under the BHCA. MSDW Bank Limited, the Company's recently chartered bank in the United Kingdom, is governed primarily by the United Kingdom's Banking Act 1987. MSDW Bank Limited is also subject to other regulation in the United Kingdom, including regulation related to capital adequacy, consumer protection and deposit protection. The activities of MSDW Bank Limited are supervised by the Financial Services Authority, which conducts periodic examinations of MSDW Bank Limited's operations and records. Morgan Stanley Dean Witter Card Services Limited, a wholly-owned subsidiary of the Company, operates the day- to-day credit card business of MSDW Bank Limited. Item 2. Properties* The Company's executive offices are located at 1585 Broadway, New York, New York, where the Company occupies approximately 958,000 square feet as its New York headquarters. The Company also occupies approximately 368,000 square feet at 750 Seventh Avenue, New York, New York. The Company owns both the 1585 Broadway and 750 Seventh Avenue buildings. The Company also owns a 600,000 square foot building in Riverwoods, Illinois that houses Credit Services' executive offices and an adjacent undeveloped 44 acre parcel. - -------- * The indicated total aggregate square footage leased by the Company does not include space occupied by the Company's securities branch offices. 17 In 1999, construction began on a 1,100,000 square foot office tower at 745 Seventh Avenue, New York, New York, which will be owned by the Company. The Company leases the land under the building pursuant to a 99-year ground lease. The Company intends to occupy the building upon project completion, which is anticipated in 2002. The Company leases 864,000 square feet at Two World Trade Center, New York, New York, under a lease expiring on May 31, 2006 and also occupies space aggregating approximately 1,069,000 square feet at various other locations in New York City under leases expiring between 2000 and 2013. In addition, the Company leases space aggregating approximately 417,000 square feet in Brooklyn, New York under a lease expiring in 2013. The Company's London headquarters are located at 25 Cabot Square, Canary Wharf, and occupy approximately 641,000 square feet (inclusive of common areas) of a building constructed by the Company. The Company owns the ground lease obligation and the freehold interest in the land and the building. The Company also leases approximately 350,000 square feet at 20 Cabot Square, Canary Wharf, under a lease arrangement expiring in 2020. The Company's Tokyo headquarters are located in Sapporo's Yebisu Garden Place, Ebisu, Shibuya-ku, where the Company occupies approximately 173,000 square feet of office space under a lease arrangement expiring in 2000, but renewable at the Company's option in two-year increments. The Company's subsidiaries have offices, operations and processing centers and warehouse facilities located throughout the United States and certain subsidiaries maintain offices and other facilities in international locations. The Company's properties that are not owned are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. Facilities owned or occupied by the Company and its subsidiaries are believed to be adequate for the purposes for which they are currently used and are well maintained. Item 3. Legal Proceedings The Company is involved in the following litigation matters: I. Term Trust Class Actions. A putative class action, Thomas D. Keeley, et al. v. Dean Witter Reynolds Inc. et al. (the "Keeley Action") was commenced in the California Superior Court, Orange County, on October 27, 1994 and later consolidated with three similar class actions. Defendants are the Company, DWR, Dean Witter Distributors, Dean Witter InterCapital Inc., Dean Witter Services Company Inc., TCW Management Co., Trust Company of the West, TCW Asset Management Co., Inc., TCW Funds Management, Inc. and eight individuals, including two DWR employees. Plaintiffs allege breach of fiduciary duty, unjust enrichment, fraud, deceit and violation of the California Corporation Code in the marketing and selling of the TCW/DW Term Trusts 2000, 2002 and 2003. Plaintiffs seek unspecified compensatory and punitive damages. Defendants filed an answer to the first amended class complaint denying all wrongdoing on December 6, 1995, and motions for judgment on the pleadings on March 13, 1997. In the Keeley Action, defendants' motions for judgment on the pleadings were denied on June 23, 1997. On June 1, 1998, the plaintiff's motion to certify the class was granted as to a California statewide class and denied as to a nationwide class. On October 13, 1998, three separate state court actions were filed in Florida, New York and New Jersey. The Florida action was removed to the U.S. District Court for the Middle District of Florida on November 10, 1998. Motions to dismiss were filed by the defendants in the Florida action on August 30, 1999, in the New Jersey action on July 26, 1999, and in the New York action on September 10, 1999. Defendants' motion to dismiss the Florida action was denied January 28, 2000 and defendants filed an answer denying all allegations of wrongdoing on February 22, 2000. Defendants' motion to dismiss the New Jersey action was granted on February 2, 2000. II. Morgan Stanley Dean Witter North American Government Income Trust Litigation. Several purported class action lawsuits, which have been consolidated, were instituted on January 11, 1995 in the U.S. District Court for the Southern District of New York against the Morgan Stanley Dean Witter North American 18 Government Income Trust (formerly TCW/DW North American Government Income Trust) (the "Trust"), DWR, some of the Trust's trustees and officers, its underwriter and distributor, the Trust's sub-adviser, the Trust's former manager and other defendants, by certain shareholders of the Trust. The consolidated amended complaint asserts claims under the Securities Act of 1933 (the "Securities Act") and generally alleges that the defendants made inadequate and misleading disclosures in the prospectuses for the Trust, in particular as such disclosures related to the nature and risks of the Trust's investments in mortgage-backed securities and Mexican securities. Plaintiffs also challenge certain fees paid by the Trust as excessive. Damages are sought in an unspecified amount. Defendants moved to dismiss the consolidated amended complaint. Although on May 8, 1996 the motions to dismiss were denied, upon reconsideration on August 28, 1996 the court dismissed several of plaintiffs' claims and clarified its earlier opinion denying defendants' motion to dismiss. In addition, on August 28, 1996, the court granted plaintiffs' motion for class certification. On December 4, 1996, in light of a new decision by the U.S. Court of Appeals for the Second Circuit, defendants filed a new motion for reconsideration of the court's decision denying the motion to dismiss, which was denied on November 20, 1997. On January 19, 2000, the court gave preliminary approval of a stipulation of settlement disposing of the litigation and authorized that notice be sent to class members regarding the fairness hearing scheduled for April 2000. III. In re Merrill Lynch, et al. Securities Litigation. On January 19, 1995, a putative class action was filed in the U.S. District Court for the District of New Jersey on behalf of all persons who placed market orders to purchase or sell securities listed on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") with DWR between November 4, 1992 and November 4, 1994. The complaint, consolidated with another action against other brokerage firms, seeks unspecified damages and alleges that DWR failed to provide best execution of customer market orders for NASDAQ securities. The complaint asserts claims for violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and state law claims for breach of fiduciary duty and unjust enrichment. On December 15, 1995, the district court granted summary judgment in favor of DWR and, on June 19, 1997, a three-judge panel of the U.S. Court of Appeals for the Third Circuit affirmed. On January 30, 1998, the full Court of Appeals, sitting en banc, reversed and remanded the action to the district court for further proceedings. On April 30, 1998, a petition for a writ of certiorari to the U.S. Supreme Court was filed by the defendants. On June 12, 1998, plaintiffs filed a motion for leave to file an amended complaint to extend the end date for the class period from November 4, 1994 to August 28, 1996 and to name new class representatives. On July 21, 1998, the Magistrate granted the plaintiffs' motion to file an amended complaint. Defendants have appealed that ruling to the district court judge. On October 5, 1998, the U.S. Supreme Court denied the petition for certiorari. On November 8, 1999, the district court denied plaintiffs' motion for class certification. IV. Penalty Bid Litigation. On or about August 21, 1998, a purported class action complaint, Friedman, et al. v. Salomon Smith Barney, et al., was filed in the U.S. District Court for the Southern District of New York against the Company and nine other underwriters of securities. An amended complaint dated February 15, 1999, was filed against the Company and sixteen other underwriters of securities. The amended plaintiff class purports to consist of all retail brokerage customers who purchased securities in public offerings from defendants and their alleged co-conspirators at artificially inflated prices. The amended complaint alleges that defendants and their co- conspirators engaged in anti-competitive activity with respect to the distribution of securities in public offerings by agreeing (i) to discourage retail customers from "flipping" or selling shares purchased in public offerings prior to the expiration of a purported "retail restricted period" (a period alleged to have been arbitrarily set by the syndicate manager during which restraints on retail accounts are imposed), and/or (ii) to penalize retail customers who "flipped," and/or (iii) otherwise to prevent retail customers from "flipping." The amended complaint also alleges that similar restraints were not imposed on institutional purchasers of shares in public offerings. The amended complaint alleges violations of Section 1 of the Sherman Act and breach of fiduciary duty, and seeks compensatory, treble and punitive damages in unspecified amounts, injunctive relief, costs and expenses, including attorneys', accountants' and experts' fees. On May 7, 1999, defendants filed a motion to dismiss the amended complaint. Another purported class action, captioned Myers v. Merrill Lynch & Co., Inc. et al., was filed on or about August 17, 1998 in California Superior Court, San Francisco County, against Merrill Lynch & Co., Inc., Paine 19 Webber Group Incorporated, the Company, Travelers Group Inc., Legg Mason Inc., H.J. Meyers & Co., Inc. and The Bear Stearns Companies Inc. The complaint alleges that defendants sold the stock of public companies to investors in public offerings without disclosing the existence of restrictions on "flipping" and serious conflicts of interest with investors resulting from financial and other penalties imposed on brokers and clients for "flipping." The complaint also alleges that similar restrictions were not imposed on larger institutional purchasers of stock in those offerings. The complaint asserts claims for unfair competition and false advertising under various sections of the California Business and Professions Code (the "Business Code"), negligent misrepresentations under the California Civil Code and unfair, fraudulent and unlawful business practices under the Business Code. The complaint seeks injunctive relief and an award of costs and expenses, including attorneys' and experts' fees. On September 15, 1998, the action was removed to the U.S. District Court for the Northern District of California. On October 30, 1998, defendants filed a motion to dismiss the complaint. On March 25, 1999, the court held a hearing on defendants' motion to dismiss the complaint and plaintiffs' motion to remand the action. On August 23, 1999, the court denied plaintiffs' motion to remand the action and granted a motion filed by certain defendants to dismiss the complaint on the grounds of preemption. On September 23, 1999, plaintiffs appealed the decision to the U.S. Court of Appeals for the Ninth Circuit. V. IPO Fee Litigation. On or about November 3, 1998, a purported class action complaint, Gillet v. Goldman, Sachs & Co., et al., was filed in the U.S. District Court for the Southern District of New York against the Company and 26 other underwriters of initial public offering ("IPO") securities. On November 23, 1998 and December 2, 1998, two other substantially similar class action complaints, captioned Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman, Sachs & Co. et al. were filed in the U.S. District Court for the Southern District of New York against the same underwriter defendants. On February 11, 1999, Gillet v. Goldman, Sachs & Co., et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman, Sachs & Co. et al. were consolidated and, on March 15, 1999, a consolidated amended complaint, captioned In re Public Offering Fee Antitrust Litigation, was filed against the Company and 24 other underwriters. The consolidated amended complaint alleges that defendants conspired to fix the "fee" paid by purported class members to buy and sell IPO securities of U.S. companies by invariably setting the underwriters' spread at 7%, particularly in issuances of $20 to $80 million, in violation of Section 1 of the Sherman Act. The consolidated amended complaint seeks treble damages and injunctive relief, as well as costs, including reasonable attorneys' fees. On April 29, 1999, defendants filed a motion to dismiss the amended complaint. VI. Nenni, et al. v. Dean Witter Reynolds Inc. In December 1998, a putative class action complaint was filed in the U.S. District Court for the District of Massachusetts against DWR, Morgan Stanley Dean Witter Distributors Inc. and the Company. The complaint, filed on behalf of all purchasers of certain of the Company's mutual funds subject to a contingent deferred sales charge (the "Mutual Funds"), alleges violations of Sections 11, 12 and 15 of the Securities Act, Sections 10(b) and 20 of the Exchange Act and Rule 10b-5 promulgated thereunder, in that the Mutual Funds' prospectuses and registration statements allegedly omitted certain disclosures concerning the transferability of the Mutual Funds to brokerage accounts outside of DWR. The complaint seeks unspecified compensatory and punitive damages, declaratory and injunctive relief, interest and costs, including reasonable attorneys' fees. On February 24, 1999, defendants filed a motion to dismiss the action. On April 30, 1999, plaintiffs filed an amended complaint. On July 9, 1999, defendants filed a motion to dismiss the amended complaint, and on September 29, 1999, the court granted defendants' motion to dismiss the amended complaint. On October 28, 1999, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the First Circuit. VII. Other. In addition to the matters described above, the Company, including MS&Co. and DWR, has been named from time to time as a defendant in various legal actions, including arbitrations, arising in connection with its activities as a global diversified financial services institution, certain of which include large claims for punitive damages. The Company, including MS&Co. and DWR, is also involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies. Some of these legal actions, investigations and proceedings may result in adverse judgments, penalties or fines. 20 In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases such as some of those described above in which substantial damages are sought, the Company cannot state what the eventual outcome of pending matters will be. The Company is contesting the allegations made in each pending matter and believes, based on current knowledge and after consultation with counsel, that the outcome of such matters will not have a material adverse effect on the consolidated financial condition of the Company, but may be material to the Company's operating results for any particular period, depending on the level of the Company's income for such period. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning executive officers of the Company as of February 25, 2000. All of the executive officers are members of the Company's Management Committee.
Name and Age Present Title and Principal Occupation ------------ -------------------------------------- Philip J. Purcell, 56..... Chairman of the Board of Directors and Chief Executive Officer of the Company since the Merger. Mr. Purcell was the Chairman of the Board of Directors and Chief Executive Officer of Dean Witter Discover from 1986 until the Merger. He is a trustee or director of approximately 95 registered investment companies for which MSDW Advisors serves as investment manager or investment adviser. Mr. Purcell is also a director of AMR Corporation. John J. Mack, 55.......... President, Chief Operating Officer and Director of the Company since the Merger. Mr. Mack was the President of Morgan Stanley from June 1993 until the Merger. He was a Director and a Managing Director of Morgan Stanley from December 1987 until the Merger. Richard M. DeMartini, 47.. Head of the Company's International Private Client Group since December 1998. Mr. DeMartini was head of the Company's Individual Asset Management Division from May 1997 until December 1998 and President and Chief Operating Officer of Dean Witter Capital from January 1989 until the Merger. Kenneth M. deRegt, 44..... Head of the Company's Worldwide Fixed Income Group since the Merger. Mr. deRegt was head of Morgan Stanley's Fixed Income Division from January 1997 until the Merger and directed Morgan Stanley's Global Fixed Income Trading and Risk Management from July 1993 until the Merger. James F. Higgins, 52...... Head of the Company's Private Client Group since the Merger. Mr. Higgins was President and Chief Operating Officer of Dean Witter Financial from January 1989 until the Merger. Peter F. Karches, 48...... Head of the Company's Institutional Securities Group since the Merger. Mr. Karches was a Director and Managing Director of Morgan Stanley from 1994 until the Merger. He was head of Morgan Stanley's Securities Division from January 1997 until the Merger and head of Morgan Stanley's Fixed Income Division from 1992 until December 1996. Donald G. Kempf, Jr., 62.. Executive Vice President, Chief Legal Officer and Secretary of the Company since December 1999. Prior to joining the Company, Mr. Kempf had been a partner at the law firm of Kirkland & Ellis from 1971 and a member of its management committee from 1981 until 1998.*
- -------- * Mr. Kempf became the Company's Chief Legal Officer at the beginning of fiscal year 2000. Christine A. Edwards, the Company's former Chief Legal Officer, stepped down effective June 10, 1999. Pursuant to a September 1, 1999 agreement, the Company paid Mrs. Edwards an amount equal to the sum of her base salary through January 31, 2000, her above-base compensation for fiscal 1998 and the amount she would have been entitled to under the Company's Key Executive Employment Plan. Mrs. Edwards was a "full career" employee, her equity compensation awards were vested, and the forfeiture and transfer restrictions on her equity awards were removed. In addition, she received certain fringe benefits (including health care coverage and reimbursement of certain expenses). 21
Name and Age Present Title and Principal Occupation ------------ -------------------------------------- Mitchell M. Merin, 46.... President and Chief Operating Officer of the Asset Management Group since December 1998. Mr. Merin has been President of MSDW Advisors since April 1997 and its Chief Executive Officer since June 1998. He was Executive Vice President and Chief Administrative Officer of Dean Witter Discover from 1994 until the Merger. He is a trustee or director of approximately 65 registered investment companies for which Van Kampen (or a subsidiary thereof) serves as investment manager or investment adviser. David W. Nelms, 39....... President and Chief Operating Officer of Discover Financial Services since September 1998. Mr. Nelms was a senior executive from 1992 until 1998 at MBNA America Bank where his last position was Vice Chairman. Stephan F. Newhouse, 52.. Deputy Head of the Company's Institutional Securities Group since December 1997. Mr. Newhouse has been a Director and Vice Chairman of MS&Co. since December 1997 and a Managing Director of MS&Co. since 1988. Vikram S. Pandit, 43..... Head of the Company's Worldwide Institutional Equities Group since the Merger. Mr. Pandit was head of Morgan Stanley's Equity Division from January 1997 until the Merger and was head of Morgan Stanley's Equity Derivatives business from May 1994 until December 1996. Joseph R. Perella, 58.... Head of the Company's Worldwide Investment Banking Group since the Merger. Mr. Perella was head of Morgan Stanley's Investment Banking Division from January 1997 until the Merger and was head of Morgan Stanley's Corporate Finance Department from May 1995 until December 1996. He has been a Director of MS&Co. since March 1994 and a Managing Director of MS&Co. since November 1993. John H. Schaefer, 48..... Executive Vice President and Chief Strategic and Administrative Officer of the Company since June 1998. Mr. Schaefer was head of Corporate and Strategic Planning for the Company from the Merger until June 1998. Mr. Schaefer was Executive Vice President and Director of Corporate Finance for Dean Witter Discover from 1991 until the Merger. Robert G. Scott, 54...... Executive Vice President and Chief Financial Officer of the Company since the Merger. Mr. Scott was the head of Morgan Stanley's Investment Banking Division from 1994 to 1996 and has been a Director and a Managing Director of MS&Co. since 1979. Sir David A. Walker, 60.. Head of the Company's European business since November 1994 and Chairman of Morgan Stanley International Incorporated since December 1995. Sir David was a Director of Morgan Stanley from November 1994 until the Merger and a Managing Director of Morgan Stanley from May 1995 until the Merger. He is also a non-executive director of Reuters Group PLC.
Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fiscal quarter ended November 30, 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information relating to the principal market in which the Registrant's Common Stock is traded, the high and low sales prices per share for each full quarterly period within the two most recent fiscal periods, the approximate number of holders of record of Common Stock and the frequency and amount of any cash dividends declared for the two most recent fiscal periods is set forth under the caption "Quarterly Results" on page 90 of the Registrant's 1999 Annual Report to Shareholders and such information is incorporated by reference herein. 22 To enhance its ongoing stock repurchase program, during the quarter ended November 30, 1999, the Company sold European-style put options on an aggregate of 1,000,000 shares of its Common Stock. These put options expired in February 2000. They entitled the holder to sell Common Stock to the Company at prices ranging from $48.51 to $50.29 per share. The sale of these put options, which was made as private placement to a third party, generated proceeds to the Company of approximately $2.5 million. Item 6. Selected Financial Data Selected Financial Data for the Registrant and its subsidiaries for each of the last five fiscal years is set forth under the same caption on page 4 of the 1999 Annual Report to Shareholders. Such information is incorporated by reference herein and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained on pages 55 to 90 of such Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth under the same caption on pages 22 to 47 of the 1999 Annual Report to Shareholders. Such information is incorporated by reference herein and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained on pages 55 to 90 of such Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is contained on pages 47 through 53 of the 1999 Annual Report to Shareholders under the caption "Risk Management" and is incorporated by reference herein. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements of the Registrant and its subsidiaries, together with the Notes thereto and Independent Auditors' Report thereon, are contained in the 1999 Annual Report to Shareholders on pages 54 to 90, and such information is incorporated by reference herein, including the information appearing under the caption "Quarterly Results" on page 90 of such Annual Report. The Combined Financial Statements for the years ended December 31, 1999 and 1998 of the Morgan Stanley U.K. Group Profit Sharing Scheme and Plan, together with the Notes thereon and the Report of Independent Chartered Accountants, appear as Exhibit 99.2. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information relating to Directors and Nominees of the Registrant is set forth under the caption "Election of Directors" on pages 4 to 6 of the Proxy Statement of the Registrant for its 2000 Annual Meeting of Stockholders and is incorporated by reference herein. Also incorporated by reference herein is the information under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" that appears on page 19 of the Proxy Statement. Item 11. Executive Compensation Information relating to executive compensation is set forth under the captions "Director Compensation" on page 7 and "Compensation of Executive Officers" (excluding the information under the subheadings "Report of the Compensation Committees on Executive Compensation" and "Stock Performance Graph") on pages 10 to 20 of the Proxy Statement of the Registrant for its 2000 Annual Meeting of Stockholders and such information is incorporated by reference herein. 23 Item 12. Security Ownership of Certain Beneficial Owners and Management Information relating to security ownership of management and certain beneficial owners is set forth under the captions "Stock Ownership of Management" and "Principal Stockholders" on pages 8 and 9, respectively, of the Proxy Statement of the Registrant for its 2000 Annual Meeting of Stockholders and such information is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions Information regarding certain relationships and related transactions is set forth under the caption "Certain Transactions" on pages 19 and 20 of the Proxy Statement of the Registrant for its 2000 Annual Meeting of Stockholders and such information is incorporated by reference herein. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)Documents filed as part of this Report: 1. Financial Statements The financial statements required to be filed hereunder are listed on page S-1 hereof. 2. Financial Statement Schedules The financial statement schedules required to be filed hereunder are listed on page S-1 hereof. 3. Exhibits An exhibit index has been filed as part of this report beginning on page E-1 hereto and is incorporated herein by reference. (b) A Current Report on Form 8-K, dated September 22, 1999, was filed with the Securities and Exchange Commission in connection with the announcement of the Company's third fiscal quarter financial results. A Current Report on Form 8-K, dated October 20, 1999, was filed with the Securities and Exchange Commission in connection with the Company's launch of ichoice. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 25, 2000. Morgan Stanley Dean Witter & Co. (Registrant) By /s/ Philip J. Purcell _____________________________________ Philip J. Purcell Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY We, the undersigned directors and executive officers of Morgan Stanley Dean Witter & Co., hereby severally constitute Donald G. Kempf, Jr., Robert G. Scott and Ronald T. Carman, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 25th day of February, 2000.
Signature Title --------- ----- /s/ Philip J. Purcell Chairman of the Board and Chief Executive ___________________________________________ Officer (Philip J. Purcell) /s/ John J. Mack President, Chief Operating Officer and ___________________________________________ Director (John J. Mack) /s/ Robert G. Scott Executive Vice President and Chief ___________________________________________ Financial Officer (Principal Financial (Robert G. Scott) Officer) /s/ Joanne Pace Controller (Principal Accounting Officer) ___________________________________________ (Joanne Pace) /s/ Robert P. Bauman Director ___________________________________________ (Robert P. Bauman) /s/ Edward A. Brennan Director ___________________________________________ (Edward A. Brennan)
25
Signature Title --------- ----- /s/ Daniel B. Burke Director ___________________________________________ (Daniel B. Burke) /s/ C. Robert Kidder Director ___________________________________________ (C. Robert Kidder) /s/ Charles F. Knight Director ___________________________________________ (Charles F. Knight) /s/ Miles L. Marsh Director ___________________________________________ (Miles L. Marsh) /s/ Michael A. Miles Director ___________________________________________ (Michael A. Miles) /s/ Allen E. Murray Director ___________________________________________ (Allen E. Murray) /s/ Clarence B. Rogers, Jr. Director ___________________________________________ (Clarence B. Rogers, Jr.) /s/ Laura D'Andrea Tyson Director ___________________________________________ (Laura D'Andrea Tyson)
26 Morgan Stanley Dean Witter & Co. Index to Financial Statements and Financial Statement Schedules Items (14)(a)(1) and (14)(a)(2)
Page ----------------------- Form 10-K Annual Report --------- ------------- Financial Statements - -------------------- Independent Auditors' Report.......................... 54 Consolidated Statements of Financial Condition at November 30, 1999 and November 30, 1998.............. 55 Consolidated Statements of Income for Fiscal 1999, 1998, and 1997....................................... 57 Consolidated Statements of Comprehensive Income for Fiscal 1999, 1998 and 1997........................... 58 Consolidated Statements of Cash Flows for Fiscal 1999, 1998 and 1997........................................ 59 Consolidated Statements of Changes in Shareholders' Equity for Fiscal 1999, 1998 and 1997................ 60 Notes to Consolidated Financial Statements............ 62 Financial Statement Schedules - ----------------------------- Schedule I--Condensed Financial Information of Morgan Stanley Dean Witter & Co. (Parent Company Only)--at November 30, 1999 and November 30, 1998 and for each of the Three Fiscal Years in the Period Ended November 30, 1999.............................. S-2--S-5
S-1 SCHEDULE I MORGAN STANLEY DEAN WITTER & CO. (Parent Company Only) Condensed Statements of Financial Condition (dollars in millions, except share data)
November 30, November 30, 1999 1998 ------------ ------------ Assets: Cash and cash equivalents............................................. $ 1,914 $ 5,652 Financial instruments owned........................................... 2,446 451 Advances to subsidiaries.............................................. 50,121 43,686 Investment in subsidiaries, at equity................................. 17,129 14,484 Other assets.......................................................... 2,139 2,202 ------- ------- Total assets........................................................ $73,749 $66,475 ======= ======= Liabilities and Shareholders' Equity: Short-term borrowings................................................. $25,360 $21,359 Payables to subsidiaries.............................................. 6,044 6,341 Other liabilities and accrued expenses................................ 730 579 Long-term borrowings.................................................. 24,601 24,077 ------- ------- 56,735 52,356 ------- ------- Commitments and contingencies Shareholders' equity: Preferred stock....................................................... 670 674 Common stock (1) ($0.01 par value; 1,750,000,000 shares authorized, 1,211,685,904 and 1,211,685,904 shares issued, 1,104,630,098 and 1,131,341,616 shares outstanding at November 30, 1999 and November 30, 1998)................................................................ 12 12 Paid-in capital (1)................................................... 3,836 3,740 Retained earnings..................................................... 16,285 12,080 Employee stock trust.................................................. 2,426 1,913 Cumulative translation adjustments.................................... (27) (12) ------- ------- Subtotal............................................................ 23,202 18,407 Note receivable related to sale of preferred stock to ESOP............ (55) (60) Common stock held in treasury, at cost (1) ($0.01 par value, 107,055,806 and 80,344,288 shares at November 30, 1999 and November 30, 1998)............................................................ (4,355) (2,702) Common stock issued to employee trust................................. (1,778) (1,526) ------- ------- Total shareholders' equity.......................................... 17,014 14,119 ------- ------- Total liabilities and shareholders' equity............................ $73,749 $66,475 ======= =======
- -------- (1) Amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 2000. See Notes to Condensed Financial Statements. S-2 SCHEDULE I MORGAN STANLEY DEAN WITTER & CO. (Parent Company Only) Condensed Statements of Income and Comprehensive Income (dollars in millions)
Fiscal 1999 Fiscal 1998 Fiscal 1997 ----------- ----------- ----------- Revenues: Interest and dividends................... $2,585 $3,098 $4,531 Principal transactions................... 55 60 6 Fiduciary fees........................... 16 16 23 Other.................................... 2 (1) 1 ------ ------ ------ Total revenues......................... 2,658 3,173 4,561 ------ ------ ------ Expenses: Interest expense......................... 2,460 2,976 4,403 Non-interest expenses.................... 29 9 70 ------ ------ ------ Total expenses......................... 2,489 2,985 4,473 ------ ------ ------ Income before provision for income taxes and equity in earnings of subsidiaries.. 169 188 88 Provision for income taxes............... 63 70 44 ------ ------ ------ Income before equity in earnings of subsidiaries............................ 106 118 44 Equity in earnings of subsidiaries, net of tax.................................. 4,685 3,158 2,542 ------ ------ ------ Net income............................... $4,791 $3,276 $2,586 ====== ====== ====== Other comprehensive income, net of tax: Foreign currency translation adjustment............................ (15) (3) 2 ------ ------ ------ Comprehensive income..................... $4,776 $3,273 $2,588 ====== ====== ====== Net income............................... $4,791 $3,276 $2,586 ====== ====== ====== Preferred stock dividend requirements.... $ 44 $ 55 $ 66 ====== ====== ====== Earnings applicable to common shares..... $4,747 $3,221 $2,520 ====== ====== ======
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)
Fiscal 1999 Fiscal 1998 Fiscal 1997 ----------- ----------- ----------- Cash flows from operating activities: Net income............................... $ 4,791 $ 3,276 $ 2,586 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash charges (credits) included in net income: Compensation payable in common or preferred stock..................... 675 334 374 Equity in subsidiaries' earnings, net of dividends........................ (1,119) (1,300) (1,504) Change in assets and liabilities: Financial instruments owned.......... (2,126) (37) 69 Other assets......................... 242 (589) (724) Other liabilities and accrued expenses............................ 301 (161) 336 ------- ------- ------- Net cash provided by operating activities.............................. 2,764 1,523 1,137 ------- ------- ------- Cash flows from investing activities: Investments in and advances to subsidiaries, at equity................. (8,193) 1,605 1,402 ------- ------- ------- Net cash (used for) provided by investing activities................................ (8,193) 1,605 1,402 ------- ------- ------- Cash flows from financing activities: Net proceeds from (payments for) short- term borrowings......................... 4,001 4,614 (3,779) Net proceeds from: Issuance of common stock............... 270 186 194 Issuance of put options................ 9 -- -- Issuance of long-term borrowings....... 6,519 8,167 6,115 Payments for: Repurchases of common stock............ (2,374) (2,925) (124) Repayments of long-term borrowings..... (6,159) (6,944) (3,912) Redemption of cumulative preferred stock................................. -- (200) (345) Cash dividends......................... (575) (519) (416) ------- ------- ------- Net cash provided by (used for) financing activities................................ 1,691 2,379 (2,267) ------- ------- ------- Dean Witter, Discover & Co.'s (Parent Company Only) net cash activity for the month of December 1996............ -- -- (139) ------- ------- ------- Net (decrease) increase in cash and cash equivalents............................... (3,738) 5,507 133 Cash and cash equivalents, at beginning of period.................................... 5,652 145 12 ------- ------- ------- Cash and cash equivalents, at end of period.................................... $ 1,914 $ 5,652 $ 145 ======= ======= =======
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 Basis of Financial Information The accompanying condensed financial statements (the "Parent Company Financial Statements") give retroactive effect to the May 1997 merger of Morgan Stanley Group Inc. ("Morgan Stanley") with and into Dean Witter, Discover & Co. ("Dean Witter Discover"), which was accounted for as a pooling of interests. The pooling of interests method of accounting requires the restatement of all periods presented as if Dean Witter Discover and Morgan Stanley had always been combined. The Parent Company Financial Statements, including the notes thereto, should be read in conjunction with the consolidated financial statements of Morgan Stanley Dean Witter & Co. (the "Company") and the notes thereto found on pages 55 to 90 of the Company's Annual Report to Shareholders which is incorporated by reference in this Form 10-K. Prior to the consummation of the merger, Dean Witter Discover's year ended on December 31 and Morgan Stanley's fiscal year ended on November 30. Subsequent to the merger, the Company adopted a fiscal year-end of November 30. The Company's results for the 12 months ended November 30, 1999 ("fiscal 1999"), November 30, 1998 ("fiscal 1998") and November 30, 1997 ("fiscal 1997") reflect the change in fiscal year-end. Fiscal 1997 includes the results of Dean Witter Discover that were restated to conform with the new fiscal year-end date. Employee Stock Ownership Plan The Company has a $140 million leveraged employee stock ownership plan, funded through an independently managed trust. The Employee Stock Ownership Plan ("ESOP") was established to broaden internal ownership of the Company and to provide benefits to its employees in a cost-effective manner. Each of the 3,493,477 ESOP preferred shares outstanding at November 30, 1999 is held by the ESOP trust, is convertible into 6.6 shares of the Company's common stock and is entitled to annual dividends of $2.78 per preferred share. In January 2000, all shares of the ESOP Convertible Preferred Stock were converted into common shares of the Company. Stock Split On December 20, 1999, the Company declared a two-for-one common stock split, effected in the form of a 100% stock dividend, payable to shareholders of record on January 12, 2000 and distributable on January 26, 2000. All share and shareholders' equity data have been retroactively restated to reflect this split. 2. Transactions with Subsidiaries The Company has transactions with its subsidiaries determined on an agreed- upon basis and has guaranteed certain unsecured lines of credit and contractual obligations of certain of its subsidiaries. The Company received cash dividends from its consolidated subsidiaries totaling $3,566 million, $1,858 million and $1,088 million in fiscal 1999, 1998 and 1997, respectively. S-5 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Morgan Stanley Dean Witter & Co.: We have audited the consolidated financial statements of Morgan Stanley Dean Witter & Co. and subsidiaries as of fiscal years ended November 30, 1999 and 1998, and for each of the three fiscal years in the period ended November 30, 1999, and have issued our report thereon dated January 21, 2000; such consolidated financial statements and report are included in your 1999 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included Schedule I listed in the Index to Financial Statements and Financial Statement Schedules. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, based on our audits, the condensed financial statement schedules for Morgan Stanley Dean Witter & Co. (Parent Company Only), when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth herein. /s/ DELOITTE & TOUCHE LLP New York, New York January 21, 2000 S-6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM 10-K For the fiscal year ended November 30, 1999 Commission File No. 1-11758 Morgan Stanley Dean Witter & Co. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT INDEX Certain of the following exhibits, as indicated parenthetically, were previously filed as exhibits to registration statements filed by the Registrant or its predecessor companies under the Securities Act of 1933, as amended, or to reports or registration statements filed by the Registrant or its predecessor companies under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), respectively, and are hereby incorporated by reference to such statements or reports. The Exchange Act file number of the Company is 1-11758. Prior to the Merger, the Exchange Act file number of Morgan Stanley Group Inc. ("Morgan Stanley") was 1-9085. In addition, certain of the following exhibits, as indicated parenthetically, were previously filed as exhibits to a Schedule 13D, as amended (the "Schedule 13D"), filed by certain senior officers of the Company under the Exchange Act and are hereby incorporated by reference.
Sequentially Exhibit Number No. Description Pages ------- ----------- ------------ 3.1* Amended and Restated Certificate of Incorporation of the Company, as amended to date. 3.2 By-Laws of the Company, as amended to date (Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1999). 4.1 Rights Agreement dated as of April 25, 1995 between the Company and Chemical Bank, as rights agent, which includes as Exhibit B thereto the Form of Rights Certificate (Exhibit 1 to the Company's Registration Statement on Form 8-A dated April 25, 1995). 4.2 Amendment dated as of February 4, 1997 to the Rights Agreement between the Company and The Chase Manhattan Bank, as rights agent (Exhibit 4.1 to the Company's Current Report on Form 8-K dated February 4, 1997). 4.3 Second Amendment dated as of June 15, 1999 to the Rights Agreement between the Company and The Chase Manhattan Bank (as successor to Chemical Bank), as rights agent (Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 15, 1999). 4.4 Stockholders' Agreement dated February 14, 1986, as amended (Exhibit 4.2 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.5 Form of Consent and Amendment dated as of January 31, 1996 among the Company and certain signatories to the Stockholders' Agreement referred to in Exhibit 4.4 (Exhibit 4.3 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended November 30, 1995). 4.6 Form of Consent and Amendment dated as of December 14, 1999 among the Company and certain signatories to the Stockholders' Agreement referred to in Exhibit 4.4 (Exhibit O to Amendment No. 3 to the Schedule 13D dated January 2, 2000). 4.7 Indenture dated as of February 24, 1993 between the Company and The First National Bank of Chicago, as trustee (Exhibit 4 to the Company's Registration Statement on Form S-3 (No. 33-57202)). 4.8 Amended and Restated Senior Indenture dated as of May 1, 1999 between the Company and The Chase Manhattan Bank, as trustee (Exhibit 4-e to the Company's Registration Statement on Form S-3/A (No. 333-75289)). 4.9 Amended and Restated Subordinated Indenture dated as of May 1, 1999 between the Company and The First National Bank of Chicago, as trustee (Exhibit 4-f to the Company's Registration Statement on Form S-3/A (No. 333-75289)). 4.10 Subordinated Indenture dated as of November 15, 1993 among Morgan Stanley Finance plc, The Company, as guarantor, and The Chase Manhattan Bank (as successor to Chemical Bank), as trustee (Exhibit 4.1 to Morgan Stanley's Current Report on Form 8-K dated November 19, 1993).
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Sequentially Exhibit Number No. Description Pages ------- ----------- ------------ 4.11 First Supplemental Subordinated Indenture dated as of June 1, 1997 among Morgan Stanley Finance plc, the Company, as guarantor, and The Chase Manhattan Bank, as trustee (Exhibit 4-f to the Company's Registration Statement on Form S-3 (No. 333-27881)). 4.12 Amended and Restated Voting Agreement dated December 14, 1999 among the Company, State Street Bank and Trust Company and Other Persons Signing Similar Voting Agreements (Exhibit P to Amendment No. 3 to the Schedule 13D dated January 2, 2000). 4.13 Instruments defining the Rights of Security Holders, Including Indentures--Except as set Forth in Exhibits 4.1 through 4.12 above, the instruments defining the rights of holders of Long-term debt securities of the Company and its subsidiaries are omitted pursuant to Section (b)(4)(iii) of Item 601 of regulation S-K. The Company hereby agrees to furnish Copies of these instruments to the Securities and Exchange Commission upon request. 10.1 Services Agreement by and between the Company and International Business Machines Corporation, Effective as of July 1, 1999 (Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1999; confidential treatment has been requested for portions of this exhibit). 10.2 Form of Pooling and Servicing Agreement used in connection with the Discover Card Trust 1993B (Exhibit 4.2 to the Company's Registration Statement on Form S-1 (No. 33-57302)). 10.3 Pooling and Servicing Agreement dated as of October 1, 1993 between Greenwood Trust Company as master servicer, servicer and seller and U.S. Bank National Association, as trustee (Exhibit 4.1 to the Discover Card Master Trust I Registration Statement on Form S-1 (No. 33-71502)). 10.4 First Amendment to Pooling and Servicing Agreement dated as of August 15, 1994 between Greenwood Trust Company, as master servicer, servicer and seller and U.S. Bank National Association, as trustee (Exhibit 4.4 to the Discover Card Master Trust I Current Report on Form 8-K dated August 1, 1995). 10.5 Second Amendment to Pooling and Servicing Agreement dated as of February 29, 1996 between Greenwood Trust Company, as master servicer, servicer and seller and U.S. Bank National Association, as trustee (Exhibit 4.4 to the Discover Card Master Trust I Current Report on Form 8-K dated April 30, 1996). 10.6 Third Amendment to Pooling and Servicing Agreement dated as of March 30, 1998 between Greenwood Trust Company, as master servicer, servicer and seller and U.S. Bank National Association, as trustee (Exhibit 4.1(d) to the Discover Card Master Trust I Registration Statement on Form 8-A dated April 9, 1998). 10.7 Fourth Amendment to Pooling and Servicing Agreement dated as of November 30, 1998 between Greenwood Trust Company, as master servicer, servicer and seller and U.S. Bank National Association, as trustee (Exhibit 4.1 to the Discover Card Master Trust I Current Report on Form 8-K dated November 30,1998). 10.8 Trust Agreement dated March 5, 1991 between the Company and State Street Bank and Trust Company (Exhibit 10.15 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.9 First Amendment to Trust Agreement dated April 3, 1996 between the Company and State Street Bank and Trust Company (Exhibit 10.14 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended November 30, 1996).
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Sequentially Exhibit Number No. Description Pages ------- ----------- ------------ 10.10 Second Amendment to Trust Agreement dated May 31, 1997 between the Company and State Street Bank and Trust Company (Exhibit O to Amendment No. 1 to the Schedule 13D dated May 31, 1997). 10.11 Third Amendment to Trust Agreement dated November 30, 1999 between the Company and State Street Bank and Trust Company (Exhibit R to Amendment No. 3 to the Schedule 13D dated January 2, 2000). 10.12 Amended and Restated Trust Agreement of MSDWD Capital Trust I dated as of March 12, 1998 among the Company, as depositor, The Bank of New York, as property trustee, The Bank of New York (Delaware) as Delaware trustee, and the administrators named thereon (Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998). 10.13+ Dean Witter Reynolds Inc. Supplemental Pension Plan (formerly known as the Dean Witter Reynolds Financial Services Inc. Supplemental Pension Plan for Executives) (amended and restated as of December 14, 1993) (Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.14+ Omnibus Equity Incentive Plan (Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No. 33- 63024)). 10.15+ Employees Replacement Stock Plan (Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No. 33- 63024)). 10.16+ Amendment to the Employees Replacement Stock Plan (adopted June 18, 1993) (Exhibit 10.1 to the Company's Current Report on Form 8-k dated November 18, 1993). 10.17+ Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (amended and restated) (Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.18+ Amendment to Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1997). 10.19+ Amendment to Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998). 10.20+ Amendment to Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1998). 10.21+ Amendment to Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998). 10.22*+ Amendments to Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (adopted December 22, 1999). 10.23+ 1993 Stock Plan for Non-Employee Directors (Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 33-63024)). 10.24+ Amendment to the 1993 Stock Plan for Non-Employee Directors (Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.25+ Transferred Executives Pension Supplement (amended and restated) (Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.26+ 1994 Omnibus Equity Plan (Exhibit 10.52 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993).
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Sequentially Exhibit Number No. Description Pages ------- ----------- ------------ 10.27+ Tax Deferred Equity Participation Plan (amended and restated as of September 21, 1999) (Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1999). 10.28+ Key Executive Employment Plan, as amended April 19, 1996 (Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 10.29+ Directors' Equity Capital Accumulation Plan (Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended November 30, 1997). 10.30+ Employees Equity Accumulation Plan (Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.31+ Employee Stock Purchase Plan (Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998). 10.32+* Amendment to Employee Stock Purchase Plan (adopted December 14, 1999). 10.33+ Form of Agreement under the Morgan Stanley & Co. Incorporated Owners' and Select Earners' Plan (Exhibit 10.1 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.34+ Form of Agreement under the Officers' and Select Earners' Plan (Exhibit 10.2 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.35+ Morgan Stanley & Co. Incorporated Excess Benefit Plan (Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998). 10.36+ Supplemental Executive Retirement Plan (Exhibit 10.32 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998). 10.37+* Amendment to Supplemental Executive Retirement Plan (adopted December 22, 1999). 10.38+ Performance Unit Plan (amended and restated) (Exhibit 10.8 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.39+ 1988 Equity Incentive Compensation Plan, as amended (Exhibit 10.12 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.40+ 1995 Equity Incentive Compensation Plan (Annex A to Morgan Stanley's Proxy Statement for its 1996 Annual Meeting of Stockholders). 10.41+ 1988 Capital Accumulation Plan, as amended (Exhibit 10.13 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.42+ Form of Deferred Compensation Agreement under the Pre- Tax Incentive Program (Exhibit 10.12 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). 10.43+ Form of Deferred Compensation Agreement under the Pre- Tax Incentive Program 2 (Exhibit 10.12 to Morgan Stanley's Annual Report for the fiscal year ended November 30, 1996). 10.44+ Trust Deed and Rules of the Morgan Stanley International Profit Sharing Scheme dated November 12, 1987 of the Company, Morgan Stanley International and Noble Lowndes Settlement Trustees Limited (Exhibit 10.11 to Morgan Stanley's Annual Report on Form 10-K for the fiscal year ended January 31, 1993).
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Sequentially Exhibit Number No. Description Pages ------- ----------- ------------ 10.45+ Trust Deed and Rules of the Morgan Stanley UK Group Profit Sharing Plan dated November 3, 1997 of the Company, Morgan Stanley UK Group, Morgan Stanley International Incorporated and Noble Lowndes Settlement Trustees Limited (Exhibit 10.40 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998). 10.46+ Amendment to Trust Deed and Rules of Morgan Stanley UK Group Profit Sharing Plan (Exhibit 10.41 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998 ). 10.47+ Amendments to the Rules of the Morgan Stanley UK Group Profit Sharing Plan (Exhibit 10.42 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998). 11* Statement Re: Computation of Earnings Per Common Share. 12* Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends. 13* The following portions of the Company's 1999 Annual Report to Shareholders, which are incorporated by reference in this Annual Report on Form 10-K, are filed as an Exhibit: 13.1 "Quarterly Results" (page 90). 13.2 "Selected Financial Data" (page 4). 13.3 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 22 to 47). 13.4 "Risk Management" (pages 47 to 53). 13.5 Consolidated Financial Statements of the Company and its subsidiaries, together with the Notes thereto and the Independent Auditors' Report thereon (pages 54 to 90). 21* Subsidiaries of the Company. 23.1* Consent of Deloitte & Touche LLP. 23.2* Consent of Deloitte & Touche LLP with respect to the Combined Financial Statements for the fiscal year ended December 31, 1999 for the Morgan Stanley U.K. Group Profit Sharing Scheme and Plan. 24 Powers of Attorney (included on signature page). 27* Financial Data Schedule. 99.1* Change in Employment Status Agreement by and between the Company and Christine A. Edwards dated September 1, 1999. 99.2* Combined Financial Statements for the years ended December 31, 1999 and 1998 for the Morgan Stanley U.K. Group Profit Sharing Scheme and Plan.
- -------- * Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). E-5 [LOGO] Printed on Recycled Paper EX-3.1 2 AMENDED & RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO. MAY 31, 1997 ARTICLE I NAME ---- The name of the corporation (which is hereinafter referred to as the "Corporation") is: Morgan Stanley, Dean Witter, Discover & Co. ARTICLE II ADDRESS ------- The address of the Corporation's registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III PURPOSE ------- The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized and incorporated under the General Corporation Law of the State of Delaware. ARTICLE IV CAPITALIZATION -------------- The total number of shares of stock which the Corporation shall have authority to issue is one billion seven hundred eighty million (1,780,000,000), consisting of thirty million (30,000,000) shares of Preferred Stock, par value $0.01 per share (hereinafter referred to as "Preferred Stock"), and one billion seven hundred fifty million (1,750,000,000) shares of Common Stock, par value $0.01 per share (hereinafter referred to as "Common Stock"). The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware (hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (1) The designation of the series, which may be by distinguishing number, letter or title. (2) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding). (3) The amounts payable on, and the preferences, if any, of shares of the series in respect of dividends, and whether such dividends, if any, shall be cumulative or noncumulative. (4) Dates at which dividends, if any, shall be payable. (5) The redemption rights and price or prices, if any, for shares of the series. (6) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. (7) The amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation. (8) Whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series of such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made. (9) Restrictions on the issuance of shares of the same series or of any other class or series. (10) The voting rights, if any, of the holders of shares of the series. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Except as may be provided in this Certificate of Incorporation or in a Preferred Stock Designation or by applicable law, the holders of shares of Common Stock shall be entitled to one vote for each such share upon all questions presented to the stockholders, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. The holders of the shares of Common Stock shall at all times, except as otherwise provided in this Certificate of Incorporation or as required by law, vote as one class, together with the holders of any other class or series of stock of the Corporation accorded such general voting rights. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any 2 equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. ARTICLE V BY-LAWS ------- In furtherance of, and not in limitation of, the powers conferred by law, the Board of Directors is expressly authorized and empowered: (1) to adopt, amend or repeal the Bylaws of the Corporation; provided, however, that the Bylaws adopted by the Board of Directors under the powers hereby conferred may be amended or repealed by the Board of Directors or by the stockholders having voting power with respect thereto, provided further that, in the case of amendments by stockholders, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required in order for the stockholders to alter, amend or repeal any provision of the Bylaws or to adopt any additional Bylaw; and (2) from time to time to determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of stockholders; and, except as so determined or as expressly provided in this Certificate of Incorporation or in any Preferred Stock Designation, no stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law. The Corporation may in its Bylaws confer powers upon the Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law. ARTICLE VI ACTION OF STOCKHOLDERS ---------------------- Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. ARTICLE VII BOARD OF DIRECTORS ------------------ Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in this Certificate of Incorporation, to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed in 3 such manner as prescribed by the Bylaws of the Corporation and may be increased or decreased from time to time in such manner as prescribed by the Bylaws. Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. The directors, other than those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation, shall be divided into three classes, initially consisting of 6, 4 and 4 directors. One class of directors initially consisting of 4 directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1998, another class initially consisting of 4 directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1999, and another class initially consisting of 6 directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2000. Members of each class shall hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the Corporation commencing with the 1998 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in this Certificate of Incorporation, to elect additional directors under specified circumstances, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in this Certificate of Incorporation, to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and by the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class. ARTICLE VIII INDEMNIFICATION --------------- Each person who is or was a director or officer of the Corporation shall be indemnified by the Corporation to the fullest extent permitted from time to time by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, if permitted by applicable law, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. The Corporation may, by action of the 4 Board of Directors, provide indemnification to employees and agents (other than a director or officer) of the Corporation, to directors, officers, employees or agents of a subsidiary, and to each person serving as a director, officer, partner, member, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, at the request of the Corporation, with the same scope and effect as the foregoing indemnification of directors and officers of the Corporation. The Corporation shall be required to indemnify any person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors or is a proceeding to enforce such person's claim to indemnification pursuant to the rights granted by this Certificate of Incorporation or otherwise by the Corporation. Without limiting the generality or the effect of the foregoing, the Corporation may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article VIII. Any amendment or repeal of this Article VIII shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal. ARTICLE IX DIRECTORS' LIABILITY -------------------- A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the General Corporation Law of the State of Delaware, or (4) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of this Article IX shall not adversely affect any right or protection of a director of the Corporation existing hereunder in respect of any act or omission occurring prior to such amendment or repeal. If the General Corporation Law of the State of Delaware shall be amended, to authorize corporate action further eliminating or limiting the liability of directors, then a director of the Corporation, in addition to the circumstances in which he is not liable immediately prior to such amendment, shall be free of liability to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. ARTICLE X AMENDMENTS ---------- Except as may be expressly provided in this Certificate of Incorporation, the Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or a Preferred Stock Designation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article X; provided, however, that any amendment or repeal of Article VIII or Article IX of this Certificate of Incorporation shall not adversely affect any right or 5 protection existing thereunder in respect of any act or omission occurring prior to such amendment or repeal, and provided further that no Preferred Stock Designation shall be amended after the issuance of any shares of the series of Preferred Stock created thereby, except in accordance with the terms of such Preferred Stock Designation and the requirements of applicable law. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, and in addition to approval by the Board of Directors, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with paragraph (1) of Article V, Article VI, Article VII or this second paragraph of this Article X. For the purposes of this Certificate of Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. 6 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE ESOP CONVERTIBLE PREFERRED STOCK OF DEAN WITTER, DISCOVER & CO. ------------------------------ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------------ The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 3,902,438 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Issuance. ------------------------- (A) The shares of such series shall be designated ESOP CONVERTIBLE PREFERRED STOCK (hereinafter referred to as the "ESOP Preferred Stock") and such series shall consist of 7 3,902,438 shares. Such number of shares may be increased or decreased from time to time by resolution of the Committee (as hereinafter defined), but no such increase shall result in such series consisting of more than 4,000,000 shares, and no decrease shall reduce the number of shares of ESOP Preferred Stock to a number less than that of shares of ESOP Preferred Stock then outstanding plus the number of shares issuable upon exercise of any rights, options or warrants or upon conversion of outstanding securities issued by the Corporation relating to such shares. Notwithstanding the preceding sentence, the Board may increase the number of shares of ESOP Preferred Stock to a number greater than 4,000,000 shares, or may decrease the number of such shares, subject only to any limitations imposed by applicable law or the Certificate of Incorporation. Any shares of ESOP Preferred Stock redeemed or purchased by the Corporation shall remain issued and outstanding for all purposes (except that as long as such shares are held by the Corporation or its nominee, no dividends shall be paid on such shares and they shall neither be entitled to vote nor counted for quorum purposes) and may thereafter be transferred by the Corporation from time to time to a trustee or trustees referred to in paragraph (B) of this Section 1 (whereupon the voting and dividend rights of such shares shall be restored); provided that the Corporation may provide at the time of or at any time after such redemption or purchase that any such shares then held by the Corporation or its nominee shall be retired, and such shares shall then be restored to the status of authorized but unissued shares of Preferred Stock of the Corporation. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the functions of the Board set forth in this Certificate of Designation. (B) Shares of ESOP Preferred Stock shall be issued only to a trustee or trustees acting on behalf of an employee stock ownership trust or plan or other employee benefit plan (a "Plan") of the Corporation. In the event of any sale, transfer or other disposition (hereinafter a "transfer") of shares of ESOP Preferred Stock to any person (including, without limitation, any participant in the Plan) other than (x) any trustee or trustees of the Plan, (y) any pledgee of such shares acquiring such shares as security for any loan or loans made to the Plan or to any trustee or trustees acting on behalf of the Plan or (z) the Corporation, the shares of ESOP Preferred Stock so transferred, upon such transfer and without any further 8 action by the Corporation or the holder, shall be automatically converted into shares of Common Stock at the Conversion Price (as hereinafter defined) and on the terms otherwise provided for the conversion of shares of ESOP Preferred Stock into shares of Common Stock pursuant to Section 5 hereof and no such transferee shall have any of the voting powers, preferences and relative, participating, optional or special rights ascribed to shares of ESOP Preferred Stock hereunder, but, rather, only the powers and rights pertaining to the Common Stock into which such shares of ESOP Preferred Stock shall be so converted; provided, however, that in the event of a foreclosure or other realization upon shares of ESOP Preferred Stock pledged as security for any loan or loans made to the Plan or to the trustee or the trustees acting on behalf of the Plan, the pledged shares so foreclosed or otherwise realized upon shall be converted automatically into shares of Common Stock at the Conversion Price and on the terms otherwise provided for conversions of shares of ESOP Preferred Stock into shares of Common Stock pursuant to Section 5 hereof. In the event of such a conversion, such transferee shall be treated for all purposes as the record holder of the shares of Common Stock into which the ESOP Preferred Stock shall have been converted as of the date of such conversion. Certificates representing shares of ESOP Preferred Stock shall be legended to reflect such restrictions on transfer. Notwithstanding the foregoing Provisions of this Section 1, shares of ESOP Preferred Stock (i) may be converted into shares of Common Stock as provided by Section 5 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) be redeemable by the Corporation upon the terms and conditions provided by Sections 6, 7 and 8 hereof. 2. Dividends and Distributions. ---------------------------- (A) (1) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of ESOP Preferred Stock (other than the Corporation or its nominee) shall be entitled to receive, when and as declared by the Board out of funds legally available therefor, cash dividends ("Preferred Dividends") payable in accordance with either of the following elections, as the Board shall elect from time to time in its absolute discretion: (i) in an amount per share initially equal to $2.78 per share per annum, and no more (such amount, as adjusted from time to time pursuant to the terms hereof, including during any period in which a 9 Semiannual Payment Election (as defined below) shall be in effect, the "Annual Dividend Rate"), payable annually in arrears on December 31 (or such later date not more than four business days thereafter as the Board may from time to time elect in its absolute discretion; such date, the "Annual Payment Date") of each year (such election, the "Annual Payment Election") beginning on the Annual Payment Date occurring immediately after the effective date of such Annual Payment Election; or (ii) in an amount per share initially equal to $2.78 per share per annum, and no more (such amount, as adjusted from time to time pursuant to the terms hereof, including during any period in which an Annual Payment Election is in effect, the "Semiannual Dividend Rate"; and the Semiannual Dividend Rate and the Annual Dividend Rate, as in effect at any time, are each hereinafter referred to as the "Preferred Dividend Rate"), semiannually in arrears, one-half on each June 30 and December 31 (or, in either case, such later date not more than four business days after either of such dates as the Board may from time to time elect in its absolute discretion; such dates, the "Semiannual Payment Dates") of each year (such election, the "Semiannual Payment Election"), beginning on the Semiannual Payment Date occurring immediately after the effective date of such Semiannual Payment Election; provided that any Semiannual Payment Election shall be made effective only during the period beginning on January 5 and ending on June 29 in each year. The Board shall give prompt notice to the holders of the ESOP Preferred Stock of any Semiannual Payment Election or Annual Payment Election and any election to alter any Dividend Payment Date pursuant to this Section 2(A)(1). Each Annual Payment Date or Semiannual Payment Date, as applicable, is hereinafter referred to as a "Dividend Payment Date", and each payment of a Preferred Dividend shall be made to holders of record at the opening of business on such Dividend Payment Date. (2) Preferred Dividends shall begin to accrue on outstanding shares of ESOP Preferred Stock from the date of issuance of such shares, except that with respect to any shares of ESOP Preferred Stock redeemed or purchased by the Corporation and then reissued, Preferred Dividends shall accrue on such shares from their date of reissuance. Preferred Dividends shall accrue on a daily basis, whether or not the Corporation shall then have earnings or surplus 10 (computed on the basis of a 360-day year of twelve 30-day months in case of any period less than one year) based on the Preferred Dividend Rate in effect on such date; provided however, that if a Semiannual Payment Election or an Annual Payment Election becomes effective on or after such date and before the immediately succeeding Dividend Payment Date, payments in respect of dividends on the ESOP Preferred Stock made on or after the effective date of such Semiannual Payment Election or Annual Payment Election and on or before such Dividend Payment Date shall be computed using the Preferred Dividend Rate in effect on the date of such payment; provided further, the dividends payable on the first Dividend Payment Date following the issuance of the ESOP Preferred Stock shall be in an amount equal to the Annual Dividend Rate for a full annum or the Semiannual Dividend Rate for a full semiannum, as applicable. Accrued but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on which they first become payable, but no interest shall accrue on accumulated but unpaid Preferred Dividends. (B) So long as any shares of ESOP Preferred Stock shall be outstanding, no dividend shall be declared or paid or set apart for payment on any other series of stock ranking on a parity with the ESOP Preferred Stock as to dividends, unless there shall also be or have been declared and paid or set apart for payment on the ESOP Preferred Stock, like dividends for all dividend payment periods of the ESOP Preferred Stock ending on or before the dividend payment date of such parity stock, ratably in proportion to the respective amounts of dividends (1) accumulated and unpaid or payable on such parity stock, on the one hand, and (2) accumulated and unpaid through the dividend payment period or periods of the ESOP Preferred Stock next preceding such dividend payment date, on the other hand. If full cumulative dividends on the ESOP Preferred Stock have not been declared and paid or set apart for payment when due, the Corporation shall not declare or pay or set apart for payment any dividends or make any other distributions on, or make any payment on account of the purchase, redemption or other retirement of, any other class of stock or series thereof of the Corporation ranking, as to dividends or upon dissolution, junior to the ESOP Preferred Stock until full cumulative dividends on the ESOP Preferred Stock shall have been paid or declared and set apart; provided, however, that the foregoing shall not apply to (i) any dividend or distribution payable solely in any shares of, or options, warrants or rights to subscribe for or purchase shares of, any stock ranking, as to dividends and upon dissolution, 11 junior to the ESOP Preferred Stock or (ii) the acquisition of shares of any stock ranking, as to dividends and upon dissolution, junior to the ESOP Preferred Stock in exchange solely for or by conversion solely into shares of any other stock ranking junior to the ESOP Preferred Stock as to dividends and upon dissolution. (C) Any dividend payment made on shares of ESOP Preferred Stock shall first be credited against the earliest accumulated but unpaid dividend due with respect to such shares. 3. Liquidation Preference. ----------------------- (A) In the event of any dissolution or liquidation of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of any series or class or classes of stock of the Corporation ranking junior to ESOP Preferred Stock upon dissolution or liquidation, the holders of ESOP Preferred Stock (other than the Corporation or its nominee) shall be entitled to receive the Liquidation Price (as hereinafter defined) per share in effect at the time of dissolution or liquidation plus an amount equal to all dividends accrued (whether or not accumulated) and unpaid on the ESOP Preferred Stock to the date of final distribution to such holders; but such holders shall not be entitled to and shall not otherwise receive any further payments. The Liquidation Price per share that holders of ESOP Preferred Stock shall receive upon dissolution or liquidation shall be $35.875, subject to adjustment as hereinafter provided. If, upon any dissolution or liquidation of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of ESOP Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares ranking, as to dissolution or liquidation, on a parity with ESOP Preferred Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of ESOP Preferred Stock and any such other shares ratably in accordance with the respective amounts that would be payable on such shares of ESOP Preferred Stock and any such other shares if all amounts payable thereon were paid in full. For the purposes of this Section 3, neither a consolidation or merger of the Corporation with or into one or more corporations, nor the sale, transfer, lease or exchange (for cash, shares of equity stock, securities or other consideration) of all or substantially all of the 12 assets of the Corporation, nor the distribution to the stockholders of the Corporation of all or substantially all of the consideration for such sale, unless such consideration (apart from assumption of liabilities) or the net proceeds thereof consists substantially entirely of cash, shall be deemed to be a dissolution or liquidation, voluntary or involuntary. (B) Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or senior to ESOP Preferred Stock upon dissolution or liquidation, upon any dissolution or liquidation of the Corporation, after payment shall have been made in full to the holders of ESOP Preferred Stock as provided in this Section 3, but not prior thereto, any other series or class or classes of stock ranking junior to ESOP Preferred Stock upon dissolution or liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets of the Corporation remaining to be paid or distributed, and the holders of ESOP Preferred Stock shall not be entitled to share therein. 4. Ranking and Voting of Shares. ----------------------------- (A) Each of (i) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (ii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (iv) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, shall rank on a parity with ESOP Preferred Stock as to dividends and as to distribution of assets upon dissolution or liquidation. Unless otherwise provided in the Certificate of Incorporation of the Corporation, as the same may be 13 amended, or in a Certificate of Designation of Rights and Preferences relating to any subsequent series of Preferred Stock, the ESOP Preferred Stock shall rank on a parity with all series of the Corporation's Preferred Stock, other than the Corporation's Series A Junior Participating Preferred Stock to which the ESOP Preferred Stock shall rank senior, as to dividends and as to the distribution of assets upon dissolution or liquidation. (B) The holders of shares of ESOP Preferred Stock (other than the Corporation or its nominee) shall have the following voting rights: (1) The holders of ESOP Preferred Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation, voting together with the holders of Common Stock as one class. The holder of each share of ESOP Preferred Stock shall be entitled to a number of votes equal to 1.35 times the number of shares of Common Stock into which such share of ESOP Preferred Stock could be converted on the record date for determining the stock holders entitled to vote; it being understood that whenever the "Conversion Price" (as defined in Section 5 hereof) is adjusted as provided in Section 9 hereof, the number of votes of the ESOP Preferred Stock shall also be corres pondingly adjusted. Notwithstanding the immediately preceding sentence, if the governing body of the New York Stock Exchange or any other securities listing service or exchange (each, an "Exchange") or any relevant governmental or regulatory entity (each such entity, and each governing body of an Exchange, a "Regulating Entity") shall have disapproved of such voting power or taken or threatened any action against the Corporation or in respect of any of its securities in accordance with Rule 19c-4 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any other rule or listing standard of any Regulating Entity regarding the voting power of securities, or if the Board of Directors determines in its sole judgment that any Regulating Entity may so disapprove or take or threaten any such action, the holder of each share of ESOP Preferred Stock shall be entitled to a maximum number of votes permissible (consistent with continued listing of the Corporation's securities on any such Exchange) in accordance with the interpretations of any such rule or listing standard by such Regulating Entity, as determined by the Board. (2) Except as otherwise required by law or set forth herein, holders of ESOP Preferred Stock shall have no 14 special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action, including the issuance of any Preferred Stock now or hereafter authorized; provided, however, that the vote of at least 66-2/3% of the outstanding shares of ESOP Preferred Stock, voting separately as a series, shall be necessary to approve any alteration, amendment or repeal of any provision of the Certificate of Incorporation or any alteration, amendment or repeal of any provision of the resolutions relating to the designation, preferences and rights of ESOP Preferred Stock (including any such alteration, amendment or repeal effected by any merger or consolidation in which the Corporation is the surviving or resulting corporation, but not including any alteration or amendment of rights expressly provided for in Section (B)(1) above or in Section 2(A)(1)), if such amendment, alteration or repeal would alter or change the powers, preferences, or special rights of the ESOP Preferred Stock so as to affect them adversely. 5. Conversion into Common Stock. ----------------------------- (A) A holder of shares of ESOP Preferred Stock shall be entitled, at any time prior to the close of business on the date fixed for redemption of such shares pursuant to Section 6, 7 or 8 hereof, to cause any or all of such shares to be converted into shares of Common Stock. The number of shares of Common Stock into which each share of the ESOP Preferred Stock may be converted shall be determined by dividing the Liquidation Price in effect at the time of conversion by the Conversion Price (as hereinafter defined) in effect at the time of conversion. The initial Conversion Price per share at which shares of Common Stock shall be issuable upon conversion of any shares of ESOP Preferred Stock shall be $10.871, subject to adjustment as hereinafter provided; that is, a conversion rate initially equivalent to three and three-tenths (3-3/10) shares of Common Stock for each share of ESOP Preferred Stock, which is subject to adjustment as hereinafter provided. (B) Any holder of shares of ESOP Preferred Stock desiring to convert such shares into shares of Common Stock shall surrender, if certificated, the certificate or certificates representing the shares of ESOP Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock 15 powers relating thereto), or if uncertificated, a duly executed stock power relating thereto, at the principal executive office of the Corporation or the offices of the transfer agent for the ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the ESOP Preferred Stock by the Corporation or the transfer agent for the ESOP Preferred Stock, accompanied by written notice of conversion. Such notice of conversion shall specify (i) the number of shares of ESOP Preferred Stock to be converted and the name or names in which such holder wishes the Common Stock and any shares of ESOP Preferred Stock not to be so converted to be issued, and (ii) the address to which such holder wishes delivery to be made of a confirmation of such conversion, if uncertificated, or any new certificates which may be issued upon such conversion, if certificated. (C) Upon surrender, if certificated, of a certificate representing a share or shares of ESOP Preferred Stock for conversion, or if uncertificated, of a duly executed stock power relating thereto, the Corporation shall issue and send by hand delivery (with receipt to be acknowledged) or by first class mail, postage prepaid, to the holder thereof or to such holder's designee, at the address designated by such holder, if certificated, a certificate or certificates for, or if uncertificated, confirmation of, the number of shares of Common Stock to which such holder shall be entitled upon conversion. If there shall have been surrendered shares of ESOP Preferred Stock only part of which are to be converted, the Corporation shall issue and deliver to such holder or such holder's designee, if certificated, a new certificate or certificates representing the number of shares of ESOP Preferred Stock that shall not have been converted, or if uncertificated, confirmation of the number of shares of ESOP Preferred Stock that shall not have been converted. (D) The issuance by the Corporation of shares of Common Stock upon a conversion of shares of ESOP Preferred Stock into shares of Common Stock made at the option of the holder thereof shall be effective as of the earlier of (i) the delivery to such holder or such holder's designee of the certificates representing the shares of Common Stock issued upon conversion thereof, if certificated, or confirmation, if uncertificated, and (ii) the commencement of business on the second business day after the surrender of the certificate or certificates, if certificated, or a duly executed stock power, if uncertificated, for the shares of 16 ESOP Preferred Stock to be converted. On and after the effective date of conversion, the person or persons entitled to receive Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, and no allowance or adjust ment shall be made in respect of dividends payable to holders of Common Stock of record on any date prior to such effective date. The Corporation shall not be obligated to pay any dividend that may have accrued or have been declared but that is not payable to holders of shares of ESOP Preferred Stock if the Dividend Payment Date for such dividend is on or subsequent to the effective date of conversion of such shares. (E) The Corporation shall not be obligated to deliver to holders of ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (F) The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock or treasury Common Stock, solely for issuance upon the conversion of shares of ESOP Preferred Stock as herein provided, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of ESOP Preferred Stock then outstanding. 6. Redemption at the Option of the Corporation. -------------------------------------------- (A) The ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Corporation at any time after September 19, 2000, out of funds legally available therefor, at a redemption price per share equal to 100% of the Liquidation Price plus an amount equal to all accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption. Payment of the redemption price shall be made by the Corporation in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (E) of this Section 6. From and after the date fixed for redemption, dividends on shares of ESOP Preferred Stock called for redemption will cease to accrue and all rights of the holder in respect of such shares shall cease, except the right to receive the redemption price. Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Corporation, to be held as treasurer shares or to be retired, in either case as provided in Sec- tion 1(A). If less than all of the 17 outstanding shares of ESOP Preferred Stock are to be redeemed, the Corporation shall either redeem a portion of the shares of each holder determined pro rata based on the number of shares held by each holder or shall select the shares to be redeemed by lot, as may be determined by the Board. (B) Notice of redemption will be sent to the holders of ESOP Preferred Stock at the address on the books of the Corporation or any transfer agent for ESOP Preferred Stock by first class mail, postage prepaid, mailed not less than twenty (20) days nor more than sixty (60) days prior to the redemption date or in any other manner provided by law. Each notice shall state: (i) the redemption date; (ii) the total number of shares of ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates, if certificated, for such shares are to be surrendered for payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; (vi) whether such redemption price should be paid in cash or in shares of Common Stock; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised and the Conversion Price and number of shares of Common Stock issuable upon conversion of a share of ESOP Preferred Stock at the time. Upon surrender of the certificates, if certificated, for any shares so called for redemption, or upon the date fixed for redemption, if uncertificated, such shares, if not previously converted, shall be redeemed by the Corporation as of the close of business on the date fixed for redemption and at the redemption price set forth in this Section 6. (C) The Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph (A) of this Section 6, at any time within one year after either of the following events: (i) there shall be a change in the federal tax law or regulations of the United States of America or of an interpretation or application of such law or regulations or of a determination by a court of competent jurisdiction that in any case has the effect of precluding the Corporation from claiming (other than for purposes of calculating any alternative minimum tax) any of the tax deductions for dividends paid on 18 the ESOP Preferred Stock when such dividends are used as provided under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), as in effect on December 31, 1995. (ii) the Corporation shall certify to the holders of the ESOP Preferred Stock that the Corporation has determined in good faith that the Plan either is not qualified as a "stock bonus plan" within the meaning of Section 401(a) of the Code or is not an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Code, elect either to (a) redeem, out of funds legally available therefor, any or all of such ESOP Preferred Stock for cash or, if the Corporation so elects, in shares of Common Stock, or a combination of such shares of Common Stock and cash, as permitted by paragraph (E) of this Section 6, at a redemption price equal to (x) if the relevant event is as provided in clause (i) above, the Liquidation Price per share on the date fixed for redemption, plus an amount equal to accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption or (y) if the relevant event is as provided in clause (ii) above, an amount calculated on the basis of the redemption prices provided in paragraph (D) of this Section 6 on the date fixed for redemption or (b) exchange any or all of such shares of ESOP Preferred Stock for securities of at least equal value (as determined by an independent appraiser) that constitute "qualifying employer securities" with respect to a holder of ESOP Preferred Stock within the meaning of Section 409(l) of the Code and Section 407(d)(5) of the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), or any successor provisions of law. If the Corporation elects to redeem any or all of the ESOP Preferred Stock pursuant to clause (a) of the preceding sentence, notice of such redemption shall be given as required in paragraph (B) of this Section 6, and if the Corporation elects to exchange any or all of the ESOP Preferred Stock for securities of at least equal value pursuant to clause (b) of the preceding sentence, it will cause notice of such election to be sent to the holders of ESOP Preferred Stock at the address shown on the books of the Corporation or any transfer agent for ESOP Preferred Stock by first class mail, postage prepaid, mailed not less than twenty (20) days nor more than sixty (60) days prior to the date of exchange or in any other manner required by law. Each notice shall state: (i) the exchange date; (ii) the total number of shares of ESOP Preferred Stock to be 19 exchanged and, if fewer than all the shares held by such holder are to be exchanged, the number of shares held by such holder to be exchanged; (iii) the exchange rate; (iv) the place or places where certificates, if certificated, for such shares are to be surrendered for exchange; and (v) that dividends on the shares to be exchanged will cease to accrue an such exchange date. (D) Notwithstanding anything to the contrary in paragraph (A) of this Section 6, in the event that the Plan is, or contributions thereto are, terminated, the Corporation may, in its sole discretion, call for redemption any or all of the then outstanding ESOP Preferred Stock, upon notice as required in paragraph (B) of this Section 6, out of funds legally available therefor, at a redemption price per share equal to the following percentages of the Liquidation Price in effect on the date fixed for redemption:
During the Twelve- Month Period Percentage of Beginning September 19, Liquidation Price ------------------------- ----------------- 1996 103.10 1997 102.33 1998 101.55 1999 100.78 2000 100.00
and thereafter at 100%, plus, in each case, an amount equal to all accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption. Payment of the redemption price shall be made by the Corporation in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (E) of this Section 6. From and after the date fixed for redemption, dividends on shares of ESOP Preferred Stock called for redemption will cease to accrue and all rights of the holder in respect of such shares shall cease, except the right to receive the redemption price. Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Corporation, to be held as treasury shares or to be retired, in either case as provided in Section 1(A). (E) The Corporation, at its option, may make payment of the redemption price required upon redemption of shares of ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such shares and cash, any such shares of Common Stock to be valued for such purpose at their Fair Market Value (as defined in paragraph 9(H)(2)); provided, however, that in calculating 20 their Fair Market Value the Adjustment Period (as defined in paragraph 9(H)(2)) shall be deemed to be the five (5) consecutive trading days preceding the date of redemption. 7. Redemption at the Option of the Holder. --------------------------------------- (A) Unless otherwise provided by law, shares of ESOP Preferred Stock shall be redeemed by the Corporation at the option of the holder, at any time and from time to time upon notice to the Corporation given not less than five business days prior to the date fixed by the holder in such notice, when and to the extent necessary for such holder to provide for distributions required to be made under, or to satisfy an investment election provided to participants in accordance with, the Plan or any successor plan or when the holder elects to redeem shares of ESOP Preferred Stock in connection with any Preferred Dividend (a "Dividend Redemption"), in shares of Common Stock legally available therefor, at a redemption price equal to the higher of (x) the Liquidation Price per share on the date fixed for redemption and (y) the Fair Market Value (as defined in paragraph 9(H)(2)) of the number of shares of Common Stock into which each share of ESOP Preferred Stock is convertible at the time the notice of such redemption is given, plus in either case an amount equal to accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption (such higher price on any date, together with such accrued and unpaid dividends, the "Special Redemption Price"). At the election of the Corporation, such redemp- tion may instead be made out of funds legally available therefor in cash or a combination of Common Stock and cash. Any shares of Common Stock shall be valued for the purposes of redemption pursuant to this paragraph (A) as provided by paragraph (E) of Section 6. In the case of any Dividend Redemption, such holder shall give the notice specified above on the fifth business day after the related Dividend Payment Date and such redemption shall be effective as to such number of shares of ESOP Preferred Stock as shall equal (x) the aggregate amount of such Preferred Dividends paid with respect to shares of ESOP Preferred Stock allocated or credited to the accounts of participants in the Plan or any successor plan that are used to repay any loan associated with such allocated or credited shares divided by (y) the Special Redemption Price specified above in this paragraph (A). (B) Unless otherwise provided by law, shares of ESOP Preferred Stock shall be redeemed by the Corporation at the option of the holder, at any time and from time to 21 time upon notice to the Corporation given not less than five business days prior to the date fixed by the holder in such notice, upon certification by such holder to the Corporation of the following events: (i) when and to the extent necessary for such holder to make any payments of principal, interest or premium due and payable (whether voluntary, scheduled, upon acceleration or otherwise) upon any obligations of the trust established under the Plan in connection with the acquisition of ESOP Preferred Stock or any indebtedness, expenses or costs incurred by the holder for the benefit of the Plan; or (ii) when and if it shall be established to the satisfaction of the holder that the Plan has not initially been determined by the Internal Revenue Service to be qualified as a "stock bonus plan" and an "employee stock ownership plan" within the meaning of Section 401(a) or 4975(e)(7) of the Code, respectively, in shares of Common Stock legally available therefor, at a redemption price equal to the Liquidation Price plus an amount equal to accrued and unpaid dividends thereon to the date fixed for redemption. At the election of the Corporation, such redemption may instead be made out of funds legally available therefor in cash or a combination of Common Stock and cash. Any shares of Common Stock shall be valued for the purposes of redemption pursuant to this paragraph (B) as provided by paragraph (E) of Section 6. 8. Consolidation, Merger, etc. --------------------------- (A) If the Corporation shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into securities of any successor or resulting company (including the Corpora tion) that constitute "qualifying employer securities" with respect to a holder of ESOP Preferred Stock within the meanings of Section 409(l) of the Code and Section 407(d)(5) of ERISA, or any successor provision of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, then, in such event, the terms of such consolidation or merger or similar transaction shall provide that the shares of ESOP Preferred Stock of such holder shall be converted into or exchanged for and shall become preferred securities of such successor or resulting company, having in respect of such company insofar as possible (taking into account, without limitation, any requirements relating to the listing of such preferred securities on any national securities exchange or the qualification of such preferred securities for trading in any over-the-counter market) the 22 same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 6, 7 and 8 hereof), and the qualifications, limitations or restrictions thereon, that the ESOP Preferred Stock had immediately prior to such transaction; provided, however, that after such transaction each security into which the ESOP Preferred Stock is so converted or for which it is exchanged shall be convertible, pursuant to the terms and conditions provided by Section 5 hereof, into the number and kind of qualifying employer securities receivable by a holder equivalent to the number of shares of Common Stock into which such shares of ESOP Preferred Stock could have been converted pursuant to Section 5 hereof immediately prior to such transaction and provided further that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of considera tion to be received in such transaction, which election cannot practicably be made by the holders of the ESOP Preferred Stock, then such election shall be deemed to be solely for "qualifying employer securities" (together, if applicable, with a cash payment in lieu of fractional shares) with the effect provided above on the basis of the number and kind of qualifying employer securities receivable by a holder of the number of shares of Common Stock into which the shares of ESOP Preferred Stock could have been converted pursuant to Section 5 hereof immediately prior to such transaction (it being understood that if the kind or amount of qualifying employer securities receivable in respect of each share of Common Stock upon such transaction is not the same for each such share, then the kind and amount of qualifying employer securities deemed to be receivable in respect of each share of Common Stock for purposes of this proviso shall be the kind and amount so receivable per share of Common Stock by a plurality of such shares). The rights of the ESOP Preferred Stock as preferred equity of such successor or resulting company shall successively be subject to adjustments pursuant to Section 9 hereof after any such transaction as nearly equivalent as practicable to the adjustments provided for by such Section prior to such transaction. The Corporation shall not consummate any such merger, consolidation or similar transaction unless all the terms of this paragraph (A) are complied with. (B) If the Corporation shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, 23 reclassified or converted into other shares or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities that are common stock or common equity (as referred to in paragraph (A) of this Section 8) and cash payments, if applicable, in lieu of fractional shares or other interests, outstanding shares of ESOP Preferred Stock shall, without any action on the part of the Corporation or any holder thereof (but subject to paragraph (C) of this Section 8), be automatically converted immediately prior to the consummation of such merger, consolidation or similar transaction into shares of Common Stock at the Conversion Price then in effect. (C) If the Corporation shall enter into any agreement providing for any consolidation or merger or similar transaction described in paragraph (B) of this Section 8, then the Corporation shall as soon as practicable thereafter (and in any event at least ten (10) business days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Corporation, to receive, upon consummation of such transaction (if and when such transaction is consummated), out of funds legally available therefor, from the Corporation or the successor of the Corporation, in redemption of such ESOP Preferred Stock, in lieu of any cash or other securities which such holder would otherwise be entitled to receive under paragraph (B) of this Section 8, a cash payment equal to the Liquidation Price per share on the date fixed for such transaction, plus an amount equal to accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for such transaction. No such notice of redemption shall be effective unless given to the Corporation prior to the close of business of the fifth business day prior to consummation of such transaction, unless the Corporation or the successor of the Corporation shall waive such prior notice, but any notice or redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Corporation prior to the close of business on the fifth business day prior to consummation of such transaction. 9. Anti-dilution Adjustments. -------------------------- (A)(1) In the event the Corporation shall, at any time or from time to time while any of the shares of the ESOP Preferred Stock are outstanding, (i) pay a dividend or make a distribution in respect of the Common Stock in shares 24 of Common Stock or (ii) subdivide the outstanding shares of Common Stock into a greater number of shares, in each case whether by reclassification of shares, recapitalization of the Corporation (excluding a recapitalization or reclass- ification effected by a merger or consolidation to which Section 8 applies) or otherwise, then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(A) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock outstanding immediately before such event. Such adjustment to the Conversion Price shall be effective, upon payment of such dividend or distribution in respect of the Common Stock, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis), and in the case of a subdivision shall become effective immediately as of the effective date thereof. An adjustment to the Conversion Price pursuant to this Section 9(A)(1) shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (2) In the event the Corporation shall, at any time or from time to time while any of the shares of the ESOP Preferred Stock are outstanding, combine the outstanding shares of Common Stock into a lesser number of shares, whether by reclassification of shares, recapitalization of the Corporation (excluding a recapitalization or reclassification effected by a merger, consolidation or other transaction to which Section 8 applies) or otherwise, then, in such event, the Conversion Price shall, subject to the provisions of paragraph (F) of this Section 9, automatically be adjusted by dividing the Conversion Price in effect immediately before such event by the Section 9(A) Fraction. An adjustment to the Conversion Price made pursuant to this paragraph 9(A)(2) shall be given effect immediately as of the effective date of such combination and shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (B) In the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, issue to holders of shares of Common Stock as a dividend or distribu tion, including by way of a reclassification of shares 25 or a recapitalization of the Corporation, any right or warrant to purchase shares of Common Stock (but not including as a right or warrant for this purpose any security convertible into or exchangeable for shares of Common Stock) for a consideration having a Fair Market Value (as hereinafter defined) per share less than the Fair Market Value of a share of Common Stock on the date of issuance of such right or warrant (other than pursuant to any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted), then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Sec- tion 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(B) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance of warrants or rights plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the maximum aggregate consideration payable upon exercise in full of all such rights and warrants. Such adjustment to the Conversion Price shall be effective upon such issuance of rights or warrants. An adjustment to the Conversion Price pursuant to this Section 9(B) shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (C)(1) In the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, issue, sell or exchange shares of Common Stock (other than pursuant to (x) any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant for this purpose any security convertible into or exchangeable for shares of Common Stock) or (y) any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted) at a purchase price per share less than the Fair Market Value of a share of Common Stock on the date of such issuance, sale or exchange, then, in such 26 event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(C)(1) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance, sale or exchange plus the number of shares of Common Stock so issued, sold or exchanged and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance, sale or exchange plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance, sale or exchange for the maximum aggregate consideration paid therefor. (2) In the event that the Corporation shall, at any time or from time to time while any ESOP Preferred Stock is outstanding, issue, sell or exchange any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant for this purpose any security convertible into or exchangeable for shares of Common Stock other than pursuant to any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted) for a consideration having a Fair Market Value, on the date of such issuance, sale or exchange, less than the Non- Dilutive Amount (as hereinafter defined), then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(C)(2) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the total of (x) the maximum aggregate consideration payable at the time of the issuance, sale or exchange of such right or warrant and (y) the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. 27 (3) An adjustment to the Conversion Price pursuant to this Section 9(C) shall be effective upon the effective date of any issuance, sale or exchange described in paragraph (1) or (2) above. Any such adjustment shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (D) In the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, make an Extraordinary Distribution (as hereinafter defined) in respect of the Common Stock, whether by dividend, distribution, reclassification of shares or recapitalization of the Corporation (including capitalization or reclassification effected by a merger or consolidation to which Section 8 does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of Common Stock, then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(D) Fraction"), the numerator of which is the product of (a) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the Corporation multiplied by (b) the Fair Market Value of a share of Common Stock on the day before the ex-dividend date with respect to an Extra- ordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer that is a Pro Rata Repurchase or on the date of purchase with respect to any Pro Rata Repurchase that is not a tender offer, as the case may be, and the denominator of which is (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer that is a Pro Rata Repurchase, or on the date of purchase with respect to 28 any Pro Rata Repurchase that is not a tender offer, as the case may be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the aggregate purchase price of the Pro Rata Repurchase, as the case may be. The Corporation shall send each holder of ESOP Preferred Stock (i) notice of its intent to make any Extraordinary Distribution and (ii) notice of any offer by the Corporation to make a Pro Rata Repurchase, in each case at the same time as, or as soon as practicable after, such offer is first communicated to holders of Common Stock or, in the case of an Extraordinary Distribution, the announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or admitted to trading. Such notice shall indicate the intended record date and the amount and nature of such dividend or distribution, or the number of shares subject to such offer for a Pro Rata Repurchase and the purchase price payable by the Corporation pursuant to such offer, as well as the Conversion Price and the number of shares of Common Stock into which a share of ESOP Preferred Stock may be converted at such time. An adjustment to the Conversion Price pursuant to this Section 9(D) shall be effective (i) in the case of an Extraordinary Dividend as of the record date for the determination of holders entitled to receive such Extraordinary Dividend (on a retroactive basis) and (ii) in the case of a Pro Rata Repurchase upon the expiration date thereof (if such Pro Rata Repurchase is a tender offer) or the effective date thereof (if such Pro Rata Repurchase is not a tender offer). Any such adjustment shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (E) The Board shall have the authority to determine that any adjustment to the Conversion Price provided for in paragraph (A)(1), (B), (C) or (D) of this Section 9 shall not be made (or if already made, to determine that such adjustment shall be cancelled prospectively), and in lieu thereof to declare a dividend in respect of the ESOP Preferred Stock in shares of ESOP Preferred Stock (a "Special Dividend") in such a manner that a holder of ESOP Preferred Stock will become a holder of that number of shares of ESOP Preferred Stock equal to the product of the number of such shares held prior to such event times the Section 9(A), Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as appli- 29 cable. The declaration of such a Special Dividend shall be authorized, if at all, by the Board no later than 30 calendar days following the authorization by the Board (or by a committee duly authorized by the Board) of the transaction or other event described in any of the foregoing paragraphs (A)(1), (B), (C) or (D) that would otherwise result in an adjustment to the Conversion Price being made pursuant to any such paragraphs, and if the Board does not authorize the declaration of a Special Dividend by the end of such 30-day period, then no such Special Dividend shall be declared and the adjustment to the Conversion Price provided for in paragraph (A)(1), (B), (C) or (D) of this Section 9 shall become final and binding on the Corporation and all stockholders of the Corporation. Concurrently with the declaration of any Special Dividend pursuant to this paragraph (E), the Conversion Price, the Liquidation Price and the Preferred Dividend Rate of all shares of ESOP Preferred Stock shall be adjusted by dividing the Conversion Price, the Liquidation Price and the Preferred Dividend Rate, respectively, in effect immediately before such event by the Section 9(A), Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as appli cable. (F) Unless the Board determines otherwise, and notwithstanding any other provision of this Section 9, any adjustment to the Conversion Price provided for in any of paragraphs (A), (B), (C) or (D) of this Section 9 shall not be made unless such adjustment would require an increase or decrease of at least one percent (1%) in the Conversion Price and, similarly, the Board shall not declare any Special Dividend pursuant to paragraph (E) of this Section 9 unless such Special Dividend or adjustment would require an increase or decrease of at least one percent (1%) in the number of shares of ESOP Preferred Stock outstanding. Any lesser adjustment to the Conversion Price or Special Dividend shall be carried forward and shall be made no later than the time of, and together with, the next subsequent adjustment to the Conversion Price or Special Dividend which, together with any adjustment or adjustments or Special Dividend or Dividends so carried forward, shall amount to an increase or decrease of at least one percent (1%) of the Conversion Price or an increase or decrease of at least one percent (1%) in the number of shares of ESOP Preferred Stock outstanding, whichever the case be. 30 (G) If the Corporation shall make any dividend or distribution on the Common Stock or issue any Common Stock, other capital stock or other security of the Corporation or any rights or warrants to purchase or acquire any such security, which transaction does not result in an adjustment to the Conversion Price or to the number of shares of ESOP Preferred Stock out- standing pursuant to the foregoing provisions of this Section 9, the Board may, in its sole discretion, consider whether such action is of such a nature that some type of equitable adjustment should be made in respect of such transaction. If in such case the Board determines that some type of adjustment should be made, an adjustment shall be made effective as of such date as determined by the Board. The determination of the Board as to whether some type of adjustment should be made pursuant to the foregoing provisions of this Section 9(G), and, if so, as to what adjustment should be made and when, shall be final and binding on the Corporation and all stockholders of the Corporation. The Corporation shall be entitled, but not required, to make such additional adjustments, in addition to those required by the foregoing provisions of this Section 9, as shall be necessary in order that any dividend or distribution in shares of capital stock of the Corporation, subdivision, reclassification or combination of shares of the Corporation or any reclassification of the Corporation shall not be taxable to holders of the Common Stock. (H) For purposes hereof, the following definitions shall apply: (1) "Extraordinary Distribution" shall mean any dividend or other distribution to holders of Common Stock (effected while any of the shares of ESOP Preferred Stock are outstanding) of (i) cash or (ii) any shares of capital stock of the Corporation (other than shares of Common Stock), other securities of the Corporation (other than securities of the type referred to in paragraph (B) of this Section 9), evidences of indebtedness of the Corporation or any other person or any other property (including shares of any subsidiary of the Corporation), or any combination of the foregoing, where the aggregate amount of such cash dividend or other distribution together with the amount of all cash dividends and other distributions made during the preceding period of twelve months, when combined with the aggregate amount of all Pro Rata Repurchases (for this purpose, including only that portion of the aggregate 31 purchase price of such Pro Rata Repurchase that is in excess of the Fair Market Value of the Common Stock repurchased as determined on the applicable expiration date (including all extensions thereof) of any tender offer or exchange offer that is a Pro Rata Repurchase, or the date of purchase with respect to any other Pro Rata Repurchase that is not a tender offer or exchange offer) made during such period, exceeds twelve and one-half percent (12-1/2%) of the aggregate Fair Market Value of all shares of Common Stock outstanding on the day before the ex- dividend date with respect to such Extraordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash. The Fair Market Value of an Extraordinary Distribution for purposes of paragraph (D) of this Section 9 shall be the sum of the Fair Market Value of such Extraordinary Distribution plus the aggregate amount of any cash dividends or other distributions that are not Extraordinary Distributions made during such twelve-month period and not previously included in the calculation of an adjustment pursuant to paragraph (D) of this Sec- tion 9, but shall exclude the aggregate amount of regular quarterly dividends declared by the Board and paid by the Corporation in such twelve-month period. (2) "Fair Market Value" shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Corporation or any other issuer that are publicly traded, the average of the Current Market Prices (as hereinafter defined) of such shares or securities for each day of the Adjustment Period (as hereinafter defined). "Current Market Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the Corporation or any other issuer for a day shall mean the last reported sales price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and 32 asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in such security selected for such purpose by the Board. "Adjustment Period" shall mean the period of five consecutive trading days, selected by the Board during the twenty (20) trading days preceding, and including, the date as of which the Fair Market Value of a security is to be determined. The "Fair Market Value" of any security that is not publicly traded or of any other property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board, or, if no such investment banking or appraisal firm is in the good faith judgment of the Board available to make such determination, as determined in good faith by the Board. (3) "Non-Dilutive Amount" in respect of an issuance, sale or exchange by the Corporation of any right or warrant to purchase, or acquire shares of Common Stock (including any security convertible into or exchangeable for shares of Common Stock) shall mean the difference between (i) the product of the Fair Market Value of a share of Common Stock on the day preceding the first public announcement of such issuance, sale or exchange multiplied by the maximum number of shares of Common Stock that could be acquired on such date upon the exercise in full of such rights or warrants (including upon the conversion or exchange of all such convertible or exchangeable securities), whether or not exercisable (or convertible or exchangeable) at such date, and (ii) the aggregate amount payable pursuant to such right or warrant to purchase or acquire such maximum number of shares of Common Stock; provided, however, that in no event shall the Non- Dilutive Amount be less than zero. For purposes of the foregoing sentence, in the case of a security convertible into or exchangeable for shares of Common Stock, the amount payable pursuant to a right or warrant to purchase or acquire shares of Common Stock shall be the Fair Market Value of such security on the date of the issuance, sale or exchange of such security by the Corporation. (4) "Pro Rata Repurchase" shall mean any purchase of shares or Common Stock by the Corporation or any subsidiary thereof, whether for cash, shares of capital stock of the Corporation, other securities of the Corporation, evidences of indebtedness of the Corporation or any other person or any other property (including shares of a subsidiary of the Corporation), or any combination thereof, 33 effected while any of the shares of ESOP Preferred Stock are outstanding, pursuant to any tender offer or exchange offer subject to Section 13(e) of the Exchange Act, or any successor provision of law, or pursuant to any other offer available to substantially all holders of Common Stock; provided, however, that no purchase of shares by the Corporation or any subsidiary thereof made in open market transactions shall be deemed a Pro Rata Repurchase. For purposes of this Section 9(H), shares shall be deemed to have been purchased by the Corporation or any subsidiary thereof "in open market transactions" if they have been purchased substantially in accordance with the requirements of Rule 10b-18 as in effect under the Exchange Act on the date shares of ESOP Preferred Stock are initially issued by the Corporation or on such other terms and conditions as the Board shall have determined are reasonably designed to prevent such purchases from having a material effect on the trading market for the Common Stock. (I) Whenever an adjustment to the Conversion Price of the ESOP Preferred Stock is required pursuant to this Section 9, the Corporation shall forthwith place on file with the transfer agent for the Common Stock and the ESOP Preferred Stock, if there be one, and with the Treasurer of the Corporation, a statement signed by the Treasurer or any Assistant Treasurer of the Corporation stating the adjusted Conversion Price determined as provided herein. In addition, whenever a Special Dividend is declared pursuant to paragraph (E) of this Section 9, (i) the maximum number of shares of ESOP Preferred Stock shall be adjusted by multiplying 3,902,438 (or such other number as shall be the maximum number of shares of ESOP Preferred Stock in effect prior to the authorization of such Special Dividend) by the Section 9(A), Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as the case may be, (ii) the Board shall take action as is necessary so that a sufficient number of shares of ESOP Preferred Stock are designated with respect to any increase in the number of shares of ESOP Preferred Stock to be outstanding as a result of such Special Dividend and (iii) the Corporation shall forthwith place on file with the transfer agent for the Common Stock and the ESOP Preferred Stock, if there be one, and with the Treasurer of the Corporation, a statement signed by the Treasurer or any Assistant Treasurer of the Corporation stating the adjusted maximum number of shares of ESOP Preferred Stock, Conversion Price, Liquidation Price and Preferred Dividend Rate determined as provided herein. The statement required by either of the two preceding sentences shall set forth in 34 reasonable detail such facts as shall be necessary to show the reason and the manner of computing such adjustments, including any determination of Fair Market Value involved in such computation. Promptly after each adjustment to the maximum number of shares of ESOP Preferred Stock, Conversion Price, the Liquidation Price, the Preferred Dividend Rate, or the number of shares of ESOP Preferred Stock outstanding, the Corporation shall mail a notice thereof and of the then prevailing maximum number of shares of ESOP Preferred Stock, Conversion Price, Liquidation Price, Preferred Dividend Rate and number of shares of ESOP Preferred Stock outstanding to each holder of shares of ESOP Preferred Stock. 10. Miscellaneous. -------------- (A) All notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have given upon the earlier of receipt thereof of three (3) business days after the mailing thereof if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms hereof) with postage prepaid, addressed: (i) if to the Corporation, to its office at Two World Trade Center, New York, New York 10048 (Attention: Secretary) or to the transfer agent for the ESOP Preferred Stock, or other agent of the Corporation designated as permitted hereof or (ii) if to any holder of the ESOP Preferred Stock or Common Stock, as the case may be, to such holder at the address of such holder as listed in the stock record books of the Corporation (which may include the records of any transfer agent for Common Stock) or (iii) to such other address as the Corporation or any such holder, as the case may be, shall have designated by notice similarly given. (B) The term "Common Stock" as used herein means the Corporation's Common Stock, par value $0.01 per share, as the same exists at the date of filing of this Certificate of Designation pursuant to Section 151 of the General Corporation Law of the State of Delaware, or any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or par value to without par value, or from without par value to par value. In the event that, at any time as a result of an adjustment made pursuant to Section 9 hereof, the holder of any shares of the ESOP Preferred Stock upon thereafter surrendering such shares for conversion shall become entitled to receive any shares or other securities of the Corporation other than shares of Common Stock, the anti-dilution provisions contained in Section 9 35 hereof shall apply in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock, and the provisions of Sections 1 through 8 and 10 hereof respect to the Common Stock shall apply on like or similar terms to any such other shares or securities. (C) The Corporation shall pay any and all stock transfer and documentary stamp taxes that may be payable in respect of any issuance or delivery of shares of ESOP Preferred Stock or shares of Common Stock or other securities issued on account of ESOP Preferred Stock pursuant thereto or certificates representing such shares or securities. The Corporation shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of ESOP Preferred Stock or Common Stock or other securities in a name other than that in which the shares of ESOP Preferred Stock with respect to which such shares or other securities are issued or delivered were registered, or in respect of any payment to any person with respect to any shares or securities other than a payment to the registered holder thereof, and shall not be required to make any such issuance, delivery or payment unless and until the person otherwise entitled to such issuance, delivery or payment has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid or is not payable. (D) In the event that a holder of shares of ESOP Preferred Stock shall not by written notice designate the name in which shares of Common Stock to be issued upon conversion or exchange of such shares should be registered or to whom payment upon redemption of shares of ESOP Preferred Stock should be made or the address to which the certificate or certificates representing such shares, or such payment, should be sent, the Corporation shall be entitled to register such shares, and make such payment, in the name of the holder of such ESOP Preferred Stock as shown on the records of the Corporation and to send the certificate or certificates or other documentation repre senting such shares, or such payment, to the address of such other holder shown on the records of the Corporation. (E) The Corporation may appoint, and from time to time discharge and change, a transfer agent for the ESOP Preferred Stock. Upon any such appointment or discharge of a transfer agent, the Corporation, shall send notice thereof by first-class mail, postage prepaid, to each holder of record of ESOP Preferred Stock. 36 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards --------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 37 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7-3/8% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. ______________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ______________________________ The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 1,000,000 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ------------------------------------------ series of the Preferred Stock authorized by this resolution shall be the 7-3/8% 38 Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The number of shares of Cumulative Preferred Stock shall be 1,000,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be ---------- entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 7-3/8% per annum. Dividends on the Cumulative Preferred Stock, calculated as a percentage of the stated value, will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to 39 perform the functions of the Board set forth in this Certificate of Designation. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall ----------------------- rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) 40 plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ----------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock -------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares 41 of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the 42 time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ----------- redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' 43 prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to August 30, 1998. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancelation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside 44 by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Authorization and Issuance of Other Securities. No consent of the ----------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the ------------------------ right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ----- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; 45 (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share,(iv) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of 46 $200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 47 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 48 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7.82% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. ------------------------------ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------------ The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 611,238 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ------------------------------------------ series of the Preferred Stock authorized by this resolution shall be the 7.82% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the 49 "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The maximum number of shares of Cumulative Preferred Stock shall be 611,238. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be ---------- entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 7.82% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the functions of the Board set forth in this Certificate of Designation. 50 Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided, that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall ----------------------- rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary of involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date 51 of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ----------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock -------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like 52 voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given 53 in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ----------- redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the 54 Cumulative Preferred Stock shall not be redeemable prior to November 30, 1998. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancelation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 55 7. Authorization and Issuance of Other Securities. No consent of the ----------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the ------------------------ right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ----- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or 56 liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 57 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By:/s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 58 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7.80% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. --------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware --------------------------- The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 1,150,000 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ------------------------------------------ series of the Preferred Stock authorized by this resolution shall be the 7.80% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per 59 share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The maximum number of shares of Cumulative Preferred Stock shall be 1,150,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be ---------- entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 7.80% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the functions of the Board forth in this Certificate of Designation. 60 Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock ----------------------- shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date 61 of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ----------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock -------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like 62 voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of the Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) 63 given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ----------- redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stocks books of the Corporation; provided, however, that shares of the 64 Cumulative Preferred Stock shall not be redeemable prior to February 28, 1999. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declined) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancelation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 65 7. Authorization and Issuance of Other Securities. No consent of the ----------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase or decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the ------------------------ right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ----- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or 66 liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock in such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 67 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 68 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 9.00% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. __________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware __________________________ The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 720,900 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ------------------------------------------ series of the Preferred Stock authorized by this resolution shall be the 9.00% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any 69 purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The maximum number of shares of Cumulative Preferred Stock shall be 720,900. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be ---------- entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 9.00% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the functions of the Board set forth in this Certificate of Designation. 70 Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The Shares of Cumulative Preferred Stock shall ----------------------- rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date 71 of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ----------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock -------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like 72 voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given 73 in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ----------- redeemed at the option of the Corporation, as a whole, or from time to time, in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the 74 Cumulative Preferred Stock shall not be redeemable prior to February 28, 2000. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancelation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 75 7. Authorization and Issuance of Other Securities. No consent of the ----------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the ------------------------ right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitation provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ----- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or 76 liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's Series A Fixed/ Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 77 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 78 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 8.40% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. ________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ________________________ The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 996,776 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ------------------------------------------ series of the Preferred Stock authorized by this resolution shall be the 8.40% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the 79 Board with respect to the capital and surplus of the Corporation. The total number of shares of Cumulative Preferred Stock shall be 996,776. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be ---------- entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 8.40% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the functions of the Board set forth in this Certificate of Designation. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or 80 declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall ----------------------- rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights 81 upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ----------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock -------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been 82 paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of 83 shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ----------- redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to August 30, 2000. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. 84 If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancelation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Authorization and Issuance of Other Securities. No consent of the ----------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or 85 decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the ------------------------ right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ----- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and 86 (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's Series A Fixed/ Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 87 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By:/s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 88 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 8.20% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. ______________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ______________________________ The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 847,500 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ------------------------------------------ series of the Preferred Stock authorized by this resolution shall be the 8.20% Cumulative Preferred Stock, par value $0.01 per share, 89 with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The total number of shares of Cumulative Preferred Stock shall be 847,500. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be ---------- entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 8.20% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the functions of the Board set forth in this Certificate of Designation. 90 Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall ----------------------- rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date 91 of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ----------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock -------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like 92 voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given 93 in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ----------- redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the 94 Cumulative Preferred Stock shall not be redeemable prior to November 30, 2000. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancelation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 95 7. Authorization and Issuance of Other Securities. No consent of the ----------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the ------------------------ right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ----- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or 96 liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 97 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 98 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7-3/4% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. --------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware --------------------------- The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 1,000,000 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ----------------------------------------- series of the Preferred Stock authorized by this resolution shall be the 7-3/4% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the 99 "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The number of shares of Cumulative Preferred Stock shall be 1,000,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. (a) Holders of shares of Cumulative Preferred Stock will --------- be entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 7-3/4% per annum. Dividends on the Cumulative Preferred Stock, calculated as a percentage of the stated value, will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as such term is defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the 100 functions of the Board set forth in this Certificate of Designation. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. (b) If one or more amendments to the Internal Revenue Code of 1986, as amended (the "Code"), are enacted that reduce the percentage of the dividends received deduction as specified in Section 243(a)(1) of the Code or any successor provision (the "Dividends Received Percentage") to below 70%, the amount of each dividend payable per share of the Cumulative Preferred Stock for dividend payments made on or after the date of enactment of such change will be adjusted by multiplying the amount of the dividend payable determined as described above (before adjustment) by a factor, which will be the number determined in accordance with the following formula (the "DRD Formula"), and rounding the result to the nearest cent: 1 - (.35(1 - .70)) ------------------ 1 - (.35(1 - DRP)) 101 For the purposes of the DRD Formula, "DRP" means the Dividends Received Percentage applicable to the dividend in question. No amendment to the Code, other than a change in the percentage of the dividends received deduction set forth in Section 243(a)(1) of the Code or any successor provision, will give rise to an adjustment. Notwithstanding the foregoing provisions, in the event that, with respect to any such amendment, the Corporation will receive either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the Internal Revenue Service to the effect that such an amendment would not apply to dividends payable on the Cumulative Preferred Stock, then any such amendment will not result in the adjustment provided for pursuant to the DRD Formula. The opinion referenced in the previous sentence will be based upon a specific exception in the legislation amending the DRP or upon a published pronouncement of the Internal Revenue Service addressing such legislation. Unless the context otherwise requires, references to dividends in this Certificate of Designation will mean dividends as adjusted by the DRD Formula. The Corporation's calculation of the dividends payable, as so adjusted and as certified accurate as to calculation and reasonable as to method by the independent certified public accountants then regularly engaged by the Corporation, will be final and not subject to review absent manifest error. If any amendment to the Code which reduces the Dividends Received Percentage to below 70% is enacted after a dividend payable on a dividend payment date has been declared, the amount of dividend payable on such dividend payment date will not be increased. Instead, an amount, equal to the excess of (x) the product of the dividends paid by the Corporation on such dividend payment date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the reduced Dividends Received Percentage) over (y) the dividends paid by the Corporation on such dividend payment date, will be payable to holders of record on the next succeeding dividend payment date in addition to any other amounts payable on such date. In the event that the amount of dividends payable per share of the Cumulative Preferred Stock will be adjusted pursuant to the DRD Formula, the Corporation will cause notice of each such adjustment to be sent to 102 the holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof as shall be fixed by the Board or the Committee. In the event that the Dividends Received Percentage is reduced to 40% or less, the Corporation may, at its option, redeem the Cumulative Preferred Stock, in whole but not in part, as described in paragraph 6 hereof. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall ---------------------- rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, 103 shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ---------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of Shares of Cumulative Preferred Stock ------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. 104 Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of 105 Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ---------- redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to August 30, 2001, except as stated below. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation 106 will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. Notwithstanding the foregoing provisions, if the Dividends Received Percentage is equal to or less than 40% and, as a result, the amount of dividends on the Cumulative Preferred Stock payable on any dividend payment date will be or is adjusted upwards as described in paragraph 2(b) hereof, the Corporation, at its option, may redeem all, but not less than all, of the outstanding shares of the Cumulative Preferred Stock (and the Depositary Shares) (a "Dividends Received Deduction Redemption"); provided that within sixty days of the date on which an amendment to the Code is enacted which reduces the Dividends Received Percentage to 40% or less, the Corporation sends notice to holders of the Cumulative Preferred Stock relating to any Dividends Received Deduction Redemption of such redemption. A redemption of the Cumulative Preferred Stock will take place on the date specified in the 107 notice, which shall be not less than thirty nor more than sixty days from the date such notice is sent to holders of the Cumulative Preferred Stock. A Dividends Received Deduction Redemption shall be at the applicable redemption price set forth in the following table, in each case plus accrued and unpaid dividends (whether or not declared) thereon to but excluding the date fixed for redemption, including any changes in dividends payable due to changes in the Dividends Received Percentage, if any: Redemption Price ---------------- Per Depositary Redemption Period Per Share Share - ------------------ --------- --------- May 31, 1997 to August 29, 1997..... $210.00 $52.50 August 30, 1997 to August 29, 1998.. 208.00 52.00 August 30, 1998 to August 29, 1999.. 206.00 51.50 August 30, 1999 to August 29, 2000.. 204.00 51.00 August 30, 2000 to August 29, 2001.. 202.00 50.50 On or after August 30, 2001......... 200.00 50.00 7. Authorization and Issuance of Other Securities. No consent of the ---------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the ----------------------- right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ---- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, 108 if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per 109 share, (iii) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (iv) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 110 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards -------------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 111 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE SERIES A FIXED/ADJUSTABLE RATE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. --------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware --------------------------- The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 1,725,000 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ------------------------------------------ series of the Preferred Stock authorized by this resolution 112 shall be the Series A Fixed/Adjustable Rate Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "Series A Fixed/Adjustable Rate Preferred Stock"). The stated value per share of Series A Fixed/Adjustable Rate Preferred Stock shall not for any purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The number of shares of Series A Fixed/Adjustable Rate Preferred Stock shall be 1,725,000. The Series A Fixed/Adjustable Rate Preferred Stock is issuable in whole shares only. 2. Dividends. (a) Holders of shares of Series A Fixed/Adjustable Rate ---------- Preferred Stock will be entitled to receive cash dividends, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment. Dividends on the Series A Fixed/Adjustable Rate Preferred Stock, calculated as a percentage of the stated value, will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). From the date of issuance of the Series A Fixed/Adjustable Rate Preferred Stock and continuing through November 30, 2001, the rate of such dividend will be 5.91% per annum. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to perform the functions of the Board set forth in this Certificate of Designation. After November 30, 2001, dividends on the Series A Fixed/Adjustable Rate Preferred Stock will be payable quarterly on each dividend payment date at the Applicable Rate (as defined in paragraph 3) from time to time in effect. The Applicable Rate per annum for any dividend period beginning on or after November 30, 2001 will be equal to .37% plus the highest of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the Thirty-Year 113 Constant Maturity Rate (each as defined in paragraph 3), as determined in advance of such dividend period. The Applicable Rate per annum for any dividend period beginning on or after November 30, 2001, will not be less then 6.41% nor greater then 12.41% (without taking into account any adjustments set forth in paragraph 2(b)). Dividends on shares of the Series A Fixed/Adjustable Rate Preferred Stock will be cumulative from the date of initial issuance of such shares of Series A Fixed/Adjustable Rate Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360- day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 10(b)) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Series A Fixed/Adjustable Rate Preferred Stock, like dividends for all dividend payment periods of the Series A Fixed/Adjustable Rate Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Series A Fixed/Adjustable Rate Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Series A Fixed/Adjustable Rate Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared 114 and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Series A Fixed/Adjustable Rate Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Series A Fixed/Adjustable Rate Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Series A Fixed/Adjustable Rate Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Series A Fixed/Adjustable Rate Preferred Stock as to dividends. (b) If one or more amendments to the Internal Revenue Code of 1986, as amended (the "Code"), are enacted that reduce the percentage of the dividends received deduction as specified in Section 243(a)(1) of the Code or any successor provision (the "Dividends Received Percentage") to below 70%, the amount of each dividend payable per share of the Series A Fixed/Adjustable Rate Preferred Stock for dividend payments made on or after the date of enactment of such change will be adjusted by multiplying the amount of the dividend payable determined as described above (before adjustment) by a factor, which will be the number determined in accordance with the following 115 formula (the "DRD Formula"), and rounding the result to the nearest cent: 1 - (.35 (1 - .70)) ------------------- 1 - (.35 (1 - DRP)) For the purposes of the DRD Formula, "DRP" means the Dividends Received Percentage applicable to the dividend in question. No amendment to the Code, other than a change in the percentage of the dividends received deduction set forth in Section 243(a)(1) of the Code or any successor provision, will give rise to an adjustment. Notwithstanding the foregoing provisions, in the event that, with respect to any such amendment, the Corporation will receive either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the Internal Revenue Service to the effect that such an amendment would not apply to dividends payable on the Series A Fixed/Adjustable Rate Preferred Stock, then any such amendment will not result in the adjustment provided for pursuant to the DRD Formula. The opinion referenced in the previous sentence will be based upon a specific exception in the legislation amending the DRP or upon a published pronouncement of the Internal Revenue Service addressing such legislation. Unless the context otherwise requires, references to dividends in this Certificate of Designation will mean dividends as adjusted by the DRD Formula. The Corporation's calculation of the dividends payable, as so adjusted and as certified accurate as to calculation and reasonable as to method by the independent certified public accountants then regularly engaged by the Corporation, will be final and not subject to review absent manifest error. If any amendment to the Code which reduces the Dividends Received Percentage to below 70% is enacted after a dividend payable on a dividend payment date has been declared, the amount of dividend payable on such dividend payment date 116 will not be increased. Instead, an amount, equal to the excess of (x) the product of the dividends paid by the Corporation on such dividend payment date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the reduced Dividends Received Percentage) over (y) the dividends paid by the Corporation on such dividend payment date, will be payable on the next succeeding dividend payment date to holders of record in addition to any other amounts payable on such date. In addition, if prior to May 31, 1997, an amendment to the Code is enacted that reduces the Dividends Received Percentage to below 70% and such reduction retroactively applies to a dividend payment date of the Series A Fixed/Adjustable Rate Cumulative Preferred Stock, no par value, with a stated value of $200.00 per share ("Morgan Stanley Series A Fixed/Adjustable Rate Preferred Stock") of Morgan Stanley Group Inc. ("Morgan Stanley") as to which Morgan Stanley previously paid dividends on the Morgan Stanley Series A Fixed/Adjustable Rate Preferred Stock (each an "Affected Dividend Payment Date"), holders of the Series A Fixed/Adjustable Rate Preferred Stock shall be entitled to receive when, as and if declared by the Board out of assets of the corporation legally available for payment, additional dividends (the "Additional Dividends") on the next succeeding dividend payment date (or if such amendment is enacted after the dividend payable on such dividend payment date has been declared and on or before such dividend is paid, on the second succeeding dividend payment date following the date of enactment) payable on such succeeding dividend payment date to holders of record in an amount equal to the excess of (x) the product of the dividends paid by Morgan Stanley on each Affected Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the reduced Dividends Received Percentage applied to each Affected Dividend Payment Date) over (y) the dividends paid by Morgan Stanley on each Affected Dividend Payment Date. 117 Additional Dividends will not be paid in respect of the enactment of any amendment to the Code on or after May 31, 1997 which retroactively reduces the Dividends Received Percentage to below 70%, or if prior to May 31, 1997, such amendment would not result in an adjustment due to the Corporation having received either an opinion of counsel or tax ruling referred to in the third preceding paragraph. The Corporation will only make one payment of Additional Dividends. In the event that the amount of dividends payable per share of the Series A Fixed/Adjustable Rate Preferred Stock will be adjusted pursuant to the DRD Formula and/or Additional Dividends are to be paid, the Corporation will cause notice of each such adjustment and, if applicable, any Additional Dividends, to be sent to the holders of record as they appear on the stock books of the Corporation on such record date, not more than 60 days nor less than 10 days preceding the payment date thereof as shall be fixed by the Board or the Committee. In the event that the Dividends Received Percentage is reduced to 50% or less, the Corporation may, at its option, redeem the Series A Fixed/Adjustable Rate Preferred Stock, in whole but not in part, as described in paragraph 7 hereof. 3. Applicable Rate. Except as provided above in paragraph 2, the ---------------- "Applicable Rate" per annum for any dividend period beginning on or after November 30, 2001 will be equal to .37% plus the Effective Rate (as defined herein), but not less than 6.41% nor greater than 12.41% (without taking into account any adjustments as described in paragraph 2(b)). The "Effective Rate" for any dividend period beginning on or after November 30, 2001 will be equal to the highest of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the Thirty-Year Constant Maturity Rate (each as defined herein) for such dividend period. If the Corporation determines in good faith that for any reason: (i) any one of the Treasury Bill Rate, the 118 Ten-Year Constant Maturity Rate or the Thirty-Year Constant Maturity Rate cannot be determined for any dividend period beginning on or after November 30, 2001, then the Effective Rate for such dividend period will be equal to the higher of whichever two of such rates can be so determined; (ii) only one of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate or the Thirty-Year Constant Maturity Rate can be determined for any dividend period beginning on or after November 30, 2001, then the Effective Rate for such dividend period will be equal to whichever such rate can be so determined; or (iii) none of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate or the Thirty-Year Constant Maturity Rate can be determined for any dividend period beginning on or after November 30, 2001, then the Effective Rate for the preceding dividend period will be continued for such dividend period. The "Treasury Bill Rate" for each dividend period will be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate is published during the relevant Calendar Period (as defined herein) for three-month U.S. Treasury bills, as published weekly by the Federal Reserve Board (as defined herein) during the Calendar Period immediately preceding the tenth calendar day preceding the dividend period for which the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is being determined. The "Ten-Year Constant Maturity Rate" for each dividend period will be the arithmetic average of the two most recent weekly per annum Ten-Year Average Yields (as defined herein) (or the one weekly per annum Ten-Year Average Yield, if only one such yield is published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately preceding the tenth calendar day preceding the dividend period for which the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is being determined. 119 The "Thirty-Year Constant Maturity Rate" for each dividend period will be the arithmetic average of the two most recent weekly per annum Thirty-Year Average Yields (as defined herein) the one weekly per annum Thirty-Year Average Yield, if only one such yield is published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately preceding the tenth calendar day preceding the dividend period for which the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is being determined. If the Federal Reserve Board does not publish a weekly per annum market discount rate, Ten-Year Average Yield or Thirty-Year Average Yield during any applicable Calendar Period, then the Treasury Bill Rate, Ten-Year Constant Maturity Rate or Thirty-Year Constant Maturity Rate, as the case may be, for such dividend period will be the arithmetic average of the two most recent weekly per annum market discount rates for three-month U.S. Treasury bills, Ten- Year Average Yields or Thirty-Year Average Yields, as the case may be (or the one weekly per annum rate, if only one such rate is published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If any such rate is not published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate, Ten-Year Constant Maturity Rate or Thirty-Year Constant Maturity Rate for such dividend period will be the arithmetic average of the two most recent weekly per annum (i) in the case of the Treasury Bill Rate, market discount rates (or the one weekly per annum market discount rate, if only one such rate is published during the relevant Calendar Period) for all of the U.S. Treasury bills then having remaining maturities of not less than 80 nor more than 100 days, and (ii) in the case of the Ten-Year Constant Maturity Rate, average yields to maturity (or the one weekly per annum average yield to 120 maturity, if only one such yield is published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other then Special Securities (as defined herein)) then having remaining maturities of not less than eight nor more than twelve years, and (iii) in the case of the Thirty-Year Constant Maturity Rate, average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield is published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having remaining maturities of not less than twenty-eight nor more than thirty years, in each case as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board does not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the Corporation. If the Corporation determines in good faith that for any reason (i) no such U.S. Treasury bill rates are published as provided above during such Calendar Period or (ii) the Corporation cannot determine the Treasury Bill Rate for any dividend period; then the Treasury Bill Rate for such dividend period will be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable non-interest- bearing U.S. Treasury securities with a remaining maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations are not generally available) to the Corporation by at least three recognized dealers in U.S. Government securities selected by the Corporation. If the Corporation determines in good faith that for any reason the Corporation cannot determine the Ten-Year Constant Maturity Rate or Thirty-Year Constant Maturity Rate for any dividend period as provided above, then the applicable rate for such dividend period will be the arithmetic average of the per annum average yields to maturity based upon the closing 121 bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other then Special Securities) with a final maturity date (i) in the case of the Ten-Year Constant Maturity Rate, not less than eight nor more then twelve years from the date of each such quotation, and (ii) in the case of the Thirty-Year Constant Maturity Rate, no less than twenty-eight nor more than thirty years from the date of each such quotation, in each case as chosen and quoted daily for each business day in New York City (or less frequently if daily quotations are not generally available) to the Corporation by at least three recognized dealers in the United States. The Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the Thirty- Year Constant Maturity Rate will each be rounded to the nearest five hundredths of a percent, with .025% being rounded upward. The Applicable Rate with respect to each dividend period beginning on or after November 30, 2001 will be calculated as promptly as practicable by the Corporation according to the appropriate method described above. The Corporation will cause notice of each Applicable Rate to be given to the holders of Series A Fixed/Adjustable Rate Preferred Stock when payment is made of the dividend for the immediately preceding dividend period. As used in this paragraph 3, the term "Calendar Period" means a period of fourteen calendar days; the term "Federal Reserve Board" means the Board of Governors of the Federal Reserve System; the term "Special Securities" means securities which can, at the option of the holder, be surrendered at face value in payment of any Federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount; the term "Ten-Year Average Yield" means the average yield to maturity for actively traded marketable U.S. 122 Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and the term "Thirty-Year Average Yield" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of thirty years). 4. Liquidation Preference. The shares of Series A Fixed/Adjustable Rate ----------------------- Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Series A Fixed/Adjustable Rate Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series A Fixed/Adjustable Rate Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Series A Fixed/Adjustable Rate Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Series A Fixed/Adjustable Rate Preferred Stock to the date of final distribution. The holders of the Series A Fixed/Adjustable Rate Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Series A Fixed/Adjustable Rate Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock will not be entitled to any further participation in any distribution of 123 assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 5. Conversion. The Series A Fixed/Adjustable Rate Preferred Stock is not ----------- convertible into shares of any other class or series of stock of the Corporation. 6. Voting Rights. The holders of shares of Series A Fixed/Adjustable Rate -------------- Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Series A Fixed/Adjustable Rate Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Series A Fixed/Adjustable Rate Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to 124 elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Series A Fixed/Adjustable Rate Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of Preferred Stock having like voting rights being entitled to such number of votes, if any, for each share 125 of such stock held as may be granted to them). (b) So long as any shares of Series A Fixed/Adjustable Rate Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Series A Fixed/Adjustable Rate Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 10(a) hereof) to the shares of the Series A Fixed/Adjustable Rate Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Series A Fixed/Adjustable Rate Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Series A Fixed/Adjustable Rate Preferred Stock with respect to the 126 payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series A Fixed/Adjustable Rate Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 7. Redemption. The shares of the Series A Fixed/Adjustable Rate Preferred ----------- Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Series A Fixed/Adjustable Rate Preferred Stock shall not be redeemable prior to November 30, 2001, except as stated below. Subject to the foregoing, on or after such date, shares of the Series A Fixed/Adjustable Rate Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Series A Fixed/Adjustable Rate Preferred Stock have not been paid, the Series A Fixed/Adjustable Rate Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Series A Fixed/Adjustable Rate Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Series A Fixed/Adjustable Rate Preferred Stock. If fewer than all the 127 outstanding shares of Series A Fixed/Adjustable Rate Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 7 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Series A Fixed/Adjustable Rate Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. Notwithstanding the foregoing provisions, if the Dividends Received Percentage is equal to or less than 50% and, as a result, the amount of dividends on the Series A Fixed/Adjustable Rate Preferred Stock payable on any dividend payment date will be or is adjusted upwards as described in paragraph 2(b) hereof, the Corporation, at its 128 option, may redeem all, but not less than all, of the outstanding shares of the Series A Fixed/Adjustable Rate Preferred Stock (the Depositary Shares) (a "Dividends Received Deduction Redemption") provided that within sixty days of the date on which an amendment to the Code is enacted which reduces the Dividends Received Percentage to 50% or less, the Corporation sends notice to holders of the Series A Fixed/Adjustable Rate Preferred Stock of such redemption. A Dividends Received Deduction Redemption, in accordance with this paragraph, will take place on the date specified in the notice, which shall be not less than thirty nor more then sixty days from the date such notice is sent to holders of the Series A Fixed/Adjustable Rate Preferred Stock. A Dividends Received Deduction Redemption shall be at the applicable redemption price set forth in the following table, in each case plus accrued and unpaid dividends (whether or not declared) thereon to but excluding the date fixed for redemption, including any changes in dividends payable due to changes in the Dividends Received Percentage and Additional Dividends, if any:
Redeemable Price ---------------------- Per Depositary Redemption Period Per Share Share - ----------------- --------- ----------- May 31, 1997 to November 29, 1997....... $210.00 $52.50 November 30, 1997 to November 29, 1998.. 208.00 52.00 November 30, 1998 to November 29, 1999.. 206.00 51.50 November 30, 1999 to November 29, 2000.. 204.00 51.00 November 30, 2000 to November 29, 2001.. 202.00 50.50 On or after November 30, 2001........... 200.00 50.00
8. Authorization and Issuance of Other Securities. No consent of the holders ----------------------------------------------- of the Series A Fixed/Adjustable Rate Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, 129 (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Series A Fixed/Adjustable Rate Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 9. Amendment of Resolution. The Board and the Committee each reserves the ------------------------ right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Series A Fixed/Adjustable Rate Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 10. Rank. For the purposes of this resolution, any stock of any class or ----- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Series A Fixed/Adjustable Rate Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Series A Fixed/Adjustable Rate Preferred Stock; (b) on a parity with shares of the Series A Fixed/Adjustable Rate Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be 130 different from those of the Series A Fixed/Adjustable Rate Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Series A Fixed/Adjustable Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Series A Fixed/Adjustable Rate Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Series A Fixed/Adjustable Rate Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Series A Fixed/Adjustable Rate Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) if issued, the Corporation's 7.82% Cumulative 131 Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.03% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 132 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 133 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 8.03% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF DEAN WITTER, DISCOVER & CO. ___________________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ___________________________________ The undersigned DOES HEREBY CERTIFY: A. The following resolution was duly adopted by the Board of Directors (the "Board") of Dean Witter, Discover & Co., a Delaware corporation (hereinafter called the "Corporation"), by unanimous vote thereof at a meeting on May 28, 1997: RESOLVED that, pursuant to authority expressly granted to and vested in the Board by provisions of the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), which shall consist of 670,000 of the shares of Preferred Stock which the Corporation has authority to issue, is authorized, and the Board hereby fixes the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such ----------------------------------------- series of the Preferred Stock authorized by this resolution shall be the 8.03% 134 Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of the Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board with respect to the capital and surplus of the Corporation. The number of shares of the Cumulative Preferred Stock shall be 670,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. (a) Holders of shares of the Cumulative Preferred Stock --------- will be entitled to receive, when, as and if declared by the Board or the Committee (as hereinafter defined) out of assets of the Corporation legally available for payment cash dividends at the rate of 8.03% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 of each year (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of the Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. For the purposes of this Certificate of Designation, the "Committee" shall mean any committee of the Board to whom the Board, pursuant to Section 141(c) of the General Corporation Law of the State of Delaware, delegates authority to 135 perform the functions of the Board set forth in this Certificate of Designation. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any Preferred Stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. (b) If one or more amendments to the Internal Revenue Code of 1986, as amended (the "Code"), are enacted that reduce the percentage of the dividends received deduction as specified in Section 243(a)(1) of the Code or any successor provision (the "Dividends Received Percentage") to below 70%, the amount of each dividend payable per share of the Cumulative Preferred Stock for dividend payments made on or after the date of enactment of such change, and so long as the Dividends Received Percentage remains below 70%, will be adjusted by multiplying the amount of the dividend payable determined as described above (before adjustment) by a factor, which will be the number determined in accordance with the following formula 136 (the "DRD Formula"), and rounding the result to the nearest cent: 1 - (.35 (1 - .70)) ------------------- 1- (.35 (1 - DRP)) For the purposes of the DRD Formula, "DRP" means the Dividends Received Percentage applicable to the dividend in question. No amendment to the Code, other than a change in the percentage of the dividends received deduction set forth in Section 243(a)(1) of the Code or any successor provision, will give rise to an adjustment. Notwithstanding the foregoing provisions, in the event that, with respect to any such amendment, the Corporation will receive either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the Internal Revenue Service to the effect that such an amendment would not apply to dividends payable on the Cumulative Preferred Stock, then any such amendment will not result in the adjustment provided for pursuant to the DRD Formula. The opinion referenced in the previous sentence will be based upon a specific exception in the legislation amending the DRP or upon a published pronouncement of the Internal Revenue Service addressing such legislation. Unless the context otherwise requires, references to dividends in this Certificate of Designation will mean dividends as adjusted by the DRD Formula. The Corporation's calculation of the dividends payable, as so adjusted and as certified accurate as to calculation and reasonable as to method by the independent certified public accountants then regularly engaged by the Corporation, will be final and not subject to review absent manifest error. If any amendment to the Code which reduces the Dividends Received Percentage to below 70% is enacted after a dividend payable on a dividend payment date has been declared and on or before such dividend is paid, the amount of dividend payable on such dividend payment date will not be increased. Instead, an amount, equal to the excess of (x) the product of the dividends paid by the Corporation on such dividend payment date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the reduced Dividends Received Percentage) over (y) the dividends paid by the Corporation on such dividend payment date, will be payable on the next succeeding dividend payment date to 137 holders of record on the record date for such next succeeding dividend payment in addition to any other amounts payable on such date. In the event that the amount of dividends payable per share of the Cumulative Preferred Stock will be adjusted pursuant to the DRD Formula, the Corporation will cause notice of each such adjustment to be sent to the holders of record as they appear on the stock books of the Corporation on such record date, not more than 60 days nor less than 10 days preceding the payment date thereof as shall be fixed by the Board or the Committee. In the event that the Dividends Received Percentage is reduced to 50% or less, the Corporation may, at its option, redeem the Cumulative Preferred Stock, in whole but not in part, as described in paragraph 6 hereof. 3. Liquidation Preference. The shares of the Cumulative Preferred Stock ---------------------- shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of the Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of the Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the 138 holders of shares of the Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into ---------- shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of the Cumulative Preferred Stock ------------- shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of the Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the 139 event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of the Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of the Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of the Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of the Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of the Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of the Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of the Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined 140 in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of the Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of the Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of the Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be ---------- redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to February 28, 2007, except as stated below. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at the option of the Corporation, in whole or in part, upon not less than 30 days' notice at the redemption prices set forth below, plus accrued and accumulated but unpaid dividends to but excluding the date fixed for 141 redemption, if redeemed during the twelve-month period beginning on February 28 of the years indicated below:
Year Redemption Price Per Share - ---- -------------------------- 2007................... $205.354 2008................... 204.282 2009................... 203.212 2010................... 202.142 2011................... 201.070 On or after 2012....... 200.000
If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any share of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of the Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. Notwithstanding the foregoing provisions, if the Dividends Received Percentage is equal to or less than 50% and, as a result, the amount of dividends on the Cumulative Preferred Stock payable on any dividend payment date will be or is adjusted upwards as described in paragraph 2(b) hereof, the Corporation, at its option, may redeem all, but not less than all, of the outstanding shares of the Cumulative Preferred Stock (a "Dividends Received Deduction Redemption"); provided that within sixty days of the date of the date on which an amendment to the Code is enacted which reduces the Dividends Received Percentage to 50% or less and the date on which notice of issuance of the Cumulative Preferred Stock is given, the Corporation sends notice to holders of the Cumulative Preferred Stock of such redemption. A Dividends Received Deduction Redemption, in accordance with this paragraph, will take place on the date specified in the notice, which shall be not less than thirty nor more than sixty days from the date such notice is sent to holders of the Cumulative Preferred Stock. A Dividends Received Deduction Redemption shall be at the applicable redemption price set forth in the following table, in each case plus accrued and accumulated but unpaid dividends thereon to but excluding the date fixed for redemption, including any changes in 142 dividends payable due to changes in the Dividends Received Percentage and Additional Dividends, if any:
Redemption period Redemption price per share - ----------------- -------------------------- February 28, 1998 to February 27, 1999 $210.000 February 28, 1999 to February 27, 2000 208.889 February 28, 2000 to February 27, 2001 207.778 February 28, 2001 to February 27, 2002 206.667 February 28, 2002 to February 27, 2003 205.556 February 28, 2003 to February 27, 2004 204.444 February 28, 2004 to February 27, 2005 203.333 February 28, 2005 to February 27, 2006 202.222 February 28, 2006 to February 27, 2007 201.111
If a Dividends Received Deduction Redemption occurs on or after February 28, 2007, the redemption prices shall be as set forth in the first paragraph of this paragraph 6. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of the Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 143 7. Authorization and Issuance of Other Securities. No consent of the ---------------------------------------------- holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves ----------------------- the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or ---- classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or 144 liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of the Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and the Corporation's Series A Junior Participating Preferred Stock, and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iii) the Corporation's 7-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's Series A Fixed/Adjustable Rate Preferred Stock, with a liquidation value of $200.00 per share, (v) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (viii) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.20% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 145 B. This Certificate of Designation shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, Dean Witter, Discover & Co. has caused this Certificate of Designation to be signed by Christine A. Edwards, its Executive Vice President, General Counsel and Secretary, this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards ---------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 146 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of DEAN WITTER, DISCOVER & CO. Pursuant to Section 151 of the General Corporation Law of the State of Delaware The undersigned officer of Dean Witter, Discover & Co., a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the said Corporation, the said Board of Directors on April 21, 1995 adopted the following resolution creating a series of 220,000 shares of Preferred Stock designated as Series A Junior Participating Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Amended and Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be ---------------------- designated as "SERIES A JUNIOR PARTICIPATING PREFERRED STOCK" and the number of shares constituting such series shall be 220,000. Section 2. Dividends and Distributions. --------------------------- (A) The holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of 147 Directors out of funds legally available for the purposes, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $0.01 per share, of the Corporation (the "COMMON STOCK") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after April 21, 1995 (the "RIGHTS DECLARATION DATE") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii subdivide the outstanding Common Stock, or (ii combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue form the date of issue of such 148 shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Junior ------------- Participating Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "DEFAULT PERIOD") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating 149 Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors. (ii) During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that such voting right shall not be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior ---- ----- Participating Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him or her at his or her last address as the same appears on the books of the Corporation. Such 150 meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors. (D) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 151 Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series a Junior Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the 152 Corporation unless the Corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Participating ----------------- Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding up. (A) Upon any -------------------------------------- liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to 1,000 times the Exercise Price, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of he Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not 153 sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, Etc. In case the Corporation shall -------------------------- enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Junior Participating ------------- Preferred Stock shall not be redeemable. Section 9. Amendment. The Amended and Restated Certificate of --------- Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding 154 shares of Series A Junior Participating Preferred Stock, voting separately as a class. Section 10. Fractional Shares. Series A Junior Participating Preferred ----------------- Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this 25th day of April, 1995. DEAN WITTER, DISCOVER & CO. /s/ Ronald T. Carman ------------------------------------------------ Name: Ronald T. Carman Title: Senior vice President and Associate General Counsel 155 CERTIFICATE OF INCREASE OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF DEAN WITTER, DISCOVER & CO. Pursuant to Section 151 of the General Corporation Law of the State of Delaware Dean Witter, Discover & Co. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with Section 103 thereof, does hereby certify: 1. Pursuant to a Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock filed in the office of the Secretary of State of Delaware on April 26, 1995, the Board of Directors of the Corporation created a series of 220,000 shares of Series A Junior Participating Preferred Stock, and as of the date hereof no shares of such series have been issued. 2. The Board of Directors, on April 18, 1997, adopted the following resolution authorizing an increase in the authorized number of shares of Series A Junior Participating Preferred Stock from 220,000 to 450,000: RESOLVED, that the number of shares constituting the series of the Corporation's Series A Junior Participating Preferred Stock be increased to 450,000. 156 3. This Certificate of Increase and the increase in the authorized number of shares of Series A Junior Participating Preferred Stock provided for herein shall not become effective until, and shall become effective at, 12:01 a.m. on May 31, 1997. IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate of Increase this 30th day of May, 1997. DEAN WITTER, DISCOVER & CO. By: /s/ Christine A. Edwards --------------------------------- Name: Christine A. Edwards Title: Executive Vice President, General Counsel & Secretary 157 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 03:00 PM 03/24/1998 981113145 - 0923632 CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO. Pursuant to Section 242 of the General Corporation Law of the State of Delaware Morgan Stanley, Dean Witter, Discover & Co. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify that: FIRST: The Board of Directors of the Corporation, by unanimous written consent pursuant to Section 141 of the General Corporation Law of the State of Delaware, duly adopted resolutions setting forth a proposed amendment to the Amended and Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and authorizing the officers of the Corporation to submit such amendment to the stockholders of the Corporation for approval at the Corporation's 1998 annual meeting of stockholders. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Board of Directors declares it advisable that Article I of the Corporation's Amended and Restated Certificate of Incorporation be amended to read in its entirety as follows: ARTICLE I NAME ---- The name of the corporation (which is hereinafter referred to as the "Corporation") is: Morgan Stanley Dean Witter & Co. SECOND: Thereafter, pursuant to resolution of its Board of Directors, the 1998 annual meeting of stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by the Corporation's Amended and Restated Certificate of Incorporation were voted in favor of the amendment. THIRD: Said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 158 FOURTH: This Certificate of Amendment shall not become effective until, and shall become effective at, 5:00 p.m. on March 24, 1998. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by Ronald T. Carman, its Assistant Secretary, this 24th day of March, 1998. MORGAN STANLEY, DEAN WITTER, DISCOVER & CO. BY: /s/ Ronald T. Carman --------------------------------------- Ronald T. Carman, Assistant Secretary 159 CERTIFICATE OF ELIMINATION OF PREFERRED STOCK OF MORGAN STANLEY DEAN WITTER & CO. (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware) Morgan Stanley Dean Witter & Co., a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), certifies as follows: FIRST: The Corporation's Amended and Restated Certificate of Incorporation authorizes the issuance of 1,000,000 shares of a series of Preferred Stock designated 7-3/8% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "7-3/8% Preferred Stock"). SECOND: The Preferred Stock Financing Committee of the Board of Directors of the Corporation (the "Preferred Stock Financing Committee") redeemed and retired all issued and outstanding shares of the 7-3/8% Preferred Stock, which constituted all authorized shares of the 7-3/8% Preferred Stock. THIRD: Pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the "GCL"), the Preferred Stock Financing Committee adopted the following resolutions: RESOLVED FURTHER, that upon redemption of the 7-3/8% Preferred Stock and corresponding Depositary Shares, all of the shares of 7-3/8% Preferred Stock so redeemed shall be retired; and RESOLVED FURTHER, that upon redemption and retirement of the 7-3/8% Preferred Stock in accordance with the foregoing resolutions, none of the authorized shares of such series of Preferred Stock will be outstanding and no shares of such series thereafter will be issued; and RESOLVED FURTHER, that any officer of the Corporation is authorized and directed to execute a Certificate of Elimination as provided by Section 151(g) of the GCL in accordance with Section 103 of the GCL, substantially in the form attached as Exhibit A, with such changes therein as the officer executing the same may approve and as are permitted by the GCL to be made by such officer, such approval to be conclusively evidenced by such officer's execution of such Certificate of Elimination, and to file the same forthwith in the Office of the Secretary of State of the State of Delaware, and when such Certificate of Elimination becomes 160 effective, all references to the 7-3/8% Preferred Stock in the Amended and Restated Certificate of Incorporation of the Corporation shall be eliminated and the shares of 7-3/8% Preferred Stock so redeemed and retired shall resume the status of authorized and unissued shares of Preferred Stock of the Corporation, without designation as to series. FOURTH: Pursuant to the provisions of Section 151(g) of the GCL, all references to 7-3/8% Preferred Stock in the Amended and Restated Certificate of Incorporation of the Corporation hereby are eliminated, and the shares that were designated to such series hereby are returned to the status of authorized but unissued shares of the Preferred Stock of the Corporation, without designation as to series. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Martin M. Cohen, its Assistant Secretary, this 21 day of October, 1998. MORGAN STANLEY DEAN WITTER & CO. By: /s/ Martin M. Cohen ---------------------------- Title: Assistant Secretary 161 CERTIFICATE OF ELIMINATION OF THE 7.80% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY DEAN WITTER & CO. (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware) Morgan Stanley Dean Witter & Co., a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), certifies as follows: FIRST: The Corporation's Amended and Restated Certificate of Corporation authorizes the issuance of 1,150,000 shares of a series of Preferred Stock designated 7.80% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "7.80% Preferred Stock"). SECOND: Pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the "DGCL"), the Preferred Stock Financing Committee of the Board of Directors of the Corporation adopted the following resolutions: RESOLVED FURTHER, that none of the authorized shares of the 7.80% Preferred Stock are outstanding and none of the authorized shares of such series of Preferred Stock will be issued; and RESOLVED FURTHER, that any officer of the Corporation is authorized and directed to execute a Certificate of Elimination as provided by Section 151(g) of the DGCL in accordance with Section 103 of the DGCL, substantially in the form attached as Exhibit A, with such changes therein as the officer executing the same may approve and as are permitted by the DGCL to be made by such officer, such approval to be conclusively evidenced by such officer's execution of such Certificate of Elimination, and to file the same forthwith in the Office of the Secretary of State of the State of Delaware, and when such Certificate of Elimination becomes effective, all references to the 7.80% Preferred Stock in the Amended and Restated Certificate of Incorporation of the Corporation shall be eliminated and the shares of 7.80% Preferred Stock shall resume the status of authorized and unissued shares of Preferred Stock of the Corporation, without designation as to series. THIRD: Pursuant to the provisions of Section 151(g) of the DGCL, all references to 7.80% Preferred Stock in the Amended and Restated Certificate of Incorporation of the Corporation hereby are eliminated, and the shares that were designated to such series hereby are 162 returned to the status of authorized but unissued shares of the Preferred Stock of the Corporation, without designation as to series. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Martin M. Cohen, its assistant Secretary, this 2nd day of March, 1999. MORGAN STANLEY DEAN WITTER & CO. By /s/ Martin M. Cohen ------------------- Name: Martin M. Cohen Title: Assistant Secretary 163 CERTIFICATE OF ELIMINATION OF THE 7.82% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY DEAN WITTER & CO. (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware) Morgan Stanley Dean Witter & Co., a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), certifies as follows: FIRST: The Corporation's Amended and Restated Certificate of Corporation authorizes the issuance of 611,238 shares of a series of Preferred Stock designated 7.82% Cumulative Preferred Stock, par value $0.01 per share, with a stated value of $200.00 per share (the "7.82% Preferred Stock"). SECOND: Pursuant to the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the "DGCL"), the Preferred Stock Financing Committee of the Board of Directors of the Corporation adopted the following resolutions: RESOLVED FURTHER, that none of the authorized shares of the 7.82% Preferred Stock are outstanding and none of the authorized shares of such series of Preferred Stock will be issued; and RESOLVED FURTHER, that any officer of the Corporation is authorized and directed to execute a Certificate of Elimination as provided by Section 151(g) of the DGCL in accordance with Section 103 of the DGCL, substantially in the form attached as Exhibit A, with such changes therein as the officer executing the same may approve and as are permitted by the DGCL to be made by such officer, such approval to be conclusively evidenced by such officer's execution of such Certificate of Elimination, and to file the same forthwith in the Office of the Secretary of State of the State of Delaware, and when such Certificate of Elimination becomes effective, all references to the 7.82% Preferred Stock in the Amended and Restated Certificate of Incorporation of the Corporation shall be eliminated and the shares of 7.82% Preferred Stock shall resume the status of authorized and unissued shares of Preferred Stock of the Corporation, without designation as to series. THIRD: Pursuant to the provisions of Section 151(g) of the DGCL, all references to 7.82% Preferred Stock in the Amended and Restated Certificate of Incorporation of the Corporation hereby are eliminated, and the shares that were designated to such series hereby are 164 returned to the status of authorized but unissued shares of the Preferred Stock of the Corporation, without designation as to series. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Martin M. Cohen, its assistant Secretary, this 2nd day of March, 1999. MORGAN STANLEY DEAN WITTER & CO. By /s/ Martin M. Cohen -------------------- Name: Martin M. Cohen Title: Assistant Secretary 165 EX-10.22 3 AMENDMENTS TO DEAN WITTER START PLAN Exhibit 10.22 AMENDMENT TO THE DEAN WITTER START PLAN ---------------------- WHEREAS, Dean Witter Reynolds Inc. ("DWR"), a Delaware corporation, maintains the Dean Witter START Plan (the "START Plan"); WHEREAS, DWR desires that the START Plan be amended as set forth herein; NOW, THEREFORE, the START Plan is hereby amended as follows: 1. Effective January 1, 2000, Section 11(c) of the START Plan shall be amended by adding two new sentences immediately following the third sentence thereof to read as follows: "Effective January 1, 2000, if a Participant whose vested Accounts exceed the amount described in Section 411(a)(11) of the Code on the date the distribution commences does not consent to the distribution of the Participant's Plan Benefit under Section 11(b), then payment of the Participant's Plan Benefit shall, subject to Section 13(a), be deferred to such date as the Participant shall elect. Notwithstanding the foregoing, effective January 1, 2000, if the Participant's vested Accounts do not exceed $5,000 as of January 1 (or such other date(s) as the Plan Administrator shall designate from time to time), then the deferral of the Participant's Plan Benefit shall end, and distribution of the Participant's Plan Benefit shall be made approximately 90 days thereafter, provided, however, that at the time of distribution the Participant's vested Accounts do not, in fact, exceed $5,000." 2. Effective January 1, 1999, Morgan Stanley International Incorporated ("MSII") shall be a Participating Company, as defined in the START Plan, with respect to MSII employees primarily servicing business units or cost centers of otherwise Participating Companies; 3. Effective as of January 1, 1999, the first sentence of Section 4(b)(i)(3) of the START Plan is hereby amended by inserting the words ", determined with regard to the Participant's Earnings while an Eligible Employee" within the parenthetical and immediately following the words "up to 6% of Earnings." 4. Effective July 1, 1999, the fifth sentence of Section 6(d) of the START Plan is amended by adding the words ", is fully (100%) vested" after the words "who has attained age 55" and after the words "who has attained age 60." IN WITNESS WHEREOF, the undersigned had hereunder set his hand as of the 22nd day of December, 1999. DEAN WITTER REYNOLDS INC. By: /s/ Michael T Cunningham ------------------------ Exhibit 10.22 AMENDMENT TO THE DEAN WITTER START PLAN ---------------------- WHEREAS, pursuant to a Stock Purchase Agreement between SPS Transaction Services, Inc. ("SPS") and Associates First Capital Corporation ("Associates"), SPS has sold substantially all of its assets to Associates and all of the common stock of SPS held by the Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (the "Plan") has been converted into cash; and WHEREAS, the Compensation Committee of Dean Witter Reynolds Inc. (the "Company") has determined that, as a result of the closing of the transaction between SPS and Associates, it is necessary and appropriate to amend the Plan as hereinafter set forth and has authorized an officer of the Company to execute this amendment. NOW, THEREFORE, BE IT RESOLVED: 1. Section 3(f) of the Plan is amended in its entirety to read as follows: Transferred Employees. If a Participant transfers employment to SPS --------------------- Transaction Services, Inc. (or any of its subsidiaries) ("SPS") before October 15, 1998 or Nations-Securities, A Dean Witter/Nations Bank Company ("Nations"), such transferred Participant's Period of Service shall include service with SPS before October 15, 1998 or Nations but not more than the lesser of such transferred Participant's service with SPS before October 15, 1998 or Nations or the service necessary for such transferred Participant to fully vest in the Matching Contribution Account, such post- transfer service to be determined in accordance with this Section 3. 2. Section 3(g) of the Plan is amended in its entirety to read as follows: Service with SPS. In the case of any individual who was an employee ---------------- of SPS and who either transferred employment to a member of the Affiliated Group before October 15, 1998 or severed employment with SPS before October 15, 1998 and is hired as an Employee by a member of the Affiliated Group within 12 months of such severance, such Employee's Service used to determine a Year of Service under this Section 3 shall include service with SPS before October 15, 1998 determined by applying the rules set forth in this Section 3 to such Employee's employment by SPS as if such employment was employment by a member of the Affiliated Group. 3. Section 6(c) of the Plan is amended by inserting the following new sentence at the end thereof: Notwithstanding any provision of the Plan to the contrary, a Participant shall not be permitted to make a Fund Balance Transfer into the SPS Stock Fund on or after October 15, 1998. 4. Section 7(b) of the Plan is amended by inserting the following new sentence at the end thereof: Notwithstanding any provision of the Plan to the contrary, any amounts that are attributable to employer contributions and that are held in the SPS Stock Fund on October 15, 1998 shall be transferred to the Morgan Stanley Dean Witter Stock Fund as soon as practicable after such date. 5. Section 7(c)(v) of the Plan is amended by inserting the following new sentence at the end thereof: Notwithstanding any provision of the Plan to the contrary, as soon as practicable after the SPS Stock Conversion Date, the assets of the SPS Stock Fund (other than those attributable to employer contributions) shall be invested in a U.S. Government money market Investment Fund available under the Plan or in such other similar Investment Fund as the Trustee deems suitable, and thereafter the SPS Stock Fund shall terminate and cease to be an Investment Fund under the Plan. 6. Section 9(a) of the Plan is amended by inserting the following new sentence at the end thereof: Notwithstanding any provision of the Plan to the contrary, an Employee shall not be permitted to make such a contribution on or after October 15, 1998 in the form of Stock received from a plan maintained by SPS or a note evidencing a participant loan under the SPS Transaction Services, Inc. START Plan. 7. The first sentence of Section 12(h)(ix) of the Plan is amended by inserting the phrase "before October 15, 1998" at the end thereof. 8. The first sentence of Section 12(h)(x) of the Plan is amended by inserting the phrase "before October 15, 1998" at the end thereof. 9. Section 21 of the Plan is amended by inserting the following new definition immediately after the definition of "SPS Stock": "SPS Stock Conversion Date" means the date upon which SPS Stock is ------------------------- converted into cash in accordance with the Stock Purchase Agreement between SPS and Associates First Capital Corporation. 10. The Plan is further amended by inserting the following new Supplement E immediately after Supplement D: SUPPLEMENT E SALE OF SPS Pursuant to a Stock Purchase Agreement between SPS and Associates First Capital Corporation ("Associates"), SPS has sold substantially all of the stock of its subsidiaries to Associates, and all of the SPS Stock held by the Plan was converted into cash. Accordingly, except where the context clearly requires otherwise, all of the references in the Plan to SPS, the SPS START Plan, SPS Stock and the SPS Stock Fund shall be deemed to be deleted effective as of the SPS Stock Conversion Date. Following such sale there were no employees of SPS, the SPS START Plan was transferred to Associates, and the SPS Stock Fund was terminated. 11. The foregoing amendments to the Plan shall be effective as of October 15, 1998. IN WITNESS WHEREOF, the undersigned had hereunder set his hand as of the 22nd day of December, 1999. DEAN WITTER REYNOLDS INC. By: /s/ Michael T Cunningham ------------------------- EX-10.32 4 AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.32 MORGAN STANLEY DEAN WITTER & CO. EMPLOYEE STOCK PURCHASE PLAN Amended December 14, 1999 SECTION 1 - PURPOSE - ------------------- The purpose of the Plan is to secure for the Company and its stockholders the benefits of the incentive inherent in the ownership of Common Stock by current and future Eligible Employees. The Plan is intended to comply with the provisions of Code Section 423 and shall be administered, interpreted and construed in accordance with such provisions. SECTION 2 - DEFINITIONS - ----------------------- When used herein, the following terms shall have the following meanings: 2.1 "Board of Directors" means the Board of Directors of the Company, or any ------------------ committee of such Board of Directors, as the Board of Directors may determine from time to time. 2.2 "Code" means the Internal Revenue Code of 1986, as amended from time to ---- time, or any successor statute thereto. 2.3 "Committee" means the committee appointed by the Board of Directors to --------- administer the Plan pursuant to Section 12. 2.4 "Common Stock" means common stock, par value $0.01 per share, of the ------------ Company. 2.5 "Common Stock Account" means the account established with, and maintained -------------------- by, the Custodian for the purpose of holding Common Stock purchased pursuant to this Plan. 2.6 "Company" means Morgan Stanley Dean Witter & Co., a Delaware corporation, ------- and its successors and assigns. 2.7 "Custodian" means the agent selected by the Company to hold Common Stock --------- purchased under the Plan. 2.8 "Disability" means disability as defined under any qualified, defined ---------- benefit plan sponsored by the Company or any Subsidiary in which an Eligible Employee is a participant on the date such Eligible Employee terminates employment with the Company or any Subsidiary. 2.9 "Eligible Compensation" means the sum of the types and amounts of --------------------- compensation determined from time to time by the Committee in its sole discretion to be eligible to be taken into account under the Plan, provided that no such determination shall include or exclude any type or amount of compensation contrary to the requirements of Section 423 of the Code and any regulations promulgated thereunder. 1 2.10 "Eligible Employee" means all employees of the Company and its ----------------- Subsidiaries that have been designated as eligible to participate in the Plan pursuant to and in accordance with rules prescribed by the Committee from time to time, which rules, however, shall neither permit nor deny participation in the Plan contrary to the requirements of the Code (including, but not limited to, Section 423(b)(3), (4), (5), and (8) thereof) and the regulations promulgated thereunder. 2.11 "Fair Market Value" means the average of the high and low sales prices of ----------------- a share of Common Stock as reported on the New York Stock Exchange Composite Tape on the date in question or, if the Common Stock shall not have been traded on such date, the average of the high and low sales prices on the first day prior thereto on which the Common Stock was so traded or, if the Common Stock was not so traded, such other amount as may be determined by the Committee in its sole discretion. 2.12 "Investment Date" means for each Eligible Employee, each date on which he --------------- receives his Eligible Compensation in each Plan Year, or such other dates as may be determined by the Committee in its sole discretion. 2.13 "Participant" means an Eligible Employee who has met the requirements of ----------- Section 3 and has elected to participate in the Plan pursuant to Section 4.1. 2.14 "Payroll Deduction Account" means the bookkeeping entry established by the ------------------------- Company for each Participant pursuant to Section 4.3. 2.15 "Plan" means the Morgan Stanley Dean Witter & Co. Employee Stock Purchase ---- Plan as set forth herein and as amended from time to time. 2.16 "Plan Year" means a calendar year. --------- 2.17 "Retirement" means retirement as defined by any qualified or non-qualified ---------- defined benefit plan sponsored by the Company or a Subsidiary in which an Eligible Employee is a participant on the date such Eligible Employee terminates employment with the Company or any Subsidiary. 2.18 "Subsidiary" means any corporation designated by the Committee which ---------- constitutes a "subsidiary" of the Company, within the meaning of Code Section 424(f). SECTION 3 - ELIGIBILITY - ----------------------- 3.1 General Rule. Subject to Section 3.3, each Eligible Employee shall be - ----------------- eligible to participate in the Plan beginning on the later of (i) the Eligible Employee's date of hire by the Company or any Subsidiary and (ii) the date such employee becomes an Eligible Employee. 3.2 Leave of Absence. Unless the Committee otherwise determines, a Participant - --------------------- on a paid leave of absence shall continue to be a Participant in the Plan so long as such Participant is on such paid leave of absence. Unless otherwise determined by the Committee, a Participant on an unpaid leave of absence shall not be entitled to participate in any offering commencing after such unpaid leave has begun but shall not be deemed to have terminated employment for purposes of the Plan. A Participant who, upon failing to return to work following a leave of absence, is deemed not to be an employee, shall not be entitled to participate in any offering commencing after such termination of employment, and such Participant's Payroll Deduction Account shall be paid out in accordance with Section 6.2. 3.3 Common Stock Account. As a condition to participation in this Plan, each - ------------------------- Eligible Employee shall be required to hold shares purchased hereunder in a Common Stock Account and such employee's decision to participate in the Plan shall constitute the appointment of the Custodian as custodial agent for the purpose of holding such shares. Such Common Stock Account will be governed by, and subject to, the terms and conditions of a written agreement between the Company and the Custodian. 2 SECTION 4 - PARTICIPATION AND PAYROLL DEDUCTIONS - ------------------------------------------------ 4.1 Enrollment. Each Eligible Employee may elect to participate in the Plan - --------------- for a Plan Year by completing a Company-specified enrollment process. Upon completing the enrollment process, an Eligible Employee shall commence participation in the Plan on the next practicable Investment Date. Each Eligible Employee shall be advised of the purchase price (expressed as a percentage of Fair Market Value) determined under Section 5.2(b) before enrolling in the Plan. 4.2 Amount of Deduction. When enrolling, the Eligible Employee shall specify a - ------------------------ payroll deduction amount of a percentage (in whole numbers) of Eligible Compensation which shall be withheld from such Eligible Employee's regular paychecks, including bonus paychecks, for the Plan Year, provided, however, ----------------- that the Committee may determine and specify, from time to time, (i) the range of permissible percentages of Eligible Compensation an Eligible Employee may specify to be withheld and (ii) the maximum amount, if any, of Eligible Compensation that may be deducted for an Eligible Employee in any Plan Year, and provided further, that no such determination shall be contrary to the requirements of Code Section 423 and the regulations promulgated thereunder. The Committee, in its sole discretion, may authorize payment in respect of any option exercised hereunder by personal check. 4.3 Payroll Deduction Accounts. Each Participant's payroll deduction shall be - ------------------------------- credited, as soon as practicable following the relevant pay date, to a Payroll Deduction Account, pending the purchase of Common Stock in accordance with the provisions of the Plan. All such amounts shall be assets of the Company and may be used by the Company for any corporate purpose. No interest shall accrue or be paid on amounts credited to a Payroll Deduction Account. 4.4 Subsequent Plan Years. Unless otherwise specified prior to the beginning - -------------------------- of any Plan Year by completing a Company-specified process, a Participant shall be deemed to have elected to participate in each subsequent Plan Year for which the Participant is eligible to the same extent and in the same manner as at the end of the prior Plan Year. 4.5 Changes in Participation. - ----------------------------- (a) At any time during a Plan Year, a Participant may cease participation in the Plan by completing a Company-specified process. Such cessation will become effective as soon as practicable following completion of such process, whereupon no further payroll deductions will be made and the Company shall pay to such Participant an amount equal to the balance in the Participant's Payroll Deduction Account as soon as practicable thereafter. To the extent then an Eligible Employee, any Participant who ceased to participate may elect to participate again as of any subsequent Investment Date in any calendar quarter after the quarter in which such Participant ceased to participate. (b) At any time during a Plan Year (but not more than once in any calendar quarter), a Participant may increase or decrease the percentage of Eligible Compensation subject to payroll deduction within the limits approved by the Committee pursuant to Section 4.2 by completing a Company- specified process. Such increase or decrease shall become effective with the first pay period following the completion of such process to which it may be practically applied. Notwithstanding any increase in the percentage of Eligible Compensation subject to pay deduction pursuant to this Section 4.5(b), in no event may the amount of Eligible Compensation deducted for an Eligible Employee for any Plan Year exceed the maximum amount authorized to be deducted pursuant to Section 4.2. 3 (c) Notwithstanding anything herein to the contrary, in the event the Committee determines under Section 5.2(b) to change the purchase price of a share of Common Stock, each Participant shall be advised in advance of the effective date of such change and afforded the opportunity to make a change in participation under Section 4.5(a) or 4.5(b) before such change in the purchase price takes effect. SECTION 5 - OFFERINGS --------------------- 5.1 Maximum Number of Shares. The Plan will be implemented by making offerings - ----------------------------- of Common Stock on each Investment Date until the maximum number of shares of Common Stock available under the Plan have been issued pursuant to the exercise of options. 5.2 Grant and Exercise of Options - ---------------------------------- (a) Subject to Section 5.3, on each Investment Date, each Participant shall be deemed, subject to Section 5.4, to have been granted an option to purchase, and shall be deemed, without any further action, to have exercised such option and purchased the number of shares of Common Stock determined by dividing the amount credited to the Participant's Payroll Deduction Account on such date by the purchase price (as determined in paragraph (b) below). All such shares shall be credited to the Participant's Common Stock Account. (b) The purchase price for each share of Common Stock shall be expressed as a percentage of Fair Market Value on the Investment Date and shall be determined from time to time by the Committee, but in no event shall such purchase price be less than 85 percent of the Fair Market Value of such share on the Investment Date. 5.3 Oversubscription of Shares. If the total number of shares for which - ------------------------------- options are exercised on any Investment Date exceeds the maximum number of shares available for the applicable offering, the Company shall make an allocation of the shares available for delivery and distribution among the Participants in as nearly a uniform manner as shall be practicable, and the balance of all amounts credited to the Payroll Deduction Accounts shall be applied to the next offering. 5.4 Limitations on Grant and Exercise of Options - ------------------------------------------------- (a) No option granted under this Plan shall permit a Participant to purchase stock under all employee stock purchase plans (as defined by Code Section 423(b)) of the Company and any Subsidiary in an amount which, in the aggregate, would exceed $25,000 based on the Fair Market Value of such stock (determined at the time the option is granted) for each calendar year in which the option is outstanding at any time. (b) No employee who would own, immediately after the option is granted, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary (a "5% Owner") shall be granted an option. For purposes of determining whether an employee is a 5% Owner, the rules of Code Section 424(d) shall apply in determining the stock ownership of an individual and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee. SECTION 6 - DISTRIBUTIONS OF COMMON STOCK ACCOUNT - ------------------------------------------------- 6.1 Restrictions on Distributions. Shares of Common Stock purchased hereunder - --- (other than shares of Common Stock acquired upon the automatic investment of dividends pursuant to Section 7) cannot be withdrawn from the Plan by a Participant, or a former Participant who has terminated employment with the Company and its Subsidiaries, for a period of 24 months immediately 4 following the Investment Date on which such shares were purchased, unless otherwise determined by the Company consistent with the requirements of Section 423 of the Code. 6.2 Termination of Employment. If a Participant's employment with the Company - ------------------------------ and its Subsidiaries terminates for any reason during a Plan Year, shares credited to the Participant's Common Stock Account may be withdrawn by the Participant from the Plan, subject to the provisions of Section 6.1, or may be sold by the Participant through the Plan. Shares not otherwise withdrawn from or sold through the Plan will be distributed to the Participant as soon as practicable following the expiration of a 24 month period beginning on the Investment Date on which the last share was purchased under the Plan. Additionally, any amount credited to the Participant's Payroll Deduction Account shall be refunded to the Participant or, in the event of the Participant's death, to the Participant's estate, as soon as practicable. 6.3 During Employment. Prior to the Participant's termination of employment - ---------------------- with the Company and its Subsidiaries, a Participant may withdraw some or all of the whole shares credited to the Participant's Common Stock Account, subject to the provisions of Section 6.1, or may sell through the Plan some or all of the whole shares credited to the Participant's Common Stock Account, subject to the provisions of Section 10.3. 6.4 Sales through the Plan. Subject to the provisions of Section 10.3, a - --------------------------- Participant or a former Participant who has terminated employment with the Company and its Subsidiaries may sell his shares of Common Stock acquired under the Plan pursuant to procedures established from time to time by the Company. SECTION 7 - DIVIDENDS ON SHARES - ------------------------------- All cash dividends paid with respect to shares of Common Stock held in a participant's Common Stock Account shall be invested automatically in shares of Common Stock purchased at 100 percent of Fair Market Value on the date such dividend is paid. All non-cash distributions paid on Common Stock held in a Participant's Common Stock Account shall be paid to the Participant as soon as practicable. SECTION 8 - RIGHTS AS A STOCKHOLDER - ----------------------------------- When a Participant purchases Common Stock pursuant to the Plan or when Common Stock is credited to a Participant's Common Stock Account, subject to the restrictions set forth in Sections 6 and 10.3, the Participant shall have all of the rights and privileges of a stockholder of the Company with respect to the shares so purchased or credited, whether or not certificates representing shares shall have been issued. SECTION 9 - OPTIONS NOT TRANSFERABLE - ------------------------------------ Neither a Participant's Payroll Deduction Account nor any options granted under the Plan to a Participant may be transferred, pledged or otherwise disposed of in any way (other than by will or the laws of descent and distribution) by a Participant and such options are exercisable during the Participant's lifetime only by the Participant. Any attempt at such assignment, transfer, pledge or other disposition shall be without effect. SECTION 10 - COMMON STOCK - ------------------------- 10.1 Reserved Shares. There shall be reserved for issuance and purchase under - --------------------- the Plan an aggregate of 25,404,187 shares of Common Stock (as of October 31, 1999), subject to adjustment as provided in Section 11. Shares subject to the Plan may be shares now or hereafter authorized but unissued, treasury shares, or both. 5 10.2 Restrictions on Exercise. In its sole discretion, the Board of Directors - ------------------------------ may require as conditions to the exercise of any option that shares of Common Stock reserved for issuance upon the exercise of an option shall have been duly listed on any recognized national securities exchange, and that either a registration statement under the Securities Act of 1933, as amended, with respect to said shares shall be effective, or the Participant shall have represented at the time of purchase, in form and substance satisfactory to the Company, that it is the Participant's intention to purchase the shares for investment only and not for resale or distribution. 10.3 Restriction on Sale. Shares of Common Stock purchased hereunder (other - ------------------------- than shares of Common Stock acquired upon the automatic investment of dividends pursuant to Section 7) shall not be transferable by a Participant for a period of 12 months immediately following the Investment Date on which such shares were purchased. SECTION 11 - ADJUSTMENT UPON CHANGES IN CAPITALIZATION - ------------------------------------------------------ In the event of a subdivision or consolidation of the outstanding shares of Common Stock, or the payment of a stock dividend thereon, the number of shares reserved or authorized to be reserved under this Plan shall be increased or decreased, as the case may be, proportionately, and such other adjustments shall be made as may be deemed necessary or equitable by the Board of Directors. In the event of any other change affecting the Common Stock, such adjustments shall be made as may be deemed equitable by the Board of Directors, in its sole discretion, to give proper effect to such event, subject to the limitations of Code Section 424. SECTION 12 - ADMINISTRATION - --------------------------- 12.1 Appointment. The Plan shall be administered by the Committee. The - ----------------- Committee shall consist of two or more members who shall serve at the pleasure of the Board of Directors. The Board of Directors may from time to time appoint members of the Committee in substitution for, or in addition to, members previously appointed and may fill vacancies, however caused, in the Committee. 12.2 Authority. Subject to the express provisions of the Plan, the Committee - --------------- shall have authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable in administering the Plan, all of which determinations shall be final and binding upon all persons. If and to the extent required by Securities and Exchange Commission Rule 16b-3 or any successor exemption under which the Committee believes it is appropriate for the Plan to qualify, the Committee may restrict a Participant's ability to participate in the Plan or sell any Common Stock received under the Plan for such period as the Committee deems appropriate or may impose such other conditions in connection with participation or distributions under the Plan as the Committee deems appropriate. 12.3 Duties of Committee. The Committee shall provide for the establishment - ------------------------- and maintenance of records of the Plan and of each Payroll Deduction Account and Common Stock Account established for any Participant hereunder. 12.4 Plan Expenses. The Company shall pay the fees and expenses of accounts - ------------------- and counsel to the Company or the Committee, agents and other personnel and all other costs of administration of the Plan. 12.5 Indemnification. To the maximum extent permitted by law, no member of the - --------------------- Committee shall be personally liable by reason of any contract or other instrument executed by such member or on such member's behalf in such member's capacity as a member of the Committee or for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless, directly from its own assets (including the proceeds of any insurance policy the premiums of 6 which are paid from the Company's own assets), each member of the Committee and each other officer, employee or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan or to the management or control of the assets of the Plan may be delegated or allocated, against any cost or expense (including fees, disbursements and other charges of legal counsel) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud, willful misconduct or bad faith. The foregoing shall not be deemed to limit the Company's obligation to indemnify any member of the Committee under the Company's Certificate of Incorporation or By-laws, or any other agreement between the Company and such member. SECTION 13 - AMENDMENT AND TERMINATION - -------------------------------------- 13.1 Amendment. Subject to the provisions of Code Section 423, the Board of - --------------- Directors may amend the Plan in any respect; provided, however, that the ----------------- Plan may not be amended in any manner that will retroactively impair or otherwise adversely affect the rights of any person to benefits under the Plan which have accrued prior to the date of such action. 13.2 Termination. The Plan will terminate on the Investment Date that - ----------------- Participants become entitled to purchase a number of shares greater than the number of shares remaining available for purchase. In addition, the Plan may be terminated at any prior time, at the sole discretion of the Board of Directors. SECTION 14 - GOVERNMENTAL AND OTHER REGULATIONS - ----------------------------------------------- The Plan and the grant and exercise of options to purchase shares hereunder, and the Company's obligation to sell and deliver shares upon the exercise of options to purchase shares, shall be subject to all applicable Federal, state and foreign laws, rules and regulations, and to such approvals by any regulatory or governmental agency as, in the opinion of counsel to the Company, may be required. SECTION 15 - NO EMPLOYMENT RIGHTS - --------------------------------- The Plan does not create, directly or indirectly, any right for the benefit of any employee or class of employees to purchase any shares from the Company (other than as expressly provided in, and subject to the terms and conditions of, the Plan), or create in any employee or class of employees any right with respect to continuation of employment by the Company or any Subsidiary, and it shall not be deemed to interfere in any way with the Company's or any Subsidiary's right to terminate, or otherwise modify, an employee's employment at any time. SECTION 16 - WITHHOLDING - ------------------------ As a condition to receiving shares hereunder, the Company may require the Participant to make a cash payment to the Company of, or the Company may withhold from any shares distributable under the Plan, an amount necessary to satisfy all Federal, state, city or other taxes required to be withheld in respect of such payments pursuant to any law or governmental regulation or ruling. SECTION 17 - OFFSETS - -------------------- To the extent permitted by law, the Company shall have the absolute right to withhold any amounts payable to any Participant under the terms of the Plan to the extent of any amount owed for any reason by such Participant to the Company or any Subsidiary and to set off and apply the amounts so withheld to payment of any such amount owed to the Company or any Subsidiary, whether or not such amount shall then be immediately due and payable and in such order or priority as among such amounts owed as the Committee, in its sole discretion, shall determine. 7 SECTION 18 - NOTICES, ETC. - -------------------------- All elections, designations, requests, notices, instructions and other communications from a Participant to the Committee or the Company required or permitted under the Plan shall be in Company-specified form, and if required to be in writing shall be mailed by first-class mail or delivered to such Company- specified location and shall be deemed to have been given and delivered only upon actual receipt thereof at such location. SECTION 19 - CAPTIONS, ETC. - --------------------------- The captions of the sections and paragraphs of this Plan have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provision of the Plan. References to sections herein are to the specified sections of this Plan unless another reference is specifically stated. Wherever used herein, a singular number shall be deemed to include the plural unless a different meaning is required by the context. SECTION 20 - EFFECT OF PLAN - --------------------------- The provisions of the Plan shall be binding upon, and inure to the benefit of, all successors of the Company and each Participant, including, without limitation, such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. SECTION 21 - GOVERNING LAW - -------------------------- The internal laws of the State of New York shall govern all matters relating to this Plan except to the extent superseded by the laws of the United States. 8 EX-10.37 5 AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Exhibit 10.37 AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Morgan Stanley Dean Witter & Co. (the "Company") hereby amends the Morgan Stanley Dean Witter & Co. Supplemental Executive Retirement Plan, as amended (the "SERP"), as follows: 1. The second sentence of Paragraph I of the SERP is amended, effective as of January 1, 1999, by adding the following clause, immediately prior to the end thereof: "; and provided further, that effective January 1, 1999, the term "Firm" shall not include Morgan Stanley International Incorporated ("MSII") to the extent of MSII employees primarily servicing business units and/or cost centers of subsidiaries of the former Dean Witter, Discover & Co., determined immediately prior to its merger with Morgan Stanley Group Inc. and no employment in such an excluded position shall count as "Credited Service" under the Plan, except as specifically provided in Appendix C." 1. The third paragraph of Appendix C of the SERP is amended, effective as of January 1, 1999, by adding the following sentence to the end thereof: "Effective January 1, 1999, the provisions of this paragraph shall be applied to an employee in an excluded position at MSII who transfers directly from MSII to the Firm as if the prior service with MSII in an excluded position had been service with DWD." 3. The last paragraph of Appendix C of the SERP is further amended, effective as of January 1, 1999, by adding the following sentence at the end thereof: "Notwithstanding anything herein to the contrary, for former Kearny employees, the term "Salary" shall mean only base compensation earned for any period while employed with the Firm, whether or not paid during such period and Salary shall be limited to an annual base compensation rate of $200,000." IN WITNESS WHEREOF, the Company has caused this Amendment to be executed on its behalf as of January 1, 1999. MORGAN STANLEY DEAN WITTER & CO. By: /s/ Michael T. Cunningham ------------------------- EX-11 6 STATEMENT RE: COMPUTATION OF EARNINGS PER COMMON SHARE Morgan Stanley Dean Witter & Co. Computation of Earnings Per Share (In millions, except share and per share data) EXHIBIT 11
Fiscal Year Ended ------------------------------------------------------------------------- November 30 November 30 November 30 1999 1998 1997 ------------------------ ---------------------- --------------------- Basic: Weighted-average shares outstanding 1,096,789,720 1,151,645,450 1,149,636,466 ======================== ====================== ===================== Earnings: Income before cumulative effect of accounting change $4,791 $3,393 $2,586 Cumulative effect of accounting change - (117) - Less: Preferred stock dividend requirements (44) (55) (66) ------------------------ ---------------------- --------------------- Earnings applicable to common shares $4,747 $3,221 $2,520 ======================== ====================== ===================== Basic EPS before cumulative effect of accounting change $4.33 $2.90 $2.19 Cumulative effect of accounting change - (0.10) - ------------------------ ---------------------- --------------------- Basic earnings per share $4.33 $2.80 $2.19 ======================== ====================== ===================== Diluted: Weighted-average shares outstanding 1,096,789,720 1,151,645,450 1,149,636,466 Average common shares issuable under employee benefit plans 39,347,870 37,079,530 38,729,302 Average common shares issuable upon conversion of ESOP preferred stock 23,363,080 23,863,150 24,247,182 ------------------------ ---------------------- --------------------- Total weighted-average diluted shares 1,159,500,670 1,212,588,130 1,212,612,950 ======================== ====================== ===================== Earnings: Income before cumulative effect of accounting change $4,791 $3,393 $2,586 Cumulative effect of accounting change - (117) - Less: Preferred stock dividend requirements (36) (47) (61) ------------------------ ---------------------- --------------------- Earnings applicable to common shares $4,755 $3,229 $2,525 ======================== ====================== ===================== Diluted EPS before cumulative effect of accounting change $4.10 $2.76 $2.08 Cumulative effect of accounting change - (0.09) - ------------------------ ---------------------- -------------------- Diluted earnings per share $4.10 $2.67 $2.08 ======================== ====================== ====================
EX-12 7 STATEMENT RE: RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (Dollars in millions)
Fiscal Year 1999 1998 1997 ------------------- -------------------- -------------------- Ratio of Earnings to Fixed Charges Earnings: Income before income taxes/1/ $7,728 $5,385 $4,274 Add: Fixed charges, net 11,499 13,614 10,898 ------------------- -------------------- -------------------- Income before income taxes and fixed charges, net $19,227 $18,999 $15,172 =================== ==================== ==================== Fixed charges: Total interest expense $11,390 $13,514 $10,806 Interest factor in rents 109 100 92 ------------------- -------------------- -------------------- Total fixed charges $11,499 $13,614 $10,898 =================== ==================== ==================== Ratio of earnings to fixed charges 1.7 1.4 1.4 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends Earnings: Income before income taxes/1/ $7,728 $5,385 $4,274 Add: Fixed charges, net 11,499 13,614 10,898 ------------------- -------------------- -------------------- Income before income taxes and fixed charges, net $19,227 $18,999 $15,172 =================== ==================== ==================== Fixed charges: Total interest expense $11,390 $13,514 $10,806 Interest factor in rents 109 100 92 Preferred stock dividends 72 87 110 ------------------- -------------------- -------------------- Total fixed charges and preferred stock dividends $11,571 $13,701 $11,008 =================== ==================== ==================== Ratio of earnings to fixed charges and preferred stock dividends 1.7 1.4 1.4
/1/ 1998 Income before income taxes does not include a cumulative effect of accounting change. "Earnings" consist of income before income taxes and fixed charges. "Fixed charges" consist of interest costs, including interest on deposits, and that portion of rent expense estimated to be representative of the interest factor. The preferred stock dividend amounts represent pre-tax earnings required to cover dividends on preferred stock. EX-13.1 8 QUARTERLY RESULTS Exhibit 13.1
1999 FISCAL QUARTER(2) 1998 FISCAL QUARTER ------------------------------------------ -------------------------------------------- (dollars in millions, except share and per share data) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH - -------------------------------------------------------------------------------- -------------------------------------------- Total revenues $ 8,405 $ 8,529 $ 8,370 $ 8,624 $ 7,585 $ 8,428 $ 7,498 $ 7,620 Interest expense 2,877 2,753 2,914 2,846 3,145 3,554 3,377 3,438 Provision for consumer loan losses 177 119 113 120 405 275 280 213 - -------------------------------------------------------------------------------- -------------------------------------------- Net revenues 5,351 5,657 5,343 5,658 4,035 4,599 3,841 3,969 - -------------------------------------------------------------------------------- -------------------------------------------- Total non-interest expenses 3,679 3,799 3,780 3,023 2,903 3,202 2,931 2,708 Gain on sale of businesses -- -- -- -- -- -- -- 685 - -------------------------------------------------------------------------------- -------------------------------------------- Income before income taxes and cumulative effect of accounting change 1,672 1,858 1,563 2,635 1,132 1,397 910 1,946 Provision for income taxes 635 707 593 1,002 441 545 284 722 - -------------------------------------------------------------------------------- -------------------------------------------- Income before cumulative effect of accounting change 1,037 1,151 970 1,633 691 852 626 1,224 Cumulative effect of accounting change -- -- -- -- (117) -- -- -- - -------------------------------------------------------------------------------- -------------------------------------------- Net income $ 1,037 $ 1,151 $ 970 $ 1,633 $ 574 $ 852 $ 626 $ 1,224 - -------------------------------------------------------------------------------- -------------------------------------------- Basic earnings per share(1) (3): Income before cumulative effect of accounting change $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.58 $ 0.72 $0.54 $ 1.08 Cumulative effect of accounting change -- -- -- -- (0.10) -- -- -- - -------------------------------------------------------------------------------- -------------------------------------------- Net income $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.48 $ 0.72 $ 0.54 $ 1.08 Diluted earnings per share(1) (3): Income before cumulative effect of accounting change $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.55 $ 0.69 $ 0.51 $ 1.04 Cumulative effect of accounting change -- -- -- -- (0.09) -- -- -- - -------------------------------------------------------------------------------- -------------------------------------------- Net income $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.46 $ 0.69 $ 0.51 $ 1.04 Dividends to common shareholders(1) $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.10 $ 0.10 $ 0.10 $ 0.10 Book value(1) $ 12.47 $ 13.00 $ 13.27 $ 14.85 $ 11.24 $ 10.98 $ 11.07 $ 11.94 Stock price range(1) (4) $31.16- $44.53- $41.07- $43.19- $26.13- $34.88- $29.03- $19.22- 48.50 57.10 51.78 63.63 35.25 42.22 42.22 37.38 - -------------------------------------------------------------------------------- --------------------------------------------
(1) Amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 2000. (2) Certain reclassifications have been made to previously reported fiscal 1999 quarterly amounts. (3) Summation of the quarters' earnings per common share may not equal the annual amounts due to the averaging effect of the number of shares and share equivalents throughout the year. (4) Closing prices represent the range of sales per share on the New York Stock Exchange for the periods indicated. The number of stockholders of record at November 30, 1999 approximated 152,000. The number of beneficial owners of common stock is believed to exceed this number. EX-13.2 9 SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA Exhibit 13.2
fiscal year/(1)/ (dollars in millions, except share and per share data) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Revenues: Investment banking $ 4,523 $ 3,340 $ 2,694 Principal transactions: Trading 5,983 3,283 3,191 Investments 725 89 463 Commissions 2,921 2,321 2,066 Fees: Asset management, distribution and administration 3,170 2,889 2,525 Merchant and cardmember 1,492 1,647 1,704 Servicing 1,194 928 762 Interest and dividends 13,755 16,436 13,583 Other 165 198 144 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 33,928 31,131 27,132 Interest expense 11,390 13,514 10,806 Provision for consumer loan losses 529 1,173 1,493 - ----------------------------------------------------------------------------------------------------------------------------------- Net revenues 22,009 16,444 14,833 - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: Compensation and benefits 8,398 6,636 6,019 Other 5,883 5,108 4,466 Merger-related expenses -- -- 74 Relocation charge -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 14,281 11,744 10,559 - ----------------------------------------------------------------------------------------------------------------------------------- Gain on sale of businesses -- 685 -- - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 7,728 5,385 4,274 Provision for income taxes 2,937 1,992 1,688 - ----------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 4,791 3,393 2,586 Cumulative effect of accounting change -- (117) -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,791 $ 3,276 $ 2,586 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings applicable to common shares/(2)/ $ 4,747 $ 3,221 $ 2,520 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA/(3)/: Earnings per common share: Basic before cumulative effect of accounting change $ 4.33 $ 2.90 $ 2.19 Cumulative effect of accounting change -- (0.10) -- - ----------------------------------------------------------------------------------------------------------------------------------- Basic $ 4.33 $ 2.80 $ 2.19 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted before cumulative effect of accounting change $ 4.10 $ 2.76 $ 2.08 Cumulative effect of accounting change -- (0.09) -- - ----------------------------------------------------------------------------------------------------------------------------------- Diluted $ 4.10 $ 2.67 $ 2.08 - ----------------------------------------------------------------------------------------------------------------------------------- Book value per common share $ 14.85 $ 11.94 $ 11.06 Dividends per common share $ 0.48 $ 0.40 $ 0.28 BALANCE SHEET AND OTHER OPERATING DATA: Total assets $ 366,967 $ 317,590 $302,287 Consumer loans, net 20,229 15,209 20,033 Total capital/(4)/ 39,699 37,922 33,577 Long-term borrowings/(4)/ 22,685 23,803 19,621 Shareholders' equity 17,014 14,119 13,956 Return on average common shareholders' equity 32.6% 24.5% 22.0% Average common and equivalent shares/(2)(3)/ 1,096,789,720 1,151,645,450 1,149,636,466 - ------------------------------------------------------------------------------------------------------------------------------------ fiscal year/(1)/ (dollars in millions, except share and per share data) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Revenues: Investment banking $ 2,190 $ 1,556 Principal transactions: Trading 2,659 1,685 Investments 86 121 Commissions 1,776 1,533 Fees: Asset management, distribution and administration 1,732 1,377 Merchant and cardmember 1,505 1,135 Servicing 809 680 Interest and dividends 11,288 10,530 Other 126 115 - --------------------------------------------------------------------------------------------------------------------------- Total revenues 22,171 18,732 Interest expense 8,934 8,190 Provision for consumer loan losses 1,214 722 - --------------------------------------------------------------------------------------------------------------------------- Net revenues 12,023 9,820 - --------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: Compensation and benefits 5,071 4,005 Other 3,835 3,464 Merger-related expenses -- -- Relocation charge -- 59 - -------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 8,906 7,528 - -------------------------------------------------------------------------------------------------------------------------- Gain on sale of businesses -- -- - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 3,117 2,292 Provision for income taxes 1,137 827 - -------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 1,980 1,465 Cumulative effect of accounting change -- -- - -------------------------------------------------------------------------------------------------------------------------- Net income $ 1,980 $ 1,465 - -------------------------------------------------------------------------------------------------------------------------- Earnings applicable to common shares/(2)/ $ 1,914 $ 1,400 - -------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA/(3)/: Earnings per common share: Basic before cumulative effect of accounting change $ 1.67 $ 1.19 Cumulative effect of accounting change -- -- - -------------------------------------------------------------------------------------------------------------------------- Basic $ 1.67 $ 1.19 - -------------------------------------------------------------------------------------------------------------------------- Diluted before cumulative effect of accounting change $ 1.58 $ 1.13 Cumulative effect of accounting change -- -- - -------------------------------------------------------------------------------------------------------------------------- Diluted $ 1.58 $ 1.13 - -------------------------------------------------------------------------------------------------------------------------- Book value per common share $ 9.22 $ 7.82 Dividends per common share $ 0.22 $ 0.16 BALANCE SHEET AND OTHER OPERATING DATA: Total assets $ 238,860 $ 181,961 Consumer loans, net 21,262 19,733 Total capital/(4)/ 31,152 24,644 Long-term borrowings/(4)/ 19,450 14,636 Shareholders' equity 11,702 10,008 Return on average common shareholders' equity 20.0% 16.4% Average common and equivalent shares/(2)(3)/ 1,146,713,860 1,180,288,434 - --------------------------------------------------------------------------------------------------------------------------
(1) Fiscal 1995 and fiscal 1996 represent the combination of Morgan Stanley Group Inc.'s financial statements for the fiscal years ended November 30 with Dean Witter, Discover & Co.'s financial statements for the years ended December 31. (2) Amounts shown are used to calculate basic earnings per common share. (3) Amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 2000. (4) These amounts exclude the current portion of long-term borrowings and include Capital Units and Preferred Securities Issued by Subsidiaries. EX-13.3 10 MANAGEMENT'S DISCUSSION & ANALYSIS EXHIBIT 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations 99 AR page 22 INTRODUCTION THE COMPANY Morgan Stanley Dean Witter & Co. (the "Company") is a pre-eminent global financial services firm that maintains leading market positions in each of its three business segments -- Securities, Asset Management and Credit Services. The Company combines global strength in investment banking and institutional sales and trading with strength in providing full-service and online brokerage services, investment and global asset management services and, primarily through its Discover/(R) /Card brand, quality consumer credit products. The Company provides its products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. The Company's results for the 12 months ended November 30, 1999 ("fiscal 1999"), November 30, 1998 ("fiscal 1998") and November 30, 1997 ("fiscal 1997") are discussed below. All share and per share information presented herein have been retroactively adjusted to reflect a two-for-one common stock split, effected in the form of a 100% stock dividend, declared December 20, 1999 and payable January 26, 2000 to shareholders of record as of January 12, 2000. RESULTS OF OPERATIONS CERTAIN FACTORS AFFECTING RESULTS OF OPERATIONS* The Company's results of operations may be materially affected by market fluctuations and by economic factors. In addition, results of operations in the past have been, and in the future may continue to be, materially affected by many factors of a global nature, including economic and market conditions; the availability and cost of capital; the level and volatility of equity prices and interest rates; currency values and other market indices; technological changes and events (such as the increased use of the Internet to conduct electronic commerce and the emergence of electronic communication trading networks); the availability and cost of credit; inflation; investor sentiment; and legislative and regulatory developments. Such factors also may have an impact on the Company's ability to achieve its strategic objectives on a global basis, including (without limitation) continued increased market share in its securities activities, growth in assets under management and the expansion of its Credit Services business. The Company's Securities business, particularly its involvement in primary and secondary markets for all types of financial products, including derivatives, is subject to substantial positive and negative fluctuations due to a variety of factors that cannot be predicted with great certainty, including variations in the fair value of securities and other financial products and the volatility and liquidity of global trading markets. Fluctuations also occur due to the level of market activity around the world, which, among other things, affects the size, number and timing of investment banking client assignments and transactions and the realization of returns from the Company's private equity and other principal investments. The level of global market activity also could impact the flow of investment capital into mutual funds and the way in which such capital is allocated among money market, equity, fixed income or other investment alternatives which also could cause fluctuations to occur in the Company's Asset Management business. In the Company's Credit Services business, changes in economic variables, such as the number and size of personal bankruptcy filings, the rate of unemployment and the level of consumer debt, may substantially affect consumer loan levels and credit quality, which, in turn, could impact overall Credit Services results. The Company's results of operations also may be materially affected by competitive factors. Included among the principal competitive factors affecting the Securities business are the quality of its professionals and other personnel, its products and services, relative pricing and innovation. Competition in the Company's Asset Management business is affected by a number of factors, including investment objectives and performance; advertising and sales promotion efforts; and the level of fees, distribution channels and types and quality of services offered. In Credit Services, competition centers on merchant acceptance of credit cards, credit card acquisition and customer utilization of credit cards, all of which are impacted by the type of fees, interest rates and other features offered. In addition to competition from firms traditionally engaged in the financial services business, there has been increased competition in recent years from other sources, such as commercial banks, insurance companies, online service providers, sponsors of mutual funds and other companies offering financial services both in the U.S. and globally. The financial services industry also has experi- - -------------------------------------------------------------------------------- * This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as well as a discussion of some of the risks and uncertainties involved in the Company's businesses that could affect the matters referred to in such statements. enced consolidation and convergence in recent years, as financial institutions involved in a broad range of financial services industries have merged. This convergence trend is expected to continue and could result in the Company's competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. In November 1999, the Gramm- Leach-Bliley Act was passed in the U.S., effectively repealing certain sections of the 1933 Glass-Steagall Act. Its passage allows commercial banks, securities firms and insurance firms to affiliate, which may accelerate consolidation and lead to increasing competition in markets which traditionally have been dominated by investment banks and retail securities firms. The Company also has experienced increased competition for qualified employees in recent years, including from companies engaged in Internet-related businesses and private equity funds, in addition to the traditional competition for employees from the financial services, insurance and management consulting industries. For a detailed discussion of the competitive factors in the Company's Securities, Asset Management and Credit Services businesses, see the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1999. As a result of the above economic and competitive factors, net income and revenues in any particular period may not be representative of full-year results and may vary significantly from year to year and from quarter to quarter. The Company intends to manage its business for the long term and to mitigate the potential effects of market downturns by strengthening its competitive position in the global financial services industry through diversification of its revenue sources and enhancement of its global franchise. The Company's overall financial results will continue to be affected by its ability and success in maintaining high levels of profitable business activities, emphasizing fee-based assets that are designed to generate a continuing stream of revenues, managing risks in the Securities, Asset Management and Credit Services businesses, evaluating credit product pricing and monitoring costs. In addition, the complementary trends in the financial services industry of consolidation and globalization present, among other things, technological, risk management and other infrastructure challenges that will require effective resource allocation in order for the Company to remain competitive. The Company believes that technological advancements in the Internet and the growth of electronic commerce will continue to present both challenges and opportunities to the Company and could lead to significant changes and innovations in the financial markets and financial services industry as a whole. The Company's initiatives in this area have included Web-enabling existing businesses or enhancing client communication and access to information and services and making investments, or otherwise participating, in alternative trading systems, electronic communication networks and related businesses or technologies. The Company expects to continue to augment these initiatives in the future. GLOBAL MARKET AND ECONOMIC CONDITIONS IN FISCAL 1999 Global market and economic conditions were generally favorable during much of fiscal 1999. Financial markets within many regions exhibited improved performance and, although experiencing periods of volatility, benefited from a succession of global interest rate cuts which were made in late 1998. These interest rate actions helped stabilize economies throughout the world and contributed to the global recovery from the extremely turbulent and uncertain conditions that existed during the latter half of fiscal 1998. During that period, severe economic turmoil in Russia, Asia and certain emerging market nations adversely affected investor confidence and led to periods of high volatility, low levels of liquidity and increased credit spreads, creating difficult conditions in the global financial markets. The improved global market and economic environment contributed to the Company's record results in fiscal 1999. The Company's Securities business generated record levels of net income and net revenues and ended the fiscal year with record levels of financial advisors, customer accounts and assets. The Company's Credit Services business also achieved record operating results in fiscal 1999, reflecting a continued improvement in the credit quality of customer receivables as well as increased customer transaction volume. In the Company's Asset Management business, customer assets under management or supervision increased to record levels at fiscal year-end. In the U.S., market conditions benefited from robust corporate earnings and the strong performance of the domestic economy, which continued to exhibit positive fundamentals and a high rate of growth. During much of fiscal 1999, the U.S. economy was characterized by several favorable trends, such as historically low levels of unemployment, high levels of consumer confidence and spending, and a high demand for imports. The domestic economy also was positively impacted by the overall improvement in global page 23 99 AR page 24 market and economic conditions, as many non-U.S. regions continued to recover from the difficult conditions that existed during the end of fiscal 1998. However, throughout fiscal 1999, there were persistent indications that U.S. economic growth was proceeding at a brisk pace and at a higher rate than anticipated. Such indications, coupled with the tight domestic labor market, increasing wage pressures and the renewed vigor in international markets, led to fears of accelerating inflation. In an effort to slow the U.S. economy and to mitigate inflationary pressures, during fiscal 1999 the Federal Reserve Board(the "Fed") raised the overnight lending rate by 0.25% on three separate occasions and also raised the discount rate by 0.25% on two separate occasions. Such increases reversed the Fed's interest rate actions that occurred in the fourth quarter of fiscal 1998, when it lowered the overnight lending rate by a total of 0.75%. At the conclusion of fiscal 1999, the Fed announced that it was adopting a neutral bias toward interest rates. However, there still remained much uncertainty as to whether additional interest rate actions would be necessary in the event that indications of inflationary pressures continue to persist in the future. Conditions in European financial markets also demonstrated signs of recovery in fiscal 1999. European financial markets benefited from positive investor sentiment relating to the European Economic and Monetary Union ("EMU"). EMU commenced on January 1, 1999 when the European Central Bank (the "ECB") assumed control of monetary policy for the 11 European Union (the "EU") countries participating in the EMU. Since its inception, the euro has emerged as a new funding alternative for many issuers. During the first half of fiscal 1999, European financial markets were adversely affected by the severe economic and financial turmoil that developed in Russia, Asia and certain emerging market nations in late 1998. These developments contributed to lower levels of exports and a sluggish rate of economic growth within the region. In response to these conditions, both the ECB and the Bank of England lowered interest rates in an effort to stimulate economic activity. During the latter half of fiscal 1999, the prospects for improved economic performance within Europe increased due to indications of recovery in the levels of manufacturing output and exports in Germany, the region's largest economy. European economic prospects also improved due to increased consolidation and restructuring activity across the region, the ongoing recovery of global financial markets and a lower interest rate environment, although concerns of accelerating inflation led both the ECB and the Bank of England to raise interest rates in the fourth quarter of fiscal 1999. Economic and financial difficulties have existed in the Far East region since the latter half of fiscal 1997. The Japanese economy has suffered from its worst recession since the end of World War II and has been adversely affected by shrinking consumer demand, declining corporate profits, deflation and rising unemployment. However, during fiscal 1999, there were indications that the steps taken by Japan's government to mitigate these conditions, including bank bailouts, emergency loans and stimulus packages, were beginning to have a favorable impact on the nation's economic performance. Certain financial markets elsewhere in the Far East, such as in Hong Kong, Singapore and Korea, also began to demonstrate signs of recovery during fiscal 1999 and have experienced a marked rebound in economic activity. Although uncertainty still remains, investor interest in the Far East region has generally increased as a result of these improved prospects. The worldwide market for mergers and acquisitions continued to be robust during fiscal 1999. The volume of global merger and acquisition transactions achieved record levels and contributed to record levels of revenues by the Company's investment banking business. The merger and acquisition market reflected ongoing consolidation and globalization across many industries, particularly in the technology and telecommunications sectors. During fiscal 1999, there also was a significant increase in the volume of cross-border transactions, primarily driven by higher levels of activity in the European merger and acquisition markets. In addition, fiscal 1999 included some of the largest merger and acquisition transactions ever completed. The markets for the underwriting of securities also were positively impacted by the generally favorable market and economic conditions which existed during much of fiscal 1999. In fiscal 1999, U.S. consumer demand and retail sales continued to increase at a strong pace. The relatively favorable interest rate environment that continued to exist in the U.S. for much of the year enabled consumers to manage finances advantageously while still allowing for steady growth in consumer credit. In addition, the level of loan losses and personal bankruptcies continued to decline. The Company continued to invest in the growth of its credit card business through the expansion of its Discover/NOVUS/(R) /Network, as evidenced by a record number of new merchant enrollments in fiscal 1999. The Company also increased its marketing and solicitation activities with respect to the Discover Card brand and the launch of the Morgan Stanley Dean Witter/SM /Card in the United Kingdom. FISCAL 1999 AND FISCAL 1998 RESULTS FOR THE COMPANY The Company achieved record net income of $4,791 million in fiscal 1999, a 46% increase from fiscal 1998. Fiscal 1998's net income included a net gain of $345 million from the sale of the Company's Global Custody business, its interest in the operations of SPS Transaction Services, Inc. ("SPS") and certain BRAVO/(R) /Card receivables ("BRAVO") (see "Results of Operations -- Business Acquisition and Dispositions" herein). Fiscal 1998's net income also included a $117 million charge resulting from the cumulative effect of an accounting change. This charge represents the effect of an accounting change adopted in the fourth quarter of fiscal 1998 (effective December 1, 1997) with respect to the accounting for offering costs paid by investment advisors of closed-end funds, where such costs are not specifically reimbursed through separate advisory contracts (see Note 2 to the consolidated financial statements). Excluding the net gain from the sale of the businesses noted above and the charge resulting from the cumulative effect of an accounting change, fiscal 1999's net income increased 57%. In fiscal 1998, net income was $3,276 million, an increase of 27% from fiscal 1997. Excluding the net gain from the sale of the businesses noted above and the charge resulting from the cumulative effect of an accounting change, fiscal 1998 net income was $3,048 million, an increase of 18%. The Company's income tax rate was 38.0%, 37.0% and 39.5% in fiscal 1999, 1998 and 1997, respectively. The increase in fiscal 1999 reflects an increase in provisions for certain tax matters, partially offset by reduced state and local taxes resulting from the resolution of certain audit issues. The decrease in fiscal 1998 primarily reflects lower tax rates applicable to non-U.S. earnings. Basic earnings per common share increased 55% to $4.33 in fiscal 1999 and 28% to $2.80 in fiscal 1998. Excluding the net gain from the sale of the businesses noted above and the impact of the cumulative effect of an accounting change, fiscal 1999's basic earnings per common share increased 67%, and fiscal 1998's basic earnings per common share increased 19%. Diluted earnings per common share increased 54% to $4.10 in fiscal 1999 and 28% to $2.67 in fiscal 1998. Excluding the net gain from the sale of the businesses noted above and the impact of the cumulative effect of an accounting change, fiscal 1999's diluted earnings per common share increased 65%, and fiscal 1998's diluted earnings per common share increased 19%. The Company's return on average shareholders' equity was 33%, 25% and 22% in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Excluding the net gain from the sale of the businesses noted above and the impact of the cumulative effect of an accounting change, fiscal 1998's return on average shareholders' equity was 23%. BUSINESS ACQUISITION AND DISPOSITIONS During the second quarter of fiscal 1999, the Company completed its acquisition of AB Asesores, the largest independent financial services firm in Spain. AB Asesores has leading positions in personal investment, asset management, institutional research and brokerage, and investment banking. Through its approximately 300 financial advisors, it offers its individual investors proprietary mutual funds and other financial products. This acquisition reflects the Company's strategic initiative to build its international Securities and Asset Management businesses to serve the needs of individual investors. The Company's fiscal 1999 results include the operations of AB Asesores since March 25, 1999, the date of acquisition. In fiscal 1998, the Company entered into several transactions reflecting its strategic decision to focus on growing its core Asset Management and Credit Services businesses. page 25 99 AR page 26 In the fourth quarter of fiscal 1998, the Company completed the sale of its Global Custody business. The Company also sold its interest in the operations of SPS, a 73%-owned, publicly held subsidiary of the Company. In addition, the Company sold certain credit card receivables relating to its discontinued BRAVO Card. The Company's aggregate net pre-tax gain resulting from these transactions was $685 million. In addition, during fiscal 1998 the Company sold its Prime Option/SM /MasterCard/(R) /portfolio ("Prime Option"), a business it had operated with NationsBank of Delaware, N.A., and its Correspondent Clearing business. The gains resulting from the sale of these businesses were not material to the Company's results of operations or financial condition. BUSINESS SEGMENTS The remainder of Results of Operations is presented on a business segment basis. With the exception of fiscal 1997's merger-related expenses, substantially all of the operating revenues and operating expenses of the Company can be directly attributed to its three business segments: Securities, Asset Management and Credit Services. Certain revenues and expenses have been allocated to each business segment, generally in proportion to their respective revenues or other relevant measures. The accompanying business segment information includes the operating results of Morgan Stanley Dean Witter Online ("MSDW Online"), the Company's provider of electronic brokerage services, within the Securities segment. Previously, the Company had included MSDW Online's results within its Credit Services segment. In addition, the segment data presented below reflect the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." Prior to the adoption of SFAS No. 131, the Company had presented the results of its Securities and Asset Management segments on a combined basis. The segment data of all periods presented have been restated to reflect these changes. The following discussion excludes the cumulative effect of the accounting change in references to fiscal 1998 net income. Certain reclassifications have been made to prior-period amounts to conform to the current year's presentation. SECURITIES STATEMENTS OF INCOME
FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - -------------------------------------------------------- Revenues: Investment banking $ 4,430 $ 3,314 $ 2,660 Principal transactions: Trading 5,983 3,283 3,191 Investments 712 390 473 Commissions 2,904 2,288 2,024 Asset management, distribution and administration fees 1,240 998 783 Interest and dividends 11,448 13,455 10,233 Other 158 166 130 - -------------------------------------------------------- Total revenues 26,875 23,894 19,494 Interest expense 10,500 12,355 9,470 - -------------------------------------------------------- Net revenues 16,375 11,539 10,024 - -------------------------------------------------------- Compensation and benefits 7,225 5,428 4,825 Occupancy and equipment 493 419 388 Brokerage, clearing and exchange fees 378 354 318 Information processing and communications 756 591 514 Marketing and business development 511 414 280 Professional services 578 445 290 Other 570 447 383 - -------------------------------------------------------- Total non-interest expenses 10,511 8,098 6,998 - -------------------------------------------------------- Income before income taxes 5,864 3,441 3,026 Provision for income taxes 2,183 1,199 1,185 - -------------------------------------------------------- Net income $ 3,681 $ 2,242 $ 1,841
Securities provides a wide range of financial products, services and investment advice to individual and institutional investors. Securities business activities are conducted in the U.S. and throughout the world and include investment banking, institutional sales and trading, full-service and online brokerage services, and principal investing activities. At November 30, 1999, the Company's financial advisors provided investment services to more than 4.5 million client accounts with assets of $583 billion. The Company had the second largest financial advisor sales organization in the U.S. and had 12,674 professional financial advisors and 475 branches globally at November 30, 1999. Securities achieved record net revenues and net income of $16,375 million and $3,681 million in fiscal 1999, increases of 42% and 64%, respectively, from fiscal 1998. In fiscal 1998, Securities net revenues and net income increased 15% and 22%, respectively, from fiscal 1997. In both fiscal 1999 and fiscal 1998, the levels of net revenues and net income in the Company's Securities business reflected a strong global market for mergers and acquisitions and securities underwritings, higher principal trading and commission revenues primarily driven by generally favorable market and economic conditions, high levels of customer trading volume and the continued increase in the level of client accounts and asset balances. The results of both years were partially offset by increased costs for incentive- based compensation, as well as increased non-compensation expenses associated with the Company's higher level of global business activities. Investment Banking Investment banking revenues are derived from the underwriting of securities offerings and fees from advisory services. Investment banking revenues were as follows:
FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ------------------------------------------------------- Advisory fees from merger, acquisition and restructuring transactions $1,886 $1,322 $ 920 Equity underwriting revenues 1,272 815 888 Fixed income underwriting revenues 1,272 1,177 852 - ------------------------------------------------------- Total investment banking revenues $4,430 $3,314 $2,660 - -------------------------------------------------------
Investment banking revenues increased 34% to record levels in fiscal 1999, surpassing the Company's previous record attained in fiscal 1998. Revenues in fiscal 1999 reflect higher advisory fees from merger, acquisition and restructuring transactions, as well as increased revenues from underwriting both equity and fixed income securities. In fiscal 1998, higher revenues from merger, acquisition and restructuring transactions and fixed income underwritings were partially offset by lower equity underwriting revenues. The worldwide merger and acquisition markets remained robust for the fifth consecutive year with more than $3.4 trillion of transactions (per Thomson Financial Securities Data) announced during calendar year 1999, including record volume in the U.S., Europe and the Far East. During calendar year 1999, the Company's dollar volume of announced merger and acquisition transactions surpassed $1.1 trillion, an increase of more than 77% over the comparable period of 1998. The high level of transaction activity reflected the continuing trends of consolidation and globalization across many industry sectors, as companies attempted to expand into new markets and businesses through strategic combinations. In fiscal 1999, merger and acquisition transaction volume was particularly strong in the telecommunications and technology sectors and also reflected a significant increase in the level of European merger and acquisition activity. The sustained growth of the merger and acquisition markets, coupled with the Company's global presence and strong market share, had a positive impact on advisory fees, which increased 43% in fiscal 1999. Higher advisory fees from real estate transactions also contributed to the increase. The 44% increase in advisory fees in fiscal 1998 was primarily due to high transaction volumes resulting from the strong global market for merger, acquisition and restructuring activities, as well as increased revenues from real estate advisory transactions. Equity underwriting revenues increased 56% in fiscal 1999 and continued to reflect a high volume of equity offerings and the Company's strong global market share. In fiscal 1999, the Company's equity underwriting revenues benefited from favorable global economic conditions, which led major equity market indices higher and new issue activity to record levels. The primary market for equity issuances was particularly strong in the U.S. and in Europe and reflected the Company's participation in some of the year's largest transactions and its leadership in the underwriting of technology-related issuances. Equity underwriting revenues decreased 8% in fiscal 1998, reflecting reduced activity in the primary market in the second half of the fiscal year due to the significant uncertainty and volatility in global financial markets that existed during that period. Revenues from fixed income underwriting increased 8% in fiscal 1999. The volume of fixed income underwriting transactions was generally strong during much of fiscal 1999, reflecting favorable global market conditions. In addition, the relatively low levels of interest rates in the U.S. during much of the year allowed issuers to take advantage of lower borrowing costs. EMU, which has permitted many corporate issuers to access the euro-denominated credit market, and the need for strategic financing in light of the robust global market for mergers and acquisitions also had a favorable impact on the volume of fixed income underwriting transactions. Higher revenues from underwriting derivative fixed income products also contributed to the increase. Fixed income underwriting revenues increased 38% in fiscal 1998, primarily driven by higher revenues from issuances of global high-yield and investment grade fixed income securities. The primary market for these securities benefited from relatively low nominal interest rates which page 27 99 AR page 28 existed throughout the year and attracted many issuers to the market, as well as from periods of strong investor demand. During the latter part of fiscal 1998, the primary market was less active, as increased volatility in global financial markets caused an unprecedented widening of credit spreads and a shift of investor preferences toward financial instruments with higher credit ratings. Principal Transactions Principal transactions include revenues from customers' purchases and sales of securities in which the Company acts as principal and gains and losses on securities held for resale. Decisions relating to principal transactions in securities are based on an overall review of aggregate revenues and costs associated with each transaction or series of transactions. This review includes an assessment of the potential gain or loss associated with a trade and the interest income or expense associated with financing or hedging the Company's positions. Principal transaction trading revenues were as follows:
FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ---------------------------------------------------- Equities $3,065 $2,048 $1,310 Fixed income 2,090 455 1,187 Foreign exchange 397 587 500 Commodities 431 193 194 - ---------------------------------------------------- Total principal transaction trading revenues $5,983 $3,283 $3,191 - ----------------------------------------------------
Principal transaction trading revenues increased 82% in fiscal 1999, primarily reflecting higher fixed income, equity and commodity trading revenues, partially offset by a decline in foreign exchange trading revenues. Principal transaction trading revenues increased 3% in fiscal 1998, as higher equity and foreign exchange trading revenues were partially offset by a decline in fixed income trading revenues. Equity trading revenues increased 50% in fiscal 1999, primarily reflecting higher revenues from equity cash products. The increase was primarily driven by higher levels of customer trading volumes in both listed and over-the-counter securities, particularly in the U.S. and Europe, as generally favorable global market and economic conditions increased investor demand for equity securities. Higher revenues from trading equity derivative products, which benefited from strong trading volumes and periods of market volatility, and certain proprietary trading activities also contributed significantly to the increase. Equity trading revenues increased 56% in fiscal 1998, primarily reflecting higher revenues from equity cash and derivative products. The increase in revenues from equity cash products was primarily attributable to higher trading volumes in European markets, which benefited from the Company's increased sales and research coverage of the region that began in mid-1997. European equity trading revenues also benefited from generally favorable market conditions and positive investor sentiment regarding EMU. Revenues from trading equity derivative products also increased in fiscal 1998, primarily due to increased transaction volume and the high levels of market volatility that existed throughout the year, particularly in technology-related securities. Fixed income trading revenues increased 359% in fiscal 1999, primarily reflecting higher revenues from investment grade, high-yield and securitized fixed income securities, as well as swap transactions. Fiscal 1999's revenues benefited from significantly improved conditions in the global fixed income markets as compared with the periods of extreme volatility and illiquidity that existed at the end of fiscal 1998. During the first half of fiscal 1999, the continuing recovery of global economic and market conditions led to strong investor demand for fixed income products and contributed to high transaction volume. In addition, fears of accelerating inflation in the U.S. and the interest rate actions taken by the Fed and the ECB resulted in periods of volatility in the global fixed income markets, which resulted in increased trading opportunities. Market conditions and trading volumes were more moderate during the latter half of fiscal 1999, primarily reflecting a rising interest rate environment in the U.S. and Europe. Fixed income trading revenues decreased 62% in fiscal 1998, reflecting significantly lower revenues from investment grade, high-yield and securitized fixed income securities. Revenues from investment grade fixed income securities were adversely affected by the severe economic and financial turmoil in the Far East, Russia and emerging markets that occurred during the year. These difficult conditions caused investor preferences to shift toward higher quality financial instruments, principally to U.S. treasury securities. This negatively affected the trading of credit-sensitive fixed income securities by widening credit spreads, reducing market liquidity and de-coupling the historical price relationships between credit-sensitive securities and government securities. Revenues from high-yield fixed income securities also were impacted by the turbulent conditions in the global financial markets due to investors' concerns about the impact of a prolonged economic downturn on high-yield issuers. Revenues from securitized fixed income securities also declined, as the relatively low interest rate environment in the U.S. increased prepayment concerns and resulted in increased spreads. Foreign exchange revenues declined 32% in fiscal 1999 from the record level of revenues achieved in fiscal 1998. The decrease primarily reflects reduced customer trading volumes and lower levels of volatility in the global foreign exchange markets as compared with the prior year. During much of fiscal 1999, the U.S. dollar strengthened against the euro, reflecting the strong economic performance of the U.S., coupled with a slower growth rate across much of Europe. The U.S. dollar also appreciated against the Japanese yen in the beginning of fiscal 1999, although the yen strengthened later in the year due to the prospects of improved economic growth in the Far East and increased investor demand for yen-denominated assets. Revenues from foreign exchange trading increased 17% to record levels in fiscal 1998. The increase was primarily attributable to high levels of customer trading volume and volatility in the foreign exchange markets. During fiscal 1998, the U.S. dollar fluctuated against major currencies due to concerns about the U.S. economy's exposure to the financial crises in the Far East and emerging markets, as well as from the Fed's decision to lower the overnight lending rate on three occasions during the fourth quarter. Certain European currencies also experienced periods of volatility, resulting from expectations of interest rate fluctuations in anticipation of EMU and the collapse of the Russian ruble. Difficult political and economic conditions in certain Asian nations, coupled with the continued recession in Japan, also contributed to periods of high volatility in the currency markets. Commodities trading revenues rose 123% to record levels in fiscal 1999, primarily driven by higher revenues from energy-related products, including crude oil, refined energy products and natural gas. Revenues from trading energy-related products benefited from the sharp rise in energy prices that occurred during the latter half of fiscal 1999. The upward trend of energy prices was primarily attributable to strong demand for energy products, relatively low inventory levels and reduced production volumes. Revenues from natural gas trading benefited from periods of price volatility during the year, which was primarily attributable to changing weather conditions and varying levels of demand. Higher revenues from electricity and metals trading also contributed to the increase. In fiscal 1998, commodities trading revenues were comparable to those recorded in fiscal 1997, as higher revenues from energy- related products and electricity were partially offset by lower revenues from natural gas trading. Revenues from trading energy-related products were impacted by energy prices that fell during much of fiscal 1998. Diminished demand for these products, partially due to the economic crisis in the Far East, coupled with high inventory levels, contributed to the decline in prices. Electricity trading revenues benefited from higher electricity prices, primarily during the summer months when the demand for electric power increased. Revenues from natural gas trading decreased as unseasonably warm weather in certain regions of the U.S. during the winter months reduced the demand for home heating oil, leading to a decline in prices. In both fiscal 1999 and fiscal 1998, commodities trading revenues benefited from the expansion of the customer base for commodity-related products, including derivatives, and the use of such products for risk management purposes. Principal transaction investment revenues aggregating $712 million were recognized in fiscal 1999 as compared with $390 million in fiscal 1998. Fiscal 1999's revenues reflected the highest level of revenues recorded by the Company's private equity business and included realized and unrealized gains from the Company's positions in Equant N.V., a Netherlands-based data communications company, and Knight/Trimark Group Inc., a U.S.-based broker- dealer. Net gains from increases in the value of certain other private equity and venture capital investments also contributed to fiscal 1999's results. Fiscal 1998's principal transaction investment revenues primarily resulted from gains on certain positions that were sold during the year and increases in the value of certain of the Company's private equity investments. Such increases included gains from the initial public offering of Equant N.V. and from the sale of positions in Fort James Corporation and Jefferson Smurfit Corporation. Commissions Commission revenues primarily arise from agency transactions in listed and over- the-counter equity securities and sales of mutual funds, futures, insurance products and options. Commissions also include revenues from customer securities transactions associated with MSDW Online. Commission revenues increased 27% in fiscal 1999, primarily reflecting higher revenues from equity cash products in markets located in the U.S., Europe and the Far East. page 29 99 AR page 30 In the U.S., favorable market conditions and strong investor demand for equity products contributed to a high volume of customer securities transactions, including listed and over-the-counter equity securities. Revenues from markets in Europe also benefited from strong customer transaction volume, as improved economic and market conditions in the region increased investor demand for European equity securities. Commission revenues from markets in Japan and elsewhere in the Far East increased, as improved economic prospects within the region increased investor interest and led to higher transaction volumes. Commission revenues increased 13% in fiscal 1998, reflecting higher revenues from equity cash products, primarily from markets in the U.S. and Europe, as well as higher revenues from derivative products. Revenues from U.S. markets benefited from high levels of market volatility, which contributed to increased customer trading volumes. Revenues from European markets benefited from strong customer trading volumes, which were positively impacted by the generally favorable performances of certain European equity markets and from the Company's increased sales and research activities in the region. Commissions on derivative products increased as the high levels of market volatility contributed to increased customer hedging activities and trading volumes. In both fiscal 1999 and fiscal 1998, commission revenues also benefited from higher sales of mutual funds and the continued growth in the number of the Company's financial advisors. In October 1999, the Company launched ichoice/SM/, a new service and technology platform available to individual investors. ichoice provides each of the Company's individual investor clients with the choice of self-directed investing online; a traditional full-service brokerage relationship through a financial advisor; or some combination of both. ichoice provides a range of pricing options, including fee-based pricing. In future periods, the amount of revenues recorded within the "Commissions" and "Asset Management, distribution and administration fees" income statement categories will be affected by the number of the Company's clients electing a fee-based pricing arrangement. Net Interest Interest and dividend revenues and interest expense are a function of the level and mix of total assets and liabilities, including financial instruments owned, reverse repurchase and repurchase agreements, trading strategies associated with the Company's institutional securities activities, customer margin loans and the prevailing level, term structure and volatility of interest rates. Interest and dividend revenues and interest expense are integral components of trading activities. In assessing the profitability of trading activities, the Company views net interest and principal trading revenues in the aggregate. In addition, decisions relating to principal transactions in securities are based on an overall review of aggregate revenues and costs associated with each transaction or series of transactions. This review includes an assessment of the potential gain or loss associated with a trade and the interest income or expense associated with financing or hedging the Company's positions. Net interest revenues decreased 14% in fiscal 1999, reflecting the level and mix of interest bearing assets and liabilities during the period, including liabilities associated with the Company's aircraft financing activities, as well as certain trading strategies utilized in the Company's institutional securities business. Net interest revenues increased 44% in fiscal 1998, primarily attributable to higher levels of revenues from net interest earning assets, including financial instruments owned and customer margin loans. In both periods, higher levels of securities lending transactions also had a positive impact on net interest revenues. Asset Management, Distribution and Administration Fees Asset management, distribution and administration fees include revenues from asset management services, including fees for promoting and distributing mutual funds ("12b-1 fees") and fees from investment management services provided to segregated customer accounts pursuant to various contractual arrangements in connection with the Company's Investment Consulting Services ("ICS") business. The Company receives 12b-1 fees for services it provides in promoting and distributing certain open-ended mutual funds. These fees are based on either the average daily fund net asset balances or average daily aggregate net fund sales and are affected by changes in the overall level and mix of assets under management or supervision. Asset management, distribution and administration fees increased 24% in fiscal 1999 and 27% in fiscal 1998. The increase in both periods was primarily attributable to higher 12b-1 fees from promoting and distributing mutual funds to individual investors through the Company's financial advisors. Higher revenues from investment management services and the continued growth in the level of client asset balances, which rose to $583 billion at November 30, 1999 from $438 billion at November 30, 1998, also contributed to the increase. Non-Interest Expenses FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ------------------------------------------------------ Compensation and benefits $ 7,225 $5,428 $4,825 Occupancy and equipment 493 419 388 Brokerage, clearing and exchange fees 378 354 318 Information processing and communications 756 591 514 Marketing and business development 511 414 280 Professional services 578 445 290 Other 570 447 383 - ------------------------------------------------------ Total non-interest expenses $10,511 $8,098 $6,998 - ------------------------------------------------------ Fiscal 1999's total non-interest expenses increased 30% to $10,511 million. Within the non-interest expense category, employee compensation and benefits expense increased 33%, reflecting increased levels of incentive compensation based on record fiscal 1999 revenues and earnings, as well as an increase in the number of employees. Excluding compensation and benefits expense, non-interest expenses increased $616 million. Occupancy and equipment expense increased 18%, principally reflecting additional office space in New York and certain other locations, as well as incremental rent attributable to the opening of 37 securities branch locations. Brokerage, clearing and exchange fees increased 7%, primarily attributable to higher brokerage expenses due to higher levels of trading volume in the global securities markets. Information processing and communications costs increased 28%, primarily due to increased costs associated with the Company's information technology infrastructure, including server and data center costs. A higher number of employees utilizing communications systems and certain data services also contributed to the increase. Marketing and business development expense increased 23%, reflecting higher advertising expenses associated with the Company's individual securities business, including MSDW Online. Increased travel and entertainment costs associated with the high levels of activity in the global financial markets also contributed to the increase. Professional services expense increased 30%, primarily reflecting higher consulting costs as a result of certain information technology initiatives, including the Company's preparations for the Year 2000 (see also "Year 2000" herein). Higher legal costs associated with increased levels of business activity and higher temporary staffing fees also contributed to the increase. Other expenses increased 28%, primarily reflecting the impact of a higher level of business activity on various operating expenses. An increase in charitable donations and the amortization of goodwill associated with the Company's acquisition of AB Asesores in March 1999 also contributed to the increase. Fiscal 1998's total non-interest expenses increased 16% to $8,098 million. Within the non-interest expense category, employee compensation and benefits expense increased 12%, reflecting increased levels of incentive compensation based on higher fiscal 1998 revenues and earnings, as well as an increase in the number of employees. Excluding compensation and benefits expense, non-interest expenses increased $497 million. Occupancy and equipment expense increased 8%, principally reflecting additional office space and higher occupancy costs in New York and Hong Kong, as well as incremental rent attributable to the opening of 27 securities branch locations. Brokerage, clearing and exchange fees increased 11%, primarily reflecting increased expenses related to higher levels of trading volume in the global securities markets. Information processing and communications costs increased 15% due to higher data services and communications costs related to an increased number of employees and continued enhancements and maintenance associated with the Company's information technology infrastructure. Marketing and business development expense increased 48%, reflecting higher advertising expenses associated with the Company's individual securities business, primarily MSDW Online, as well as higher travel and entertainment costs relating to increased levels of business activity. Professional services expense increased 53%, primarily reflecting higher consulting costs as a result of certain information technology initiatives, including the Company's preparations for EMU and Year 2000. Higher levels of temporary staff and employment fees due to the increased level of overall business activity also contributed to the increase. Other expenses increased 17%, reflecting the impact of a higher level of business activity on various operating expenses. page 31 99 AR page 32 ASSET MANAGEMENT STATEMENTS OF INCOME FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - --------------------------------------------------------- Revenues: Investment banking $ 93 $ 26 $ 34 Principal transactions: Investments 13 (301) (10) Commissions 17 33 42 Asset management, distribution and administration fees 1,930 1,891 1,742 Interest and dividends 61 252 227 Other 7 27 9 - --------------------------------------------------------- Total revenues 2,121 1,928 2,044 Interest expense 9 165 163 - --------------------------------------------------------- Net revenues 2,112 1,763 1,881 - --------------------------------------------------------- Compensation and benefits 648 659 659 Occupancy and equipment 96 97 77 Brokerage, clearing and exchange fees 107 198 142 Information processing and communications 92 87 95 Marketing and business development 127 125 119 Professional services 137 135 88 Other 138 91 136 - --------------------------------------------------------- Total non-interest expenses 1,345 1,392 1,316 - --------------------------------------------------------- Gain on sale of businesses -- 323 -- - --------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 767 694 565 Provision for income taxes 319 264 230 - --------------------------------------------------------- Income before cumulative effect of accounting change 448 430 335 - --------------------------------------------------------- Cumulative effect of accounting change -- (117) -- - --------------------------------------------------------- Net income $ 448 $ 313 $ 335 - --------------------------------------------------------- Asset Management ranks among the top five global active asset managers and provides a wide range of investment advisory products through both proprietary and non-proprietary distribution channels. Morgan Stanley Dean Witter Advisors and Van Kampen Investments ("VK") offer individual investors a broad array of mutual fund and wealth management tools that cover the full spectrum of investment categories, including growth, income, sector and global. Morgan Stanley Dean Witter Investment Management and Miller Anderson & Sherrerd serve the specialized needs of global institutional and high net worth investors. Asset Management's product breadth includes mutual funds, closed-end funds, managed accounts, managed futures funds, pooled vehicles, variable annuities and unit investment trusts. In fiscal 1999, Asset Management's assets under management or supervision increased $49 billion to $425 billion at November 30, 1999. Asset Management achieved net revenues and net income of $2,112 million and $448 million in fiscal 1999, increases of 20% and 43%, respectively, from fiscal 1998. Fiscal 1998's net income included a net gain of $182 million from the sale of the Company's Global Custody business (see "Results of Operations -- Business Acquisition and Dispositions" herein). Fiscal 1998 net income also included a $117 million charge resulting from the cumulative effect of an accounting change. This charge represents the effect of an accounting change adopted in the fourth quarter of fiscal 1998 (effective December 1, 1997) with respect to the accounting for offering costs paid by investment advisors of closed-end funds, where such costs are not specifically reimbursed through separate advisory contracts (see Note 2 to the consolidated financial statements). Excluding the net gain from the sale of the Global Custody business and the charge resulting from the cumulative effect of an accounting change, fiscal 1999's net income increased 81%. In fiscal 1998, Asset Management net revenues and net income decreased 6% and 7%, respectively, from fiscal 1997. Excluding the net gain from the sale of the Global Custody business and the charge resulting from the cumulative effect of an accounting change, fiscal 1998's net income decreased 26%. The fiscal 1999 and fiscal 1998 levels of net revenues and net income in the Company's Asset Management business primarily reflected strong growth in customer assets under management or supervision. In fiscal 1998, net revenues and net income were adversely affected by losses from an institutional leveraged emerging market debt portfolio. Investment Banking Asset Management primarily generates investment banking revenues from the underwriting of Unit Investment Trust products. Investment banking revenues increased 258% in fiscal 1999 and decreased 24% in fiscal 1998. In both periods, the fluctuations were primarily associated with changes in the level of Unit Investment Trust sales volumes. Principal Transactions Asset Management primarily generates principal transaction revenues from gains and losses resulting from the Company's capital investments in certain of its funds and other investments. Principal transaction investment revenues aggregating $13 million were recognized in fiscal 1999 as compared with losses of $(301) million in fiscal 1998. Fiscal 1999's revenues primarily consist of net gains from the Company's capital investments in certain of its funds, reflecting generally favorable market condi- tions. Fiscal 1998's results primarily reflect losses from an institutional leveraged emerging market debt portfolio that occurred during the third quarter of fiscal 1998. Commissions Asset Management primarily generates commission revenues from dealer and distribution concessions on sales of certain funds, as well as certain allocated commission revenues. Commission revenues decreased 48% in fiscal 1999 and 21% in fiscal 1998. In both periods, the fluctuations primarily reflected lower levels of transaction volume and allocated commission revenues. Net Interest Asset Management generates net interest revenues from certain investment positions, as well as from certain allocated interest revenues and expenses. Net interest revenues in fiscal 1998 and fiscal 1997 also include revenues from global custody and correspondent clearing services. Net interest revenues decreased 40% in fiscal 1999, primarily reflecting the Company's sale of its Global Custody and Correspondent Clearing businesses in fiscal 1998. Net interest revenues increased 36% in fiscal 1998, primarily reflecting higher net revenues from certain investment positions. Asset Management, Distribution and Administration Fees Asset management, distribution and administration fees primarily include revenues from the management and administration of assets. These fees arise from investment management services the Company provides to investment vehicles (the "Funds") pursuant to various contractual arrangements. Generally, the Company receives fees based upon the Fund's average net assets. Revenues in fiscal 1998 and fiscal 1997 also include other administrative fees and non-interest revenues earned from global custody and correspondent clearing services. Asset management, distribution and administration fees were as follows:
FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - --------------------------------------------------------------------------------------- Asset management, distribution and administration fees $1,930 $1,891 $1,742 - --------------------------------------------------------------------------------------- The Company's customer assets under management or supervision were as follows: FISCAL FISCAL FISCAL (dollars in billions) 1999 1998 1997 - --------------------------------------------------------------------------------------- Products offered primarily to individuals $ 258 $ 219 $ 193 Products offered primarily to institutional clients 167 157 145 - --------------------------------------------------------------------------------------- Total assets under management or supervision at fiscal year-end/(1)/ $ 425 $ 376 $ 338 - ---------------------------------------------------------------------------------------
(1) These amounts include assets associated with the Company's ICS business. Revenues generated by ICS are included in the Company's Securities segment. ICS assets were $23 billion, $19 billion and $14 billion at November 30 1999, 1998 and 1997, respectively. In fiscal 1999, asset management, distribution and administration fees increased 2%. The increase in revenues primarily reflects higher fund management fees as well as other revenues resulting from a higher level of assets under management or supervision. These increases were partially offset by the absence of revenues from global custody and correspondent clearing activities, attributable to the Company's sale of its Global Custody business in the fourth quarter of fiscal 1998 and its Correspondent Clearing business in the third quarter of fiscal 1998. In fiscal 1998, asset management, distribution and administration fees increased 9%. The increase in revenues primarily reflects higher fund management fees as well as other revenues resulting from a higher level of assets under management or supervision, including revenues from developed country global equity and fixed income products. Such increases were partially offset by the impact of market depreciation in certain of the Company's products resulting from the downturn in certain global financial markets which occurred during the latter half of the year. Fiscal 1998's revenues also were negatively impacted by the Company's sale of its Global Custody and Correspondent Clearing businesses. As of November 30, 1999, assets under management or supervision increased $49 billion from fiscal year-end 1998. In fiscal 1999, approximately 25% of the increase in assets under management or supervision was attributable to net inflows of new customer assets, while the remaining 75% reflected market appreciation. In fiscal 1998, approximately 50% of the increase in assets under management or supervision was attributable to net inflows of new customer assets, while the remaining 50% reflected market appreciation. page 33 99 AR page 34 Non-Interest Expenses FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ----------------------------------------------------- Compensation and benefits $ 648 $ 659 $ 659 Occupancy and equipment 96 97 77 Brokerage, clearing and exchange fees 107 198 142 Information processing and communications 92 87 95 Marketing and business development 127 125 119 Professional services 137 135 88 Other 138 91 136 - ----------------------------------------------------- Total non-interest expenses $1,345 $1,392 $1,316 - ----------------------------------------------------- Fiscal 1999's total non-interest expenses decreased 3% to $1,345 million. Within the non-interest expense category, employee compensation and benefits expense decreased 2%, reflecting lower costs due to the sale of the Company's Global Custody business in fiscal 1998, partially offset by higher incentive compensation costs based on higher fiscal 1999 revenues and earnings. Excluding compensation and benefits expense, non-interest expenses decreased $36 million. Occupancy and equipment expense was comparable to the prior year, as higher occupancy costs at certain office locations were offset by lower costs due to the Company's sale of its Global Custody business. Brokerage, clearing and exchange fees decreased 46%, primarily attributable to commissions paid in fiscal 1998 in connection with the Company's launch of the Van Kampen Senior Income Trust mutual fund and lower sales of closed-end funds through the non- proprietary distribution channel. In addition, lower agent bank costs were incurred in fiscal 1999 due to the Company's sale of its Global Custody business. These decreases were partially offset by a higher level of deferred commission amortization. Information processing and communications costs increased 6%, primarily due to increased costs associated with the Company's information technology infrastructure, as well as higher market data costs. These increases were partially offset by lower costs due to the Company's sale of its Global Custody business. Marketing and business development expenses increased 2%, as higher costs due to business growth, including new product launches, were partially offset by lower costs due to the Company's sale of its Global Custody business. Professional services expense increased 1%, as higher consulting fees were partially offset by lower legal expenses and lower costs due to the Company's sale of its Global Custody business. Other expenses increased 52%, reflecting the impact of a higher level of business activity on various operating expenses, as well as costs associated with the consolidation of certain office locations. Fiscal 1998's total non-interest expenses increased 6% to $1,392 million. Within the non-interest expense category, employee compensation and benefits expense was comparable to the prior year. Occupancy and equipment expense increased 26%, principally reflecting the reclassification of certain expenses associated with VK, as well as additional office space and higher occupancy costs at certain locations. Brokerage, clearing and exchange fees increased 39%, primarily reflecting commissions paid in connection with the Company's launch of the Van Kampen Senior Income Trust mutual fund, higher closed-end fund sales through the non-proprietary distribution channel, and a higher level of deferred commission amortization. Information processing and communications costs decreased 8% due to the reclassification of certain expenses associated with VK, as well as lower allocated communications costs. Marketing and business development expense increased 5%, primarily reflecting higher costs due to business growth, including new product launches. Professional services expense increased 53%, primarily reflecting higher consulting and subadvisory costs. Other expenses decreased 33%, which primarily reflects a lower level of allocated expenses. CREDIT SERVICES STATEMENTS OF INCOME FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ----------------------------------------------------- Fees: Merchant and cardmember $1,492 $1,647 $1,704 Servicing 1,194 928 762 Other -- 5 5 - ----------------------------------------------------- Total non-interest revenues 2,686 2,580 2,471 - ----------------------------------------------------- Interest revenue 2,246 2,729 3,123 Interest expense 881 994 1,173 - ----------------------------------------------------- Net interest income 1,365 1,735 1,950 Provision for consumer loan losses 529 1,173 1,493 - ----------------------------------------------------- Net credit income 836 562 457 - ----------------------------------------------------- Net revenues 3,522 3,142 2,928 - ----------------------------------------------------- Compensation and benefits 525 549 535 Occupancy and equipment 54 67 61 Information processing and communications 477 462 471 Marketing and business development 1,041 872 780 Professional services 121 97 73 Other 207 207 251 - ----------------------------------------------------- Total non-interest expenses 2,425 2,254 2,171 - ----------------------------------------------------- Gain on sale of businesses -- 362 -- - ----------------------------------------------------- Income before income taxes 1,097 1,250 757 Provision for income taxes 435 529 284 - ----------------------------------------------------- Net income $ 662 $ 721 $ 473 - ----------------------------------------------------- The Company's Credit Services business is operated by its Discover Financial Services business unit, which also operates the Discover/ NOVUS Network, a proprietary network of merchant and cash access locations. The credit cards offered by the Company include the Discover Card, the Discover Platinum Card, the Morgan Stanley Dean Witter Card and other proprietary general purpose credit cards. Fiscal 1999 does not include the results from Prime Option, the operations of SPS and certain receivables associated with the discontinued BRAVO Card, all of which were sold during fiscal 1998. Prime Option, a business the Company had operated with NationsBank of Delaware, N.A., was sold during the second quarter of fiscal 1998. The Company sold its interest in the operations of SPS, which was a 73%-owned, publicly held subsidiary of the Company, in the fourth quarter of fiscal 1998. The Company discontinued its BRAVO Card in fiscal 1998 and sold certain credit card receivables associated with the BRAVO Card in the fourth quarter of fiscal 1998. Fiscal 1998's net after-tax gain on the sale of these businesses was $163 million. The sale of Prime Option, the operations of SPS and certain BRAVO receivables reflect the Company's strategic decision to focus on the growth of its existing Discover Card and Morgan Stanley Dean Witter brand names. Reflecting this focus, the Company introduced the Discover Platinum Card and the Morgan Stanley Dean Witter Card in fiscal 1999. In fiscal 1999, Credit Services net income decreased 8% to $662 million, primarily due to fiscal 1998's inclusion of the $163 million net gain on the sale of the above-mentioned businesses. Excluding this gain, net income increased 19% in fiscal 1999. The increase was primarily attributable to a lower provision for loan losses and increased servicing fees, partially offset by lower net interest income and merchant and cardmember fees and higher marketing and business development expenses. In fiscal 1998, net income increased 52% to $721 million from $473 million in fiscal 1997. Excluding the net gain on the sale of the businesses mentioned above, net income increased 18% in fiscal 1998. The increase was primarily attributable to a reduction in the provision for loan losses primarily resulting from the sale of Prime Option and the operations of SPS as well as higher servicing fees. The increase in net income was partially offset by lower net interest income and increases in marketing and business development expenses and incremental taxes associated with the sale of the operations of SPS. As a result of enhancements made to certain of the Company's operating systems in the fourth quarter of fiscal 1997, the Company began recording charged-off cardmember fees and interest revenue directly against the income statement line items to which they were originally recorded. Prior to the enhancements, charged-off cardmember fees and interest revenue both were recorded as a reduction of interest revenue. While this change had no impact on net revenues, the Company believes the revised presentation better reflects the manner in which charge-offs affect the Credit Services statements of income. However, since prior periods have not been restated to reflect this change, the comparability of merchant and cardmember fees and interest revenue between fiscal 1998 and fiscal 1997 has been affected. Accordingly, the following sections also will discuss the changes in these income statement categories excluding the impact of this reclassification. page 35 99 AR page 36 Credit Services statistical data were as follows: FISCAL FISCAL FISCAL (dollars in billions) 1999 1998 1997 - ----------------------------------------------------------- Consumer loans at fiscal year-end: Owned $21.0 $16.0 $20.9 Managed $38.0 $32.5 $36.0 General purpose credit card transaction volume $70.6 $58.0 $55.8 - ----------------------------------------------------------- The higher level of consumer loans at November 30, 1999 was primarily attributable to growth in the Company's Discover Platinum Card. The lower level of consumer loans at November 30, 1998 reflects the Company's sale of Prime Option, the operations of SPS and certain BRAVO receivables during fiscal 1998. Merchant and Cardmember Fees Merchant and cardmember fees include revenues from fees charged to merchants on credit card sales, late payment fees, over-limit fees, insurance fees, cash advance fees, and fees for the administration of credit card programs and transaction processing services. Merchant and cardmember fees decreased 9% to $1,492 million during fiscal 1999 and decreased 3% to $1,647 million during fiscal 1998. The decrease in fiscal 1999 was primarily due to the Company's sale of the operations of SPS and the sale of Prime Option. Fiscal 1999 also was impacted by higher merchant discount revenue offset by lower levels of overlimit fees and cash advance fees. The increase in merchant discount revenue was associated with record levels of sales volume. Overlimit fees decreased primarily due to a lower level of overlimit fee occurrences. Cash advance fees decreased due to lower cash advance transaction volume, primarily attributable to the Company's actions to limit cash advances in an effort to improve credit quality. The 3% decrease in merchant and cardmember fees in fiscal 1998 primarily reflects the reclassification of charged-off cardmember fees discussed above. Excluding the effect of the reclassification of charged-off cardmember fees, merchant and cardmember fees would have increased 2% in fiscal 1998. This increase was attributable to higher merchant discount revenue primarily associated with increased growth of general purpose credit card transaction volume related to the Discover Card, offset by lower revenues due to the sale of the operations of SPS in October 1998. In addition, merchant and cardmember fees benefited from higher overlimit and late fees attributable to a fee increase introduced during fiscal 1998 and an increase in occurrences of overlimit accounts and delinquent payments. Partially offsetting these increases was a decrease in cash advance fees as a result of lower cash advance transaction volume, primarily attributable to limits on cash advances imposed by the Company in an effort to improve credit quality. Servicing Fees Servicing fees are revenues derived from consumer loans which have been sold to investors through asset securitizations. Cash flows from the interest yield and cardmember fees generated by securitized loans are used to pay investors in these loans a predetermined fixed or floating rate of return on their investment, to reimburse the investors for losses of principal resulting from charged-off loans and to pay the Company a fee for servicing the loans. Any excess cash flows remaining are paid to the Company. The servicing fees and excess net cash flows paid to the Company are reported as servicing fees in the consolidated statements of income. The sale of consumer loans through asset securitizations therefore has the effect of converting portions of net credit income and fee income to servicing fees. The Company completed asset securitizations of $3.0 billion in fiscal 1999 and $4.5 billion in fiscal 1998. The asset securitizations in fiscal 1999 and 1998 have expected maturities ranging from three to 10 years from the date of issuance. The table below presents the components of servicing fees: FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ---------------------------------------------------------- Merchant and cardmember fees $ 552 $ 505 $ 436 Interest revenue 2,694 2,598 2,116 Interest expense (996) (1,010) (829) Provision for consumer loan losses (1,056) (1,165) (961) - ---------------------------------------------------------- Servicing fees $ 1,194 $ 928 $ 762 - ---------------------------------------------------------- Servicing fees are affected by the level of securitized loans, the spread between the interest yield on the securitized loans and the yield paid to the investors, the rate of credit losses on securitized loans and the level of cardmember fees earned from securitized loans. Servicing fees also include the effects of interest rate contracts entered into by the Company as part of its interest rate risk management program. Servicing fees increased 29% in fiscal 1999 and 22% in fiscal 1998. The increase in fiscal 1999 was due to higher levels of net interest income primarily resulting from higher levels of average securitized loans. The increase also reflects a decline in credit losses from securitized consumer loans resulting from a lower level of charge-offs related to the Discover Card portfolio and the positive impact of the sale of the operations of SPS, partially offset by an increase in the level of average securitized loans. The increase in servicing fees in fiscal 1998 was due to higher levels of net interest cash flows and increased fee revenue, partially offset by increased credit losses from securitized consumer loans, which were primarily a result of higher levels of average securitized loans. Net Interest Income Net interest income is equal to the difference between interest revenue derived from consumer loans and short-term investment assets and interest expense incurred to finance those assets. Credit Services assets, consisting primarily of consumer loans, currently earn interest revenue at fixed rates and, to a lesser extent, market-indexed variable rates. The Company incurs interest expense at fixed and floating rates. Interest expense also includes the effects of interest rate contracts entered into by the Company as part of its interest rate risk management program. This program is designed to reduce the volatility of earnings resulting from changes in interest rates and is accomplished primarily through matched financing, which entails matching the repricing schedules of consumer loans and the related financing. The following tables present analyses of Credit Services average balance sheets and interest rates in fiscal 1999, fiscal 1998 and fiscal 1997 and changes in net interest income during those fiscal years: AVERAGE BALANCE SHEET ANALYSIS
FISCAL 1999 FISCAL 1998/(3)/ FISCAL 1997/(3)/ AVERAGE AVERAGE AVERAGE (dollars in millions) BALANCE RATE INTEREST BALANCE RATE INTEREST BALANCE RATE INTEREST - ------------------------------------------------------------ --------------------------------- -------------------------------- ASSETS Interest earning assets: General purpose credit card loans $16,173 13.10% $2,118 $17,184 13.87% $2,383 $19,512 14.03% $2,738 Other consumer loans 4 8.98 -- 1,374 16.70 229 1,773 15.73 279 Investment securities 672 5.16 35 496 6.25 31 176 5.45 10 Other 1,656 5.61 93 1,465 5.88 86 1,680 5.75 96 - ------------------------------------------------------------ --------------------------------- -------------------------------- Total interest earning assets 18,505 12.14 2,246 20,519 13.30 2,729 23,141 13.49 3,123 Allowance for loan losses (774) (847) (828) Non-interest earning assets 1,544 1,517 1,529 - ------------------------------------------------------------ --------------------------------- -------------------------------- Total assets $19,275 $21,189 $23,842 - ------------------------------------------------------------ --------------------------------- -------------------------------- LIABILITIES AND SHAREHOLDER'S EQUITY Interest bearing liabilities: Interest bearing deposits Savings $ 1,492 4.51% $ 67 $ 1,073 4.79% $ 51 $ 963 4.27% $ 41 Brokered 5,609 6.37 357 5,656 6.62 375 4,589 6.66 306 Other time 1,927 5.61 108 2,189 6.16 135 2,212 6.12 135 - ------------------------------------------------------------ --------------------------------- -------------------------------- Total interest bearing deposits 9,028 5.90 532 8,918 6.29 561 7,764 6.21 482 Other borrowings 6,046 5.76 349 7,162 6.05 433 11,371 6.07 691 - ------------------------------------------------------------ --------------------------------- -------------------------------- Total interest bearing liabilities 15,074 5.84 881 16,080 6.18 994 19,135 6.13 1,173 Shareholder's equity/other liabilities 4,201 5,109 4,707 - ------------------------------------------------------------ --------------------------------- -------------------------------- Total liabilities and shareholder's equity $19,275 $21,189 $23,842 - ------------------------------------------------------------ --------------------------------- -------------------------------- Net interest income $ 1,365 $1,735 $1,950 - ------------------------------------------------------------ --------------------------------- -------------------------------- Net interest margin/(1)/ 7.38% 8.46% 8.43% Interest rate spread/(2)/ 6.30% 7.12% 7.36% - ------------------------------------------------------------ --------------------------------- --------------------------------
(1) Net interest margin represents net interest income as a percentage of total interest earning assets. (2) Interest rate spread represents the difference between the rate on total interest earning assets and the rate on total interest bearing liabilities. (3) Certain prior-year information has been reclassified to conform to the current year's presentation. page 37 99 AR page 38 RATE/VOLUME ANALYSIS
INCREASE/(DECREASE) DUE TO CHANGES IN: FISCAL 1999 VS. FISCAL 1998 FISCAL 1998 VS. FISCAL 1997 (dollars in millions) VOLUME RATE TOTAL VOLUME RATE TOTAL - -------------------------------------------------------------------------- --------------------------------------------- INTEREST REVENUE General purpose credit card loans $(140) $(125) $(265) $(327) $(28) $(355) Other consumer loans (229) -- (229) (63) 13 (50) Investment securities 11 (7) 4 17 4 21 Other 11 (4) 7 (12) 2 (10) -------- ---------- Total interest revenue (268) (215) (483) (355) (39) (394) - -------------------------------------------------------------------------- --------------------------------------------- INTEREST EXPENSE Interest bearing deposits: Savings 20 (4) 16 5 5 10 Brokered (3) (15) (18) 71 (2) 69 Other time (16) (11) (27) (1) 1 ---- -------- ---------- Total interest bearing deposits 7 (36) (29) 72 7 79 Other borrowings (67) (17) (84) (256) (2) (258) -------- ---------- Total interest expense (62) (51) (113) (187) 8 (179) -------- ---------- Net interest income $(206) $(164) $(370) $(168) $(47) $(215) - -------------------------------------------------------------------------- ---------------------------------------------
Net interest income decreased 21% in fiscal 1999 and 11% in fiscal 1998. The decrease in fiscal 1999 was primarily due to lower average levels of owned consumer loans and a lower yield on these loans. The decrease in average owned consumer loans was due to the sale of the operations of SPS, the sale of Prime Option and the discontinuance of the BRAVO Card in fiscal 1998, as well as a higher level of securitized Discover Card loans. The lower yield in fiscal 1999 was due to a lower yield on Discover Card loans, coupled with the exclusion of SPS loans from the Company's portfolio. The lower yield on Discover Card loans was primarily due to the more competitive interest rates offered to both existing and new cardmembers. The lower yield reflected an increase in consumer loans from balance transfers, which often are offered at below-market interest rates for an introductory period. In fiscal 1998, excluding the effect of the reclassification of charged-off cardmember fees discussed previously, net interest income would have decreased 15%. The decrease in fiscal 1998 was due to lower average levels of owned consumer loans and a lower yield on general purpose credit card loans. The decrease in average owned consumer loans was primarily due to an increase in securitized loans and the sale of the Prime Option and SPS portfolios. The lower yield on general purpose credit card loans in fiscal 1998 was due to a larger number of cardmembers taking advantage of promotional rates. In both years, the Company believes that the effect of changes in market interest rates on net interest income was mitigated as a result of its liquidity and interest rate risk management policies. The supplemental table below provides average managed loan balance and rate information which takes into account both owned and securitized loans: SUPPLEMENTAL AVERAGE MANAGED LOAN INFORMATION
FISCAL 1999 FISCAL 1998 FISCAL 1997 AVERAGE AVERAGE AVERAGE (dollars in millions) BALANCE RATE BALANCE RATE BALANCE RATE - ------------------------------------------------------------ ----------------------- ------------------- Consumer loans $33,534 14.23% $34,619 14.86% $34,619 14.83% General purpose credit card loans 33,530 14.23 32,684 14.72 32,176 14.72 Total interest earning assets 35,862 13.66 36,580 14.38 36,475 14.37 Total interest bearing liabilities 32,431 5.74 32,141 6.15 32,469 6.17 Consumer loan interest rate spread 8.49 8.71 8.66 Interest rate spread 7.92 8.23 8.20 Net interest margin 8.47 8.98 8.88 - ------------------------------------------------------------ ----------------------- -------------------
Provision for Consumer Loan Losses The provision for consumer loan losses is the amount necessary to establish the allowance for loan losses at a level that the Company believes is adequate to absorb estimated losses in its consumer loan portfolio at the balance sheet date. The Company's allowance for loan losses is regularly evaluated by management for adequacy and was $769 million at November 30, 1999 and $787 million at November 30, 1998. The provision for consumer loan losses, which is affected by net charge- offs, loan volume and changes in the amount of consumer loans estimated to be uncollectable, decreased 55% in fiscal 1999 and 21% in fiscal 1998. The decrease in fiscal 1999 was primarily due to a lower level of charge-offs related to the Discover Card portfolio and the positive impact of the sale of the operations of SPS, the sale of Prime Option and the discontinuance of the BRAVO Card. This decrease was reflective of the Company's continuing efforts to improve the credit quality of its portfolio. The provision for consumer loan losses also was positively impacted by a decline in the loan loss allowance in connection with securitization transactions entered into prior to the third quarter of 1996. This loan loss allowance was fully amortized by the end of fiscal 1999. The decrease in fiscal 1998 was due to a decrease in net charge-offs resulting from lower average levels of owned consumer loans, primarily attributable to an increased level of securitized loans and reduced levels of charge-offs associated with the sale of Prime Option and SPS receivables, partially offset by a small increase in the net charge-off rate of the Discover Card portfolio. The provision for consumer loan losses also was positively impacted by a decline in the loan loss allowance in connection with securitization transactions entered into prior to the third quarter of 1996 as discussed above. The Company's future charge-off rates and credit quality are subject to uncertainties that could cause actual results to differ materially from what has been discussed above. Factors that influence the provision for consumer loan losses include the level and direction of consumer loan delinquencies and charge-offs, changes in consumer spending and payment behaviors, bankruptcy trends, the seasoning of the Company's loan portfolio, interest rate movements and their impact on consumer behavior, and the rate and magnitude of changes in the Company's consumer loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio. Consumer loans are considered delinquent when interest or principal payments become 30 days past due. Consumer loans are charged-off when they become 180 days past due, except in the case of bankruptcies and fraudulent transactions, where loans are charged-off earlier. Loan delinquencies and charge-offs are primarily affected by changes in economic conditions and may vary throughout the year due to seasonal consumer spending and payment behaviors. The net charge-off rate decreased in fiscal 1999 as compared with fiscal 1998, reflecting the Company's increased focus on credit quality and account collections, as well as the sale of Prime Option, the operations of SPS and the discontinuance of the BRAVO Card. page 39 99 AR page 40 The following table presents delinquency and net charge-off rates with supplemental managed loan information: ASSET QUALITY
FISCAL 1999 FISCAL 1998 FISCAL 1997 (dollars in millions) OWNED MANAGED OWNED MANAGED OWNED MANAGED - ----------------------------------------------------------------- ------------------------ -------------------- Consumer loans at period-end $20,998 $37,975 $15,996 $32,502 $20,917 $35,950 Consumer loans contractually past due as a percentage of period-end consumer loans: 30 to 89 days 3.35% 3.79% 3.54% 3.69% 3.96% 3.91% 90 to 179 days 2.20% 2.53% 2.67% 2.84% 3.11% 3.07% Net charge-offs as a percentage of average consumer loans 4.78% 5.42% 6.75% 6.90% 6.78% 6.95% - ----------------------------------------------------------------- ------------------------ --------------------
Non-Interest Expenses
FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - --------------------------------------------------------------------------------------------- Compensation and benefits $ 525 $ 549 $ 535 Occupancy and equipment 54 67 61 Information processing and communications 477 462 471 Marketing and business development 1,041 872 780 Professional services 121 97 73 Other 207 207 251 - --------------------------------------------------------------------------------------------- Total non-interest expenses $ 2,425 $ 2,254 $ 2,171 - ---------------------------------------------------------------------------------------------
Total non-interest expenses increased 8% to $2,425 million in fiscal 1999 and increased 4% to $2,254 million in fiscal 1998. Employee compensation and benefits expense decreased 4% in fiscal 1999 and increased 3% in fiscal 1998. The decrease in fiscal 1999 was primarily due to lower compensation costs resulting from the sale of Prime Option and the operations of SPS. These decreases were partially offset by higher employment costs at Discover Financial Services associated with increased employment levels due to increased levels of transaction volume. The increase in fiscal 1998 was due to an increased number of employees and higher executive compensation costs associated with Discover Financial Services, offset by lower compensation costs associated with the sale of Prime Option and the operations of SPS. Occupancy and equipment expense decreased 19% in fiscal 1999 and increased 10% in fiscal 1998. The decrease in fiscal 1999 was primarily due to the exclusion of the results of Prime Option and SPS, partially offset by higher occupancy costs associated with Discover Financial Services. The increase in fiscal 1998 was primarily due to higher rent and other occupancy costs at certain of the Company's facilities, including payment processing centers. Information processing and communications expense increased 3% in fiscal 1999 and decreased 2% in fiscal 1998. The increase in fiscal 1999 was due to higher external data processing costs at Discover Financial Services, including cardmember data analysis associated with increased portfolio activity, partially offset by the exclusion of the results of Prime Option and SPS in fiscal 1999. In fiscal 1998, lower transaction processing costs resulting from the sale of the operations of SPS were partially offset by higher external data processing costs related to the Year 2000 project and increased cardmember data analysis associated with credit risk management activity. Marketing and business development expense increased 19% in fiscal 1999 and 12% in fiscal 1998. In fiscal 1999, the Company continued to invest in the growth of its credit card business, including the introduction of the Discover Platinum Card during the first quarter of 1999 and the launch of the Morgan Stanley Dean Witter Card in the United Kingdom during the latter half of fiscal 1999. Marketing and business development expense increased in fiscal 1999 due to direct mailing and other promotional activities related to the launch and continued promotion of the Discover Platinum and Morgan Stanley Dean Witter Cards, higher cardmember rewards expense and a new advertising campaign for the Discover Card. Higher cardmember rewards expense was due to increased sales volume. Cardmember rewards expense includes the Cashback Bonus/(R) /award program, pursuant to which the Company annually pays Discover Cardmembers, and Private Issue/(R) /Cardmembers electing this feature, a percentage of their purchase amounts ranging up to 1% based upon a cardmember's level of annual purchases. The increase in fiscal 1998 was attributable to higher advertising and promotional expenses associated with increased direct mail and other promotional activities related to the Discover Card, Private Issue Card and partnership programs, as well as higher cardmember rewards expense. The Company increased marketing and promotional spending significantly in the third and fourth quarters of fiscal 1998 in an effort to renew and increase growth in the Discover Card brand. Professional services expense increased 25% in fiscal 1999 and 33% in fiscal 1998. The increase in fiscal 1999 was due to higher costs associated with account collections and consumer credit counseling, partially offset by a decrease in expenses associated with the sale of the operations of SPS. The increase in fiscal 1998 was due to services related to increased partnership program activity, higher expenditures for consumer credit counseling, collections services and consulting fees. Other expenses primarily include fraud losses, credit inquiry fees and other administrative costs. Other expenses remained unchanged in fiscal 1999 as compared with fiscal 1998. In fiscal 1999, increased operational costs associated with higher application and transaction volumes and costs associated with the launch of the Morgan Stanley Dean Witter Card in the United Kingdom were offset by a decrease in expenses associated with the sale of the operations of SPS. In fiscal 1998, other expenses decreased 18%, reflecting a decline in the level of fraud losses as well as a lower level of expenses resulting from the sale of Prime Option and the operations of SPS. Seasonal Factors The credit card lending activities of Credit Services are affected by seasonal patterns of retail purchasing. Historically, a substantial percentage of credit card loan growth occurs in the fourth calendar quarter, followed by a flattening or decline of consumer loans in the following calendar quarter. Merchant fees, therefore, have historically tended to increase in the first fiscal quarter, reflecting higher sales activity in the month of December. Additionally, higher card-member rewards expense is accrued in the first fiscal quarter, reflecting seasonal growth in retail sales volume. LIQUIDITY AND CAPITAL RESOURCES The Balance Sheet The Company's total assets increased to $367.0 billion at November 30, 1999 from $317.6 billion at November 30, 1998, primarily reflecting higher financial instruments owned, securities borrowed, consumer loans and customer receivables, partially offset by lower levels of securities purchased under agreements to resell. A substantial portion of the Company's total assets consists of highly liquid marketable securities and short-term receivables arising principally from securities transactions. The highly liquid nature of these assets provides the Company with flexibility in financing and managing its business. Funding and Capital Policies The Company's senior management establishes the overall funding and capital policies of the Company, reviews the Company's performance relative to these policies, monitors the availability of sources of financing, reviews the foreign exchange risk of the Company and oversees the liquidity and interest rate sensitivity of the Company's asset and liability position. The primary goal of the Company's funding and liquidity activities is to ensure adequate financing over a wide range of potential credit ratings and market environments. Many of the Company's businesses are capital-intensive. Capital is required to finance, among other things, the Company's securities inventories, underwritings, principal investments, private equity activities, consumer loans and investments in fixed assets. As a policy, the Company attempts to maintain sufficient capital and funding sources in order to have the capacity to finance itself on a fully collateralized basis at all times, including periods of financial stress. Currently, the Company believes it has sufficient capital to meet its needs. In addition, the Company attempts to maintain total equity, on a consolidated basis, at least equal to the sum of all of its subsidiaries' equity. Subsidiary equity capital requirements are determined by regulatory requirements (if applicable), asset mix, leverage considerations and earnings volatility. The Company views return on equity to be an important measure of its performance, in the context of both the particular business environment in which the Company is operating and its peer group's results. In this regard, the Company actively manages its consolidated capital position based upon, among other things, business opportunities, capital availability and rates of return together with internal capital policies, regulatory requirements and page 41 99 AR page 42 rating agency guidelines and therefore may, in the future, expand or contract its capital base to address the changing needs of its businesses. The Company returns internally generated equity capital which is in excess of the needs of its businesses to its shareholders through common stock repurchases and dividends. The Company's liquidity policies emphasize diversification of funding sources. The Company also follows a funding strategy which is designed to ensure that the tenor of the Company's liabilities equals or exceeds the expected holding period of the assets being financed. Short-term funding generally is obtained at rates related to U.S., Euro or Asian money market rates for the currency borrowed. Repurchase transactions are effected at negotiated rates. Other borrowing costs are negotiated depending upon prevailing market conditions (see Notes 5 and 6 to the consolidated financial statements). Maturities of both short-term and long-term financings are designed to minimize exposure to refinancing risk in any one period. The volume of the Company's borrowings generally fluctuates in response to changes in the amount of repurchase transactions outstanding, the level of the Company's securities inventories and consumer loans receivable, and overall market conditions. Availability and cost of financing to the Company can vary depending upon market conditions, the volume of certain trading activities, the Company's credit ratings and the overall availability of credit. The Company, therefore, maintains a surplus of unused short-term funding sources at all times to withstand any unforeseen contraction in credit capacity. In addition, the Company attempts to maintain cash and unhypothecated marketable securities equal to at least 110% of its outstanding short-term unsecured borrowings. The Company has in place a contingency funding strategy, which provides a comprehensive one- year action plan in the event of a severe funding disruption. The Company views long-term debt as a stable source of funding for core inventories, consumer loans and illiquid assets and, therefore, maintains a long-term debt-to-capitalization ratio at a level appropriate for the current composition of its balance sheet. In general, fixed assets are financed with fixed rate long-term debt, and securities inventories and the majority of current assets are financed with a combination of short-term funding, floating rate long-term debt or fixed rate long-term debt swapped to a floating basis. Both fixed rate and floating rate long-term debt (in addition to sources of funds accessed directly by the Company's Credit Services business) are used to finance the Company's consumer loan portfolio. Consumer loan financing is targeted to match the repricing and duration characteristics of the loans financed. The Company uses derivative products (primarily interest rate, currency and equity swaps) to assist in asset and liability management, reduce borrowing costs and hedge interest rate risk (see Note 6 to the consolidated financial statements). The Company's reliance on external sources to finance a significant portion of its day-to-day operations makes access to global sources of financing important. The cost and availability of unsecured financing generally are dependent on the Company's short-term and long-term debt ratings. In addition, the Company's debt ratings can have a significant impact on certain trading revenues, particularly in those businesses where longer term counter-party performance is critical, such as over-the-counter derivative transactions. As of January 31, 2000, the Company's credit ratings were as follows: COMMERCIAL PAPER SENIOR DEBT - ------------------------------------------------------------------------------- Dominion Bond Rating Service Limited R-1 (middle) AA (low) Duff & Phelps Credit Rating Co. D-1+ AA Fitch IBCA, Inc. F1+ AA Japan Rating & Investment Information, Inc. a-1+ AA Moody's Investors Service P-1 Aa3 Standard & Poor's A-1 A+ Thomson Financial BankWatch TBW-1 AA+ - ------------------------------------------------------------------------------- During fiscal 1999, Duff & Phelps Credit Rating Co. upgraded the Company's senior debt rating from AA- to AA, Japan Rating & Investment Information, Inc. upgraded the Company's senior debt rating from AA- to AA, Standard & Poor's placed the Company's senior debt ratings on Positive Outlook, Thomson Financial BankWatch upgraded the Company's senior debt rating from AA to AA+ and Fitch IBCA, Inc. upgraded the Company's senior debt rating from AA- to AA. On January 27, 2000, Dominion Bond Rating Service Limited established a senior debt rating of AA (low) for the Company. As the Company continues its global expansion and derives revenues increasingly from various currencies, foreign currency management is a key element of the Company's financial policies. The Company benefits from operating in several different currencies because weakness in any particular currency often is offset by strength in another currency. The Company closely monitors its exposure to fluctuations in currencies and, where cost-justified, adopts strategies to reduce the impact of these fluctuations on the Company's financial performance. These strategies include engaging in various hedging activities to manage income and cash flows denominated in foreign currencies and using foreign currency borrowings, when appropriate, to finance investments outside the U.S. Principal Sources of Funding The Company funds its balance sheet on a global basis. The Company's funding for its Securities and Asset Management businesses is raised through diverse sources. These sources include the Company's capital, including equity and long- term debt; repurchase agreements; U.S., Canadian, Euro and Japanese commercial paper; letters of credit; unsecured bond borrows; securities lending; buy/sell agreements; municipal reinvestments; master notes; and committed and uncommitted lines of credit. Repurchase agreement transactions, securities lending and a portion of the Company's bank borrowings are made on a collateralized basis and, therefore, provide a more stable source of funding than short-term unsecured borrowings. The funding sources utilized for the Company's Credit Services business include the Company's capital, including equity and long-term debt; asset securitizations; commercial paper; deposits; asset-backed commercial paper; Federal Funds; and short-term bank notes. The Company sells consumer loans through asset securitizations using several transaction structures. Riverwoods Funding Corporation ("RFC"), an entity included in the Company's consolidated financial statements, issues asset-backed commercial paper. The Company's bank subsidiaries solicit deposits from consumers, purchase Federal Funds and issue short-term bank notes. Interest bearing deposits are classified by type as savings, brokered and other time deposits. Savings deposits consist primarily of money market deposits and certificates of deposit accounts sold directly to cardmembers and savings deposits from individual securities clients. Brokered deposits consist primarily of certificates of deposits issued by the Company's bank subsidiaries. Other time deposits include institutional certificates of deposits. The Company, through Greenwood Trust Company, an indirect subsidiary of the Company, sells notes under a short-term bank note program. The Company maintains borrowing relationships with a broad range of banks, financial institutions, counterparties and others from which it draws funds in a variety of currencies. The volume of the Company's borrowings generally fluctuates in response to changes in the amount of repurchase transactions outstanding, the level of the Company's securities inventories and consumer loans receivable, and overall market conditions. Availability and cost of financing to the Company can vary depending upon market conditions, the volume of certain trading activities, the Company's credit ratings and the overall availability of credit. The Company maintains a senior revolving credit agreement with a group of banks to support general liquidity needs, including the issuance of commercial paper (the "MSDW Facility"). Under the terms of the MSDW Facility, the banks are committed to provide up to $5.5 billion. The MSDW Facility contains restrictive covenants which require, among other things, that the Company maintain shareholders' equity of at least $9.1 billion at all times. The Company believes that the covenant restrictions will not impair the Company's ability to pay its current level of dividends. At November 30, 1999, no borrowings were outstanding under the MSDW Facility. The Company maintains a master collateral facility that enables Morgan Stanley & Co. Incorporated ("MS&Co."), one of the Company's U.S. broker-dealer subsidiaries, to pledge certain collateral to secure loan arrangements, letters of credit and other financial accommodations (the "MS&Co. Facility"). As part of the MS&Co. Facility, MS&Co. also maintains a secured committed credit agreement with a group of banks that are parties to the master collateral facility under which such banks are committed to provide up to $1.875 billion. The credit agreement contains restrictive covenants which require, among other things, that MS&Co. maintain specified levels of consolidated shareholder's equity and Net Capital, as defined. At November 30, 1999, no borrowings were outstanding under the MS&Co. Facility. The Company also maintains a revolving committed financing facility that enables Morgan Stanley & Co. International Limited ("MSIL"), the Company's London-based broker-dealer subsidiary, to secure committed funding from a syndicate of banks by providing a broad range of collateral under repurchase agreements (the "MSIL Facility"). Such banks are committed to provide up to an aggregate of $1.91 billion, available in six major currencies. The facility agreement contains restrictive covenants which require, among other things, that MSIL maintain specified levels of Shareholder's Equity and Financial Resources, each as defined. At page 43 99 AR page 44 November 30, 1999, no borrowings were outstanding under the MSIL Facility. On June 7, 1999, Morgan Stanley Dean Witter Japan Limited ("MSDWJL"), the Company's Tokyo-based broker-dealer subsidiary, entered into a committed revolving credit facility, guaranteed by the Company, that provides funding to support general liquidity needs, including support of MSDWJL's unsecured borrowings (the "MSDWJL Facility"). Under the terms of the MSDWJL Facility, a syndicate of banks is committed to provide up to 60 billion Japanese yen. At November 30, 1999, no borrowings were outstanding under the MSDWJL Facility. RFC maintains a senior bank credit facility to support the issuance of asset-backed commercial paper in the amount of $2.6 billion. Under the terms of the asset-backed commercial paper program, certain assets of RFC were subject to a lien in the amount of $2.6 billion at November 30, 1999. RFC has never borrowed from its senior bank credit facility. The Company anticipates that it will utilize the MSDW Facility, the MS&Co. Facility, the MSIL Facility or the MSDWJL Facility for short-term funding from time to time (see Note 5 to the consolidated financial statements). Fiscal 1999 and Subsequent Activity During fiscal 1999, the Company issued senior notes aggregating $7,626 million, including non-U.S. dollar currency notes aggregating $2,490 million, primarily pursuant to its public debt shelf registration statements. These notes have maturities from 2000 to 2029 and a weighted average coupon interest rate of 4.8% at November 30, 1999; the Company has entered into certain transactions to obtain floating interest rates based primarily on short-term LIBOR trading levels. At November 30, 1999, the aggregate outstanding principal amount of the Company's Senior Indebtedness (as defined in the Company's public debt shelf registration statements) was approximately $49.9 billion. Between November 30, 1999 and January 31, 2000, the Company issued additional debt obligations aggregating approximately $5,093 million. These notes have maturities from 2000 to 2014. Effective December 1999, the Company's Board of Directors authorized the Company to purchase, subject to market conditions and certain other factors, an additional $1 billion of the Company's common stock for capital management purposes. The Company also has a separate ongoing repurchase authorization in connection with awards granted under its equity-based compensation plans. During fiscal 1999, the Company purchased $2,374 million of its common stock. Subsequent to November 30, 1999 and through January 31, 2000, the Company purchased an additional $406 million of its common stock; the unused portion of the capital management common stock repurchase authorization at January 31, 2000 was approximately $1,098 million (without giving effect to any outstanding put options). In an effort to enhance its ongoing stock repurchase program, the Company may sell put options on shares of its common stock to third parties. These put options entitle the holder to sell shares of the Company's common stock to the Company on certain dates at specified prices. As of November 30, 1999, put options were outstanding on an aggregate of 1,000,000 shares of the Company's common stock. These put options expire in February 2000. The Company may elect cash settlement of the put options instead of taking delivery of the stock. Effective March 1, 1999, the Company redeemed all of the outstanding 7.82% Capital Units and 7.80% Capital Units. The aggregate principal amount of the Capital Units redeemed was $352 million. During fiscal 1999, the Company repurchased in a series of transactions in the open market $64 million of the $134 million outstanding 8.03% Capital Units. The Company has retired these repurchased Capital Units. In January 2000, the Company and Morgan Stanley Finance, plc, a U.K. subsidiary, called for redemption all of the outstanding 9.00% Capital Units on February 28, 2000. The aggregate principal amount of the Capital Units to be redeemed is $144 million. On May 5, 1999, the Company's shelf registration statement for the issuance of an additional $12 billion of debt securities, units, warrants or purchase contracts, or any combination thereof in the form of units or preferred stock, became effective. At November 30, 1999, certain assets of the Company, such as real property, equipment and leasehold improvements of $2.2 billion and goodwill and other intangible assets of $1.3 billion, were illiquid. In addition, included in other assets are approximately $1.9 billion of aircraft that the Company has acquired in connection with its aircraft financing activities. Certain equity investments made in connection with the Company's private equity and other principal investment activities, high-yield debt securities, emerging market debt, certain collateralized mortgage obligations and mortgage-related loan products, bridge financings, and certain senior secured loans and positions are not highly liquid. The Company also has commitments to fund certain fixed assets and other less liquid investments, including at November 30, 1999 approximately $417 million in connection with its private equity and other principal investment activities. Additionally, the Company has provided and will continue to provide financing, including margin lending and other extensions of credit to clients. At November 30, 1999, the aggregate value of high-yield debt securities and emerging market loans and securitized instruments held in inventory was $2,128 million (a substantial portion of which was subordinated debt). These securities, loans and instruments were not attributable to more than 3% to any one issuer, 16% to any one industry or 22% to any one geographic region. Non- investment grade securities generally involve greater risk than investment grade securities due to the lower credit ratings of the issuers, which typically have relatively high levels of indebtedness and, therefore, are more sensitive to adverse economic conditions. In addition, the market for non-investment grade securities and emerging market loans and securitized instruments has been, and may in the future be, characterized by periods of volatility and illiquidity. The Company has in place credit and other risk policies and procedures to control total inventory positions and risk concentrations for non-investment grade securities and emerging market loans and securitized instruments that are administered in a manner consistent with the Company's overall risk management policies and procedures (see "Risk Management" following "Management's Discussion and Analysis of Financial Condition and Results of Operations"). The Company has contracted to develop a one million-square-foot office tower in New York City. Pursuant to this agreement, the Company will own the building and has entered into a 99-year lease for the land at the development site. Construction began in 1999 and the Company intends to occupy the building upon project completion, which is anticipated in 2002. The total investment in this project (which will be incurred over the next several years) is estimated to be approximately $650 million. In connection with certain of its business activities, the Company provides financing or financing commitments (on a secured and unsecured basis) to companies in the form of senior and subordinated debt, including bridge financing on a selective basis. The borrowers may be rated investment grade or non-investment grade, and the loans may have varying maturities. As part of these activities, the Company may syndicate and trade certain positions of these loans. At November 30, 1999, the aggregate value of loans and positions was $1.3 billion. The Company also has provided additional commitments associated with these activities aggregating $7.3 billion at November 30, 1999. These commitments are generally agreements to lend to counterparties, have fixed termination dates and are contingent on all conditions to borrowing set forth in the contract having been met. At January 31, 2000, the Company had loans and positions outstanding of $2.4 billion and aggregate commitments of $8.2 billion. The higher level of the Company's commitments as compared with prior periods is primarily attributable to increased merger and acquisition activities, particularly in Europe. However, there can be no assurance that the level of such activities will continue in future periods. In September 1998, the Company made an investment of $300 million in the Long-Term Capital Portfolio, L.P. ("LTCP"). The Company is a member of a consortium of 14 financial institutions participating in an equity recapitalization of LTCP. The objectives of this investment were to continue active management of its positions and, over time, reduce excessive risk exposures and leverage, return capital to the participants and ultimately realize the potential value of the LTCP portfolio. During fiscal 1999, a substantial portion of this investment was returned to the Company. The gross notional and fair value amounts of derivatives used by the Company for asset and liability management and as part of its trading activities are summarized in Notes 6 and 9, respectively, to the consolidated financial statements (see also "Derivative Financial Instruments" herein). REGULATORY CAPITAL REQUIREMENTS Dean Witter Reynolds Inc. ("DWR") and MS&Co. are registered broker-dealers and registered futures commission merchants and, accordingly, are subject to the minimum net capital requirements of the Securities and Exchange Commission ("SEC"), the New York Stock Exchange and the Commodity Futures Trading Commission. MSIL, a London-based broker-dealer subsidiary, is regulated by the Securities and Futures Authority ("SFA") in the United Kingdom and, accordingly, is subject to the Financial Resources Requirements of the SFA. MSDWJL, a Tokyo- based broker-dealer, is regulated by the Japanese Ministry of Finance with respect to regulatory capital requirements. DWR, MS&Co., MSIL and MSDWJL page 45 99 AR page 46 have consistently operated in excess of their respective regulatory requirements (see Note 11 to the consolidated financial statements). Certain of the Company's subsidiaries are Federal Deposit Insurance Corporation ("FDIC") insured financial institutions. Such subsidiaries, therefore, are subject to the regulatory capital requirements adopted by the FDIC. These subsidiaries have consistently operated in excess of these and other regulatory requirements. Certain other U.S. and non-U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in excess of their applicable local capital adequacy requirements. In addition, Morgan Stanley Derivative Products Inc., a triple-A rated subsidiary through which the Company conducts some of its derivative activities, has established certain operating restrictions which have been reviewed by various rating agencies. EFFECTS OF INFLATION AND CHANGES IN FOREIGN EXCHANGE RATES Because the Company's assets to a large extent are liquid in nature, they are not significantly affected by inflation. However, inflation may result in increases in the Company's expenses, which may not be readily recoverable in the price of services offered. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, upon the value of financial instruments and upon the markets for consumer credit services, it may adversely affect the Company's financial position and profitability. A portion of the Company's business is conducted in currencies other than the U.S. dollar. Non-U.S. dollar assets typically are financed by direct borrowing or swap-based funding in the same currency. Changes in foreign exchange rates affect non-U.S. dollar revenues as well as non-U.S. dollar expenses. Those foreign exchange exposures that arise and are not hedged by an offsetting foreign currency exposure are actively managed by the Company to minimize risk of loss due to currency fluctuations. DERIVATIVE FINANCIAL INSTRUMENTS The Company actively offers to clients and trades for its own account a variety of financial instruments described as "derivative products" or "derivatives." These products generally take the form of futures, forwards, options, swaps, caps, collars, floors, swap options and similar instruments which derive their value from underlying interest rates, foreign exchange rates, or commodity or equity instruments and indices. All of the Company's trading-related divisions use derivative products as an integral part of their respective trading strategies, and such products are used extensively to manage the market exposure that results from a variety of proprietary trading activities (see Note 9 to the consolidated financial statements). In addition, as a dealer in certain derivative products, most notably interest rate and currency swaps, the Company enters into derivative contracts to meet a variety of risk management and other financial needs of its clients. Given the highly integrated nature of derivative products and related cash instruments in the determination of overall trading division profitability and the context in which the Company manages its trading areas, it is not meaningful to allocate trading revenues between the derivative and underlying cash instrument components. Moreover, the risks associated with the Company's derivative activities, including market and credit risks, are managed on an integrated basis with associated cash instruments in a manner consistent with the Company's overall risk management policies and procedures (see "Risk Management" following "Management's Discussion and Analysis of Financial Condition and Results of Operations"). It should be noted that while particular risks may be associated with the use of derivatives, in many cases derivatives serve to reduce, rather than increase, the Company's exposure to market, credit and other risks. The total notional value of derivative trading contracts outstanding at November 30, 1999 was $3,404 billion (as compared with $2,860 billion at November 30, 1998). While these amounts are an indication of the degree of the Company's use of derivatives for trading purposes, they do not represent the Company's market or credit exposure and may be more indicative of customer utilization of derivatives. The Company's exposure to market risk relates to changes in interest rates, foreign currency exchange rates, or the fair value of the underlying financial instruments or commodities. The Company's exposure to credit risk at any point in time is represented by the fair value of such contracts reported as assets. Such total fair value outstanding as of November 30, 1999 was $22.8 billion. Approximately $18.4 billion of that credit risk exposure was with counterparties rated single-A or better (see Note 9 to the consolidated financial statements). The Company also uses derivative products (primarily interest rate, currency and equity swaps) to assist in asset and lia- bility management, reduce borrowing costs and hedge interest rate risk (see Note 6 to the consolidated financial statements). The Company believes that derivatives are valuable tools that can provide cost-effective solutions to complex financial problems and remains committed to providing its clients with innovative financial products. The Company established Morgan Stanley Derivative Products Inc. to offer derivative products to clients who will enter into derivative transactions only with triple-A rated counterparties. In addition, the Company, through its continuing involvement with regulatory, self-regulatory and industry activities, provides leadership in the development of policies and practices in order to maintain confidence in the markets for derivative products, which is critical to the Company's ability to assist clients in meeting their overall financial needs. YEAR 2000 The Year 2000 issue arose since many of the world's computer systems (including those in non-information technology systems) traditionally recorded years in a two-digit format. If not addressed, such computer systems may have been unable to properly interpret dates beyond the year 1999, which may have led to business disruptions in the U.S. and internationally. Accordingly, the Company established a firmwide initiative to address issues associated with the Year 2000. As part of this initiative, the Company reviewed its global software and hardware infrastructure for mainframe, server and desktop computing environments and engaged in extensive remediation and testing. The Year 2000 initiative also encompassed the review of agencies, vendors and facilities for Year 2000 compliance. Since 1995, the Company prepared actively for the Year 2000 issue to ensure that it would have the ability to respond to any critical business process failure, to prevent the loss of work-space and technology, and to mitigate any potential financial loss or damage to its global franchise. Where necessary, contingency plans were expanded or developed to address specific Year 2000 risk scenarios, supplementing existing business policies and practices. During fiscal 1999, in its preparation for the millennial changeover, the Company established a global Command, Control and Communication Network (the "C3 Network"). The purpose of the C3 Network was to enable the Company's management, on both a global and regional basis, to monitor and manage any Year 2000-related issues and their potential impact on the Company's business activities. Using a variety of tools developed for this purpose, the C3 Network monitored business verification points as well as internal issues and external events. The Company also maintained communications with clients and regulators and coordinated global communications between senior management and all of the Company's business areas. The Company considers the transition into the Year 2000 successful from the perspective of both its internal systems and global external interactions. Over the millennial changeover period, no material issues were encountered, and the Company conducted business as usual. Based upon current information, the Company estimates that the total cost associated with implementing its Year 2000 initiative, including the review, remediation and testing of all internal systems, review of vendors, and event management will be approximately $240 million. Substantially all of such costs were incurred by the end of fiscal 1999, although approximately $15 million in costs are expected to be incurred during fiscal 2000. These costs are funded through operating cash flow and expensed in the period in which they are incurred. page 47 EX-13.4 11 RISK MANAGEMENT Exhibit 13.4 RISK MANAGEMENT RISK MANAGEMENT POLICY AND CONTROL STRUCTURE Risk is an inherent part of the Company's business and activities. The extent to which the Company properly and effectively identifies, assesses, monitors and manages each of the various types of risk involved in its activities is critical to its soundness and profitability. The Company's broad-based portfolio of business activities helps reduce the impact that volatility in any particular area or related areas may have on its net revenues as a whole. The Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal risks involved in the Company's business activities: market risk, credit risk, operational risk, legal risk and funding risk. Funding risk is discussed in the "Liquidity and Capital Resources" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 22. Risk management at the Company is a multi-faceted process with independent oversight that requires constant communication, judgment and knowledge of specialized products and markets. The Company's senior management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. In recognition of the increasingly varied and complex nature of the global financial services business, the Company's risk management policies, procedures and methodologies are evolutionary in nature and are subject to ongoing review and modification. The Management Committee, composed of the Company's most senior officers, establishes the overall risk management policies for the Company and reviews the Company's performance relative to these policies. The Management Committee has created several Risk Committees to assist it in monitoring and reviewing the Company's risk management practices. These Risk Committees, as well as other committees established to manage and monitor specific risks, review the risk monitoring and risk management policies and procedures relating to the Company's market and credit risk profile, sales practices, pricing of consumer loans and reserve adequacy, legal enforceability, and operational and systems risks. The Firm Risk Management, Controllers, Treasury and Law, Compliance and Governmental Affairs Departments, which are all independent of the Company's business units, also assist senior management and the Risk Committees in monitoring and controlling the Company's risk profile. The Firm Risk Management Department is responsible for risk policy development, risk analysis and risk reporting to senior management and the Risk Committees and has operational responsibility for measuring and monitoring aggregate market and credit risk with respect to institutional trading activities. In addition, the Internal Audit Department, which also reports to senior management, periodically examines and evaluates the Company's operations and control environment. The Company continues to be committed to employing qualified personnel with appropriate expertise in each of its various administrative and business areas to implement effectively the Company's risk management and monitoring systems and processes. The following is a discussion of the Company's risk management policies and procedures for its principal risks (other than funding risk). The discussion focuses on the Company's securities trading (primarily its institutional trading activities) and consumer lending and related activities. The Company believes that these activities generate a substantial portion of its principal risks. This discussion and the estimated amounts of the Company's market risk exposure generated by the Company's statistical analyses are forward-looking statements. However, the analyses used to assess such risks are not predictions of future events, and actual results may vary significantly from such analyses due to events in the markets in which the Company operates and certain other factors described below. MARKET RISK Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. For a discussion of the Company's currency exposure relating to its net monetary investments in non-U.S. dollar functional currency subsidiaries, see Note 11 to the consolidated financial statements. TRADING AND RELATED ACTIVITIES Primary Market Risk Exposures and Market Risk Management During fiscal 1999, the Company had exposures to a wide range of interest rates, equity prices, foreign exchange rates and commodity prices -- and associated volatilities and spreads -- related to a broad spectrum of global markets in which it conducts its trading activities. The Company is exposed to interest rate risk as a result of maintaining market-making activities and proprietary trading in interest rate sensitive financial instruments (e.g., risk arising from changes in the level or volatility of interest rates, the timing of mortgage prepayments, the shape of the yield curve and credit spreads for corporate bonds and emerging market debt). The Company is exposed to equity price risk as a result of making markets in equity securities and equity derivatives and maintaining proprietary positions. The Company is exposed to foreign exchange rate risk in connection with making markets in foreign currencies and foreign currency options and with maintaining foreign exchange positions. The Company's currency trading covers many foreign currencies, including the yen, euro and pound sterling. The Company is exposed to commodity price risk as a result of trading in commodity-related derivatives and physical commodities. The Company manages its trading positions by employing a variety of strategies, which include diversification of risk exposures Page 48 and the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., swaps, options, futures and forwards). The Company manages the market risk associated with its trading activities on a Company-wide basis, on a trading division level worldwide and on an individual product basis. The Company manages and monitors its market risk exposures in such a way as to maintain a portfolio that the Company believes is well-diversified with respect to market risk factors. Market risk limits have been approved for the Company and each major trading division of the Company worldwide (equity, fixed income, foreign exchange and commodities). Discrete market risk limits are assigned to trading desks and, as appropriate, products and regions. Trading division risk managers, desk risk managers and the Firm Risk Management Department monitor market risk measures against limits and report major market and position events to senior management. The Firm Risk Management Department independently reviews the Company's trading portfolios on a regular basis from a market risk perspective utilizing Value-at-Risk and other quantitative and qualitative risk measurements and analyses. The Company may use measures, such as rate sensitivity, convexity, volatility and time decay measurements, to estimate market risk and to assess the sensitivity of positions to changes in market conditions. Stress testing, which measures the impact on the value of existing portfolios of specified changes in market factors, for certain products is performed periodically and reviewed by trading division risk managers, desk risk managers and the Firm Risk Management Department. Value-at-Risk The statistical technique known as Value-at-Risk ("VaR") is one of the tools used by management to measure, monitor and review the market risk exposures of the Company's trading portfolios. The Firm Risk Management Department calculates and distributes daily VaR-based risk measures to various levels of management. VaR Methodology, Assumptions and Limitations The Company estimates VaR using a model based on historical simulation for major market risk factors and Monte Carlo simulation for name-specific risk in certain equity and fixed income exposures. Historical simulation involves constructing a distribution of hypothetical daily changes in trading portfolio value based on historical observation of daily changes in key market indices or other market factors ("market risk factors") and on information on the sensitivity of the portfolio values to these market risk factor changes. In the case of the Company's VaR, approximately four years of historical data are used to characterize potential changes in market risk factors. The Company's one-day 99% VaR corresponds to the negative change in portfolio value that, based on observed market risk factor movements, would have been exceeded with a frequency of 1%, or once in 100 trading days. The VaR model generally takes into account linear and non-linear exposures to price and interest rate risk and linear exposure to implied volatility risks. Market risks that are incorporated in the VaR model include equity and commodity prices, interest rates, foreign exchange rates and associated volatilities. As of November 30, 1999, a total of approximately 500 market risk factor benchmark data series was incorporated in the Company's VaR model covering interest rates, equity prices, foreign exchange rates, commodity prices and associated volatilities. As a supplement to the use of historical simulation for major market risk factors, the Company's VaR model uses Monte Carlo simulation to capture name-specific risk in global equities and in U.S. corporate and high-yield bonds. The model includes measures of name-specific risk for approximately 8,000 equity names and 55 classes of corporate and high-yield bonds. VaR models such as the Company's should be expected to evolve over time in response to changes in the composition of trading portfolios and to improvements in modeling techniques and systems capabilities. During fiscal 1999, as part of the Company's ongoing program of VaR model enhancement, position and risk coverage were broadened, and risk measurement methodologies were refined. Equity enhancements included improved capture of name-specific implied volatility risk for equity options of different maturities, which tended to decrease measured VaR, and name-specific equity price risk with respect to certain private equity positions, which tended to increase VaR. Fixed income enhancements included: improved modeling of implied volatility risk, improved capture of interest rate related risks in mortgage-backed and emerging market financial instruments, and a change, related to EMU, from multiple to a single set of yield curve risk factors for euro currencies, all of which tended to decrease measured VaR. Among their benefits, VaR models permit estimation of a portfolio's aggregate market risk exposure, incorporating a range of varied market risks; reflect risk reduction due to portfolio diversifi- page 49 Page 50 cation; and can cover a wide range of portfolio assets yet are relatively easy to interpret. However, VaR risk measures should be interpreted in light of the methodology's limitations, which include the following: past changes in market risk factors will not always yield accurate predictions of the distributions and correlations of future market movements; changes in portfolio value in response to market movements may differ from the responses calculated by a VaR model; published VaR results reflect past trading positions while future risk depends on future positions; VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under market conditions that are unusual relative to the historical period used in estimating the VaR. The Company is aware of these and other limitations and therefore uses VaR as only one component in its risk management review process. This process also incorporates stress testing and extensive risk monitoring and control at the trading desk, division and Company levels. VaR for Fiscal 1999 The table below presents the results of the Company's VaR for each of the Company's primary market risk exposures and on an aggregate basis at November 30, 1999 and November 30, 1998, incorporating substantially all financial instruments generating market risk (including funding liabilities related to trading positions, retail trading activities and private equity positions). However, a small proportion of trading positions generating market risk was not covered, and the modeling of the risk characteristics of some positions involved approximations which could be significant under certain circumstances. Market risks that are in the VaR values shown in the following table, but that the Company has found particularly difficult to model, include certain fixed income instruments (such as aspects of prepayment behavior of mortgage-backed securities and credit derivatives price risk), name-specific equity price risk in private or newly public companies, certain commodity price risks (such as electricity price risk) and certain liquidity risks. Since VaR is based on historical data and changes in market risk factor returns, VaR should not be viewed as predictive of the Company's future financial performance or its ability to monitor and manage risk, and there can be no assurance that the Company's actual losses on a particular day will not exceed the VaR amounts indicated below or that such losses will not occur more than once in 100 trading days. 99%/ONE-DAY VaR PRIMARY MARKET RISK CATEGORY AT NOVEMBER 30, (dollars in millions, pre-tax) 1999 1998(1) - -------------------------------------------------------------------- Interest rate $33 $28 Equity price 32 17 Foreign exchange rate 3 5 Commodity price 16 6 - -------------------------------------------------------------------- Subtotal 84 56 Less diversification benefit(2) 33 18 - -------------------------------------------------------------------- Aggregate Value-at-Risk $51 $38 - -------------------------------------------------------------------- (1) The Interest rate Value-at-Risk for fiscal 1998 has been restated to reflect the estimated impact of enhancements to the Company's VaR model made during fiscal 1999 described above. (2) Equals the difference between Aggregate VaR and the sum of the VaRs for the four risk categories. This benefit arises because the simulated 99%/one-day losses for each of the four primary market risk categories occur on different days; similar diversification benefits also are taken into account within each such category. The change in Interest rate VaR from November 30, 1998 to November 30, 1999 reflected, in part, an increase in certain high-yield and emerging market interest rate risk positions. The change in Equity price VaR from November 30, 1998 to November 30, 1999 reflected, in part, an increase in the market value of certain private equity positions, a substantial portion of which was sold by the Company shortly after the end of the fiscal year. The change in Commodity price VaR reflected, in part, higher market values of commodities positions arising from increases in energy prices throughout the year. In order to facilitate comparisons with other global financial services firms, the Company notes that its Aggregate VaR at November 30, 1999 for other confidence levels and time horizons was as follows: $32 million for 95%/one-day VaR and $151 million for 99%/two-week VaR. The table below presents the high, low and average 99%/one-day VaR over the course of fiscal 1999 for substantially all of the Company's institutional trading activities. This measure of VaR incorporates most of the Company's trading-related market risks. Certain market risks included in the year-end VaR discussed above are excluded from this measure (i.e., equity price risk in private equity positions and funding liabilities related to trading positions). DAILY 99%/ONE-DAY VaR PRIMARY MARKET RISK CATEGORY FOR FISCAL 1999 (dollars in millions, pre-tax) HIGH LOW AVERAGE - -------------------------------------------------------------------- Interest rate $62 $17 $29 Equity price 38 14 21 Foreign exchange rate 13 2 5 Commodity price 19 6 11 Aggregate Value-at-Risk $60 $27 $36 - -------------------------------------------------------------------- The histogram below presents the Company's daily 99%/one-day VaR for its institutional trading activities during fiscal 1999: Description of Histogram: The horizontal axis of the chart categorizes the 99%/ one-day Value-At-Risk into numerical ranges. The vertical axis of the chart indicates the number of trading days that VaR fell into a given numerical range. The histogram shows that distribution of daily 99%/one-day Value-at-Risk during fiscal year 1999 was: Value -at - Risk Number of Days - ------------------------------------------------------------------------------ less than 28 9 - ------------------------------------------------------------------------------ 28 - 30 28 - ------------------------------------------------------------------------------ 30 - 32 47 - ------------------------------------------------------------------------------ 32 - 34 29 - ------------------------------------------------------------------------------ 34 - 36 21 - ------------------------------------------------------------------------------ 36 - 38 38 - ------------------------------------------------------------------------------ 38 - 40 30 - ------------------------------------------------------------------------------ 40 - 42 20 - ------------------------------------------------------------------------------ 42 - 44 11 - ------------------------------------------------------------------------------ 44 - 46 7 - ------------------------------------------------------------------------------ 46 - 48 3 - ------------------------------------------------------------------------------ 48 - 50 3 - ------------------------------------------------------------------------------ 50 - 52 3 - ------------------------------------------------------------------------------ 52 - 54 1 - ------------------------------------------------------------------------------ 54 - 56 2 - ------------------------------------------------------------------------------ 56 - 58 5 - ------------------------------------------------------------------------------ greater than 58 3 - ------------------------------------------------------------------------------ The histogram below shows the distribution of daily revenues during fiscal 1999 for the Company's institutional trading businesses (net of interest expense and including commissions and primary revenue credited to the trading businesses): Description of Histogram: The horizontal axis of the chart categorizes daily net revenue of the Institutional Securities Business into numerical ranges. The vertical axis of the chart indicates the number of trading days that revenue fell into a given numerical range. The histogram shows that distribution of daily institutional trading revenue during the fiscal year 1999 was: Daily Institutional Trading Number of Days Revenue - -------------------------------------------------------------------------------- less than 5 4 - -------------------------------------------------------------------------------- less than 5 - less than 2.5 4 - -------------------------------------------------------------------------------- less than 2.5 - 0 2 - -------------------------------------------------------------------------------- 0 - 2.5 3 - -------------------------------------------------------------------------------- 2.5 - 5 7 - -------------------------------------------------------------------------------- 5 - 7.5 9 - -------------------------------------------------------------------------------- 7.5 - 10 6 - -------------------------------------------------------------------------------- 10 - 12.5 6 - -------------------------------------------------------------------------------- 12.5 - 15 13 - -------------------------------------------------------------------------------- 15 - 17.5 11 - -------------------------------------------------------------------------------- 17.5 - 20 13 - -------------------------------------------------------------------------------- 20 - 22.5 13 - -------------------------------------------------------------------------------- 22.5 - 25 17 - -------------------------------------------------------------------------------- 25 - 27.5 23 - -------------------------------------------------------------------------------- 27.5 - 30 15 - -------------------------------------------------------------------------------- 30 - 32.5 13 - -------------------------------------------------------------------------------- 32.5 - 35 20 - -------------------------------------------------------------------------------- 35 - 37.5 9 - -------------------------------------------------------------------------------- 37.5 - 40 11 - -------------------------------------------------------------------------------- 40 - 42.5 10 - -------------------------------------------------------------------------------- 42.5 - 45 4 - -------------------------------------------------------------------------------- 45 - 47.5 5 - -------------------------------------------------------------------------------- 47.5 - 50 7 - -------------------------------------------------------------------------------- 50 - 52.5 7 - -------------------------------------------------------------------------------- 52.5 - 55 5 - -------------------------------------------------------------------------------- 55 - 57.5 4 - -------------------------------------------------------------------------------- 57.5 - 60 2 - -------------------------------------------------------------------------------- greater than 60 14 - -------------------------------------------------------------------------------- The Company evaluates the reasonableness of its VaR model by comparing the potential declines in portfolio values generated by the model with actual trading results. There were no days during fiscal 1999 in which the Company incurred daily mark-to-market losses (trading revenue net of interest income and expense and excluding commissions and primary revenue credited to the trading businesses) in its institutional trading business in excess of the 99%/one-day VaR which incorporates the enhancements to the Company's VaR model made during fiscal 1999. CONSUMER LENDING AND RELATED ACTIVITIES Interest Rate Risk and Management In its consumer lending activities, the Company is exposed to market risk primarily from changes in interest rates. Such changes in interest rates impact interest earning assets, principally credit card and other consumer loans and net servicing fees received in connection with consumer loans sold through asset securitizations, as well as the interest-sensitive liabilities which finance these assets, including asset securitizations, commercial paper, medium-term notes, long-term borrowings, deposits, asset-backed commercial paper, Federal Funds and short-term bank notes. The Company's interest rate risk management policies are designed to reduce the potential volatility of earnings which may arise from changes in interest rates. This is accomplished primarily by matching the repricing of credit card and consumer loans and the related financing. To the extent that asset and related financing repricing characteristics of a particular portfolio are not matched effectively, the Company utilizes interest rate derivative contracts, such as swap, cap and collar agreements, to achieve its matched financing objectives. Interest rate swap agreements effectively convert the underlying asset or financing from fixed to variable repricing, from variable to fixed repricing or, in more limited circumstances, from variable to variable repricing. Interest rate cap agreements effectively establish a maximum interest rate on certain variable rate financings. Interest rate collar agreements effectively establish a range of interest rates on certain variable rate financings. Sensitivity Analysis Methodology, Assumptions and Limitations For its consumer lending activities, the Company uses a variety of techniques to assess its interest rate risk exposure, one of which is interest rate sensitivity simulation. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in Page 51 Page 52 interest rates over the 12-month period from its fiscal year-end, the Company assumes that all interest rate sensitive assets and liabilities will be impacted by a hypothetical, immediate 100-basis-point increase in interest rates as of the beginning of the period. Interest rate sensitive assets are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period. In fiscal 1999, a substantial portion of the Company's credit card receivables was repriced to a fixed interest rate, although the Company has the right, with notice to cardmembers, to reprice the receivables to a new fixed interest rate. The Company considers such receivables to be interest rate sensitive, consistent with its policy of matching the repricing of its credit card receivables and the related financing. The Company measured the earnings sensitivity for these assets from the expected repricing date, which takes into consideration the required notice period and billing cycles. In addition, assets which have a market-based index, such as the prime rate, which will reset before the end of the 12-month period, or assets with rates that are fixed at fiscal year-end but which will mature, or otherwise contractually reset to a market-based indexed or other fixed rate prior to the end of the 12-month period, are rate-sensitive. The latter category includes certain credit card loans which may be offered at below-market rates for an introductory period, such as for balance transfers and special promotional programs, after which the loans will contractually reprice in accordance with the Company's normal market-based pricing structure. For purposes of measuring rate-sensitivity for such loans, only the effect of the hypothetical 100-basis-point change in the underlying market-based indexed or other fixed rate has been considered rather than the full change in the rate to which the loan would contractually reprice. For assets which have a fixed rate at fiscal year-end but which contractually will, or are assumed to, reset to a market-based indexed or other fixed rate during the next 12 months, earnings sensitivity is measured from the expected repricing date. In addition, for all interest rate sensitive assets, earnings sensitivity is calculated net of expected loan losses. Interest rate sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period. Thus, liabilities which have a market-based index, such as the prime, commercial paper, or LIBOR rates, which will reset before the end of the 12-month period, or liabilities whose rates are fixed at fiscal year-end but which will mature and be replaced with a market-based indexed rate prior to the end of the 12-month period, are rate-sensitive. For liabilities which have a fixed rate at fiscal year-end, but which are assumed to reset to a market-based index during the next 12 months, earnings sensitivity is measured from the expected repricing date. Assuming a hypothetical, immediate 100-basis-point increase in the interest rates affecting all interest rate sensitive assets and liabilities as of November 30, 1999, it is estimated that the pre-tax income of consumer lending and related activities over the following 12-month period would be reduced by approximately $10 million. The comparable reduction of pre-tax income for the 12-month period following November 30, 1998 was estimated to be approximately $65 million. The decrease at November 30, 1999 as compared with the prior year was primarily the result of the Company's consumer loan repricing actions made during fiscal 1999 and the related impact of the funding supporting the Company's consumer loans. The hypothetical model assumes that the balances of interest rate sensitive assets and liabilities at fiscal year-end will remain constant over the next 12-month period. It does not assume any growth, strategic change in business focus, change in asset pricing philosophy or change in asset/liability funding mix. Thus, this model represents a static analysis which cannot adequately portray how the Company would respond to significant changes in market conditions. Furthermore, the analysis does not necessarily reflect the Company's expectations regarding the movement of interest rates in the near term, including the likelihood of an immediate 100-basis-point change in market interest rates nor necessarily the actual effect on earnings if such rate changes were to occur. CREDIT RISK The Company's exposure to credit risk arises from the possibility that a customer or counterparty to a transaction might fail to perform under its contractual commitment, which could result in the Company incurring losses. With respect to its institutional securities activities, the Company has credit guidelines which limit the Company's current and potential credit exposure to any one counterparty and to each type of counterparty (by rating category). The Credit Department that is responsible for the Company's institutional securities activities administers and monitors these credit limits on a worldwide basis. In addition to monitoring credit limits, the Company manages the credit exposure relating to its trading activities by reviewing periodically counterparty financial soundness, by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and by limiting the duration of exposure. In certain cases, the Company also may close out transactions, assign them to other counterparties or purchase credit protection to mitigate credit risk. With respect to the leveraged lending business, the Leveraged Financing Commitment Committee, which is composed of senior managers from various departments within the Company, including the Credit Department, reviews each leveraged loan request. With respect to its consumer lending activities, potential credit card holders undergo credit reviews by the Credit Department of Discover Financial Services to establish that they meet standards of ability and willingness to pay. Credit card applications are evaluated using scoring models (statistical evaluation models) based on information obtained from credit bureaus. The Company's credit scoring systems include both industry and customized models using the Company's criteria and historical data. Each cardmember's credit line is reviewed at least annually, and actions resulting from such review may include raising or lowering a cardmember's credit line or closing the account. In addition, the Company, on a portfolio basis, performs monthly monitoring and review of consumer behavior and risk profiles. The Company also reviews the creditworthiness of prospective Discover/NOVUS Network merchants and conducts annual reviews of merchants, with the greatest scrutiny given to merchants with substantial sales volume. The Company is subject to concentration risk by holding large positions in certain types of securities or commitments to purchase securities of a single issuer, including sovereign governments and other entities, issuers located in a particular country or geographic area, public and private issuers involving developing countries or issuers engaged in a particular industry (see Note 9 to the consolidated financial statements). OPERATIONAL RISK Operational risk refers generally to the risk of loss resulting from the Company's operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in the Company's operating systems, and inadequacies or breaches in the Company's control processes. The Company operates different businesses in diverse markets and is reliant on the ability of its employees and systems to process high numbers of transactions. These transactions may cross multiple markets and involve different currencies. In the event of a breakdown or improper operation of systems or improper action by employees, the Company could suffer financial loss, regulatory sanctions and damage to its reputation. In order to mitigate and control operational risk, the Company has developed and continues to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels. For example, the Company's securities business has procedures that require that all transactions are accurately recorded and properly reflected in the Company's books and records and are confirmed on a timely basis; that position valuations are subject to periodic independent review procedures; and that collateral and adequate documentation (e.g., master agreements) are obtained from counterparties in appropriate circumstances. With respect to its consumer lending activities, the Company manages operational risk through its system of internal controls which provides checks and balances to ensure that transactions and other account-related activity (e.g., new account solicitation, transaction authorization and processing, billing and collection of delinquent accounts) are properly approved, processed, recorded and reconciled. Disaster recovery plans are in place for critical systems on a Company-wide basis, and redundancies are built into the systems as deemed appropriate. The Company also uses periodic self-assessments and Internal Audit reviews as a further check on operational risk. LEGAL RISK Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and the risk that a counterparty's performance obligations will be unenforceable. The Company is generally subject to extensive regulation in the different jurisdictions in which it conducts its business. The Company has established procedures based on legal and regulatory requirements on a worldwide basis that are designed to ensure compliance with all applicable statutory and regulatory requirements. The Company, principally through the Law, Compliance and Governmental Affairs Department, also has established procedures that are designed to ensure that senior management's policies relating to conduct, ethics and business practices are followed globally. In connection with its business, the Company has various procedures addressing issues, such as regulatory capital requirements, sales and trading practices, new products, use and safekeeping of customer funds and securities, credit granting, collection activities, money-laundering and recordkeeping. The Company also has established procedures to mitigate the risk that a counterparty's performance obligations will be unenforceable, including consideration of counterparty legal authority and capacity, adequacy of legal documentation, the permissibility of a transaction under applicable law and whether applicable bankruptcy or insolvency laws limit or alter contractual remedies. Page 53 EX-13.5 12 CONSOLIDATED FINANCIAL STATEMENTS Exhibit 13.5 report of independent auditors 99 AR: page 54 TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MORGAN STANLEY DEAN WITTER & CO. We have audited the accompanying consolidated statements of financial condition of Morgan Stanley Dean Witter & Co. and subsidiaries as of fiscal years ended November 30, 1999 and 1998, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders' equity for each of the three fiscal years in the period ended November 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Morgan Stanley Dean Witter & Co. and subsidiaries at fiscal years ended November 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended November 30, 1999, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in fiscal 1998, Morgan Stanley Dean Witter & Co. changed its method of accounting for certain offering costs of closed-end funds. /s/ Deloitte & Touche LLP New York, New York January 21, 2000 consolidated statements of financial condition
(dollars in millions, except share data) NOVEMBER 30, 1999 NOVEMBER 30, 1998 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 12,325 $ 16,878 Cash and securities deposited with clearing organizations or segregated under federal and other regulations (including securities at fair value of $6,925 at November 30, 1999 and $7,518 at November 30, 1998) 9,713 10,531 Financial instruments owned: U.S. government and agency securities 25,646 12,350 Other sovereign government obligations 17,522 15,050 Corporate and other debt 30,443 22,388 Corporate equities 14,843 14,289 Derivative contracts 22,769 21,442 Physical commodities 819 416 Securities purchased under agreements to resell 70,366 79,570 Receivable for securities provided as collateral 9,007 4,388 Securities borrowed 85,064 69,338 Receivables: Consumer loans (net of allowances of $769 at November 30, 1999 and $787 at November 30, 1998) 20,229 15,209 Customers, net 29,299 18,785 Brokers, dealers and clearing organizations 2,252 4,432 Fees, interest and other 5,371 3,359 Office facilities, at cost (less accumulated depreciation and amortization of $1,667 at November 30, 1999 and $1,375 at November 30, 1998) 2,204 1,834 Other assets 9,095 7,331 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $366,967 $317,590 - --------------------------------------------------------------------------------------------------------------------------------
page 55 99 AR: page 56
(dollars in millions, except share data) NOVEMBER 30, 1999 NOVEMBER 30, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Commercial paper and other short-term borrowings $ 38,242 $ 28,137 Deposits 10,397 8,197 Financial instruments sold, not yet purchased: U.S. government and agency securities 12,285 11,305 Other sovereign government obligations 7,812 13,899 Corporate and other debt 2,322 3,093 Corporate equities 15,402 11,501 Derivative contracts 23,228 21,198 Physical commodities 919 348 Securities sold under agreements to repurchase 104,450 92,327 Obligation to return securities received as collateral 14,729 6,636 Securities loaned 30,080 23,152 Payables: Customers 45,775 40,606 Brokers, dealers and clearing organizations 1,335 5,244 Interest and dividends 2,951 371 Other liabilities and accrued expenses 10,439 8,623 Long-term borrowings 28,604 27,435 - ----------------------------------------------------------------------------------------------------------------------------------- 348,970 302,072 - ----------------------------------------------------------------------------------------------------------------------------------- Capital Units 583 999 - ----------------------------------------------------------------------------------------------------------------------------------- Preferred Securities Issued by Subsidiaries 400 400 - ----------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies Shareholders' equity: Preferred stock 670 674 Common stock(1)($0.01 par value, 1,750,000,000 shares authorized, 1,211,685,904 and 1,211,685,904 shares issued, 1,104,630,098 and 1,131,341,616 shares outstanding at November 30, 1999 and November 30, 1998) 12 12 Paid-in capital(1) 3,836 3,740 Retained earnings 16,285 12,080 Employee stock trust 2,426 1,913 Cumulative translation adjustments (27) (12) - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal 23,202 18,407 Note receivable related to sale of preferred stock to ESOP (55) (60) Common stock held in treasury, at cost(1)($0.01 par value, 107,055,806 and 80,344,288 shares at November 30, 1999 and November 30, 1998) (4,355) (2,702) Common stock issued to employee trust (1,778) (1,526) - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 17,014 14,119 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 366,967 $ 317,590 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 2000. See Notes to Consolidated Financial Statements. consolidated statements of income
fiscal year (dollars in millions, except share and per share data) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues: Investment banking $ 4,523 $ 3,340 $ 2,694 Principal transactions: Trading 5,983 3,283 3,191 Investments 725 89 463 Commissions 2,921 2,321 2,066 Fees: Asset management, distribution and administration 3,170 2,889 2,525 Merchant and cardmember 1,492 1,647 1,704 Servicing 1,194 928 762 Interest and dividends 13,755 16,436 13,583 Other 165 198 144 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 33,928 31,131 27,132 Interest expense 11,390 13,514 10,806 Provision for consumer loan losses 529 1,173 1,493 - ----------------------------------------------------------------------------------------------------------------------------------- Net revenues 22,009 16,444 14,833 - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: Compensation and benefits 8,398 6,636 6,019 Occupancy and equipment 643 583 526 Brokerage, clearing and exchange fees 485 552 460 Information processing and communications 1,325 1,140 1,080 Marketing and business development 1,679 1,411 1,179 Professional services 836 677 451 Other 915 745 770 Merger-related expenses -- -- 74 - ----------------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 14,281 11,744 10,559 - ----------------------------------------------------------------------------------------------------------------------------------- Gain on sale of businesses -- 685 -- - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 7,728 5,385 4,274 Provision for income taxes 2,937 1,992 1,688 - ----------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 4,791 3,393 2,586 Cumulative effect of accounting change -- (117) -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,791 $ 3,276 $ 2,586 - ----------------------------------------------------------------------------------------------------------------------------------- Preferred stock dividend requirements $ 44 $ 55 $ 66 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings applicable to common shares(1) $ 4,747 $ 3,221 $ 2,520 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings per common share(2): Basic before cumulative effect of accounting change $ 4.33 $ 2.90 $ 2.19 Cumulative effect of accounting change -- (0.10) -- - ----------------------------------------------------------------------------------------------------------------------------------- Basic $ 4.33 $ 2.80 $ 2.19 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted before cumulative effect of accounting change $ 4.10 $ 2.76 $ 2.08 Cumulative effect of accounting change -- (0.09) -- - ----------------------------------------------------------------------------------------------------------------------------------- Diluted $ 4.10 $ 2.67 $ 2.08 - ----------------------------------------------------------------------------------------------------------------------------------- Average common shares outstanding(2): Basic 1,096,789,720 1,151,645,450 1,149,636,466 Diluted 1,159,500,670 1,212,588,130 1,212,612,950 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Amounts shown are used to calculate basic earnings per common share. (2) Amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 2000. See Notes to Consolidated Financial Statements. page 57 consolidated statements of comprehensive income 99 AR: page 58
fiscal year (dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Net income $ 4,791 $ 3,276 $ 2,586 Other comprehensive income, net of tax: Foreign currency translation adjustment (15) (3) 2 - -------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 4,776 $ 3,273 $ 2,588 - --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. consolidated statements of cash flows
fiscal year (dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,791 $ 3,276 $ 2,586 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Non-cash charges included in net income: Cumulative effect of accounting change -- 117 -- Gain on sale of businesses -- (685) -- Deferred income taxes (160) (55) (77) Compensation payable in common or preferred stock 675 334 374 Depreciation and amortization 541 575 338 Provision for consumer loan losses 529 1,173 1,493 Changes in assets and liabilities: Cash and securities deposited with clearing organizations or segregated under federal and other regulations 839 (3,641) (1,691) Financial instruments owned, net of financial instruments sold, not yet purchased (22,081) 11,127 1,730 Securities borrowed, net of securities loaned (8,798) (5,061) (10,561) Receivables and other assets (11,276) 2,114 (13,808) Payables and other liabilities 5,669 6,095 19,058 - -------------------------------------------------------------------------------------------------------------------------- Net cash (used for) provided by operating activities (29,271) 15,369 (558) - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (payments for) proceeds from: Office facilities (656) (358) (301) Sale of businesses, net of disposal costs -- 1,399 -- Purchase of AB Asesores, net of cash acquired (223) -- -- Net principal disbursed on consumer loans (8,769) (2,314) (4,994) Purchases of consumer loans -- -- (11) Sales of consumer loans 2,997 4,466 2,783 Other investing activities -- -- (5) - -------------------------------------------------------------------------------------------------------------------------- Net cash (used for) provided by investing activities (6,651) 3,193 (2,528) - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from (payments for) short-term borrowings 9,994 5,620 (1,336) Securities sold under agreements to repurchase, net of securities purchased under agreements to resell 21,327 (14,407) 3,080 Net proceeds from (payments for): Deposits 2,200 (796) 2,113 Issuance of common stock 270 186 194 Issuance of put options 9 -- -- Issuance of long-term borrowings 7,552 9,771 6,619 Issuance of Preferred Securities Issued by Subsidiaries -- 400 -- Issuance of Capital Units -- -- 134 Payments for: Repayments of long-term borrowings (6,618) (7,069) (3,964) Redemption of cumulative preferred stock -- (200) (345) Redemption of Capital Units (416) -- -- Repurchases of common stock (2,374) (2,925) (124) Cash dividends (575) (519) (416) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 31,369 (9,939) 5,955 - -------------------------------------------------------------------------------------------------------------------------- Dean Witter, Discover & Co.'s net cash activity for the month of December 1996 -- -- (1,158) - -------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (4,553) 8,623 1,711 Cash and cash equivalents, at beginning of period 16,878 8,255 6,544 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, at end of period $ 12,325 $ 16,878 $ 8,255 - --------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. page 59 consolidated statements of changes in shareholders' equity 99 AR: page 60
EMPLOYEE PREFERRED COMMON PAID-IN RETAINED STOCK (dollars in millions) STOCK STOCK(1) CAPITAL(1) EARNINGS TRUST - ------------------------------------------------------------------------------------------ BALANCE AT FISCAL YEAR-END 1996 $1,223 $12 $3,583 $7,477 $1,495 Net income -- -- -- 2,586 -- Dividends -- -- -- (387) -- Redemption of 8.88% Cumulative Preferred Stock (195) -- -- -- -- Redemption of 8-3/4% Cumulative Preferred Stock (150) -- -- -- -- Conversion of ESOP Preferred Stock (2) -- (1) -- -- Issuance of common stock -- -- (22) -- -- Repurchases of common stock -- -- -- -- -- Compensation payable in common stock -- -- 243 -- 186 ESOP shares allocated, at cost -- -- -- -- -- Retirement of treasury stock -- -- (6) (265) -- Translation adjustments -- -- -- -- -- Issuance of common stock in connection with Discover Brokerage Direct acquisition -- -- 14 -- -- Adjustment for change in Dean Witter Discover's year-end -- -- (90) (81) -- - ------------------------------------------------------------------------------------------ BALANCE AT NOVEMBER 30, 1997 $876 $12 $3,721 $9,330 $1,681 Net income -- -- -- 3,276 -- Dividends -- -- -- (526) -- Redemption of 7-3/8% Cumulative Preferred Stock (200) -- -- -- -- Conversion of ESOP Preferred Stock (2) -- (12) -- -- Issuance of common stock -- -- (210) -- -- Repurchases of common stock -- -- -- -- -- Compensation payable in common stock -- -- 241 -- 232 ESOP shares allocated, at cost -- -- -- -- -- Translation adjustments -- -- -- -- -- - ------------------------------------------------------------------------------------------ NOTE RECEIVABLE COMMON COMMON RELATED TO STOCK STOCK SALE OF HELD ISSUED CUMULATIVE PREFERRED IN TO TRANSLATION STOCK TO TREASURY, EMPLOYEE (dollars in millions) ADJUSTMENTS ESOP AT COST TRUST TOTAL - ------------------------------------------------------------------------------------------ BALANCE AT FISCAL YEAR-END 1996 $(11) $(78) $(1,005) $(994) $11,702 Net income -- -- -- -- 2,586 Dividends -- -- -- -- (387) Redemption of 8.88% Cumulative Preferred Stock -- -- -- -- (195) Redemption of 8-3/4% Cumulative Preferred Stock -- -- -- -- (150) Conversion of ESOP Preferred Stock -- -- 3 -- -- Issuance of common stock -- -- 246 -- 224 Repurchases of common stock -- -- (124) -- (124) Compensation payable in common stock -- -- 278 (343) 364 ESOP shares allocated, at cost -- 10 -- -- 10 Retirement of treasury stock -- -- 271 -- -- Translation adjustments 2 -- -- -- 2 Issuance of common stock in connection with Discover Brokerage Direct acquisition -- -- 49 -- 63 Adjustment for change in Dean Witter Discover's year-end -- -- 32 -- (139) - ------------------------------------------------------------------------------------------ BALANCE AT NOVEMBER 30, 1997 $(9) $(68) $(250) $(1,337) $13,956 Net income -- -- -- -- 3,276 Dividends -- -- -- -- (526) Redemption of 7-3/8% Cumulative Preferred Stock -- -- -- -- (200) Conversion of ESOP Preferred Stock -- -- 14 -- -- Issuance of common stock -- -- 417 -- 207 Repurchases of common stock -- -- (2,925) -- (2,925) Compensation payable in common stock -- -- 42 (189) 326 ESOP shares allocated, at cost -- 8 -- -- 8 Translation adjustments (3) -- -- -- (3) - ------------------------------------------------------------------------------------------
EMPLOYEE PREFERRED COMMON PAID-IN RETAINED STOCK (dollars in millions) STOCK STOCK(1) CAPITAL(1) EARNINGS TRUST - ------------------------------------------------------------------------------------------ BALANCE AT NOVEMBER 30, 1998 $674 $12 $3,740 $12,080 $1,913 Net income -- -- -- 4,791 -- Dividends -- -- -- (586) -- Conversion of ESOP Preferred Stock (4) -- (18) -- -- Issuance of common stock -- -- (134) -- -- Repurchases of common stock -- -- -- -- -- Compensation payable in common stock -- -- 223 -- 513 ESOP shares allocated, at cost -- -- -- -- -- Issuance of common stock in connection with AB Asesores acquisition -- -- 16 -- -- Issuance of put options -- -- 9 -- -- Translation adjustments -- -- -- -- -- - ------------------------------------------------------------------------------------------ BALANCE AT NOVEMBER 30, 1999 $670 $12 $3,836 $16,285 $2,426 - ------------------------------------------------------------------------------------------ NOTE RECEIVABLE COMMON COMMON RELATED TO STOCK STOCK SALE OF HELD ISSUED CUMULATIVE PREFERRED IN TO TRANSLATION STOCK TO TREASURY, EMPLOYEE (dollars in millions) ADJUSTMENTS ESOP AT COST TRUST TOTAL - ----------------------------------------------------------------------------------- BALANCE AT NOVEMBER 30, 1998 $(12) $(60) $(2,702) $(1,526) $14,119 Net income -- -- -- -- 4,791 Dividends -- -- -- -- (586) Conversion of ESOP Preferred Stock -- -- 22 -- -- Issuance of common stock -- -- 465 -- 331 Repurchases of common stock -- -- (2,374) -- (2,374) Compensation payable in common stock -- -- 186 (252) 670 ESOP shares allocated, at cost -- 5 -- -- 5 Issuance of common stock in connection with AB Asesores acquisition -- -- 48 -- 64 Issuance of put options -- -- -- -- 9 Translation adjustments (15) -- -- -- (15) - ------------------------------------------------------------------------------------------ BALANCE AT NOVEMBER 30, 1999 $(27) $(55) $(4,355) $(1,778) $17,014 - ------------------------------------------------------------------------------------------
(1) Amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 2000. See Notes to Consolidated Financial Statements. page 61 notes to consolidated financial statements 99 AR: page 62 1 INTRODUCTION AND BASIS OF PRESENTATION THE COMPANY Morgan Stanley Dean Witter & Co. (the "Company") is a pre-eminent global financial services firm that maintains leading market positions in each of its three business segments -- Securities, Asset Management and Credit Services. Its Securities business includes securities underwriting, distribution and trading; merger, acquisition, restructuring, real estate, project finance and other corporate finance advisory activities; full-service and online brokerage services; research services; the trading of foreign exchange and commodities, as well as derivatives on a broad range of asset categories, rates and indices; securities lending; and private equity activities. The Company's Asset Management business provides global asset management advice and services to investors through a variety of product lines and brand names, including Morgan Stanley Dean Witter Advisors, Van Kampen Investments, Morgan Stanley Dean Witter Investment Management and Miller Anderson & Sherrerd. The Company's Credit Services business includes the issuance of the Discover(R) Card and the Morgan Stanley Dean Witter (SM) Card; and the operation of the Discover/NOVUS(R) Network, a proprietary network of merchant and cash access locations. The consolidated financial statements include the accounts of the Company and its U.S. and international subsidiaries, including Morgan Stanley & Co. Incorporated ("MS&Co."), Morgan Stanley & Co. International Limited ("MSIL"), Morgan Stanley Dean Witter Japan Limited ("MSDWJL"), Dean Witter Reynolds Inc. ("DWR"), Morgan Stanley Dean Witter Advisors Inc. and NOVUS Credit Services Inc. BASIS OF FINANCIAL INFORMATION The consolidated financial statements give retroactive effect to the May 1997 merger of Morgan Stanley Group Inc. ("Morgan Stanley") with and into Dean Witter, Discover & Co. ("Dean Witter Discover"), which was accounted for as a pooling of interests. The pooling of interests method of accounting requires the restatement of all periods presented as if Dean Witter Discover and Morgan Stanley had always been combined. The consolidated statement of changes in shareholders' equity reflects the accounts of the Company as if the preferred and additional common stock issued in connection with the merger had been issued during all of the periods presented. Prior to the consummation of the merger, Dean Witter Discover's year ended on December 31 and Morgan Stanley's fiscal year ended on November 30. Subsequent to the merger, the Company adopted a fiscal year-end of November 30. The Company's results for the 12 months ended November 30, 1999 ("fiscal 1999"), November 30, 1998 ("fiscal 1998") and November 30, 1997 ("fiscal 1997") reflect the change in fiscal year-end. Fiscal 1997 includes the results of Dean Witter Discover that were restated to conform with the new fiscal year-end date. The consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require management to make estimates and assumptions regarding certain trading inventory valuations, consumer loan loss levels, the potential outcome of litigation and other matters that affect the consolidated financial statements and related disclosures. Management believes that the estimates utilized in the preparation of the consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. Certain reclassifications have been made to prior-year amounts to conform to the current presentation. All material inter-company balances and transactions have been eliminated. STOCK SPLIT On December 20, 1999, the Company declared a two-for-one common stock split, effected in the form of a 100% stock dividend, payable to shareholders of record on January 12, 2000 and distributable on January 26, 2000. All share, per share and shareholders' equity data have been retroactively restated to reflect this split. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of these statements, cash and cash equivalents consist of cash and highly liquid investments not held for resale with maturities, when purchased, of three months or less. In connection with the fiscal 1999 purchase of AB Asesores, the Company issued 1.4 million shares of common stock having a fair value on the date of acquisition of $64 million. In connection with the fiscal 1997 purchase of Morgan Stanley Dean Witter Online (formerly Discover Brokerage Direct, Inc.), the Company issued 3.8 million shares of common stock having a fair value on the date of acquisition of approximately $63 million. CONSUMER LOANS Consumer loans, which consist primarily of credit card and consumer installment loans, are reported at their principal amounts outstanding, less applicable allowances. Interest on consumer loans is credited to income as earned. Interest is accrued on credit card loans until the date of charge-off, which generally occurs at the end of the month during which an account becomes 180 days past due, except in the case of bankruptcies and fraudulent transactions, which are charged off earlier. The interest portion of charged-off credit card loans is written off against interest revenue. Origination costs related to the issuance of credit cards are charged to earnings over periods not exceeding 12 months. ALLOWANCE FOR CONSUMER LOAN LOSSES The allowance for consumer loan losses is a significant estimate that is regularly evaluated by management for adequacy and is established through a charge to the provision for loan losses. The evaluations take into consideration factors such as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower's ability to pay. The Company uses the results of these evaluations to provide an allowance for loan losses. The exposure for credit losses for owned loans is influenced by the performance of the portfolio and other factors discussed above, with the Company absorbing all related losses. SECURITIZATION OF CONSUMER LOANS The Company periodically sells consumer loans through asset securitizations and continues to service these loans. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"), the present value of the future net servicing revenues which the Company estimates that it will receive over the term of the securitized loans is recognized in income as the loans are securitized. A corresponding asset also is recorded and then amortized as a charge to income over the term of the securitized loans, with actual net servicing revenues continuing to be recognized in income as they are earned. The impact of recognizing the present value of estimated future net servicing revenues as loans are securitized has not been material to the Company's consolidated statements of income. The exposure for credit losses for securitized loans is limited to the Company's retained contingent risk, which represents the Company's retained interest in securitized loans and any credit enhancement provided. FINANCIAL INSTRUMENTS USED FOR TRADING AND INVESTMENT Financial instruments, including derivatives, used in the Company's trading activities are recorded at fair value, and unrealized gains and losses are reflected in trading revenues. Interest and dividend revenue and interest expense arising from financial instruments used in trading activities are reflected in the consolidated statements of income as interest and dividend revenue or interest expense. The fair values of the trading positions generally are based on listed market prices. If listed market prices are not available or if liquidating the Company's positions would reasonably be expected to impact market prices, fair value is determined based on other relevant factors, including dealer price quotations and price quotations for similar instruments traded in different markets, including markets located in different geographic areas. Fair values for certain derivative contracts are derived from pricing models which consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. Purchases and sales of financial instruments are recorded in the accounts on trade date. Unrealized gains and losses arising from the Company's dealings in over-the-counter ("OTC") financial instruments, including derivative contracts related to financial instruments and commodities, are presented in the accompanying consolidated statements of financial condition on a net-by-counterparty basis, when appropriate. Equity securities purchased in connection with private equity and other principal investment activities initially are carried in the consolidated financial statements at their original costs. The carrying value of such equity securities is adjusted when changes in the underlying fair values are readily ascertainable, generally as page 63 99 AR: page 64 evidenced by listed market prices or transactions which directly affect the value of such equity securities. Downward adjustments relating to such equity securities are made in the event that the Company determines that the eventual realizable value is less than the carrying value. The carrying value of investments made in connection with principal real estate activities which do not involve equity securities are adjusted periodically based on independent appraisals, estimates prepared by the Company of discounted future cash flows of the underlying real estate assets or other indicators of fair value. Loans made in connection with private equity and investment banking activities are carried at cost plus accrued interest less reserves, if deemed necessary, for estimated losses. FINANCIAL INSTRUMENTS USED FOR ASSET AND LIABILITY MANAGEMENT The Company has entered into various contracts as hedges against specific assets, liabilities or anticipated transactions. These contracts include interest rate swaps, foreign exchange forwards and foreign currency swaps. The Company uses interest rate and currency swaps to manage the interest rate and currency exposure arising from certain borrowings and to match the repricing characteristics of consumer loans with those of the borrowings that fund these loans. For contracts that are designated as hedges of the Company's assets and liabilities, gains and losses are deferred and recognized as adjustments to interest revenue or expense over the remaining life of the underlying assets or liabilities. For contracts that are hedges of asset securitizations, gains and losses are recognized as adjustments to servicing fees. Gains and losses resulting from the termination of hedge contracts prior to their stated maturity are recognized ratably over the remaining life of the instrument being hedged. The Company also uses foreign exchange forward contracts to manage the currency exposure relating to its net monetary investment in non-U.S. dollar functional currency operations. The gain or loss from revaluing these contracts is deferred and reported within cumulative translation adjustments in shareholders' equity, net of tax effects, with the related unrealized amounts due from or to counterparties included in receivables from or payables to brokers, dealers and clearing organizations. SECURITIES TRANSACTIONS Clients' securities transactions are recorded on a settlement date basis with related commission revenues and expenses recorded on the trade date. Securities purchased under agreements to resell ("reverse repurchase agreements") and securities sold under agreements to repurchase ("repurchase agreements"), principally government and agency securities, are treated as financing transactions and are carried at the amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements; such amounts include accrued interest. Reverse repurchase and repurchase agreements are presented on a net-by-counterparty basis, when appropriate. It is the Company's policy to take possession of securities purchased under agreements to resell. The Company monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral. Where deemed appropriate, the Company's agreements with third parties specify its rights to request additional collateral. Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced and received in connection with the transactions. The Company measures the fair value of the securities borrowed and loaned against the collateral on a daily basis. Additional collateral is obtained as necessary to ensure such transactions are adequately collateralized. Collateral received under securities financing transactions, such as reverse repurchase agreements, is recognized, together with a corresponding obligation to return the collateral, if the collateral provider does not have the contractual right to substitute collateral or redeem collateral on short notice. Collateral transferred under securities financing transactions, such as repurchase agreements, is reclassified from financial instruments owned to receivable for securities provided as collateral if the Company does not have the contractual right to substitute collateral or redeem collateral on short notice. At November 30, 1999 and 1998, the Company recorded obligations to return securities received as collateral of $14,729 million and $6,636 million, respectively. The related assets received as collateral were recorded among several captions included in the Company's consolidated statements of financial condition. At November 30, 1999 and 1998, after giving effect to reclassifications, the net increase in total assets and total liabilities was $10,256 million and $2,089 million, respectively. INVESTMENT BANKING Underwriting revenues and fees for mergers and acquisitions and advisory assignments are recorded when services for the transaction are substantially completed. Transaction-related expenses are deferred and later expensed to match revenue recognition. OFFICE FACILITIES Office facilities are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of buildings and leasehold improvements are provided principally by the straight-line method, while depreciation and amortization of furniture, fixtures and equipment are provided by both straight-line and accelerated methods. Property and equipment are depreciated over the estimated useful lives of the related assets, while leasehold improvements are amortized over the lesser of the economic useful life of the asset or, where applicable, the remaining term of the lease. INCOME TAXES Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the temporary differences between the financial statement and income tax bases of assets and liabilities, using currently enacted tax rates. EARNINGS PER SHARE The calculations of earnings per common share are based on the weighted average number of common shares and share equivalents outstanding and give effect to preferred stock dividend requirements. As of December 1, 1997, the Company adopted SFAS No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the previous earnings per share ("EPS") categories of primary and fully diluted with "basic EPS," which reflects no dilution from common stock equivalents, and "diluted EPS," which reflects dilution from common stock equivalents and other dilutive securities based on the average price per share of the Company's common stock during the period. The EPS amounts of prior periods have been restated in accordance with SFAS No. 128. The adoption of SFAS No. 128 has not had a material effect on the Company's EPS calculations. CARDMEMBER REWARDS Cardmember rewards, primarily the Cashback Bonus(R) award, pursuant to which the Company annually pays Discover Cardmembers, and Private Issue(R) Cardmembers electing this feature, a percentage of their purchase amounts ranging up to 1%, are based upon a cardmember's level of annual purchases. The liability for cardmember rewards expense, included in other liabilities and accrued expenses, is accrued at the time that qualified cardmember transactions occur and is calculated on an individual cardmember basis. STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Under the provisions of APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at year-end rates of exchange, and the income statements are translated at weighted average rates of exchange for the year. In accordance with SFAS No. 52, "Foreign Currency Translation," gains or losses resulting from translating foreign currency financial statements, net of hedge gains or losses and related tax effects, are reflected in cumulative translation adjustments, a separate component of shareholders' equity. Gains or losses resulting from foreign currency transactions are included in net income. page 65 99 AR: page 66 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets are amortized on a straight-line basis over periods from five to 40 years, generally not exceeding 25 years, and are periodically evaluated for impairment. At November 30, 1999 and 1998, goodwill and other intangible assets of approximately $1.3 billion and $1.2 billion, respectively, were included in the Company's consolidated statements of financial condition as a component of other assets. ACCOUNTING CHANGE In the fourth quarter of fiscal 1998, the Company adopted American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), with respect to the accounting for offering costs paid by investment advisors of closed-end funds where such costs are not specifically reimbursed through separate advisory contracts. In accordance with SOP 98-5 and per an announcement by the Financial Accounting Standards Board ("FASB") staff in September 1998, such costs are to be considered start-up costs and expensed as incurred. Prior to the adoption of SOP 98-5, the Company deferred such costs and amortized them over the life of the fund. The Company recorded a charge to earnings for the cumulative effect of the accounting change as of December 1, 1997, of $117 million, net of taxes of $79 million. The effect of adopting these provisions on the Company's income before the cumulative effect of the accounting change for fiscal year 1998 was a decrease of $24 million, net of taxes. The effect on basic and diluted earnings per share was $0.02. The pro forma effect on net income for fiscal 1997 would not have been material. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, establish standards for the reporting and presentation of comprehensive income and the disclosure requirements related to segments. The Company adopted SFAS No. 130 and SFAS No. 131 in fiscal 1999. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises and standardizes pension and other postretirement benefit plan disclosures that are to be included in the employers' financial statements. SFAS No. 132 does not change the measurement or recognition rules for pensions and other postretirement benefits. The Company adopted SFAS No. 132 in fiscal 1999. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As issued, SFAS No. 133 was effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 for one year to fiscal years beginning after June 15, 2000. The Company is in the process of evaluating the impact of adopting SFAS No. 133. In July 1998, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14"). Under EITF 97-14, assets of the rabbi trust are to be consolidated with those of the employer, and the value of the employer's stock held in the rabbi trust should be classified in shareholders' equity and generally accounted for in a manner similar to treasury stock. The Company therefore has included its obligations under certain deferred compensation plans in employee stock trust. Shares that the Company has issued to the rabbi trusts are recorded in common stock issued to employee trust. Both employee stock trust and common stock issued to employee trust are components of shareholders' equity. The adoption of EITF 97-14 did not result in any change to the Company's consolidated statements of income, total assets, total liabilities or total shareholders' equity. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP is effective for financial statements for fiscal years beginning after December 15, 1998 and provides specif- ic guidance as to when certain costs incurred in connection with an internal-use software project should be capitalized and when they should be expensed. The Company has adopted SOP 98-1 effective December 1, 1999. The adoption of SOP 98-1 is not expected to have a material impact on the Company's consolidated financial statements. 3 CONSUMER LOANS Consumer loans were as follows: (dollars in millions) NOV. 30, 1999 NOV. 30, 1998 - --------------------------------------------------------------------- Credit card and consumer installment $20,998 $15,996 Less: Allowance for loan losses 769 787 - --------------------------------------------------------------------- Consumer loans, net $20,229 $15,209 - --------------------------------------------------------------------- Activity in the allowance for consumer loan losses was as follows: FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - --------------------------------------------------------------------- Balance beginning of period $ 787 $ 884 $ 781 Additions: Provision for loan losses 529 1,173 1,493 Purchase of loan portfolios -- 1 -- - --------------------------------------------------------------------- Total additions 529 1,174 1,493 - --------------------------------------------------------------------- Deductions: Charge-offs 893 1,423 1,639 Recoveries (120) (170) (196) - --------------------------------------------------------------------- Net charge-offs 773 1,253 1,443 - --------------------------------------------------------------------- Other(1) 226 (18) 53 - --------------------------------------------------------------------- Balance end of period $ 769 $ 787 $ 884 - --------------------------------------------------------------------- (1) These amounts primarily reflect transfers related to asset securitizations and the fiscal 1998 sale of consumer loans associated with SPS, Prime Option and BRAVO (see Note 16). Interest accrued on loans subsequently charged off, recorded as a reduction of interest revenue, was $116 million, $199 million and $301 million in fiscal 1999, 1998 and 1997, respectively. The amounts charged off in fiscal 1999 and 1998 include only interest, whereas fiscal 1997 also includes cardmember fees. At November 30, 1999 and 1998, $5,248 million and $3,999 million of the Company's consumer loans had minimum contractual maturities of less than one year. Because of the uncertainty regarding consumer loan repayment patterns, which historically have been higher than contractually required minimum payments, this amount may not necessarily be indicative of the Company's actual consumer loan repayments. At November 30, 1999, the Company had commitments to extend credit in the amount of $204 billion. Commitments to extend credit arise from agreements to extend to customers unused lines of credit on certain credit cards, provided there is no violation of conditions established in the related agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage and customer creditworthiness. The Company received net proceeds from asset securitizations of $2,997 million, $4,466 million and $2,783 million in fiscal 1999, 1998 and 1997, respectively. The uncollected balances of consumer loans sold through asset securitizations were $16,977 million and $16,506 million at November 30, 1999 and 1998, respectively. The Company uses interest rate exchange agreements to hedge the risk from changes in interest rates on servicing fee revenues (which are derived from loans sold through asset securitizations). Gains and losses from these agreements are recognized as adjustments to servicing fees. The estimated fair value of the Company's consumer loans approximated carrying value at November 30, 1999 and 1998. The Company's consumer loan portfolio, including securitized loans, is geographically diverse, with a distribution approximating that of the population of the U.S. page 67 99 AR: page 68 4 DEPOSITS Deposits were as follows: (dollars in millions) NOV. 30, 1999 NOV. 30, 1998 - --------------------------------------------------------------------- Demand, passbook and money market accounts $ 1,458 $1,355 Consumer certificate accounts 1,698 1,635 $100,000 minimum certificate accounts 7,241 5,207 - --------------------------------------------------------------------- Total $10,397 $8,197 - --------------------------------------------------------------------- The weighted average interest rates of interest bearing deposits outstanding during fiscal 1999 and 1998 were 5.9% and 6.2%, respectively. At November 30, 1999 and 1998, the notional amounts of interest rate exchange agreements that hedged deposits outstanding were $473 million and $650 million and had fair values of $6 million and $15 million, respectively. Under these interest rate exchange agreements, the Company primarily pays floating rates and receives fixed rates. At November 30, 1999, the weighted average interest rate of the Company's deposits, including the effect of interest rate exchange agreements, was 5.9%. At November 30, 1999, certificate accounts maturing over the next five years were as follows: (dollars in millions) - --------------------------------------------------------------------- 2000 $2,473 2001 2,706 2002 1,407 2003 1,042 2004 940 - --------------------------------------------------------------------- The estimated fair value of the Company's deposits, using current rates for deposits with similar maturities, approximated carrying value at November 30, 1999 and 1998. 5 SHORT-TERM BORROWINGS At November 30, 1999 and 1998, commercial paper in the amount of $27,072 million and $19,643 million, with weighted average interest rates of 5.3% for both years, was outstanding. At November 30, 1999 and 1998, the notional amounts of interest rate and currency swaps that hedged commercial paper outstanding were $2,865 million and $208 million and had fair values of $(3) million and $(6) million. These contracts had no material effect on the weighted average interest rates of commercial paper. At November 30, 1999 and 1998, other short-term borrowings of $11,170 million and $8,494 million were outstanding. These borrowings included bank loans, Federal Funds and bank notes. The Company maintains a senior revolving credit agreement with a group of banks to support general liquidity needs, including the issuance of commercial paper (the "MSDW Facility"). Under the terms of the MSDW Facility, the banks are committed to provide up to $5.5 billion. The MSDW Facility contains restrictive covenants which require, among other things, that the Company maintain shareholders' equity of at least $9.1 billion at all times. The Company believes that the covenant restrictions will not impair the Company's ability to pay its current level of dividends. At November 30, 1999, no borrowings were outstanding under the MSDW Facility. The Company maintains a master collateral facility that enables MS&Co. to pledge certain collateral to secure loan arrangements, letters of credit and other financial accommodations (the "MS&Co. Facility"). As part of the MS&Co. Facility, MS&Co. also maintains a secured committed credit agreement with a group of banks that are parties to the master collateral facility under which such banks are committed to provide up to $1.875 billion. The credit agreement contains restrictive covenants which require, among other things, that MS&Co. maintain specified levels of consolidated shareholder's equity and Net Capital, as defined. At November 30, 1999, no borrowings were outstanding under the MS&Co. Facility. The Company also maintains a revolving committed financing facility that enables MSIL to secure committed funding from a syndicate of banks by providing a broad range of collateral under repurchase agreements (the "MSIL Facility"). Such banks are committed to provide up to an aggregate of $1.91 billion, available in six major currencies. The facility agreement contains restrictive covenants which require, among other things, that MSIL maintain specified levels of Shareholder's Equity and Financial Resources, each as defined. At November 30, 1999, no borrowings were outstanding under the MSIL Facility. On June 7, 1999, MSDWJL, the Company's Tokyo-based broker-dealer subsidiary, entered into a committed revolving credit facility, guaranteed by the Company, that provides funding to support general liquidity needs, including support of MSDWJL's unsecured borrowings (the "MSDWJL Facility"). Under the terms of the MSDWJL Facility, a syndicate of banks is committed to provide up to 60 billion Japanese yen. At November 30, 1999, no borrowings were outstanding under the MSDWJL Facility. Riverwoods Funding Corporation ("RFC"), an entity included in the consolidated financial statements of the Company, maintains a senior bank credit facility to support the issuance of asset-backed commercial paper in the amount of $2.6 billion. Under the terms of the asset-backed commercial paper program, certain assets of RFC were subject to a lien in the amount of $2.6 billion at November 30, 1999. RFC has never borrowed from its senior bank credit facility. The Company anticipates that it will utilize the MSDW Facility, the MS&Co. Facility, the MSIL Facility or the MSDWJL Facility for short-term funding from time to time. 6 LONG-TERM BORROWINGS MATURITIES AND TERMS Long-term borrowings at fiscal year-end consist of the following:
U.S. DOLLAR NON-U.S. DOLLAR(1) AT NOVEMBER 30 ------------------------------ -------------------- ------------------- INDEX/ FIXED FLOATING EQUITY FIXED FLOATING 1999 1998 (dollars in millions) RATE RATE(2) LINKED RATE RATE(2) TOTAL TOTAL - ------------------------------------------------------------------ -------------------- ------------------- Due in fiscal 1999 $ -- $-- $ -- $ -- $ -- $ -- $ 5,031 Due in fiscal 2000 1,619 3,081 928 62 1,212 6,902 6,863 Due in fiscal 2001 1,947 2,217 536 139 782 5,621 3,899 Due in fiscal 2002 1,440 1,260 156 115 1,070 4,041 2,501 Due in fiscal 2003 1,093 1,034 137 347 207 2,818 2,895 Due in fiscal 2004 2,306 465 293 113 28 3,205 580 Thereafter 4,113 741 238 643 282 6,017 5,666 - ------------------------------------------------------------------ -------------------- ------------------- Total $12,518 $ 8,798 $ 2,288 $ 1,419 $ 3,581 $28,604 $27,435 - ------------------------------------------------------------------ -------------------- ------------------- Weighted average coupon at fiscal year-end 6.5% 6.0% n/a 5.4% 3.2% 5.9% 6.1% - ------------------------------------------------------------------ -------------------- -------------------
(1) Weighted average coupon was calculated utilizing non-U.S. dollar interest rates. (2) U.S. dollar contractual floating rate borrowings bear interest based on a variety of money market indices, including London Interbank Offered Rates ("LIBOR") and Federal Funds rates. Non-U.S. dollar contractual floating rate borrowings bear interest based on euro floating rates. MEDIUM-TERM NOTES Included in the table above are medium-term notes of $15,724 million and $17,011 million at November 30, 1999 and 1998. The effective weighted average interest rate on all medium-term notes was 5.3% in fiscal 1999 and 5.7% in fiscal 1998. Maturities of these notes range from fiscal 2000 through fiscal 2028. STRUCTURED BORROWINGS U.S. dollar index/equity linked borrowings include various structured instruments whose payments and redemption values are linked to the performance of a specific index (e.g., Standard & Poor's 500), a basket of stocks or a specific equity security. To minimize the exposure resulting from movements in the underlying equity position or index, the Company has entered into various page 69 99 AR: page 70 equity swap contracts and purchased options which effectively convert the borrowing costs into floating rates based upon LIBOR. These instruments are included in the preceding table at their redemption values based on the performance of the underlying indices, baskets of stocks or specific equity securities at November 30, 1999 and 1998. OTHER BORROWINGS Included in the Company's long-term borrowings are subordinated notes of $1,356 million and $1,309 million at November 30, 1999 and 1998, respectively. The effective weighted average interest rate on these subordinated notes was 7.0% in fiscal 1999 and 7.1% in fiscal 1998. Maturities of the subordinated notes range from fiscal 2001 to fiscal 2016. Certain of the Company's long-term borrowings are redeemable prior to maturity at the option of the holder. These notes contain certain provisions which effectively enable noteholders to put the notes back to the Company and therefore are scheduled in the foregoing table to mature in fiscal 2000 through fiscal 2001. The stated maturities of these notes, which aggregate $2,081 million, are from fiscal 2001 to fiscal 2014. MS&Co., a U.S. broker-dealer subsidiary of the Company, has outstanding $357 million of 8.22% fixed rate subordinated Series A notes, $243 million of 8.51% fixed rate subordinated Series B Notes, $313 million of 6.81% fixed rate subordinated Series C notes, $96 million of 7.03% fixed rate subordinated Series D notes, $82 million of 7.28% fixed rate subordinated Series E notes and $25 million of 7.82% fixed rate subordinated Series F notes. These notes have maturities from fiscal 2001 to fiscal 2016. The terms of such notes contain restrictive covenants which require, among other things, that MS&Co. maintain specified levels of Consolidated Tangible Net Worth and Net Capital, each as defined. ASSET AND LIABILITY MANAGEMENT A portion of the Company's fixed rate long-term borrowings is used to fund highly liquid marketable securities and short-term receivables arising from securities transactions. The Company uses interest rate swaps to more closely match the duration of these borrowings to the duration of the assets being funded and to manage interest rate risk. These swaps effectively convert certain of the Company's fixed rate borrowings into floating rate obligations. In addition, for non-U.S. dollar currency borrowings that are not used to fund assets in the same currency, the Company has entered into currency swaps which effectively convert the borrowings into U.S. dollar obligations. The Company's use of swaps for asset and liability management reduced its interest expense and effective average borrowing rate as follows: FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - --------------------------------------------------------------------- Net reduction in interest expense from swaps for the fiscal year $22 $48 $21 - --------------------------------------------------------------------- Weighted average coupon of long-term borrowings at fiscal year-end(1) 5.9% 6.1% 6.1% - --------------------------------------------------------------------- Effective average borrowing rate for long-term borrowings after swaps at fiscal year-end(1) 5.8% 5.9% 6.0% - --------------------------------------------------------------------- (1) Included in the weighted average and effective average calculations are non-U.S. dollar interest rates. The effective weighted average interest rate on the Company's index/equity linked notes, which is not included in the table above, was 5.8% and 5.2% in fiscal 1999 and fiscal 1998, respectively, after giving effect to the related hedges. The table below summarizes the notional or contract amounts of the swaps utilized by the Company for asset and liability management by maturity and weighted average interest rates to be received and paid at November 30, 1999. Swaps utilized to hedge the Company's structured borrowings are presented at their redemption values:
U.S. DOLLAR NON-U.S. DOLLAR(1) ----------------------------------------- -------------------- RECEIVE RECEIVE RECEIVE RECEIVE RECEIVE FIXED FLOATING FLOATING INDEX/ FIXED FLOATING NOV. 30, NOV. 30, PAY PAY PAY EQUITY PAY PAY 1999 1998 (dollars in millions) FLOATING FIXED FLOATING LINKED FLOATING FLOATING(2) TOTAL TOTAL - --------------------------------------------------------------------------------- -------------------- -------------------- Maturing in fiscal 1999 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 2,181 Maturing in fiscal 2000 1,180 300 420 928 62 226 3,116 2,241 Maturing in fiscal 2001 1,834 -- 85 536 134 360 2,949 2,181 Maturing in fiscal 2002 1,075 200 -- 156 111 3 1,545 979 Maturing in fiscal 2003 500 -- -- 137 347 199 1,183 1,252 Maturing in fiscal 2004 2,131 200 -- 293 113 28 2,765 537 Thereafter 3,165 200 -- 238 638 282 4,523 3,730 - --------------------------------------------------------------------------------- -------------------- -------------------- Total $ 9,885 $ 900 $ 505 $ 2,288 $ 1,405 $ 1,098 $16,081 $13,101 - --------------------------------------------------------------------------------- -------------------- -------------------- Weighted average at fiscal year-end(3) Receive rate 6.4% 5.4% 5.8% n/a 5.5% 4.0% Pay rate 6.1% 6.2% 5.9% n/a 4.8% 5.3% - --------------------------------------------------------------------------------- -------------------- --------------------
(1) The differences between the receive rate and the pay rate may reflect differences in the rate of interest associated with the underlying currency. (2) These amounts include currency swaps used to effectively convert borrowings denominated in one currency into obligations denominated in another currency. (3) The table was prepared under the assumption that interest rates remain constant at year-end levels. The variable interest rates to be received or paid will change to the extent that rates fluctuate. Such changes may be substantial. Variable rates presented generally are based on LIBOR or Treasury bill rates. The above table does not include interest rate floor agreements that are utilized by the Company to manage interest rate risk. At November 30, 1999, interest rate floor agreements with an aggregate notional value of $610 million were outstanding. These agreements have expiration dates from fiscal 2000 to fiscal 2014 and an aggregate fair value of $0.2 million at November 30, 1999. There were no interest rate floor agreements outstanding at November 30, 1998. As noted above, the Company uses interest rate and currency swaps to modify the terms of its existing borrowings. Activity during the periods in the notional value of the swap contracts used by the Company for asset and liability management (and the unrecognized (loss) gain at fiscal year-end) is summarized in the table below: FISCAL FISCAL (dollars in millions) 1999 1998 - ------------------------------------------------------------------------- Notional value at beginning of period $ 13,101 $ 11,707 Additions 5,372 4,520 Matured (1,804) (2,305) Terminated (848) (868) Effect of foreign currency translation on non-U.S. dollar notional values and changes in redemption values on structured borrowings 260 47 - ------------------------------------------------------------------------- Notional value at fiscal year-end $ 16,081 $ 13,101 - ------------------------------------------------------------------------- Unrecognized (loss) gain at fiscal year-end $ (243) $ 279 - ------------------------------------------------------------------------- The Company also uses interest rate swaps and swap options to modify certain of its repurchase financing agreements. The Company had interest rate swaps and swap options with notional values of approximately $6.0 billion and $5.1 billion at November 30, 1999 and 1998 and unrecognized losses of approximately $(38) million and $(10) million at November 30, 1999 and 1998, for such purpose. The unrecognized losses on these swaps and swap options were offset by unrecognized gains on certain of the Company's repurchase financing agreements. The estimated fair value of the Company's long-term borrowings approximated carrying value based on rates available to the Company at year-end for borrowings with similar terms and maturities. Cash paid for interest for the Company's borrowings and deposits approximated interest expense in fiscal 1999, 1998 and 1997. page 71 99 AR: page 72 7 COMMITMENTS AND CONTINGENCIES The Company has non-cancelable operating leases covering office space and equipment. At November 30, 1999, future minimum rental commitments under such leases (net of subleases, principally on office rentals) were as follows: (dollars in millions) - ----------------------------------------------------------------- 2000 $392 2001 346 2002 275 2003 225 2004 200 Thereafter 1,027 - ----------------------------------------------------------------- Occupancy lease agreements, in addition to base rentals, generally provide for rent and operating expense escalations resulting from increased assessments for real estate taxes and other charges. Total rent expense, net of sublease rental income, was $296 million, $274 million and $262 million in fiscal 1999, 1998 and 1997, respectively. The Company has an agreement with IBM Corporation, under which the Company receives information processing, data networking and related services. Under the terms of the agreement, the Company has an aggregate minimum annual commitment of $120 million subject to annual cost-of-living adjustments. The Company has contracted to develop a one million square-foot office tower in New York City. Pursuant to this agreement, the Company will own the building and has entered into a 99-year lease for the land at the development site. Construction began in 1999 and the Company intends to occupy the building upon project completion, which is anticipated in 2002. The total investment in this project (which will be incurred over the next several years) is estimated to be approximately $650 million. In the normal course of business, the Company has been named as a defendant in various lawsuits and has been involved in certain investigations and proceedings. Some of these matters involve claims for substantial amounts. Although the ultimate outcome of these matters cannot be ascertained at this time, it is the opinion of management, after consultation with counsel, that the resolution of such matters will not have a material adverse effect on the consolidated financial condition of the Company but may be material to the Company's operating results for any particular period, depending upon the level of the Company's income for such period. At November 30, 1999 and 1998, the Company had approximately $6.3 billion and $5.7 billion, respectively, of letters of credit outstanding to satisfy various collateral requirements. Financial instruments sold, not yet purchased represent obligations of the Company to deliver specified financial instruments at contracted prices, thereby creating commitments to purchase the financial instruments in the market at prevailing prices. Consequently, the Company's ultimate obligation to satisfy the sale of financial instruments sold, not yet purchased may exceed the amounts recognized in the consolidated statements of financial condition. The Company also has commitments to fund certain fixed assets and other less liquid investments, including at November 30, 1999 approximately $417 million in connection with its private equity and other principal investment activities. Additionally, the Company has provided and will continue to provide financing, including margin lending and other extensions of credit to clients (including subordinated loans on an interim basis to leveraged companies associated with its investment banking and its private equity and other principal investment activities), that may subject the Company to increased credit and liquidity risks. 8 EARNINGS PER SHARE Earnings per share was calculated as follows (in millions, except for per share data): FISCAL FISCAL FISCAL BASIC EPS: 1999 1998 1997 - -------------------------------------------------------------------------------- Income before cumulative effect of accounting change $ 4,791 $ 3,393 $ 2,586 Cumulative effect of accounting change -- (117) -- Preferred stock dividend requirements (44) (55) (66) - -------------------------------------------------------------------------------- Net income available to common shareholders $ 4,747 $ 3,221 $ 2,520 - -------------------------------------------------------------------------------- Weighted average common shares outstanding 1,097 1,152 1,150 Basic EPS before cumulative effect of accounting change $ 4.33 $ 2.90 $ 2.19 Cumulative effect of accounting change -- (0.10) -- - -------------------------------------------------------------------------------- Basic EPS $ 4.33 $ 2.80 $ 2.19 - -------------------------------------------------------------------------------- FISCAL FISCAL FISCAL DILUTED EPS: 1999 1998 1997 - -------------------------------------------------------------------------------- Income before cumulative effect of accounting change $ 4,791 $ 3,393 $ 2,586 Cumulative effect of accounting change -- (117) -- Preferred stock dividend requirements (36) (47) (61) - -------------------------------------------------------------------------------- Net income available to common shareholders $ 4,755 $ 3,229 $ 2,525 - -------------------------------------------------------------------------------- Weighted average common shares outstanding 1,097 1,152 1,150 Effect of dilutive securities: Stock options 39 37 39 ESOP convertible preferred stock 24 24 24 - -------------------------------------------------------------------------------- Weighted average common shares outstanding and common stock equivalents 1,160 1,213 1,213 - -------------------------------------------------------------------------------- Diluted EPS before cumulative effect of accounting change $ 4.10 $ 2.76 $ 2.08 Cumulative effect of accounting change -- (0.09) -- - -------------------------------------------------------------------------------- Diluted EPS $ 4.10 $ 2.67 $ 2.08 - -------------------------------------------------------------------------------- 9 TRADING ACTIVITIES TRADING REVENUES The Company's trading activities include providing securities brokerage, derivatives dealing and underwriting services to clients. While trading activities are generated by client order flow, the Company also takes proprietary positions based on expectations of future market movements and conditions. The Company's trading strategies rely on the integrated management of its client-driven and proprietary transactions, along with the hedging and financing of these positions. The Company manages its trading businesses by product groupings and therefore has established distinct, worldwide trading divisions having responsibility for equity, fixed income, foreign exchange and commodities products. Because of the integrated nature of the markets for such products, each product area trades cash instruments as well as related derivative products (e.g., options, swaps, futures, forwards and other contracts with respect to such underlying instruments or commodities). Revenues related to principal trading are summarized below by trading division: FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ------------------------------------------------------------------ Equities $3,065 $2,048 $1,310 Fixed income 2,090 455 1,187 Foreign exchange 397 587 500 Commodities 431 193 194 - ------------------------------------------------------------------ Total principal transaction trading revenues $5,983 $3,283 $3,191 - ------------------------------------------------------------------ Interest revenue and expense are integral components of trading activities. In assessing the profitability of trading activities, the Company views net interest and principal trading revenues in the aggregate. The Company's trading portfolios are managed with a view toward the risk and profitability of the portfolios to the Company. The nature of the equities, fixed income, foreign exchange and commodities activities conducted by the Company, including the use of derivative products in these businesses, and the market, credit and concentration risk management policies and procedures covering these activities are discussed below. page 73 99 AR: page 74 EQUITIES The Company makes markets and trades in the global secondary markets for equities and convertible debt and is a dealer in equity warrants, exchange traded and OTC equity options, index futures, equity swaps and other sophisticated equity derivatives. The Company's activities as a dealer primarily are client-driven, with the objective of meeting clients' needs while earning a spread between the premiums paid or received on its contracts with clients and the cost of hedging such transactions in the cash or forward market or with other derivative transactions. The Company limits its market risk related to these contracts, which stems primarily from underlying equity/index price and volatility movements, by employing a variety of hedging strategies, such as delta hedging (delta is a measure of a derivative contract's price movement based on the movement of the price of the security or index underlying the contract). The Company also takes proprietary positions in the global equity markets by using derivatives, most commonly futures and options, in addition to cash positions, intending to profit from market price and volatility movements in the underlying equities or indices positioned. Equity option contracts give the purchaser of the contract the right to buy (call) or sell (put) the equity security or index underlying the contract at an agreed-upon price (strike price) during or at the conclusion of a specified period of time. The seller (writer) of the contract is subject to market risk, and the purchaser is subject to market risk (to the extent of the premium paid) and credit risk. Equity swap contracts are contractual agreements whereby one counterparty receives the appreciation (or pays the depreciation) on an equity investment in return for paying another rate, often based upon equity index movements or interest rates. The counterparties to the Company's equity transactions include commercial banks, investment banks, broker-dealers, investment funds and industrial companies. FIXED INCOME The Company is a market-maker for U.S. and non-U.S. government securities, corporate bonds, money market instruments, medium-term notes and Eurobonds, high-yield securities, emerging market securities, mortgage- and other asset-backed securities, preferred stock and tax-exempt securities. In addition, the Company is a dealer in interest rate and currency swaps and other related derivative products, OTC options on U.S. and non-U.S. government bonds and mortgage-backed forward agreements ("TBA"), options and swaps. In this capacity, the Company facilitates asset and liability management for its customers in interest rate and currency swaps and related products and OTC government bond options. Swaps used in fixed income trading are, for the most part, contractual agreements to exchange interest payment streams (i.e., an interest rate swap may involve exchanging fixed for floating interest payments) or currencies (i.e., a currency swap may involve exchanging yen for U.S. dollars in one year at an agreed-upon exchange rate). The Company profits by earning a spread between the premium paid or received for these contracts and the cost of hedging such contracts. The Company seeks to manage the market risk of its swap portfolio, which stems from interest rate and currency movements and volatility, by using modeling that quantifies the sensitivity of its portfolio to movements in interest rates and currencies and by adding positions to or selling positions from its portfolio as needed to minimize such sensitivity. Typically, the Company adjusts its positions by entering into additional swaps or interest rate and foreign currency futures or foreign currency forwards and by purchasing or selling additional underlying government bonds. The Company manages the risk related to its option portfolio by using a variety of hedging strategies such as delta hedging, which includes the use of futures and forward contracts to hedge market risk. The Company also is involved in using debt securities to structure products with multiple risk/return factors designed to suit investor objectives. The Company is an underwriter of and a market-maker in commercial and residential mortgage-backed securities and asset-backed securities as well as commercial, residential and real estate loan products. The Company provides financing to customers for commercial, residential and real estate loan products. The Company also uses TBA contracts in its role as a dealer in mortgage-backed securities and facilitates customer trades by taking positions in the TBA market. Typically, these positions are hedged by offsetting TBA contracts or underlying cash positions. The Company profits by earning the bid-offer spread on such transactions. As is the case with all mortgage-backed products, market risk associated with these instruments results from interest rate fluctuations and changes in mortgage prepayment speeds. The Company also acts as principal and agent in aircraft finance transactions. Acting as principal, the Company acquires aircraft outright or under leases and finances these assets by issuance of non-recourse debt in the securitization market and other similar financing arrangements. The counterparties to the Company's fixed income transactions include investment advisors, commercial banks, insurance companies, investment funds and industrial companies. FOREIGN EXCHANGE The Company is a market-maker in a number of foreign currencies. In this business, it actively trades currencies in the spot and forward markets earning a dealer spread. The Company seeks to manage its market risk by entering into offsetting positions. The Company conducts an arbitrage business in which it seeks to profit from inefficiencies between the futures, spot and forward markets. The Company also makes a market in foreign currency options. This business largely is client-driven and involves the purchasing and writing of European and American style options and certain sophisticated products to meet specific client needs. The Company profits in this business by earning spreads between the options' premiums and the cost of hedging such positions. The Company limits its market risk by using a variety of hedging strategies, including the buying and selling of the currencies underlying the options based upon the options' delta equivalent. Foreign exchange option contracts give the purchaser of the contract the right to buy (call) or sell (put) the currency underlying the contract at an agreed-upon strike price at or over a specified period of time. Forward contracts and futures represent commitments to purchase or sell the underlying currencies at a specified future date at a specified price. The Company also takes proprietary positions in currencies to profit from market price and volatility movements in the currencies positioned. The majority of the Company's foreign exchange business relates to major foreign currencies such as yen, euro, pound sterling, Swiss francs and Canadian dollars. The balance of the business covers a broad range of other currencies. The counterparties to the Company's foreign exchange transactions include commercial banks, investment banks, broker-dealers, investment funds and industrial companies. COMMODITIES The Company, as a major participant in the world commodities markets, trades in physical precious, base and platinum group metals, electricity, energy products (principally oil, refined oil products and natural gas) as well as a variety of derivatives related to these commodities such as futures, forwards and exchange traded and OTC options and swaps. Through these activities, the Company provides clients with a ready market to satisfy end users' current raw material needs and facilitates their ability to hedge price fluctuations related to future inventory needs. The former activity at times requires the positioning of physical commodities. Derivatives on those commodities, such as futures, forwards and options, often are used to hedge price movements in the underlying physical inventory. The Company profits as a market-maker in physical commodities by earning the bid-offer spread inherent in the physical markets. To facilitate hedging for its clients, the Company often is required to take positions in the commodity markets in the form of forward, option and swap contracts involving oil, natural gas, precious and base metals, and electricity. The Company generally hedges these positions by using a variety of hedging techniques such as delta hedging, whereby the Company takes positions in the physical markets and/or positions in other commodity derivatives such as futures and forwards to offset the market risk in the underlying derivative. The Company profits from this business by earning a spread between the premiums paid or received for these derivatives and the cost of hedging such derivatives. The Company also maintains proprietary trading positions in commodity derivatives, including futures, forwards and options in addition to physical commodities, to profit from price and volatility movements in the underlying commodities markets. Forward, option and swap contracts on commodities are structured similarly to like-kind derivative contracts for cash financial instruments. The counterparties to OTC commodity contracts include precious metals producers, refiners and consumers as well as shippers, central banks, and oil, gas and electricity producers. The following discussions of risk management, market risk, credit risk, concentration risk and customer activities relate to the Company's trading activities. page 75 99 AR: page 76 RISK MANAGEMENT Risk management at the Company is a multi-faceted process with independent oversight that requires constant communication, judgment and knowledge of specialized products and markets. The Company's senior management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. In recognition of the increasingly varied and complex nature of the global financial services business, the Company's risk management policies, procedures and methodologies are evolutionary in nature and are subject to ongoing review and modification. Many of the Company's risk management and control practices are subject to periodic review by the Company's internal auditors as well as to interactions with various regulatory authorities. The Management Committee, composed of the Company's most senior officers, establishes the overall risk management policies for the Company and reviews the Company's performance relative to these policies. The Management Committee has created several Risk Committees to assist it in monitoring and reviewing the Company's risk management practices. These Risk Committees, as well as other committees established to manage and monitor specific risks, review the risk monitoring and risk management policies and procedures relating to the Company's market and credit risk profile, sales practices, legal enforceability, and operational and systems risks. The Controllers, Treasury, Law, Compliance and Governmental Affairs and Firm Risk Management Departments, which are all independent of the Company's business units, assist senior management and the Risk Committees in monitoring and controlling the Company's risk profile. In addition, the Internal Audit Department, which also reports to senior management, periodically examines and evaluates the Company's operations and control environment. The Company continues to be committed to employing qualified personnel with appropriate expertise in each of its various administrative and business areas to implement effectively the Company's risk management and monitoring systems and processes. MARKET RISK Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. The Company manages the market risk associated with its trading activities on a Company-wide basis, on a trading division level worldwide and on an individual product basis. Market risk limits have been approved for the Company and each major trading division of the Company worldwide. Discrete market risk limits are assigned to trading desks and, as appropriate, products and regions. Trading division risk managers, desk risk managers and the Firm Risk Management Department all monitor market risk measures against limits and report major market and position events to senior management. The Firm Risk Management Department independently reviews the Company's trading portfolios on a regular basis from a market risk perspective utilizing Value-at-Risk and other quantitative and qualitative risk measurements and analyses. The Company may use measures, such as rate sensitivity, convexity, volatility and time decay measurements, to estimate market risk and to assess the sensitivity of positions to changes in market conditions. Stress testing, which measures the impact on the value of existing portfolios of specified changes in market factors, for certain products is performed periodically and is reviewed by trading division risk managers, desk risk managers and the Firm Risk Management Department. CREDIT RISK The Company's exposure to credit risk arises from the possibility that a counterparty to a transaction might fail to perform under its contractual commitment, which could result in the Company incurring losses. The Company has credit guidelines which limit the Company's current and potential credit exposure to any one counterparty. Specific credit risk limits based on these credit guidelines also are in place for each type of counterparty (by rating category). The Credit Department administers and monitors the credit limits among trading divisions on a worldwide basis. In addition to monitoring credit limits, the Company manages the credit exposure relating to the Company's trading activities by reviewing counterparty financial soundness periodically, by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances and by limiting the duration of exposure. In certain cases, the Company also may close out transactions or assign them to other counterparties to mitigate credit risk. CONCENTRATION RISK The Company is subject to concentration risk by holding large positions in certain types of securities or commitments to purchase securities of a single issuer, including sovereign governments and other entities, issuers located in a particular country or geographic area, public and private issuers involving developing countries or issuers engaged in a particular industry. Financial instruments owned by the Company include U.S. government and agency securities and securities issued by other sovereign governments (principally Japan, Italy, Canada and Germany), which, in the aggregate, represented approximately 12% of the Company's total assets at November 30, 1999. In addition, substantially all of the collateral held by the Company for resale agreements or bonds borrowed, which together represented approximately 29% of the Company's total assets at November 30, 1999, consists of securities issued by the U.S. government, federal agencies or other sovereign government obligations. Positions taken and commitments made by the Company, including positions taken and underwriting and financing commitments made in connection with its private equity and principal investment activities, often involve substantial amounts and significant exposure to individual issuers and businesses, including non-investment grade issuers. The Company seeks to limit concentration risk through the use of the systems and procedures described in the preceding discussions of market and credit risk. CUSTOMER ACTIVITIES The Company's customer activities involve the execution, settlement and financing of various securities and commodities transactions on behalf of customers. Customer securities activities are transacted on either a cash or margin basis. Customer commodities activities, which include the execution of customer transactions in commodity futures transactions (including options on futures), are transacted on a margin basis. The Company's customer activities may expose it to off-balance sheet credit risk. The Company may have to purchase or sell financial instruments at prevailing market prices in the event of the failure of a customer to settle a trade on its original terms or in the event cash and securities in customer margin accounts are not sufficient to fully cover customer losses. The Company seeks to control the risks associated with customer activities by requiring customers to maintain margin collateral in compliance with various regulations and Company policies. NOTIONAL/CONTRACT AMOUNTS AND FAIR MARKET VALUES OF DERIVATIVES The gross notional or contract amounts of derivative instruments and fair value (carrying amount) of the related assets and liabilities at November 30, 1999 and 1998, as well as the average fair value of those assets and liabilities for fiscal 1999 and 1998, are presented in the table which follows. Fair value represents the cost of replacing these instruments and is further described in Note 2. Future changes in interest rates, foreign currency exchange rates or the fair values of the financial instruments, commodities or indices underlying these contracts ultimately may result in cash settlements exceeding fair value amounts recognized in the consolidated statements of financial condition. Assets represent unrealized gains on purchased exchange traded and OTC options and other contracts (including interest rate, foreign exchange, and other forward contracts and swaps), net of any unrealized losses owed to the page 77 99 AR: page 78 counterparties on offsetting positions in situations where netting is appropriate. Similarly, liabilities represent net amounts owed to counterparties. These amounts will vary based on changes in the fair values of underlying financial instruments and/or the volatility of such underlying instruments:
FISCAL YEAR-END GROSS NOTIONAL/CONTRACT AMOUNT(1) (2) FISCAL YEAR-END FAIR VALUES(3) AVERAGE FAIR VALUES(3) (4) - ---------------------------------------------------------------------------------------------------------------------------------- (dollars in billions at fiscal year-end) ASSETS LIABILITIES ASSETS LIABILITIES ------ ----------- ------ ----------- 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 Interest rate and currency swaps and options (including caps, floors and swap options) and $2,689 $1,719 other fixed income securities contracts $ 9.5 $ 10.1 $ 9.4 $ 10.4 $ 9.0 $ 9.5 $ 6.2 $ 8.6 Foreign exchange forward and futures contracts 405 903 and options 3.7 3.7 3.6 4.1 3.3 4.6 3.5 4.4 Equity security contracts (including equity swaps, futures contracts, and warrants and 110 107 options) 7.1 5.2 7.3 4.8 5.9 4.8 5.4 4.6 170 91 Commodity forwards, futures, options and swaps 2.4 2.2 2.9 1.9 2.3 2.0 2.6 1.7 Mortgage-backed securities forward contracts, 30 40 swaps and options 0.1 0.2 -- -- 0.1 0.2 0.1 -- $3,404 $2,860 Total $ 22.8 $ 21.4 $ 23.2 $ 21.2 $ 20.6 $ 21.1 $ 17.8 $ 19.3
(1) The notional amounts of derivatives have been adjusted to reflect the effects of leverage, where applicable. (2) Notional amounts include purchased and written options of $399 billion and $401 billion, respectively, at November 30, 1999, and $485 billion and $442 billion, respectively, at November 30, 1998. (3) These amounts represent carrying value (exclusive of collateral) at November 30, 1999 and 1998, respectively, and do not include receivables or payables related to exchange traded futures contracts. (4) Amounts are calculated using a monthly average. The gross notional or contract amounts of these instruments are indicative of the Company's degree of use of derivatives for trading purposes but do not represent the Company's exposure to market or credit risk. Credit risk arises from the failure of a counterparty to perform according to the terms of the contract. The Company's exposure to credit risk at any point in time is represented by the fair value of the contracts reported as assets. These amounts are presented on a net-by-counterparty basis when appropriate but are not reported net of collateral, which the Company obtains with respect to certain of these transactions to reduce its exposure to credit losses. The Company monitors the creditworthiness of counterparties to these transactions on an ongoing basis and requests additional collateral when deemed necessary. The Company believes the ultimate settlement of the transactions outstanding at November 30, 1999 will not have a material effect on the Company's financial condition. The remaining maturities of the Company's swaps and other derivative products at November 30, 1999 and 1998 are summarized in the following table, showing notional values by year of expected maturity:
LESS THAN 1 TO 3 3 TO 5 MORE THAN (dollars in billions) 1 YEAR YEARS YEARS 5 YEARS TOTAL - ------------------------------------------------------------------------------------------------------------------------------ AT NOVEMBER 30, 1999 Interest rate and currency swaps and options (including caps, floors and swap options) and other fixed income securities contracts $ 664 $ 662 $ 531 $ 832 $2,689 Foreign exchange forward and futures contracts and options 397 8 -- -- 405 Equity securities contracts (including equity swaps, futures contracts, and warrants and options) 77 22 8 3 110 Commodity forwards, futures, options and swaps 97 47 19 7 170 Mortgage-backed securities forward contracts, swaps and options 21 1 3 5 30 - ------------------------------------------------------------------------------------------------------------------------------ Total $1,256 $ 740 $ 561 $ 847 $3,404 - ------------------------------------------------------------------------------------------------------------------------------ Percent of total 37% 22% 16% 25% 100% - ------------------------------------------------------------------------------------------------------------------------------ AT NOVEMBER 30, 1998 Interest rate and currency swaps and options (including caps, floors and swap options) and other fixed income securities contracts $ 457 $ 479 $ 371 $ 412 $1,719 Foreign exchange forward and futures contracts and options 892 11 -- -- 903 Equity securities contracts (including equity swaps, futures contracts, and warrants and options) 82 17 7 1 107 Commodity forwards, futures, options and swaps 53 22 8 8 91 Mortgage-backed securities forward contracts, swaps and options 25 1 2 12 40 - ------------------------------------------------------------------------------------------------------------------------------ Total $1,509 $ 530 $ 388 $ 433 $2,860 - ------------------------------------------------------------------------------------------------------------------------------ Percent of total 53% 19% 13% 15% 100% - ------------------------------------------------------------------------------------------------------------------------------
page 79 99 AR: page 80 The credit quality of the Company's trading-related derivatives at November 30, 1999 and 1998 is summarized in the table below, showing the fair value of the related assets by counterparty credit rating. The actual credit ratings are determined by external rating agencies or by equivalent ratings used by the Company's Credit Department:
COLLATERALIZED OTHER NON- NON- INVESTMENT INVESTMENT (dollars in millions) AAA AA A BBB GRADE GRADE TOTAL - -------------------------------------------------------------------------------------------------------------------------------- AT NOVEMBER 30, 1999 Interest rate and currency swaps and options (including caps, floors and swap options) and other fixed income securities contracts $ 1,569 $ 3,842 $ 2,896 $ 884 $ 117 $ 174 $ 9,482 Foreign exchange forward contracts and options 556 1,551 1,285 170 -- 140 3,702 Equity securities contracts (including equity swaps, warrants and options) 1,742 2,310 1,109 260 1,308 320 7,049 Commodity forwards, options and swaps 164 571 660 469 52 508 2,424 Mortgage-backed securities forward contracts, swaps and options 41 33 35 1 1 1 112 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 4,072 $ 8,307 $ 5,985 $ 1,784 $ 1,478 $ 1,143 $22,769 - -------------------------------------------------------------------------------------------------------------------------------- Percent of total 18% 37% 26% 8% 6% 5% 100% - -------------------------------------------------------------------------------------------------------------------------------- AT NOVEMBER 30, 1998 Interest rate and currency swaps and options (including caps, floors and swap options) and other fixed income securities contracts $ 894 $ 3,727 $ 3,694 $ 1,181 $ 98 $ 510 $10,104 Foreign exchange forward contracts and options 306 1,413 1,435 337 -- 263 3,754 Equity securities contracts (including equity swaps, warrants and options) 1,995 1,105 478 61 1,364 165 5,168 Commodity forwards, options and swaps 71 448 401 708 46 534 2,208 Mortgage-backed securities forward contracts, swaps and options 130 51 21 3 -- 3 208 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 3,396 $ 6,744 $ 6,029 $ 2,290 $ 1,508 $ 1,475 $21,442 - -------------------------------------------------------------------------------------------------------------------------------- Percent of total 16% 31% 28% 11% 7% 7% 100% - --------------------------------------------------------------------------------------------------------------------------------
The Company also has obtained assets posted as collateral by investment grade counterparties amounting to $2.7 billion and $2.5 billion at November 30, 1999 and November 30, 1998, respectively. 10 PREFERRED STOCK, CAPITAL UNITS AND PREFERRED SECURITIES ISSUED BY SUBSIDIARIES Preferred stock of the Company is composed of the following issues:
SHARES OUTSTANDING AT BALANCE AT NOVEMBER 30 NOVEMBER 30 (dollars in millions) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- ESOP Convertible Preferred Stock, liquidation preference $35.88 3,493,477 3,581,964 $125 $129 Series A Fixed/Adjustable Rate Cumulative Preferred Stock, stated value $200 1,725,000 1,725,000 345 345 7-3/4% Cumulative Preferred Stock, stated value $200 1,000,000 1,000,000 200 200 - ---------------------------------------------------------------------------------------------------------------------------------- Total $670 $674 - ----------------------------------------------------------------------------------------------------------------------------------
Each issue of outstanding preferred stock ranks in parity with all other outstanding preferred stock of the Company. In fiscal 1998, MSDW Capital Trust I, a Delaware statutory business trust (the "Capital Trust"), all of the common securities of which are owned by the Company, issued $400 million of 7.10% Capital Securities (the "Capital Securities") that are guaranteed by the Company. The Capital Trust issued the Capital Securities and invested the proceeds in 7.10% Junior Subordinated Deferrable Interest Debentures issued by the Company, which are due February 28, 2038. The Company has Capital Units outstanding which were issued by the Company and Morgan Stanley Finance plc ("MS plc"), a U.K. subsidiary. A Capital Unit consists of (a) a Subordinated Debenture of MS plc guaranteed by the Company and having maturities from 2015 to 2017 and (b) a related Purchase Contract issued by the Company, which may be accelerated by the Company beginning approximately one year after the issuance of each Capital Unit, requiring the holder to purchase one Depositary Share representing shares (or fractional shares) of the Company's Cumulative Preferred Stock. The aggregate amount of Capital Units outstanding was $583 million and $999 million at November 30, 1999 and 1998, respectively. Effective March 1, 1999, the Company redeemed all of the outstanding 7.82% Capital Units and 7.80% Capital Units. The aggregate principal amount of the Capital Units redeemed was $352 million. During fiscal 1999, the Company repurchased in a series of transactions in the open market $64 million of the $134 million outstanding 8.03% Capital Units. During fiscal 1999, the Company retired these repurchased Capital Units. The estimated fair value of the Capital Units approximated carrying value at November 30, 1999 and November 30, 1998. In January 2000, the Company and MS plc called for redemption all of the outstanding 9.00% Capital Units on February 28, 2000. The aggregate principal amount of the Capital Units to be redeemed is $144 million. In January 2000, all shares of the ESOP Convertible Preferred Stock were converted into common shares of the Company (see Note 12). 11 SHAREHOLDERS' EQUITY MS&Co. and DWR are registered broker-dealers and registered futures commission merchants and, accordingly, are subject to the minimum net capital requirements of the Securities and Exchange Commission, the New York Stock Exchange and the Commodity Futures Trading Commission. MS&Co. and DWR have consistently operated in excess of these requirements. MS&Co.'s net capital totaled $3,515 million at November 30, 1999, which exceeded the amount required by $2,906 million. DWR's net capital totaled $765 million at November 30, 1999, which exceeded the amount required by $631 million. MSIL, a London-based broker-dealer subsidiary, is subject to the capital requirements of the Securities and Futures Authority, and MSDWJL, a Tokyo-based broker-dealer, is subject to the capital requirements of the Japanese Ministry of Finance. MSIL and MSDWJL have consistently operated in excess of their respective regulatory capital requirements. Under regulatory capital requirements adopted by the Federal Deposit Insurance Corporation ("FDIC") and other bank regulatory agencies, FDIC-insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital, as defined, to average assets ("leverage ratio") (b) 4% of Tier 1 capital, as defined, to risk-weighted assets ("Tier 1 risk-weighted capital ratio") and (c) 8% of total capital, as defined, to risk-weighted assets ("total risk-weighted capital ratio"). At November 30, 1999, the leverage ratio, Tier 1 risk-weighted capital ratio and total risk-weighted capital ratio of each of the Company's FDIC-insured financial institutions exceeded these regulatory minimums. Certain other U.S. and non-U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in excess of their local capital adequacy requirements. Morgan Stanley Derivative Products Inc., the Company's triple-A rated derivative products subsidiary, also has established certain operating restrictions which have been reviewed by various rating agencies. The regulatory capital requirements referred to above, and certain covenants contained in various agreements governing page 81 99 AR: page 82 indebtedness of the Company, may restrict the Company's ability to withdraw capital from its subsidiaries. At November 30, 1999, approximately $5.6 billion of net assets of consolidated subsidiaries may be restricted as to the payment of cash dividends and advances to the Company. The Company repurchased approximately 50 million and 86 million shares of its common stock in fiscal 1999 and fiscal 1998, respectively. In an effort to enhance its ongoing stock repurchase program, the Company may sell put options on shares of its common stock to third parties. These put options entitle the holder to sell shares of the Company's common stock to the Company on certain dates at specified prices. As of November 30, 1999, put options were outstanding on an aggregate of 1.0 million shares of the Company's common stock. These put options expire in February 2000. The Company may elect cash settlement of the put options instead of taking delivery of the stock. Cumulative translation adjustments include gains or losses resulting from translating foreign currency financial statements from their respective functional currencies to U.S. dollars, net of hedge gains or losses and related tax effects. The Company uses foreign currency contracts and designates certain non-U.S. dollar currency debt as hedges to manage the currency exposure relating to its net monetary investments in non-U.S. dollar functional currency subsidiaries. Increases or decreases in the value of the Company's net foreign investments generally are tax-deferred for U.S. purposes, but the related hedge gains and losses are taxable currently. Therefore, the gross notional amounts of the contracts and debt designated as hedges exceed the Company's net foreign investments to result in effective hedging on an after-tax basis. The Company attempts to protect its net book value from the effects of fluctuations in currency exchange rates on its net monetary investments in non-U.S. dollar subsidiaries by selling the appropriate non-U.S. dollar currency in the forward market. However, under some circumstances, the Company may elect not to hedge its net monetary investments in certain foreign operations due to market conditions, including the availability of various currency contracts at acceptable costs. Information relating to the hedging of the Company's net monetary investments in non-U.S. dollar functional currency subsidiaries and their effects on cumulative translation adjustments is summarized below: AT NOVEMBER 30 (dollars in millions) 1999 1998 - ----------------------------------------------------------------------------- Net monetary investments in non-U.S. dollar functional currency subsidiaries $ 1,972 $ 1,364 - ----------------------------------------------------------------------------- Gross notional amounts of foreign exchange transactions and non-U.S. dollar debt designated as hedges(1) $ 3,309 $ 2,239 - ----------------------------------------------------------------------------- Cumulative translation adjustments resulting from net investments in subsidiaries with a non-U.S. dollar functional currency $ 57 $ 29 Cumulative translation adjustments resulting from realized or unrealized gains or losses on hedges, net of tax (84) (41) - ----------------------------------------------------------------------------- Total cumulative translation adjustments $ (27) $ (12) - ----------------------------------------------------------------------------- (1) Notional amounts represent the contractual currency amount translated at respective fiscal year-end spot rates. 12 EMPLOYEE COMPENSATION PLANS The Company has adopted a variety of compensation plans for certain of its employees as well as the Company's non-employee directors. These plans are designed to facilitate a pay-for-performance policy, provide compensation commensurate with other leading financial services companies and provide for internal ownership in order to align the interests of employees with the long-term interests of the Company's shareholders. These plans are summarized below. EQUITY-BASED COMPENSATION PLANS The Company is authorized to issue up to approximately 590 million shares of its common stock in connection with awards under its equity-based compensation plans. At November 30, 1999, approximately 320 million shares were available for future grant under these plans. STOCK OPTION AWARDS Stock option awards have been granted pursuant to several equity-based compensation plans. Historically, these plans have generally provided for the granting of stock options having an exercise price not less than the fair value of the Company's common stock (as defined in the plans) on the date of grant. Such options generally become exercisable over a one-to-five-year period and expire seven to 10 years from the date of grant. The following table sets forth activity relating to the Company's stock option awards (share data in millions):
FISCAL 1999 FISCAL 1998 FISCAL 1997 ----------------- ----------------- ---------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE - ---------------------------------------------------------------------------- ------------------------ -------------------------- Options outstanding at beginning of period 126.6 $20.04 128.2 $13.93 120.6 $ 8.52 Granted 23.2 56.65 31.2 34.39 40.4 24.08 Exercised (15.5) 17.12 (30.6) 9.12 (29.8) 5.84 Forfeited (3.0) 23.88 (2.2) 19.70 (3.0) 13.33 - ---------------------------------------------------------------------------- ------------------------ -------------------------- Options outstanding at end of period 131.3 $26.76 126.6 $20.04 128.2 $13.93 - ---------------------------------------------------------------------------- ------------------------ -------------------------- Options exercisable at end of period 93.6 $25.21 81.2 $19.69 88.6 $13.34 - ---------------------------------------------------------------------------- ------------------------ --------------------------
The following table presents information relating to the Company's stock options outstanding at November 30, 1999 (share data in millions):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE NUMBER EXERCISE LIFE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE - -------------------------------------------------------------------------------------- ---------------------------- $4.00-$9.99 40.1 $ 8.75 5.1 33.5 $ 8.69 $10.00-$19.99 13.8 15.21 3.9 5.8 14.54 $20.00-$29.99 33.5 26.43 7.2 25.8 26.36 $30.00-$39.99 19.2 35.54 8.8 13.5 35.52 $40.00-$49.99 5.0 44.19 6.9 4.4 44.12 $50.00-$63.00 19.7 59.01 9.8 10.6 59.45 - -------------------------------------------------------------------------------------- ---------------------------- Total 131.3 6.8 93.6 - -------------------------------------------------------------------------------------- ----------------------------
Deferred Compensation Awards The Company has made deferred compensation awards pursuant to several equity-based compensation plans. These plans provide for the deferral of a portion of certain key employees' compensation with payments made in the form of the Company's common stock or in the right to receive unrestricted shares (collectively, "Restricted Stock"). Compensation expense for all such awards (including those subject to forfeiture) amounted to $699 million, $415 million and $347 million in fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Compensation expense for Restricted Stock awards was determined based on the fair value of the Company's common stock (as defined in the plans). The number of Restricted Stock shares outstanding was 115 million at November 30, 1999, 118 million at November 30, 1998 and 124 million at November 30, 1997. Restricted Stock awarded under these plans are subject to restrictions on sale, transfer or assignment until the end of a specified restriction period, generally five to 10 years from the date of grant. Holders of Restricted Stock generally may forfeit ownership of a portion of their award if employment is terminated before the end of the relevant restriction period. Holders of vested Restricted Stock generally will forfeit ownership in certain limited situations, including termination for cause during the restriction period. Employee Stock Purchase Plan Under the Employee Stock Purchase Plan, eligible employees may purchase shares of the Company's common stock at not less than 85% of the fair value on the date of purchase. Employees of the Company purchased 1.4 million shares of common stock in fiscal 1999, 1.2 million shares in fiscal 1998 and 1.0 million shares in fiscal 1997. The discount to fair value was $9 million for fiscal 1999, $6 million for fiscal 1998 and $3 million for fiscal 1997. The plan is "non-compensatory" under APB No. 25, and, accordingly, no charge to earnings has been recorded for the amount of the discount to fair value. page 83 99 AR: page 84 Non-Employee Director Awards The Company sponsors an equity-based plan for non-employee directors under which shares of the Company's common stock have been authorized for issuance in the form of option grants, stock awards or deferred compensation. The effect of these grants on results of operations was not material. OTHER COMPENSATION PLANS Carried Interest Plans Under various Carried Interest Plans, certain key employees effectively participate in a portion of the Company's realized gains from certain of its investments in private equity transactions. Compensation expense for fiscal 1999, 1998 and 1997 related to these plans aggregated $5 million, $33 million and $38 million, respectively. Real Estate Fund Plans Under various plans, select employees and consultants to certain partnerships may participate in certain gains realized by the Company's real estate funds. Compensation expense relating to these plans aggregated $10 million, $3 million and $8 million for fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Profit Sharing Plans The Company sponsors qualified profit sharing plans covering substantially all U.S. employees and also provides cash payment of profit sharing to employees of its international subsidiaries. Contributions are made to eligible employees at the discretion of the Board of Directors based upon the financial performance of the Company. Profit sharing expense for fiscal 1999, fiscal 1998 and fiscal 1997 was $153 million, $115 million and $113 million, respectively. Employee Stock Ownership Plan The Company has a $140 million leveraged employee stock ownership plan, funded through an independently managed trust. The Employee Stock Ownership Plan ("ESOP") was established to broaden internal ownership of the Company and to provide benefits to its employees in a cost-effective manner. Each of the 3,493,477 ESOP preferred shares outstanding at November 30, 1999 is held by the ESOP trust, is convertible into 6.6 shares of the Company's common stock and is entitled to annual dividends of $2.78 per preferred share. The ESOP trust funded its stock purchase through a loan of $140 million from the Company. The ESOP trust note, due September 19, 2005 (extendible at the option of the ESOP trust to September 19, 2010), bears a 10-3/8% interest rate per annum with principal payable without penalty on or before the due date. The ESOP trust expects to make principal and interest payments on the note from funds provided by dividends on the shares of convertible preferred stock and contributions from the Company, if required. The note receivable from the ESOP trust is reflected as a reduction in the Company's shareholders' equity. Shares allocated to employees generally may not be withdrawn until the employee's death, disability, retirement or termination. Contributions to the ESOP by the Company and allocation of ESOP shares to employees are made annually at the discretion of the Board of Directors based on the financial performance of the Company. The cost of shares allocated to participants' accounts amounted to $5 million in fiscal 1999, $8 million in fiscal 1998 and $10 million in fiscal 1997. The ESOP debt service costs for fiscal 1999, fiscal 1998 and fiscal 1997 were paid from dividends received on preferred stock held by the plan and from Company contributions. In January 2000, all shares of the ESOP Convertible Preferred Stock were converted into common shares of the Company. PRO FORMA EFFECT OF SFAS NO. 123 Had the Company elected to recognize compensation cost pursuant to SFAS No. 123 for its stock option plans and the Employee Stock Purchase Plan, net income would have been reduced by $415 million, $214 million and $196 million for fiscal 1999, 1998 and 1997, respectively. Basic and diluted earnings per common share would have been reduced by $0.38, $0.19 and $0.17 for fiscal 1999, 1998 and 1997, respectively. The weighted average fair value at date of grant for stock options granted during fiscal 1999, 1998 and 1997 was $29.76, $11.19 and $8.38 per option, respectively. The fair value of stock options at date of grant was estimated using the Black-Scholes option pricing model utilizing the following weighted average assumptions: FISCAL FISCAL FISCAL 1999 1998 1997 - ------------------------------------------------------------------- Risk-free interest rate 5.9% 4.9% 6.0% Expected option life in years 5.6 4.8 6.0 Expected stock price volatility 38.6% 33.2% 28.0% Expected dividend yield 1.1% 1.3% 1.3% - ------------------------------------------------------------------- 13 EMPLOYEE BENEFIT PLANS The Company sponsors various pension plans for the majority of its worldwide employees. The Company provides certain other postretirement benefits, primarily health care and life insurance, to eligible employees. The Company also provides certain benefits to former or inactive employees prior to retirement. The following summarizes these plans: PENSION PLANS Substantially all of the U.S. employees of the Company and its U.S. affiliates are covered by non-contributory pension plans that are qualified under Section 401(a) of the Internal Revenue Code (the "Qualified Plans"). Unfunded supplementary plans (the "Supplemental Plans") cover certain executives. In addition to the Qualified Plans and the Supplemental Plans (collectively, the "U.S. Plans"), 10 of the Company's international subsidiaries also have pension plans covering substantially all of their employees. These pension plans generally provide pension benefits that are based on each employee's years of credited service and on compensation levels specified in the plans. For the Qualified Plans and the other international plans, the Company's policy is to fund at least the amounts sufficient to meet minimum funding requirements under applicable employee benefit and tax regulations. Liabilities for benefits payable under the Supplemental Plans are accrued by the Company and are funded when paid to the beneficiaries. The following tables present information for the Company's pension plans on an aggregate basis. Pension expense includes the following components: FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ------------------------------------------------------------------- U.S. Plans: Service cost, benefits earned during the period $ 98 $ 72 $ 54 Interest cost on projected benefit obligation 80 78 67 Expected return on plan assets (86) (87) (66) Net amortization 8 1 1 - ------------------------------------------------------------------- Total U.S. plans 100 64 56 Total international plans 18 12 9 - ------------------------------------------------------------------- Net pension expense $ 118 $ 76 $ 65 - ------------------------------------------------------------------- The following table provides the assumptions used in determining the Company's benefit obligation for the U.S. Plans: FISCAL FISCAL 1999 1998 - ------------------------------------------------------------------- Weighted average discount rate 7.50% 6.75% Rate of increase in future compensation levels 5.00% 5.00% Expected long-term rate of return on plan assets 9.00% 9.00% - ------------------------------------------------------------------- page 85 99 AR: page 86 The following table provides a reconciliation of the changes in the U.S. Plans' benefit obligation and fair value of plan assets for fiscal 1999 and fiscal 1998, as well as a summary of the U.S. Plans' funded status at November 30, 1999 and 1998: FISCAL FISCAL (dollars in millions) 1999 1998 - --------------------------------------------------------------------------- Reconciliation of benefit obligation: Benefit obligation at beginning of year $ 1,213 $ 1,089 Service cost 98 72 Interest cost 80 78 Plan amendments -- 4 Actuarial (gain) or loss (77) 38 Benefits paid (100) (59) Curtailment -- (9) - --------------------------------------------------------------------------- Benefit obligation at end of year $ 1,214 $ 1,213 - --------------------------------------------------------------------------- Reconciliation of fair value of plan assets: Fair value of plan assets at beginning of year $ 981 $ 994 Actual return on plan assets 185 7 Employer contributions 88 39 Benefits paid (100) (59) - --------------------------------------------------------------------------- Fair value of plan assets at end of year $ 1,154 $ 981 - --------------------------------------------------------------------------- Funded status: Funded status $ (60) $ (232) Unrecognized transition obligation 5 8 Unrecognized prior-service cost 27 28 Unrecognized (gain) or loss (44) 136 - --------------------------------------------------------------------------- Net amount recognized $ (72) $ (60) - --------------------------------------------------------------------------- Amounts recognized in the consolidated statements of financial condition consist of: Prepaid benefit cost $ 44 $ 17 Accrued benefit liability (117) (107) Intangible asset 1 30 - --------------------------------------------------------------------------- Net amount recognized $ (72) $ (60) - --------------------------------------------------------------------------- For the Supplemental Plans, the aggregate accumulated benefit obligation was $90 million and $82 million at November 30, 1999 and 1998, respectively. The Company also maintains a separate defined contribution pension plan which covers substantially all employees of the Company's U.K. subsidiaries (the "U.K. Plan"). Under the U.K. Plan, benefits are determined by the purchasing power of the accumulated value of contributions paid. In fiscal 1999, 1998 and 1997, the Company's expense related to the U.K. Plan was $25 million, $17 million and $15 million, respectively. POSTRETIREMENT BENEFITS The Company has unfunded postretirement benefit plans that provide medical and life insurance for eligible retirees, employees and dependents. At November 30, 1999 and 1998, the Company's accrued postretirement benefit costs were $99 million and $95 million, respectively. POSTEMPLOYMENT BENEFITS Postemployment benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, and continuation of health care and life insurance coverage provided to former or inactive employees after employment but before retirement. These benefits were not material to the consolidated financial statements in fiscal 1999, 1998 and 1997. 14 INCOME TAXES The provision for income taxes consists of: FISCAL FISCAL FISCAL (dollars in millions) 1999 1998 1997 - ---------------------------------------------------------------- Current: U.S. federal $1,868 $1,199 $1,079 U.S. state and local 491 372 348 Non-U.S. 738 476 338 - ---------------------------------------------------------------- 3,097 2,047 1,765 - ---------------------------------------------------------------- Deferred: U.S. federal 37 (26) (45) U.S. state and local (11) 1 (17) Non-U.S. (186) (30) (15) - ---------------------------------------------------------------- (160) (55) (77) - ---------------------------------------------------------------- Provision for income taxes $2,937 $1,992 $1,688 - ---------------------------------------------------------------- The following table reconciles the provision to the U.S. federal statu- tory income tax rate: FISCAL FISCAL FISCAL 1999 1998 1997 - -------------------------------------------------------------------- U.S. federal statutory income tax rate 35.0% 35.0% 35.0% U.S. state and local income taxes, net of U.S. federal income tax benefits 3.6 4.6 5.1 Lower tax rates applicable to non-U.S. earnings (2.3) (2.4) (1.1) Other 1.7 (0.2) 0.5 - -------------------------------------------------------------------- Effective income tax rate 38.0% 37.0% 39.5% - -------------------------------------------------------------------- As of November 30, 1999, the Company had approximately $3.1 billion of earnings attributable to foreign subsidiaries for which no provisions have been recorded for income tax that could occur upon repatriation. Except to the extent such earnings can be repatriated tax efficiently, they are permanently invested abroad. It is not practicable to determine the amount of income taxes payable in the event all such foreign earnings are repatriated, since such liability, if any, is dependent on circumstances existing if and when remittance occurs. Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company's deferred tax assets and liabilities at November 30, 1999 and 1998 are as follows: NOV. 30, NOV. 30, (dollars in millions) 1999 1998 - -------------------------------------------------------------------- Deferred tax assets: Employee compensation and benefit plans $1,486 $1,289 Loan loss allowance 282 371 Other valuation and liability allowances 593 604 Deferred expenses 163 -- Other 303 167 - -------------------------------------------------------------------- Total deferred tax assets 2,827 2,431 - -------------------------------------------------------------------- Deferred tax liabilities: Prepaid commissions 217 239 Valuation of inventory, investments and receivables 188 127 Other 194 237 - -------------------------------------------------------------------- Total deferred tax liabilities 599 603 - -------------------------------------------------------------------- Net deferred tax assets $2,228 $1,828 - -------------------------------------------------------------------- Cash paid for income taxes was $1,736 million, $1,591 million and $1,251 million in fiscal 1999, 1998 and 1997, respectively. 15 SEGMENT AND GEOGRAPHIC INFORMATION In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The adoption of this statement did not have an effect on the Company's financial position, results of operations, earnings per share or cash flows. This statement establishes new standards for disclosures that relate to business operating segments ("segments"). The segment data for prior periods has been restated to reflect the adoption of SFAS No. 131. In addition, the operating results of Morgan Stanley Dean Witter Online ("MSDW Online"), the Company's provider of electronic brokerage services, is included within the Securities segment. Previously, the Company had included MSDW Online's results within its Credit Services segment. The Company structures its segments primarily based upon the nature of the financial products and services provided to customers and the Company's management organization. The Company operates in three business segments: Securities, Asset Management and Credit Services through which it provides a wide range of financial products and services to its customers. The Company's Securities business includes securities underwriting, distribution and trading; merger, acquisition, restructuring, real estate, project finance and other corporate finance advisory activities; full-service and online brokerage services; research services; the trading of foreign exchange and commodities, as well as derivatives on a broad range of asset categories, rates and indices; securities lending; and private equity activities. The Company's Asset Management business provides global asset management advice and services to investors through a variety of product lines and brand names, including Morgan Stanley Dean Witter Advisors, Van Kampen Investments, Morgan Stanley Dean Witter Investment Management and Miller Anderson & Sherrerd. The Company's Credit Services business includes the issuance of the Discover Card, the Discover Platinum Card, the Morgan Stanley Dean Witter Card, the Private Issue Card and co-branded and affinity cards; and the operation of the Discover/NOVUS Network, a proprietary network of merchant and cash access locations. page 87 99 AR: page 88 Revenues and expenses directly associated with each respective segment are included in determining their operating results. Other revenues and expenses that are not directly attributable to a particular segment are allocated based upon the Company's allocation methodologies, generally based on each segment's respective revenues or other relevant measures. Selected financial information for the Company's segments is presented in the table below.
FISCAL 1999 (dollars in millions) SECURITIES ASSET MANAGEMENT CREDIT SERVICES TOTAL - --------------------------------------------------------------------------------------------------------------------- All other revenues $15,427 $2,060 $2,157 $19,644 Net interest 948 52 1,365 2,365 - --------------------------------------------------------------------------------------------------------------------- Net revenues 16,375 2,112 3,522 22,009 - --------------------------------------------------------------------------------------------------------------------- Income before taxes 5,864 767 1,097 7,728 Provision for income taxes 2,183 319 435 2,937 - --------------------------------------------------------------------------------------------------------------------- Net income 3,681 448 662 4,791 - --------------------------------------------------------------------------------------------------------------------- Total assets(1) $336,890 $4,927 $25,150 $366,967 - --------------------------------------------------------------------------------------------------------------------- FISCAL 1998 (dollars in millions) SECURITIES ASSET MANAGEMENT CREDIT SERVICES TOTAL - --------------------------------------------------------------------------------------------------------------------- All other revenues $10,439 $1,676 $1,407 $13,522 Net interest 1,100 87 1,735 2,922 - --------------------------------------------------------------------------------------------------------------------- Net revenues 11,539 1,763 3,142 16,444 - --------------------------------------------------------------------------------------------------------------------- Gain on sale of businesses -- 323 362 685 - --------------------------------------------------------------------------------------------------------------------- Income before taxes and cumulative effect of accounting change 3,441 694 1,250 5,385 Provision for income taxes 1,199 264 529 1,992 Cumulative effect of accounting change -- (117) -- (117) - --------------------------------------------------------------------------------------------------------------------- Net income 2,242 313 721 3,276 - --------------------------------------------------------------------------------------------------------------------- Total assets(1) $292,867 $4,537 $20,186 $317,590 - --------------------------------------------------------------------------------------------------------------------- FISCAL 1997 (dollars in millions) SECURITIES ASSET MANAGEMENT CREDIT SERVICES TOTAL - --------------------------------------------------------------------------------------------------------------------- All other revenues $9,261 $1,817 $978 $12,056 Net interest 763 64 1,950 2,777 - --------------------------------------------------------------------------------------------------------------------- Net revenues 10,024 1,881 2,928 14,833 - --------------------------------------------------------------------------------------------------------------------- Income before taxes(2) 3,026 565 757 4,274 Provision for income taxes(2) 1,185 230 284 1,688 - --------------------------------------------------------------------------------------------------------------------- Net income(2) 1,841 335 473 2,586 - --------------------------------------------------------------------------------------------------------------------- Total assets(1) $272,761 $5,117 $24,409 $302,287 - ---------------------------------------------------------------------------------------------------------------------
(1) Corporate assets have been fully allocated to the Company's business segments. (2) Fiscal 1997 total income before taxes, provision for income taxes and net income includes merger-related expenses of $74 million ($63 million net of taxes), which were not allocated to the respective segments. The Company operates in both U.S. and non-U.S. markets. The Company's non-U.S. business activities are principally conducted through European and Asian locations. The following table presents selected income statement information and the total assets of the Company's operations by geographic area. The principal methodologies used in preparing the geographic area data are as follows: commission revenues are recorded based on the location of the sales force; trading revenues are principally recorded based on location of the trader; investment banking revenues are based on location of the client; and asset management and portfolio service fees are recorded based on the location of the portfolio manager.
FISCAL 1999 (dollars in millions) U.S. EUROPE ASIA OTHER ELIMINATIONS TOTAL - ---------------------------------------------------------------------------------------------------------------------------- Net revenues $ 17,430 $ 3,741 $ 1,203 $ (42) $ (323) $ 22,009 Income before taxes 6,297 1,275 250 (94) -- 7,728 Total assets 364,852 164,410 37,626 17,698 (217,619) 366,967 - ---------------------------------------------------------------------------------------------------------------------------- FISCAL 1998 (dollars in millions) U.S. EUROPE ASIA OTHER ELIMINATIONS TOTAL - ---------------------------------------------------------------------------------------------------------------------------- Net revenues $ 12,837 $ 2,787 $ 1,023 $ 95 $ (298) $ 16,444 Income before taxes and cumulative effect of accounting change 3,955 1,089 287 54 -- 5,385 Total assets 328,450 139,923 25,712 9,138 (185,633) 317,590 - ---------------------------------------------------------------------------------------------------------------------------- FISCAL 1997 (dollars in millions) U.S. EUROPE ASIA OTHER ELIMINATIONS TOTAL - ---------------------------------------------------------------------------------------------------------------------------- Net revenues $ 12,464 $ 1,757 $ 866 $ 55 $ (309) $ 14,833 Income before taxes 3,617 399 240 18 -- 4,274 Total assets 298,923 126,138 30,656 8,805 (162,235) 302,287 - ----------------------------------------------------------------------------------------------------------------------------
16 BUSINESS ACQUISITION AND DISPOSITIONS During the second quarter of fiscal 1999, the Company completed its acquisition of AB Asesores, the largest independent financial services firm in Spain. AB Asesores has leading positions in personal investment, asset management, institutional research and brokerage, and investment banking. Through its approximately 300 financial advisors, it offers its individual investors proprietary mutual funds and other financial products. This acquisition reflects the Company's strategic initiative to build international Securities and Asset Management businesses to serve the needs of individual investors. The Company's fiscal 1999 results include the operations of AB Asesores since March 25, 1999, the date of acquisition. In fiscal 1998, the Company entered into several transactions reflecting its strategic decision to focus on growing its core Asset Management and Credit Services businesses. In the fourth quarter of fiscal 1998, the Company completed the sale of its Global Custody business. The Company also sold its interest in the operations of SPS Transaction Services, Inc., a 73%-owned, publicly held subsidiary of the Company. In addition, the Company sold certain credit card receivables relating to its discontinued BRAVO/(R)/ Card. The Company's aggregate net pre-tax gain resulting from these transactions was $685 million. In addition, during fiscal 1998 the Company sold its Prime Option/SM/ MasterCard/(R)/ portfolio, a business it had operated with NationsBank of Delaware, N.A., and its Correspondent Clearing business. The gains resulting from the sale of these businesses were not material to the Company's results of operations or financial condition. page 89 99 AR: page 90 17 QUARTERLY RESULTS (UNAUDITED)
1999 FISCAL QUARTER(2) 1998 FISCAL QUARTER ------------------------------------------ -------------------------------------------- (dollars in millions, except share and per share data) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH - -------------------------------------------------------------------------------- -------------------------------------------- Total revenues $ 8,405 $ 8,529 $ 8,370 $ 8,624 $ 7,585 $ 8,428 $ 7,498 $ 7,620 Interest expense 2,877 2,753 2,914 2,846 3,145 3,554 3,377 3,438 Provision for consumer loan losses 177 119 113 120 405 275 280 213 - -------------------------------------------------------------------------------- -------------------------------------------- Net revenues 5,351 5,657 5,343 5,658 4,035 4,599 3,841 3,969 - -------------------------------------------------------------------------------- -------------------------------------------- Total non-interest expenses 3,679 3,799 3,780 3,023 2,903 3,202 2,931 2,708 Gain on sale of businesses -- -- -- -- -- -- -- 685 - -------------------------------------------------------------------------------- -------------------------------------------- Income before income taxes and cumulative effect of accounting change 1,672 1,858 1,563 2,635 1,132 1,397 910 1,946 Provision for income taxes 635 707 593 1,002 441 545 284 722 - -------------------------------------------------------------------------------- -------------------------------------------- Income before cumulative effect of accounting change 1,037 1,151 970 1,633 691 852 626 1,224 Cumulative effect of accounting change -- -- -- -- (117) -- -- -- - -------------------------------------------------------------------------------- -------------------------------------------- Net income $ 1,037 $ 1,151 $ 970 $ 1,633 $ 574 $ 852 $ 626 $ 1,224 - -------------------------------------------------------------------------------- -------------------------------------------- Basic earnings per share(1) (3): Income before cumulative effect of accounting change $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.58 $ 0.72 $0.54 $ 1.08 Cumulative effect of accounting change -- -- -- -- (0.10) -- -- -- - -------------------------------------------------------------------------------- -------------------------------------------- Net income $ 0.93 $ 1.03 $ 0.87 $ 1.50 $ 0.48 $ 0.72 $ 0.54 $ 1.08 Diluted earnings per share(1) (3): Income before cumulative effect of accounting change $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.55 $ 0.69 $0.51 $ 1.04 Cumulative effect of accounting change -- -- -- -- (0.09) -- -- -- Net income $ 0.88 $ 0.98 $ 0.83 $ 1.42 $ 0.46 $ 0.69 $ 0.51 $ 1.04 - -------------------------------------------------------------------------------- -------------------------------------------- Dividends to common shareholders(1) $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.10 $ 0.10 $ 0.10 $ 0.10 Book value(1) $ 12.47 $ 13.00 $ 13.27 $ 14.85 $ 11.24 $ 10.98 $ 11.07 $ 11.94 Stock price range(1) (4) $31.16-48.50 $44.53-57.10$41.07-51.78 $43.19-63.63 $26.13-35.25 $34.88-42.22$29.03-48.44 $19.22-37.38 - -------------------------------------------------------------------------------- --------------------------------------------
(1) Amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 2000. (2) Certain reclassifications have been made to previously reported fiscal 1999 quarterly amounts. (3) Summation of the quarters' earnings per common share may not equal the annual amounts due to the averaging effect of the number of shares and share equivalents throughout the year. (4) Closing prices represent the range of sales per share on the New York Stock Exchange for the periods indicated. The number of stockholders of record at November 30, 1999 approximated 152,000. The number of beneficial owners of common stock is believed to exceed this number. EX-21 13 SUBSIDIARIES OF THE COMPANY Exhibit 21 MORGAN STANLEY DEAN WITTER & CO. /1/,/2/ --------------------------------- Subsidiaries As on February 1, 2000
Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- Dean Witter Alliance Capital Corporation Delaware 1993 Dean Witter Asset Corporation Delaware 1992 Dean Witter Capital Corporation Delaware 1987 Dean Witter Advisers Inc. Delaware 1989 Dean Witter Capital Advisers Inc. Delaware 1989 DW Administrators Inc. Delaware 1989 DW Window Coverings Holding, Inc. Delaware 1988 Dean Witter Futures and Currency Management Inc. Delaware 1987 Dean Witter Realty Inc. Delaware 1982 Dean Witter Global Realty Inc. Delaware 1995 Dean Witter Holding Corporation Delaware 1983 Civic Center Leasing Corporation Delaware 1983 Lee Leasing Corporation Delaware 1982 Lewiston Leasing Corporation Delaware 1983 Sartell Leasing Corporation Delaware 1982 Dean Witter Leasing Corporation Delaware 1982 Dean Witter Realty Credit Corporation Delaware 1982 Dean Witter Realty Fourth Income Properties Inc. Delaware 1986 Dean Witter Realty Growth Properties Inc. Delaware 1985 Dean Witter Realty Income Associates I Inc. Delaware 1983 Dean Witter Realty Income Associates II Inc. Delaware 1984 Dean Witter Realty Income Properties I Inc. Delaware 1983 Dean Witter Realty Income Properties II Inc. Delaware 1984 Dean Witter Realty Income Properties III Inc. Delaware 1985 Dean Witter Realty Yield Plus Assignor Inc. Delaware 1987 Dean Witter Realty Yield Plus Inc. Delaware 1987 Dean Witter Realty Yield Plus II Inc. Delaware 1988 DW Arboretum Plaza Inc. Delaware 1992 DW Bennington Property Inc. Delaware 1993 DW Chesterbrook Investors Inc. Delaware 1992 DW Duportail Investors Inc. Delaware 1992 DW Greycoat Inc. Delaware 1993 Green Orchard Inc. Massachusetts 1991 LLJV Funding Corporation Massachusetts 1984 Realty Management Services Inc. Delaware 1982 Dean Witter Reynolds Inc. Delaware 1968 Dean Witter Reynolds Insurance Agency (Massachusetts) Inc. Massachusetts 1975 Dean Witter Reynolds Insurance Agency (Ohio) Inc. Ohio 1977 Dean Witter Reynolds Insurance Agency (Oklahoma) Inc. Oklahoma 1976 Dean Witter Reynolds Insurance Agency (Texas) Inc. Texas 1978 Dean Witter Reynolds Insurance Services (Alabama) Inc. Alabama 1991 Dean Witter Reynolds Insurance Services (Arkansas) Inc. Arkansas 1977 Dean Witter Reynolds Insurance Services (Illinois) Inc. Illinois 1975 Dean Witter Reynolds Insurance Services, Inc. (Puerto Rico) Puerto Rico 1987 Dean Witter Reynolds Insurance Services (Maine) Inc. Maine 1995 Dean Witter Reynolds Insurance Services (Montana) Inc. Montana 1977 Dean Witter Reynolds Insurance Services (New Hampshire) Inc. New Hampshire 1977
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Year of Jurisdiction of Inc./ Incorporation Form. -------------------- -------- (Dean Witter Reynolds Inc., continued) Dean Witter Reynolds Insurance Services (South Dakota) Inc. South Dakota 1977 Dean Witter Reynolds Insurance Services (Wyoming) Inc. Wyoming 1977 DWR Special Partners Inc. Delaware 1982 Morgan Stanley Dean Witter Insurance Services (Arizona) Inc. Arizona 1974 Morgan Stanley Dean Witter Insurance Services Inc. Delaware 1972 Dean Witter Reynolds Insurance Agency (Indiana) Inc. Indiana 1975 FD Insurance Services, Inc. Delaware 1997 FD Insurance Services of Nevada, Inc. Nevada 1997 FD Insurance Services of New Mexico, Inc. New Mexico 1997 FD Insurance Services of Texas, Inc. Texas 1997 Dean Witter Reynolds Partners Inc. Delaware 1982 Dean Witter Reynolds Venture Equities Inc. Delaware 1981 Dean Witter Venture Management Inc. Delaware 1986 Dean Witter Venture Inc. Delaware 1993 Demeter Management Corporation Delaware 1977 DWD Electronic Financial Services Inc. Delaware 1997 Morgan Stanley Dean Witter Online Inc. California 1992 Bay One Technologies Group, Inc. California 1996 DWR Partnership Administrators Inc. Delaware 1989 Early Adopter Fund Manager Inc. Delaware 1999 Jolter Investments Inc. Delaware 1989 Morgan Rundle Inc. Delaware 1978 MR Ventures Inc. Delaware 1982 Morgan Stanley & Co. Incorporated Delaware 1969 Graystone Wealth Management Services LLC Delaware 1999 Morgan Stanley Flexible Agreements Inc. Delaware 1992 MS Securities Services Inc. Delaware 1981 Prime Dealer Services Corp. Delaware 1994 Morgan Stanley ABS Capital I Inc. Delaware 1997 Morgan Stanley ABS Capital II Inc. Delaware 1997 Morgan Stanley Advisory Partnership Inc. Delaware 1985 Morgan Stanley Asset Funding Inc. Delaware 1997 Morgan Stanley Baseball, Inc. Delaware 1989 Morgan Stanley Capital Group Inc. Delaware 1984 South Eastern Electric Development Corporation Delaware 1998 South Eastern Energy Corporation Delaware 1999 South Eastern Generating Corporation Delaware 2000 Morgan Stanley Capital International Inc. * Delaware 1998 Morgan Stanley Capital International S.A. Switzerland 1998 Morgan Stanley Capital (Jersey) Limited Jersey, Channel Is. 1987 Morgan Stanley Capital Partners III, Inc. Delaware 1993 Morgan Stanley Capital Services Inc. Delaware 1985 Morgan Stanley Commercial Mortgage Capital, Inc. Delaware 1994 Morgan Stanley Credit Products Ltd. Cayman Islands 1998 Morgan Stanley Dean Witter Advisors Inc. Delaware 1992 Morgan Stanley Dean Witter Services Company Inc. Delaware 1994 Morgan Stanley Dean Witter Capital I Inc. Delaware 1985 Morgan Stanley Dean Witter Commodities Management Inc. Delaware 1992 Morgan Stanley Dean Witter Distributors Inc. Delaware 1992 Morgan Stanley Dean Witter Equity Funding, Inc. Delaware 1998 Morgan Stanley Dean Witter HK RAV IV, LLC Delaware 1999
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Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- Morgan Stanley Dean Witter International Incorporated Delaware 1978 Dean Witter Reynolds GmbH Germany 1974 Dean Witter Reynolds (Hong Kong) Limited Hong Kong 1979 Dean Witter Reynolds International, Inc. Panama 1959 Dean Witter Reynolds (Geneva) S.A. Switzerland 1991 Dean Witter International Ltd. England 1988 Dean Witter Capital Markets International Ltd. (U.K.) England 1987 Dean Witter Futures Limited England 1977 Dean Witter Reynolds Limited England 1968 Dean Witter Reynolds International, S.A. France 1979 Dean Witter Reynolds (Lausanne) S.A. Switzerland 1973 Dean Witter Reynolds (Lugano) S.A. Switzerland 1989 Dean Witter Reynolds S.p.A. Italy 1978 Morgan Stanley Dean Witter Trust Company (Cayman) Ltd. Cayman Islands 1998 Morgan Stanley Dean Witter Nominees Limited Cayman Islands 1999 Tate Limited Cayman Islands 1999 Morgan Stanley Dean Witter Investment Group Inc. Delaware 1999 Morgan Stanley Dean Witter Investment Management Inc. Delaware 1980 Morgan Stanley Dean Witter Global Franchise Inc. Delaware 1997 Morgan Stanley Dean Witter Investment Management Holdings Inc. Delaware 1995 Miller Anderson & Sherrerd, LLP Pennsylvania 1971 MAS Fixed Income Partnership I, L.P. Delaware 1995 MAS Fixed Income I, LLC Delaware 1995 MAS Fixed Income Partnership II, LP Delaware 1995 MAS Fixed Income II, LLC Delaware 1995 MAS Fund Distribution, Inc. Pennsylvania 1992 Morgan Stanley Dean Witter Municipal Funding, Inc. Delaware 1998 Morgan Stanley Dean Witter Principal Funding, Inc. Delaware 1998 Morgan Stanley Dean Witter Trust FSB Federal Charter 1996 Morgan Stanley Dean Witter Wealth Management, Inc. Delaware 1998 Morgan Stanley Derivative Products Inc. Delaware 1994 Morgan Stanley Developing Country Debt II, Inc. Delaware 1991 Morgan Stanley Emerging Markets Inc. Delaware 1990 Morgan Stanley Equity (C.I.) Limited Jersey, Channel Is. 1995 Morgan Stanley Equity Finance Limited England 1997 Morgan Stanley Equity Investors Inc. Delaware 1988 Morgan Stanley Finance (Jersey) Limited Jersey, Channel Is. 1990 Morgan Stanley Funding, Inc. Delaware 1997 Morgan Stanley Global Emerging Markets, Inc. Delaware 1996 Morgan Stanley Insurance Agency Inc. Delaware 1985 Morgan Stanley International Incorporated Delaware 1963 AB Asesores Morgan Stanley Dean Witter, S.V., S. A. Spain 1999 AB Asesores Alicante, S.A. Spain 1996 AB Asesores Baleares, S.A. * Spain 1997 AB Asesores Bursatiles Aragon, S.A. * Spain 1988 AB Asesores Bursatiles Cordoba, S.A. * Spain 1992 AB Asesores Bursatiles Murcia, S.A. * Spain 1993 AB Asesores Bursatiles Sur, S.A. * Spain 1989 AB Asesores Ceuta, S.L. * Spain 1998 AB Asesores Castilla, S.A. * Spain 1996 AB Asesores CFMB Almeria, S.A. * Spain 1998 AB Asesores Girona, S.A. Spain 1996
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Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- (Morgan Stanley International Incorporated, continued) (AB Asesores Morgan Stanley Dean Witter, S.V., S. A., continued) AB Asesores Gran Canaria, S.A. Spain 1995 AB Asesores Leon, S.A. Spain 1994 AB Asesores Tenerife, S.A. Spain 1996 AB Asesores Gestion Fondos, SGIIC, S.A. Spain 1987 AB Asesores Gestion Pensiones EGFP, S.A. Spain 1992 AB Asesores Wellesley, S.A. Spain 1998 Inversiones Tosas, S.A. Spain 1987 Bank Morgan Stanley AG Switzerland 1973 Cabot Aircraft Services Limited Ireland 1997 Morgan Stanley AB Sweden 1999 Morgan Stanley AOZT Russia 1994 Morgan Stanley Asia Holdings I Inc. Delaware 1990 Morgan Stanley Asia Holdings II Inc. Delaware 1990 Morgan Stanley Asia Holdings III Inc. Delaware 1990 Morgan Stanley Asia Holdings IV Inc. Delaware 1990 Morgan Stanley Asia Holdings V Inc. Delaware 1990 Morgan Stanley Asia Holdings VI Inc. Delaware 1990 Morgan Stanley Asia Pacific (Holdings) Limited Cayman Islands 1995 Fosbury Investments Cooperatieve U.A. The Netherlands 1998 Morgan Stanley Asia Regional (Holdings) II LLC Cayman Islands 1995 Morgan Stanley Asia Regional (Holdings) III LLC Cayman Islands 1995 Morgan Stanley Dean Witter (Singapore) Holdings Pte Ltd Rep. of Singapore 1999 Morgan Stanley Dean Witter Asia (Singapore) Pte Rep. of Singapore 1992 Morgan Stanley Dean Witter Capital Group (Singapore) Pte Rep. of Singapore 1990 Morgan Stanley Dean Witter Futures (Singapore) Pte Rep. of Singapore 1992 Morgan Stanley Dean Witter Private Equity (Asia) Pte Ltd Rep. of Singapore 1999 Morgan Stanley Dean Witter Investment Management Company Rep. of Singapore 1990 Morgan Stanley Asia Regional (Holdings) IV LLC Cayman Islands 1995 Morgan Stanley Dean Witter (Hong Kong) Holdings Hong Kong 1998 MSDW Asia Securities Products LLC Cayman Islands 1995 Morgan Stanley Dean Witter Asia Limited Hong Kong 1984 Morgan Stanley Dean Witter Futures (Hong Kong) Limited Hong Kong 1988 Morgan Stanley Dean Witter Hong Kong Securities Limited Hong Kong 1988 Morgan Stanley Dean Witter Pacific Limited Hong Kong 1987 MSDW-JL Holdings I Limited Cayman Islands 1998 Morgan Stanley Japan (Holdings) Ltd. Cayman Islands 1984 Morgan Stanley Japan Limited Hong Kong 1993 Morgan Stanley Dean Witter Japan Limited Cayman Islands 1999 Morgan Stanley Asset & Investment Trust Management Co., Limited Japan 1987 Morgan Stanley Asset Management S.A. Luxembourg 1988 Morgan Stanley Canada Limited Canada 1982 Morgan Stanley Capital SA France 1989 Morgan Stanley Capital (Luxembourg) S.A. Luxembourg 1993 Morgan Stanley Dean Witter Asia (China) Limited Hong Kong 1991 Morgan Stanley Dean Witter Asia (Taiwan) Ltd. Rep. of China 1990 Morgan Stanley Dean Witter Australia Limited Australia 1989 Morgan Stanley Dean Witter Australia Finance Limited Australia 1999 Morgan Stanley Dean Witter Australia Securities Limited Australia 1997 Morgan Stanley Dean Witter Australia Securities (Nominee) Pty Limited Australia 1999 Morgan Stanley Dean Witter (Espana) SA Spain 1998
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Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- (Morgan Stanley International Incorporated, continued) Morgan Stanley Dean Witter (Europe) Limited England 1998 Morgan Stanley Dean Witter Financial Holdings, LLC Delaware 1999 Morgan Stanley Dean Witter Hong Kong Finance Limited Hong Kong 1999 Morgan Stanley Dean Witter Fixed Income Limited Jersey, Channel Is. 1999 Narib Limited Jersey, Channel Is. 1999 Willow Capital Limited Jersey, Channel Is. 1999 Woburn Investments Cooperatieve UA The Netherlands 1999 Morgan Stanley Dean Witter UK Capital Limited England 1999 Morgan Stanley Funding Limited Jersey, Channel Is. 1997 Morgan Stanley Funding II Limited Jersey, Channel Is. 1999 Morgan Stanley Group (Europe) England 1988 Delta AB 1 General Partner Limited England 1996 Morgan Stanley Capital Group Limited England 1993 Morgan Stanley Dean Witter Bank Limited England 1999 Morgan Stanley Dean Witter Card Services Limited England 1999 Morgan Stanley Dean Witter Investment Management Limited England 1986 Morgan Stanley (Europe) Limited England 1993 Morgan Stanley Finance plc England 1993 MSDW Corporate Holdings Limited England 2000 MSDW Corporate Holdings I Limited Jersey, Channel Is. 1999 Sunningdale Investments Cooperatieve UA The Netherlands 1999 MSDW Corporate Holdings II Limited Jersey, Channel Is. 1999 Morgan Stanley Property Management (UK) Limited England 1987 Morgan Stanley Services (UK) Limited England 1993 Morgan Stanley (Structured Products) Jersey Limited Jersey, Channel Is. 1994 Morgan Stanley UK Group England 1976 Morgan Stanley & Co. International Limited England 1986 Morgan Stanley International Nominees Limited England 1994 Morgan Stanley & Co. Limited England 1986 Morgan Stanley Securities Limited England 1986 Morstan Nominees Limited England 1986 MSDW Equity (UK) Plc England 1998 MS Leasing UK Limited England 1991 Morgan Stanley Dean Witter Hong Kong Nominees Limited Hong Kong 1988 Morgan Stanley Dean Witter Mauritius Company Limited Mauritius 1993 Morgan Stanley Dean Witter Investment Management Private Limited India 1993 Morgan Stanley India Securities Limited India 1995 JM Morgan Stanley Securities Limited * India 1998 Morgan Stanley Dean Witter (Thailand) Limited Thailand 1997 Morgan Stanley Holding (Deutschland) GmbH Germany 1990 Morgan Stanley Bank AG Germany 1986 Morgan Stanley International Insurance Ltd. Bermuda 1995 Morgan Stanley Latin America Incorporated Delaware 1994 Morgan Stanley Administadora de Carteiras S.A. Brazil 1996 Morgan Stanley Dean Witter do Brasil Ltda. Brazil 1995 Morgan Stanley Dean Witter Distributidora de Titulos e Valores Mobilarios SA Brazil 1998 Morgan Stanley Financial Products Ltd. Cayman Islands 1997 MSLA Advisors Incorporated Delaware 1995 Morgan Stanley Middle East Inc. Delaware 1997 Morgan Stanley Mortgage Servicing Ltd. England 1997 Morgan Stanley Offshore Investment Company Ltd. Cayman Islands 1987
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Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- (Morgan Stanley International Incorporated, continued) Morgan Stanley S.A. France 1992 Morgan Stanley Dean Witter (France) SA France 1998 Morgan Stanley Services (Jersey) Limited Jersey, Channel Is. 1997 Morgan Stanley South Africa (Pty) Limited South Africa 1994 Morgan Stanley SPV I (Cayman Islands) LLC Cayman Islands 1996 Farlington Corporation Ireland 1996 ITALSEC S.r.l. Italy 1996 Morgan Stanley SPV II (Cayman Islands) LLC Cayman Islands 1996 Morgan Stanley Trading Beteiligungs-GmbH Germany 1993 Morgan Stanley Trading GmbH & Co. KG Germany 1994 Morgan Stanley Wertpapiere GmbH Germany 1989 MS Italy (Holdings) Inc. Delaware 1990 Banca Morgan Stanley SpA Italy 1990 MS LDC, Ltd. Delaware 1991 MSDW Capital Investments Inc. Delaware 1999 MSAM/Kokusai (Cayman Islands), Inc. Cayman Islands 1996 MSAM/Kokusai II (Cayman Islands), Inc. Cayman Islands 1997 MSDW Investment Holdings Limited Cayman Islands 1999 Cabot 2 Limited England 1978 MS Cabot Inc. Delaware 1995 MSDW Investment Holdings (US) Inc. Delaware 1999 MSDW Investment Holdings (UK) Ltd. England 1999 Acorn Group plc England 1983 Applied Risc Technologies Limited England 1995 Cabot 7 Limited England 1994 Cabot 3 Limited England 1982 Cabot 4 Limited England 1997 Cabot 5 Limited England 1980 Cabot 6 Limited England 1983 MSL Incorporated Delaware 1976 Morgan Stanley (Jersey) Limited Jersey, Channel Is. 1986 Morgan Stanley LEF I, Inc. Delaware 1989 Morgan Stanley Leveraged Capital Fund Inc. Delaware 1985 Morgan Stanley Leveraged Equity Fund II, Inc. Delaware 1987 Morgan Stanley Dean Witter Private Equity Asia Limited Hong Kong 1992 Morgan Stanley Leveraged Equity Holdings Inc. Delaware 1987 Morgan Stanley Market Products Inc. Delaware 1987 Morgan Stanley Mortgage Capital Inc. New York 1984 Morgan Stanley Overseas Finance Ltd. Cayman Islands 1997 Morgan Stanley Overseas Services (Jersey) Limited Jersey, Channel Is. 1986 Morgan Stanley Real Estate Investment Management Inc. Delaware 1990 Morgan Stanley Real Estate Fund, Inc. Delaware 1989 MSREF I, L.L.C. Delaware 1995 MSREF I-CO, L.L.C. Delaware 1995 Morgan Stanley Real Estate Investment Management II, Inc. Delaware 1994 MSREF II-CO, L.L.C. Delaware 1995 Morgan Stanley Realty Incorporated Delaware 1969 BH-MS Realty Inc. Delaware 1983 BH-MS Leasing Inc. Delaware 1983 BH-Sartell Inc. Delaware 1983 Brooks Harvey & Co., Inc. Delaware 1971
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Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- (Morgan Stanley Realty Incorporated, continued) Japan Realty Finance Company Cayman Islands 1998 Kearny Global, Inc. Delaware 1998 Corzo Venezia S.R.L. Italy 1999 Kearny Germany GmbH Germany 1999 Kearny Real Estate Company Delaware 1998 Kearny Global Investors, K.K. Japan 1998 Lombard Servicing Inc. Japan 1999 Morgan Stanley Realty of California Inc. California 1970 Morgan Stanley Realty of Illinois Inc. Delaware 1989 Morgan Stanley Realty Japan Ltd. Japan 1998 MSDW Canary Wharf, L.L.C. Delaware 1999 Tokyo Realty Investment Company Cayman Islands 1998 The Morgan Stanley Scholarship Fund Inc. (Not-For-Profit) Delaware 1985 Morgan Stanley Securitization Funding Inc. Delaware 1998 Morgan Stanley Senior Funding, Inc. Delaware 1996 Morgan Stanley Services Inc. Delaware 1988 Morgan Stanley Structured Products (Cayman) I Limited Cayman Islands 1997 Morgan Stanley Structured Products (Cayman) II Limited Cayman Islands 1997 Morgan Stanley Technical Services Inc. Delaware 1989 Morgan Stanley Technical Services MB/VC Inc. Delaware 1993 Morgan Stanley Venture Capital Inc. Delaware 1984 Morgan Stanley Venture Capital II, Inc. Delaware 1992 Morgan Stanley Venture Capital III, Inc. Delaware 1996 Morgan Stanley Ventures Inc. Delaware 1984 Morstan Development Company, Inc. Delaware 1971 Moranta, Inc. Georgia 1979 Porstan Development Company, Inc. Oregon 1982 MS 10020, Inc. Delaware 1994 MS 10036, Inc. Delaware 1996 MS Capital Cayman Ltd. Cayman Islands 1997 MS Capital Holdings Inc. Delaware 1997 Morgan Stanley Capital (Delaware) L.L.C. Delaware 1997 MS Financing Inc. Delaware 1986 G.H.Y. Capital II B.V. The Netherlands 1999 Corso Marconi Immobiliare Limited Liability Company Delaware 1998 Corso Marconi Immobiliare S.a.r.l. Luxembourg 1998 Octavian S.a.r.l. Luxembourg 1999 Luxco France S.a.r.l. Luxembourg 1999 Luxco Germany S.a.r.l. Luxembourg 1999 Alfa Romeo Vertriebsgesellschaft mbH * Germany 1969 Goliath 89.Beteiligungs-Und Verwaltungesellschaft mbH Germany 1999 Luxco Spain S.a.r.l. Luxembourg 1999 Luxco UK S.a.r.l. Luxembourg 1999 Inmap 2000 (U.K.) Limited England 1996 Saigarage Genova SpA Italy 1992 Corso Marconi Immobiliare 2 Limited Liability Company Delaware 1999 Morgan Stanley 750 Building Corp. Delaware 1994 G.H.Y. Capital B.V. The Netherlands 1998 MS Tokyo Properties Ltd. Japan 1989 MSDW LTCP, L.L.C. Delaware 1998 MSDW 745, LLC Delaware 1998
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Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- MS Holdings Incorporated Delaware 1995 MS Real Estate Special Situations Inc. Delaware 1997 MS Real Estate Special Situations GP Inc. Delaware 1997 MS Synfuels, Inc. Delaware 1998 MS Technology Holdings, Inc. Delaware 1997 MS Venture Capital (Japan) Inc. Delaware 1989 MSAM Holdings II, Inc. Delaware 1996 Van Kampen Investments Inc. Delaware 1992 American Capital Contractual Services, Inc. New York 1957 Riverview International Inc. Delaware 1998 Van Kampen Advisors Inc. Delaware 1974 Van Kampen Asset Management Inc. Delaware 1936 Van Kampen Funds Inc. Delaware 1974 Van Kampen Exchange Corp. California 1975 Van Kampen Insurance Agency of Illinois Inc. Illinois 1996 Van Kampen Insurance Agency of Texas Inc. Texas 1996 Van Kampen Investment Advisory Corp. Delaware 1982 Van Kampen Investor Services Inc. Delaware 1987 Van Kampen Management Inc. Delaware 1990 Van Kampen Recordkeeping Services Inc. Delaware 1997 Van Kampen System Inc. Delaware 1996 Van Kampen Trust Co. Texas 1986 VKAC Cayman Limited Cayman Islands 1995 MSBF Inc. Delaware 1995 MSCP III Holdings, Inc. Delaware 1994 MSDW Capital Partners IV, Inc. Delaware 1998 MSDW Capital Trust I Delaware 1998 MSDW CPIV Holdings, Inc. Delaware 1998 MSDW European Real Estate Special Situations Inc. Delaware 1999 MSDW International Employee Services LLC Delaware 1998 MSDW Offshore Equity Services Inc. Delaware 1998 JJ&J Investments Limited Cayman Islands 1999 MSDW May PERC I Limited Cayman Islands 1999 MSDW Equity Finance Services I (Cayman) Ltd. Cayman Islands 1998 MSDW Equity Investments Limited Cayman Islands 1999 MSDW Offshore Equity Services (Korea) Inc. Delaware 1999 MSDW Structured Asset Corp. Delaware 1998 MSDW Synfuels II, Inc. Delaware 1998 MSDW Synfuels III, Inc. Delaware 1998 MSDW Venture Partners IV, Inc. Delaware 1999 MSDW VP IV Holdings, Inc. Delaware 1999 MSIT Holdings, Inc. Delaware 1996 SL Partners MD Side Fund, LLC Delaware 1999 MSREF II, Inc. Delaware 1994 MSREF II, L.L.C. Delaware 1995 MSREF III, Inc. Delaware 1997 MSUH Holdings I, Inc. Delaware 1996 MSUH Holdings II, Inc. Delaware 1996 MS SP Urban Horizons, Inc. Delaware 1996 MS Urban Horizons, Inc. Delaware 1994 NOVUS Credit Services Inc. Delaware 1960 Bank of New Castle Delaware 1988
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Year of Jurisdiction of Inc./ Incorporation Form. ------------- ----- (NOVUS Credit Services Inc., continued) Discover Brokerage Direct, Inc. Delaware 1999 Discover Card Limited Gibraltar 1992 Discover Financial Services, Inc. Delaware 1985 Discover Services Corporation Delaware 1990 Greenwood Trust Company Delaware 1911 GTC Insurance Agency, Inc. Delaware 1999 GTC Insurance Agency, Inc. of Alabama Alabama 1999 Morgan Stanley Dean Witter Bank, Inc. Utah 1990 MWF Insurance Agency, Inc. Delaware 1999 MWF Insurance Agency, Inc. of Alabama Alabama 1999 Mountain Receivables Corp. Delaware 1996 NCL Investments, Inc. Delaware 1997 Morgan Stanley Dean Witter Credit Corporation of Pennsylvania Pennsylvania 1967 Morgan Stanley Dean Witter Credit Corporation Delaware 1969 Morgan Stanley Dean Witter Credit Corporation of Iowa Iowa 1977 Morgan Stanley Dean Witter Credit Corporation of Minnesota Minnesota 1994 Morgan Stanley Dean Witter Credit Corporation of Tennessee Tennessee 1975 NOVUS Financial Corporation of Washington Washington 1991 Discover Financial Services (Canada), Inc. Canada 1985 SCFC Receivables Corp. Delaware 1989 Discover Receivables Financing Corporation Delaware 1989 Discover Receivables Financing Group, Inc. Delaware 1990 SCFC Receivables Financing Corporation Delaware 1988 SPS Transaction Services, Inc. Delaware 1991 Utah Receivables Financing Corporation Delaware 1997 One Water Corporation Massachusetts 1985 Open Road Airways, Inc. Delaware 1998 PG Holdings, Inc. Delaware 1991 PG Investors, Inc. Delaware 1991 PG Investors II, Inc. Delaware 1996 PG Investors III, Inc. Delaware 2000 Pierpont Power, Inc. New York 1987 Reynolds Securities Inc. Delaware 1978 Romley Computer Leasing Inc. Delaware 1985 Strategic Investments I, Inc. Delaware 1996 Tempo-GP, Inc. Delaware 1986 Tempo-LP, Inc. Delaware 1986 Zephyr (Cayman) Limited Cayman Islands 1999
/1/ Morgan Stanley Dean Witter & Co. was incorporated in Delaware in 1981. /2/ "*" indicates that one or more minority shareholders are non-affiliates. -9- EX-23.1 14 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following Registration Statements of Morgan Stanley Dean Witter & Co. of our reports dated January 21, 2000, included in and incorporated by reference in this Annual Report on Form 10-K of Morgan Stanley Dean Witter & Co. for the fiscal year ended November 30, 1999: Filed on Form S-3: Registration Statement No. 33-57202 Registration Statement No. 33-60734 Registration Statement No. 33-89748 Registration Statement No. 33-92172 Registration Statement No. 333-07947 Registration Statement No. 333-22409 Registration Statement No. 333-27881 Registration Statement No. 333-27893 Registration Statement No. 333-27919 Registration Statement No. 333-46403 Registration Statement No. 333-46935 Registration Statement No. 333-76111 Registration Statement No. 333-75289 Filed on Form S-4: Registration Statement No. 333-25003 Filed on Form S-8: Registration Statement No. 33-62374 Registration Statement No. 33-63024 Registration Statement No. 33-63026 Registration Statement No. 33-78038 Registration Statement No. 33-79516 Registration Statement No. 33-82240 Registration Statement No. 33-82242 Registration Statement No. 33-82244 Registration Statement No. 333-04212 Registration Statement No. 333-28141 Registration Statement No. 333-25003 Registration Statement No. 333-28263 Registration Statement No. 333-62869 Registration Statement No. 333-78081 Registration Statement No. 333-95303 /s/ Deloitte & Touche LLP New York, New York February 24, 2000 EX-23.2 15 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS TO THE DIRECTORS OF MORGAN STANLEY DEAN WITTER & CO. We consent to the incorporation by reference in the Registration Statement No. 333-28263 of Morgan Stanley Dean Witter & Co. on Form S-8 of our report dated 22 February 2000 relating to the Morgan Stanley UK Group Profit Sharing Schemes, appearing in the Annual Report on Form 10-K of Morgan Stanley Dean Witter & Co. for the fiscal year ended 30 November 1999. /s/ DELOITTE & TOUCHE DELOITTE & TOUCHE Chartered Accountants 22 February 2000 EX-27 16 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the Consolidated Statements of Financial Condition at November 30, 1999 and the Consolidated Statements of Income for the Twelve Months Ended November 30, 1999 and is qualified in its entirety by reference to such consolidated financial statements. 1,000,000 YEAR NOV-30-1999 DEC-01-1999 NOV-30-1999 22,038 66,158 70,366 85,064 112,042 2,204 366,967 48,639 64,790 104,450 30,080 61,968 28,604 0 670 12 16,332 366,967 5,983 13,755 2,921 4,523 5,856 11,390 8,398 7,728 7,728 0 0 4,791 4.33 4.10
EX-99.1 17 CHANGE IN EMPLOYMENT STATUS AGREEMENT Exhibit 99.1 CHANGE IN EMPLOYMENT STATUS AGREEMENT ("Agreement") I, Christine A. Edwards, and Morgan Stanley Dean Witter & Co., a Delaware corporation (the "Company"), agree to resolve all issues regarding my employment status as follows: Section 1 -- Change in Employment Status ------------- --------------------------- (a) I resigned as the Executive Vice President, Chief Legal Officer and Secretary of the Company and, except as provided in Section 1(b), all other officer positions, offices and directorships with the Company and its affiliates effective on June 10, 1999. (b) The Company and I acknowledge and agree that I will remain an active employee of the Company until January 31, 2000 (the "Retirement Date"), however, I will report to the office on an "as needed" basis. (c) The Company and I acknowledge and agree that following my retirement, I will be available as an Advisory Director of Morgan Stanley Dean Witter ("MSDW") to provide such consulting services as the Company may reasonably require from such retirement for such period of time and on such terms as the Company and I may mutually agree. Such consulting services shall relate to financial services modernization, antitrust issues relating to the credit card industry, changes in national trading marketplaces, corporate governance, employment practices issues and such other matters as we may mutually agree. (d) The Company and I acknowledge that we entered into a separate release agreement contemporaneously herewith (the "Release Agreement"). Section 2 -- Payments and Benefits ------------- --------------------- (a) In General: I may revoke the Release Agreement within seven days after I sign it. If I do not revoke the Release Agreement, the Company will pay me the amounts and provide me with the benefits set forth in this Section in consideration for my acceptance of the terms of this Agreement and the Release Agreement. I acknowledge that if I fail to comply with the terms and conditions of this Agreement or the Release Agreement, the Company is not required to pay me any amount or provide me with any benefit set forth in Section 2(d) that becomes payable or effective on or after the date of such failure, subject to the requirement to arbitrate such matters as provided in Section 4. (b) Continuation of Base Salary and Employee Benefits: The Company will pay me my base salary, at the rate currently in effect (which the parties acknowledge is $300,000 per year), less any applicable withholding and deductions, until the Retirement Date, notwithstanding my earlier death or disability. If I voluntarily terminate my employment with the Company prior to the Retirement Date, within 30 days after such voluntary termination, the Company will pay me a lump sum cash payment equal to the amount of base salary payable to me pursuant to the preceding sentence that remains unpaid and that would otherwise have been payable to me had I remained employed with the Company until the Retirement Date. The Company also will continue to provide or make available to me all employee benefits currently provided or made available (other than incentive compensation or stock-based benefits), subject to my payment of any applicable premium or contribution, until the earliest of the date I voluntarily terminate my employment, the Retirement Date or the date of my death, notwithstanding my earlier disability. (c) Reimbursement of Legal Fees: Except for disputes arising after this Agreement is executed that are covered by Section 4, the Company will reimburse me for all legal fees and expenses incurred by me in connection with my change of employment status with the Company promptly following my submission of written documentation (in reasonable detail) of such fees and expenses. (d) Annual Bonus and Severance Payment: The Company will pay me a cash bonus for 1999 in an amount not less than seven-twelfths (7/12ths) of the value of my above base compensation (defined as my total reward less my base salary) for the Company's fiscal year 1998. Such bonus will be reduced by any applicable withholding and deductions and paid at the same time that bonuses for 1999 are paid to other senior executives of the Company, notwithstanding my earlier death, disability, termination of or retirement from employment. In addition, the Company will pay me a severance payment in an amount equal to the sum of (1) the amount I would have received under Section 4.2(a) of the Morgan Stanley Dean Witter & Co. Key Executive Employment Plan, as amended, and (2) five-twelfths (5/12ths) of the value of my above base compensation for the Company's fiscal year 1998. Such severance payment will be reduced by any applicable withholding and deductions and paid within 30 days of my signing this Agreement, notwithstanding my earlier death, disability, termination of or retirement from employment. (e) Stock Option and Restricted Stock Unit Awards: Any awards of stock options and restricted stock units granted to me that by their terms were not previously vested have been vested. All forfeiture provisions applicable to, and transfer restrictions imposed by the Company on, any of my stock option awards and any shares of the Company's common stock underlying any of my stock option awards have been removed. All forfeiture provisions applicable to any restricted stock units held by me have been removed. All restricted stock units held by me shall become payable in accordance with their terms. To the extent not inconsistent with the preceding, the termination of my employment is considered to be and will be treated by the Company as (i) a "full career retirement" for purposes of any awards granted to me in December 1997 and December 1998 and (ii) a "retirement" for purposes of all other outstanding options and restricted stock units granted to me. (f) Restoration Option Rights: The restoration option rights granted to me in connection with awards of stock options will not terminate upon the termination of my employment and instead will remain in effect until the earlier of the expiration of the underlying stock options or my election to terminate my status as an Advisory Director of MSDW. (g) Continuation of Medical Plan Coverage: The Company will continue to provide medical plan coverage to me at the level in effect upon the termination of my 2 employment with the Company (provided that I continue to timely make any regularly required contributions under such plan) until the earliest of (i) my attainment of age 65, (ii) my eligibility for coverage under another group medical plan, or (iii) the termination of the Company's group medical plan and failure of the Company to adopt a replacement plan; provided that if the other group medical plan referred to in clause (ii) above contains any exclusion or limitation with respect to any preexisting condition I or any of the members of my family have, the Company will continue to provide medical plan coverage to me as provided herein. (h) D&O Coverage: The Company will continue to provide to me at the level provided to other senior executive officers of the Company directors' and officers' insurance coverage with respect to all ongoing outside activities originally undertaken by me on behalf of the Company, including, without limitation, my membership on the boards of directors and committees of exchanges, self-regulatory organizations and trade associations. (i) Retirement and Deferred Compensation Benefits: Any retirement and/or deferred compensation benefits payable to me under the qualified and non- qualified retirement and deferred compensation plans of the Company and its predecessors will be calculated and become payable in accordance with the terms and conditions of such plans, it being understood that the termination of my employment with the Company is considered to be and will be treated by the Company as a "full career retirement" or "retirement", as applicable, under any retirement plan where relevant to determine my eligibility for benefits but not the amount of or time of commencement of such benefits. (j) Riverwoods Office: Continuing for so long as I am an Advisory Director of MSDW, the Company will provide an appropriate office and secretarial support to me at its offices in Riverwoods, Illinois. Section 3 -- Miscellaneous ------------- ------------- (a) Entire Agreement: This Agreement and the Release Agreement constitute the entire agreement between the parties regarding the matters which are the subject hereof and supersede and are in full substitution for any and all prior agreements and understandings among them relating to such matters, and no party shall be liable or bound to the other party hereto in any manner with respect to such subject matter by any warranties, representations, covenants or agreements except as specifically set forth herein. This Agreement may not be modified or cancelled in any manner except by a writing signed by both me and an authorized officer of the Company. If any provision in this Agreement is found to be unenforceable, all other provisions will remain fully enforceable. (b) Successors: This Agreement inures to the benefit of and binds my heirs, administrators, representatives, executors, successors, and assigns, and will inure to the benefit of all Released Parties (as defined in the Release Agreement) and their respective heirs, administrators, representatives, executors, successors, and assigns. This Agreement also binds the Company and its related entities, subsidiaries, affiliates and successors. (c) Interpretation: This Agreement shall be construed as a whole according to its fair meaning. It shall not be construed strictly for or against me or any Released Party. 3 Unless the context indicates otherwise, the term "or" shall be deemed to include the term "and" and the singular or plural number shall be deemed to include the other. Captions are intended solely for convenience of reference and shall not be used in the interpretation of this Agreement. This Agreement shall be governed by the statutes and common law of the State of New York, excluding its statutes or common law regarding choice of laws. (d) Taxes: I acknowledge that I am responsible for paying any taxes with respect to payments and benefits that I receive pursuant to this Agreement. Section 4 -- Arbitration of Disputes ------------- ----------------------- The Company and I agree to be bound by the arbitration provisions in Section 7 of the Release Agreement for resolution of any dispute with respect to this Agreement. This arbitration agreement applies to, among others, disputes about the validity, interpretation, or effect of this Agreement or alleged violations of it, or other statutory violation claims. EXECUTED at Lake Forest, Illinois, this 1st day of September, 1999. /s/ Christine A. Edwards ------------------------ Christine A. Edwards EXECUTED at New York, New York, this 1st day of September, 1999. MORGAN STANLEY DEAN WITTER & CO. BY: /s/ John H. Schaefer --------------------- Name: John H. Schaefer Title: Executive Vice President 4 EX-99.2 18 COMBINED FINANCIAL STATEMENTS Exhibit 99.2 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN Combined Financial Statements for the years 31 December 1999 and 1998 Deloitte & Touche Stonecutter Court 1 Stonecutter Street London EC4A 4TR MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN REPORT AND COMBINED FINANCIAL STATEMENTS 1999 AND 1998 CONTENTS Page Report of the Independent Chartered Accountants 1 Statement of the financial condition 2 Statement of income and changes in Schemes equity 3 Notes to the financial statements 4 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN REPORT OF THE INDEPENDENT CHARTERED ACCOUNTANTS TO THE TRUSTEE OF THE MORGAN STANLEY UK GROUP PROFIT SHARING SCHEMES (incorporating the Morgan Stanley UK Group Profit Sharing Scheme and the Morgan Stanley UK Group Profit Sharing Plan) We have audited the accompanying combined statements of financial condition of the Morgan Stanley UK Group Profit Sharing Scheme ("the Scheme") and the Morgan Stanley UK Group Profit Sharing Plan ("the Plan"), (collectively "the Schemes"), as of 31 December 1999 and 1998 and the related statements of income and changes in schemes' equity for the years then ended. These combined financial statements are the responsibility of the Scheme's and the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements referred to above present fairly, in all material respects, the combined financial condition of the Schemes as of 31 December 1999 and 1998 and the combined results of operations and the changes in Schemes' equity for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ Deloitte & Touche Deloitte & Touche Chartered Accountants Stonecutter Court 1 Stonecutter Street London, EC4A 4TR England 22 February 2000 1 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN COMBINED STATEMENTS OF FINANCIAL CONDITION 31 December 1999 and 1998
Notes 1999 1998 $ $ ASSETS Investments at market value Morgan Stanley Dean Witter & Co. Common Stock 2,3 89,739,502 42,678,171 Amounts due from Trustee 64,237 59,109 Employee contributions receivable 10,399,802 9,397,520 ----------- ---------- TOTAL ASSETS 100,203,541 52,134,800 =========== ========== LIABILITIES AND COMBINED SCHEMES' EQUITY Dividend income, net of withholding taxes, payable to participants 26,778 20,724 Taxes withheld in respect of dividend income 37,456 38,382 Combined Schemes' equity 100,139,307 52,075,694 ----------- ---------- TOTAL LIABILITIES AND COMBINED SCHEMES' EQUITY 100,203,541 52,134,800 =========== ==========
See Notes accompanying Combined Financial Statements 2 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN COMBINED STATEMENTS OF INCOME AND CHANGES IN SCHEMES' EQUITY Years ended 31 December 1999 and 1998
Notes 1999 1998 $ $ CASH DIVIDENDS Distribution from Morgan Stanley Dean Witter & Co. 607,514 472,521 Less: United States tax withheld (35,387) (70,876) ----------- ------------ 572,127 401,645 GAINS ON INVESTMENTS Gain on sale of Morgan Stanley Dean Witter & Co. Common Stock 2 4,554,978 2,849,581 Change in unrealised appreciation of investments 3 40,229,585 5,283,698 EMPLOYEE CONTRIBUTIONS Current year 10,399,802 9,397,520 Less : over provision in prior year (92,800) ----------- ------------ INCOME FOR THE YEAR 55,663,692 17,932,444 Less: Dividend income payable to participants (509,400) (378,019) Income tax payable (62,727) (23,624) Withdrawals disbursed to employees (5,781,651) (3,822,395) Value of shares transferred to employees (1,246,301) (894,770) ----------- ------------ INCREASE IN COMBINED SCHEMES' EQUITY 48,063,613 12,813,636 COMBINED SCHEMES' EQUITY AT 1 JANUARY 52,075,694 39,262,058 ----------- ------------ COMBINED SCHEMES' EQUITY AT 31 DECEMBER 100,139,307 52,075,694 =========== ============
See Notes accompanying Combined Financial Statements 3 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN NOTES TO THE COMBINED FINANCIAL STATEMENTS Years ended 31 December 1999 and 1998 Description of the Schemes The financial statements show the combined results of the Morgan Stanley UK Group Profit Sharing Scheme and Morgan Stanley UK Group Profit Sharing Plan. On 12 November 1987 the Morgan Stanley International Profit Sharing Scheme was established in the United Kingdom by a trust deed made between Morgan Stanley Group Inc., its subsidiary Morgan Stanley International and Noble Lowndes Settlement Trustees Limited. After the merger between Morgan Stanley Group Inc. and Dean Witter, Discover & Co. on 31 May 1997 a new scheme, the Morgan Stanley UK Group Profit Sharing Plan, was established in the United Kingdom on 3 November 1998 by a trust deed made between Morgan Stanley, Dean Witter, Discover & Co., its subsidiary Morgan Stanley UK Group and Noble Lowndes Settlement Trustees Limited. On 2 November 1999, a change was made to the Plan trust deed amending the parent company name to Morgan Stanley Dean Witter & Co. The Schemes allow employees of Morgan Stanley UK Group to accumulate pre- tax profit share contributions in the form of shares of Morgan Stanley Dean Witter & Co. Common Stock, with all contributions after 1998 being paid into the Plan. Eligibility Full time employees of Morgan Stanley UK Group with at least one year of service, commencing from the first of the month after the date of joining, are eligible to participate in a scheme. Employees may elect to participate in the Schemes, for the full amount of their profit share, up to a maximum of the lesser of 10% of UK base salary or (pound)8,000. Funding Policy Amounts invested by employees are invested by Noble Lowndes Settlement Trustees Limited, as Trustee, in Morgan Stanley Dean Witter & Co. shares which are held by the Trustee in their name on the employee's behalf. Shares in respect of the previous qualifying period are appropriated to employees within two weeks of 31 December (the qualifying date). The Trustee's fees and brokerage commissions are borne by Morgan Stanley UK Group, the employer. During the first two years after appropriation (the Retention Period) certain statutory restrictions apply limiting members' ability to deal in or withdraw their shares. After the Retention Period, members may withdraw their shares or instruct the Trustee to sell their shares and withdraw the cash proceeds. The cost of withdrawals from the Schemes is determined on a first in first out basis within the relevant employee allocation. Taxation The United Kingdom Board of Inland Revenue have approved both the Scheme and the Plan under Schedule 9, Income & Corporation Taxes Act 1988 and the Scheme and the Plan are thus exempt from taxation. Employee contributions to the Schemes are not liable to income tax if shares are held by the Trustee for at least five years after appropriation. If employees' shares are sold prior to the end of the three year period, some or all of the income tax benefits are lost. 4 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN NOTES TO THE COMBINED FINANCIAL STATEMENTS Years ended 31 December 1999 and 1998 1. ACCOUNTING POLICIES Presentation of the Accounts The Trustee, being the same for both the Scheme and the Plan, has resolved that the results of the Scheme and the Plan should be combined as this appropriately represents the similar nature of the schemes and the intent of the employer, Morgan Stanley UK Group to continue benefits under the Scheme after the merger. Foreign Currencies Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date except for employee contributions receivable, which are translated at the rate ruling at the time of share purchase, which occurs shortly after balance sheet date. Transactions in foreign currencies are translated at the approximate rate of exchange ruling at the date of the transaction. Valuation of Investments The investments are recorded at market value based on the closing market price on the New York Stock Exchange. Dividend Income Dividend income is recorded when the applicable dividends are declared. Dividends are received net of US withholding tax and are allocated to participants according to their shareholdings. Stock Split On 20 December 1999, Morgan Stanley Dean Witter & Co. declared a two-for-one common stock split, effected in the form of a 100% stock dividend payable to shareholders of record on 12 January 2000 and distributable on 26 January 2000. All share data has been retroactively restated to reflect this split. 5 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN NOTES TO THE COMBINED FINANCIAL STATEMENTS Years ended 31 December 1999 and 1998 2. CHANGES IN COMBINED HOLDINGS OF MORGAN STANLEY DEAN WITTER & CO. COMMON STOCK
Number of Total Shares Cost (restated) $ At 1 January 1998 1,094,674 10,704,860 Add:Purchase January 1998 248,694 6,907,738 ------------ ------------ 1,343,638 17,612,598 Less: Sales of shares during the year (111,514) (979,795) Less: Transfers of shares during the year (29,922) (894,770) ------------ ------------ At 31 December 1998 1,202,202 15,738,033 Add: Purchases January 1999 222,258 9,304,720 Less: Sales of shares during the year (130,834) (1,226,673) Less: Transfers of shares during the year (36,330) (1,246,301) ------------ ------------ At 31 December 1999 1,257,296 22,569,779 ============ ============
Each stock purchase was made in January 1999 in one transaction representing more than 5% of the current value of the plan at the beginning of the year.
1999 1998 $ $ Aggregate proceeds of sales 5,781,651 3,829,376 Aggregate cost of sales (1,226,673) (979,795) ------------ ------------ Net gain on sales 4,554,978 2,849,581 ------------ ------------ Aggregate proceeds of transfers 1,246,301 894,770 Aggregate cost of transfers (1,246,301) (894,770) ------------ ------------ Net gain on transfers - - ------------ ------------ 4,554,978 2,849,581 ============ ============
6 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME AND MORGAN STANLEY UK GROUP PROFIT SHARING PLAN NOTES TO THE COMBINED FINANCIAL STATEMENTS Years ended 31 December 1999 and 1998 3. CHANGE IN UNREALISED APPRECIATION OF INVESTMENTS At 31 December 1999 the closing price on the New York Stock Exchange for Morgan Stanley Dean Witter, & Co. common stock was $71.375 per share.
Number Total of shares $ (restated) Market value at 31 December 1999 1,257,296 89,739,502 Average cost at 31 December 1999 1,257,296 22,569,779 ----------- ------------ Unrealised appreciation at 31 December 1999 67,169,723 Unrealised appreciation at 1 January 1999 26,940,138 ------------ Increase in unrealised appreciation 40,229,585 ============ Market value at 31 December 1998 1,202,202 42,678,171 Average cost at 31 December 1998 1,202,202 15,738,033 ----------- ------------ Unrealised appreciation at 31 December 1998 26,940,138 Unrealised appreciation at 1 January 1998 21,656,440 ------------ Increase in unrealised appreciation 5,283,698 ============
4. Subsequent eVents A stock split of 2 to 1 which was declared on 20 December 1999 became effective on the 26 January 2000. 7 -----END PRIVACY-ENHANCED MESSAGE-----