Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Morgan Stanley Group Inc. 56 309K
2: EX-10.12 Deferred Compensation Agreement 15 52K
3: EX-10.14 First Amendment to Trust Agreement 12 56K
4: EX-11 Statement Re: Computation of Earnings Per Share 2± 11K
5: EX-12 Statement Re: Computation of Ratios 2± 12K
6: EX-13.1 Quarterly Results 3± 21K
7: EX-13.2 Selected Financial Data 2± 16K
8: EX-13.3 Management's Discussion and Analysis 21 139K
9: EX-13.4 Consolidated Financial Statements and Notes 38 256K
10: EX-21 Subsidiaries of the Company 5 30K
11: EX-23.1 Consent of Ernst & Young, LLP 1 9K
12: EX-23.2 Consent of Ernst & Young, LLP - M.S. U.K. Group 1 7K
13: EX-27 Financial Data Schedule 1 10K
14: EX-99 Financial Statements - Ms Uk Group Profit Sharing 9 26K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
COMMISSION FILE NUMBER 1-9085
MORGAN STANLEY GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
1585 BROADWAY
NEW YORK, N.Y.
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
13-2838811
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
10036
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 761-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
[Enlarge/Download Table]
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------------------
Common Stock, $1 par value New York Stock Exchange
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Depositary Shares, each representing 1/4 of a share of 7 3/4% New York Stock Exchange
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/8 of a share of 8 3/4% New York Stock Exchange
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/8 of a share of 7 3/8% New York Stock Exchange
Cumulative Preferred Stock, $200 stated value
Depositary Shares, each representing 1/4 of a share of Series A Fixed/Adjustable New York Stock Exchange
Rate Cumulative Preferred Stock, $200 stated value
7.82% Capital Units; 7.80% Capital Units; 9.00% Capital Units; New York Stock Exchange
8.40% Capital Units; 8.20% Capital Units; 8.03% Capital Units*
6 1/2% PERQS(SM) Due July 1, 1997; 6% PERQS(SM) Due October 1, 1997; American Stock Exchange
7% PERQS(SM) Due November 15, 1997; 6% PERQS(SM) Due February 16, 1999+
Exchangeable Notes Due September 30, 2000; Exchangeable Notes Due New York Stock Exchange
December 31, 2001; Exchangeable Notes Due March 29, 2002++
PEEQS(SM) Due May 1, 2001+++ American Stock Exchange
AMEX Hong Kong 30 Index(SM) Call Warrants Expiring October 3, 1997 American Stock Exchange
Nikkei 225 Protection Step-Up Exchangeable Notes Due July 31, 2003 New York Stock Exchange
Nikkei 225 Index Call Warrants Expiring August 15, 1997 American Stock Exchange
---------------
* Each Capital Unit consists of (a) a Subordinated Debenture (of the same
rate) of Morgan Stanley Finance plc guaranteed by the Registrant and (b) a
related purchase contract of the Registrant requiring the holder to purchase
one Depositary Share representing shares (or fractional shares) of the
Registrant's Cumulative Preferred Stock (of the same rate), $200 stated
value. The Capital Units and the Depositary Shares are registered on the New
York Stock Exchange.
+ "Performance Equity-linked Redemption Quarterly-pay Securities." The issue
price and amount payable at maturity with respect to the PERQS are based on
the share price of certain non-affiliated companies.
++ Notes which are exchangeable on a defined date for equity securities of
certain non-affiliated companies.
+++ "Protected Exchangeable Equity-linked Securities." Principal protected notes
which are exchangeable for cash based on the value of the S&P 500 Index.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X]. NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 3, 1997 was approximately $6,209,256,089. For purposes of
this information, the outstanding shares of common stock owned by certain
Managing Directors and Principals of certain wholly-owned subsidiaries of the
Registrant, and 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 February 3, 1997, there were 158,104,726 shares of Common Stock, $1
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Morgan Stanley Group Inc. 1996 Annual Report to Stockholders -- Incorporated
in part in Form 10-K, Parts I, II and IV.
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PART I
ITEM 1. BUSINESS
Morgan Stanley Group Inc. (the "Company"*) is a holding
company that, through its subsidiaries, provides a wide range of financial
services on a global basis. Its businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring, real estate,
project finance and other corporate finance advisory activities; asset
management; merchant banking and other principal investment activities;
brokerage and research services; the trading of foreign exchange and
commodities as well as derivatives on a broad range of asset categories, rates
and indices; and global custody, securities clearance services and securities
lending. These services are provided to a large and diversified group of
clients and customers, including corporations, governments, financial
institutions and individual investors. The Company, which was formed in 1935,
conducts business from its head office in New York City and through a network
of 28 principal offices in 19 countries. At November 30, 1996, the Company
employed 11,613 people, approximately 1,500 of whom joined the Company during
fiscal 1996 as a result of the Company's acquisitions of Miller Anderson &
Sherrerd, LLP and VK/AC Holding, Inc. (see "Asset Management").
The Company conducts its broker-dealer business principally in
the United States ("U.S.") through Morgan Stanley & Co. Incorporated ("MS&Co."),
in Europe through Morgan Stanley & Co. International Limited ("MSIL"), in Japan
through Morgan Stanley Japan Limited ("MS Japan") and in the rest of Asia
through Morgan Stanley Asia Limited ("MS Asia"). Because of the increasing
integration of the international financial markets, the Company manages its
principal operating subsidiaries, including MS&Co., MSIL, MS Japan and MS Asia,
on a coordinated global basis with a view to the profitability of the enterprise
as a whole.
The Company's business activities are highly integrated and
constitute a single industry segment. Financial information concerning the
Company for each of the three periods ended November 30, 1996, November 30,
1995,** and January 31, 1995, including the amount of total revenue contributed
by classes of similar products or services that accounted for 10% or more of the
Company's consolidated revenue in any one of those periods and information with
respect to the Company's operations by geographic area, is set forth in the
Consolidated Financial Statements and the Notes thereto in the 1996 Annual
Report to Stockholders and is incorporated herein by reference.
----------
* Unless the context otherwise requires, the term "Company" means Morgan
Stanley Group Inc. and includes the consolidated subsidiaries of Morgan
Stanley Group Inc. Please note that in the 1996 Annual Report to
Stockholders, which is incorporated by reference in part in this Form
10-K, the term "Morgan Stanley" is generally used to refer to the
Company. Except for the historical information contained in this Form
10-K, certain items herein, including (without limitation) certain
matters discussed under Part I, Item 3, "Legal Proceedings" and under
Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (incorporated herein by reference)
("MD&A"), are forward-looking statements. The matters referred to in
such statements could be affected by the risks and uncertainties
involved in the Company's business, including (without limitation) the
effect of economic and market conditions, the level and volatility of
interest rates and currency values, the impact of current or pending
legislation and regulation and the other risks and uncertainties
detailed in Part I, Item I, "Competition, Regulation and Certain Risk
Factors" and "Risk Management" and in the MD&A.
** The Company changed its fiscal year-end from January 31 to November 30
effective for November 30, 1995 resulting in a ten-month period for
fiscal 1995.
RECENT DEVELOPMENT *
On February 5, 1997, the Company and Dean Witter, Discover &
Co. ("DWD") announced a definitive agreement to merge. The combined company
would be a pre-eminent global financial services firm with a market
capitalization of approximately $21 billion (as of the time of the merger
announcement) and with leading market positions in the securities, asset
management and credit services businesses. The new company will be named Morgan
Stanley, Dean Witter, Discover & Co. The merger would combine Morgan Stanley's
strengths in investment banking and institutional sales and trading with DWD's
strengths in retail distribution, asset gathering and credit services. DWD has
the third largest retail brokerage operation with over 9,000 account executives
and 361 branches throughout the U.S. and manages more than $100 billion in
customer assets. Led by the Discover(R) Card, DWD is the nation's largest credit
card issuer with 39 million accounts, and the third largest in credit card
receivables. In asset management, the combination would result in a business
that manages more than $270 billion of assets on a pro forma basis.
Under the terms of the merger agreement unanimously approved
by the Boards of both companies, each of the Company's common shares will be
exchanged for 1.65 DWD common shares. Shares of the Company's preferred stock
outstanding at the date of the merger will be exchanged for shares of preferred
stock of DWD having substantially identical terms. The transaction, which is
expected to be completed in mid-1997, is intended to be a tax-free exchange and
accounted for as a pooling of interests and is subject to customary closing
conditions, including certain regulatory approvals and the approval of
shareholders of both companies. Pursuant to the pooling of interests method of
accounting, prior to the time of closing each company will formally rescind any
stock repurchase authorizations existing at that time. Prior to such
rescissions, both companies may continue to repurchase stock in the open market
subject to the aggregate limitations imposed by the pooling of interests method.
As of the date hereof, the Company does not expect to actively repurchase its
stock in the open market.
INVESTMENT BANKING
UNDERWRITING
The Company is a leading global financial services firm which
provides advice to, and raises capital worldwide for, a broad group of domestic
and international clients. The Company manages and participates in public
offerings and private placements of debt, equity and other securities
denominated in U.S. dollars and other currencies in the U.S. and international
capital markets. The Company is a leading underwriter of common stock, preferred
stock and other equity-related securities, including American Depositary
Receipts ("ADRs"), Preferred Equity Redemption Cumulative Stock ("PERCS(R)"),
Performance Equity-linked Redemption Quarterly-pay Securities ("PERQSSM") and
capital securities. The Company also underwrites taxable fixed income securities
and tax exempt securities. The Company underwrites mortgage-related
----------
* See also 1996 Annual Report to Stockholders, "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Subsequent Events" and "Notes to Consolidated
Financial Statements, Note 13."
2
securities, including private pass-throughs and collateralized mortgage
obligations ("CMOs"), and other asset-backed securities. The Company is active
as an underwriter and distributor of commercial paper and other short-term and
medium-term securities. The Company is also involved in tender offers,
repurchase programs, consent solicitations, rights offerings and exchange offers
on behalf of clients.
FINANCIAL ADVISORY SERVICES
The Company provides domestic and international corporate and
institutional clients with a wide range of advisory services on key strategic
matters such as mergers, acquisitions, joint ventures, privatizations, defenses,
divestitures, spin-offs, restructurings, proxy mechanisms and leveraged buyouts
as well as long-range financial planning. Other such services provided to
clients include advice with respect to recapitalizations, dividend policy,
valuations, foreign exchange exposures and financial risk management strategies.
The Company furnishes advice and other services relating to a wide variety of
project financings, including infrastructure, electric power and natural
resource projects. In addition, the Company provides advisory services in
connection with lease transactions and the purchase, sale and financing of real
estate.
FINANCING
The Company may, from time to time, also provide financing or
financing commitments to companies in connection with its investment banking
activities. The Company may provide extensions of credit to leveraged companies
in the form of senior or subordinated debt, as well as bridge financing on a
select basis (which may be in connection with the Company's commitment to the
Morgan Stanley Bridge Fund, L.L.C.). In fiscal 1996, the Company commenced
senior lending activities, including the origination and syndication of senior
secured loans of non-investment grade companies.
A subsidiary of the Company also acts as general partner of
Princes Gate Investors II, L.P. ("Princes Gate"), a limited partnership with
$850 million in aggregate investment capacity that was formed to invest in
special situation opportunities. Princes Gate generally makes minority equity
and equity-related investments which are short to medium-term in duration and
which arise out of the Company's worldwide investment banking activities. See
also "Merchant Banking and Other Principal Investing."
SALES, TRADING AND MARKET-MAKING ACTIVITIES
The Company provides a broad range of sales and trading
services to investors worldwide and is an active dealer in fixed income, equity,
foreign exchange and commodity products, including derivatives. In the U.S., the
Company ranks as one of the largest dealers in equity and fixed income
securities and other financial instruments. As a member of the major U.S.
securities and commodities exchanges, as well as the major foreign exchanges,
including the London and Tokyo Stock Exchanges, the Company conducts its sales
and trading activities both as principal and as agent on behalf of a wide range
of domestic and international investors. The Company trades for its own account
in equity and fixed income securities and instruments, foreign currencies,
commodities and associated derivative products. The Company also provides
financing to clients, including margin lending and other extensions of credit.
3
EQUITY
The Company's equity sales, trading and market-making
activities cover domestic and foreign equity and equity-related securities (both
exchange traded and over-the-counter ("OTC")), including ADRs, Optimised
Portfolios as Listed Securities (OPALSSM), World Equity Benchmark Shares
(WEBSSM) and restricted/control stock; convertible debt and preferred
securities, including PERCS(R), PERQS(SM) and warrants; equity index products
and equity swaps; and international index arbitrage, equity repurchases, and
program and block trade execution. The Company also engages in the risk
arbitrage business, which involves, among other things, investing for the
Company's own account in securities of companies involved in publicly announced
corporate transactions in which the Company is not at the time of investment
acting as adviser or agent.
The Company provides various equity financing services,
including prime brokerage, which offers consolidated clearance and settlement of
securities trades, custody, financing, foreign exchange and portfolio reporting
services. The Company acts as principal and agent in stock borrowing and stock
loan transactions in support of the Company's domestic and international trading
and brokerage, asset management and clearing activities, and as an intermediary
between broker-dealers. A subsidiary of the Company is also engaged in the
clearance of securities for its preferred shareholders, who are registered
broker-dealers. Morgan Stanley Capital International (MSCI), a joint venture
between the Company and Capital International Perspective, S.A., markets and
distributes over 3,500 country, industry and regional benchmark indices covering
49 countries (including The World, EAFE(R) and Emerging Market Indices), and a
27-year historical database, including fundamental and valuation data on over
4,100 companies in developed and emerging market countries.
FIXED INCOME
The Company distributes and trades domestic and international
debt securities, including preferred stock and corporate debt instruments
(bonds, medium-term notes and commercial paper), offers investment strategies to
institutional accounts, develops swap and other risk management strategies for
customers, and assists corporations in their repurchase of debt. In addition,
the Company trades a full range of money market instruments, including
certificates of deposit, domestic and foreign bankers' acceptances,
floating-rate certificates of deposit and floating-rate notes. The Company is an
active dealer and market-maker in a broad range of long-term and short-term tax
exempt securities. The Company is also involved in structuring debt securities
with multiple risk/return factors designed to suit investor objectives and
repackaged asset vehicles (RAVs) through which investors can restructure asset
portfolios to provide liquidity or recharacterize risk profiles.
The Company is one of 37 primary dealers of U.S. government
securities currently recognized by the Federal Reserve Bank of New York. As
such, it is among the firms with which the Federal Reserve conducts its open
market operations and is required to submit bids in Treasury auctions, make
secondary markets in U.S. government securities, provide the Federal Reserve
Bank of New York with market information and maintain certain capital standards.
The Company is also a member of a number of selling groups responsible for the
distribution of various issues of U.S. agency and other debt securities. As
such, it is required to make secondary markets in these
4
securities and to provide market information to the U.S. agency and
instrumentality issuers. The Company is also a member of the primary syndicate
that issues German government bonds, a member of the Japanese government bond
syndicate and a primary dealer in Canadian, French and Italian government bonds.
The Company also makes secondary markets in various foreign government bonds and
other foreign currency denominated bonds issued in the Eurobond market and in
the U.S.
The Company's daily trading inventory positions in government,
agency and instrumentality securities are financed substantially through the use
of repurchase agreements. The Company also borrows and lends fixed income
securities. In addition, the Company acts as an intermediary between borrowers
and lenders of short-term funds utilizing repurchase and reverse repurchase
agreements. At any given point in time, the Company may hold large positions in
certain types of securities or commitments to purchase securities of a single
issuer, sovereign governments and other entities, issuers located in a
particular country or geographic area, public and private issuers involving
developing countries or issuers engaged in a particular industry. For example,
financial instruments owned by the Company include U.S. government and agency
securities and securities issued by other sovereign governments (principally
Japan, Germany and Italy) which, in the aggregate, represented 16% of the
Company's total assets at November 30, 1996. In addition, a vast majority of all
of the collateral held by the Company for resale agreements or bonds borrowed,
which together represents 36% of the Company's total assets at November 30,
1996, consists of securities issued by the U.S. government, federal agencies or
non-U.S.
governments.
The Company trades and distributes asset-backed securities.
The Company makes markets and trades in Government National Mortgage Association
("GNMA") securities, Federal Home Loan Mortgage Corp. ("FHLMC") participation
certificates and Federal National Mortgage Association ("FNMA") obligations. The
Company enters into significant commitments, such as forward contracts, standby
arrangements and OTC options contracts, for GNMA, FHLMC and FNMA securities. The
Company also acts as an underwriter of and market-maker in mortgage-backed
securities, CMOs and related instruments, and a market-maker in commercial,
residential and real estate loan products. In this capacity, the Company takes
positions in market segments where liquidity can vary greatly from time to time.
The carrying value at November 30, 1996 of the portion of the Company's
mortgage-related portfolio traded in markets that the Company believed was
experiencing lower levels of liquidity approximated $1,544 million.
The Company also underwrites, trades, invests and makes
markets in high-yield debt securities and emerging market loans and securitized
instruments. "High-yield" refers to companies or sovereigns whose debt is rated
as non-investment grade. At November 30, 1996, the aggregate net market value of
high-yield debt securities and emerging market loans and securitized instruments
held in inventory, including the securities of issuers in which the Company has
made equity investments in connection with its merchant banking and other
principal investment activities (see "Merchant Banking and Other Principal
Investing"), was $1,635 million (a substantial portion of which was subordinated
debt), with not more than 4%, 15% and 10% of all such securities, loans and
instruments attributable to any one issuer, industry or geographic region,
respectively. For a discussion of the various risks associated with the
Company's high-yield debt and emerging market loan activities and the Company's
policies and procedures with respect to the management and monitoring of these
risks, see "Risk Management -- Policies and Procedures for
5
Specific Activities." The Company also trades senior secured loans of
non-investment grade companies.
FOREIGN EXCHANGE AND COMMODITIES
The Company actively trades a number of foreign currencies on
a spot and forward basis with its customers, for its own account and to hedge
its securities positions or liabilities. In connection with its market-making
activities, the Company takes open positions in the foreign exchange market for
its own account. The Company, on a more limited basis, enters into forward
currency transactions as agent and principal. The Company is a leading
participant in currency futures trading at the International Monetary Market
division of the Chicago Mercantile Exchange and is a leading dealer in OTC and
exchange traded currency options on a worldwide basis. The Company also trades
as principal in the spot, forward and futures markets in a variety of
commodities, including precious metals, base metals, crude oil, oil products,
natural gas and related energy products. The Company is an active market-maker
in swaps and OTC options on commodities such as metals, crude oil, oil products,
natural gas and electricity, and offers a range of hedging programs relating to
production, consumption and reserve/inventory management. The Company is also an
electricity power marketer in the U.S.
DERIVATIVES
The Company actively offers to clients and trades for its own
account a variety of financial instruments described as "derivative products" or
"derivatives." These products, some of which may be complex in structure,
generally take the form of 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 business units use
derivative products as an integral part of their respective trading strategies,
and such products are used extensively to manage the market exposure that
results from proprietary trading activities. In addition, as a dealer in certain
derivative products (most notably interest rate and currency swaps) the Company
enters into derivative contracts to meet a variety of risk management and other
financial needs of its clients. Through the Company's triple-A rated subsidiary
(Morgan Stanley Derivative Products Inc.), the Company also enters into swap and
related derivative transactions with certain clients seeking a triple-A rated
counterparty.* For a discussion of the various risks associated with the
Company's derivative activities and the Company's policies and procedures with
respect to the management and monitoring of these risks, see "Risk Management --
Policies and Procedures for Specific Activities."
RESEARCH
The Company, through its economists, industry analysts and
strategists, is engaged in a wide range of research activities. The Company
analyzes worldwide trends covering a broad
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* For a detailed discussion of the Company's use of derivatives, see 1996
Annual Report to Stockholders, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Derivative Financial
Instruments" and "Notes to Consolidated Financial Statements, Note 5."
In addition, the Company also uses derivative products (primarily
interest rate and currency swaps) to assist in asset and liability
management and to reduce borrowing costs. See 1996 Annual Report to
Stockholders, "Notes to Consolidated Financial Statements, Note 3."
6
range of industries such as aerospace and defense electronics, healthcare and
insurance, as well as companies in the U.S. and internationally, and produces
publications and studies on the economy, financial markets, portfolio strategy,
technical market analyses, industry developments and individual companies. The
Company 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 clients. In addition, the Company 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.
PRIVATE CLIENT SERVICES
Through its Private Client Services group ("PCS"), the Company
extends its full range of investment advisory services and financial products to
high net worth individuals and families, small and mid-sized institutions, small
corporations and professional investors from offices in the U.S., Europe and
Asia. PCS provides access to the Company's trading capabilities, its fundamental
research and analytical products and its security underwritings. PCS investment
professionals optimize global asset allocation requirements (including
implementation of asset allocation strategies devised by the Company's asset
management division) and manage the specific asset classes of private investors.
PCS also offers private investors the opportunity to co-invest with the Company
in its principal activities such as merchant banking, venture capital, foreign
exchange, commodities or specialized funds. The Company's Swiss bank subsidiary,
Bank Morgan Stanley AG, offers private banking services and the other PCS
services to selected international clients.
ASSET MANAGEMENT
Through the Company's asset management division, which now
includes the Morgan Stanley Asset Management division ("MSAM"), Miller Anderson
& Sherrerd, LLP ("MAS") and Van Kampen American Capital, Inc. ("VKAC"), the
Company provides global portfolio management to a wide range of institutions and
individual clients.
MSAM and MAS primarily manage assets for institutions around
the world, including corporations, non-profit organizations and governmental
agencies investing in domestic and international equities and fixed income
securities (including emerging markets). MSAM and MAS sponsor open-end mutual
funds and closed-end funds with assets that include equities, taxable and
tax-exempt fixed income securities and balanced and multi-asset-class products.
MSAM and MAS also manage assets through separate accounts and pooled vehicles.
MSAM provides a broad range of fiduciary and named fiduciary services for
pension funds and trusts.
On October 31, 1996, the Company completed its acquisition of
VK/AC Holding, Inc., the parent of VKAC. The addition of VKAC, the fourth
largest non-proprietary mutual fund sponsor in the U.S. with approximately $61
billion of assets under management or supervision at November 30, 1996, broadens
the Company's institutional-oriented asset management business to include the
retail market. VKAC markets and provides investment
7
advisory and administrative services to open- and closed-end funds and certain
institutional clients (e.g., insurance companies, pension funds, municipalities,
high net worth individuals and mutual funds sponsored by third parties), and
markets and provides ongoing evaluation and credit surveillance for unit
investment trusts ("UITs"). VKAC's sponsored fund assets include equities and
taxable and tax-exempt fixed income securities. VKAC's sponsored UITs include
portfolios of nationally diversified and single-state insured and uninsured
municipal securities and, depending on market demand, also include portfolios of
government securities, insured and uninsured corporate debt securities, global
fixed income securities and equity securities. VKAC distributes its investment
products primarily through a large and diversified network of unaffiliated
national and regional broker-dealers, as well as commercial banks and thrifts,
insurance companies and their affiliated broker-dealers and financial planners
("Retail Distribution Firms"), although a relatively small number of Retail
Distribution Firms account for a substantial portion of sales of VKAC's
products. VKAC has proprietary and preferred distribution relationships with
several of its Retail Distribution Firms. In fiscal 1997, the Company expects to
begin distributing certain domestic and international MSAM and MAS products
through VKAC's distribution network.
As of November 30, 1996, through MSAM, MAS and VKAC, the
Company was the sponsor of 123 open-end proprietary mutual funds, 51 proprietary
closed-end funds and over 3,000 UITs.* The Company had approximately $171
billion of assets under management or supervision at November 30, 1996, of which
approximately $36 billion related to international products. Assets under
management or supervision were composed of approximately $52 billion related to
open-end mutual funds, $16 billion related to closed-end funds, $12 billion
related to UITs, $17 billion related to fiduciary accounts and $74 billion
related to separate accounts, pooled vehicles and other arrangements.
GLOBAL SECURITIES SERVICES
Through its Morgan Stanley Services division ("MS Services"),
the Company provides a full range of global custody and correspondent clearing
services, including clearance and settlement, agency lending, foreign exchange,
valuation and cash management. MS Services supports mutual funds, investment
limited partnerships, investment managers, investment funds, insurance
companies, banks, foundations, endowments, family trusts, government agencies,
public and private pension funds and broker-dealers. Through MS Services, the
Company maintains a network of 77 agent banks in 65 countries and had
approximately $144 billion in global assets under custody at November 30, 1996.
On December 10, 1996, the Company announced that it had
reached agreement with Barclays PLC ("Barclays") to acquire its institutional
global custody business for consideration to be fixed over a period of time. The
transaction involves approximately $250 billion of assets currently administered
by Barclays, and the combination of the two global custody businesses would have
increased the Company's assets under administration at November 30, 1996 to
approximately $394 billion on a pro forma basis (assuming current clients of
Barclays agree to become clients of the Company). Barclays has agreed to provide
global
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* Such funds and UITs are registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended.
8
subcustodial services to the Company for a period of time after completion of
the acquisition. The acquisition is expected to be completed during the second
quarter of fiscal 1997.
MERCHANT BANKING AND OTHER PRINCIPAL INVESTING
The Company has sponsored, acts as general partner for and
invests in several limited partnerships which conduct a variety of activities
broadly described as merchant banking. Such activities include, among other
things, making commitments to purchase, and making negotiated investments in,
equity and debt securities in merger, acquisition, restructuring, private
investment and leveraged capital transactions. Such activities also include
venture capital investments and investments in real estate assets, portfolios
and operating companies. The Company typically contributes a minority of the
capital of the merchant banking funds, and clients of the Company contribute the
remaining capital. The Company typically receives management fees for operating
the merchant banking funds, as well as a share of the profits of the funds when
performance criteria have been met.
In the private equity area, Morgan Stanley Capital Partners
III, L.P. ("MSCP III") was formed in 1994 with $1.9 billion in capital
commitments to invest in private equity or equity-related securities of
operating and financial services companies. As of November 30, 1996, MSCP III,
and its predecessor funds which are no longer making new investments, had $1.8
billion of cost basis in their portfolios related to 30 companies in a wide
range of industries.
In the venture capital area, Morgan Stanley Venture Partners
III, L.P. ("MSVP III") was formed in November 1996 with $275 million in capital
commitments to invest in private equity or equity-related securities of U.S.
emerging growth companies, primarily in the healthcare and information
technology sectors. As of November 30, 1996, MSVP III's predecessor funds, which
are no longer making new investments, had $138 million of cost basis remaining
in their portfolios related to 29 companies.
In the real estate area, The Morgan Stanley Real Estate Fund
II, L.P. ("MSREF II") was formed in 1994 with approximately $1 billion in
capital commitments to invest in real estate assets. As of November 30, 1996,
MSREF II, and its predecessor fund which is no longer making new investments,
had $921 million of cost basis in real estate with a total capitalization of
$2.2 billion (including third party financing) remaining in their portfolios
relating to 33 investments.
From time to time, the Company expects to sponsor additional
funds and commit to invest in such funds.
Equity securities purchased in merchant banking and principal
investment transactions ("investments") generally are held for appreciation, are
not readily marketable and do not provide dividend income. As of November 30,
1996, the aggregate carrying value of the Company's investments (directly and
indirectly through the above-referenced funds and Princes Gate and its
affiliates and predecessors) in 95 privately held companies was $107 million and
in 23 publicly held companies was $267 million. At November 30, 1996, the
Company had aggregate commitments of approximately $208 million to make future
investments in connection with its merchant banking and other principal
investment activities (including Princes Gate). The Company's future commitments
extend until November 2006.
9
It is not possible to determine whether or when the Company
will realize the value of the investments, including any appreciation, dividends
or other distributions thereon, since, among other things, such investments are
generally subject to restrictions on such realization relating to the
circumstances of particular transactions. Moreover, estimates of the eventual
realizable value of the investments fluctuate significantly over time in light
of business, market, economic and financial conditions generally or in relation
to specific transactions or other factors, including the financial leverage
involved in the underlying transactions. For a discussion of the various risks
associated with the Company's merchant banking and other principal investment
activities and the Company's policies and procedures with respect to the
management and monitoring of these risks, see "Risk Management -- Policies and
Procedures for Specific Activities."
The Company may also underwrite, trade, invest and make
markets in, and publish research with respect to, the securities and senior
loans of issuers in which the Company or the merchant banking funds have an
investment. Such securities may include equity and high-yield debt securities of
such issuers. In addition, the Company may provide financial advisory services
to, and have securities and commodity trading relationships with, these issuers.
From time to time, the Company may provide loans, financing commitments or other
extensions of credit, including on a subordinated and interim basis, to
companies (which may otherwise be leveraged) associated with its merchant
banking and other principal investment activities.
FINANCE, ADMINISTRATION AND OPERATIONS
The Company's finance, administration and operations
departments include Controllers, Credit, Corporate Services, Corporate Treasury,
Information Technology, Internal Audit, Market Risk, Legal and Compliance, Tax,
Office of Development and Operations. These departments support the Company's
diverse global businesses through the processing of securities, foreign exchange
and commodities transactions; receipt and delivery of funds and securities;
safeguarding of customers' securities; internal financial controls, including
management of global expenses, capital structure and funding; and ensuring
compliance with regulatory and legal requirements. In addition, the Company has
integrated recruitment, staffing, compensation and benefits, and career
development and training initiatives to ensure that its human resources are
aligned with strategic objectives. Certain of these areas also assist in the
management and monitoring of the risks associated with the Company's business
activities (see "Risk Management -- Risk Management and Monitoring Control
Structure").
COMPETITION, REGULATION AND CERTAIN RISK FACTORS
The Company encounters intense competition in all aspects of
the financial services business and competes worldwide directly with other
firms, both domestic and international, a significant number of which have
greater capital and other resources. Among the principal competitive factors
affecting the Company's business are the Company's general reputation, the
overall quality of its professionals, its ability to maintain existing client
relationships and develop new ones, and its capability in originating and
marketing innovative products and services. Moreover, the Company's ability to
access capital at competitive rates (which is generally dependent on the
Company's credit ratings) and commit capital are important competitive factors
in relation not only to generating potentially higher sales and trading
revenues, but also attracting business opportunities involving the facilitation
of major transactions by clients.
10
In addition to competition from firms traditionally engaged in
the financial services business, there has been increased competition from other
sources, such as commercial banks, insurance companies and other companies
offering financial services. As a result of recent or pending legislative and
regulatory initiatives in the U.S. to remove or relieve certain restrictions on
commercial banks, competition in some markets which have traditionally been
dominated by investment banks has increased and may continue to increase in the
near future. Such competition, among other things, affects the Company's ability
to attract and retain highly skilled individuals. In addition, the two
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's business is, and the securities, commodities and
financial services industries generally are, subject to extensive regulation in
the U.S. at both the federal and state levels and internationally. Various
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of customers
participating in those markets. MS&Co. and certain other subsidiaries of the
Company are broker dealers. MS&Co. is registered as a broker-dealer with the
Securities and Exchange Commission ("SEC") and in all 50 states, the District of
Columbia and Puerto Rico, and is a member of the National Association of
Securities Dealers, Inc. ("NASD") and the New York Stock Exchange, Inc.
("NYSE"). Broker-dealers are subject to regulation by state 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, which
may result in censure, fine, the issuance of cease-and-desist orders, the
suspension or expulsion of a broker-dealer or member, its officers or employees
or other similar consequences. Additional legislation and regulations, including
those relating to the activities of affiliates of broker-dealers, changes in
rules promulgated by the SEC or other governmental regulatory and
self-regulatory authorities (such as changes to the U.S. Internal Revenue Code
and related regulations or rules promulgated by the Financial Accounting
Standards Board) or changes in the interpretation or enforcement of existing
laws and rules, may directly affect the manner of operation and profitability of
the Company.*
As a futures commission merchant, MS&Co. is registered with
the Commodity Futures Trading Commission ("CFTC") and its 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
----------
* For a discussion of recent accounting matters that could have an impact
on the Company's future financial condition, see 1996 Annual Report to
Stockholders, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Potential Impact of Financial
Accounting Standards Board Pronouncements and Exposure Drafts on the
Company's Financial Statements."
11
membership corporation, which has been designated a registered futures
association by the CFTC and of which MS&Co. is a member.
As a broker-dealer, MS&Co. is subject to the SEC's temporary
risk assessment rules which require, among other things, that a broker-dealer
maintain and preserve certain information, describe risk management policies and
procedures and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have a material
impact on the financial and operational condition of the broker-dealer. As a
futures commission merchant, MS&Co. is also subject to the CFTC's risk
assessment rules which have certain requirements similar to the SEC's rules and
also require the reporting of certain "trigger events" when net capital is
reduced by substantial amounts.
The Company and certain other subsidiaries, including MS&Co.,
Morgan Stanley Asset Management Inc., MAS and certain affiliates of VKAC, are
registered as investment advisers with the SEC and in certain states. Virtually
all aspects of the Company's investment advisory business are subject to various
federal and state laws and regulations. These laws and regulations are primarily
intended to benefit the investment product holder and generally grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict the Company from carrying on its investment advisory
business in the event that it fails to comply with such laws and regulations. In
such event, the possible sanctions which may be imposed include the suspension
of individual employees, limitations on the Company's engaging in the investment
advisory business for specified periods of time, the revocation of registrations
under applicable laws or other censures and fines.
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.
Margin lending by certain subsidiaries of the Company is
subject to the margin rules of the Board of Governors of the Federal Reserve
System and the NYSE. Morgan Stanley Trust Company, the Company's principal
subsidiary that engages in custodial activities, is subject to regulation by the
New York State Banking Department.
Certain of the Company's government securities activities are
conducted through Morgan Stanley Market Products Inc., which is a member of the
NASD and is registered as a government securities broker-dealer with the SEC and
in certain states. The Department of the Treasury has promulgated regulations
concerning, among other things, capital adequacy, custody and use of government
securities and transfers and control of government securities subject to
repurchase transactions. The rules of the Municipal Securities Rulemaking Board,
which are enforced by the NASD, govern the municipal securities activities of
the Company.
Companies in the merchant banking portfolio that are in
certain regulated industries (e.g., insurance, public utilities or broadcasting)
could subject the Company to additional regulation by virtue of the Company's
affiliation with the merchant banking funds that own equity interests in such
companies or otherwise. For example, one merchant banking portfolio company owns
several
12
insurance companies which subjects the Company to certain state insurance
holding company regulations that require the Company, among other things, to
register with certain state regulatory authorities. These state insurance
regulations also generally prohibit the acquisition of a controlling interest in
the Company (which may be deemed to occur upon the acquisition of 10% or more of
the outstanding voting stock of the Company) without the prior approval of the
relevant state commissioners of insurance.
The Company's business is also subject to extensive regulation
by various non-U.S. governments, securities exchanges, central banks and
regulatory bodies, especially in those jurisdictions in which the Company
maintains an office. For example, the Company's business in the United Kingdom
is regulated by The Securities and Futures Authority Limited, the Bank of
England and the Investment Management Regulatory Organisation Limited, and a
number of exchanges, including the London Stock Exchange and the London
International Financial Futures and Options Exchange. The Deutsche Bundesbank,
the Bundesaufsichtsamt fuer das Kreditwesen (the Federal Banking Supervisory
Authority), the Bundesaufsichtsamt fuer den Wertpapierhandel (the Federal
Supervisory Authority for Securities Trading), the Deutsche Terminboerse (the
German Futures Exchange) and the Frankfurt Stock Exchange regulate the Company's
activities in the Federal Republic of Germany. The Company's business in Japan
is subject to Japanese law applicable to foreign securities firms and related
regulations of the Japanese Ministry of Finance and to the rules of the Bank of
Japan, the Japanese Securities Dealers Association and several Japanese
securities and futures exchanges, including the Tokyo Stock Exchange, the Osaka
Securities Exchange and the Tokyo International Financial Futures Exchange. The
Monetary Authority of Singapore and the Singapore International Monetary
Exchange Ltd. regulate the Company's business in Singapore; and the Company's
operations in Hong Kong are regulated by the Securities and Futures Commission,
The Stock Exchange of Hong Kong Ltd. and the Hong Kong Futures Exchange Ltd.
As registered broker-dealers and member firms of the NYSE,
certain subsidiaries of the Company, including MS&Co., are subject to the SEC's
net capital rule, and as a futures commission merchant MS&Co. is 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 considering imposing rules relating to capital requirements that
apply to subsidiaries of the Company (such as rules that have been or will be
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,
merchant banking and trading activities, and the financing of customer account
balances, and also restricts the Company's ability to withdraw capital from its
subsidiaries, which in turn may limit the Company's ability to pay dividends,
repay debt or redeem or purchase shares of its outstanding capital stock. A
change in such rules, or the imposition of new rules, affecting the scope,
coverage, calculation or amount of capital requirements, or a significant
operating loss or any unusually large charge against capital, would adversely
affect the ability of the Company to pay dividends or to expand or even maintain
present levels of business.
The "European Monetary Union" is scheduled to commence on
January 1, 1999 when the European Currency Unit ("ECU") will be replaced by the
"Euro" at a conversion rate of
13
1:1, and those national currencies which are to participate in the European
Monetary Union will ultimately cease to exist as separate currencies by virtue
of being replaced by the Euro. During a transition period of approximately three
years, the national currencies would continue to be in circulation as units of
the Euro at a rate of exchange irrevocably fixed during the course of 1998. At
present, there is uncertainty as to (i) the countries that will participate in
the European Monetary Union, (ii) the conversion rates of the participating
currencies into the Euro and (iii) whether commencement of the European Monetary
Union will occur on time. The European Monetary Union would have an impact on
certain of the Company's businesses (e.g., foreign exchange and certain cash and
derivative products related to the ECU and the participating currencies);
however, the effects of the European Monetary Union have not been quantified at
this time due to the uncertainties indicated above, and the Company will
continue to monitor developments in this area.
The widespread use of computer programs that rely on two-digit
date programs to perform computations and decision-making functions may cause
computer systems to malfunction in the year 2000 which could lead to business
delays and disruptions in the U.S. and internationally. The Company has been
modifying its computer systems to address this issue. However, due to the
interdependent nature of computer systems, the Company may be adversely impacted
in the year 2000 depending on whether it or other entities not affiliated with
the Company address this issue successfully.
RISK MANAGEMENT *
RISK MANAGEMENT POLICY
Risk is an inherent part of the Company's businesses and
activities. The financial services business and its profitability are affected
by many factors of a national and international nature, including economic and
market conditions, broad trends in business and finance, legislation and
regulation affecting the national and international financial communities,
inflation, the availability of capital, the availability of credit and the level
and volatility of interest rates, currency values and market prices. The extent
to which the Company properly and effectively identifies, assesses, monitors and
manages each of the various types of risks 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. From an
operational perspective, the Company seeks to identify, assess, monitor and
manage, in accordance with defined policies and procedures, the following
principal risks involved in each area of business activity: market risk, credit
risk, operational risk, legal risk and funding risk. **
Risk management at the Company is an integrated process with
independent oversight which requires constant communication, judgment and
knowledge of specialized products and markets. The Company's senior management
takes an active role in the risk management
----------
* For a further discussion of the Company's risk management policies and
procedures, see 1996 Annual Report to Stockholders, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Management" and "Notes to Consolidated Financial
Statements, Note 5."
** For a discussion of the Company's policies addressing funding risk, see
1996 Annual Report to Stockholders, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources -- Funding and Capital Policies."
14
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 financial services business, the Company's risk
management policies and procedures are evolutionary in nature and are subject to
ongoing review, modification and revision. Many of the Company's risk management
and control practices are subject to periodic review by the Company's internal
auditors and independent accountants, as well as interactions with various
regulatory authorities. 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.
RISK MANAGEMENT AND MONITORING CONTROL STRUCTURE
The Company has developed a multi-tiered approach for
monitoring and managing its risks. The Finance and Risk Committee, authorized by
the Company's Board of Directors, is chaired by the Company's Chief Financial
Officer and is composed of senior officers with familiarity and expertise in
dealing with risk management principles. It establishes the overall risk
management policies of the Company, reviews the Company's performance relative
to these policies, allocates capital among business activities of the Company,
monitors the availability of sources of financing, reviews the foreign exchange
risk of the Company, and oversees liquidity and interest rate sensitivity of the
Company's asset and liability position. The Firm Risk Manager heads the Firm
Risk Management Group (the Market Risk, Credit and Internal Audit Departments
that are all independent of the Company's business areas), which assists senior
management and the Finance and Risk Committee in establishing, monitoring and
controlling the Company's overall risk profile. With respect to the Company's
major trading divisions (fixed income, equity, commodities and foreign
exchange), division risk managers manage and monitor positions and set the
overall division risk profile on a worldwide basis within established market
risk limits, review major trading positions and strategies, and report major
market and position events to the Firm Risk Manager. Desk risk managers perform
similar functions with respect to a product area or particular product at the
business unit and trading desk level.
During fiscal 1996, the Company established a Risk Management
Advisory Board which advises the Firm Risk Management Group on risk measurement
methodologies, models and systems and establishes review procedures for models
used by the Company for valuation and risk measurement. Other departments within
the Company, which are independent of the Company's business areas, that also
are actively involved in monitoring the Company's risk profile include:
Controllers, Corporate Treasury, Information Technology, Legal and Compliance,
Tax and Operations. In addition, the Company has certain commitment committees,
composed of a cross-section of the Company's senior officers from various
disciplines, that are involved in managing and monitoring the risks associated
with the Company's diverse businesses. The High-Yield Commitment Committee and
Equity Commitment Committee determine whether the Company should participate in
a transaction involving the underwriting or placement of high-yield or equity
securities, respectively, where the Company's capital and reputation may be at
risk, and evaluate the potential revenues and risks involved with respect to
particular transactions.
15
MANAGEMENT AND MONITORING OF PRINCIPAL RISKS
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 Company-wide, on a divisional level worldwide and on an
individual product basis. Specific market risk guidelines and limits have been
approved for the Company and each trading division of the Company worldwide by
the Finance and Risk Committee. Discrete market risk limits are assigned to
business units and trading desks within trading areas which are compatible with
the trading division limits. Division risk managers, desk risk managers and the
Market Risk Department all monitor market risk measures against limits. The
Market Risk Department independently reviews the Company's trading portfolios on
a regular basis from a market risk perspective which includes 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 division risk
managers, desk risk managers and the Market Risk Department.
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, resulting in the Company incurring losses. The Finance
and Risk Committee has approved Company-wide credit guidelines which limit the
Company's credit exposure to any one counterparty. Specific credit risk limits
based on the credit guidelines also have been approved by the Finance and Risk
Committee for each type of counterparty (by rating category) as well as
secondary positions of high-yield and emerging market debt, and 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 its 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 may also close
out transactions or assign them to other counterparties to mitigate credit risk.
Operational risk refers to the risk of human error and
malfeasance or deficiencies in the Company's operating systems. There is
considerable fluctuation within each year and from year to year in the volume of
business that the Company must process, clear and settle with the trend toward
increased transaction volume. The Company is exposed to operational risk from
processing and settlement problems which may be especially acute in some
non-U.S. markets, particularly emerging markets, and during periods of heavy
trading volume in certain U.S. markets. The Company has developed and continues
to enhance specific policies and procedures that are designed to provide, among
other things, that: (1) all transactions are accurately recorded and properly
reflected in the Company's books and records and confirmed on a timely basis;
(2) cash disbursements/deliveries and receipts/deliveries of securities are
authorized, controlled and reconciled; (3) position valuations are subject to
periodic independent review procedures; (4) profit and loss information reported
to management, reflected in the Company's books and records, and reported to tax
authorities incorporates all activity; (5) collateral and adequate documentation
(e.g.,
16
master agreements) are obtained from counterparties in appropriate
circumstances; (6) valuation and risk models are periodically reviewed as
appropriate; and (7) information systems function as intended and are utilized
appropriately by authorized personnel.
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 (see
"Competition, Regulation and Certain Risk Factors"). The Company has established
legal standards and procedures on a worldwide basis that are designed to ensure
compliance with all applicable statutory and regulatory requirements. The
Company, principally through the Legal and Compliance Department, has also
established procedures, such as the Company's Code of Conduct, that are designed
to ensure that senior management's policies relating to conduct, ethics and
business practices are followed globally. The Company also conducts on a regular
basis education and training programs that emphasize protection of client
interests and maintenance of the Company's reputation and global business
franchise. In connection with its business, the Company has various procedures
addressing a variety of issues, such as regulatory capital requirements, sales
and trading practices, new products, use and safekeeping of customer funds and
securities, money-laundering and record-keeping. The Company has also
established certain procedures to mitigate the risk that a counterparty's
performance obligations will be unenforceable. In particular, the Company has
adopted procedures, which are generally product-specific and vary in accordance
with risk profile and market practice, to consider counterparty legal authority
and capacity, adequacy of legal documentation, the permissibility of a
transaction under local law and whether applicable bankruptcy or insolvency laws
limit or alter contractual remedies.
POLICIES AND PROCEDURES FOR SPECIFIC ACTIVITIES
Positions and commitments taken by the Company in connection
with its merchant banking and other principal investment activities (see
"Merchant Banking and Other Principal Investing") often may involve substantial
amounts of capital and subject the Company to, among other things, risk due to
significant exposure to one issuer, industry or business. Additionally, the
equity securities owned by the Company and the funds sponsored by the Company in
connection with the Company's principal investment activities are generally not
highly liquid. All proposed investments made by the Company and the funds
sponsored by the Company are reviewed and approved by senior professionals of
the Company, and any proposed loans, financing commitments or other extensions
of credit made by the Company in connection with its merchant banking and
investment banking activities are reviewed and approved by senior management.
The Company analyzes projected cash flows and returns of the prospective
investment and sensitivities to changes in economic assumptions, and reviews,
among other things, the prospective portfolio company's industry and its
relative position in such industry as well as its future prospects. In the case
of equity investments, the Company also negotiates with the portfolio company's
other equity holders certain rights related to the management and strategic
direction of the business, significant portfolio company transactions and exit
strategy. With respect to any loans, financing commitments or other extensions
of credit, the Company reviews the creditworthiness of the counterparty, the
availability to the counterparty of financing generally, the likely overall
financial return and the Company's available capital and funding sources. After
any investment or loan, financing commitment or other extension of credit is
made, the Company regularly monitors the investment or counterparty by, among
other things, reviewing related business plans, financial performance and
industry trends.
17
The Company's trading and underwriting of high-yield debt
securities and emerging market loans and securitized instruments also subject
the Company to market and credit risks. For example, securities held by the
Company in connection with its high-yield trading activities typically rank
subordinate to bank debt of the issuer and may rank subordinate to other debt of
the issuer. The market for these securities has been, and may in the future be,
characterized by periods of illiquidity. The liquidity of any particular issue
may be significantly better or worse than the overall liquidity of the
high-yield market at any time, depending on the quality of the issuer, and
during certain periods market quotations may not represent firm bids of dealers
or prices of actual sales. In addition, the Company through its market-making
and trading activities may be the sole or principal source of liquidity in
certain issues and, as a result, may substantially affect the prices at which
such issues trade. To mitigate the potential impact on the Company's operating
results of the greater risk inherent in high-yield debt securities and emerging
market loans and securitized instruments, the Company has policies to control
total inventory positions in these securities and instruments. Additionally, as
indicated above, the Company has credit policies to control exposures to
individual high-yield issuers and emerging market counterparties.
Derivatives facilitate risk transfer and enhance liquidity in
the marketplace, and the origination and trading of derivatives have been
utilized as efficient and cost effective tools that enable users to adjust risk
profiles, such as interest rate or currency risk, or to take proprietary trading
positions. Widespread acceptance of derivatives has contributed to the
development of more complex OTC products structured for particular clients to
address specific financing and risk management needs.* Derivative transactions
may have both on- and off-balance sheet implications, depending on the nature of
the contract, and the Company's use of derivative products may subject the
Company to various risks.** In times of market stress, liquidity in certain
derivatives positions, as well as in underlying cash instruments, may be
reduced. Credit risk in the context of OTC derivative transactions relates to
the potential for a counterparty to default on its contract and is represented
by the replacement cost of all contracts in a gain position (after considering
the effects of master netting agreements where applicable) rather than by the
gross notional or contractual values. The risks associated with derivative
products, including credit and market risks, are managed in a manner consistent
with the Company's overall risk management policies as described above. The
Company's exposure to changes in interest rates, foreign currencies and other
factors is managed on an individual product basis, generally by entering into
offsetting or other positions in a variety of financial instruments and
derivative products. In addition, with respect to certain exchange-listed
derivatives, the Company has agreements with customers that permit the Company
to close out positions or require additional collateral (and in many cases
require excess collateral) if certain events occur. In certain instances, the
Company may also limit the types of derivative products that may be traded in a
particular account.
----------
* As previously indicated, the Company also uses derivative products
(primarily interest rate and currency swaps) to assist in asset and
liability management and to reduce borrowing costs. The risks
associated with derivatives activities in this context are managed in a
manner consistent with the Company's overall risk management policies.
** It should be noted, however, that in many cases derivatives serve to
reduce, rather than increase, the Company's exposure to losses from
market, credit and other risks.
18
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 364,000
square feet at 750 Seventh Avenue, New York, New York. Both the 1585 Broadway
and 750 Seventh Avenue buildings are owned by the Company. The Company also
leases space at various other locations in Manhattan under leases expiring
between 1997 and 2002 and aggregating approximately 748,000 square feet. In
addition, the Company leases space in Brooklyn, New York aggregating
approximately 383,000 square feet under a lease expiring in 2013.
The Company's London headquarters are located at 25 Cabot
Square, Canary Wharf (approximately three miles east of the City of London), and
occupy approximately 641,000 square feet (inclusive of common areas) of a
building constructed by the Company. The Company owns the ground lease
obligation and the freehold interest in the land and the building. The Company
also leases approximately 350,000 square feet at 20 Cabot Square, Canary Wharf,
under a lease arrangement expiring in 2020.
The Company's Tokyo headquarters are located at Yebisu GPT,
Ebisu, Shibuya-ku, where the Company occupies approximately 143,000 square feet
of office space under a lease arrangement expiring in 1998, but renewable at the
Company's option in two-year increments.
VKAC has corporate offices located in Oakbrook Terrace,
Illinois, where it occupies approximately 191,000 square feet under a lease
expiring in 2006, and corporate offices in Houston, Texas, where it occupies
approximately 186,000 square feet under a lease expiring in 2000.
Most of the Company's other offices in the U.S. and
internationally are located in leased premises, the leases for which expire at
various dates through 2016. Facilities owned or occupied by the Company and its
subsidiaries are believed to be adequate for the purposes for which they are
currently used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following litigation matters:
I. The National Commercial Bank v. Morgan Stanley Asset
Management Inc., et al. On May 2, 1994, a complaint was filed in the United
States District Court for the Southern District of New York by The National
Commercial Bank ("NCB") against Morgan Stanley Asset Management Inc. ("MSAM
Inc.") and three present and former MSAM Inc. employees. The complaint alleged
that NCB established a managed account at MSAM Inc. in or about February 1993 to
trade United States Treasury securities and that in August 1993 that account
suffered substantial losses. The complaint alleged violations of sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
and rule 10b-5 promulgated thereunder, common law fraud, common law constructive
fraud, breach of fiduciary duty, breach of contract, negligence and negligent
misrepresentation, and sought compensatory damages in excess of $39 million,
punitive damages in an unspecified amount, costs, attorneys' fees and interest.
On June 28, 1994, defendants filed answers to the complaint. On July 11, 1994,
defendants filed third-party
19
complaints against two employees of NCB, asserting claims over and for
contribution and indemnity in the event defendants are determined to be liable
to NCB. The complaint, answers and third-party complaints were thereafter
amended. The claims against MSAM Inc.'s two present employees were thereafter
dismissed without prejudice as were their claims against the two employees of
NCB. Discovery is proceeding. On October 1, 1996, MSAM Inc. filed a motion for
partial summary judgment on the claims under sections 10(b) and 20(a) of the
Exchange Act and rule 10b-5 promulgated thereunder and for common law fraud,
constructive fraud and negligent misrepresentation.
II. NASDAQ Antitrust Litigation. On December 16, 1994, a
consolidated amended complaint was filed in the United States District Court for
the Southern District of New York against a total of 33 defendants, including
MS&Co. The consolidated amended complaint alleged that MS&Co. and other
participants and market makers on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") engaged in a conspiracy to fix the
"spread" between bid and asked prices for securities traded on the NASDAQ in
violation of Section 1 of the Sherman Act. The plaintiff class was alleged to
include persons throughout the United States who are customers of the defendants
or their affiliates and who purchased or sold securities on the NASDAQ during
the period from May 1, 1989 through May 27, 1994. Plaintiffs were alleged to
have been damaged in that they paid more for securities purchased on the NASDAQ,
or received less for securities sold, than they would have but for the alleged
conspiracy. The consolidated amended complaint sought compensatory damages,
treble damages, declaratory and injunctive relief, attorneys' fees and costs.
Judgment against each of the defendants was sought on a joint and several basis.
On February 2, 1995, MS&Co. and the other named defendants filed a motion to
dismiss, which was granted on August 10, 1995 with leave to replead. On August
22, 1995, plaintiffs filed a Refiled Consolidated Complaint which was identical
in substance to the dismissed pleading except that it lists by name the stocks
that plaintiffs contend were the subject of the alleged conspiracy. On December
18, 1995, MS&Co. filed its answer. On December 26, 1996, the court granted, in
part, plaintiffs' motion for class certification. Discovery is proceeding.
III. MGN Pension Trustees Ltd., et al. v. Morgan Stanley Trust
Company. On October 20, 1995, a complaint was filed against Morgan Stanley Trust
Company ("MSTC") in the United States District Court for the Eastern District of
New York by MGN Pension Trustees Ltd. (as trustee of the Mirror Group Pension
Scheme) and The Law Debenture Trust Corporation plc (as trustee of the Maxwell
Communication Pension Plan). The complaint alleged that MSTC breached a variety
of duties purportedly owed to certain pension plans whose assets were managed by
an entity controlled by the late Robert Maxwell. The complaint asserted claims
for breach of contract, breach of fiduciary duty, aiding and abetting a breach
of fiduciary duty, participation in a breach of fiduciary duty, fraud and aiding
and abetting a fraud, and sought between $21.5 million and $142.3 million in
compensatory damages, punitive damages in an unspecified amount, return of
commissions, interest, costs and attorneys' fees. By orders dated November 27,
1996 and January 27, 1997, the court granted MSTC's motion to dismiss the action
on the grounds of forum non conveniens. Plaintiffs have filed a notice of appeal
to the United States Court of Appeals for the Second Circuit.
IV. Global Opportunity Fund Litigation. On December 19, 1995, 20
investors in a Cayman Islands investment fund named The Global Opportunity Fund
(the "Fund") brought an action against Morgan Stanley Bank Luxembourg, S.A.
("MSBL") in Luxembourg Commercial
20
Court seeking damages in the amount of $44 million and costs. The apparent core
of plaintiffs' complaint is that MSBL was responsible for providing certain net
asset valuations to the Fund and performed that function in a negligent manner.
A hearing is scheduled for November 5-6, 1997.
V. County of Orange and Moorlach v. Morgan Stanley & Co., Inc. On
June 11, 1996, an adversary proceeding was commenced by Orange County and its
Treasurer-Tax Collector against MS&Co. The proceeding was originally filed in
the United States Bankruptcy Court for the Central District of California, where
Orange County's Chapter 9 bankruptcy proceeding was then pending. The action is
now pending before the United States District Court for the Central District of
California. The complaint asserts that Orange County, acting through its former
Treasurer-Tax Collector, entered into various reverse repurchase agreements and
other transactions with MS&Co. which were beyond the County's authority or ultra
vires, and, therefore, void. The complaint also asserts that MS&Co. allowed
Orange County to enter into unsuitable transactions. In addition, the complaint
alleges that MS&Co. violated the automatic stay provisions of the Bankruptcy
Code when it liquidated the County's collateral and closed out certain reverse
repurchase transactions subsequent to the County's December 6, 1994 bankruptcy
filing. The complaint asserts claims for ultra vires, setoff, equitable
subordination, restitution, enforcement of the automatic stay, avoidance of
post-petition transfers and negligence, and seeks compensatory damages in an
unspecified amount, declaratory and injunctive relief, restitution, interest,
various costs and attorneys' fees. On August 29, 1996, MS&Co. filed its answer
to the complaint. Discovery is proceeding.
VI. Department of Justice NASDAQ Investigation. On July 17, 1996,
MS&Co. and 23 other dealers who make markets in securities traded on NASDAQ
entered into a stipulation and order with the United States Department of
Justice which simultaneously filed a civil complaint in the United States
District Court for the Southern District of New York alleging that the 24 market
makers had violated section 1 of the Sherman Act. The complaint asserts, and
MS&Co. denies, that the various market makers had entered into a so-called
"quoting convention" under which the market makers avoided the use of odd-eighth
quotes when the spread between the bid and ask price was at least 3/4. The
stipulation and order commits the 24 market makers to avoid engaging in certain
practices which could support the existence of a purported "quoting convention"
and to adopt various procedures to assure compliance with their agreement. The
stipulation and order is subject to court approval and, if approved, will result
in the dismissal of the complaint.
VII. Other. In addition to the matters described above, the
Company, including MS&Co., 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.,
is also involved, from time to time, in investigations and proceedings by
governmental and self-regulatory agencies.
In view of the inherent difficulty of predicting the outcome
of such matters, particularly in cases such as some of those described above in
which substantial damages are sought, the Company cannot state what the eventual
outcome of pending matters will be. The Company is contesting the allegations
made in each pending matter and believes, based on current knowledge and after
consultation with counsel, that the outcome of such matters will not have a
21
material adverse effect on the Company's Consolidated Financial Statements
incorporated by reference herein.
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, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information relating to the principal market in which the
Registrant's Common Stock is traded, the high and low sales prices per share for
each full quarterly period within the two most recent fiscal periods, the
approximate number of holders of record of Common Stock and the frequency and
amount of any cash dividends declared for the two most recent fiscal periods is
set forth under the caption "Quarterly Results" on page 88 of the Registrant's
1996 Annual Report to Stockholders and such information is hereby incorporated
herein by reference.
In connection with the acquisition of VK/AC Holding, Inc., the
parent of VKAC, on October 31, 1996, MSAM Holdings II, Inc., a subsidiary of the
Company ("MSAM II"), issued 259,058 shares of its 4% Exchangeable Redeemable
Preferred Stock (the "MSAM II Preferred Stock"), exchangeable into common stock
of the Company. The MSAM II Preferred Stock was issued in four series (Series A
through D) to certain members of the management of VKAC, all of whom were
accredited investors, in exchange for an aggregate of 87,110 shares of stock
held by such persons in VK/AC Holding, Inc. in a transaction exempt from
registration with the SEC pursuant to Section 4(2) of the Securities Act of
1933, as amended. The Series A, Series B, Series C and Series D MSAM II
Preferred Stock may be exchanged during a 30-day period beginning November 1,
1997, 1998, 1999 and 2000, respectively, and upon the occurrence of certain
events, including a change of control of MSAM II or the Company. Each share of
MSAM II Preferred Stock is exchangeable into 2.0554985 shares of common stock of
the Company, subject to adjustment from time to time to take into account
certain events relating to the Company or the Company's outstanding common stock
that may occur, including stock dividends or distributions, stock splits,
combinations or reclassifications, consolidations or mergers (the "Exchange
Ratio"). As a result of the proposed merger of the Company and DWD, the holders
of the MSAM II Preferred Stock will have the right, at their option, to exchange
any share of MSAM II Preferred Stock on the closing of the merger for either (I)
a number of shares of common stock of the new company, Morgan Stanley, Dean
Witter, Discover & Co. ("MSDWD"), equal to the product of (a) the Exchange
Ratio and (b) 1.65 (the number of shares of MSDWD that will be exchanged for
each share of the Company's common stock as part of the merger) or (II) cash in
an amount equal to the greater of (x) $100 per share of MSAM II Preferred Stock
plus accrued and unpaid dividends or (y) the then current fair market value of
the number of shares of MSDWD common stock determined in accordance with (I)
above. See Part I, Item I, "Recent Development."
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data for the Registrant and its
subsidiaries for each of the last five fiscal periods is set forth under the
same caption on the inside cover of the 1996 Annual Report to
22
Stockholders. Such information (other than the information contained in the
column entitled "Fiscal Period Ended November 30, 1995 Annualized (Unaudited)")
is hereby incorporated herein by reference and should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto contained on
pages 52 to 88 of such Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition
and Results of Operations is set forth under the same caption on pages 30 to 50
of the 1996 Annual Report to Stockholders. Such information is hereby
incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 52 to
88 of such Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and
its subsidiaries, together with the Notes thereto and the Report of Independent
Auditors thereon, are contained in the 1996 Annual Report to Stockholders on
pages 51 to 88, and such information is hereby incorporated herein by reference,
including the information appearing under the caption "Quarterly Results" on
page 88 of such Annual Report.
The Statement of Financial Condition at December 31, 1996 and
1995 for the Morgan Stanley U.K. Group Profit Sharing Scheme (the "Plan"), the
Statement of Changes in Plan Equity for the Years Ended December 31, 1996, 1995
and 1994 together with the Notes thereon and the Report of Independent Chartered
Accountants appear as Exhibit 99.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information about each of
the Company's directors and executive officers on November 30, 1996:
[Download Table]
Name Age Position
---- --- --------
Richard B. Fisher 60 Chairman of the Board of Directors,
Managing Director and director of the
Company and MS&Co.
John J. Mack 52 President, Managing Director and director
of the Company and MS&Co.
Barton M. Biggs 64 Managing Director and director of the
Company and MS&Co.
Peter F. Karches 45 Managing Director and director of the
Company and MS&Co.
Sir David A. Walker 57 Managing Director and director of the
Company and MS&Co. and director and
Executive Chairman of Morgan Stanley Group
(Europe) Plc
Robert P. Bauman 65 Director of the Company
Daniel B. Burke 68 Director of the Company
S. Parker Gilbert 63 Director of the Company
Allen E. Murray 67 Director of the Company
Paul J. Rizzo 69 Director of the Company
Jonathan M. Clark 59 General Counsel and Secretary of the
Company and MS&Co. and Managing Director
and director of MS&Co.
Philip N. Duff 39 Chief Financial Officer and Managing
Director of the Company and MS&Co. and
director of MS&Co.
Eileen K. Murray 38 Treasurer of the Company and MS&Co., Chief
Accounting Officer of the Company and
Managing Director of MS&Co.
24
All directors hold office until the next annual meeting of
stockholders and until their respective successors have been duly elected and
qualified. Officers serve at the discretion of the Board of Directors.
There are no family relationships among any directors or executive officers.
Mr. Fisher has served as Chairman of the Board of Directors of the
Company and MS&Co. since January 1991. From January 1984 through December 1990,
he served as President of the Company and MS&Co. He has been a director and a
Managing Director of the Company since July 1975 and a director and a Managing
Director of MS&Co. since July 1970. He has also been a member of the Executive
Committee of the Board of Directors (the "Executive Committee") from March 1986
and its Chairman from May 1991. He was a partner of Morgan Stanley & Co., the
predecessor of MS&Co., from July 1970 through June 1975.
Mr. Mack has been President of the Company and MS&Co. since June
1993. He has been a director and a Managing Director of the Company since
December 1987 and was a director and a Managing Director of the Company from
January 1979 to March 1986. Mr. Mack has been a director and a Managing Director
of MS&Co. since January 1979. He has also been a member of the Executive
Committee since December 1987.
Mr. Biggs has been a director and a Managing Director of the
Company since May 1991 and a director and a Managing Director of MS&Co. since
July 1973. He was a director and a Managing Director of the Company from July
1975 to March 1986. He has also been a member of the Executive Committee since
May 1991. He was a partner in Morgan Stanley & Co. from June 1973 through June
1975. Mr. Biggs is chairman of the board of directors of The Latin America
Discovery Fund, Inc., Morgan Stanley Emerging Markets Fund, Inc., Morgan Stanley
Africa Investment Fund, Inc., Morgan Stanley India Investment Fund, Inc., Morgan
Stanley Asia-Pacific Fund, Inc., Morgan Stanley Emerging Markets Debt Fund,
Inc., Morgan Stanley Global Opportunity Bond Fund, Inc., The Morgan Stanley High
Yield Fund, Inc., The Pakistan Investment Fund, Inc., The Thai Fund, Inc., The
Turkish Investment Fund, Inc., The Brazilian Investment Fund, Inc., The Malaysia
Fund, Inc., Morgan Stanley Institutional Fund, Inc., Morgan Stanley Fund, Inc.,
Morgan Stanley Russia & New Europe Fund, Inc. and Morgan Stanley Universal Fund,
Inc.
Mr. Karches has been a director and a Managing Director of the
Company since February 1994 and a director and a Managing Director of MS&Co.
since January 1985. He has also been a member of the Executive Committee since
February 1994.
Sir David Walker has been a director of the Company since November
1994, a Managing Director of the Company since May 1995, a director of MS&Co.
since February 1995 and a Managing Director of MS&Co. since November 1994. He
has served as a director and the Executive Chairman of Morgan Stanley Group
(Europe) Plc since December 1994. He has also been a member of the Executive
Committee since November 1994. Before joining the Company, Sir David Walker was
Deputy Chairman of Lloyds Bank Plc in England. From 1988 to 1992 he was Chairman
of the Securities and Investments Board, the British authority that regulates
the securities markets. From 1982 to 1988 he was the executive director of the
Bank of England and
25
remained as a non-executive director at the Bank until early 1993. Sir David
Walker has been a non-executive director of Reuters Holdings PLC since April
1994.
Mr. Bauman has been the non-executive chairman of British
Aerospace PLC since May 1994. He served as chief executive officer of SmithKline
Beecham Plc from 1989 until April 1994. Mr. Bauman is also a director of CIGNA
Corporation and Union Pacific Corporation. Mr. Bauman has been a non-executive
director of Reuters Holdings PLC since March 1994. Mr. Bauman has been a
director of the Company since April 1996.
Mr. Burke is retired. He served as chief executive officer of
Capital Cities/ABC, Inc. from 1990 until February 1994. He also served as
president and chief operating officer of that corporation from 1986 until
February 1994 and was one of its directors from 1967 until February 1996. Mr.
Burke is also a director of Consolidated Rail Corporation, Darden Restaurants,
Inc., Rohm and Haas Company and The Washington Post Company. Mr. Burke has been
a director of the Company since February 1994 and serves on both the Audit
Committee of the Board of Directors (the "Audit Committee") and the Compensation
Committee of the Board of Directors (the "Compensation Committee").
Mr. Gilbert is retired. He served as Chairman of the Board of
Directors of the Company and MS&Co. from January 1984 through December 1990. He
served as President of the Company and MS&Co. from January 1983 through December
1983. He was a Managing Director of the Company from July 1975 through December
1990 and a director and a Managing Director of MS&Co. from May 1970 through
December 1990. From January 1969 through June 1975, Mr. Gilbert was a partner in
Morgan Stanley & Co. He has been a director of the Company since July 1975. Mr.
Gilbert is also a director of Burlington Resources Inc., ITT Industries, Inc.,
and Taubman Centers, Inc.
Mr. Murray is retired. He served as chairman of the board of
directors and chief executive officer of Mobil Corporation from February 1986
until March 1994 and as one of its directors from May 1977 until March 1994. Mr.
Murray also served as president and chief operating officer of that corporation
from November 1984 until March 1993. He is also a director of Lockheed Martin
Corporation, Metropolitan Life Insurance Company and Minnesota Mining &
Manufacturing Company. Mr. Murray has been a director of the Company since
November 1992. Mr. Murray is chairman of the Audit Committee and serves on the
Compensation Committee.
Mr. Rizzo is retired. He served as vice chairman of the board of
directors of International Business Machines Corporation from January 1993
through December 1994 and from February 1983 to September 1987 and as a senior
vice president from 1974 until February 1983. He has been a partner in Franklin
Street Partners since 1992. From September 1987 until 1992, he was dean of
Kenan-Flagler Business School at the University of North Carolina-Chapel Hill.
Mr. Rizzo is also a director of Cox Enterprises, Inc., Johnson & Johnson, Kenan
Transport Company, The McGraw-Hill Companies, Inc. and Ryder System, Inc. Mr.
Rizzo was a director of the Company from July 1986 through December 1992 and has
been a director since February 1995. Mr. Rizzo is chairman of the Compensation
Committee and serves on the Audit Committee.
Mr. Clark has been the General Counsel and Secretary of the
Company and MS&Co. since February 1993. He has also been a director and a
Managing Director of MS&Co since
26
February 1993. Before joining the Company, Mr.
Clark was a partner of Davis Polk & Wardwell, a New York law firm.
Mr. Duff has been the Chief Financial Officer of the Company and
MS&Co. since February 1994. He has been a Managing Director of the Company since
November 1995, a director of MS&Co. since November 1995 and a Managing Director
of MS&Co. since February 1993. From January 1991 to February 1993, he was a
Principal of MS&Co.
Ms. Murray has been the Treasurer of the Company and MS&Co. since
May 1996 and Chief Accounting Officer of the Company since March 1994. She has
been a Managing Director of MS&Co. since February 1994. From January 1991 to
January 1994, she was a Principal of MS&Co.
27
ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation. The following
table summarizes the compensation paid by the Company and its subsidiaries to
the Company's five most highly compensated executive officers who were serving
as executive officers at November 30, 1996 (the "named executive officers") for
services rendered in all capacities to the Company and its subsidiaries for
Fiscal 1994, Fiscal 1995 and Fiscal 1996 (as used in Part III, "Fiscal 1994"
refers to the twelve-month period from February 1, 1994 to January 31, 1995;
"Fiscal 1995" refers to the ten-month period from February 1, 1995 to November
30, 1995; and "Fiscal 1996" refers to the twelve-month period from December 1,
1995 to November 30, 1996).
[Enlarge/Download Table]
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------- -------------------------
Restricted Securities
Stock Underlying All Other
Name and Award(s) Options Compensation
Principal Position Year (2) Salary ($)(3) Bonus ($)(3)(4) ($)(5) (#)(6) ($)(7)
---------------------------- ------- ------------- --------------- ---------- ------- ------
Richard B. Fisher: 1996 $ 575,000 $5,756,250 $4,142,128 -- $19,650
Chairman of the 1995 477,329 4,187,004 2,072,349 -- 15,150
Board
of Directors and 1994 575,000 2,062,500 -- 198,276 15,000
Managing
Director(1)
John J. Mack: 1996 $ 550,000 $5,771,875 $4,154,366 181,598 $19,650
President and 1995 456,575 4,140,308 2,046,186 -- 15,150
Managing Director 1994 550,000 2,025,000 -- 193,192 15,000
Barton M. Biggs: 1996 $ 450,000 $3,490,625 $2,365,182 -- $18,150
Managing Director 1995 373,562 2,801,713 1,294,128 -- 13,650
1994 450,000 1,700,000 -- 149,130 15,000
Peter F. Karches: 1996 $ 450,000 $5,521,875 $3,958,326 181,598 $19,650
Managing Director 1995 373,562 3,891,267 1,906,223 -- 15,150
1994 300,000 2,025,000 -- 193,192 15,000
Sir David A 1996 $ 426,745 $3,505,159 $2,376,550 181,598 $18,150
Walker(8):
Managing Director 1995 360,991 1,721,585 687,335 -- 3,244
1994(9) 86,252 119,418 -- 6,938 --
(1) As of the date hereof, the Company does not have an executive officer
designated as "Chief Executive Officer"; however, for purposes of complying with
rules of the SEC, Mr. Fisher is deemed the "CEO" in this table.
(2) In February 1995, the Board of Directors approved a change in the fiscal
year-end of the Company from January 31 to November 30. Figures for Fiscal 1995
relate to the ten-month period commencing on February 1, 1995 and ending on
November 30, 1995.
(3) Includes amounts contributed by each of the named executive officers to
various deferred compensation plans of the Company.
28
(4) Includes amounts representing annual cash bonus. The amounts reported also
include the value of units awarded pursuant to the 1988 Capital Accumulation
Plan, a plan which provides participation in certain investments that the
Company has made directly or indirectly in other entities.
(5) The amounts reported represent the market value of the Company's common
stock, par value $1.00 per share (the "Common Stock"), underlying vested and
unvested restricted stock units at the date of grant, without taking into
account any diminution in value attributable to the restrictions on such stock
units. Awards of restricted stock units were made on December 9, 1996 for
performance in Fiscal 1996; the closing price of the Common Stock on that date
as reported on the Consolidated Transaction Reporting System was $58 per share.
Awards of restricted stock units were made on December 11, 1995 for performance
in Fiscal 1995; the closing price of the Common Stock on that date as reported
on the Consolidated Transaction Reporting System was $42.75 per share.
The vesting schedule for restricted stock units awarded as part of Fiscal 1996
compensation to all officers of the Company, including the named executive
officers, is as follows: 75% of each award reported in the table above vested
upon grant; the remaining 25% of the award will vest in five equal annual
installments. The vesting schedule for restricted stock units awarded as part of
Fiscal 1995 compensation to all Managing Directors, including the named
executive officers, is as follows: 60% of each award reported in the table above
vested upon grant; the remaining 40% of each award will vest in ten equal annual
installments. Dividend equivalents are paid on restricted stock units (including
unvested units) at the same rate as dividends paid to stockholders of Common
Stock.
Vested and unvested restricted stock units awarded as part of Fiscal 1996
compensation generally do not convert into shares of Common Stock and are not
transferable for five years after award. Vested and unvested restricted stock
units awarded as part of Fiscal 1995 compensation generally do not convert into
shares of Common Stock and are not transferable for ten years after award.
Restricted stock units, whether vested or unvested, may not be sold, assigned,
exchanged, pledged, hypothecated or otherwise disposed of or encumbered prior to
the lapse of restrictions on transferability. Restricted stock units, whether
vested or unvested, are subject to forfeiture in certain circumstances specified
by the Compensation Committee.
The aggregate number of restricted stock units (including units awarded prior
to the years reported) and the market value ascribed thereto as of November 30,
1996 for each of the named executive officers are as follows: Mr. Fisher-
393,440 ($23,753,940); Mr. Mack- 388,883 ($23,478,811); Mr. Biggs- 248,467
($15,001,195); Mr. Karches- 476,741 ($28,783,238) and Sir David Walker- 57,053
($3,444,575). Such number of restricted stock units and market values ascribed
to them give effect to restricted stock unit awards granted subsequent to the
end of Fiscal 1996. The value ascribed to restricted stock units above has been
reported in accordance with the rules of the SEC. The value ascribed to stock
units by the Compensation Committee differs from the amounts reported herein.
The initial value ascribed to vested restricted stock units by the Compensation
Committee(which represented 75% of the award for Fiscal 1996 and 60% of the
award for Fiscal 1995)is based on fair market value at the time of grant, as
determined by the Compensation Committee. The Compensation Committee also
grants additional stock units which vest over time (which represented 25% of
the award for Fiscal 1996 and 40% of the award for Fiscal 1995) in order to
compenstate for significant restrictions on disposition (by sale or otherwise)
of the shares of Common Stock corresponding to all stock units. The value of
stock-based compensation earned cannot be realized
29
immediately and will be dependent on the market value of the Company's stock
well into the future.
(6) Awards of stock options were made during Fiscal 1996 to certain Managing
Directors, including certain named executive officers. These stock options were
considered a supplement to, and not a part of, year-end compensation for Fiscal
1996. Awards of stock options were also made to all Managing Directors,
including the named executive officers, for services performed in Fiscal 1994.
The vesting schedule for stock options awarded in Fiscal 1996 is as follows: 20%
of each award reported in the table above will vest annually from 1998 through
2000 and the remaining 40% will vest in 2001. The stock options awarded in
Fiscal 1996 become exercisable upon vesting and the expiration date is February
26, 2003.
The vesting schedule for stock options awarded as part of Fiscal 1994
compensation is as follows: 60% of each award reported in the table above vested
and was exercisable upon grant, the remaining 40% of each award will vest and be
exercisable in nine annual installments. The expiration date for the stock
options awarded as part of Fiscal 1994 compensation is January 31, 2005. The
terms of these stock option awards may vary slightly in certain non-U.S.
jurisdictions.
Stock options, whether vested or unvested, may not be sold, assigned, exchanged,
pledged, hypothecated or otherwise disposed of or encumbered. Stock options,
whether vested or unvested, are subject to forfeiture in certain circumstances
specified by the Compensation Committee. Any shares acquired upon the exercise
of options awarded as part of Fiscal 1994 compensation generally may not be
transferred or sold prior to January 31, 2005, except to the extent required to
cover the exercise price and tax liability arising upon exercise.
(7) The amounts reported for Messrs. Fisher, Mack, Biggs and Karches consist of
contributions by the Company to the Company's Deferred Profit Sharing Plan
("DPSP") and the Company's Employee Stock Ownership Plan ("ESOP"). For amounts
reported for Fiscal 1996, the Company contributed 39% to the DPSP and 61% to the
ESOP; for Mr. Biggs, the Company contributed 42% to the DPSP and 58% to the
ESOP. For amounts reported for Fiscal 1995, the Company contributed 21% to the
DPSP and 79% to the ESOP; for Mr. Biggs, the Company contributed 23% to the DPSP
and 77% to the ESOP. For amounts reported for Fiscal 1994, the Company
contributed 50% to the DPSP and 50% to the ESOP. Contributions to the DPSP and
the ESOP are made on December 31 and relate to the preceding twelve months. The
amounts reported for Sir David Walker consist of contributions by the Company to
the Morgan Stanley UK Group Profit Sharing Scheme.
(8) U.S. Dollar amounts reported for Sir David Walker have been converted from
Pound Sterling amounts at the average daily spot exchange rates for Fiscal 1994,
1995 and 1996, respectively.
(9) Sir David Walker joined the Company on November 18, 1994 and the amounts
reported for Fiscal 1994 represent compensation received from that date through
the end of Fiscal 1994.
Compensation to Managing Directors and Principals of MS&Co. who are not
executive officers of the Company may exceed the compensation paid to the named
executive officers.
30
Stock Options. The following table provides information
concerning stock options granted to the following named executive officers
during Fiscal 1996.
[Enlarge/Download Table]
OPTION GRANTS IN THE LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE GRANT DATE
NAME GRANTED (#)(1) IN FISCAL YEAR ($/SH)(2) EXPIRATION DATE PRESENT VALUE ($)(3)
------------------------------ ------------- -------------- --------- ----------------- --------------------
John J. Mack ............ 181,598 4.2% $ 49.56 February 26, 2003 $3,000,000
Peter F. Karches ........ 181,598 4.2% $ 49.56 February 26, 2003 $3,000,000
Sir David A. Walker ..... 181,598 4.2% $ 49.56 February 26, 2003 $3,000,000
----------
(1) The stock option grants provide that 20% will vest annually from 1998
through 2000, and the remaining 40% will vest in 2001. The stock
options become exercisable upon vesting.
(2) The Compensation Committee approved the grant of stock options on
February 26, 1996 with an exercise price equal to the average high and
low sale price of a share of Common Stock as reported on the
Consolidated Transaction Reporting System on February 26, 1996.
(3) Options were valued using a modified Black-Scholes option pricing
model. The assumptions used as the variables in the model include:
25.2% volatility (Common Stock price daily volatility for the two-year
period prior to February 20, 1996); a 5.66% risk-free rate of return
(the average continuous yield of a seven-year zero coupon U.S. Treasury
Bond expiring February 15, 2003); a 1.5% annual dividend yield (the
annualized dividend yield during February 1996); and a seven-year
option life (equal to the term of the option, assuming exercise at the
end of the option term). The data relating to the hypothetical value is
presented pursuant to SEC rules. The actual amount, if any, realized
upon the exercise of stock options will depend on the market price of
the Common Stock relative to the exercise price of the stock option at
the time the stock option is exercised. There is no assurance that the
hypothetical values of the stock options reflected in the table will be
realized.
31
Option Exercises and Fiscal Year-End Values. The following
table provides information concerning stock option exercises in Fiscal 1996 and
unexercised stock options held by each named executive officer as of November
30, 1996.
[Enlarge/Download Table]
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FY-END (#)(2) FY-END ($)(3)
----------------------------- -----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- -------------- -------------- ----------- ------------- ----------- -------------
Richard B. Fisher ....... 100,000 $3,460,020 379,914 71,370 $15,436,336 $2,098,992
John J. Mack ............ 248,220 7,830,351 316,226 251,132 12,794,294 3,788,336
Barton M. Biggs ......... 57,780 1,851,864 256,862 53,676 10,541,519 1,578,611
Peter F. Karches ........ 45,000 1,531,829 285,066 251,132 11,370,999 3,788,336
Sir David A. Walker ..... -- -- -- 188,536 -- 1,947,387
---------------------
(1) The valuation represents the difference between the average high and
low sale price of a share of Common Stock, as reported on the
Consolidated Transaction Reporting System on the date of exercise, and
the exercise price of the options exercised.
(2) The sale or disposition of shares of Common Stock underlying certain of
the options is restricted.
(3) The value of unexercised, in-the-money options is based upon the
difference between the exercise prices of all such options and $59.16,
the fair market value, as determined by the Compensation Committee, of
a share of Common Stock at the end of Fiscal 1996. The actual amount,
if any, realized upon exercise of stock options will depend upon the
market price of the Common Stock relative to the exercise price per
share of Common Stock of the stock option at the time the stock option
is exercised. There is no assurance that the values of unexercised
in-the-money stock options reflected in this table will be realized.
Pension Plans. MS&Co.'s Pension Plan (the "Pension Plan") is a
defined benefit pension plan which covers all employees of MS&Co. who have
completed at least one year of service with MS&Co. or one of its affiliates.
There is no maximum age limit to the eligibility requirements. The Pension Plan
provides for normal retirement benefits beginning at age 65 but permits earlier
retirement at or after attaining age 55 with ten years of Vesting Service as
defined in the Pension Plan (five years if hired prior to January 1, 1988),
subject to a reduction in benefits if payments commence earlier than age 60.
Salary is defined to include the highest five years of base compensation during
the last ten years prior to retirement, excluding bonuses, overtime and other
supplemental compensation. All participants become vested after completing five
years of service.
In addition to the Pension Plan, MS&Co. has adopted an Excess
Benefit Plan for participants in the Pension Plan whose benefits are reduced
pursuant to limitations imposed by the Internal Revenue Code of 1986, as
amended, on pensions paid under federal income tax qualified plans. Employees
covered by the Excess Benefit Plan receive a benefit equal to the amount of
benefit disallowed under the Pension Plan due to such limitations, including for
1996 a $150,000 compensation limit (subject to being increased in $10,000
increments based on annual rates of
32
inflation) on the amount of compensation that can be taken into account for
qualified pension plan purposes.
MS&Co. also maintains a Supplemental Executive Retirement Plan
covering current and former Managing Directors and Principals of MS&Co. who are
not less than 55 years of age and have completed at least five years of service
and whose age plus years of service equals or exceeds 65. Benefits without any
reduction are paid if payment occurs at or after age 60. Benefits payable under
the Supplemental Executive Retirement Plan, however, are reduced by benefits
payable under the Pension Plan and the Excess Benefit Plan and pension plans of
affiliates of MS&Co. and of former employers. For participants who commence
receiving benefits in 1989 and beyond, the annual benefit payable under the
Supplemental Executive Retirement Plan (as reduced in the preceding sentence) is
further reduced to the extent that total retirement benefits do not exceed
$140,000. Participants are fully vested under the Supplemental Executive
Retirement Plan at all times. Messrs. Fisher and Biggs currently meet the
eligibility requirements of the Supplemental Executive Retirement Plan.
The following table illustrates the total estimated annual
normal retirement pension benefits, including Excess Benefit Plan and
Supplemental Executive Retirement Plan amounts, payable upon normal retirement
at age 65 to participants for the specified remuneration and years of credited
service classifications set forth below. Benefit amounts are computed on a
straight-life annuity basis. There is no off-set for the payment of social
security benefits although the calculation of benefits takes social security
covered compensation into consideration.
[Enlarge/Download Table]
PENSION PLAN TABLE
ANNUAL PENSION BENEFITS BASED ON YEARS OF CREDITED SERVICE AT AGE 65
FINAL
AVERAGE
SALARY 5 YRS. 10 YRS. 15 YRS. 20 YRS. 25 YRS. 30 YRS. 35 YRS.
-------- ------- -------- ------- ------- ------- ------- -------
$100,000 $20,000 $30,000 $40,000 $50,000 $50,000 $55,000 $60,000
150,000 30,000 45,000 60,000 75,000 75,000 82,500 90,000
200,000 40,000 60,000 80,000 100,000 100,000 110,000 120,000
250,000 50,000 75,000 100,000 125,000 125,000 137,500 140,000
300,000 60,000 90,000 120,000 140,000 140,000 140,000 154,122
350,000 70,000 105,000 140,000 140,000 140,000 154,605 180,372
400,000 80,000 120,000 140,000 140,000 147,587 177,105 206,622
450,000 90,000 135,000 140,000 140,000 166,337 199,605 232,872
500,000 100,000 140,000 140,000 148,070 185,087 222,105 259,122
550,000 110,000 140,000 140,000 163,070 203,837 244,605 285,372
600,000 120,000 140,000 140,000 178,070 222,587 267,105 311,622
650,000 130,000 140,000 144,802 193,070 241,337 289,605 337,872
700,000 140,000 140,000 156,052 208,070 260,087 312,105 364,122
The compensation of the individuals named in the Summary Compensation Table for
purposes of determining benefits under the Pension Plan, the Excess Benefit Plan
and the Supplemental Executive Retirement Plan during calendar 1996 is the
amount reported as base salary in the Summary Compensation Table above. As of
January 31, 1997, the credited years of service (rounded to the nearest whole
year) for each of the named executive officers are as follows: Mr.
33
Fisher-35; Mr. Mack-24; Mr. Biggs-24; Mr. Karches-21; and Sir David Walker-2
(with respect to the Supplemental Executive Retirement Plan only).
Sir David Walker is a participant in the Morgan Stanley UK
Group Pension Plan (the "UK Plan"). During Fiscal 1996, the benefit structure of
the U.K. Plan was changed from a defined benefit plan to a defined contribution
plan. Permanent employees of Morgan Stanley UK Group in the United Kingdom who
are under age 65 are eligible to participate in the UK Plan as of their date of
hire. The UK Plan provisions which apply to Sir David Walker provide for normal
retirement benefits beginning at age 65 but permit earlier retirement at or
after attaining age 50, subject to a reduction in benefits if payments commence
earlier than age 60.
In addition, Sir David Walker is provided with a supplemental
benefit on the portion of his base salary which exceeds the amount of
compensation that can be taken into account for determining pension benefits
under applicable rules of the U.K. Inland Revenue, on the same general terms and
conditions as those applicable under the UK Plan. The present U.K. Inland
Revenue earnings limit is (pound)82,200 per annum (approximately $134,700 at
November 30, 1996). Sir David Walker's total retirement benefit under the UK
Plan (including the supplemental benefit) is 1/60th of final pensionable salary
multiplied by years of pensionable service as of retirement.
As of November 30, 1996, the estimated annual benefit payable
to Sir David Walker under the UK Plan and the supplemental arrangement described
above at the earliest age when a participant in the UK Plan may retire with an
unreduced benefit (age 60) was (pound)22,650 (approximately $37,100).
Director's Compensation. Messrs. Fisher, Mack, Biggs, Karches
and Walker do not receive any additional compensation for acting as directors of
the Company. Directors who are not employees of the Company or a subsidiary (the
"Outside Directors") receive a director's fee of $40,000 for each full year
served (prorated for those directors serving part of a year). Each Outside
Director who served on the Board of Directors in Fiscal 1996 has been granted
400 shares of Common Stock pursuant to the Company's 1993 Stock Plan for Outside
Directors for services to the Company during Fiscal 1996. Directors receive no
additional compensation for participation on committees of the Board.
Additional Information with Respect to Compensation Committee
Interlocks and Insider Participation in Compensation Decisions. The Company's
Compensation Committee is composed of Messrs. Rizzo, Burke and Murray, none of
whom is, or during the previous year has been, an officer or employee of the
Company.
During Fiscal 1996, no executive officer of the Company (i)
served as a member of the compensation committee (or other board committee
performing similar functions or, in the absence of any such committee, the
entire board of directors) of another entity, one of whose executive officers
served on the Company's Compensation Committee; (ii) served as a director of
another entity, one of whose executive officers served on the Company's
Compensation Committee; or (iii) served as a member of the compensation
committee (or other board committee performing similar functions or, in the
absence of any such committee, the entire board of directors) of another entity,
one of whose executive officers served as a director of the Company.
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Voting Agreements. Certain stockholders of the Company hold
their shares of Common Stock subject to agreements relating to, among other
things, the voting and disposition of such shares. Such agreements include the
Stockholders' Agreement dated as of February 14, 1986, as amended (the
"Stockholders' Agreement"), among the Company and those persons who were
stockholders (the "Recapitalization Signatories") of the Company at the time of
a recapitalization effected in contemplation of the Company's initial public
offering (all of whom were Managing Directors or Principals of MS&Co. and
employees of the Company at such time) and certain agreements (the "MAS
Agreements") entered into between the Company and certain former general
partners of MAS (the "MAS Signatories") who received shares of Common Stock in
connection with the Company's purchase of MAS completed on January 3, 1996. In
addition, various voting agreements (the "Plan Agreements" and, together with
the Stockholders' Agreement and the MAS Agreements, the "Voting Agreements")
have been entered into between the Company, certain of its employees and/or a
trustee for a trust that holds shares of Common Stock on behalf of such
employees (together with the Recapitalization Signatories and the MAS
Signatories, the "Signatories") in connection with the granting to such
employees of stock awards, stock unit awards and/or option awards under each of
the Company's 1988 Equity Incentive Compensation Plan (the "1988 Equity
Incentive Compensation Plan") and the Company's 1995 Equity Incentive
Compensation Plan (the "1995 Equity Incentive Compensation Plan" and,
collectively with the 1988 Equity Incentive Compensation Plan, the "Equity
Incentive Compensation Plans"), options under the Company's 1986 Stock Option
Plan (the "Stock Option Plan") and performance units under the Company's
Performance Unit Plan (the "Performance Unit Plan"). The shares of Common Stock
subject to the Plan Agreements have been issued pursuant to stock awards or
stock unit awards and performance units granted to eligible employees under the
Equity Incentive Compensation Plans and the Performance Unit Plan, respectively,
and upon the exercise of options granted to eligible employees under the Equity
Incentive Compensation Plans and the Stock Option Plan, respectively. Shares of
the Company's ESOP Convertible Preferred Stock (the "ESOP Stock"), each of which
is entitled to 2.7 votes with respect to each matter to be voted on by
shareholders, are not subject to any of the Voting Agreements.
The Voting Agreements provide that, before any vote of the
stockholders of the Company occurs, a preliminary vote (the "Preliminary Vote")
will be taken at which each Signatory who is an employee of the Company on such
date may vote all of his shares of Common Stock subject to the Voting Agreements
in such manner as such Signatory may determine in his sole discretion. At any
meeting of the stockholders called to vote with respect to any corporate action,
a Signatory who was an employee of the Company at the time of the Preliminary
Vote or a trustee for a trust that holds shares of Common Stock corresponding to
stock units awarded under the Equity Incentive Compensation Plans (including any
such stock units awarded to former employees who do not participate in the
Preliminary Vote) must vote the shares of Common Stock that are subject to the
Voting Agreements in accordance with the vote of the majority of the shares of
Common Stock voted in the Preliminary Vote. Signatories who are no longer
employed by the Company on the date of the Preliminary Vote do not participate
in the Preliminary Vote and are not required to vote their shares of Common
Stock in accordance with the vote of the majority of the shares of Common Stock
voted in the Preliminary Vote. At February 3, 1997, 48,250,541 shares of Common
Stock (constituting approximately 28.7% of the votes that are entitled to be
cast with respect to a corporate action) were subject to voting
35
restrictions contained in the Voting Agreements and could be required to be
voted in accordance with the results of any Preliminary Vote.
Stock Ownership of Management. The following table shows
certain information concerning the number of shares of the Company's capital
stock beneficially owned, directly or indirectly, as of February 3, 1997, by
each director and named executive officer and by all current directors and
executive officers as a group.
[Enlarge/Download Table]
COMMON STOCK
-------------------------
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
BENEFICIAL OWNERS OWNERSHIP OF CLASS
----------------- ----------- --------
Richard B. Fisher(1)(2)(3)(4).......................................... 4,072,111 2.6
John J. Mack(1)(2)(3)(4)............................................... 2,345,725 1.5
Barton M. Biggs(1)(2)(3)(4)............................................ 2,517,539 1.6
Peter F. Karches(1)(2)(3)(4)........................................... 1,163,374 *
Sir David A. Walker(3)................................................. 57,131 *
Robert P. Bauman....................................................... 1,266 *
Daniel B. Burke........................................................ 3,200 *
S. Parker Gilbert(2)(4)................................................ 2,368,661 1.5
Allen E. Murray........................................................ 6,900 *
Paul J. Rizzo.......................................................... 3,726 *
All current directors and executive officers as a group
(13 persons)(1)(2)(3)(4)............................................ 12,915,119 8.1
(1) Except as otherwise disclosed below, the voting and disposition of the
shares of Common Stock beneficially owned by executive officers are
subject to the Voting Agreements.
(2) Includes 331,844; 299,384; 262,826; 292,792; 89,008 and 1,422,898
shares for Messrs. Fisher, Mack, Biggs, Karches, Gilbert and all
current directors and executive officers as a group, respectively, that
may be acquired upon the exercise of options that are exercisable
within 60 days after February 3, 1997. Such options were granted
pursuant to the 1988 Equity Incentive Compensation Plan or the Stock
Option Plan.
(3) Includes 393,440; 388,883; 248,467; 476,741; 57,053 and 1,781,032
shares of Common Stock underlying stock unit awards granted Messrs.
Fisher, Mack, Biggs, Karches, Walker and all current directors and
executive officers as a group, respectively, as part of compensation
pursuant to the Equity Incentive Compensation Plans. With respect to
all such stock unit awards, an equivalent number of shares of Common
Stock held in trust may be voted in accordance with the Voting
Agreements.
(4) Includes 2,757; 2,757; 2,692; 2,757; 705 and 15,720 shares of Common
Stock into which shares of ESOP Stock are convertible which have been
allocated to Messrs. Fisher, Mack, Biggs, Karches, Gilbert and all
current directors and executive officers as a group, respectively. Each
share of ESOP Stock is convertible into two shares of Common Stock.
Each share of ESOP Stock is entitled to 2.7 votes with respect to each
matter that may be voted on. ESOP participants have the ability to
direct the voting with respect to ESOP Stock allocated to them. Such
shares are not subject to the Voting Agreements.
----------
* Indicates beneficial ownership of less than 1% of the outstanding Common
Stock.
36
Principal Stockholders. The following table sets forth certain
information regarding each person or group of persons known to the Company as of
February 3, 1997 to be the beneficial owner of more than 5% of any class of the
Company's voting securities.
[Enlarge/Download Table]
SHARES OF COMMON STOCK
NAME OF PERSONS OR IDENTITY OF GROUP BENEFICIALLY OWNED NUMBER PERCENT
-------------------------------------------------------- ------------------------- -------
Signatories to Voting Agreements(1)..................... 58,715,600 (2)(3)(4)(5) 35
(1) The voting of the shares of Common Stock received in connection with
the Company's 1986 recapitalization effected in contemplation of the
Company's initial public offering (the "Recapitalization Common Stock")
is subject to the voting restrictions contained in the Stockholders'
Agreement. The voting of Common Stock issued to certain employees in
connection with the Equity Incentive Compensation Plans, the Stock
Option Plan, the Performance Unit Plan and the Company's purchase of
MAS is generally subject to similar voting restrictions. The
information provided relates to the voting power of such securities.
The Signatories to the Voting Agreements do not share dispositive
power. See "Voting Agreements" above.
Except as otherwise determined by the Board of Directors of the Company
and subject to applicable legal requirements, the Recapitalization
Signatories may dispose or transfer their Recapitalization Common Stock
only in accordance with the terms of the Stockholders' Agreement.
Similar restrictions apply to Common Stock acquired pursuant to the
Performance Unit Plan and/or Stock Option Plan (collectively with the
Recapitalization Common Stock, "Total Restricted Stock"). Shares
subject to such restrictions may only be disposed of in accordance with
the following age restrictions and percentages of Total Restricted
Stock: under age 35 -- 0%, ages 35-38 -- 10%, ages 39-42 -- 20%, ages
43-46 -- 30%, ages 47-49 -- 40%, ages 50 and above -- 50%. Such
restrictions are in effect only while a holder of such Total Restricted
Stock remains an employee of the Company.
(2) Includes 9,297,310 shares of Common Stock that may be acquired upon the
exercise of options that are exercisable within 60 days after February
3, 1997. Such options were granted pursuant to the 1988 Equity
Incentive Compensation Plan or the Stock Option Plan. Of these shares,
128,188 are not subject to the Voting Agreements.
(3) Includes 27,414,199 shares underlying stock unit awards granted
pursuant to the Equity Incentive Compensation Plans. An equivalent
number of shares of Common Stock held in trust will be voted in
accordance with the results of a Preliminary Vote.
(4) Includes 1,167,749 shares of Common Stock that are not subject to the
Voting Agreements.
(5) Does not include 998,145 shares of Common Stock into which shares of
ESOP Stock are convertible which have been allocated to the
Signatories. Each share of ESOP Stock is convertible into two shares of
Common Stock. Each share of ESOP Stock is entitled to 2.7 votes with
respect to each matter to be voted on by the Company's shareholders.
Such shares are not subject to the Voting Agreements.
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as described herein, no director or executive
officer of the Company was indebted to the Company during Fiscal 1996 for any
amount in excess of $60,000, and there were no related party transactions among
the Company and its executive officers, directors and the holders of more than
5% of the outstanding shares of Common Stock.
Mr. Mack, through a corporation, owns an interest in an
aircraft that was utilized in Company business. Aggregate payments made by the
Company to the corporation for property and services during the period from
December 1, 1995 to December 31, 1996 were $152,585. Payments for property and
services were made on terms that the Company believes could have been obtained
from non-affiliated third parties for comparable transactions.
The Company extends, and in the ordinary course of its
business during Fiscal 1996 the Company extended, credit to certain directors,
officers and employees of the Company and MS&Co., as well as to members of their
immediate families, in connection with their purchase of securities. Such
extensions of credit have been made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with non-affiliated third parties, and did not involve more than
normal risk of collectibility or present other unfavorable features. To the
extent that officers and employees of the Company, MS&Co. and MSIL (and members
of their immediate families) wish to purchase securities in brokerage
transactions, they are ordinarily required to do so through MS&Co. or MSIL, as
the case may be, which offers them a discount of 40% on its standard commission
rate. MS&Co. and the Company's other broker-dealer subsidiaries also, from time
to time and in the ordinary course of business, enter into transactions
involving the purchase or sale of securities from or to certain directors,
officers and employees of the Company, MS&Co. and the Company's other
broker-dealer subsidiaries, as the case may be, and members of their immediate
families, as principal. Such purchases and sales of securities on a principal
basis are effected at a discount from the dealer mark-up or mark-down, as the
case may be, charged to non-affiliated third parties. Pursuant to its stock
repurchase authorization, the Company also may repurchase or acquire shares of
Common Stock in the open market and in privately negotiated transactions,
including transactions with directors, executive officers and employees. Such
transactions are in the ordinary course of business and at prevailing market
prices.
The Company, from time to time, also makes advances to certain
of its directors, officers and employees against commissions and other
compensation that would otherwise be payable to them in the ordinary course of
business and loans in connection with housing and relocation expenses. No
interest is charged by the Company on such advances and loans.
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 F-1 hereof.
38
2 Financial Statement Schedules. The financial statement
schedules required to be filed hereunder are listed on page
F-1 hereof.
3 Exhibits. Certain of the following exhibits, as indicated
parenthetically, were previously filed as exhibits to
registration statements filed by the Registrant under the
Securities Act of 1933, as amended, or to reports or
registration statements filed by the Registrant under the
Securities Exchange Act of 1934, as amended, respectively, and
are hereby incorporated by reference to such statements or
reports.
2.1 Agreement and Plan of Merger dated as of June 21,
1996 among VK/AC Holdings, Inc., Morgan Stanley Group
Inc., MSAM Holdings II, Inc. and MSAM Acquisition
Inc. (Quarterly Report on Form 10-Q for the fiscal
quarter ended May 31, 1996).
2.2 Agreement and Plan of Merger dated as of February 4,
1997 between Dean Witter, Discover & Co. and Morgan
Stanley Group Inc. (Current Report on Form 8-K dated
February 4, 1997).
3.1 Restated Certificate of Incorporation of the Company,
as amended to date (Registration Statement on Form
8-A dated December 16, 1996).
3.2 By-Laws of the Company, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1995).
4.1 Restated Certificate of Incorporation of the Company,
as amended to date (see Exhibit 3.1).
4.2 Stockholders' Agreement dated February 14, 1986, as
amended (Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
4.3 Form of Consent and Amendment dated as of January 31,
1996 between the Company and certain signatories to
the Stockholders' Agreement referred to in Exhibit
4.2 (Annual Report on Form 10-K for the fiscal period
ended November 30, 1995).
4.4 Senior Indenture dated as of April 15, 1989 between
the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
4.5 First Supplemental Senior Indenture dated as of May
15, 1991 between the Company and The Chase Manhattan
Bank (formerly known as Chemical Bank), as trustee
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.6 Second Supplemental Senior Indenture dated as of
April 15, 1996 between the Company and The Chase
Manhattan Bank (formerly
39
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.7 Subordinated Indenture dated as of April 15, 1989
between the Company and The First National Bank of
Chicago, as trustee (Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
4.8 First Supplemental Subordinated Indenture dated as of
May 15, 1991 between the Company and The First
National Bank of Chicago, as trustee (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
4.9 Second Supplemental Subordinated Indenture dated as
of April 15, 1996 between the Company and The First
National Bank of Chicago, as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.10 Subordinated Indenture dated as of November 15, 1993
among Morgan Stanley Finance plc, the Company, as
guarantor, and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated December 1, 1993).
4.11 Voting Agreement dated March 5, 1991 among the
Company, State Street Bank and Trust Company and
Other Persons Signing Similar Voting Agreements
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.12 Instruments defining the Rights of Security Holders,
Including Indentures - In addition to Exhibits 4.1
through 4.11 herein, pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the
Securities and Exchange Commission upon request
copies of the instruments defining the rights of
holders of long-term debt securities of the
Registrant and its subsidiaries, none of which
instruments authorizes the issuance of an amount of
securities that exceeds 10% of the total assets of
the Registrant and its subsidiaries on a consolidated
basis.
10.1+ Form of Agreement under the Morgan Stanley & Co.
Incorporated Owners' and Select Earners' Plan (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.2+ Form of Agreement under the Morgan Stanley Group Inc.
Officers' and Select Earners' Plan (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
40
10.3+ Morgan Stanley & Co. Incorporated Excess Benefit
Plan, as amended and restated to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.4+ Morgan Stanley & Co. Incorporated Supplemental
Executive Retirement Plan, as amended (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.5+ Morgan Stanley Group Inc. 1986 Stock Option Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.6+ Morgan Stanley Group Inc. Performance Unit Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.7+ Morgan Stanley Group Inc. Deferred Compensation Plan
for Outside Directors, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.8+ Morgan Stanley Group Inc. 1988 Equity Incentive
Compensation Plan, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.9+ Morgan Stanley Group Inc. 1995 Equity Incentive
Compensation Plan (Proxy Statement for 1996 Meeting
of Stockholders).
10.10+ Morgan Stanley Group Inc. 1988 Capital Accumulation
Plan, as amended to date (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.11+ Form of Deferred Compensation Agreement under the
Pre-Tax Incentive Program (Annual Report on Form 10-K
for the fiscal year ended January 31, 1994).
10.12+* Deferred Compensation Agreement under the Pre-Tax
Incentive Program 2.
10.13 Trust Agreement dated March 5, 1991 between the
Company and State Street Bank and Trust Company
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
* Filed herewith.
41
10.14* First Amendment to Trust Agreement dated April 3, 1996 between
the Company and State Street Bank and Trust Company.
10.15 Agreement of Lease dated May 13, 1986 between Morgan Stanley
& Co. Incorporated and Forest City Pierrepont Associates, as
amended (Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
10.16 Agreement of Sublease between McGraw Hill, Inc. and Morgan
Stanley & Co. Incorporated, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31, 1993).
10.17 Lease dated January 22, 1993 between Rock-McGraw, Inc. and
Morgan Stanley & Co. Incorporated (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.18 Agreement of Lease dated February 10, 1995 among Canary Wharf
Limited, Morgan Stanley UK Group and the Company (Annual
Report on Form 10-K for the fiscal year ended January 31,
1995).
10.19 Stock Option Agreement dated as of February 4, 1997 between
Dean Witter, Discover & Co., as Issuer, and Morgan Stanley
Group Inc., as Grantee (Current Report on Form 8-K dated
February 4, 1997).
11* Statement Re: Computation of Earnings Per Share.
12* Statement Re: Computation of Ratio of Earnings to Fixed
Charges and Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
13* The following portions of the Company's 1996 Annual Report to
Stockholders, which are incorporated by reference in this
Annual Report on Form 10-K, are filed as an Exhibit:
13.1 "Quarterly Results" (page 88).
13.2 "Selected Financial Data" (other than the information
contained in the column entitled "Fiscal Period Ended
November 30, 1995 Annualized (Unaudited)") (Inner
Cover).
13.3 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (pages 30 to
50).
13.4 Consolidated Financial Statements of the Company and
its subsidiaries, together with the Notes thereto and
the Report of Independent Auditors thereon (pages 51
to 88).
21* Subsidiaries of the Company.
----------
* Filed herewith.
42
23.1* Consent of Ernst & Young, LLP.
23.2* Consent of Ernst & Young, LLP with respect to the Financial
Statements for the fiscal year ended December 31, 1996 for
the Morgan Stanley U.K. Group Profit Sharing Scheme.
24 Powers of Attorney (included on signature page).
27* Financial Data Schedule.
99* Financial Statements for the fiscal year ended December 31,
1996 for the Morgan Stanley U.K. Group Profit Sharing Scheme.
(b) Form 8-K dated October 2, 1996, Items 5 and 7.
----------
* Filed herewith.
43
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 27, 1997.
MORGAN STANLEY GROUP INC.
By /s/ Richard B. Fisher
---------------------
Richard B. Fisher
Chairman of the Board of Directors
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Morgan Stanley
Group Inc., hereby severally constitute Jonathan M. Clark, Robert G. Scott and
Ralph L. Pellecchio, 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 27th of February, 1997.
[Download Table]
Signature Title
--------- -----
/s/ Richard B. Fisher Chairman, Managing Director
------------------------ and Director
(Richard B. Fisher)
/s/ John J. Mack President, Managing Director
------------------------ and Director
(John J. Mack)
/s/ Barton M. Biggs Managing Director and Director
------------------------
(Barton M. Biggs)
/s/ Peter F. Karches Managing Director and Director
------------------------
(Peter F. Karches)
/s/ Sir David A. Walker Managing Director and Director
------------------------
(Sir David A. Walker)
/s/ Philip N. Duff Chief Financial Officer
------------------------ and Managing Director
(Philip N. Duff)
/s/ Eileen K. Murray Treasurer and Chief Accounting
------------------------ Officer
(Eileen K. Murray)
44
[Download Table]
Signature Title
--------- -----
/s/ Robert P. Bauman Director
------------------------
(Robert P. Bauman)
/s/ Daniel B. Burke Director
------------------------
(Daniel B. Burke)
/s/ S. Parker Gilbert Director
------------------------
(S. Parker Gilbert)
/s/ Allen E. Murray Director
------------------------
(Allen E. Murray)
/s/ Paul J. Rizzo Director
------------------------
(Paul J. Rizzo)
45
Morgan Stanley Group Inc.
Index to Financial Statements
and Financial Statement Schedules
Items (14)(a)(1) and (14)(a)(2)
[Enlarge/Download Table]
PAGE
----
FINANCIAL STATEMENTS FORM 10-K ANNUAL REPORT
-------------------- --------- -------------
Report of Independent Auditors .................... 51
Consolidated Statement of Financial ............... 52
Condition at November 30, 1996
and November 30, 1995
Consolidated Statement of Income for .............. 54
the Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year Ended January 31, 1995
Consolidated Statement of Cash Flows .............. 55
for the Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year January 31, 1995
Consolidated Statement of Changes ................. 56
in Stockholders' Equity for the
Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year Ended January 31, 1995
Notes to Consolidated Financial ................... 58
Statements
FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial .................. F-2 - F-5
Information of Registrant Morgan
Stanley Group Inc. (Parent Company
Only) - Condensed Financial Statements
for the Fiscal Year Ended November 30, 1996,
the Fiscal Period Ended November 30, 1995
and the Fiscal Year Ended January 31, 1995
F-1
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Condensed Statement of Financial Condition
November 30, 1996 and November 30, 1995
(Dollars in thousands, except share data)
[Enlarge/Download Table]
November 30, November 30,
1996 1995
------------ ------------
Assets:
Cash and interest-bearing equivalents ........................ $ - $ 57,994
Financial instruments owned .................................. 700,493 543,073
Advances to subsidiaries ..................................... 39,901,432 26,201,837
Investment in subsidiaries, at equity ........................ 6,576,247 4,871,122
Other assets ................................................. 964,383 589,155
------------ ------------
Total assets ................................................. $ 48,142,555 $ 32,263,181
============ ============
Liabilities and Stockholders' Equity:
Short-term borrowings ........................................ $ 16,536,711 $ 10,173,519
Payables to subsidiaries ..................................... 11,622,531 8,037,076
Other liabilities and accrued expenses ....................... 606,418 590,534
Long-term borrowings ......................................... 12,838,590 8,287,688
------------ ------------
41,604,250 27,088,817
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ............................................. 1,222,712 817,523
Common stock, $1.00 par value; authorized 600,000,000 shares;
issued 163,236,893 shares at November 30, 1996
and 162,838,920 shares at November 30, 1995* ............... 163,237 162,839
Paid-in capital* ............................................ 1,144,305 730,356
Retained earnings ........................................... 4,503,698 3,815,224
Cumulative translation adjustments .......................... (10,512) (8,984)
------------ ------------
Subtotal ................................................. 7,023,440 5,516,958
Less:
Note receivable related to sale of preferred stock to ESOP 77,721 88,559
Common stock held in treasury, at cost
(9,894,271 shares at November 30, 1996
and 7,635,174 shares at November 30, 1995)* ............ 407,414 254,035
------------ ------------
Total stockholders' equity .............................. 6,538,305 5,174,364
------------ ------------
Total liabilities and stockholders' equity ................... $ 48,142,555 $ 32,263,181
============ ============
* Amounts for fiscal 1995 have been retroactively adjusted to give effect for a
two-for-one stock split, effected in the form of a 100% stock dividend, which
became effective on January 26, 1996.
See Notes to Condensed Financial Statements.
F-2
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Condensed Statement of Income
For the Fiscal Year Ended November 30, 1996, the Fiscal Period Ended
November 30, 1995 and the Fiscal Year Ended January 31, 1995
(Dollars in Thousands, Except Share Data)
[Enlarge/Download Table]
Fiscal Year Ended Fiscal Period Ended Fiscal Year Ended
REVENUES: November 30, November 30, January 31,
1996 1995 1995
------------------ -------------------- ------------------
Interest and dividends $ 3,037,461 $ 1,490,239 $ 1,312,628
Principal transactions (63,439) 22,090 11,875
Fiduciary fees 20,914 15,137 12,683
Other 2,026 370 (93)
------------------ -------------------- ------------------
Total revenues 2,996,962 1,527,836 1,337,093
Interest expense 3,002,423 1,540,677 1,263,495
Expenses excluding interest 1,080 8,231 10,312
------------------ -------------------- ------------------
(Loss) income before income tax (benefit) provision
and equity in earnings of subsidiaries (6,541) (21,072) 63,286
Income tax (benefit) provision (8,092) (17,544) 29,296
------------------ -------------------- ------------------
Income (loss) before equity in earnings of subsidiaries 1,551 (3,528) 33,990
Equity in earnings of subsidiaries, net of tax 1,028,010 603,665 360,884
------------------ -------------------- ------------------
Net income $ 1,029,561 $ 600,137 $ 394,874
================== ==================== ==================
Preferred stock dividend requirements $ 66,282 $ 54,155 $ 64,723
================== ==================== ==================
Earnings applicable to common shares (1) $ 963,279 $ 545,982 $ 330,151
================== ==================== ==================
Average common and common equivalent
shares outstanding (1) (2) 153,514,483 156,912,678 157,793,216
================== ==================== ==================
Primary earnings per share (2) $ 6.27 $ 3.48 $ 2.09
================== ==================== ==================
Fully diluted earnings per share (2) $ 5.96 $ 3.33 $ 2.02
================== ==================== ==================
(1) Amounts shown are used to calculate primary earnings per share.
(2) Amounts for fiscal 1995 and fiscal 1994 have been retroactively adjusted to
give effect for a two-for-one stock split, effected in the form of a 100%
stock dividend, which became effective on January 26, 1996.
See Notes to Condensed Financial Statements.
F-3
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Condensed Statement of Cash Flows
For the Fiscal Year Ended November 30, 1996, the Fiscal Period Ended
November 30, 1995 and the Fiscal Year Ended January 31, 1995
(Dollars in Thousands)
[Enlarge/Download Table]
Fiscal Year Ended Fiscal Period Ended
November 30, November 30,
1996 1995
------------------ --------------------
Cash flows from operating activities:
Net income $ 1,029,561 $ 600,137
Adjustments to reconcile net income to net cash
used for operating activities:
Non-cash charges (credits) included in net income:
Deferred income taxes (62,053) (9,966)
Compensation payable in common or preferred stock 426,080 165,420
Equity in subsidiaries' earnings, net of dividends 1,668,810 818,544
(Increase) decrease in assets:
Financial instruments owned (157,420) 44,833
Investment in and advances to subsidiaries, at equity (15,804,317) (8,490,001)
Other assets (338,321) (380,582)
Increase (decrease) in liabilities:
Payables to subsidiaries 3,585,455 3,519,194
Other liabilities and accrued expenses, net of deferred liabilities 78,002 280,467
------------------ --------------------
Net cash used for operating activities (9,574,203) (3,451,954)
Cash flows from investing activities:
Purchase of Miller Anderson & Sherrerd, LLP, net of cash acquired (199,783) -
Purchase of Van Kampen American Capital, Inc.,net of cash acquired (986,425) -
------------------ --------------------
Net cash used for investing activities (1,186,208) -
Cash flows from financing activities:
Net proceeds related to short-term borrowings 6,363,192 2,875,282
Proceeds from:
Issuance of common stock 111,713 78,513
Issuance of 7-3/4% Cumulative Preferred Stock 197,174 -
Issuance of Series A Fixed/Adjustable Rate Cumulative Preferred Stock 342,833 -
Issuance of long-term borrowings 5,873,615 1,899,417
Payments for:
Repurchase of common stock (507,287) (103,126)
Repayments of long-term borrowings (1,361,913) (1,195,501)
Redemption of 9.36% Cumulative Preferred Stock (137,500)
Cash dividends (179,410) (122,941)
------------------ --------------------
Net cash provided by financing activities 10,702,417 3,431,644
------------------ --------------------
Net decrease in cash and interest-bearing equivalents (57,994) (20,310)
Cash and interest-bearing equivalents, at beginning of year 57,994 78,304
------------------ --------------------
Cash and interest-bearing equivalents, at end of year $ - $ 57,994
================== ====================
[Enlarge/Download Table]
Fiscal Year Ended
January 31,
1995
------------------
Cash flows from operating activities:
Net income $ 394,874
Adjustments to reconcile net income to net cash
used for operating activities:
Non-cash charges (credits) included in net income:
Deferred income taxes 19,747
Compensation payable in common or preferred stock 116,481
Equity in subsidiaries' earnings, net of dividends 79,878
(Increase) decrease in assets:
Financial instruments owned 48,955
Investment in and advances to subsidiaries, at equity (5,700,470)
Other assets (110,979)
Increase (decrease) in liabilities:
Payables to subsidiaries 3,885,791
Other liabilities and accrued expenses, net of deferred liabilities (139,983)
------------------
Net cash used for operating activities (1,405,706)
Cash flows from investing activities:
Purchase of Miller Anderson & Sherrerd, LLP, net of cash acquired -
Purchase of Van Kampen American Capital, Inc.,net of cash acquired -
------------------
Net cash used for investing activities -
Cash flows from financing activities:
Net proceeds related to short-term borrowings 822,433
Proceeds from:
Issuance of common stock 20,477
Issuance of 7-3/4% Cumulative Preferred Stock -
Issuance of Series A Fixed/Adjustable Rate Cumulative Preferred Stock -
Issuance of long-term borrowings 2,153,858
Payments for:
Repurchase of common stock (287,123)
Repayments of long-term borrowings (1,201,955)
Redemption of 9.36% Cumulative Preferred Stock
Cash dividends (151,297)
------------------
Net cash provided by financing activities 1,356,393
------------------
Net decrease in cash and interest-bearing equivalents (49,313)
Cash and interest-bearing equivalents, at beginning of year 127,617
------------------
Cash and interest-bearing equivalents, at end of year $ 78,304
==================
In connection with the Company's acquisition of Miller Anderson & Sherrerd, LLP,
the Company issued 2,012,264 shares of common stock having a fair value on the
date of acquisition, January 3, 1996, of approximately $83 million.
See Notes to Condensed Financial Statements.
F-4
SCHEDULE I
Morgan Stanley Group Inc.
(Parent Company Only)
Notes to Condensed Financial Statements
1. General
The condensed financial statements of Morgan Stanley Group Inc. (the
"Company") should be read in conjunction with the consolidated financial
statements of Morgan Stanley Group Inc. and Subsidiaries and the notes
thereto.
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 its subsidiaries.
3. Change in Fiscal Year-End
On February 28, 1995, the Board of Directors approved a change in the
Company's fiscal year-end from January 31 to November 30. This change
became effective for the fiscal period ended November 30, 1995, and,
accordingly, this report includes the results for the fiscal year ended
November 30, 1996 ("fiscal 1996"), the 10-month period from February 1,
1995 through November 30, 1995 ("fiscal 1995"), and those for the fiscal
year ended January 31, 1995 ("fiscal 1994").
4. Subsequent Event
On February 5, 1997, the Company and Dean Witter, Discover & Co. announced
a definitive agreement to merge. The combined company would be a
pre-eminent global financial services firm with a market capitalization of
approximately $21 billion (as of the time of the merger announcement date)
and with leading market positions in the securities, asset management and
credit services business. The new company will be named Morgan Stanley,
Dean Witter, Discover & Co. Under the terms of the merger agreement
unanimously approved by the Boards of both companies, each of the Company's
common shares will be exchanged for 1.65 DWD common shares. The
transaction, which is expected to be completed in mid-1997, is intended to
be accounted for as a pooling of interests and is subject to customary
closing conditions, including certain regulatory approvals and the approval
of shareholders of both companies.
F-5
Exhibit Index
-------------
Exhibit No. Exhibit
----------- -------
2.1 Agreement and Plan of Merger dated as of June 21,
1996 among VK/AC Holdings, Inc., Morgan Stanley Group
Inc., MSAM Holdings II, Inc. and MSAM Acquisition
Inc. (Quarterly Report on Form 10-Q for the fiscal
quarter ended May 31, 1996).
2.2 Agreement and Plan of Merger dated as of February 4,
1997 between Dean Witter, Discover & Co. and Morgan
Stanley Group Inc. (Current Report on Form 8-K dated
February 4, 1997).
3.1 Restated Certificate of Incorporation of the Company,
as amended to date (Registration Statement on Form
8-A dated December 16, 1996).
3.2 By-Laws of the Company, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1995).
4.1 Restated Certificate of Incorporation of the Company,
as amended to date (see Exhibit 3.1).
4.2 Stockholders' Agreement dated February 14, 1986, as
amended (Annual Report on Form 10-K for the fiscal
year ended January 31, 1993).
4.3 Form of Consent and Amendment dated as of January 31,
1996 between the Company and certain signatories to
the Stockholders' Agreement referred to in Exhibit
4.2 (Annual Report on Form 10-K for the fiscal period
ended November 30, 1995).
4.4 Senior Indenture dated as of April 15, 1989 between
the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
4.5 First Supplemental Senior Indenture dated as of May
15, 1991 between the Company and The Chase Manhattan
Bank (formerly known as Chemical Bank), as trustee
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.6 Second Supplemental Senior Indenture dated as of
April 15, 1996 between the Company and The Chase
Manhattan Bank (formerly
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.7 Subordinated Indenture dated as of April 15, 1989
between the Company and The First National Bank of
Chicago, as trustee (Annual Report on Form 10-K for
the fiscal year ended January 31, 1993).
4.8 First Supplemental Subordinated Indenture dated as of
May 15, 1991 between the Company and The First
National Bank of Chicago, as trustee (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
4.9 Second Supplemental Subordinated Indenture dated as
of April 15, 1996 between the Company and The First
National Bank of Chicago, as trustee (Current Report
on Form 8-K dated May 6, 1996).
4.10 Subordinated Indenture dated as of November 15, 1993
among Morgan Stanley Finance plc, the Company, as
guarantor, and The Chase Manhattan Bank (formerly
known as Chemical Bank), as trustee (Current Report
on Form 8-K dated December 1, 1993).
4.11 Voting Agreement dated March 5, 1991 among the
Company, State Street Bank and Trust Company and
Other Persons Signing Similar Voting Agreements
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
4.12 Instruments defining the Rights of Security Holders,
Including Indentures - In addition to Exhibits 4.1
through 4.11 herein, pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the
Securities and Exchange Commission upon request
copies of the instruments defining the rights of
holders of long-term debt securities of the
Registrant and its subsidiaries, none of which
instruments authorizes the issuance of an amount of
securities that exceeds 10% of the total assets of
the Registrant and its subsidiaries on a consolidated
basis.
10.1+ Form of Agreement under the Morgan Stanley & Co.
Incorporated Owners' and Select Earners' Plan (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.2+ Form of Agreement under the Morgan Stanley Group Inc.
Officers' and Select Earners' Plan (Annual Report on
Form 10-K for the fiscal year ended January 31,
1993).
----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
10.3+ Morgan Stanley & Co. Incorporated Excess Benefit
Plan, as amended and restated to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.4+ Morgan Stanley & Co. Incorporated Supplemental
Executive Retirement Plan, as amended (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.5+ Morgan Stanley Group Inc. 1986 Stock Option Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.6+ Morgan Stanley Group Inc. Performance Unit Plan, as
amended and restated to date (Annual Report on Form
10-K for the fiscal year ended January 31, 1993).
10.7+ Morgan Stanley Group Inc. Deferred Compensation Plan
for Outside Directors, as amended to date (Annual
Report on Form 10-K for the fiscal year ended January
31, 1993).
10.8+ Morgan Stanley Group Inc. 1988 Equity Incentive
Compensation Plan, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31,
1993).
10.9+ Morgan Stanley Group Inc. 1995 Equity Incentive
Compensation Plan (Proxy Statement for 1996 Meeting
of Stockholders).
10.10+ Morgan Stanley Group Inc. 1988 Capital Accumulation
Plan, as amended to date (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.11+ Form of Deferred Compensation Agreement under the
Pre-Tax Incentive Program (Annual Report on Form 10-K
for the fiscal year ended January 31, 1994).
10.12+* Deferred Compensation Agreement under the Pre-Tax
Incentive Program 2.
10.13 Trust Agreement dated March 5, 1991 between the
Company and State Street Bank and Trust Company
(Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
----------
+ Management Contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
* Filed herewith.
10.14* First Amendment to Trust Agreement dated April 3, 1996 between
the Company and State Street Bank and Trust Company.
10.15 Agreement of Lease dated May 13, 1986 between Morgan Stanley
& Co. Incorporated and Forest City Pierrepont Associates, as
amended (Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).
10.16 Agreement of Sublease between McGraw Hill, Inc. and Morgan
Stanley & Co. Incorporated, as amended to date (Annual Report
on Form 10-K for the fiscal year ended January 31, 1993).
10.17 Lease dated January 22, 1993 between Rock-McGraw, Inc. and
Morgan Stanley & Co. Incorporated (Annual Report on Form 10-K
for the fiscal year ended January 31, 1993).
10.18 Agreement of Lease dated February 10, 1995 among Canary Wharf
Limited, Morgan Stanley UK Group and the Company (Annual
Report on Form 10-K for the fiscal year ended January 31,
1995).
10.19 Stock Option Agreement dated as of February 4, 1997 between
Dean Witter, Discover & Co., as Issuer, and Morgan Stanley
Group Inc., as Grantee (Current Report on Form 8-K dated
February 4, 1997).
11* Statement Re: Computation of Earnings Per Share.
12* Statement Re: Computation of Ratio of Earnings to Fixed
Charges and Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
13* The following portions of the Company's 1996 Annual Report to
Stockholders, which are incorporated by reference in this
Annual Report on Form 10-K, are filed as an Exhibit:
13.1 "Quarterly Results" (page 88).
13.2 "Selected Financial Data" (other than the information
contained in the column entitled "Fiscal Period Ended
November 30, 1995 Annualized (Unaudited)") (Inner
Cover).
13.3 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (pages 30 to
50).
13.4 Consolidated Financial Statements of the Company and
its subsidiaries, together with the Notes thereto and
the Report of Independent Auditors thereon (pages 51
to 88).
21* Subsidiaries of the Company.
----------
* Filed herewith.
23.1* Consent of Ernst & Young, LLP.
23.2* Consent of Ernst & Young, LLP with respect to the
Financial Statements for the fiscal year ended
December 31, 1996 for the Morgan Stanley U.K. Group
Profit Sharing Scheme.
24 Powers of Attorney (included on signature page).
27* Financial Data Schedule.
99* Financial Statements for the fiscal year ended December 31,
1996 for the Morgan Stanley U.K. Group Profit Sharing Scheme.
----------
* Filed herewith.
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K405’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 1/31/05 | | 31 |
| | 7/31/03 | | 1 |
| | 2/26/03 | | 31 | | 32 |
| | 2/15/03 | | 32 |
| | 3/29/02 | | 1 |
| | 12/31/01 | | 1 |
| | 5/1/01 | | 1 |
| | 11/1/00 | | 23 |
| | 9/30/00 | | 1 |
| | 11/1/99 | | 23 |
| | 2/16/99 | | 1 |
| | 1/1/99 | | 14 |
| | 11/1/98 | | 23 |
| | 11/15/97 | | 1 |
| | 11/1/97 | | 23 |
| | 10/3/97 | | 1 |
| | 10/1/97 | | 1 |
| | 8/15/97 | | 1 | | | | | 13F-E |
| | 7/1/97 | | 1 |
| Filed on: | | 2/27/97 | | 45 | | | | | 424B3 |
| | 2/5/97 | | 3 | | 51 | | | 424B3, 8-K, SC 13G/A |
| | 2/4/97 | | 40 | | 55 | | | 3, 8-K |
| | 2/3/97 | | 1 | | 38 |
| | 1/31/97 | | 34 | | | | | 424B3 |
| | 1/27/97 | | 21 | | | | | 424B3 |
| | 12/31/96 | | 24 | | 56 | | | 13F-E, 424B3 |
| | 12/26/96 | | 21 | | | | | 8-K |
| | 12/16/96 | | 40 | | 52 | | | 424B2, S-3 |
| | 12/10/96 | | 9 |
| | 12/9/96 | | 30 | | | | | 424B3 |
| For Period End: | | 11/30/96 | | 1 | | 51 |
| | 11/27/96 | | 21 | | | | | 424B3 |
| | 10/31/96 | | 8 | | 23 |
| | 10/2/96 | | 44 | | | | | 8-K |
| | 10/1/96 | | 21 |
| | 8/29/96 | | 22 |
| | 7/17/96 | | 22 | | | | | 8-K |
| | 6/21/96 | | 40 | | 52 | | | 424B3, 8-K |
| | 6/11/96 | | 22 |
| | 5/31/96 | | 40 | | 52 | | | 10-Q |
| | 5/6/96 | | 41 | | 53 | | | 424B2, 8-K |
| | 4/15/96 | | 40 | | 53 | | | 424B3, S-3/A |
| | 4/3/96 | | 43 | | 55 | | | DEF 14A, PRE 14A |
| | 2/26/96 | | 32 | | | | | 10-K405, 424B3, DEF 14A |
| | 2/20/96 | | 32 | | | | | 424B3, 8-K |
| | 1/31/96 | | 40 | | 52 | | | 424B3 |
| | 1/26/96 | | 48 | | 49 |
| | 1/3/96 | | 36 | | 50 |
| | 12/31/95 | | 24 | | | | | 13F-E |
| | 12/19/95 | | 21 |
| | 12/18/95 | | 21 |
| | 12/11/95 | | 30 | | | | | SC 13G/A |
| | 12/1/95 | | 29 | | 39 | | | SC 13G/A |
| | 11/30/95 | | 2 | | 55 | | | 10-K405, 10-K405/A, 424B3 |
| | 10/20/95 | | 21 | | | | | 8-K |
| | 8/22/95 | | 21 | | | | | 8-K, SC 13D/A, SC 14D1 |
| | 8/10/95 | | 21 |
| | 2/28/95 | | 51 | | | | | 8-K |
| | 2/10/95 | | 43 | | 55 | | | SC 13G |
| | 2/2/95 | | 21 |
| | 2/1/95 | | 29 | | 51 |
| | 1/31/95 | | 2 | | 55 | | | 10-K405 |
| | 12/31/94 | | 24 | | | | | 13F-E |
| | 12/16/94 | | 21 |
| | 12/6/94 | | 22 |
| | 11/18/94 | | 31 |
| | 7/11/94 | | 20 |
| | 6/28/94 | | 20 |
| | 5/27/94 | | 21 |
| | 5/2/94 | | 20 |
| | 2/1/94 | | 29 |
| | 1/31/94 | | 42 | | 54 |
| | 12/1/93 | | 41 | | 53 |
| | 11/15/93 | | 41 | | 53 |
| | 1/31/93 | | 40 | | 55 |
| | 1/22/93 | | 43 | | 55 |
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Filing Submission 0000950123-97-001728 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
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