-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, NVkdWfiMJnT22LjbcMjSJXSF6bh/n++T08DJGUSyRMiFt9Fn1g0bZFfoZ71YuChI 8FuupZN9vPc79RujWILWew== 0000950123-95-001127.txt : 19950427 0000950123-95-001127.hdr.sgml : 19950427 ACCESSION NUMBER: 0000950123-95-001127 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19950131 FILED AS OF DATE: 19950426 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY GROUP INC /DE/ CENTRAL INDEX KEY: 0000789625 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 132838811 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09085 FILM NUMBER: 95531141 BUSINESS ADDRESS: STREET 1: 1251 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2127034000 10-K405 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JANUARY 31, 1995 COMMISSION FILE NUMBER 1-9085 MORGAN STANLEY GROUP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-2838811 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1251 AVENUE OF THE AMERICAS NEW YORK, N.Y. 10020 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 703-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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 9.36% Cumulative Preferred Stock, $25 stated value New York Stock Exchange Depositary Shares, each representing 1/8 of a share of 8.88% 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 7.82% Capital Units; 7.80% Capital Units; 9.00% Capital Units* New York Stock Exchange AMEX Hong Kong 30 Index(SM) Call Warrants Expiring November 4, 1996+ American Stock Exchange Japanese Yen Put Warrants Expiring September 18, 1995 American Stock Exchange Japan Index(SM) Call Warrants Expiring May 28, 1996+ American Stock Exchange 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++
- --------------- * Each Capital Unit consists of (a) a $25 principal amount 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 1/8 of a share 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. + The "AMEX Hong Kong 30 Index" and the "Japan Index" are service marks of the American Stock Exchange. ++ "PERQS" and "Performance Equity-linked Redemption Quarterly-pay Securities" are service marks of the Registrant. The issue price and amount payable at maturity with respect to the PERQS are based on the share price of certain non-affiliated companies. 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 April 10, 1995 was approximately $3,595,556,182. 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 April 10, 1995, there were 77,172,357 shares of Common Stock, $1 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Morgan Stanley Group Inc. 1994 Annual Report to Stockholders -- Incorporated in part in Form 10-K, Parts I, II and IV. (2) Morgan Stanley Group Inc. Proxy Statement for its 1995 Annual Meeting of Stockholders -- Incorporated in part in Form 10-K, Parts I and III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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; merchant banking and other principal investment activities; brokerage and research services; asset management; 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, international branches or representative offices in Beijing, Bombay, Frankfurt, Geneva, Hong Kong, Johannesburg, London, Luxembourg, Madrid, Melbourne, Milan, Montreal, Moscow, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo, Toronto and Zurich, and United States regional offices in Chicago, Los Angeles and San Francisco. At January 31, 1995, the Company employed 9,685 people. The Company's business activities are highly integrated and constitute a single industry segment. Financial information concerning the Company for each of the three fiscal years ended January 31, 1995, January 31, 1994 and January 31, 1993, 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 1994 Annual Report to Stockholders and is incorporated herein by reference. INVESTMENT BANKING The Company is a leading international investment banking 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 in the United States and international capital markets on behalf of United States and non-United States issuers. The Company is a leading underwriter of common stock, preferred stock, Preferred Equity Redemption Cumulative Stock ("PERCS(R)"), Performance Equity-linked Redemption Quarterly-pay Securities ("PERQS(SM)"), other equity-related securities, including American Depositary Receipts ("ADRs"), and taxable fixed income securities in the United States market and equity and taxable fixed income securities - ----------------------- * Unless the context otherwise requires, the term "Company" means Morgan Stanley Group Inc., and includes Morgan Stanley & Co. Incorporated ("Morgan Stanley"), Morgan Stanley & Co. International Limited and the other consolidated subsidiaries of Morgan Stanley Group Inc. Please note that in the 1994 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. 3 denominated in United States dollars and other currencies in international markets. The Company also underwrites tax exempt securities. In addition, the Company underwrites mortgage-related securities, including private pass-throughs and collateralized mortgage obligations ("CMOs"), and other asset-backed securities. The Company is active as an underwriter and distributor of commercial paper and other short-term and medium-term securities. The Company is also involved in tender offers, repurchase programs, consent solicitations, rights offerings and exchange offers on behalf of clients. The Company provides corporate and institutional clients in the United States and internationally 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. In addition, the Company provides advice and other services relating to project financings, lease transactions and the purchase, sale and financing of real estate. The Company may, from time to time, also provide financing or financing commitments in special situations to companies in connection with its investment banking activities. SALES, TRADING AND MARKET-MAKING ACTIVITIES The Company provides a broad range of sales, trading and research services to investors worldwide and is an active dealer in fixed income, equity, foreign exchange and commodity products, including derivatives. In the United States, the Company ranks as one of the largest dealers in equity and fixed income securities. As a member of the major United States 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 foreign institutional and, to a lesser extent, individual investors. The Company trades for its own account in equity and fixed income securities, foreign currencies, commodities and associated derivative products. The Company also provides financing to clients, including margin lending and other extensions of credit. 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 (OPALS(SM)) 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 borrows and lends equity securities. The Company also engages in the risk arbitrage business, which involves 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 distributes and trades domestic and foreign debt securities, particularly corporate debt instruments, and preferred stock, offers investment strategies to 2 4 institutional accounts, develops swap 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 mortgage-backed and other asset-backed securities and 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. Morgan Stanley is one of 38 primary dealers of United States 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 United States government securities, provide the Federal Reserve Bank of New York with market information and maintain certain capital standards. Morgan Stanley is also a member of a number of selling groups responsible for the distribution of various issues of U.S. agency and other debt securities. As such, it is required to make secondary markets in these securities and to provide market information to the U.S. agency and instrumentality issuers. Morgan Stanley 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 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 United States. 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 non-U.S. governments (principally France, Germany, Italy and Japan) which, in the aggregate, represented 19% of the Company's total assets at January 31, 1995 (positions in Japanese government securities amounted to approximately $7 billion, or 6% of total assets). In addition, a vast majority of all of the collateral held by the Company for resale agreements or bonds borrowed, which together represents 37% of the Company's total assets at January 31, 1995, consists of securities issued by the U.S. government, federal agencies or non-U.S. governments. 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 futures and 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 3 5 related instruments, and a market-maker in commercial, residential and real estate products. In this capacity, the Company carries certain related assets with reduced levels of liquidity; the carrying value of such assets approximated $1,193 million at January 31, 1995. 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. High-yield debt securities, emerging market loans and securitized instruments held for sale by the Company are carried in the Company's Consolidated Statement of Financial Condition at their fair values. Trading gains and losses (inclusive of unrealized gains and losses) on high-yield debt securities and emerging market loans and securitized instruments are included as principal transaction revenues in the Company's Consolidated Statement of Income. At January 31, 1995, the aggregate net market value of high-yield debt securities and emerging market loans and securitized instruments held in inventory was $1,160 million (a substantial portion of which was subordinated debt), with not more than 8%, 12% and 11% 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." The Company also actively trades a number of foreign currencies on a spot and short-term 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 for periods of up to seven years. 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 (e.g., gold and silver), coffee, 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 recently also became an electricity power marketer in the United States and received approval to be an associate member of the London Metals Exchange. 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 - --------------------- * The Company does not include in this category certain securities and financial instruments that "derive" their values or contractually required cash flows from the price of some other security, asset, rate or index, such as mortgage-backed securities (although mortgage-backed swaps, options and forward contracts are included). 4 6 an integral part of their respective trading strategies, and such products are used extensively to manage the market exposure that results from a variety of proprietary trading activities. 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.), which commenced operations in January 1994, the Company also enters into swap and related derivative transactions with certain clients seeking a Triple-A rated counterparty. For a detailed discussion of the Company's use of derivatives, see 1994 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."* Derivatives used in the Company's trading or dealing activities are recorded in its Consolidated Statement of Financial Condition at fair value (based on listed market prices or, if listed market prices are not available, based on other relevant factors, including dealer price quotations, time value and yield curve or volatility factors underlying the positions and price quotations for similar instruments traded in different markets), representing the cost of replacing these instruments.** Gains or losses (realized and unrealized) on derivatives are generally included on a net basis as principal transaction revenues in the Company's Consolidated Statement of Income. The total notional value of derivative trading contracts outstanding as of January 31, 1995 was $835 billion, which is an indication of the Company's degree of use of derivatives for trading purposes but is not representative of market or credit exposure. The Company's exposure to market risk relates to changes in interest rates, foreign currency exchange rates, or the fair value of the underlying financial instruments or commodities which may ultimately result in cash settlements which exceed the amounts currently recognized in the Company's Consolidated Statement of Financial Condition. The Company's credit exposure at any point in time is represented by the fair value of such instruments reported as assets which at January 31, 1995 was $8.6 billion. 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." From time to time, the Company has organized, advised and managed certain funds that invest and trade in particular equity or debt securities, foreign currencies or - ----------------------------- * 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. Net revenues from derivatives used in the Company's own asset and liability management are recognized ratably over the term of the contract as an adjustment to interest expense. See 1994 Annual Report to Stockholders, "Notes to Consolidated Financial Statements, Note 3." ** Consistent with this treatment, financial instrument and commodity related derivative contracts are carried at net replacement cost as "financial instruments owned" and "financial instruments sold, not yet purchased" in the Company's Consolidated Statement of Financial Condition and are presented on a net-by-counterparty basis in cases where there is a legal right of set-off and the Company has obtained an enforceable netting agreement. 5 7 commodities and may continue to do so in the future. In connection with such activities, the Company has made and may continue to make investments for its own account in one or more of such funds. MERCHANT BANKING AND OTHER PRINCIPAL INVESTMENT ACTIVITIES The Company also uses its capital and capital from funds under its management in a variety of activities that have been broadly described as merchant banking. Such activities include, among other things, making commitments to purchase, and making investments in, equity and debt securities in merger, acquisition, restructuring, private investment and leveraged capital transactions. Such activities also include investments in real estate assets, portfolios and operating companies. The Company is generally the general partner of, and an investor in, the funds which it sponsors. In the merchant banking area, Morgan Stanley Capital Partners III, L.P. invests primarily in private equity or equity-related securities of companies in which the fund and its affiliates will have a controlling equity position. The Morgan Stanley Leveraged Equity Fund, L.P. and The Morgan Stanley Leveraged Equity Fund II, L.P. have invested in and provided financing for leveraged transactions and companies; these funds are no longer making new investments, but are actively managing existing investment portfolios. In the venture capital area, Morgan Stanley Venture Capital Fund, II, L.P. invests primarily in private equity or equity-related securities of U.S. emerging growth companies, principally in the U.S. healthcare and information technology sectors. Morgan Stanley Research Ventures L.P. has invested in research and development projects, and Morgan Stanley Venture Capital Fund L.P. has made private equity investments in U.S. emerging growth companies in the healthcare and information technology sectors; these funds are no longer making new investments, but are actively managing existing investment portfolios. The Morgan Stanley Real Estate Fund, L.P. and The Morgan Stanley Real Estate Fund II, L.P. invest primarily in real estate; the former fund is no longer making new investments but is actively managing its existing investment portfolio. Princes Gate Investors, L.P. assists the Company's clients by investing globally in special situation opportunities, generally in the form of minority equity positions which are short to medium term in duration. From time to time the Company may 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 January 31, 1995, the aggregate carrying value of the Company's investments (directly and indirectly through the above-referenced funds) in 83 privately held companies was $252 million and in 13 publicly held companies was $136 million. At January 31, 1995, the Company had aggregate commitments of approximately $223 million to make future investments in connection with its merchant banking and other principal investment activities. The Company's future commitments extend until January 1999. 6 8 Investments made in connection with merchant banking and other principal investment transactions initially are carried in the Company's Consolidated Statement of Financial Condition at their original cost. The carrying value of such equity securities is adjusted upward only when changes in the underlying market values are readily ascertainable, generally as evidenced by listed market prices or transactions which directly affect the value of such equity securities. Any such adjustment may occur a significant time after an investment in such equity securities has been made. Downward adjustments in such equity securities are made in the event that the Company determines that the eventual realizable value is less than the carrying value. From time to time, the Company provides 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. Loans made in connection with such activities are carried at unpaid principal balances less any reserves for estimated losses. At January 31, 1995, there were no such loans or other extensions of credit outstanding. 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. Thus, these estimates may at any given time differ from the carrying value of the investments. 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." For purposes of financial statement classification, merchant banking and other principal investment advice, underwriting, origination and commitment fees are included as investment banking revenues in the Company's Consolidated Statement of Income. Fees for funds under management by the Company are included in asset management and administration revenues. Investment gains and losses relating to, and distributions from, equity investments are included in principal transactions revenues. The Company may also underwrite, trade, invest and make markets in the securities of issuers in which the Company or the funds have an investment. In addition, the Company may provide financial advisory services to, and have securities and commodity trading relationships with, these issuers. GLOBAL SECURITIES SERVICES The Company provides a full range of securities services and information, including global custody, clearance, lending and settlement operations, foreign exchange, valuation services, cash management and margin lending. The Company's securities services operations support mutual funds, investment limited partnerships, insurance companies, banks, 7 9 foundations, endowments, family trusts, government agencies, public and private pension funds and broker-dealers. The Company acts as principal and agent in stock borrow 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. Through its global securities services business, the Company has a network of agent banks in 60 countries. Morgan Stanley Capital International (MSCI(R)), the Company's global equity index and company data business, provides the global investment community with benchmark indices (including The World, EAFE(R) and Emerging Market Indices), a 25-year historical database and price and fundamental data covering 3,800 companies in 45 developed and emerging countries through a variety of print, electronic and software vendor-supported products. Through its global securities services business, the Company had approximately $90 billion in global assets under custody at January 31, 1995. ASSET MANAGEMENT Through Morgan Stanley Asset Management ("MSAM"), the Company provides global portfolio management to taxable and non-taxable institutions, domestic and foreign governments, pension funds, international organizations, mutual funds and individuals investing in United States and international equities and fixed income securities (including in emerging markets) and sponsors open and closed-end mutual funds. The Company also performs a broad range of fiduciary and named fiduciary services for pension funds and trusts. Through MSAM, the Company had approximately $49 billion in assets under management at January 31, 1995. RESEARCH The Company is engaged in a wide range of research activities. The Company analyzes worldwide economic trends covering a broad range of industries and 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, Federal Reserve open market operations, 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. FINANCE, ADMINISTRATION AND OPERATIONS The Company's finance, administration and operations departments include Information Technology, Firm Risk Management, Controllers, Treasury, Tax, Legal and Compliance, Office of Development, Facilities, General Services, and Security and Corporate Services. 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, 8 10 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"). COMPETITION AND REGULATION The Company encounters intense competition in all aspects of the financial services business and competes worldwide directly with other firms, both domestic and foreign, a significant number of which have greater capital and other resources. In addition to competition from firms traditionally engaged in the securities 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 pending legislative and regulatory initiatives in the United States to remove or relieve certain restrictions on commercial banks, it is anticipated that competition in some markets currently dominated by investment banks may increase in the near future. Such competition, among other things, affects the Company's ability to attract and retain highly skilled individuals. The Company's business is, and the securities, commodities and financial services industries generally are, subject to extensive regulation in the United States at both the Federal and state levels. 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. Morgan Stanley is registered as a broker-dealer and an investment adviser 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"). The Company and certain other subsidiaries are registered as investment advisers with the SEC and in certain states. 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 authorities and self-regulatory organizations 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, Morgan Stanley 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 9 11 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 ("NFA"), a not-for-profit membership corporation, which has been designated a registered futures association by the CFTC and of which Morgan Stanley is a member. As a broker-dealer, Morgan Stanley 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, Morgan Stanley is also subject to the first phase of 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 is participating as a member of a select industry task force to formulate a framework for the voluntary oversight of OTC derivatives activities by the SEC and the CFTC. The task force has recently developed voluntary standards 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. The Company's 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 a subsidiary 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 funds that own equity interests in such companies or otherwise. The Company's business is also subject to extensive regulation by various foreign 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, and a number of exchanges, including the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited and the London International Financial Futures and Options Exchange. The Bundesbank, the Bundesaufsichtsamt fur das Kreditwesen (the Federal German Banking Authority), the Bundesaufsichtsamt fur das Wertpapierhandel (the Federal German Securities 10 12 Agency), the Frankfurt Stock Exchange and the Deutsche Terminboerse (the German Futures 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 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 regulate the Company's business in Singapore; and the Company's operations in Hong Kong are regulated by the Securities and Futures Commission of Hong Kong, the Stock Exchange of Hong Kong Ltd. and the Hong Kong Futures Exchange. As registered broker-dealers and member firms of the NYSE, certain subsidiaries of the Company, including Morgan Stanley, are subject to the SEC's net capital rule, and as a futures commission merchant Morgan Stanley 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 to 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. RISK MANAGEMENT* 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 and currency values. 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 success and profitability. The Company seeks to maintain a broad-based portfolio - ----------------------- * For a further discussion of the Company's risk management policies and procedures, see 1994 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." 11 13 of business activities to minimize the impact that volatility in any area or related areas may have on its net revenues as a whole. From an operational perspective, the Company seeks to actively manage the principal risks involved in each area of business activity: market risk, credit risk, operational risk and legal 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 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. The Company has developed a control infrastructure to monitor and manage each type of risk on a global basis throughout the Company. In addition, the Company has developed particular risk management policies and procedures for certain business activities including merchant banking and other principal investment activities, high-yield securities and derivative products. The Company's risk management policies and procedures are continually evolving to address the increasingly global nature of the financial services business as well as the continual development of sophisticated financial products with more varied and complex risk profiles. The Company has developed a multi-tiered approach for monitoring and managing its risks. With respect to the Company's major trading businesses, senior division risk managers monitor positions and set the overall division risk profile within established limits, verify that position hedges are appropriate and well maintained, and report unusual market and position events. The base level of control is at the trading desks where desk risk managers and traders perform similar functions with respect to a product area or particular product. The Firm Risk Management Group has operational responsibility for reporting to senior management on the Company's exposure to risk. The Firm Risk Management Group consists of three departments that are all independent of the Company's business areas: the Market Risk and Exposure Management Department monitors certain divisional, geographic and product-line market risks; the Credit Department establishes and monitors counterparty exposure limits and collateral requirements to support counterparty contractual commitments; and the Internal Audit Department, which also reports to the Audit Committee of the Board of Directors, assesses the Company's operations and control environment through periodic examinations of business and operational areas. Other departments within the Company, which are independent of the Company's business areas, that are also actively involved in monitoring the Company's risk profile include the Controllers Department, the Operations Department and the Legal and Compliance Department. In addition, the Company has certain standing 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 a particular transaction. The Company's Finance and Risk Committee among other things establishes the overall funding, capital and credit policies of the Company, reviews the Company's performance relative to these 12 14 policies, allocates capital among business activities of the Company, monitors the availability of sources of financing, and oversees liquidity and interest rate sensitivity of the Company's asset and liability position. Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. The Company manages the market risk associated with its trading activities on an individual product basis, on a divisional level and Company-wide. Specific risk limits are assigned to each trading area of the Company and trading desks within trading areas. These limits are reviewed periodically and are adjusted as required. The Company uses analytic and quantitative tools, such as option pricing and hedge models, to quantify market risk for comparison, by product, to specific internal risk limits and to assess the sensitivity of positions at risk to changes in market conditions. The Company also regularly uses a variety of measures to reduce and control the market risk associated with trading proprietary positions and making markets. Market-making positions are generally hedged (that is, covered by similar, offsetting positions). Hedges may be designed to remove all or part of a position's exposure to price or yield movements and are chosen using analytic tools similar to those used to determine the risk of the positions being hedged. The Company attempts to match the risk profiles of each portfolio of securities and any related hedges as closely as possible, and to accomplish this often uses futures, options or other derivative products. Exposures in proprietary positions are managed by customizing trades to respond to specific market movements, establishing limits and monitoring procedures and regularly marking positions to market. 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 in liquidating or covering the position in the open market. All counterparties are reviewed on a regular basis to establish appropriate exposure limits for a variety of transactions. In certain cases, specific transactions are analyzed by the Credit Department to determine the amount of potential exposure that could arise, and the counterparty's credit is reviewed to determine whether it supports such exposure. In addition to the counterparty's credit status, the Credit Department analyzes market movements that could affect exposure levels. The Credit Department considers four main factors that may affect trades in determining trading limits: the settlement method; the time it will take for a trade to settle (i.e., the maturity of the trade); the volatility that could affect the value of the securities involved in the trade; and the size of the trade. In addition to determining trading limits, the Company actively manages the credit exposure relating to its trading activities by entering into master netting agreements when feasible; monitoring the creditworthiness of counterparties and the related trading limits on an ongoing basis and requesting additional collateral when deemed necessary; diversifying and limiting exposure to individual counterparties and geographic locations; and limiting the duration of exposure. In certain cases, the Company may also close out transactions or assign them to other counterparties when deemed necessary or appropriate to mitigate credit risk. Operational risk refers to the risk of human error and malfeasance or deficiencies in the Company's operating system. 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 13 15 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's advanced technology reduces transaction errors and costs by facilitating the Company's ability to communicate relevant information worldwide among business units within the Company, between the Company and its clients, and between the Company and the markets in which it participates. Through various management information systems, senior management has access to information to monitor principal positions and related funding activity. The Company's Controllers and Operations Departments monitor position, profit/loss and balance sheet information on a daily basis through rigorous reconciliation procedures, and business unit profitability, position market prices and aged positions are also analyzed. The Company's Information Technology Department is regularly involved in automation efforts to improve operational monitoring and control procedures while the Internal Audit Department is responsible for the periodic review of the effectiveness of these procedures. Legal risk is 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 and Regulation"). The Company has established legal standards and procedures on a world-wide 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, to ensure that senior management's policies relating to conduct, ethics and business practices are followed. The Company also conducts education and training programs which emphasize protection of client interests and maintenance of the Company's reputation and global business franchise. The Company has established certain procedures to mitigate the risk that a counterparty's performance obligations will be unenforceable. The Company has also adopted certain procedures, which are generally product-specific and vary in accordance with risk profile and market practice, to determine counterparty authority and legal capacity, adequacy of legal documentation, the permissibility of the transaction under local law and whether applicable bankruptcy or insolvency laws limit or alter contractual remedies. Positions and commitments taken by the Company in connection with its merchant banking and other principal investment activities often may involve substantial amounts of capital and subject the Company to risk due to significant exposure to one issuer or business, and to market and credit risk. 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 equity investments made by a fund sponsored by the Company are reviewed and approved by senior professionals in the department of the Company responsible for identifying and making such investments on behalf of such fund, and any proposed equity investments, loans, financing commitments or other extensions of credit by the Company to portfolio companies are reviewed and approved by senior management.* The Company analyzes projected operating cash flows of the prospective portfolio company's - --------------------------- * As previously indicated, there were no such loans, financing commitments or other extensions of credit outstanding at January 31, 1995. 14 16 business and projected returns on equity for the investment and their sensitivities to changes in economic assumptions, and reviews the prospective portfolio company's industry and its prospects as well as the portfolio company's relative position in the industry. With respect to any loans, financing commitments or other extensions of credit, the Company reviews the creditworthiness of the portfolio company, the availability to the company 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 continually monitors the portfolio company's business plan and financial performance as well as overall trends in the portfolio company's industry. The Company's trading and underwriting of high-yield debt securities and emerging market loans and securitized instruments also subjects 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 continue to 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 in place policies to control total inventory positions in these securities and instruments. Additionally, the Company has in place specific credit policies to control exposures to individual emerging market counterparties. Derivatives facilitate risk transfer and enhance liquidity in the marketplace, and the origination and trading of derivatives have expanded significantly over the past decade. Derivative instruments have been utilized as efficient and cost effective tools that enable users to adjust risk profiles, such as interest rate, currency, or other market risks, 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 market and credit risks.** In times of market stress, sharp price or volatility movements may also reduce liquidity in certain derivatives positions, as well as in underlying non-derivative (cash) instruments. Credit risk in - ---------------------------- * 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. 15 17 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. 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. The Company manages its credit exposure to derivative products by entering into master netting agreements when feasible, monitoring the creditworthiness of counterparties on an ongoing basis and requesting initial and/or additional collateral when deemed necessary, diversifying and limiting exposure to individual counterparties, and limiting the duration of exposure. In addition, with respect to certain exchange-listed derivatives, the Company has in place 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. ITEM 2. PROPERTIES The Company's executive offices are located at 1251 Avenue of the Americas, New York, New York, and occupy 612,255 square feet under a lease expiring in 1998. The Company also leases space at various other locations in Manhattan under leases expiring between 1996 and 2002 and aggregating approximately 504,447 square feet. In addition, the Company leases space in Brooklyn, New York, aggregating approximately 383,112 square feet under a lease expiring in 2013. During 1995, the Company will relocate approximately 4,100 of its New York City employees from existing leased space at 1221 and 1251 Avenue of the Americas to space in its buildings at 1585 Broadway and 750 Seventh Avenue, which were purchased in fiscal 1993 and fiscal 1994, respectively. The Company plans to occupy approximately 980,500 square feet at 1585 Broadway, which will become the Company's New York headquarters, and approximately 342,000 square feet of space at 750 Seventh Avenue. The total investment in these two buildings will aggregate approximately $700 million and will be capitalized and depreciated over the useful lives of the individual assets comprising the investment. During fiscal 1994, the Company recognized a pre-tax charge of $59 million ($39 million after tax). The charge was in connection with the Company's pending move to the purchased New York City facilities and to new office space in Tokyo. The charge specifically covers the Company's termination of certain leased office space and the write-off of remaining leasehold improvements in both cities. 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 475,000 square feet of a 500,000 square foot building (the "Building") constructed by the Company. The Company owns the ground lease obligation and has a 999-year lease plus an option to acquire the freehold interest in the land and the Building. The Company recently 16 18 leased approximately 350,000 square feet at 20 Cabot Square, Canary Wharf, under a lease arrangement expiring in 2020. Most of the Company's other offices are located in leased premises, the leases for which expire at various dates through 2011. 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. State of West Virginia v. Morgan Stanley & Co. Incorporated. On October 24, 1989, the State of West Virginia (the "State") commenced an action in the Circuit Court of Kanawha County, West Virginia against Morgan Stanley, County NatWest Government Securities, Inc., County NatWest, Inc., Salomon Brothers Inc, Greenwich Capital Markets, Inc. and Goldman, Sachs & Co., alleging that the defendants had induced the State, through its Board of Investments and the office of the State Treasurer, to engage in unsuitable and speculative investment activity in the State's Consolidated Fund. The complaint alleged that, as a result of this activity, the Consolidated Fund suffered significant losses. As against Morgan Stanley, the complaint alleged damages in excess of $79 million. All of the other defendants settled with the State. On March 15, 1992, the court orally granted partial summary judgment for the State on certain of its claims. The trial began on March 30, 1992 and concluded on May 8, 1992. On May 6, 1992, the court directed a verdict of approximately $32.6 million against Morgan Stanley on the State's ultra vires claim. On May 8, 1992, the jury awarded approximately $4.9 million in damages against Morgan Stanley on the State's constructive fraud claim, but found that Morgan Stanley had not engaged in actual fraud. On October 13, 1993, the court entered a judgment in the action awarding the State the total amount of $56.8 million, inclusive of pre-judgment interest, and ordering that post-judgment interest accrue on that sum at the statutory rate of 10% per annum until the judgment is paid. On January 12, 1994, the court denied Morgan Stanley's motion for judgment notwithstanding the verdict or, alternatively, for a new trial. The court granted Morgan Stanley's motion for a stay pending appeal. On May 9, 1994, Morgan Stanley filed a petition for appeal, which was granted by the Supreme Court of Appeals of West Virginia on June 29, 1994. Following oral argument on January 18, 1995, the Supreme Court of Appeals entered an order on January 20, 1995 directing the Circuit Court to prepare written findings of fact and conclusions of law clarifying the basis of its ruling. That decision was issued on March 3, 1995. Reargument of the appeal before the Supreme Court of Appeals is currently scheduled for May 10, 1995. II. Taxable Municipal Bond Litigation. Between April and October 1990, 16 purported class action complaints were filed in various federal and state courts alleging claims relating to eight offerings of taxable municipal bonds by eight different issuers in 1986. On November 27, 1990, the federal Judicial Panel on Multi-district Litigation transferred all of the actions to the United States District Court for the Eastern District of Louisiana for consolidated pretrial proceedings. 17 19 On May 3, 1991, eight amended and consolidated complaints (the "Amended and Consolidated Complaints") were filed in connection with the proceedings arising out of eight different bond offerings (the "Eight Offerings"). In addition, a single Racketeer Influenced and Corrupt Organizations Act ("RICO") complaint was filed on May 3, 1991, which addressed all of the Eight Offerings. The Amended and Consolidated Complaints and the RICO complaint, like the previously filed complaints, alleged that the defendants fraudulently informed investors that the proceeds of the Eight Offerings would be used to fund low cost, public interest loans. According to the Amended and Consolidated Complaints, the money was instead invested in guaranteed investment contracts ("GICs") issued by Executive Life Insurance Company ("Executive Life") as part of a purported scheme on the part of Drexel Burnham Lambert Incorporated ("Drexel") and Executive Life to use the underwriting of municipal bonds to permit Executive Life to invest in high risk junk bonds through Drexel. (Due to its bankruptcy filing, Drexel was not named as a defendant in any of the Amended and Consolidated Complaints.) Following the deterioration of the high yield bond market, the ratings of Executive Life and the GIC-backed bonds were downgraded, and the resulting decline in the value of the bonds is alleged to have caused losses to the members of the purported plaintiff classes. The plaintiff class in each of the actions purportedly consists of all persons who purchased the bonds at issue prior to and including April 9, 1990. The Amended and Consolidated Complaints generally alleged violations of section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and rule 10b-5 promulgated thereunder, section 80a of the Investment Company Act of 1940 (the "Investment Company Act"), section 80b-3 of the Investment Advisers Act of 1940 (the "Advisers Act") and common law and/or statutory fraud, and sought actual and punitive damages in unspecified amounts, rescission, declaratory relief, interest, costs and attorneys' fees. The RICO complaint alleged violations of section 1962(c) and (d) of Title 18 and sought compensatory and treble damages in unspecified amounts, injunctive relief, disgorgement, interest, costs, and attorneys' fees. Morgan Stanley was named as a defendant in seven of the eight Amended and Consolidated Complaints and in the RICO complaint. The master caption of the multi-district proceeding is In re Taxable Municipal Bond Securities Litigation. The seven actions naming Morgan Stanley as a defendant are: Farm Bureau Federation, et al. v. The Board of County Commissioners of Adams County, Colorado, et al.; Washington National Life Insurance Company of New York, et al. v. Morgan Stanley & Co. Incorporated, et al.; First National Bank, et al. v. Louisiana Housing Finance Agency, et al.; Associated Kellogg Bank, et al. v. Louisiana Agricultural Finance Authority, et al.; Bloomfield State Bank, et al. v. Louisiana Agricultural Finance Authority, et al.; Virgin, et al. v. Health, Educational and Housing Facility Board of the City of Memphis, Tennessee, et al.; and Farm Bureau Town & Country Insurance Company of Missouri, et al. v. El Paso Housing Finance Corporation, et al. On June 3, 1992, the court dismissed plaintiffs' claims under the Investment Company Act and the Advisers Act. On November 1, 1993, certain of the defendants in the various actions filed cross-claims to preserve their various claims for contribution, credit or offset. In connection with the RICO action, all of the plaintiffs except Washington National Life Insurance Company and Washington National Life Insurance Company of New York withdrew their RICO claims without prejudice. Thereafter, on December 13, 1993, the court granted defendants' motion for summary judgment on the Washington National plaintiffs' RICO claims, and denied the Washington National plaintiffs' motion for leave to file an amended RICO 18 20 complaint. On February 2, 1994, the court entered an order imposing sanctions on counsel for the Washington National plaintiffs. The parties reached an agreement to settle the various actions in which Morgan Stanley was named as a defendant, and the settlement was approved by the court on February 1, 1995. A fairness hearing on the proposed settlement is scheduled for July 31, 1995. III. Lundy, et al. v. Morgan Stanley & Co. Inc. On September 28, 1990, a purported class action complaint was filed in the United States District Court for the Northern District of California, purportedly on behalf of all persons who purchased 12.40% Debentures due 1997 (the "Debentures") of Imperial Corporation of America ("ICA") between January 9, 1987 and July 1, 1990. Morgan Stanley and Drexel Burnham Lambert Incorporated ("Drexel") were the underwriters for the initial offering of $100 million of the Debentures. On February 28, 1990, ICA filed for protection under Chapter 11 of the Federal Bankruptcy Code, and on July 1, 1990 defaulted on the payment of interest on the Debentures. The complaint alleged that the Debentures were issued in order to facilitate ICA's continuing investment in high yield junk bonds through Drexel, and that, with Morgan Stanley's knowledge, the prospectus issued in connection with the Debentures was materially false and omitted to state material information. The complaint asserted claims under section 10(b) of the Exchange Act and rule 10b-5 promulgated thereunder, and for fraud, negligence, negligent misrepresentation and false advertising, and sought rescission, compensatory and punitive damages in unspecified amounts, disgorgement of profits and compensation, costs and attorneys' fees. On February 25, 1991, the court certified the plaintiff class. On January 25, 1993, Morgan Stanley filed a motion for summary judgment. On October 21, 1993, the court entered a preliminary order approving an agreement, subject to certain contingencies, to settle the action. IV. Katell, et al. v. Morgan Stanley Group, Inc., et al. On November 6, 1991, a complaint was filed in the Court of Chancery of the State of Delaware for New Castle County against the Company, Morgan Stanley, two Morgan Stanley employees, Morgan Stanley Leveraged Capital Fund, Inc., Morgan Stanley Leveraged Equity Fund, L.P. ("MSLEF"), CIGNA Corp., CIGNA Capital Advisors, Inc., CIGNA Leveraged Capital Fund, Inc., SIBV/MS Holdings, Inc., Jefferson Smurfit Corp., Container Corporation of America ("CCA"), Silgan Holdings Inc. and Silgan Corporation ("Silgan"). The complaint, filed on behalf of two limited partners in MSLEF, alleged breaches of fiduciary duties, willful misconduct, gross negligence and breach of contract in connection with the purchase and sale of MSLEF's interests in CCA and Silgan. The complaint alleged damages in excess of $32.9 million and sought compensatory damages in an unspecified amount, together with interest. On February 17, 1992, plaintiffs filed an amended complaint, adding derivative claims and seeking an accounting. On January 14, 1993, the court dismissed plaintiffs' individual claims, co-investor claims, right of first refusal claims and aiding and abetting claims, but did not dismiss plaintiffs' derivative claims regarding the CCA and Silgan sale prices. On September 27, 1993, the court granted defendants' motion to stay the action pending a report by a special litigation committee. On April 15, 1994, the special litigation committee filed its report together with a motion to dismiss the action. On March 28, 1995, the court heard oral argument on the motion to dismiss. A decision is pending. A related action, captioned Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., et al., was commenced on February 18, 1992 in the Court of Chancery 19 21 of the State of Delaware for New Castle County against Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"), Morgan Stanley Leveraged Equity Fund II, Inc. and the Company. The complaint alleged that plaintiff, a limited partner in MSLEF II, was improperly excluded from MSLEF II investment opportunities in retaliation for its participation in the Katell litigation described above. The complaint asserted claims for breach of fiduciary duty, breach of the MSLEF II Partnership Agreement and breach of an implied covenant of good faith and fair dealing. The complaint sought damages in an unspecified amount, interest, injunctive relief, specific performance of the Partnership Agreement and an accounting. On July 28, 1992, the court granted defendants' motion for judgment on the pleadings. On June 1, 1993, the Delaware Supreme Court reversed and remanded the action for further proceedings. Discovery is proceeding. V. Atwood, et al. v. Burlington Industries Equity, Inc., et al. On June 3, 1992, a purported class action complaint was filed against Burlington Industries Equity, Inc. ("Burlington"), the Company, and seven officers and/or directors of Burlington, two of whom are Morgan Stanley employees. NationsBank Trust Company was subsequently added as a defendant. The plaintiff class purportedly consists of all participants in and beneficiaries of Burlington's Employee Stock Ownership Plan ("ESOP"). The complaint alleged that defendants violated the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and breached various fiduciary duties purportedly owed to plaintiffs in connection with the ESOP's August 1989 purchase of certain Burlington voting stock at $37.80 per share. The complaint alleged that defendants thereafter caused Burlington to engage in a series of transactions which decreased significantly the value of the ESOP's investment in Burlington stock. The complaint sought compensatory and punitive damages in unspecified amounts, rescission of the ESOP's August 1989 purchase of Burlington stock, removal of all defendants as ESOP fiduciaries under the ERISA statute, pre- and post-judgment interest, costs and attorneys' fees. The action is pending in the United States District Court for the Middle District of North Carolina. On August 3, 1994, the court granted in part and denied in part defendants' motion to dismiss the action. On February 13, 1995, the court granted plaintiffs' motion for class certification. Discovery is proceeding. VI. Hedged-Investments Litigation. On August 6, 1993, a purported class action complaint captioned Bruce W. Higley, D.D.S., M.S., P.A. Defined Benefit Annuity Plan v. Donahue, et al. was filed in the District Court for the City and County of Denver, Colorado purportedly on behalf of all persons and entities who invested, directly or indirectly, in certain investment partnerships or entities organized and/or managed by James D. Donahue ("Donahue"). Donahue was the founder and president of Hedged-Investments Associates, Inc. ("HIA"), through which Donahue conducted the options trading at issue in the action. HIA, in turn, was allegedly the general partner of several limited partnerships. The trading at issue occurred through accounts held at Morgan Stanley, Kidder, Peabody & Co. Incorporated ("Kidder"), and Prudential Securities Incorporated ("Prudential"). The action was brought against Donahue, Morgan Stanley, Kidder, Prudential, and individual employees at each of those firms. The complaint alleged that despite representations made to investors that the trading would be based on a "scientific" approach, would be fully hedged, and would yield a predictable return, Donahue, in conspiracy with and aided and abetted by the other defendants, in reality engaged in risky trading strategies while operating a "Ponzi scheme," which caused investors 20 22 to suffer substantial losses. As against the brokerage firms, the complaint asserted state law causes of action for violating and aiding and abetting violations of state securities laws, fraud and aiding and abetting fraud, aiding and abetting Donahue's breach of fiduciary duty, theft by deception, civil conspiracy, and aiding and abetting conversion. The complaint also asserted causes of action under the Colorado Organized Crime Control Act. The complaint sought rescissory and compensatory damages in unspecified amounts, treble damages, costs and attorneys' fees. Related litigation against Morgan Stanley and the other defendants is pending in the same court. That litigation includes an action by HIA's bankruptcy trustee and a competing class action brought on behalf of essentially the same class of investors alleged to be represented in Higley. On March 10, 1994, the court certified a plaintiff class in Higley and the competing class action. The court denied various motions to dismiss. An agreement has been reached to settle Higley and the competing class action. On March 3, 1995, the proposed settlement was filed for court approval. A fairness hearing is scheduled for April 28, 1995. The settlement described above, upon final approval by the court, will result in the dismissal of all related litigation against Morgan Stanley except for the action filed by the bankruptcy trustee for HIA and certain related partnerships, captioned Sender v. Kidder, Peabody & Co. Incorporated, et al. On November 17, 1994, the court in Sender vacated an earlier order that had dismissed the only claim asserted by the trustee against Morgan Stanley. Discovery in the Sender action is proceeding, and the trial is scheduled to begin on January 29, 1996. VII. First Tokyo Index Trust Limited v. Morgan Stanley Trust Company and Morgan Stanley International. On September 30, 1993, First Tokyo Index Trust Limited ("First Tokyo") commenced an action in the High Court of Justice, Chancery Division, London, against Morgan Stanley Trust Company ("MSTC") and Morgan Stanley International ("MSI"). MSTC was the custodian for First Tokyo's assets, and MSI engaged in certain transactions concerning those assets. First Tokyo asserted claims for breach of contract, negligence, breach of trust, breach of fiduciary duty, conversion and constructive trust, and sought the return of certain assets remaining in the First Tokyo custodial account with MSTC, compensatory damages in an unspecified amount, interest, costs and an accounting. On December 31, 1993, MSTC and MSI filed their defenses, as well as claims for contribution and/or indemnity against various individuals and entities. The parties subsequently amended their respective pleadings. On May 12, 1994, the court granted in part and denied in part plaintiff s motion to strike certain of the defenses asserted by the defendants. The defenses were subsequently amended and re-served. On November 10, 1994, the court granted MSTC and MSI's application to add Coopers & Lybrand as a third-party defendant, and to assert claims for contribution and/or indemnity against Coopers & Lybrand. Discovery is proceeding. VIII. 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") and certain MSAM employees. The complaint alleges that NCB 21 23 established a managed account at MSAM in or about February 1993 to trade United States Treasury securities and that in August 1993 that account suffered substantial losses. The complaint alleges violations of sections 10(b) and 20(a) of the 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 seeks 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 13, 1994, defendants filed third-party complaints against two employees of NCB, asserting claims over and for contribution and indemnity in the event defendants are determined to be liable to NCB. Discovery is proceeding. IX. 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 Morgan Stanley. The consolidated amended complaint alleges that Morgan Stanley 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 is 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 are 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 seeks compensatory damages, treble damages, declaratory and injunctive relief, attorneys' fees and costs. Judgment against each of the defendants is sought on a joint and several basis. On February 2, 1995, Morgan Stanley and the other named defendants filed a motion to dismiss. In addition to the federal court litigation, on May 27, 1994, a purported class action complaint captioned Abel, et al. v. Merrill Lynch & Co., et al. was filed in California Superior Court, San Diego County, against Morgan Stanley and 12 other participants and market makers on the NASDAQ. The complaint raised substantially the same allegations as the federal court litigation, on behalf of a purported class of persons in California who purchased or sold securities on the NASDAQ. On April 5, 1995, by agreement of the parties and by order of the Court, this matter was dismissed without prejudice, and the relevant statutes of limitation tolled pending termination of the federal actions. X. Other. In addition to the matters described above, the Company, including Morgan Stanley, 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 Morgan Stanley, 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 22 24 current knowledge and after consultation with counsel, that the outcome of such matters will not have a 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 quarter ended January 31, 1995. EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides certain information about each of the Registrant's executive officers on January 31, 1995:
Name Age Position ---- --- -------- Richard B. Fisher 58 Chairman of the Board of Directors, Managing Director and Director of the Registrant and Morgan Stanley John J. Mack 50 President, Managing Director and Director of the Registrant and Morgan Stanley Barton M. Biggs 62 Managing Director and Director of the Registrant and Morgan Stanley Peter F. Karches 43 Managing Director and Director of the Registrant and Morgan Stanley Robert W. Matschullat* 47 Managing Director and Director of the Registrant and Morgan Stanley Sir David A. Walker 55 Director of the Registrant and Morgan Stanley and Managing Director of Morgan Stanley Jonathan M. Clark 57 General Counsel and Secretary of the Registrant and Morgan Stanley and Managing Director and Director of Morgan Stanley
- -------------------------- * Mr. Matschullat will not stand for re-election as a Director of the Registrant at the 1995 Annual Meeting of and will resign from the Company effective July 1995. 23 25
Name Age Position - ---- --- -------- Philip N. Duff 38 Chief Financial Officer of the Registrant and Morgan Stanley and Managing Director of Morgan Stanley Charles B. Hintz 45 Treasurer of the Registrant and Morgan Stanley and Managing Director of Morgan Stanley
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 Registrant and Morgan Stanley since January 1991. From January 1984 through December 1990, he served as President of the Registrant and Morgan Stanley. He has been a director and a Managing Director of the Registrant since July 1975 and a director and a Managing Director of Morgan Stanley since July 1970. He has also been a member of the Registrant's Executive Committee since March 1986 and its chairman since May 1991. He was a partner of Morgan Stanley & Co. from July 1970 through June 1975. Mr. Mack has been President of the Registrant and Morgan Stanley since June 1993. He has been a director and a Managing Director of the Registrant since December 1987 and was a director and a Managing Director of the Registrant from January 1979 until March 1986. Mr. Mack has been a director and a Managing Director of Morgan Stanley since January 1979. He has also been a member of the Registrant's Executive Committee since December 1987. Mr. Biggs has been a director and a Managing Director of the Registrant since May 1991 and a director and Managing Director of Morgan Stanley since July 1973. He was a director and a Managing Director of the Registrant from July 1975 to March 1986. He has also been a member of the Registrant's Executive Committee since May 1991. He was a partner of Morgan Stanley & Co. from June 1973 through June 1975. Mr. Karches has been a director and a Managing Director of the Registrant since February 1994 and a director and a Managing Director of Morgan Stanley since January 1985. He has also been a member of the Registrant's Executive Committee since February 1994. Mr. Matschullat has been a director and a Managing Director of the Registrant since July 1992 and a Managing Director of Morgan Stanley since February 1986. He has been a director of Morgan Stanley from February 1986 to September 1991 and since January 1992. He has also been a member of the Registrant's Executive Committee since July 1992. Sir David Walker has been a director of the Registrant since November 1994, a director of Morgan Stanley since February 1995 and a Managing Director of Morgan Stanley since November 1994. He has also been a member of the Registrant's Executive Committee 24 26 since November 1994. Before joining the Company, Sir David was a Deputy Chairman of Lloyds Bank in England. From 1988 to 1992 he was Chairman of the Securities and Investments Board, the British authority that regulates the securities markets. Mr. Clark has been the General Counsel and Secretary of the Registrant and Morgan Stanley since February 1993. Since February 1993 he has been a director and a Managing Director of Morgan Stanley. 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 Registrant and Morgan Stanley since February 1994. He has been a Managing Director of Morgan Stanley since February 1993 and a Principal of Morgan Stanley from January 1991 to February 1993. From January 1989 to January 1991 he was a Vice President of Morgan Stanley. Mr. Hintz has been the Treasurer of the Registrant and Morgan Stanley since January 1992. He has been a Managing Director of Morgan Stanley since February 1993. From January 1989 to February 1993 he was a Principal of Morgan Stanley. 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 years, 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 years is set forth under the caption "Quarterly Results" on page 77 of the Registrant's 1994 Annual Report to Stockholders and such information is hereby incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data for the Registrant and its subsidiaries for each of the last five fiscal years is set forth under the same caption on page 2 of the 1994 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 46 to 77 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 33 to 44 of the 1994 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 46 to 77 of such Annual Report. 25 27 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 1994 Annual Report to Stockholders on pages 45 to 77 and such information is hereby incorporated herein by reference, including the information appearing under the caption "Quarterly Results" on page 77 of such Annual Report. The Statement of Financial Condition at December 31, 1994 and 1993 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, 1994, 1993 and 1992 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to Directors and Nominees of the Registrant is set forth under the caption "Election of Directors" on pages 3 and 4 of the Proxy Statement of the Registrant for its 1995 Annual Meeting of Stockholders and such information is hereby incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is set forth under the captions "Board of Directors Meetings, Committees and Fees" on page 5, "Compensation of Executive Officers" on pages 10 to 14 and "Compensation Committee Interlocks and Insider Participation" on page 19 of the Proxy Statement of the Registrant for its 1995 Annual Meeting of Stockholders and such information is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of management and certain beneficial owners is set forth under the captions "Stock Ownership of Management" and "Principal Stockholders" on pages 6 and 7, respectively, of the Proxy Statement of the Registrant for its 1995 Annual Meeting of Stockholders and such information is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is set forth under the caption "Interest of Management in Certain Transactions" on page 9 of the Proxy Statement 26 28 of the Registrant for its 1995 Annual Meeting of Stockholders and such information is hereby incorporated herein by reference. 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. 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 or to reports or registration statements filed by the Registrant under the Exchange Act, respectively, and are hereby incorporated by reference to such statements or reports. 3.1 Restated Certificate of Incorporation of the Company, as amended to date (Registration Statement on Form S-3 (No. 33-57833)). 3.2* By-Laws of the Company, as amended to date. 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 to date (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.3 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). - ----------------------------- * Filed herewith. 27 29 4.4 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). 4.5 Senior Indenture dated as of April 15, 1989 between the Company and Chemical Bank, as trustee (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.6 First Supplemental Senior Indenture dated as of May 15, 1991 between the Company and Chemical Bank, as trustee (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.7 Subordinated Indenture dated as of November 15, 1993 among Morgan Stanley Finance plc, the Company, as guarantor, and Chemical Bank, as trustee (Current Report on Form 8-K dated December 1, 1993). 4.8 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). 4.9 Instruments defining the Rights of Security Holders, Including Indentures - In addition to Exhibits 4.1 through 4.8 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). 28 30 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 to date (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. 1988 Capital Accumulation Plan, as amended to date (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.10+ 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). 10.11 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). 10.12 Lease Agreement dated as of July 5, 1972 between Morgan Stanley & Co. Incorporated and Standard Oil Company, as amended (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.13 Agreement of Lease dated May 13, 1986 between Morgan Stanley & Co. Incorporated and Forest City Pierrepont Associates, as - ------------------------------ + Management Contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). 29 31 amended (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.14 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). 10.15 Lease dated January 22, 1993 between Rock-McGraw, Inc., Landlord, to Morgan Stanley & Co. Incorporated, Tenant (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.16 999 Year Lease dated November 5, 1993 among Canary Wharf Investments Limited, Canary Wharf Management Limited, Canary Wharf Limited, Morgan Stanley UK Holdings PLC and the Company (Annual Report on Form 10-K for the fiscal year ended January 31, 1994; confidential treatment has been granted for a portion of this exhibit). 10.17 Option Agreement dated November 5, 1993 among Canary Wharf Investments Limited, 25 Cabot Square Limited and the Company (Annual Report on Form 10-K for the fiscal year ended January 31, 1994). 10.18* Agreement of Lease dated February 10, 1995 among Canary Wharf Limited, Morgan Stanley UK Group and the Company. 10.19 Sale-Purchase Agreement dated as of August 11, 1993 between 1585 Broadway Associates and the Company (Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1993). 10.20 Sale-Purchase Agreement dated as of April 28, 1994 between 750 Seventh Avenue Associates, L.P. and Morgan Stanley 750 Building Corp. (Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1994). 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. - -------------------------- * Filed herewith. 30 32 13* The following portions of the Company's 1994 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 77). 13.2 "Selected Financial Data" (page 2). 13.3 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 33 to 44). 13.4 Consolidated Financial Statements of the Company and its subsidiaries, together with the Notes thereto and the Report of Independent Auditors thereon (pages 45 to 77). 21* Subsidiaries of the Company. 23.1* Consent of Ernst & Young. 23.2* Consent of Ernst & Young with respect to the Financial Statements for the fiscal year ended December 31, 1994 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, 1994 for the Morgan Stanley U.K. Group Profit Sharing Scheme. - ----------------------- * Filed herewith. (b) A Current Report on Form 8-K, dated November 16, 1994, was filed with the Securities and Exchange Commission in connection with the announcement of the Company's third quarter financial results and declaration of a quarterly cash dividend. A Current Report on Form 8-K, dated December 8, 1994, was filed with the Securities and Exchange Commission in connection with the discussions by the Company and S.G. Warburg Group plc of the possibility of combining their businesses. A Current Report on Form 8-K, dated December 15, 1994, was filed with the Securities and Exchange Commission in connection with the termination of merger discussions between the Company and S.G. Warburg Group plc. A Current Report on Form 8-K, dated January 19, 1995, was filed with the Securities and Exchange Commission in connection with expected earnings for the fiscal quarter ending January 31, 1995. 31 33 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 April 26, 1995. 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, Philip N. Duff 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 26TH OF APRIL, 1995.
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/ Robert W. Matschullat Managing Director and Director - -------------------------- (Robert W. Matschullat) /s/ Sir David A. Walker Director - -------------------------- (Sir David A. Walker) /s/ Philip N. Duff Chief Financial Officer - -------------------------- (Philip N. Duff)
34
Signature Title --------- ----- /s/ Eileen K. Murray Chief Accounting Officer and - ------------------------- Controller (Eileen K. Murray) /s/ Daniel B. Burke Director - ------------------------- (Daniel B. Burke) /s/ Richard B. Cheney Director - ------------------------- (Richard B. Cheney) /s/ S. Parker Gilbert Director - ------------------------- (S. Parker Gilbert) /s/ Allen E. Murray Director - ------------------------- (Allen E. Murray) /s/ Paul F. Oreffice Director - ------------------------- (Paul F. Oreffice) /s/ Paul J. Rizzo Director - ------------------------- (Paul J. Rizzo)
35 MORGAN STANLEY GROUP INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ITEMS (14)(a)(l) AND (14)(a)(2)
PAGE ---- FINANCIAL STATEMENTS FORM 10-K ANNUAL REPORT - -------------------- --------- ------------- Report of Independent Auditors 45 Consolidated Statement of Financial 46 Condition at January 31, 1995 and January 31, 1994 Consolidated Statement of Income for 48 the Fiscal Years Ended January 31, 1995, January 31, 1994 and January 31, 1993 Consolidated Statement of Cash Flows 49 for the Fiscal Years Ended January 31, 1995, January 31, 1994 and January 31, 1993 Consolidated Statement of Changes 50 in Stockholders' Equity for the Fiscal Years Ended January 31, 1995, January 31, 1994 and January 31, 1993 Notes to Consolidated Financial 52 Statements FINANCIAL STATEMENT SCHEDULES - ----------------------------- Schedule III - Condensed Financial F-2 - F-5 Information of Registrant Morgan Stanley Group Inc. (Parent Company Only) - Condensed Financial Statements for the Fiscal Years Ended January 31, 1995, January 31, 1994, and January 31, 1993
F-1 36 SCHEDULE III MORGAN STANLEY GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENT OF FINANCIAL CONDITION JANUARY 31, 1995 AND JANUARY 31, 1994 (IN THOUSANDS, EXCEPT SHARE DATA)
January 31, January 31, 1995 1994 ------------ ------------ ASSETS: Cash and interest-bearing equivalents $ 78,304 $ 127,617 Financial instruments owned 587,906 636,861 Advances to subsidiaries 19,090,690 13,646,712 Investment in subsidiaries, at equity 4,310,812 4,134,198 Other assets 232,372 125,266 ------------ ------------ Total assets $ 24,300,084 $ 18,670,654 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Short-term borrowings $ 7,298,237 $ 6,475,804 Securities sold to subsidiary under agreements to repurchase 1,054,489 368,970 Payables to subsidiaries 3,463,393 263,121 Other liabilities and accrued expenses 316,281 433,818 Long-term borrowings 7,612,838 6,660,036 ------------ ------------ 19,745,238 14,201,749 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock 818,667 819,539 Common stock, $1.00 par value; authorized 300,000,000 shares; issued 79,774,278 shares in fiscal 1994 and 78,277,538 shares in fiscal 1993 79,774 78,276 Paid-in capital 706,486 816,852 Retained earnings 3,338,028 3,094,451 Cumulative translation adjustments (10,099) (2,628) ------------ ------------ Subtotal 4,932,856 4,806,490 Less: Note receivable related to sale of preferred stock to ESOP 99,624 109,138 Common stock held in treasury, at cost (4,477,495 shares in fiscal 1994 and 3,801,687 shares in fiscal 1993) 278,386 228,447 ------------ ------------ Total stockholders' equity 4,554,846 4,468,905 ------------ ------------ Total liabilities and stockholders' equity $ 24,300,084 $ 18,670,654 ============ ============
See Notes to Condensed Financial Statements. F-2 37 SCHEDULE III MORGAN STANLEY GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED JANUARY 31, 1995, JANUARY 31, 1994, AND JANUARY 31, 1993 (IN THOUSANDS, EXCEPT SHARE DATA)
Year Ended Year Ended Year Ended January 31, January 31, January 31, 1995 1994 1993 ------------ ------------ ------------ REVENUES: Interest and dividends $ 1,312,628 $ 773,222 $ 683,667 Principal transactions 11,875 (47,274) (51,544) Fiduciary fees 12,683 15,105 12,751 Other (93) 242 (113) ------------ ------------ ------------ Total revenues 1,337,093 741,295 644,761 Interest expense 1,263,495 761,543 688,133 Expenses excluding interest 10,312 17,064 5,888 ------------ ------------ ------------ Income (loss) before income tax provision (benefit) and equity in earnings of subsidiaries 63,286 (37,312) (49,260) Income tax provision (benefit) 29,296 (14,056) (22,062) ------------ ------------ ------------ Income (loss) before equity in earnings of subsidiaries 33,990 (23,256) (27,198) Equity in earnings of subsidiaries, net of tax 360,884 809,308 537,658 ------------ ------------ ------------ Net income $ 394,874 $ 786,052 $ 510,460 ============ ============ ============ Preferred stock dividend requirements $ 64,723 $ 55,489 $ 49,423 ============ ============ ============ Earnings applicable to common shares (1) $ 330,151 $ 730,563 $ 461,037 ============ ============ ============ Average common and common equivalent shares outstanding (1) 78,896,608 76,208,288 78,123,800 ============ ============ ============ Primary earnings per share $ 4.18 $ 9.59 $ 5.90 ============ ============ ============ Fully diluted earnings per share $ 4.03 $ 9.16 $ 5.71 ============ ============ ============
- --------------- (1) Amounts shown are used to calculate primary earnings per share. See Notes to Condensed Financial Statements. F-3 38 SCHEDULE III MORGAN STANLEY GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED JANUARY 31, 1995, JANUARY 31, 1994, AND JANUARY 31, 1993 (IN THOUSANDS, EXCEPT SHARE DATA)
Year Ended Year Ended Year Ended January 31, January 31, January 31, 1995 1994 1993 ------------- ----------- ----------- Cash flows from operating activities: Net income $ 394,874 $ 786,052 $ 510,460 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Non-cash charges (credits) included in net income: Deferred income taxes 19,747 (7,902) (45,032) Compensation payable in common or preferred stock 116,481 407,573 189,829 Equity in subsidiaries' earnings, net of dividends 79,878 (514,019) (776,558) (Increase) decrease in assets: Financial instruments owned 48,955 244,359 (7,581) Investment in and advances to subsidiaries, at equity (5,700,470) (5,755,573) 979,387 Other assets (110,979) (59,855) 23,909 Increase (decrease) in liabilities: Payables to subsidiaries 3,200,272 131,888 131,233 Other liabilities and accrued expenses, net of deferred taxes (139,983) 42,551 116,336 ----------- ----------- ----------- Net cash (used for) provided by operating activities (2,091,225) (4,724,926) 1,121,983 Cash flows from financing activities: Net proceeds from short-term borrowings 822,433 2,143,962 (1,640,765) Securities sold to subsidiary under agreements to repurchase 685,519 5,286 9,944 Proceeds from: Issuance of preferred stock -- 194,436 145,439 Issuance of common stock 20,477 27,196 28,463 Issuance of long-term borrowings 2,153,858 3,444,793 647,790 Payments for: Repurchase of common stock (287,123) (245,444) (99,267) Repayments of long-term borrowings (1,201,955) (636,160) (41,582) Redemption of preferred stock -- -- (250,000) Cash dividends (151,297) (133,974) (102,923) ----------- ----------- ----------- Net cash provided by (used for) financing activities 2,041,912 4,800,095 (1,302,901) ----------- ----------- ----------- Net (decrease) increase in cash and interest-bearing equivalents (49,313) 75,169 (180,918) Cash and interest-bearing equivalents, at beginning of year 127,617 52,448 233,366 ----------- ----------- ----------- Cash and interest-bearing equivalents, at end of year $ 78,304 $ 127,617 $ 52,448 =========== =========== ===========
See Notes to Condensed Financial Statements. F-4 39 SCHEDULE III 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. F-5 40 EXHIBIT INDEX EXHIBIT NO. EXHIBIT ----------- ------- 3.1 Restated Certificate of Incorporation of the Company, as amended to date (Registration Statement on Form S-3 (No. 33-57833)). 3.2* By-Laws of the Company, as amended to date. 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 to date (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.3 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). 4.4 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). 4.5 Senior Indenture dated as of April 15, 1989 between the Company and Chemical Bank, as trustee (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.6 First Supplemental Senior Indenture dated as of May 15, 1991 between the Company and Chemical Bank, as trustee (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.7 Subordinated Indenture dated as of November 15, 1993 among Morgan Stanley Finance plc, the Company, as guarantor, and Chemical Bank, as trustee (Current Report on Form 8-K dated December 1, 1993). 4.8 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). - --------------- * Filed herewith. 41 EXHIBIT NO. EXHIBIT ----------- ------- 4.9 Instruments defining the Rights of Security Holders, Including Indentures - In addition to Exhibits 4.1 through 4.8 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). 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 to date (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). - --------------- + Management Contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). 42 EXHIBIT NO. EXHIBIT ----------- ------- 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. 1988 Capital Accumulation Plan, as amended to date (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.10+ 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). 10.11 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). 10.12 Lease Agreement dated as of July 5, 1972 between Morgan Stanley & Co. Incorporated and Standard Oil Company, as amended (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.13 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). 10.14 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). 10.15 Lease dated January 22, 1993 between Rock-McGraw, Inc., Landlord, to Morgan Stanley & Co. Incorporated, Tenant (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). 43 EXHIBIT NO. EXHIBIT ----------- ------- 10.16 999 Year Lease dated November 5, 1993 among Canary Wharf Investments Limited, Canary Wharf Management Limited, Canary Wharf Limited, Morgan Stanley UK Holdings PLC and the Company (Annual Report on Form 10-K for the fiscal year ended January 31, 1994; confidential treatment has been granted for a portion of this exhibit). 10.17 Option Agreement dated November 5, 1993 among Canary Wharf Investments Limited, 25 Cabot Square Limited and the Company (Annual Report on Form 10-K for the fiscal year ended January 31, 1994). 10.18* Agreement of Lease dated February 10, 1995 among Canary Wharf Limited, Morgan Stanley UK Group and the Company. 10.19 Sale-Purchase Agreement dated as of August 11, 1993 between 1585 Broadway Associates and the Company (Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1993). 10.20 Sale-Purchase Agreement dated as of April 28, 1994 between 750 Seventh Avenue Associates, L.P. and Morgan Stanley 750 Building Corp. (Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1994). 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. - --------------- * Filed herewith. 44 EXHIBIT NO. EXHIBIT ----------- ------- 13* The following portions of the Company's 1994 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 77). 13.2 "Selected Financial Data" (page 2). 13.3 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 33 to 44). 13.4 Consolidated Financial Statements of the Company and its subsidiaries, together with the Notes thereto and the Report of Independent Auditors thereon (pages 45 to 77). 21* Subsidiaries of the Company. 23.1* Consent of Ernst & Young. 23.2* Consent of Ernst & Young with respect to the Financial Statements for the fiscal year ended December 31, 1994 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, 1994 for the Morgan Stanley U.K. Group Profit Sharing Scheme. - --------------- * Filed herewith. EX-3.2 2 BY-LAWS 1 Exhibit 3.2 BY-LAWS OF MORGAN STANLEY GROUP INC. (A DELAWARE CORPORATION) (AS AMENDED ON FEBRUARY 28, 1995) ------------------ ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE IN DELAWARE. The registered office of Morgan Stanley Group Inc. (the "Corporation") in the State of Delaware shall be in the City of Dover, County of Kent, and the registered agent in charge thereof shall be United States Corporation Company, 32 Loockerman Sq., Ste L-100, Dover, Delaware. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. All meetings of stockholders shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors, or as shall be specified in the respective notices, or waivers of notice, thereof. SECTION 2. ANNUAL MEETINGS. Commencing in 1996, the annual meeting of stockholders for the election of directors and the transaction of other business shall be held on the first Thursday in April in each year if not a legal holiday, and, if a legal holiday, then on the next business day following, or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At each annual meeting the stockholders entitled to vote shall elect directors and may transact such other business as may be proper. SECTION 3. SPECIAL MEETINGS. A special meeting of the stockholders may be called at any time and for any purpose or purposes by the President or the Chairman of the Board or by order of the Board of Directors, and shall be called by the Secretary upon the written request of the holders of record of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"). Every such request shall state the purpose or purposes of each meeting. 2 SECTION 4. NOTICE OF MEETINGS. Except as otherwise expressly required by law, written notice of each meeting of stockholders, whether annual or special, stating the place, date and hour of the meeting shall be given not less than ten days nor more than fifty days before the date on which the meeting is to be held, to each stockholder of record entitled to vote thereat by delivering a notice thereof to him personally or by mailing such notice in a postage prepaid envelope directed to him at his address as it appears on the stock ledger of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices intended for him be directed to another address, in which case such notice shall be directed to him at the address designated in such request. If any stockholder shall, in person or by attorney thereunto authorized, in writing or by telegraph, cable or telex, waive notice of any meeting of the stockholders, whether prior to or after such meeting, notice thereof need not be given to him. Every notice of a special meeting of the stockholders, besides stating the time and place of the meeting, shall state briefly the purpose or purposes thereof. SECTION 5. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of the stock ledger to prepare and make, at least ten days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in his name. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be kept and produced at the time and place of the meeting during the whole time thereof and subject to the inspection of any stockholder who may be present. The original or duplicate stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, such list or the books of the Corporation or to vote in person or by proxy at such meeting. SECTION 6. QUORUM. At each meeting of the stockholders, the holders of record of a majority of the issued and outstanding stock of the Corporation entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum for the transaction of business, except where otherwise provided by law, the Restated Certificate of Incorporation or these By-Laws. In the absence of a quorum, any officer entitled to preside at, or act as Secretary of, such meeting shall have the power to adjourn the meeting from time to time until a quorum shall be constituted. SECTION 7. VOTING. At all meetings of the stockholders, a quorum being present, all matters shall be decided by majority vote of the shares of stock entitled to vote held by the stockholders present in person or by proxy, except as otherwise required by the Restated Certificate of Incorporation or the laws of the State of Delaware. Unless otherwise provided in the Restated Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. - 2 - 3 SECTION 8. ACTION WITHOUT MEETING. Unless otherwise provided in the Restated Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III BOARD OF DIRECTORS, COMMITTEES AND SPECIAL COMMITTEES SECTION 1. NUMBER, ELECTION AND TERMS OF DIRECTORS. The business and affairs of the Corporation shall be managed by a Board of Directors consisting of not fewer than four nor more than fifteen persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. Subject to the rights of the holders of any class or series of stock having preference over the Common Stock as to dividends upon liquidation, dissolution or winding up of the Corporation, to elect directors under specified circumstances if any, directors shall be elected each year at the annual meeting of stockholders and shall hold office until their successors shall have been duly elected and qualified, or until their earlier resignation or removal. The term of office of any director of the Corporation shall cease, and he shall be deemed to have resigned, on the annual meeting of stockholders next succeeding the seventieth anniversary of his birth and such director shall not stand for re-election. SECTION 2. DESIGNATION AND POWERS OF COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation, and, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors to the extent provided by Section 141(c) of the General Corporation Law of the State of Delaware as it now exists or may hereafter be amended. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. SECTION 3. DESIGNATION AND POWERS OF SPECIAL COMMITTEES. Any committee or committees (the "Special Committee") established under the proviso of the first sentence of Section 1 of Article V of the Restated Certificate of Incorporation shall consist of such member or members as shall be designated by the Board of Directors in accordance with such proviso and shall have and may exercise such powers and authority in accordance with the proviso of - 3 - 4 such sentence. The Board of Directors may designate one or more persons as alternate members of any Special Committee, who may replace any absent or disqualified member at any meeting of such Special Committee. SECTION 4. QUORUM AND MANNER OF ACTING. At all meetings of the Board of Directors, any committee or Special Committee, a majority of the total directors or members, as the case may be, shall constitute a quorum for the transaction of business, and the act of a majority of the directors or members, as the case may be, present at any meeting at which there is a quorum shall be the act of the Board of Directors, committee or Special Committee, as the case may be, except as may be otherwise specifically provided by the laws of the State of Delaware, the Restated Certificate of Incorporation or the By-Laws. If a quorum shall not be present at any meeting of the Board of Directors, committee or Special Committee, the directors or members, as the case may be, present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 5. ANNUAL MEETING. Immediately after each annual meeting of stockholders for the election of directors the Board of Directors shall meet at the place of the annual meeting of stockholders for the purpose of organization, the election of officers and the transaction of other business. Notice of such meeting need not be given. If such meeting is held at any other time or place, notice thereof must be given or waived as hereinafter provided for special meetings of the Board of Directors. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Directors, any committee or Special Committee may be held at such time and place, within or without the State of Delaware, as shall from time to time be determined by the Board of Directors, the committee or Special Committee, as the case may be. After there has been such determination, and notice thereof has been once given to each member of the Board of Directors, committee or Special Committee, as the case may be, regular meetings may be held without further notice being given. SECTION 7. SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board or the President. Special meetings of a committee shall be held whenever called by the Chairman of the Board, the President or the Chairman or other member of such committee. Special meetings of a Special Committee shall be held whenever called by the Chairman or other member of such Special Committee. Notice of each such meeting shall be mailed to each director of the Corporation or member of a committee or Special Committee, as the case may be, addressed to him at his residence or usual place of business, at least two days before the date on which the meeting is to be held, or shall be sent to him at such place by telegraph, facsimile or other electronic transmission, cable or telex, or be delivered personally or by telephone, not later than the day before the day on which such meeting is to be held. Each such notice shall state the time and place of the meeting, but need not state the purposes. If any director of the Corporation or member of a committee or Special Committee, as the case may be, shall, in person or by an authorized attorney, in writing or by telegraph, facsimile or other electronic transmission, cable - 4 - 5 or telex, waive notice of any meeting of the Board of Directors, any committee or Special Committee whether prior to or after such meeting, notice need not be given to him. No notice to or waiver by any director of the Corporation or member of a committee or Special Committee with respect to any special meeting shall be required if such director or member shall be present at said meeting. SECTION 8. RESIGNATION. Any director of the Corporation or member of any committee or Special Committee may resign from the Board of Directors, any committee or Special Committee at any time by giving written notice to the Chairman of the Board, if any, the President or the Secretary of the Corporation. The resignation of any director of the Corporation or any member of a committee or Special Committee shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. NEWLY-CREATED DIRECTORSHIPS AND VACANCIES ON THE BOARD OF DIRECTORS. Subject to the rights of the holders of any class or series of stock having preference over the Common Stock as to dividends or upon liquidation, dissolution or winding up of the Corporation to elect directors under specified circumstances, if any, newly-created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by a majority vote of the directors then in office, although less than a quorum; and any director so chosen shall hold office for the remaining term of his predecessor or, if there shall have been no predecessor, until the next annual election of directors or until his successor shall have been duly elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 10. VACANCIES ON COMMITTEES OR SPECIAL COMMITTEES. In the absence or disqualification of a member of a committee or Special Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors, in the case of a committee, or another person, in the case of a Special Committee, to act at the meeting in the place of any such absent or disqualified members. SECTION 11. REMOVAL OF DIRECTORS. Subject to the rights of the holders of any class or series of stock having preference over the Common Stock as to dividends or upon liquidation, dissolution or winding up of the Corporation to elect directors under specified circumstances, if any, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, only by the affirmative vote of the holders of at least 80% of the voting power of the Voting Stock, voting together as a single class. SECTION 12. COMPENSATION OF DIRECTORS. The Board of Directors shall have the authority to fix the compensation of directors of the Corporation and of members of committees or Special Committees. - 5 - 6 SECTION 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, any committee or Special Committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee or Special Committee, as the case may be, and such written consent is filed with the records of the proceedings of the Board, any committee or Special Committee. SECTION 14. MEETING BY CONFERENCE TELEPHONE. Directors of the Corporation and members of any committee or Special Committee may participate in a meeting of the Board of Directors, such committee or Special Committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting. SECTION 15. MINUTES OF COMMITTEES AND SPECIAL COMMITTEES. Each Committee and Special Committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. ARTICLE IV OFFICERS SECTION 1. PRINCIPAL OFFICERS. The Board of Directors shall elect a President, a Secretary and a Treasurer, and may in addition elect a Chairman of the Board, a Vice Chairman of the Board, one or more Managing Directors, a Chief Financial Officer, a General Counsel, one or more Assistant Secretaries and one or more Assistant Treasurers. One person may hold, and perform the duties of, any two or more of said offices. SECTION 2. ELECTION, TERM OF OFFICE AND ELIGIBILITY. The officers of the Corporation referred to in Section 1 of this Article IV shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor shall have been duly elected and shall qualify, or until his death or until he shall resign or shall have been removed. SECTION 3. OTHER OFFICERS. The Board of Directors may appoint such other officers as it may from time to time determine, each of whom shall hold office for such period, and perform such duties as the President or the Board of Directors may from time to time determine. The Board of Directors may delegate to any officer referred to in Section 1 of this Article IV the power to appoint and to remove any such officers. SECTION 4. REMOVAL. Any officer may be removed, either with or without cause, at any time, by resolution adopted by the Board of Directors at any regular meeting of the Board or at any special meeting of the Board called for that purpose at which a quorum is present. - 6 - 7 SECTION 5. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors, to the Chairman of the Board, if any, the President or the Secretary of the Corporation. The resignation of any officer shall take effect upon receipt of notice or at such later time as shall be specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of stockholders and at all meetings of the Board of Directors. Subject to the control and the direction of the Board of Directors, the Chairman of the Board may enter into any contract and execute and deliver any instrument in the name and on behalf of the Corporation. The Chairman of the Board shall perform such other duties and have such other powers as the Board of Directors prescribes. SECTION 7. PRESIDENT. In the absence of the Chairman of the Board, the President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. Subject to the control and the direction of the Board of Directors, the President may enter into any contract and execute and deliver any instrument in the name and on behalf of the Corporation. The President shall perform such other duties and have such other powers as the Board of Directors prescribes. SECTION 8. VICE CHAIRMAN OF THE BOARD. In the absence of the President, the Vice Chairman of the Board shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. Subject to the control and the direction of the Board of Directors, the Vice Chairman of the Board may enter into any contract and execute and deliver any instrument in the name and on behalf of the Corporation. The Vice Chairman of the Board shall perform such other duties and have such other powers as the Board of Directors prescribes. SECTION 9. MANAGING DIRECTORS. In the absence of the Chairman of the Board, the President and the Vice Chairman, the Managing Directors, in the order of the number of shares of voting common stock of the Corporation owned by each of them beginning with the Managing Director who shall own the greatest number of such shares (and, in the case of Managing Directors owning the same number of shares of voting common stock, in the order of their seniority), shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. Subject to the control and direction of the Board of Directors, each Managing Director may enter into any contract and execute and deliver any instrument in the name and on behalf of the Corporation. Each Managing Director shall perform such other duties and have such other powers as the Board of Directors prescribes. SECTION 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be responsible for the financial affairs of the Corporation, including overseeing the duties performed by the Treasurer of the Corporation. Subject to the control and direction of the Board of Directors, the Chief Financial Officer may enter into any contract and execute and deliver any instrument in the name of and on behalf of the Corporation. The Chief Financial Officer shall perform such other duties and have such other powers as the Board of Directors prescribes. - 7 - 8 SECTION 11. GENERAL COUNSEL. The General Counsel shall be the chief legal officer of the Corporation and be responsible for its legal and regulatory affairs. He shall see that all reports, statements and other documents required by law are properly kept and filed. Subject to the control and direction of the Board of Directors, the General Counsel may enter into any contract and execute and deliver any instrument in the name of and on behalf of the Corporation. The General Counsel shall perform such other duties and have such other powers as the Board of Directors prescribes. SECTION 12. SECRETARY. The Secretary, if present, shall act as Secretary at all meetings of the Board of Directors and of the stockholders and keep the minutes thereof in a book or books to be provided for that purpose; he shall see that all notices required to be given by the Corporation are duly given and served; he shall have charge of the stock records of the Corporation; and, in general, he shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors, the Chairman of the Board or the President. SECTION 13. ASSISTANT SECRETARY. The Assistant Secretary, if any, or, if there be more than one, the Assistant Secretaries, in the order determined by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors, the Chairman of the Board or the President may from time to time prescribe. SECTION 14. TREASURER. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation and shall deposit all such funds in the name of the Corporation in such banks or other depositories as shall be selected by the Board of Directors. He shall exhibit at all reasonable times his books of account and records to any of the directors of the Corporation upon application during business hours at the office of the Corporation where such books and records shall be kept; when requested by the Board of Directors, he shall render a statement of the condition of the finances of the Corporation at any meeting of the Board or at the annual meeting of stockholders; he shall receive, and give receipt for, moneys due and payable to the Corporation from any source whatsoever; and, in general, he shall perform all the duties incident to the office of Treasurer. Subject to the control and direction of the Board of Directors, the Treasurer may enter into any contract and execute and deliver any instrument in the name of and on behalf of the Corporation and shall perform such other duties and have such other powers as the Chairman of the Board or the President prescribes. The Treasurer shall give such bond, if any, for the faithful discharge of his duties as the Board of Directors may require. SECTION 15. ASSISTANT TREASURER. The Assistant Treasurer, if any, or, if there shall be more than one, the Assistant Treasurers, in the order determined by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors, the Chairman of the Board or the President may from time to time prescribe. - 8 - 9 ARTICLE V SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR STOCK. The interest of each stockholder in the Corporation shall be evidenced by a certificate or certificates for shares of stock of the Corporation certifying the number of shares owned by him, in such form as the Board of Directors may from time to time prescribe. The certificates for shares of stock of the Corporation shall be signed by the Chairman of the Board, the President or a Managing Director and by the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer, and shall be countersigned and registered in such manner, if any, as the Board of Directors may by resolution prescribe; provided, however, that in case such certificates are signed by a transfer agent other than the Corporation or its employee or by a registrar other than the Corporation or its employee the signatures of the Chairman of the Board, President, Managing Director, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be facsimile; and further provided that in case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Corporation. SECTION 2. STOCK LEDGER. A record shall be kept by the Secretary, transfer agent or by any other officer, employee or agent designated by the Board of Directors of the name of each person, firm or corporation holding capital stock of the Corporation, the number of shares represented by, and the respective dates of, each certificate for such capital stock, and in case of cancellation of any such certificate, the respective dates of cancellation. SECTION 3. CANCELLATION. Every certificate surrendered to the Corporation for exchange or registration of transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except as provided in Section 5 of this Article V and in cases provided by the applicable law. SECTION 4. TRANSFERS. Shares of stock shall be transferable on the books of the Corporation by the holder of record thereof in person or by his attorney upon surrender of such certificate with an assignment endorsed thereon or attached thereto duly executed and with such proof of authenticity of signatures as the Corporation may reasonably require. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with the Restated Certificate of Incorporation or these By-Laws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. The Board of - 9 - 10 Directors may appoint, or authorize any principal officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. SECTION 5. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. Before any certificates for stock of the Corporation shall be issued in exchange for certificates which shall become mutilated or shall be lost, stolen or destroyed, proper evidence of such loss, theft, mutilation or destruction shall be procured for the Board of Directors, if it so requires. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 6. RECORD DATES. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a date as a record date for any such determination of stockholders. Such record date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. ARTICLE VI INDEMNIFICATION The Corporation shall indemnify, to the fullest extent permitted by applicable law, any person who was or is a party or is threatened to be made a party to, or is involved in any manner in, any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person (1) is or was a director or officer of the Corporation or a Subsidiary or (2) is or was serving at the request of the Corporation or a Subsidiary as a director, officer, partner, member, employee or agent of another corporation, partnership, joint venture, trust, committee or other enterprise. To the extent deemed advisable by the Board of Directors, the Corporation may indemnify, to the fullest extent permitted by applicable law, any person who was or is a party or is threatened to be made a party to, or is involved in any manner in, any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that the person is or was an employee or agent (other than a director or officer) of the Corporation or a Subsidiary. - 10 - 11 The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or a Subsidiary, or is or was serving at the request of the Corporation or a Subsidiary as a director, officer, partner, member, employee or agent of another corporation, partnership, joint venture, trust, committee or other enterprise, against any expense, liability or loss asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation or a Subsidiary would have the power to indemnify him against such expense, liability or loss under the provisions of applicable law. No repeal, modification or amendment of, or adoption of any provision inconsistent with, this Article VI, nor to the fullest extent permitted by applicable law, any modification of law shall adversely affect any right or protection of any person granted pursuant hereto existing at, or with respect to events that occurred prior to, the time of such repeal, amendment, adoption or modification. For purposes of this Article VI the term "Subsidiary" or "Subsidiaries" shall mean a corporation(s), all of the capital stock of which is owned directly or indirectly by the Corporation, other than directors' qualifying shares. The right to indemnification conferred in this Article VI also includes, to the fullest extent permitted by applicable law, the right to be paid the expenses (including attorney's fees) incurred in connection with any such proceeding in advance of its final disposition. The payment of any amounts to any director, officer, partner, member, employee or agent pursuant to this Article VI shall subrogate the Corporation to any right such director, officer, partner, member, employee or agent may have against any other person or entity. The rights conferred in this Article VI shall be contract rights. ARTICLE VII LIABILITY OF DIRECTORS A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach by the director of his duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. No repeal, modification or amendment of, or adoption of any provision inconsistent with, this Article VII nor, to the fullest extent permitted by law, any modification of law shall adversely affect any right or protection of a director of the Corporation existing at the time of such repeal, amendment, adoption or modification or affect the liability of any - 11 - 12 director of the Corporation for any action taken or any omission that occurred prior to the time of such repeal, amendment, adoption or modification. If the General Corporation Law of the State of Delaware shall be amended, after these By-Laws are amended to include this Article VII, to authorize corporate action further eliminating or limiting the liability of directors, then a director of the Corporation, in addition to the circumstances in which he is not liable immediately prior to such amendment, shall be free of liability to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. ARTICLE VIII OPT OUT OF BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS STATUTE The Corporation has elected not to be governed by Section 203 of the General Corporation Law of the State of Delaware relating to "Business Combinations With Interested Stockholders." ARTICLE IX MISCELLANEOUS PROVISIONS SECTION 1. CORPORATE SEAL. The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that it was incorporated in the State of Delaware in the year 1975. The Secretary shall be the custodian of the seal. SECTION 2. FISCAL YEAR. The fiscal year of the Corporation shall be as specified by the Board of Directors. SECTION 3. VOTING OF STOCKS OWNED BY THE CORPORATION. The Board of Directors may authorize any person on behalf of the Corporation to attend, vote and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. - 12 - 13 ARTICLE X AMENDMENT OF BY-LAWS In furtherance of and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation from time to time may make, amend or repeal the By- Laws of the Corporation; provided that Article VIII of these By-Laws may not be amended by the Board of Directors; and provided, further, that any By-Laws made, amended or repealed may be amended or repealed, and that any By-Laws may be made, by the stockholders of the Corporation. Notwithstanding any other provisions of the Restated Certificate of Incorporation of the Corporation or these By-Laws (and not withstanding the fact that a lesser percentage may be specified by law, the Restated Certificate of Incorporation or these By-Laws), the affirmative vote of the holders of at least 80% of the voting power of the Voting Stock, voting together as a single class, shall be required for the stockholders of the Corporation to amend, repeal or adopt any By-Laws of the Corporation. - 13 - EX-10.18 3 AGREEMENT OF LEASE 1 EXHIBIT 10.18 DATED 10TH FEBRUARY, 1995 (1) CANARY WHARF LIMITED (2) MORGAN STANLEY UK GROUP (3) MORGAN STANLEY GROUP INC _____________________________ AGREEMENT relating to the development and leasing of Part Ground and First to Sixth Floors of 20 Cabot Square Canary Wharf London E14 _____________________________ 2 THIS AGREEMENT is made the tenth day of February One thousand nine hundred and ninety-five BETWEEN:- (1) CANARY WHARF LIMITED (Co. Regn. No. 1971312) whose registered office is at One Canada Square Canary Wharf London E14 5AB ("the Developer") and (2) MORGAN STANLEY UK GROUP (Co. Regn. No. 14281415) whose registered office is at 25 Cabot Square Canary Wharf London E14 8QA ("the Tenant") (3) MORGAN STANLEY GROUP INC a corporation incorporated under the laws of Delaware having an office at 1251 Avenue of the Americas New York New York 10020 ("the Surety") WHEREBY IT IS AGREED as follows:- 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement unless the context requires otherwise the following words and expressions shall have the meanings respectively ascribed to them:- "Access Date" means the date seven days following the date of this Agreement "1927 Act Notice" means a notice of intention to make an improvement such notice being served by the Tenant pursuant to Section 3 of the Landlord and Tenant Act 1927 and as specified in Clause 9 PROVIDED THAT any communication which would otherwise constitute or be deemed to constitute a 1927 Act Notice shall be deemed not to constitute a 1927 Act Notice if the Tenant acknowledges in writing (whether in or contemporaneously with or prior to such communication) that such communication is not intended to constitute a 1927 Act Notice "Approvals" means:- (a) all consents licences permissions authorisations and approvals (including agreements under Section 52 of the Town 3 2 and Country Planning Act and Section 106 of the Town and Country Planning Act 1990) of any local or other competent authority (including LDDC acting in its capacity as statutory authority) and (b) in relation to the Developer's Works and the Developer's Building Works (if applicable) all consents licences permissions authorisations and approvals of LDDC required pursuant to the MBA (including without limitation the Design Guidelines (as therein defined)) which may from time to time be necessary to enable the Developer or the Tenant lawfully to commence and carry out the Developer's Works the Developer's Building Works or the Tenant's Works (as appropriate) and each and every stage or phase of the Developer's Works the Developer's Building Works or the Tenant's Works (as appropriate) including if the same are destroyed or damaged the reinstatement of the Developer's Works the Developer's Building Works or the Tenant's Works (as appropriate) and thereafter to use the Demised Premises for the purposes contemplated by the Lease and the term "Approval" shall be construed accordingly "Base Building" means the building described in the Base Building Definition "Base Building Definition" means the aggregate of:- (a) the specification dated 9th November 1994 entitled "Shell & Core Outline Specification 20 Cabot Square" annexed hereto as Annexure 1 and (b) the Current Building Plans which specification and a schedule of the Current Building Plans are annexed hereto as Annexures 1 and 2 respectively "Base Building Works" means the construction of the Base Building as the same may be altered from time to time "Base Rate" means the base lending rate of Barclays Bank Plc in force from time to time or (if such base lending rate shall be 4 3 incapable of determination or for any reasons shall cease to be used or published) then such other comparable commercial rates as the parties may agree or in default of agreement as may be determined by an independent person to be nominated in the absence of agreement by and on behalf of the President for the time being of The Royal Institution of Chartered Surveyors on the application of the Developer or the Tenant "Building" means the building known as 20 Cabot Square and situate within the boundaries of the land designated as Parcel FC4 on the Development Site Plan TOGETHER WITH the curtilage and appurtenances of the said building (the boundaries of the said curtilage being shown by red edging on the Development Site Plan) "Building Systems" means the systems so defined in Clause 3.3.3 "CAR Policy" means the Contractors' All Risks Policy numbered WCR941042661 (a cover note for which (or summary of) is annexed hereto as Annexure 4) and any subsequent revisions or substituted arrangements therefor which may be made from time to time "Certificate of Practical Completion" means a certificate of Practical Completion confirming Practical Completion served pursuant to this Agreement "Code of Measuring Practice" means the Code of Measuring Practice prepared by the Royal Institution of Chartered Surveyors and the Incorporated Society of Valuers and Auctioneers (Fourth Edition dated November 1993) "Completion of the Tenant's Works" means the practical completion of the Tenant's Works as determined pursuant to the provisions of Clause 5 "Consultants" means all those persons providing Consultancy Services in connection with the Base Building Works "Consultancy Services" means the services contracted to be provided in relation to the carrying out of the Base Building Works by architects quantity surveyors structural engineers 5 4 other engineers mechanical and electrical consultants drainage consultants project managers and any other consultants (other than solicitors and selling agents and letting agents) employed or consulted by or on behalf of the Developer in connection with the Base Building Works "Current Building Plans" means the building plans listed in the drawings schedule annexed hereto as Annexure 2 "Demised Premises" means the premises to be demised by the Lease as the same are more particularly described therein and shown for identification purposes edged red and in part hatched green on the plans annexed hereto as Annexure 5 and marked "Demised Premises Plans" "Developer's Building Architects" means Kohn Pederson Fox or such other architect or firm of architects as may be appointed by the Developer in connection with the Developer's Works and/or the Developer's Building Works and notified in writing to the Tenant as having been so appointed "Developer's Building Contract" means such contract or contracts entered into by the Developer providing for the execution of the Base Building Works or any part thereof as the same may be amended or modified from time to time "Developer's Building Contractors" means the management contractors of (if applicable) the main building contractors from time to time under the Developer's Building Contract "Developer's Contracting Team" means the Developer's Building Contractors and the subcontractors appointed by the Developer's Building Contractors to carry out the Base Building Works (or part thereof) "Developer's Building Works" means the Shell and Core Works and the Reconstruction Works (as those terms are hereinafter defined) "Developer's Works" means the Development Site Infrastructure Works and the Base Building Works "Development Site" means:- 6 5 (a) the land and water areas shown edged green on the Development Site Plan and any additions alterations or improvements thereto and any additional land and water areas in which the Developer has acquired a freehold or leasehold interest and which the Developer reasonably designates as part of the Development site and (b) all buildings and appurtenances thereon and all additions alterations and improvements thereto "Development Site Infrastructure Works" means the design and construction from time to time of infrastructure work (other than the Phase I Infrastructure Works) within the Development Site "Development Site Plan" means the plan entitled "Development Site Plan" annexed to this Agreement as Annexure 3 "Event of Default" shall have the meaning set out in Clause 19 "Expert" means the Independent Person acting as an expert pursuant to Clause 21 "Facilities" means the facilities labour and all other services provided to the Tenant by the Developer or Canary Wharf Management Limited in the course of or in connection with the Tenant's Works and/or as proposed by the Tenant pursuant to Clause 4.4 hereof and approved by the Developer such approval not to be unreasonably withheld or delayed "Independent Person" means the independent person appointed to act as specified in Clause 20.2 or Clause 20.3 (as applicable) "Infrastructure Contracts" means the management or other contracts entered into by the Developer (and as the same may be amended from time to time) providing for the execution of the Development Site Infrastructure Works "Initial Rent" shall have the meaning ascribed thereto in the Lease and shall be the amount specified in Clause 12.2.3 "Interest Rate" means the rate of interest specified in Clause 7 6 25.1 "LDDC" means the London Docklands Development Corporation (which definition shall include its successors in title and assigns as permitted under the MBA) "Lease" means the Lease of the Demised Premises in the form of the draft exhibited hereto (with such additions or amendments as are provided for herein) to be granted to the Tenant on the terms prescribed by Clause 12 "Licences" means the licences regulating and approving the manner of execution of the Tenant's Works in the form of the draft set out in the First Schedule to be entered into as provided in Clause 6.3 "Littlejohn Agreement" means the agreement a copy of the form of which is exhibited hereto as Exhibit 3 "MBA" means the agreement dated 17th July 1987 entitled "Master Building Agreement" between among others LDDC (1) the Developer (2) and O&Y Canary Wharf Investments Limited (3) as varied by the Modified Scheme Consent Documents and as the same may subsequently be amended from time to time "Method Statement" means the method statement to be provided by the Tenant in accordance with the provisions of Clause 4.4 "Minimum Standard Developer's Finish" means the Minimum Standard Developer's Finish for Tenant's Works a copy of which is annexed hereto as Annexure 6 "Modified Scheme Consent Documents" means the deed dated 29th January 1988 and made between LDDC (1) O&Y Canary Wharf Investments Limited (2) the Developer (3) and Olympia & York Developments Limited (4) as varied by a Revised Modified Consent Deed dated 2nd December 1991 and made between the same parties as further varied by an Agreement dated 28th October 1993 and made between LDDC (1) O&Y Canary Wharf Investments Limited (In Administration) (2) Olympia & York Canary Wharf Limited (In Administration) (3) and Messrs Adamson, Hamilton and Bloom (4) 8 7 "Net Internal Area" means the net internal area of the relevant part of the Demised Premises as defined and measured in accordance with the Code of Measuring Practice and for the avoidance of doubt in considering for the purposes of such measurement whether an area or part is used in common with other tenants or occupiers of the Building or for the purposes of essential access or is a corridor of a permanent essential nature it is agreed and declared that only those areas shown coloured yellow on the "Demised Premises Plans" shall be so classified "Phase" means a phase of the Tenant's Works the nature extent and number of which are at the entire discretion of the Tenant "Phase I Infrastructure" shall have the meaning ascribed thereto in the MBA "Practical Completion" means the practical completion of the Tenant's Works or the Developer's Building Works (as appropriate each) in accordance with this Agreement and the expression "practically complete" shall be construed accordingly "Prohibited Materials" means any of the following:- (a) High alumina cement concrete (b) Woodwool slabs in permanent shuttering form (c) Calcium Chloride used as a setting agent in cement (d) Calcium silicate brick or tiles (e) Asbestos or asbestos based products (save where trace natural elements thereof are used in products which comply with relevant British Standard Specifications) (f) Aggregates for use in reinforced concrete which do not comply with British Standard Specification 882:1983 and aggregates for use in concrete which do not comply with British Standard Specification 8100:1985 (g) Urea Formaldehyde and 9 8 (h) Crocidolite (i) Any other material generally known at the date of its use to be deleterious to health and safety or the durability of the works in which it is used "Quarterly Day" means each of the 1st day of January 1st day of April 1st day of July and 1st day of October "Reconstruction Works" means works of demolition reconstruction and reconfiguration of the west side entrance lobby area and plaza shop fronts and the blocking of certain lifts (floors 1-6 east core and 7-10 west core) and the opening up of dedicated lifts (floor 1 west core) as described in the Specification "Rent Commencement Date" means the date specified in Clause 12.2.4 subject to Clauses 13.3 13.4 and 13.5 "Riverside Car Park" means the car park shown edged brown on Plan annexed hereto as Annexure 8 "Shell and Core Works" means the works required to be carried out by the Developer in order to restore the Building to its shell and core in accordance with the Shell and Core Outline Specification a copy of which is annexed hereto as Annexure 1 "Specification" means the specification for the Reconstruction Works a copy of which is annexed hereto as Annexure 7 "Tenant's Allowance" means the agreed Developer's contribution in respect of the Tenant's Works (calculated at the rate of L.34 (inclusive of Value Added Tax) per square foot of the Net Internal Area of the first second third fourth fifth and sixth floors of the Demised Premises) such amount to be paid in accordance with Clause 8 "Tenant's Building Contractor" means the main building contractor or management contractor if any selected by the Tenant "Tenant's Plans" shall have the meaning ascribed to them in Clause 3.1.3(a) 10 9 "Tenant's Professional Firms" mean the Tenant's architects quantity surveyors engineers and other professionals or sub- contractors other than its solicitors providing services or advice to the Tenant in relation to the development of the Demised Premises or the project contemplated by this Agreement as the Tenant may from time to time appoint or nominate "Tenant's Works" means the works to be undertaken by the Tenant in completing the initial installation connection and commissioning of services to and the initial fitting out of the Demised Premises and which shall be of no lesser standard than the Minimum Standard Developer's Finish or such other works in addition thereto or in substitution thereof which are undertaken by the Tenant for the purposes of the initial fitting out of the Demised Premises and all of which are approved in accordance with the provisions of this Agreement and for the avoidance of doubt the Tenant shall not be obliged to fit out any part of the ground floor of the Demised Premises to the standard required by Minimum Standard Developer's Finish "Tenant's Works Certificate" means the certificate to be issued by the Tenant in accordance with Clause 5 signifying that (in the opinion of the Tenant) Completion of the Tenant's Works has occurred "Term Commencement Date" means 1st February 1995 "Working Day" means any day (other than a Saturday or a Sunday) upon which clearing banks in the United Kingdom are open to the public for the transaction of business 1.2 In this Agreement unless the context otherwise requires:- 1.2.1 words importing the masculine gender only shall include the feminine gender and neuter meaning and vice versa and words importing the singular number shall include the plural number and vice versa and all references to a Clause or Schedule shall mean a Clause or Schedule of this Agreement 1.2.2 11 10 references to any statute or section of a statute shall be deemed to refer to any statutory amendment or modification or re-enactment thereof for the time being in force and the provisions of Section 61 of the Law of Property Act 1925 shall be deemed to be incorporated in and form part of this Agreement 1.2.3 references to drawings and documents annexed hereto shall include the drawings and documents initialled for identification on behalf of the parties hereto for the purposes of this Agreement (whether individually or as part of an agreed bundle or bound volume) 1.2.4 titles and headings to clauses are for convenience only and shall not be construed in or affect the interpretation of this Agreement 2. COPYRIGHT 2.1 Insofar as the copyright to any drawings or other intellectual property relevant to the Base Building Works is owned by the Developer or the Developer has power to grant licence to use or reproduce the same the Developer hereby irrevocably grants to the Tenant non-exclusive licence to use and reproduce the same for the purposes set forth in Clause 2.2 below 2.2 The Tenant undertakes that it shall observe all restrictions on copyright and other intellectual property rights applicable to and treat as supplied in confidence all drawings plans specifications cost information trade contract documents and calculations supplied by the Developer the Developer's Contracting Team or its Consultants or agents in connection with or related to the Base Building Works and will not use or permit to be used any of the same otherwise than:- 2.2.1 exclusively in connection with the planning and execution of the Tenant's Works or any subsequent alterations to the Demised Premises or 2.2.2 12 11 for any other purposes authorised or required under this Agreement and that the Tenant will procure compliance with this sub-clause 2.2 by the Tenant's agents and the Tenant's Professional Firms or any third party engaged instructed or retained by the Tenant in connection with the Base Building Works and/or the Tenant's Works and matters provided for in this Agreement 3. TENANT'S WORKS 3.1.1 The Landlord accepts that the Tenant will be carrying out the Tenant's Works in Phases the timing of each Phase being at the entire discretion of the Tenant 3.1.2 Prior to commencing each phase of the Tenant's Works and at the Tenant's sole reasonable cost and expense the Tenant shall submit to the Developer details of such of the Tenant's Works as relate to the relevant Phase for approval pursuant to Clause 3.5 including (but without limitation):- (a) architectural design drawings and specifications and (b) engineering design drawings and specifications in respect of the facilities materials and work for the various elements of the Tenant's Works which the Tenant wishes to carry out and such design drawings and specifications shall be fully co-ordinated with the Base Building 3.1.3 (a) If (and to the extent only) the same are approved by the Developer pursuant to Clause 3.5 the design drawings and specifications submitted by the Tenant pursuant to the provisions of this Clause 3.1 and any changes therein permitted under this Clause 3 are herein collectively called "Tenant's 13 12 Plans" (b) In relation to those portions of the Tenant's Works which comprise the connection to or interface with the structure of Building and the electronic elements of the fire protection system the building management system the risers and other systems serving the Building the Tenant may retain the same Consultants who prepared (as applicable) such structural mechanical or electrical engineering aspects of the Base Building Works but if other Consultants are used all reasonable information shall be supplied to the Developer to enable it to review the proposals (at the Tenant's cost) and the Tenant agrees not to use Consultants in respect of whom the Developer reasonably objects 3.2 The Tenant's Plans shall be co-ordinated by the Tenant with each other and with the Current Building Plans and shall incorporate all information which may be reasonably required to let all contracts required for the performance of the Tenant's Works including without limitation the details of all such Tenant's Works and the dimensioned locations thereof with reference to the building column centre line or the face of finished column enclosures. The Tenant's Plans shall consist of:- 3.2.1 scaled and dimensioned architectural and engineering design drawings and specifications showing the Tenant's Works including (without limitation) partition locations and type door locations size and type hardware schedule reflected ceiling electrical and telephone outlets plumbing locations and mechanical electrical plumbing and fire protection drawings which architectural and engineering design drawings and specifications shall contain reasonably sufficient detail to enable the Developer acting reasonably to determine whether or not the Tenant's Plans satisfy the requirements of Clauses 3.1 and 3.3 and 3.2.2 to the extent necessary to satisfy the preamble to this 14 13 clause and to enable the Developer to be satisfied as to the same scaled and dimensioned drawings and specifications showing nonstructural architectural details including floor and wall coverings painted surfaces finishes cabinet work and any other special finish requirements of the Tenant 3.3 The Tenant's Plans (including any changes thereto) shall not:- 3.3.1 materially adversely affect the exterior (including the appearance) of the Building (but for the avoidance of doubt may include suitable antiblast plastic film applied to the interior surfaces of windows) or 3.3.2 adversely affect the Building or 3.3.3 adversely affect the usage or the functioning of the mechanical electrical sanitary heating ventilating life safety air conditioning or other service systems of the Building (the "Building Systems") or 3.3.4 violate any laws or the requirements of any Approvals or the requirements from time to time of any insurers notified in writing to the Tenant (or its representatives or advisors) or be such that any Approval or any insurance to be effected by the Developer pursuant to Clause 11 is reasonably likely to be unobtainable 3.4 One set of transparencies and two prints of each plan in relation to architectural drawings and one set of transparencies and three prints of all others shall be submitted to the Developer on each occasion that the Tenant supplies details of its proposals for each Phase of the Tenant's Works to the Developer for approval 3.5 The Tenant's Plans and any material changes thereto which the Tenant may request shall be subject to the Developer's prior approval such approval (subject to compliance with Clauses 3.2 15 14 and 3.3) not to be unreasonably withheld or delayed. If the Developer shall disapprove of any aspects of the applicable drawings and specifications then the Developer shall within ten (10) Working Days give notice in writing specifying the grounds for such disapproval failing which it shall be deemed to have given its approval to the drawings and specifications and the Tenant shall either (i) return to the Developer appropriate corrections thereto within ten (10) Working Days after receipt of such notice and if the Developer shall still decline to approve the Tenant's Plans as amended, then (subject to Clause 3.3) either party may refer the matter or matters in dispute to the Expert for a decision in accordance with the provisions of Clause 20 or (ii) notify the Developer in writing that it does not intend to proceed with such drawings and specifications 3.6 The Developer shall deliver to the Tenant a statement or statements specifying any reasonable and proper engineering architectural or other costs incurred by the Developer in reviewing Tenant's Plans and any changes thereto together with any documentary evidence which the Tenant shall reasonably require that such costs have been incurred and the Tenant shall pay to the Developer within ten (10) Working Days after the receipt thereof the amount specified in such statement 3.7 The Tenant shall use reasonable endeavours to obtain all necessary Approvals required for the Tenant's Works following approval of the Tenant's Plans 3.8 The Tenant's Plans shall include a set of DXF files on computer disk showing the same 4. ENTRY BY THE TENANT FOR THE TENANT'S WORKS AND SUBSEQUENT OCCUPATION 4.1 Prior to Completion of the Lease and thereafter subject to Clause 13.3 and if the Tenant requires access to carry out the Tenant's Works subject to the provisions of sub-clauses 4.2 4.4 and 4.5 below and Clauses 3 and 6.4 the Developer shall grant the Tenant the Tenant's Professional Firms its contractors agents advisers workmen and others engaged in the execution of the Tenant's Works access to the Demised Premises and to the Building by way of licence only in common with the Developer at all times (subject as hereinafter mentioned) with effect from 16 15 the Access Date and where necessary through the lobby and using the lifts in the eastern end and core of the Building (including after the grant of the Lease until completion of the Developer's Building Works) for the purposes only of inspection of the Building and to carry out the Tenant's Works and for any other reasonable purpose in connection with the Tenant's Works including (but without limitation) the inspection of the Demised Premises the preparation of the Tenant's Plans and other drawings and specifications as referred to in Clause 3.1.3(a) and the preparation of the method statement referred to in Clause 4.4 and any occupation by the Tenant prior to completion of the Lease shall be on the same terms as if the Lease had been granted but subject always to the provisions of this Agreement 4.2 The Tenant's Works shall be carried out and completed:- 4.2.1 in a good and workmanlike manner and 4.2.2 using good quality materials of their several kinds and (where specified) as set out in any specifications relating to the Tenant's Works and in either case being fit for the purposes for which they are intended and 4.3 The Tenant shall itself and shall procure that the Tenant's Professional Firms and the Tenant's Building Contractor and all other parties instructed by the Tenant comply with all reasonable rules restrictions and regulations in relation to access to the Demised Premises and any other parts of the Building to which the Tenant is allowed access pursuant to the provisions of this Agreement and which may reasonably be imposed by the Developer and have been notified in writing to the Tenant 4.4 As soon as reasonably practicable and in any event not less than 10 Working Days prior to commencement of any Phase of the Tenant's Works the Tenant shall submit to the Developer for and obtain the Developer's approval to a method statement relating to that Phase (a "Method Statement") in writing which Method Statement shall contain the following information in so far as it is reasonably practicable for the same to be included:- 4.4.1 17 16 details of the Tenant's Professional Firms and the Tenant's Building Contractor for the design and carrying out of each part of the Tenant's Works 4.4.2 an organisational chart relating to that Phase showing the structuring of responsibilities of its professional team and contractors and sub-contractors engaged in connection with the carrying out of the Tenant's Works 4.4.3 details of the proposed construction schedule for the Phase 4.4.4 proposals for the liaison co-ordination and co-operation between the Developer and the Tenant's Professional Firms and the Tenant's Building Contractor and the Tenant's Senior Managers (as defined in Clause 22) 4.4.5 proposals for the means and times of access to the parts of the Building to which the Tenant is to be allowed access pursuant to the provisions of this Agreement 4.4.6 insofar as the same may then be known but otherwise in accordance with paragraph (b) below proposals for the dates and times of delivery to the Development Site and the Building of materials and equipment intended for incorporation or use in the Tenant's Works 4.4.7 proposals for the storage on-site of the materials and equipment intended for incorporation in the Tenant's Works and 4.4.8 proposals for the method by which on a daily basis surplus materials and refuse and rubbish of the Tenant 18 17 its contractors servants and agents are to be removed from the areas of the Development Site and the Building to which such persons shall have access to the areas desipated by the Developer as collection points or to areas outside the Development Site Provided That: - (a) notwithstanding the Developer's approval to the Method Statement if in the carrying out of the Tenant's Works in accordance with the Method Statement it transpires that the method of carrying out of the Tenant's Works is having a materially adverse effect on the progress or completion of the Developer's Works or the conduct of the business of tenants within the Building or any other works or the ability of Canary Wharf Management Limited (or any substitute therefor) to provide any of the Estate Services or Car Park Services or Building Services (all as defined in the Lease) the Developer may require such reasonable amendments or variations to the Method Statement as are reasonably necessary to mitigate the effect on the progress or completion of the Developer's Works or the ability of Canary Wharf Management Limited to provide the aforementioned services (b) insofar as it shall not be reasonably practicable to provide the information detailed in this Clause 4.4 within the time specified the Developer shall approve its omission from the Method Statement but such information shall nonetheless be submitted to the Developer as soon as reasonably possible thereafter 4.5 Upon entering the Demised Premises and any other parts of the Building to which access is permitted to enable the Tenant to carry out the Tenant's Works (the Developer acknowledging that it is necessary that access to other parts of the Building must be afforded to the Tenant to allow the Tenant to carry out the Tenant's Works and any survey inspection tests and other procedures relating thereto) the Tenant will itself and will 19 18 procure that its contractors agents advisers and workmen will at all times:- 4.5.1 comply in all material respects with the provisions of the Method Statement approved pursuant to the provisions of sub-clause 4.4 as the same may be added to amended or varied from time to time as permitted by this Agreement and comply in all respects with the Regulations (as defined in the Lease) as updated from time to time and produced and notified to the Tenant in writing by Canary Wharf Management Limited (as an addition or substitute therefor) 4.5.2 keep free and unobstructed all escape routes in relation to the Building and procure that all vehicles visiting the Building in connection with the Tenant's Works go directly to the unloading points reasonably designated in writing to the Tenant for such purpose from time to time by the Developer and leave the Building and the Development Site promptly upon unloading being completed 4.5.3 comply in all respects with the reasonable requirements and procedures of the Developer notified in writing to the Tenant in respect of the delivery of materials for use in connection with the Tenant's Works including the days and hours on and within which deliveries may be made the Developer having due regard to the reasonable requests of the Tenant in relation thereto and acting in the interests of good estate management 4.5.4 comply in all respects with the reasonable and proper safety and floor loading requirements of the Developer notified in writing to the Tenant in respect of the storage of materials in connection with the Tenant's Works 4.5.5 20 19 comply in all respects with the reasonable and proper requirements of the Developer notified in writing to the Tenant in respect of the security and protection of the Building 4.5.6 (save to the extent and degree expressly authorised under this Agreement by reason of the approval of the Tenant's Works) not damage or cause or permit its servants agents or contractors or any other persons to damage the Developer's Works and in particular not to interfere or permit such persons to interfere with or do or permit to be done by any such persons any act or thing which may materially adversely affect any installation forming part of the Developer's Works or the carrying out or completion thereof and not to make or instruct to be made by any such persons any connections with or to such installation (other than any which form part of the Tenant's Works) without the prior approval of the Developer to such connections (which approval shall not be unreasonably withheld or delayed) 4.5.7 comply in all respects with legislation in respect of Safety Health and Welfare and the reasonable safety requirements of the Developer 4.5.8 not obstruct or cause or permit to be obstructed (save during the proper carrying out of any part of the Tenant's Works to the same) the means of access to:- (a) the vertical surfaces of the Developer's Works (b) plant machinery and equipment installed as part of the Developer's Works (c) any service ducts and risers and (d) any part of the Building other than the Demised Premises 21 20 4.5.9 The Developer hereby acknowledges that the Tenant is in the process of formulating its proposals for the Tenant's Works and is not presently in a position to determine those Facilities which it will want in connection with the carrying out of the Tenant's Works. The Developer agrees that it will negotiate with the Tenant in good faith in response to proposals from the Tenant for a suitable schedule of Facilities (including appropriate charges for the Facilities involved) and for its part the Tenant acknowledges the right of the Developer to control the timing supply and use of any such Facilities having regard to the execution of the Base Building Works and the competing interests of other potential occupants who are fitting out other parts of the Building 4.6 The Tenant shall at reasonable intervals throughout the period of the carrying out of the Tenant's Works permit the Developer to inspect the progress and manner of execution of the Tenant's Works (and to ensure compliance with the rules restrictions and regulations referred to in Clause 4.3) at all reasonable times on prior appointment and subject to the proper safety and security requirements imposed by the Tenant and/or the Tenant's Building Contractor without such inspection causing any undue delay to the Tenant's programme for the carrying out of the Tenant's Works and without causing any other interference to the Tenant's Works and making any comments in relation to the Tenant's Works their progress and manner of execution to the Tenant itself and not to the Tenant's Building Contractor or any of the other Tenant's Professional Firms 4.7 The Tenant's Works shall at all times be at the Tenant's risk and save as expressly provided in this Agreement the Developer shall have no responsibility or liability in respect thereof or (subject to the provisions of Clause 11) be under any obligations to insure the same 5. COMPLETION OF THE TENANT'S WORKS The Tenant shall procure that the Developer shall be given not less than five (5) Working Days' notice of the intention of the Tenant to inspect a relevant Phase of the Tenant's Works with a view to the 22 21 issue of the certificate of practical completion of the Tenant's Works in relation to that Phase (a "Tenant's Works Certificate") and that the Developer and such of its consultants as it may wish will be given the opportunity to accompany the Tenant on the final inspection prior to the issue of the Tenant's Works Certificate relating to that Phase in order that the Developer may (but shall not be bound to) make whatever representations to the Tenant which the Developer reasonably thinks fit as to whether or not the Phase shall have been practically completed and the Tenant will have regard to (but shall not be bound by) any such representations made before issuing the Tenant's Works Certificate and the Tenant shall as soon as reasonably practicable after its issue supply to the Developer a copy of the Tenant's Works Certificate when issued and the date specified in the Tenant's Works Certificate shall be the date of Completion of the relevant Phase of the Tenant's Works in relation to the relevant Phase for the purposes of this Agreement 6. ANCILLARY PROVISIONS AS TO WORKS 6.1.1 The Developer and the Tenant shall as soon as reasonably practicable and in any event not earlier than Completion of the Shell and Core Works (together but each at its own cost) commission and test in accordance with the specifications relating thereto all plant and machinery the supply or fixing of which is included in the Base Building Works or the Tenant's Works respectively both separately and together with all plant and machinery the supply or fixing of which is included in the Tenant's Works or the Base Building Works respectively 6.1.2 The Developer and the Tenant shall each procure that they notify and regularly consult with each other as to the proposed commencement of any procedures for testing and/or commissioning any of the said plant and machinery and to that end the Developer and the Tenant shall co-operate so as to procure the efficient testing and commissioning of the said plant and machinery in cases where the functioning of plant and machinery installed as part of the Base Building Works is dependent upon plant and machinery installed as part of 23 22 the Tenant's Works and vice versa 6.1.3 In relation to those portions of the Tenant's Works which comprise the fire protection system or the connection or interface with the electronic elements of the building management system serving the Building the Tenant shall be obliged to use a contractor reasonably designated by the Developer 6.2.1 As soon as reasonably practicable after Practical Completion of each Phase of the Tenant's Works the Tenant shall supply to the Developer a set of as-built drawings showing the works relating to that Phase actually carried out together in so far as possible with a set of DXF files on computer disk showing the same 6.2.2 As soon as reasonably possible after the Practical Completion of all the Tenant's Works the Developer and the Tenant shall each sign and exchange a memorandum amending the relevant marked up or as-built plans for the purpose of recording the works carried out by the Tenant 6.3 Within thirty (30) Working Days of Completion of each Phase of the Tenant's Works (or on completion of the Lease if later) the Developer shall execute and deliver to the Tenant an executed Licence and subject to being provided with an engrossment thereof the Tenant shall execute and deliver counterparts thereof to the Developer and for such purposes the Tenant shall supply to the Developer as soon as practicable after Completion of each Phase of the Tenant's Works a specification prepared by or on behalf of the Tenant which shall identify the relevant works insofar as the extent of the same is not apparent from the as-built drawings 7. ENTRY BY THE DEVELOPER TO THE DEMISED PREMISES AFTER THE ACCESS DATE From the Access Date the until Developer's Building Works are 24 23 entirely completed the Tenant shall upon receipt of reasonable prior notice (save in the case of emergency) permit the Developer the Consultants and the Developer's Contracting Team to enter upon the Demised Premises in order to enable the Developer to complete the Developer's Building Works the persons so entering causing no damage to the Demised Premises and the Tenant's Works and as little interference interruption to or restriction of the Tenant's Works as practicable and making good to the reasonable satisfaction of the Tenant any damage caused thereby to the Demised Premises or to the Tenant's Works 8. ALLOWANCE FOR TENANT'S WORKS 8.1 In this Clause 9 (unless the context requires otherwise) the following words and expressions shall have the meanings respectively ascribed to them:- "Costs" means all costs and expenses which are properly referable to the Tenant's Works and the expression "Relevant Costs" shall be construed accordingly; "Disbursement" shall have the meaning ascribed to it in Clause 8.2; 8.2 The Developer shall pay to the Tenant the Tenant's Allowance in accordance with the following provisions:- 8.2.1 the Developer shall pay sums on account of the Tenant's Allowance (a "Disbursement") to the Tenant from time to time within ten (10) Working Days after receipt of a written request for a Disbursement from the Tenant (such request setting forth in reasonable detail the amount of the Costs incurred by the Tenant which have not been the subject of a previous Disbursement by the Developer and the relevant Tenant's Works which have been incorporated into the Demised Premises) and such request being accompanied by a certificate from the Tenant's architect (or other appropriate and duly authorised professional advisor) confirming that the 25 24 amounts so specified in the request have been incurred and where relevant the relevant Tenant's Works have been so incorporated; 8.2.2 any such Disbursement by the Developer shall not be required to be made more frequently than monthly and (save as provided in paragraph 8.2.3 below) shall not exceed the sums incurred by the Tenant towards the relevant Costs; 8.2.3 within ten (10) Working Days following the date of Completion of the Tenant's Works any necessary final adjusting payment shall be made by the Developer to the Tenant or vice versa (as the case may be) in respect of any underpayment or overpayment of the Tenant's Allowance so that the Tenant shall in any event receive an amount equal in full to the Tenant's Allowance whether or not Costs have been incurred by the Tenant to the full amount of the Tenant's Allowance 9. AGREEMENT AS TO OPERATION OF LANDLORD AND TENANT ACT 9.1 The Tenant hereby agrees with the Developer that if the Tenant serves a 1927 Act Notice upon the Developer in relation to the Tenant's Works or any part or parts thereof the Tenant shall within twenty-eight days following the service of the 1927 Act Notice or within seven days after determination of the cost (hereinafter called "the Cost") to the Tenant of the carrying out of the works and alterations the subject of the 1927 Act Notice (time being of the essence) pay to the Developer a sum equal to One hundred and five per cent. of the Cost 9.2 The Developer and the Tenant shall use all reasonable endeavours to agree the Cost but in default of written agreement between them as to the amount of the Cost then either party may at any time following the expiration of a period of fourteen days following the service of the 1927 Act Notice refer the matter for settlement to an Independent Person pursuant to the provisions of Clause 20 26 25 10. REBATES FROM STATUTORY 10.1 As contemplated in Clause 11(14) of the MBA the Tenant hereby agrees to pay to the Developer or as it may direct the full amount of any rebates received by or on behalf of the Tenant comprising all or any part of the Corporation's Proportionate Share 10.2 The Tenant hereby assigns to the Developer all of its rights and claims in respect of the Corporation's Proportionate Share 10.3 For the purposes of this Clause 10 "Corporation's Proportionate Share" shall have the meaning ascribed thereto in the MBA 11. INSURANCE 11.1 From the date hereof until the date that the Lease is actually granted pursuant to Clause 12.1 the Developer shall insure or cause to be insured the Base Building Works and the Building and the Reconstruction Works (insofar as the same are from time to time built) either (and as appropriate):- 11.1.1 against all risks covered by the CAR Policy; or 11.1.2 insofar as reasonably practicable on the same terms (mutatis mutandis) as would have applied had the Lease been granted on the date hereof subject nevertheless to all exclusions and limitations imposed by the insurers 11.2 Within 7 days of written demand the Tenant shall pay a proportionate part (referable to the respective proportion which the Tenant would have paid had the Lease been granted) of the amount expended by or on behalf of the Developer in effecting insurance pursuant to Clause 11.1 11.3 If the Base Building Works or the Building or the Reconstruction Works are damaged or destroyed by any of the risks referred to in Clause 11.1 then unless payment of the insurance monies shall be refused in whole or in part by reason of any act or default 27 26 of the Tenant or any person under its control the Developer shall lay out the net proceeds of such insurance (making good any insufficiency in such proceeds out of its own funds) in rebuilding and reinstating the Building Works the Building or the Reconstruction Works as the case may be in accordance with this Agreement 12. GRANT OF LEASE AND RENT AND OTHER TERMS 12.1 On a date five days after the date of the determination of the Net Internal Area pursuant to Clause 12.2.2 the Developer shall duly execute and shall procure that Canary Wharf Management Limited shall execute and cause to be delivered to the Tenant the executed Lease and the Tenant (meaning Morgan Stanley UK Group only) and the Surety (meaning Morgan Stanley Group Inc only) shall execute and deliver the counterpart thereof to the Developer and the Lease shall be completed 12.2 The following provisions shall apply to the computation and the commencement date for payment of the rents payable under and the calculation of the commencement and length of the term of the Lease:- 12.2.1 the term of the Lease shall be the period of twenty-five years from the Term Commencement Date 12.2.2 (a) the Developer shall subject to Clause 13.8 as soon as reasonably possible serve notice on the Tenant when the Developer reasonably considers that such part of the Demised Premises as is to be situate on the ground floor of the Building is capable of measurement and within fifteen (15) Working Days following the date of such notice the Developer and the Tenant (for itself and the Surety) shall procure that their respective chartered surveyors shall jointly measure and endeavour to agree the Net Internal Area of such part of the Demised Premises including and separately shown the Ground Floor Area (as defined in the Lease) and the area edged red on Plan 2 28 27 (b) if such surveyors shall not be able to agree in writing within the said period the Net Internal Area of the Demised Premises either of them may require the Demised Premises to be measured by an Independent Person (c) notwithstanding the foregoing the Net Internal Area of floors 1 2 3 4 5 and 6 of the Demised Premises is agreed to be three hundred and twenty five thousand seven hundred and four (325,704) square feet and a memorandum of the same shall be endorsed on the Lease and the Counterpart thereof 12.2.3 the amount of the Initial Rent shall for the first three years of the Term be 37,500 pounds sterling and thereafter shall be 5,167,338 pounds sterling 12.2.4 the Initial Rent in respect of the Demised Premises shall be reserved under the Lease with effect from and including 1st February 1995 subject to Clause 13.4 and 13.5 12.2.5 the insurance rent and service charges as reserved in Clause 3(e) of the Lease shall be reserved under the Lease with effect from and including 1st February 1995 12.2.6 the parties shall insert any appropriate figures and details in the Lease following the calculations referred to herein 12.3 Save in relation to the car parking areas within the Building the Tenant hereby waives its right to and shall not (and shall not permit any other person to) occupy the Demised Premises or any part thereof for the purposes of its business until practical completion of the relevant Phase of the Tenant's Works in respect of such part and until practical completion as aforesaid the provisions for occupation of the Demised Premises contained herein shall continue to apply 29 28 12.4 Notwithstanding any provision in this Agreement (including any provision of this Clause 12.4) to the contrary but subject to the proviso hereto no sums in respect of rents insurance and service charges for the period prior to the grant of the Lease up to (but not including) the Quarterly Day after the grant of the Lease shall become payable until the date of completion of the Lease and on the date of completion of the Lease there shall become due and payable by the Tenant in respect of rents insurance rents and service charges for the period aforesaid an amount equal to all sums which would have become due and payable prior to the date of completion of the Lease in respect of rents insurance rents and service charges for the said period but for the provisions of this Clause 12.4 together with an amount equal to the interest from the date on which payments would have become due if the Lease had been granted on the earliest date from and including which such sums were reserved ("the Reservation Date") until the date of grant at the rate equal to the Base Rate compounded quarterly (or in respect of the period up to the date of completion at the end of that period) in arrears PROVIDED ALWAYS that the Developer may elect at any time prior to the Reservation Date that any sums due in respect of rents insurance rents and service charge prior to completion of the Lease which would have been payable under the Lease had the same been granted on the Reservation Date shall be payable as sums due under this Agreement until the Lease is completed on the dates on which the same would have fallen due had the Lease been granted on the Reservation Date 12.5 Where in consequence of the calculations made under sub-clause 12.2 or 12.4 of this Clause sums and amounts become due and payable by the Tenant to the Developer as rent in respect of any period or periods prior to the completion of the Lease such sums and amounts shall instead be due and shall commence to be paid by the Tenant as licence fees under the terms of this Agreement until the Lease has been completed 12.6 The parties shall complete any blanks in the form of Lease at the appropriate time and shall act reasonably in relation thereto 13. DEVELOPER'S BUILDING WORKS 13.1 The Developer hereby agrees to carry out and to complete the 30 29 Shell and Core Works and the Reconstruction Works in the manner set out in this Clause 13 at its sole cost (save in relation to that part of the Reconstruction Works to comprise the South and West Vestibules and any works therein as detailed in Sections 6 and 8 of the Specification in respect of which the Tenant shall reimburse the Landlord the sum of 80,000 pounds sterling including VAT within fourteen (14) days of receipt by the Tenant of a written demand following completion of the Reconstruction Works or if the Tenant shall so require in writing the Landlord shall deduct such sum from payments of the Tenant's Allowance) 13.2 The Developer will procure that the Certificate of Practical Completion of the Shell and Core Works is issued by the date falling three months after the date hereof and will procure that the Certificate of Practical Completion of the Reconstruction Works is issued by the date falling twelve months after the date hereof 13.3 The communications mechanical and electrical space shown edged and hatched green on Plan 2 shall be made available to the Tenant to enable the Tenant to commence to carry out the Tenant's Works no later than the date falling four months after the date hereof and on that date the aforementioned space shall be in such condition as to enable the Tenant properly to carry out the Tenant's 36 Works in so far as they relate to that space and for each day after the date falling four months after the date hereof that the Landlord fails (without fault on the part of the Tenant) to make the communications mechanical and electrical space available to the Tenant in such a condition as to enable the Tenant to carry out the Tenant's Works the Rent Commencement Date shall be delayed (subject to Clause 13.5 below) on a day for day basis 13.4 The Rent Commencement Date and the date on which the rent of 5,167,338 pounds sterling shall become payable shall each be delayed for each day that:- 13.4.1 the issue of a Certificate of Practical Completion in respect of the Reconstruction Works is delayed (without fault on the part of the Tenant) beyond the date falling twelve months after the date hereof (subject to Clause 13.5 below) on a day for day basis and 31 30 13.4.2 for each day that the issue of a Certificate of Practical Completion in relation to the Shell and Core Works is delayed (without fault on the part of the Tenant) beyond the date falling three months after the date hereof (subject to Clause 13.5 below) on a day for day basis 13.5 The total number of days by which the Rent Commencement Date shall be delayed shall be equal to whichever of the delays referred to in Clauses 13.3 13.4.1 and 13.4.2 is the longest to the intent that there shall be no double counting in calculating the number of days by which the Rent Commencement Date shall be delayed 13.6 The Tenant may by service of written notice at any time after the date hereof and during the period of the carrying out of the Shell and Core Works but only at such time or times as would not be likely to lead to a delay on the part of the Developer in achieving the date referred to in Clause 13.4.2 require any of the plant equipment fit out enhanced building systems fixtures fittings or furnishings ("Equipment") which are at the date of that notice still in the Building and which would be removed as part of the Shell and Core Works to be retained or if the Tenant requires to take physical possession of them and if such a notice is served the relevant Equipment shall:- 13.6.1 be retained and its retention shall thereafter be excluded from the Shell and Core Works 13.6.2 be given into the physical possession of the Tenant if so required as soon as reasonably possible after the service of the Tenant's Notice 13.7 The Developer's Building Works shall be carried out and completed:- 13.7.1 in a good and workmanlike manner 13.7.2 32 31 using good quality materials of their several kinds which are fit for the purpose for which they are intended 13.7.3 in all respects in accordance with the Specification in the case of the Reconstruction Works and in accordance with the Shell and Core Outline Specification in the case of the Shell and Core Works set out in Annexure 1 13.7.4 without using any Prohibited Materials 13.7.5 in accordance with the Standards applied and reasonably expected of fully skilled persons in the execution of such works 13.7.6 in accordance with all necessary Approvals 13.8 The Developer shall use reasonable endeavours to procure that that part of the Building presently occupied by Rymans Limited can be reconstructed in whatever way shall be necessary in order to enable the Developer to demise the plaza level of the Demised Premises as shown edged red and hatched green on plan [Z] and will on or before 28th February 1995 inform the Tenant whether it has been successful in its negotiations with Rymans Limited and if it has been successful plan [Z] shall be substituted for plan 2 for the purposes of this Agreement 13.9 The Developer shall at reasonable intervals throughout the period of the carrying out of the Developer's Works permit the Tenant to inspect the progress and manner of execution of the Developer's Building Works (and to ensure compliance with the rules restrictions and regulations referred to in this Agreement) at all reasonable times on prior appointment and subject to the proper safety and security requirements imposed by the Developer and/or the Developer's Building Contractor without such inspection causing any undue delay to the Developer's programme for the carrying out of the Developer's Works 33 32 13.10 The Developer's Works shall at all times prior to 1st February 1995 be at the Developer's risk and save as expressly provided in this Agreement the Tenant shall have no responsibility or liability in respect thereof 13.11.1 Until such time as the Littlejohn Agreement is completed (and the Developer hereby agrees to complete its works to the car park which is the subject of the Littlejohn Agreement at its own expense and make the same available to the Tenant within 6 months of the date hereof) the Tenant shall be entitled to use the same number of parking spaces (to be designated by the Developer) at the Riverside Car Park as are the subject of the Littlejohn Agreement upon the like terms mutatis mutandis (including as to licence fee) as are contained in the Littlejohn Agreement 13.11.2 Within 5 Working Days of the later of completion of the works which the Developer intends to carry out to the car park which is the subject of the Littlejohn Agreement or the date six months from the date hereof the Developer shall grant and the Tenant will accept the grant of the Littlejohn Agreement 14. COMPLETION OF DEVELOPERS BUILDING WORKS 14.1 The Developer shall procure that the Tenant shall be given not less than five (5) Working Days' notice of the intention of the Developer's Architect to inspect the Reconstruction Works or the Shell and Core Works (as the case may be) with a view to the issue of a Certificate of Practical Completion of the Shell and Core Works or the Reconstruction Works and the Tenant and its architect will be given the opportunity to accompany the Developer on the final inspection prior to the issue of the relevant Certificate of Practical Completion in order that the Tenant may make whatever representations to the Developer it shall reasonably think fit as to whether or not the Shell and Core Works or the Reconstruction Works have been practically completed and the Developer will have regard to (but not be bound by) any such representations made before issuing the Certificate of Practical Completion and the Developer shall as 34 33 soon as reasonably possible after its issue supply to the Tenant a copy of the Certificate of Practical Completion and the date specified in the Certificate of Practical Completion shall be the date of completion of the Reconstruction Works or the Shell and Core Works as the case may be 15. VALUE ADDED TAX 15.1 Where by virtue of any of the provisions of this Agreement, one party ("the Payer") is required to pay another party to this Agreement ("the Payee") any costs fees charges expenses or other amounts, then the Payer shall also:- (i) pay to the Payee any Value Added Tax at the rate for the time being in force chargeable in respect of any payments made by the Payer to the Payee in connection with or under the provisions of this Agreement or in respect of any supplies made by the Payee to the Payer in connection with or under the provisions of this Agreement provided that if the Payee makes an election to waive exemption in relation to all or part of the Demised Premises in accordance with paragraph 2 of Schedule 10 of the Value Added Tax Act 1994 as it may from time to time be amended modified or re- enacted and as a result of such election (and for the avoidance of doubt solely as a result of such election) Value Added Tax is payable by the Payer in accordance with this sub-clause then the Payee shall indemnify the Payer against such Value Added Tax as is payable by the Payer under this sub-clause and is not recoverable by the Payer pursuant to Sections 25 and 26 of the Value Added Tax Act 1994 (ii) pay to the Payee an amount equal to all Value Added Tax input tax incurred by the Payee in respect of supplies made to the Payee (including by reason of such supplies being deemed to be made for the purposes of Value Added Tax by the Payee to itself) the cost of which the Payer is obliged to reimburse to the Payee under or by virtue of the terms of this Agreement save to the extent that such Value Added Tax input tax is recoverable by the Payee or is recoverable under any other provision of this Agreement 35 34 15.2 Where Clause 15.1 above applies the Payee shall not later than fifteen (15) Working Days after receipt of the relevant sum or amount or rendering of the consideration render to the Payee a proper Value Added Tax invoice therefor 16. TITLE 16.1 The Developer's title to grant the Lease having been deduced to the Tenant prior to the date hereof the Tenant shall raise no objection or requisition in respect thereof other than those arising out of the usual pre-completion searches 16.2 The Developer shall place its Charge Certificate in respect of Title Number EGL 202850 on deposit at H.M. Land Registry and shall notify the Tenant or its Solicitors of the deposit number allocated thereto for the purposes of enabling the Tenant to register a notice of the Tenant's interest arising out of this Agreement relating to the Demised Premises 16.3 The Developer shall procure evidence of the consent of Lloyds Bank plc and if necessary London Underground Limited to the grant of the Lease and the Littlejohn Agreement 17. CONDITIONS AFFECTING THE GRANT OF THE LEASE 17.1 The Lease will be granted subject to:- 17.1.1 all charges notices orders directions regulations restrictions and other matters whatsoever arising under the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act 1990 the Planning (Hazardous Substances) Act 1990 the Planning (Consequential Provisions) Act 1990 the Planning and Compensation Act 1991 and any subsequent legislation of a similar nature and the Tenant shall be deemed to accept the Lease with full knowledge thereof and of the authorised use of the Building for the purpose of such Acts and shall not raise any requisition enquiry or objection with regard thereto save for any which shall be incurred registered issued made or created after the date hereof 36 35 17.1.2 the matters contained or referred to in the deeds or documents referred to in the Fifth Schedule to the Lease 17.1.3 a lease or leases in favour of the London Electricity Board in such form and with such appurtenant rights and powers of entry and otherwise as the London Electricity Board shall require relating to the transformer chambers in the Building (but for the avoidance of doubt outside the Demised Premises) 17.1.4 a lease or leases in favour of British Telecom Mercury Communications or such other public telecommunications operator as the Developer may determine (a "PTO") in such form and with such appurtenant rights and powers of entry and otherwise as the PTO shall require relating to the telecommunications room in the Building (but for the avoidance of doubt outside the Demised Premises) 17.2 The Tenant hereby admits that no representation whether oral or written (save in any written reply given by the Developer's Solicitors to any written enquiry) has been made to the Tenant prior to the execution hereof by or on behalf of the Developer concerning the Development Site or the Building or the Developer's Works or any part thereof which has influenced induced or persuaded the Tenant to enter into or which forms part of this Agreement or of any agreement collateral herewith 18. EVENT OF DEFAULT 18.1 An Event of Default shall occur in any of the following circumstances:- 18.1.1 if the Tenant (being a body corporate) passes a winding-up resolution (other than a resolution for the purposes of an amalgamation or reconstruction resulting in a solvent corporation) or resolves to present its own winding-up petition or is wound up or the directors 37 36 of the Tenant resolve to present a petition for an administration order in respect of the Tenant or an Administrative Receiver or a Receiver or a Receiver and Manager is appointed in respect of the property or any part thereof of the Tenant or the Surety or 18.1.2 if the Tenant (being a body corporate) calls or a nominee calls on its behalf a meeting of its creditors or any of them or makes an application to the Court under Section 425 of the Companies Act 1985 other than an application for the purposes of an amalgamation or reconstruction resulting in a solvent corporation or submits to its creditors or any of them a proposal pursuant to Part I of the Insolvency Act 1986 or enters into any arrangement scheme compromise moratorium or composition with its creditors or any of them (whether pursuant to Part I of the Insolvency Act 1986 or otherwise) or 18.1.3 the Tenant ceases for any reason to maintain its corporate existence or 18.1.4 the Tenant shall cease for any other reason to be or to remain liable under this Agreement 18.2 Upon the happening of an Event of Default the Developer may at any time thereafter (whilst the Event of Default subsists to any extent) by notice in writing to the Tenant forthwith determine this Agreement (but without prejudice to any right of action by any party in respect of any antecedent breach of any of the obligations on the part of any other party herein contained) 19. CONFIDENTIALITY PROVISIONS 19.1 None of the parties to this Agreement shall without the prior written consent of all the other parties to this Agreement disclose or publish ("Disclosure") or permit or cause Disclosure of any financial or other details whatsoever naming the parties hereto or otherwise relating to the transaction hereby effected save only for:- 38 37 19.1.1 any particular extracts or details which must be the subject of Disclosure in order to comply with any Stock Exchange or statutory requirements or the lawful requirements of any regulatory bodies or with the requirements of the Inland Revenue or Customs and Excise or in order to obtain clearance and clarification from the Customs and Excise or Inland Revenue 19.1.2 any details given to auditors bankers professional advisers and key employees of each of the parties who need to know such details (and who shall only be provided with the same upon first having undertaken to be bound by the provisions of this Clause 19 (mutatis mutandis)) 19.1.3 any particular extracts or details which have come into the public domain through no fault of the relevant party (but no disclosure to Customs & Excise or the Inland Revenue) 19.2 In the case of a party wishing to make Disclosure as permitted pursuant to the provisions of Clause 19.1 that party shall first submit details of the proposed text of the Disclosure to the other parties to this Agreement and shall act reasonably in taking full account of all representations and comments made by such other parties upon the text 19.3 This Clause 19 shall remain in effect until the expiry of a period of 5 years from the date hereof 19.4 This Clause 19 shall not apply to Disclosure by or on behalf of any party to this Agreement to any third parties and/or their professional advisers in pursuance of bona fide negotiations relating to the Development Site 20. DISPUTES 20.1 If any dispute or difference shall arise between the parties 39 38 hereto as to the construction or meaning of this Agreement or their respective rights duties and obligations hereunder or as to any matter arising out of or in connection with the subject matter of this Agreement such dispute or difference shall (unless this Agreement otherwise expressly provides) if any party hereto so requires at any time by notice served on the others ("the Determination Notice") be referred to and determined by an independent person ("the Independent Person") who shall have been qualified in respect of the general subject matter of the dispute or difference for not less than ten years and who shall be a specialist in relation to such subject matter 20.2 The Independent Person shall be appointed by agreement between the parties hereto or (if within ten (10) Working Days after service of the Determination Notice the parties have been unable to agree) on the application of any of the parties by such one of the following persons as the parties shall agree to be appropriate having regard to the nature of the dispute or difference in question 20.2.1 the Chairman for the time being of the Bar Council 20.2.2 the President for the time being of the Royal Institute of British Architects 20.2.3 the President for the time being of the Royal Institution of Chartered Surveyors 20.2.4 the President for the time being of the Institute of Chartered Arbitrators 20.2.5 the President for the time being of the Institute of Chartered Accountants in England and Wales 20.2.6 the President for the time being of the Law Society or (in each such case) the duly appointed deputy of such President or any other person authorised by him to make 40 39 appointments on his behalf 20.3 If within fifteen (15) Working Days after service of the Determination Notice the parties have been unable to agree which of the persons referred to in Clause 20.3 is appropriate to appoint the Independent Person then the Independent Person shall be appointed on the application of any of the parties by the President for the time being of the Law Society or his duly appointed deputy or any other person authorised by him to make appointments on his behalf 20.4 Except as mentioned in Clause 20.5 any person appointed under this Clause shall act as an arbitrator in accordance with the provisions of the Arbitration Acts 1950 to 1979 20.5 Whenever this Agreement expressly so provides that the Independent Person shall act as an expert then the following provisions shall have effect:- 20.5.1 the Independent Person shall act as an expert and not as an arbitrator and his decision shall be final and binding upon the bodies thereto 20.5.2 the Independent Person shall consider (inter alia) any written representations made on behalf of any party (if made reasonably promptly) but shall not be bound thereby 20.5.3 the parties hereto shall use all reasonable endeavours to procure that the Independent Person shall give his decision as speedily as possible 20.5.4 the costs of appointing the Independent Person and his costs and disbursements in connection with his duties under this Agreement shall be shared between the parties to the dispute in such proportions as the Independent Person shall determine or in the absence of such determination then equally between the parties and 41 40 20.5.5 if the Independent Person shall be or become unable or unwilling to act then the procedure herein before contained for the appointment of an expert may be repeated as often as necessary until a decision is obtained 20.5.6 Where the dispute or difference between the parties which was the subject of the Determination Notice shall have resulted in delay to the carrying out of the Tenant's Works or the Developer's Works or the Developer's Building Works the Independent Person shall be entitled (inter alia) to award such extension of time for the fulfilment of the obligation in question in respect of such delay as shall in all circumstances be fair and reasonable 21. NOTICES 21.1 "Address" means the address of the party in question shown on the first page of this Agreement or such other address as the party in question may from time to time notify in writing to the other parties to this Agreement as being its address for service for the purposes of this Agreement 21.2 Any notice approval election or other communication given or made in accordance with this Agreement shall be in writing and shall be: 21.2.1 sent by registered or recorded delivery post to the relevant party at such party's Address and if so sent shall be deemed to have been delivered given or made on the date occurring 72 hours after the date it was sent or 21.2.2 shall be personally delivered to the relevant party at such party's Address as defined in this Clause and if so delivered shall be deemed to have been delivered given or made on the date of delivery 42 41 21.2.3 Notices to the Developer shall be marked for the attention of Patrick Gamer Esq. at Canary Wharf Limited One Canada Square Canary Wharf London E14 5AB with a further copy sent to MA Ashley-Brown Esq. at Canary Wharf Limited One Canada Square Canary Wharf London E14 5AB 21.2.4 Notices to the Tenant shall be marked for the attention of F. Bartolotta Esq or such other person as shall be notified to the Landlord at 25 Cabot Square Canary Wharf London E14 with a further copy sent to Messrs Slaughter and May at 35 Basinghall Street London EC2V 5DB 22. SENIOR MANAGERS 22.1 The Developer and the Tenant each shall by notice in writing given to the other party designate not more than three (3) senior managers (each being herein referred to as a "Senior Manager" which expression shall include any persons appointed in place of the initial persons so designated) each of whom shall have authority to approve all matters requiring the approval of the Developer or the Tenant (as the case may be) pursuant to this Agreement 22.2 It is hereby acknowledged that the Developer has designated George Iacobescu and Anthony Jordan and that the Tenant has designated Frank Bartolatta and Philip Henry as their respective Senior Managers and that no further designation of a Senior Manager is required to be made by either the Developer or the Tenant 22.3 The Tenant acknowledges and represents that the Developer may rely upon the directions of any one or more of the Tenant's Senior Managers and that each such person has authority to act on behalf of the Tenant and to bind the Tenant in connection with this Agreement Directions and other communications given to or received from any one or more of the Senior Managers shall be deemed given to and received from all of the Senior Managers 22.4 Either the Developer or the Tenant may by written notice to the 43 42 other at any time hereafter change its designation of any of the Senior Managers appointed by it with effect from the date of such notice 23. CONTINUANCE AND NON-MERGER This Agreement shall remain in full force and effect in respect of any of the provisions hereof which remain to be completed satisfied or fulfilled on the grant of the Lease 24. NO ASSIGNMENT OF THIS AGREEMENT The benefit of this Agreement shall be personal to the Tenant and to the Surety respectively and neither shall assign underlet mortgage charge share or otherwise part or deal in any way whatsoever with the benefit of this Agreement or any part thereof provided always that the benefit of this Agreement after completion of the Lease shall be fully and freely assignable to any Leasehold Mortgagee (as that term is defined in the Lease) and to any person who is from time to time the Tenant under the Lease and upon any assignment of the Lease prior to Practical Completion of the whole of the Tenant's Works or any underletting of any part of the Demised Premises prior to Practical Completion of the Tenant's Works in relation to such sublet premises the Tenant will procure that unless the Tenant is to carry out the Tenant's Works for such assignee or sublessee such assignee or sublessee shall enter into direct covenants with the Landlord to observe and perform the obligations on the part of the Tenant herein contained in relation to the Tenant's Works 25. GENERAL PROVISIONS Interest on late Payments 25.1 If and so often as any of the sums payable hereunder by the Tenant to the Developer or by the Developer to the Tenant shall be unpaid after becoming due and payable the party from whom such payment shall be due shall pay on demand interest on such unpaid sums from the due date until payment in cleared funds at the rate of three per centum per annum above the Base Rate Invality of Certain Provisions 25.2 If any term of this Agreement or the application thereof to any 44 43 person or circumstances shall to any extent be invalid or unenforceable the same shall be severable from the remainder of this Agreement and the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by the Law Proper Law and Jurisdiction 25.3 This Agreement shall be governed by and construed in accordance in all respects with English law and the parties hereto hereby submit to the non-exclusive jurisdiction of the High Court of Justice of England in relation to any claim dispute or difference which may arise hereunder and in relation to the enforcement of any judgement rendered pursuant to any such claim dispute or difference and for the purpose of Order 10 Rule 3 of the Rules of the Supreme Court of England (or any modification or re-enactment thereof) the Tenant hereby irrevocably agree that any process may be served on either of them by leaving a copy thereof at the relevant party's Address (as determined pursuant to Clause 22.1) MBA - Social Contract Provisions 25.4 Pursuant to the social provisions of the MBA the Tenant acknowledges that the Developer has drawn the attention of the Tenant to the desirability of:- 25.4.1 Employment of Docklands' residents advertising of job vacancies in the local press and the notification of vacancies to Skilnet 25.4.2 Patronage of Docklands' tradesmen suppliers retailers and businesses and 25.4.3 Fostering of training facilities for Docklands' residents to secure as many people as may be practicable to be suitably qualified for the range of 45 44 job opportunities being created at the Development Site 26. GUARANTEE OF PERFORMANCE OF TENANT'S OBLIGATIONS The Surety in consideration of the Developer entering into this Agreement at the request of the Surety unconditionally and irrevocably agrees with and in favour of the Developer as follows:- 26.1 if the Tenant shall fail in any respect to observe and perform the terms and provisions in this Agreement or any of them the Surety will fully observe perform and discharge the same AND without prejudice to the generality of the foregoing the Surety hereby further covenants by way of primary obligation and not merely liability as a guarantor or merely collateral to that of the Tenant and specifically so that this obligation shall not be affected by any circumstances of any kind that would otherwise relieve the Surety from paying and making good to the Developer as soon as possible after receipt of written demand any losses costs damages and expenses occasioned to the Developer arising out of or by reason of any default of the Tenant in respect of any of its obligations under the terms and provisions of this Agreement (the Surety expressly acknowledging and undertaking for all purposes of this Agreement that in case of such failure or default on the part of the Tenant then the Surety shall forthwith thereupon be liable and required to remedy such failure or default and pay and make good the payment of all sums and amounts expressed to be payable under this Agreement) AND PROVIDED that any neglect or forbearance on the part of the Developer in enforcing or giving time for or other indulgence in respect of the observance or performance of any of the said agreements provisions and conditions other than a release given under seal shall not release the Surety from its liability under the agreement or guarantee on its part contained in this Clause 26 AND PROVIDED FURTHER THAT it is agreed that such obligations of the Surety shall survive any determination of this Agreement 26.2 if an Event of Default occurs then the Developer may within three calendar months following any such event by notice in writing require the Surety to enter into an Agreement in the like form to this Agreement (in accordance (if appropriate) with the proviso hereto) but with the Surety substituted for the Tenant PROVIDED THAT where pursuant to the foregoing the Developer shall become entitled to enforce all or any of its 46 45 respective rights or remedies against the Surety requiring the Surety to enter into an Agreement in pursuance of this sub- clause then the Surety shall assume all the obligations and have all the rights of the Tenant as if the Surety had been an original contracting party at the date hereof to this Agreement in place of the Tenant (in addition to the Surety's actual capacity hereunder) 26.3 (i) the Developer shall not be obliged before enforcing any of its rights or remedies against the Surety to take any proceedings or obtain any judgment against the Tenant in any Court or to make or file any claim in any bankruptcy or liquidation of the Tenant and the liabilities of the Surety under this Clause 27 may be enforced irrespective of whether any demand steps or proceedings are being or have been taken against the Tenant and the terms of this Clause 27 shall be a continuing guarantee and shall remain in full force and effect until each and every part of the obligations and covenants on the part of the Tenant shall have been discharged and performed in full (ii) notwithstanding the provisions of sub-clause (i) above the Landlord shall not take any steps to proceed against the Surety in respect of sums due under this Agreement unless such sums are not paid within 28 days of becoming due or in respect of any other breach unless the Tenant has not remedied that breach within a reasonable time of being required to do so 26.4 the Surety shall rank after the Developer in respect of any sums paid under this Clause 26 and in respect of any other rights which accrued howsoever to the Surety in respect of any sums so paid or liabilities incurred hereunder or in the observance performance or discharge of the obligations and covenants on the part of the Tenant and be entitled to enforce the same only after all the said obligations and covenants shall have been observed performed and discharged in full and until such observance performance and discharge the Surety shall not:- 26.4.1 during any period in which the Tenant is in breach of the terms of this Agreement seek to recover whether directly or by way of set-off lien counterclaim or 47 46 otherwise or accept any money or other property or security or exercise any rights in respect of any sum which may be or become due to the Surety on account of failure by the Tenant to observe perform or discharge the said obligations or covenants or the obligations of the Surety hereunder from the Tenant or any third party 26.4.2 during any period in which the Tenant is in breach of the terms of this Agreement claim prove for or accept any payment in any composition by or winding up or liquidation of the Tenant in competition with the Developer for any amount whatsoever owing to the Surety by the Tenant on any account whatsoever 26.4.3 during any period in which the Tenant is in breach of the terms of this Agreement exercise any right or remedy in respect of any amount paid by the Surety hereunder or any liability incurred by the Surety in observing performing or discharging the said obligations and covenants on the part of the Tenant and the Surety warrants that it has not taken and will not without the prior consent of the Developer take any security from the Tenant in connection with this guarantee and any security so taken shall be held in trust for the Developer as security for the respective liabilities of the Surety and the Tenant hereunder and the Surety shall not be entitled to any right of proof in the bankruptcy or liquidation of the Tenant or any other right of the guarantor discharging its liability in respect of the said obligations and covenants unless and until all of the same shall first have been paid observed performed and discharged in whole 26.5 the liability of the Surety under this Clause 26 shall not be released impaired diminished or affected by any variation of this Agreement (other than a variation to which the Surety is not a party) and the obligations on the part of the Surety contained in this Clause 26 shall subsist in relation and by reference to the obligations and covenants on the part of the Tenant as from time to time varied 48 47 26.6 the Surety shall not during any period in which there is a breach of the Terms of this Agreement exercise any remedy as a contingent creditor of the Tenant in respect of the Surety hereunder 27. INCORPORATION OF OTHER AGREEMENTS 27.1 This Agreement incorporates the agreement of even date herewith annexed hereto and headed Option Agreement and Agreement for First Refusal 27.2 Notwithstanding the foregoing it is hereby agreed that save as may be expressly agreed any failure by any party to perform its obligations under this Agreement or the agreement incorporated herein pursuant to Clause 27.1 shall not in any circumstances relieve any party from its obligations to perform and observe the provisions of the other Agreement IN WITNESS whereof the parties have executed this Agreement as a deed and intend the same to be delivered on the day and year first before written FIRST SCHEDULE (Form of Licence re Tenant's Works) THIS LICENCE is made the [ ] day of [ ] One thousand nine hundred and ninety BETWEEN (1) the Developer [and] (2) the Tenant [and (3) the Surety] WITNESSETH as follows:- 1. In this Licence save where the context otherwise requires the following words and expressions have the meanings hereunder assigned to them:- 1.1 "Developer" "Tenant" and "Surety" respectively mean the parties whose names and registered offices are set forth in the First Schedule and their successors in title 1.2 "Premises" means the premises described in the Second Schedule 1.3 "Lease" means the lease of the Premises made between the parties 49 48 hereto and dated [ ] for a term of [ ] years from [ ] 1.4 "Drawings" means the drawings specified in Part 1 of the Third Schedule copies of which are annexed to this Licence 1.5 "Specifications" means the specifications specified in Part 2 of the Third Schedule copies of which are annexed to this Licence 1.6 "Works" means the alterations to the Premises carried out in conformity with the Drawings and Specifications 2. The Developer has granted to the Tenant licence and consent for the carrying out of the Works 3. The Tenant covenants with the Developer:- 3.1 to pay any increased insurance premiums that may be occasioned by reason of the Works 3.2 on the expiration or sooner determination of the Lease howsoever determined if and only if so required by the Developer at the cost of the Tenant to reinstate and make good the Premises in accordance with the covenant to that effect contained in the Lease and for this purpose to obtain all consents and orders of any Local Authority Planning Authority Fire Control Authority or any other body from whom such consents or orders are required to be obtained and to make all payments therefor in the same manner 4. It is agreed and declared that:- 4.1 The covenants on the part of the Tenant and the conditions contained in the Lease shall take effect subject to and with the benefit of this Licence 4.2 The proviso for re-entry in the Lease shall be exercisable on breach of any of the covenants in this Licence on the part of the Tenant as well as on the happening of any of the events mentioned in the said proviso 4.3 Save as varied by this Licence the covenants and conditions in the Lease shall remain in full force and effect 50 49 IN WITNESS whereof the parties hereto have executed this Licence the day and year first above written THE FIRST SCHEDULE (The Parties) (a) "the Developer" whose registered office is at (b) "the Tenant" whose registered office is at (c) "the Surety" whose registered office is at
THE SECOND SCHEDULE (The Premises) 51 50 THE THIRD SCHEDULE PART 1 (The Drawings) Number Title Prepared by PART 2 (The Specifications) THE COMMON SEAL of ) [DEVELOPER] was hereunto affixed ) in the presence of:- ) Director Secretary THE COMMON SEAL of [TENANT] ) was hereunto affixed in the ) presence of:- ) Director Secretary 52 51 THE COMMON SEAL of [SURETY] ) was hereunto affixed in the ) presence of:- ) Director Secretary THE COMMON SEAL of CANARY WHARF ) LIMITED was hereunto affixed ) in the presence of:- ) Director Secretary 53 52 INDEX OF ANNEXURES AND EXHIBITS
Annexure Clause Reference - -------- ---------------- 1. Shell & Core Outline Specification "Base Building Definition" 20 Cabot Square dated 9 November 1994 2. Schedule of Current Building Plans "Base Building Definition" 3. Development Site Plan "Building" and "Development Site Plan" 4. CAR Policy Summary "CAR Policy" 5. Demised Premises Plans "Demised Premises" and "Net Internal Area" 6. Minimum Standard Developer's Finish "Minimum Standard for Tenant Work Specification Developer's Finish" 7. Specification "Reconstruction Works" 8. Plan of Riverside Car Park "Riverside Car Park" Exhibit - ------- 1. Draft Lease "Lease" 2. Option Agreement 3. Littlejohn Agreement
54 53 INDEX
Contents Page - -------- ---- 1. DEFINITIONS AND INTERPRETATION 2. COPYRIGHT 3. TENANT'S WORKS 4. ENTRY BY THE TENANT FOR THE TENANT'S WORKS AND SUBSEQUENT OCCUPATION 5. COMPLETION OF THE TENANT'S WORKS 6. ANCILLARY PROVISIONS AS TO WORKS 7. ENTRY BY THE DEVELOPER TO THE DEMISED PREMISES AFTER THE ACCESS DATE 8. ALLOWANCE FOR TENANT'S WORKS 9. AGREEMENT AS TO OPERATION OF LANDLORD AND TENANT ACT 10. REBATES FROM STATUTORY UNDERTAKERS 11. INSURANCE 12. GRANT OF LEASE AND RENT AND OTHER TERMS 13. DEVELOPER'S BUILDING WORKS 14. COMPLETION OF DEVELOPER'S BUILDING WORKS 15. VALUE ADDED TAX 16. TITLE 17. CONDITIONS AFFECTING THE GRANT OF THE LEASE 18. EVENT OF DEFAULT 19. CONFIDENTIALITY PROVISIONS 20. DISPUTES 21. NOTICES 22. SENIOR MANAGERS 23. CONTINUANCE AND NON-MERGER 24. NO ASSIGNMENT OF THIS AGREEMENT 25. GENERAL PROVISIONS 26. GUARANTEE OF PERFORMANCE OF TENANT'S OBLIGATIONS 27. INCORPORATION OF OTHER AGREEMENTS
FIRST SCHEDULE (Form of Licence re Tenant's Works) PART 2 55 54 (The Specifications) 56 DATED 199 - --------------------------------------- (1) Landlord: CANARY WHARF LIMITED (2) Management Company: CANARY WHARF MANAGEMENT LIMITED (3) Tenant: MORGAN STANLEY UK GROUP (4) Surety: MORGAN STANLEY GROUP INC ___________________________ UNDERLEASE - of - Part Ground and First to Sixth Floors 20 Cabot Square Canary Wharf London E14 ___________________________ TERM COMMENCES: 1st February 1995 YEARS: 25 TERM EXPIRES: 31st January 2020 RENT: 5,167,338 pounds sterling p.a. exclusive (subject to review) ___________________________ 57 T H I S L E A S E made on the Date and BETWEEN the Parties specified in the Particulars W I T N E S S E T H as follows:- 1. DEFINITIONS IN this Lease the following expressions shall have the following meanings:- 1.1 "Acceptable Assignee" means an Entity in relation to which on the date of the transfer to it of this Lease either (i) its long term unsecured unsubordinated and unguaranteed debt obligations are rated not less than A- by Standard & Poor's or A3 by Moody's rating agencies and which rating has not been placed on credit watch or the equivalent or (but only if such Entity is not capable of having a credit rating from Standard & Poor's or Moody's) (ii) the Entity has according to its last annual audited accounts Consolidated Shareholders' Funds of not less than 500 million pounds sterling and whose consolidated profit before taxation (after extraordinary items if applicable) as determined from its audited consolidated profit and loss accounts for each of the last three years has exceeded an amount equal to five times the Rent (which shall be no lesser sum than Five million one hundred and sixty seven thousand three hundred and thirty eight pounds sterling (5,167,338 pounds sterling)) payable at such time provided that such figures shall be derived from accounts audited by a firm of internationally recognised accountants and prepared in accordance with generally accepted accounting practices in the United Kingdom ("UK GAAP") or generally accepted accounting practices in the United States of America or generally accepted accounting practices in any other jurisdiction which are equivalent to UK GAAP and if such audited accounts are stated in a currency other than sterling then for the purpose of this definition all relevant amounts shall be converted to sterling at such exchange rate as the Landlord shall reasonably determine 1.2 "Accountant" means a Chartered Accountant or firm of Chartered Accountants appointed or employed by the Management Company or a Group Company of the Management Company to perform the functions of the Accountant under this Lease and whose identity shall be notified in writing to the Tenant 58 2 1.3 "Adjoining Property" means all parts of the Estate (other than the Demised Premises) and any land and/or buildings from time to time adjoining or neighbouring the Estate 1.4 "Atrium" means the atrium within the Building between the third and the ninth floors 1.5 "Base Building Systems" means the mechanical electrical sanitary heating ventilating life safety air conditioning and other service systems of the Building 1.6 "Base Rate" means the Base Rate for the time being of Barclays Bank PLC in force from time to time or (if such base lending rate shall be incapable of determination or for any reason shall cease to be used or published) then such other comparable commercial rate as the parties may agree or in default of agreement as may be determined by an independent person to be nominated in the absence of agreement by and on behalf of the President for the time being of the Institute of Chartered Accountants on the application of the Landlord or the Tenant 1.7 "Building" means the Building (of which the Demised Premises form part) briefly described in the Particulars and each and every part thereof and all the appurtenances belonging thereto including:- (a) all landlord's fixtures and fittings in or upon the same (b) all additions alterations and improvements thereto (excluding all tenant's and trade fixtures and fittings) 1.8 "Building Services" means the services set out in Part A of the Seventh Schedule 1.9 "Business Hours" means 7.00 am to 8.00 pm on Mondays to Fridays (inclusive) and 8.00 am to 2.00 pm on Saturdays (excluding all usual bank or public holidays) or such other extended hours as may from time to time be reasonably designated by the Landlord 1.10 "Car Park" means the car parks within the Estate (other than the car parking area (if any) within the Building) reasonably designated as such from time to time in writing by the Landlord 59 3 1.11 "Car Park Services" means the services set out in Part A of the Sixth Schedule insofar as the same are attributable to the Car Park 1.12 "Common Parts of the Building" means those parts and amenities of the Building which are from time to time provided and/or properly designated by the Landlord for common use by tenants and occupiers of the Building with or without others and all persons authorised by them including (but only after the Tenant shall have surrendered part of the Demised Premises pursuant to Clause 10.2) the Dedicated Lobby and the Dedicated Lifts but excluding the Estate Common Parts and the Lettable Areas 1.13 "Consolidated Shareholders' Funds" means the aggregate of the paid up issued share capital and share premium account of the Entity and its consolidated reserves (excluding for the avoidance of doubt any subordinated or convertible debt) but deducting any amount attributable to goodwill and other intangible assets of the Entity and its subsidiaries or such other reasonable equivalents 1.14 "Dedicated Lifts" means the passengers' lifts in the west core of the Building and includes all lift shafts and plant apparatus and equipment relating thereto 1.15 "Dedicated Lobby" means the area shown hatched [ ] on Plan [2] 1.16 "Demised Premises" means the Demised Premises as briefly described in the Particulars including:- (a) the internal plaster surfaces and finishes of all structural or load bearing walls and columns within the Demised Premises and of all walls which enclose the same (b) the entirety of all non-structural or non-load bearing walls and columns within the Demised Premises (c) the inner half severed medially of the internal non-structural or non-load bearing walls (if any) that divide the same from other parts of the Building (d) the screed and floor finishes thereof and all carpets 60 4 (e) the ceiling finishes thereof including all suspended ceilings and light fittings incorporated within the Suspended Ceiling (f) all glass window frames and window furniture in the windows and all doors door furniture and door frames (g) all sanitary and hot and cold water apparatus and equipment and the radiators (if any) therein (h) all Pipes in on under or over and exclusively serving the Demised Premises but excluding those belonging to a statutory undertaker or public utility (i) all landlord's fixtures fittings plant machinery ducting sprinklers apparatus and equipment now or hereafter in or upon the same (j) all additions alterations and improvements thereto but nevertheless excluding (i) all structural or load bearing walls and columns and the structural slabs of any roofs ceilings and floors (ii) all glass window frames and window furniture in the windows in the external skin of the Building and (iii) all tenant's fixtures and fittings 1.17 "Development" means development as defined in Section 55 of the Town and Country Planning Act 1990 1.18 "DLR Limited" means Docklands Light Railway Limited and wherever the context so admits its successors in title as owners or operators of the Docklands Light Railway or as owners of any leasehold interest in the Docklands Light Railway insofar as it falls within the Estate 1.19 "Entity" means a body corporate or other business organisation or partnership approved by the Landlord such approval not to be unreasonably withheld but excluding any state owned or controlled body corporate any public local or other authority or statutory body or government department (whether of the United Kingdom Government or any foreign government) 1.20 "Estate" means the land and water areas known as Canary Wharf 61 5 London E14 shown edged green on Plan 1 with any additional land and water areas in which the Landlord or a Group Company of the Landlord shall acquire a freehold or leasehold interest and which the Landlord from time to time reasonably designates (acting in accordance with principles of good estate management having regard to the nature and quality of the Estate) as part of the Estate and all buildings and appurtenances thereon and all additions alterations and improvements thereto 1.21 "Estate Common Parts" means those parts of the Estate (such parts not being publicly adopted) which are from time to time intended for the common use and enjoyment of the owners and tenants of the Estate and persons claiming through or under them and/or properly designated as such by the Landlord (whether or not other parties are also entitled to use and enjoy the same) (but excluding all car parks within the Estate) and for the avoidance of doubt including:- (a) roads to the point of connection with a highway maintainable at public expense (b) bridges kerbs pavements footpaths parks and esplanades landscaped areas open areas quay side areas dock water areas and river piers (c) plaza malls retail malls walkways pedestrian ways concourses and circulation areas staircases travelators escalators elevators ramps and lifts loading bays forecourts service roads service areas service decks and service bays (d) the Pipes therein and not intended to be the responsibility of a particular owner or tenant or group of owners or tenants and (e) the foundations pilings sub-structures floors walls roofs ramps access ways entrances exits and other matters or things which make up those parts of the Estate which are not and are not intended to be the responsibility of a particular owner or tenant or group of owners or tenants 1.22 "Estate Services" means the services set out in Part A of the Sixth Schedule insofar as the same are attributable to the Estate excluding the Car Park 62 6 1.23 "Ground Floor Area" means the area hatched green on Plan 2 1.24 "Force Majeure" means any failure or interruption or delay by reason of emergency or damage to or destruction of any installations or apparatus or by reason of mechanical or other defect or break down or frost or other inclement conditions or shortage of energy supplies fuel and materials water or labour or strikes or other industrial action lock outs enemy action war or civil commotion government restrictions or acts of god or any other cause beyond the reasonable control of the Landlord or the Management Company excluding however the negligence of the Landlord or the Management Company or any other respective employees 1.25 "Group Company" in relation to any company ("the Relevant Company") means a company within the same group of companies (as that term is defined in Section 42 of the Landlord and Tenant Act 1954) as the Relevant Company 1.26 "Insured Risks" means (to the extent that the same are insurable) fire storm tempest flood earthquake lightning explosion impact aircraft (other than hostile aircraft) and other aerial devices and articles dropped therefrom riot civil commotion and malicious damage bursting or overflowing of water tanks apparatus or Pipes and such other risks as the Landlord may from time to time reasonably insure against subject to such exclusions excesses and limitations as may be imposed by the insurers 1.27 "Interest Rate" means three percentage points (3%) per annum above Base Rate 1.28 "Landlord" means the party named as "Landlord" in the Particulars and includes the person for the time being entitled to the reversion immediately expectant on the determination of the Term 1.29 "this Lease" means this Underlease and any document which is made supplemental hereto or which is entered into pursuant to or in accordance with the terms hereof and which in either case is executed by both the Landlord and the Tenant 1.30 "Leasehold Mortgagee" means the holder of a mortgage or charge 63 7 on this Lease or the trustee under a deed of trust of this Lease such deed of trust securing bonds or notes issued or assumed by the Tenant and the term "Leasehold Mortgage" shall mean any such mortgage charge or deed of trust 1.31 "Lettable Areas" means those parts of any building (including the Building) leased or intended to be leased to occupational tenants but excluding any parts of such building leased or intended to be leased to public utilities for the purposes of the carrying out of their statutory obligations and the corresponding parts of any building the freehold of which has been sold including parts of such building occupied by the freehold owner of the building or any Group Company of that owner 1.32 "Management Company" means the party named as "Management Company" in the Particulars or such other company as may be substituted therefor by the Landlord by notice in writing to the Tenant pursuant to Clause 8.6 1.33 "Mechanical Space Area" means the areas on floor M1 and floor Promenade of the Building shown for the purpose of identification only edged blue and hatched blue on Plans M1 and P1 1.34 "Net Internal Area" shall have the meaning given to it by the Code of Measuring Practice published on behalf of the Royal Institution of Chartered Surveyors and the Incorporated Society of Valuers and Auctioneers (Fourth Edition November 1993) and shall be properly determined from time to time by the Estate Surveyor (as defined in Clause 9.1(o)) (ignoring works carried out by tenants or occupiers during the subsistence of the lease or underlease in existence at the time of such determination) 1.35 "Particulars" means the descriptions and terms appearing on the preceding pages headed "Lease Particulars" which comprise part of this Lease 1.36 "Permitted Part" means the separate unit of accommodation as defined in Clause 4.20(c)(ii) 1.37 "Pipes" means all pipes sewers drains ducts conduits gutters watercourses wires cables channels flues service corridors 64 8 trunking and all other conducting media and any ancillary apparatus 1.38 "Plan 1" "Plan 2" "Plan 3" "Plan 4" "Plan 5" "Plan 6" "Plan 7" "Plan 8" "Plan 9" means the plans annexed hereto and respectively so marked 1.39 "Planning Acts" means the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act 1990 the Planning (Hazardous Substances) Act 1990 the Planning (Consequential Provisions) Act 1990 the Planning and Compensation Act 1991 and any subsequent legislation of a similar nature 1.40 "Quarterly Day" means each of the 1st day of January 1st day of April 1st day of July and 1st day of October 1.41 "Regulations" means the regulations set out in a manual which has been made available to the Tenant and which may be updated from time to time and such substituted or additional reasonable Regulations as the Landlord may from time to time notify in writing to the Tenant for the general management oversight and security of the Building the Car Park or the Estate and which are made in the interests of good estate management but having regard to the nature and quality of the Estate 1.42 "Rent" means the Initial Rent and the rent payable pursuant to the provisions of the Third Schedule 1.43 "Retained Parts" means the Common Parts of the Building the Dedicated Lobby and the Dedicated Lifts and all parts of the Building which do not comprise Lettable Areas or Estate Common Parts and/or which are reasonably and properly designated as such from time to time by the Landlord 1.44 "Service Charge Deed" means a deed in the form set out in the Eighth Schedule hereto 1.45 "Specification" means the specification annexed hereto as annexure [1] 1.46 "Staircase" means the staircase which the Tenant shall be entitled to construct between the third and the sixth floors of 65 9 the Building in accordance with paragraph 11 of the First Schedule 1.47 "Superior Landlord" means the person or persons for the time being entitled to any estate or estates which are reversionary (whether immediate or mediate) upon the Landlord's estate 1.48 "Superior Lease" means the Lease dated 17th July 1987 and made between O&Y Canary Wharf Investments Limited (1) and the Landlord (2) as amended from time to time and any other lease or leases which are reversionary (whether immediate or mediate) upon this Lease 1.49 "Surety" means the party (if any) named as "Surety" in the Particulars and any other party who during the Term acts as surety 1.50 "Tanks" means the three diesel storage tanks situated beneath the area shown hatched orange on Plan P1 1.51 "Tenant" means the party named as "Tenant" in the Particulars and includes the Tenant's successors in title and assigns 1.52 "Tenant's Works" shall have the meaning ascribed to it in the Agreement for Lease made between the parties hereto and dated [ ] 1.53 "Term" means the term of years stated in the Particulars and includes the period of any holding over or any extension or continuation whether by statute or common law 1.54 "Value Added Tax" means Value Added Tax as provided for in the Value Added Tax Act 1994 1.55 "Working Days" means a day (other than a Saturday or a Sunday) on which banks are open for business in London 2. INTERPRETATION UNLESS the context otherwise requires:- 2.1 where two or more persons are included in the expression "the Tenant" and/or "the Landlord" the covenants which are expressed 66 10 to be made by the Tenant and/or the Landlord shall be deemed to be made by such persons jointly and severally 2.2 words importing persons shall include firms companies and corporations and vice versa 2.3 any covenant or regulation to be observed by any party hereto not to do any act or thing shall include an obligation not to cause permit or suffer such act or thing to be done 2.4 references either to any rights or powers of the Landlord or the Management Company or the rights of the Tenant in relation to the Adjoining Property shall be construed as extending respectively to the Superior Landlord and all persons reasonably authorised by the Landlord and/or the Management Company and the Superior Landlord and as the case may be by the Tenant 2.5 reference to the requirement of any consent and/or approval from and/or registration with the Landlord and/or the Management Company shall be construed as also including a requirement for the consent and/or approval of and/or registration with a Superior Landlord where the Superior Landlord's consent and/or approval would be required under the terms of a Superior Lease except that nothing herein shall be construed as imposing on a Superior Landlord any right unreasonably to refuse any such consent and/or approval save in circumstances where the Landlord can so refuse 2.6 any reference to a statute (whether specifically named or not) shall include any amendment or re-enactment of such statute for the time being in force and all instruments orders notices regulations directions bye-laws permissions and plans for the time being made issued or given thereunder or deriving validity therefrom 2.7 the titles and headings appearing in this Lease are for reference only and shall not affect its construction 2.8 reference to Value Added Tax shall include any tax of a similar nature substituted for or levied in addition to Value Added Tax 2.9 any notice document or other matter in this Lease required to be in writing can be served transmitted or delivered by facsimile 67 11 transmission 3. DEMISE AND RENTS THE Landlord HEREBY DEMISES unto the Tenant the Demised Premises TOGETHER WITH the rights and easements specified in the First Schedule EXCEPT AND RESERVING the rights and easements specified in the Second Schedule SUBJECT TO the matters contained or referred to in the Deeds mentioned in the Fifth Schedule TO HOLD the Demised Premises unto the Tenant from and including the Term Commencement Date for the Term YIELDING AND PAYING unto the Landlord and (where expressly provided hereunder) the Management Company during the Term by way of rent:- (a) as from the Rent Commencement Date yearly and proportionately for any fraction of a year the Initial Rent and from and including 1st February 2000 until 31st January 2005 the rent calculated pursuant to Paragraph 2 of the Third Schedule and from and including each Review Date (as that Term is defined in the Third Schedule) such Rent as shall become payable under and in accordance with the provisions of the Third Schedule in each case to be paid to the Landlord by equal quarterly payments in advance on each Quarterly Day in every year the first payment being a proportionate sum in respect of the period from and including the Rent Commencement Date to the Quarterly Day next after the Rent Commencement Date to be made on the Quarterly Day immediately preceding the Rent Commencement Date (b) a reasonable proportion to be fairly and properly determined by the Landlord of all sums (including the cost of periodic valuations (but carried out not more than once in any consecutive period of 12 months) for insurance purposes) which the Landlord shall from time to time pay for insuring the Building against the Insured Risks pursuant to Clause 7.1(a) and the other matters referred to in Clauses 7.1(c) and 7.1(d) and the whole of the sums which the Landlord shall from time to time pay for insuring against loss of rents pursuant to Clause 7.1(b) such sums to be paid to the Landlord within fourteen days of receipt by the Tenant of written demand (c) the payments to be made to the Management Company (subject to Clause 8.6) in accordance with Clause 9.2 (d) the moneys referred to in Clause 4.31 to be paid to the Landlord 68 12 or the Management Company as therein provided 4. TENANT'S COVENANTS THE Tenant HEREBY COVENANTS with the Landlord and as a separate covenant with the Management Company as follows:- 4.1 RENTS To pay the rents reserved by this Lease at the times and in the manner aforesaid without any abatement set-off counterclaim or deduction whatsoever (save those that the Tenant is required by law to make) 4.2 INTEREST ON ARREARS Without prejudice to any other right remedy or power herein contained or otherwise available to the Landlord or the Management Company if any of the rents reserved by this Lease (in the case of the Initial Rent (as reviewed from time to time) only whether formally demanded or not) or any other sum of money payable to the Landlord or the Management Company by the Tenant under this Lease shall not be paid on or before the date when payment has become due to pay interest thereon at the Interest Rate from the date on which payment was due to the date of payment to the Landlord or the Management Company (as the case may be) (both before and after any judgment) 4.3 OUTGOINGS (a) To pay and discharge all existing and future rates taxes duties charges assessments impositions and outgoings whatsoever or (where such outgoings relate to the Demised Premises and other premises) a fair proportion thereof to be reasonably and properly determined by the Landlord which now are or may at any time during the Term be payable in respect of the Demised Premises and in respect of the Staircase (if any) and (until such time as there has been a surrender and determination of this Lease in relation to part of the Demised Premises pursuant to Clause 10.2) the Dedicated Lobby and the Dedicated Lifts whether by the owner or the occupier of them (excluding any tax payable by the Landlord occasioned by the grant of and any disposition of or dealing 69 13 with the reversion to this Lease) (b) To raise no objection to the Landlord or the Management Company contesting any outgoings relating to the Demised Premises and appealing any assessments related thereto or withdrawing any such contest or appeal or agreeing with the relevant authorities on any settlement compromise or conclusion in respect thereof and to supply to the Landlord as soon as reasonably possible after receipt copies of any such assessments and to execute as soon as reasonably possible after request all consents authorisations or other documents as the Landlord or the Management Company shall reasonably and properly request to give full effect to the foregoing (c) Not to agree or appeal or contest any assessment for Uniform Business Rate or any other similar or replacement tax without the prior approval in writing of the Landlord (such approval not to be unreasonably withheld or delayed) (d) To pay all charges for electricity telephone water gas (if any) and other services and all sewage and environmental charges consumed in the Demised Premises and the Staircase (if any) and (until such time as there has been a surrender and determination of this Lease in relation to part of the Demised Premises pursuant to Clause 10.2) the Dedicated Lobby and the Dedicated Lifts including any connection charge and meter installation costs and rents and if reasonably so required by the Landlord at the Tenant's own cost to install a water meter to measure the water consumed in the Demised Premises and (where any such services are provided by the Landlord or the Management Company) to pay for any such service consumed and a standing charge at a reasonable rate (not exceeding 10% of the reasonable and proper cost of the same to the Landlord or the Management Company) specified from time to time by the Landlord or the Management Company and to permit the Landlord or the Management Company on prior appointment with the Tenant to install maintain and read any meter in the Demised Premises relating to any such service 70 14 4.4 UTILITY AUTHORITIES To pay to the Landlord or as it may direct an amount equal to any rebate or rebates which the Tenant or any undertenant may receive from public utilities in respect of the capital costs incurred by the Landlord or any Group Company of the Landlord or the London Docklands Development Corporation of providing water foul and surface water drainage gas electricity and telecommunications to the Demised Premises or the Building 4.5 Repairs (a) To keep in good and substantial repair and condition the Demised Premises (other than any parts which the Landlord or the Management Company has covenanted to repair) and the Staircase (if any) (damage to any Pipes exclusively serving the Demised Premises which comprise part of the Base Building Systems caused by a latent or inherent defect not apparent at the date hereof and occurring within ten (10) years of 22nd July 1991 and damage by the Insured Risks excepted save to the extent that payment of the insurance moneys shall be withheld by reason of any act neglect or default of the Tenant or any undertenant or any person under its or their control) (b) To replace from time to time any of the Landlord's fixtures and fittings which become in need of replacement with new ones which are similar in type and quality (excluding any such fixtures and fittings which the Landlord or the Management Company is liable to replace pursuant to their respective covenants herein contained) 4.6 PLANT AND MACHINERY To keep all plant machinery and other equipment (not being moveable property of the Tenant or any undertenant) in the Demised Premises and on the Staircase (if any) and in or serving the Mechanical Space Area properly maintained and in good working order and condition and regularly inspected maintained and serviced and:- (a) if the Landlord shall so reasonably require in respect of the air conditioning sprinkler alarm and other centrally 71 15 controlled systems to permit the Landlord or the Management Company to carry out on the Tenant's behalf inspections servicing and any repairs which may be required to such plant machinery and equipment and to pay to the Landlord or the Management Company its reasonable and proper cost of so doing plus a management charge equivalent to 10% of such reasonable and proper cost for so doing (b) from time to time at the request of the Landlord to advise the Landlord of the contractors employed by the Tenant for that purpose 4.7 DECORATIONS As and when necessary and in any case in the last three months of the Term howsoever determined in a good and workmanlike manner to prepare and decorate (with two coats at least of good quality paint) or otherwise treat as appropriate all parts of the Demised Premises and the Staircase (if any) and the Dedicated Lobby (until such time as there has been a surrender and determination of this Lease in relation to part of the Demised Premises pursuant to Clause 10.2) required to be so treated and as often as may be reasonably necessary to wash down all washable surfaces such decorations and treatment in the last three months of the Term to be executed in such colours and materials as the Landlord may reasonably require 4.8 CLEANING To keep the Demised Premises and the Staircase (if any) and the Dedicated Lobby (until such time as there has been a surrender and determination of this Lease in relation to part of the Demised Premises pursuant to Clause 10.2) in a clean and tidy condition and at least once in every month properly to clean the inside of all exterior windows window frames and other exterior glass enclosing the Demised Premises and the staircase (if any) 4.9 YIELD UP (a) Immediately prior to the expiration or sooner determination of the Term at the cost of the Tenant:- (i) to replace any of the Landlord's fixtures and fittings 72 16 which shall be missing or damaged with new ones of similar kind and quality or (at the option of the Landlord) to pay to the Landlord the reasonable and proper cost of replacing any of the same (ii) to remove from the Demised Premises and the Dedicated Lobby any moulding or sign of the name or business of the Tenant or occupiers and all tenant's fixtures fittings furniture and effects and to make good all damage caused by such removal (iii) if only required by the Landlord to remove all video data and sound communications conducting material installed in the Building by or at the request of the Tenant or any undertenant (iv) if and to the extent required by the Landlord (which requirement shall be notified to the Tenant not less than three months prior to the expiration of the Term unless sooner determined) to put or reinstate the Demised Premises (excluding the ground floor of the Demised Premises and the Mechanical Space Area) in or to a condition commensurate with that described in the specification annexed hereto entitled "Minimum Standard Developer's Finish for Tenant Work" and to leave the ground floor of the Demised Premises and the Mechanical Space Area in the condition in which they are at the date of expiration or determination of the Term or if reasonably required by the Landlord (which requirement shall be notified to the Tenant not less than three months prior to the expiration of the Term unless sooner determined) to restore the ground floor of the Demised Premises and/or the Mechanical Space Area in accordance with the Specification (v) to remove the Staircase (if any) (b) At the expiration or sooner determination of the Term quietly to yield up the Demised Premises and if appropriate the Dedicated Lobby to the Landlord in good and substantial repair and condition in accordance with the covenants and other obligations on the part of the Tenant contained in 73 17 this Lease (c) If the Tenant by notice surrenders and determines the Term as to part of the Demised Premises in accordance with Clause 10.2 the provisions of this Clause 4.9 shall on such determination extend only to the part of the Demised Premises which is the subject of such notice 4.10 RIGHTS OF ENTRY BY LANDLORD AND THE MANAGEMENT COMPANY To permit the Landlord and the Management Company with all necessary materials and appliances at all reasonable times upon reasonable prior notice (except in cases of emergency) to enter and to remain (but only for so long as is reasonably necessary) upon the Demised Premises the Staircase (if any) and the Dedicated Lobby:- (a) to view and examine the state and condition of the Demised Premises and to take schedules of the landlord's fixtures (b) to exercise any of the rights excepted and reserved by this Lease (c) for any other purpose connected with the management of the Demised Premises or the Building in accordance with the terms of this Lease 4.11 TO COMPLY WITH NOTICES (a) Whenever the Landlord shall give written notice to the Tenant of any breach of covenant to remedy such breach (if indeed a breach exists) as soon as reasonably possible thereafter (b) If the Tenant shall fail to comply with its covenant in Clause 4.11(a) the Landlord may without further notice enter the Demised Premises and carry out or cause to be carried out all or any of the works referred to in such notice and all proper costs and expenses thereby incurred shall be paid by the Tenant to the Landlord as soon as reasonably practicable after service on the Tenant of written demand 74 18 4.12 OVERLOADING FLOORS AND SERVICES AND INSTALLATION OF WIRING ETC. (a) Not to do anything which may subject the Demised Premises the Staircase (if any) the Dedicated Lobby or the Building to any strain beyond that which it is designed to bear with due margin for safety and to pay to the Landlord within fourteen (14) days of receipt by the Tenant of written demand all costs reasonably and properly incurred by the Landlord in reasonably obtaining the opinion of a qualified structural engineer as to whether the structure of the Demised Premises or the Staircase (if any) the Dedicated Lobby or the Building is being or is about to be overloaded and in deciding whether or not the Landlord has been reasonable in obtaining such an opinion regard shall be had to whether the Tenant has produced to the Landlord a copy of any report or opinion which it has obtained in relation to the overloading of the structure of the Demised Premises or the Staircase or the Dedicated Lobby or the Building as the case may be and if so the contents of that report or opinion (b) To observe the weight limits properly prescribed for all lifts in the Building (c) Not to install or use any electrical equipment unless it has been fitted with an efficient suppressor so as to prevent any interference with radio or television reception telecommunications transmission or the operation of any equipment in the Building or in any Adjoining Property (d) As soon as reasonably possible after receipt of a written request to provide or to consent to the disclosure by the relevant public utility of details to the Management Company of the installation in or upon any part of the Building or the Estate of all video data and sound communications conducting material and associated equipment installed by or at the request of the Tenant or any undertenant 4.13 PIPES Not to overload or obstruct any Pipes or discharge into any Pipes any oil or grease or any noxious or deleterious substance which may cause an obstruction or become a source of danger or 75 19 injure the Pipes or the drainage system of the Building or the Adjoining Property 4.14 COOKING Not to prepare or cook any food in the Demised Premises otherwise than on the ground floor kitchen area of the Demised Premises or in such other kitchen area approved in writing by the Landlord such approval not to be unreasonably withheld or delayed and to take all necessary steps to ensure that all smells and fumes caused by permitted cooking refuse or food shall be removed from the Demised Premises in a manner and by means approved by the Landlord such approval not to be unreasonably withheld or delayed and in any event so as to ensure that no nuisance or annoyance shall be caused to the Landlord or any of the tenants or occupiers of the Building or the Adjoining Property 4.15 DANGEROUS MATERIALS AND USE OF MACHINERY Not to bring in any part of the Building anything which is or is likely to become dangerous especially inflammable or combustible radioactive or explosive or which might materially increase the risk of fire or explosion or which would cause or be likely to cause nuisance annoyance disturbance or damage to the Landlord or any tenant owner or occupier of any part of the Building or the Estate PROVIDED THAT this clause shall not prevent the use of goods and machinery utilised in connection with a modern office building and the activities carried on thereat 4.16 HEATING COOLING AND VENTILATION AND OTHER SYSTEMS (a) Not to do anything which adversely affects the heating cooling or ventilation of the Building or any other centrally controlled systems or which imposes an additional load on the heating cooling or ventilation plant and equipment or any such system beyond that which it is designed to bear (b) To take all steps reasonably necessary to prevent any mechanical ventilation of the Demised Premises drawing air from or exhausting air into the Common Parts of the Building 76 20 (c) To the extent that such costs incurred by the Management Company in providing air conditioning ventilation and air handling to the Building do not form part of the Building Services as provided in paragraph 5 of Part A of the Seventh Schedule to pay to the Management Company within fourteen (14) days of receipt by the Tenant of written demand from time to time a fair proportion to be calculated by a method designed to reflect usage (such fair proportion to be determined from time to time by the Building Surveyor (as defined in Clause 9.1(e)) of the costs and expenses of the provision of condenser water and the cost of power for the air conditioning ventilation and air handling systems in the Building plus a management charge equivalent to 10% of such costs and expenses 4.17 USER (a) Not to use or occupy the Demised Premises for any purpose except for the Permitted User (b) Not to use the Demised Premises or any part thereof for any auction or public meeting public exhibition or public entertainment or for gambling or as a club or for the business of a turf accountancy estate agency travel agency staff or employment agency or Government Department where services are provided principally to visiting members of the public (c) Not to use the Demised Premises or any part thereof for any dangerous noisy noxious or offensive trade business or occupation whatsoever nor for any illegal purpose nor for residential or sleeping purposes (d) Not to leave the Demised Premises continuously unoccupied for more than 14 days without providing such security arrangements as are necessary and which shall be notified to the Landlord in order to protect the Demised Premises and its contents and to deal with any emergency (e) Except during such times as the Tenant is providing its own security staff at all times of the day or night to ensure that at all times the Landlord and the Management Company have written notice of the name home address and home 77 21 telephone number of at least two keyholders of the Demised Premises (f) Except during such times as the Tenant is providing its own security staff at all times of the day or night to provide the Landlord or the Management Company with a set of keys to the Demised Premises to enable the Landlord and the Management Company or their agents and others authorised by the Landlord or the Management Company to enter the Demised Premises for security purposes or in cases of emergency 4.18 ALTERATIONS SIGNS AND VISUAL AMENITY (a) Not to erect any new structure in the Demised Premises or any part thereof (unless otherwise permitted under the provisions of this Clause 4.18) nor to alter add to or change the exterior of the Demised Premises or the height elevation or external architectural or the external decorative design or appearance of the Demised Premises (b) Provided the structural integrity of the Building is not thereby affected and subject to submitting adequate plans and specifications for the approval of the Landlord and save with the consent of the Landlord not to alter divide cut maim or remove any of the principal or load-bearing walls floors beams or columns within or enclosing the Demised Premises nor save as aforesaid to make any other alterations or additions which adversely affect the structure of the Building (c) Not to make any alterations or additions to any centrally controlled systems or Base Building Systems in the Demised Premises or the Building or the Pipes within or serving the Demised Premises or the Building without obtaining the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed and to use such contractors as the Landlord may reasonably specify for works at the point of connection with the Base Building Systems and in relation to the fire alarm detection and emergency public address system the supplier of any hardware and software and the Contractor for commissioning shall be Cerebus Ltd or such other person as the Landlord shall reasonably specify 78 22 (d) As soon as reasonably practicable after carrying out any material alterations or additions to the non-structural parts of the Demised Premises to provide plans showing the nature and extent of those alterations to the Landlord (e) Not to erect or display on the physical exterior of the Demised Premises or in the windows thereof so as to be visible from the exterior any pole aerial advertisement or thing whatsoever save that the Tenant may display on the entrance door to the Demised Premises a sign stating the Tenant's name and business or profession on obtaining the prior written consent of the Landlord to the size style and the position thereof and the materials to be used such consent not to be unreasonably withheld or delayed (f) Promptly to make good all damage caused to any parts of the Building or any Adjoining Property in the carrying out of any alterations or additions (g) To provide to the Landlord DXF files on computer disk reflecting any changes to the Tenant's Works but only in so far as such disks are reasonably available 4.19 WORKS CARRIED OUT TO THE DEMISED PREMISES Without prejudice to the provisions of Clause 4.18 or to any covenants and conditions which the Landlord shall require or impose in giving consent for alterations or additions to the Demised Premises to carry out any alterations additions repairs replacements or other works to or in respect of the Demised Premises in a good and workmanlike manner and where the Landlord's consent is required for such alterations in accordance with the reasonable requirements of the Landlord notified in writing to the Tenant and in particular without prejudice to the generality thereof any works the carrying out of which may constitute a nuisance or disrupt the businesses or activities of other tenants or occupiers of the Building or the Estate or the public shall be performed outside the hours of 9.00 am to 6.00 pm on Monday to Friday (inclusive) 4.20 ALIENATION (a) Not to assign or charge any part or parts (as distinct from 79 23 the whole) of the Demised Premises and not to agree so to do (b) Not to part with possession of or share the occupation of the whole or any part or parts of the Demised Premises or agree so to do or permit any person to occupy the same save by way of an assignment or underlease of the whole of the Demised Premises or an underlease of a Permitted Part thereof (as hereinafter defined) in accordance with the provisions of this Clause PROVIDED THAT nothing contained in this Clause shall prevent the Tenant from (i) sharing occupation of the whole or any part or parts of the Demised Premises with one or more companies which are and remain Group Companies of the Tenant provided that such occupation shall not create the relationship of landlord and tenant between the Tenant and the Group Company or (ii) assigning this Lease or subletting the whole or a Permitted Part to a Group Company of the Tenant (here meaning Morgan Stanley UK Group only) without the Landlord's consent but otherwise in accordance with the terms and conditions as set out in this Clause 4.20 or (iii) subletting a part but not the whole of the Demised Premises to a Group Company of the Tenant (here meaning Morgan Stanley UK Group only) upon terms which make such underletting inalienable other than by way of an assignment or subletting of the whole of the sublet premises to another Group Company of the Tenant (here meaning Morgan Stanley UK Group) and upon having obtained an Order of the Court under Section 38(4) of the Landlord and Tenant Act 1954 authorising the exclusion of sections 24 to 28 of the said Act in relation to such underlease and the Tenant shall notify the Landlord as soon as reasonably possible after each such subletting (c) Not to underlet any part or parts of the Demised Premises (as distinct from the whole) other than on the following conditions:- (i) from 1st February 1997 until 31st January 2000 not to underlet more than fifty (50) per cent of the Net Internal Area the First Second Third Fourth Fifth and Sixth floors of the Demised Premises (ii) each separate unit of accommodation to be underlet shall comprise either one or more contiguous whole 80 24 floors or a part or parts of a floor or one or more parts of contiguous floors of the Demised Premises (but in such case the number of sublettings per whole floor in existence at any one time is not to exceed four) and such units shall be capable of being occupied and used as a separate and self-contained unit with all necessary and proper services ("a Permitted Part") and (iii) prior to the grant of any underlease of a part of the Demised Premises comprising less than one whole floor or an underlease which does not comply with sub-clause 4.20(i)(i) below an order of the Court shall be obtained under the provisions of Section 38(4) of the Landlord and Tenant Act 1954 authorising the exclusion of Sections 24 to 28 of the said Act in relation to such intended underlease (d) Not to underlet the whole of the Demised Premises or a Permitted Part at a rent less than the open market rental value of the Demised Premises or (as the case may be) of a Permitted Part in each case at the time of the agreement to grant such underlease (e) Without prejudice to the foregoing provisions not to assign or underlet the whole of the Demised Premises nor to underlet a Permitted Part thereof without the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed (f) Prior to any permitted assignment to procure that the assignee enters into a direct covenant with the Landlord to pay the rents hereby reserved and perform and observe the covenants by the Tenant contained in this Lease throughout the residue of the Term (including any extension) and a covenant with the Management Company to pay the sums due under Clause 9 (g) If the Landlord shall reasonably so require to obtain an acceptable guarantor for any person to whom this Lease is to be assigned who shall execute and deliver to the Landlord a Deed containing a covenant with the Landlord and the 81 25 Management Company as a primary obligation in the case of the Landlord to pay the rents reserved and to observe the Tenant's covenants in the Lease and in the case of the covenant with the Management Company to pay the sums due under Clause 9 (h) Prior to any permitted underlease to procure that the undertenant enters into direct covenants as follows:- (i) an unqualified covenant with the Landlord that the undertenant shall not assign or charge (or agree so to do) any part or parts (as distinct from the whole) of the premises to be thereby demised and shall not part with possession of or share the occupation of the whole or any part of the premises to be thereby demised or agree so to do or permit any person to occupy the same save by way of (i) an assignment or underlease of the whole of the premises thereby underlet or (ii) (if the undertenant is the undertenant of the whole of the Demised Premises) an underlease of a Permitted Part or (iii) (if the undertenant is an undertenant of less than the whole of the Demised Premises but of one or more whole floors an underlease of one or more whole floors or parts of a floor provided that an underlease of part of a floor shall be of premises comprising not less than 10,000 square feet in area and provided that no more than four underleases of parts of the same floor shall be in existence at any time) (ii) a covenant that the undertenant shall not assign charge (save by way of floating charge) or underlet (or agree so to do) the whole of the premises to be thereby demised or underlet (or agree so to do) a Permitted Part or a whole floor (as the case may be) without (in each case) obtaining the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed (iii) a covenant to perform and observe all the tenant's covenants and the other provisions contained in this Lease (other than the payment of the rents) so far as the same are applicable to the premises to be thereby demised and including in particular 82 26 (but without limitation) the conditions set out in Clause 4.20(c) (i) Every permitted underlease shall contain:- (i) provisions for the review of the rent thereby reserved (which the Tenant hereby covenants to operate and enforce) on an upwards only basis every five years on the dates for review specified in the Particulars to this Lease in accordance with the provisions set out in the Third Schedule hereto but excluding the provisions of sub-paragraph 1.2 of the Third Schedule and the definition of "Assumed Premises" and the definitions of and references to "Rent" and "Interim Rent" and also excluding paragraphs 1.10 1.11 1.12 1.13 1.14 and 2 and the proviso to paragraph 4 of the Third Schedule and with references to "Assumed Premises" being deemed to be references to "Demised Premises" (ii) condition for re-entry on breach of any covenant by the undertenant (iii) (subject to the provisions of Clause 4.20(h)) the same provisions (mutatis mutandis) as are set out in this Clause 4.20 in so far as they are applicable to the underlet premises (j) To procure that the principal rent is reviewed under any permitted underlease in accordance with the terms thereof (k) Not, to vary the terms of any permitted underlease (or agree so to do) without the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed (l) To procure that the rents reserved by any permitted underlease shall not be commuted or payable more than one quarter in advance and not to permit the reduction of any rents reserved by any such underlease (m) Notwithstanding the foregoing provisions of Clause 4.20(i)(i) but subject to (n) below and in respect of not more than two whole floors in aggregate the Tenant may grant an underlease or underleases for a term not exceeding ten 83 27 years which do not include provisions for the review of rent thereby reserved on the dates specified in the Particulars to this Lease and in accordance with the provisions of the Third Schedule excluding the provisions of sub- paragraph 1.2 of the Third Schedule and without reference to the definitions and references referred to in Clause 4.20(i)(i) provided that:- (i) if any provisions are contained in such underlease for the review or alteration of the amount of rent payable under such underlease they shall not permit the amount of rent payable to be decreased and (ii) the Tenant here meaning Morgan Stanley UK Group or any Group Company of Morgan Stanley UK Group in which this Lease shall at the relevant time be vested and the Surety here meaning Morgan Stanley Group Inc shall prior to the grant of such underlease if required by the Landlord enter into a deed in such form as the Landlord may reasonably require undertaking by way of surety and principal obligation with effect from the fifteenth anniversary of the Term Commencement Date to be responsible for that proportion of the rent service charge and other payments due under this Lease which is equal to the proportion which the Net Internal Area of the premises so underlet bears to the Net Internal Area of the First Second Third Fourth Fifth and Sixth Floors of the Demised Premises (or such smaller area as shall on the fifteenth anniversary of the Term Commencement Date be comprised within the Demised Premises following a surrender and determination by the Tenant pursuant to Clause 10.2) but so that such deed shall only be effective in circumstances where the Tenant here meaning Morgan Stanley UK Group or any Group Company of Morgan Stanley UK Group in which this Lease shall at the relevant time be vested has assigned this Lease otherwise than to an Acceptable Assignee prior to the fifteenth anniversary of the Term Commencement Date and the term of such underlease is expressed to expire after the fifteenth anniversary of the date of this Lease and such undertaking shall cease upon the expiry or sooner determination of such underlease 84 28 (n) Notwithstanding the foregoing provisions of this Clause 4.20 and other than to a Group Company of the Tenant not to assign underlet part with possession or share (or part with) occupation of or hold on trust the whole or any part of the Demised Premises before 1st February 1997 and not to market or otherwise offer to underlet the whole or a Permitted Part of the Demised Premises before 1st October 1996 (or 1st July 1996 if by such date all Lettable Areas in the Building have been let or are the subject of unconditional Agreements for Lease or other agreements permitting third parties to occupy) 4.21 REGISTRATION OF DISPOSITIONS Within twenty-one (21) days of every assignment transfer assent underlease assignment of underlease mortgage charge or any other disposition whether mediate or immediate of or relating to the whole or any part or parts of the Demised Premises to supply to the Landlord a copy certified by the Tenant's solicitors of the document evidencing or effecting such disposition and on each occasion to pay to the Landlord or its solicitors a reasonable registration fee 4.22 DISCLOSURE OF INFORMATION Whenever the Landlord shall reasonably request (but not more than once in any period of 12 months) to supply full particulars of all occupations and derivative interests in the Demised Premises but the Tenant shall not be required to produce to the Landlord any financial details or other details which are properly considered by the Tenant to be confidential in relation to such assignment transfer underlease charge or other devolution 4.23 LANDLORD'S COSTS To pay and indemnify the Landlord and the Management Company against all reasonable costs fees charges disbursements and expenses properly incurred by the Landlord or the Management Company:- (a) where a notice under Section 146 of the Law of Property Act 1925 is properly served in relation to or in contemplation 85 29 of the preparation and service of that notice and of any proceedings under Section 146 or 147 of that Act (notwithstanding forfeiture is avoided otherwise than by relief granted by the Court) (b) where such notices or schedules are properly served in relation to or in contemplation of the preparation and service of all such notices and schedules relating to wants of repair whenever served (but relating only to such wants of repair that accrued during the Term) (c) in connection with the recovery or attempted recovery of arrears of rent or other sums due from the Tenant or in procuring the remedying of the breach of any covenant by the Tenant (d) in relation to any application for consent required or made necessary by this Lease (such costs to include reasonable management and monitoring fees and expenses) whether or not the same is granted (except in cases where the Landlord is obliged not to unreasonably withhold its consent and the withholding of its consent is unreasonable or the Landlord has offered consent but subject to unreasonable conditions) or whether the application be withdrawn 4.24 STATUTORY REQUIREMENTS (a) At the Tenant's own expense to comply in all respects with the provisions of every statute and regulation from time to time in force and (made by any public utility or other competent authority (including duly authorised officer or court of competent jurisdiction acting under or in pursuance of any statute)) now in force or which may hereafter be in force and any other obligations imposed by law relating to the Demised Premises the Staircase (if any) or the user thereof (b) To indemnify and keep indemnified the Landlord against all proper costs charges fees and expenses of or incidental to the execution of any works or the provision or maintenance of any arrangements directed or required pursuant to Clause 4.25(a) 86 30 (c) Not to do or omit to be done in or near the Demised Premises any act or thing by reason of which the Landlord or any other occupier may under any statute or non-statutory regulations be or become liable to pay any penalty damages compensation costs charges or expenses 4.25 PLANNING ACTS (a) To comply with the provisions and requirements of the Planning Acts in so far as they relate to the Demised Premises and the Staircase and to indemnify and keep the Landlord indemnified against all actions proceedings demands proper costs expenses and liability in respect of any contravention (b) Not to apply for any planning permission for any change of use of the Demised Premises without the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed (c) To pay and satisfy any charge or levy that may hereafter be imposed under the Planning Acts in respect of the carrying out of any such operations or the commencement or continuation of any such user (d) Notwithstanding any consent which may be granted by the Landlord under this Lease not to carry out or make any alteration or addition to the Demised Premises or any change of use until any necessary notices and permissions under the Planning Acts and any other necessary approvals or consents have been obtained and produced to the Landlord and the Landlord has acknowledged (such acknowledgement not to be unreasonably withheld or delayed) that the planning permission and the said approvals or consents are acceptable to it (e) Unless the Landlord shall otherwise direct to carry out and complete before the expiration or sooner determination of the Term:- (i) any works stipulated to be carried out to the Demised Premises as a condition of any planning permission granted during the Term and implemented by the Tenant 87 31 or any undertenant and (ii) any Development begun upon the Demised Premises in respect of which the Landlord shall or may be or become liable for any charge or levy under the Planning Acts (f) If and when called upon so to do (but not more than once in any successive period of twelve (12) months) to produce to the Landlord as soon as reasonably possible after receipt by the Tenant of written demand all plans documents and other evidence as the Landlord may reasonably require in order to satisfy itself that the provisions of this Clause 4.25 have been complied with in all respects 4.26 STATUTORY NOTICES Within fourteen (14) days after receipt of the same (or sooner if requisite having regard to the time limits stated therein) to produce to the Landlord a copy and any further particulars reasonably required by the Landlord of any notice or order or proposal for the same given to the Tenant and relevant to the Demised Premises or the occupiers thereof or of the Building or of the Estate and without delay to take all necessary steps to comply with the notice or order so far as the same is the responsibility of the Tenant and at the reasonable request of the Landlord to make or join with the Landlord in making such objection or representation against or in respect of any such notice order or proposal as shall be reasonably necessary 4.27 DEFECTIVE PREMISES To give written notice to the Landlord of any defect in the Demised Premises which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing so as to comply with the duty of care imposed on the Landlord pursuant to the Defective Premises Act 1972 and at all times to display and maintain all reasonable notices of reasonable size which the Landlord may from time to time reasonably require to be displayed in relation thereto 4.28 FIRE PRECAUTIONS AND EQUIPMENT ETC. To comply with the requirements of the fire authority the 88 32 insurers of the Demised Premises and the Landlord in relation to fire precautions affecting the Demised Premises 4.29 ENCROACHMENTS AND EASEMENTS (a) Not to stop up or obstruct any of the windows save for (and subject to the manner and design of such stopping up and obstructing being first approved in writing by the Landlord such approval not to be unreasonably withheld or delayed) those windows which are in areas containing plant or equipment or communications facilities shown between points A and B on Plan 2 or lights belonging to the Demised Premises nor to permit any new window opening doorway passage Pipes or other encroachment or easement to be made or acquired into upon or over the Demised Premises or any part thereof and in case any person shall attempt to make or acquire any encroachment or easement to give written notice thereof to the Landlord immediately the same shall come to the notice of the Tenant and at the request of the Landlord to adopt such means as may be reasonably necessary for preventing any such encroachment or the acquisition of any such easement (b) Not to give to any person any acknowledgement that the Tenant enjoys the access of light to any of the windows or openings of the Demised Premises by the consent of such person nor to pay any sum of money or enter into any agreement with any person for the purpose of inducing or binding such person to abstain from obstructing the access of light to any of the windows or openings and in the event of any person doing or threatening to do anything which obstructs the access of light to any of the windows or openings as soon as reasonably possible to notify the Landlord of the same 4.30 RELETTING AND SALE NOTICES To permit the Landlord at all reasonable times by prior written appointment with the Tenant to enter upon the Demised Premises and affix and retain without interference upon any suitable parts of the Building (but not so as to affect the use and enjoyment thereof or the access of light and air to the Demised Premises) during the six (6) months preceding the expiration or 89 33 sooner determination of the Term notices for reletting the same and not to remove or obscure the said notices and to permit all persons with the written authority of the Landlord to view the Demised Premises at all reasonable hours in the daytime upon prior appointment having been made 4.31 VALUE ADDED TAX Where by virtue of any provisions of this Lease the Tenant is required to pay the Landlord or the Management Company any payment the Tenant shall also:- 4.31.1 pay to the Landlord or the Management Company (as the case may be) any Value Added Tax at the rate for the time being in force chargeable in respect of any payments made by the Tenant to the Landlord or the Management Company in connection with or under the provisions of this Lease or in respect of any supplies made by the Landlord or the Management Company to the Tenant in connection with or under the provisions of this Lease provided that if the Landlord makes an election to waive exemption in relation to all or part of the Demised Premises or in accordance with paragraph 2 of Schedule 10 of the Value Added Tax Act 1994 as it may from time to time be amended modified or re-enacted and as a result of such election (and for the avoidance of doubt solely as a result of such election) Value Added Tax is payable by the Tenant in accordance with this sub- clause then the Landlord shall indemnify the Tenant against such Value Added Tax as is payable by the Tenant under this sub-clause and is not recoverable by the Tenant pursuant to Sections 25 and 26 of the Value Added Tax Act 1994 4.31.2 pay to the Landlord or the Management Company (as the case may be) an amount equal to all Value Added Tax input tax incurred by the Landlord or the Management Company in respect of supplies made to the Landlord or the Management Company (including by reason of such supplies being deemed to be made for the purposes of Value Added Tax by the Landlord or the Management 90 34 Company to itself) the cost of which the Tenant is obliged to reimburse to the Landlord or the Management Company under or by virtue of the terms of this Lease save to the extent that such Value Added Tax input tax is recoverable by the Landlord or the Management Company or is recoverable under any other provision of this Lease 4.32 REGULATIONS Insofar as the same relate to the Demised Premises or the activities acts or omissions of the Tenant or any undertenant or any persons under its or their control to comply or procure compliance with the Regulations 4.33 COVENANTS AFFECTING REVERSION To perform and observe the provisions of the deeds and documents referred to in the Fifth Schedule hereto so far as the same are still subsisting and capable of taking effect and relate to or affect the Demised Premises 4.34 NOTIFICATION OF LOCAL EMPLOYEES To enable the Landlord to establish compliance with its undertaking to the London Borough of Tower Hamlets to procure the employment of at least 2,000 Local People within the Estate and until such time as the Landlord shall notify the Tenant in writing that such undertaking has been complied with but so that any information provided to the Landlord under this Clause 4.34 shall be used solely for establishing such compliance the Tenant will from time to time when reasonably so requested by the Landlord supply the Landlord with a certificate of the name(s) and address(es) of any Employee or Employees who are Local People which Certificate shall be in such form as is reasonably required by the Landlord and for the purposes of this Clause 4.35:- (a) "Employee" means any bona fide employee of the Tenant (or any associate company) (including without limitation apprentices articled clerks persons engaged on a Government work scheme directors self employed persons and partners) who has his or her principal place of business or work at or 91 35 spends at least 50% of his or her time working within the Estate (as the same exists at the date hereof as shown edged in green on Plan 2) or any part thereof and (save where the said person has resigned ceased to practise or attend or has been dismissed without a finding of unfair dismissal being made within the period of six months hereinafter referred to) is or was so employed for a period of at least six months (b) "Local People" means persons having their place of residence at the date of commencement of their employment in the London Borough of Tower Hamlets 4.35 DOCKLANDS LIGHT RAILWAY (a) Not to use or carry out any works on any part of the Demised Premises or on any part of the Estate in the immediate vicinity of the Docklands Light Railway for any purpose which would materially adversely affect the construction or operation of the Docklands Light Railway or the use thereof as a railway station or the safe operation of the Docklands Light Railway or the use thereof as a railway station but without prejudice to the rights granted to the Tenant in paragraph 3 of the First Schedule (subject as therein provided) (b) Not to cause interference with electrical or electronic apparatus or equipment used in connection with the operation of the Docklands Light Railway (c) In the exercise of any rights of entry granted in the First Schedule over any part of the Docklands Light Railway (in addition to complying with the provisions of paragraph 3 of the First Schedule): (i) not (save in the case of an emergency) to disrupt the operation of the Docklands Light Railway or the use thereof (ii) to comply with any reasonable and proper regulations directions or requirements of DLR Limited necessary to ensure the safe operation of the Docklands Light Railway 92 36 5. LANDLORD AND MANAGEMENT COMPANY'S COVENANTS RELATING TO SERVICES 5.1 The Management Company covenants (and the Landlord covenants in the event of default of the Management Company) with the Tenant and the Management Company covenants as a separate covenant with the Landlord (and subject as provided in Clauses 8.4 and 8.5) to provide perform and observe or procure to be provided performed and observed the Building Services the Car Park Services and the Estate Services as shall be necessary for the reasonable beneficial enjoyment and use of the Demised Premises PROVIDED THAT neither the Landlord nor the Management Company shall be liable to the Tenant in respect of any failure or interruption or delay in the provision of any of such services caused by Force Majeure 5.2 The Management Company further covenants with the Tenant not to exercise its judgment in any instance providing for the exercise of its judgment in this Lease otherwise than in good faith and in accordance with principles of good estate management 5.3 The Landlord and the Management Company further covenant with the Tenant to provide perform and observe or procure to be provided performed and observed the Building Services the Car Park Services and the Estate Services in accordance with the provisions of this Lease and to manage the Estate in such manner as shall be in accordance with principles of good estate management 6. LANDLORD'S COVENANTS THE Landlord COVENANTS with the Tenant:- 6.1 QUIET ENJOYMENT That the Tenant paying the rents reserved by this Lease and performing and observing the covenants on the part of the Tenant herein contained may peaceably hold and enjoy the Demised Premises during the Term without any interruption by the Landlord or any person lawfully claiming through under or in trust for it 93 37 6.2 GUARANTEE OF MANAGEMENT COMPANY'S OBLIGATIONS That the Management Company or the Landlord will perform the covenants on the part of the Management Company contained in this Lease 6.3 SUPERIOR TITLE To pay the rent reserved by and (save insofar as the same are the responsibility of the Tenant under this Lease) to observe and perform the conditions and covenants imposed on the lessee in the Superior Lease and to use best endeavours to procure that the Superior Landlord observes and performs the conditions and covenants imposed on the lessor in the Superior Lease 6.4 ATRIUM DEDICATED LOBBY AND DEDICATED LIFTS Until such time as the Tenant shall have surrendered and determined this Lease in relation to the third floor pursuant to Clause 10.2 the Landlord will not permit nor grant to any other tenant in occupation of premises in the Building any right to use or right of access over the Atrium nor (until such time as there has been a determination and surrender of part of the Demised Premises pursuant to Clause 10) the Dedicated Lobby or the Dedicated Lifts 6.5 FACILITIES To designate from time to time sufficient passenger lifts for the Tenant's use in accordance with paragraph 3(b) of the First Schedule and reasonable and sufficient lavatory facilities in the Building in accordance with paragraph 3(c) of the First Schedule so that at all times reasonably sufficient lifts and lavatory facilities are in existence and have been designated for use by the Tenant and further at all times to ensure that 51 car parking spaces in the building are designated for the Tenant's use in accordance with paragraph 6.1 of the First Schedule provided always that it is hereby agreed and declared that the Tenant acknowledges that the lifts in the west core and the lavatories situated on each floor of the Premises are reasonable and sufficient 94 38 6.6 NOTIFICATION OF NUMBERS OF LOCAL EMPLOYEES To notify the Tenant forthwith in writing that the undertaking referred to in Clause 4.34 has been complied with and is of no further effect 6.7 VALUE ADDED TAX That it has not and will not make during the Term an election pursuant to paragraph 2 of Schedule 10 to the Value Added Tax Act 1994 in relation to all or any part of the Demised Premises nor any part (but only for so long as Morgan Stanley UK Group has a registrable interest (at H.M. Land Registry) in the same) of the Seventh Eighth Ninth and Tenth floors of the Building 6.8 NAMING RIGHTS That it will not name nor grant to any person naming rights in respect of either the premises known as 10 South Colonnade or the premises known as 20 Cabot Square 7. INSURANCE 7.1 LANDLORD TO INSURE THE Landlord shall insure and keep insured with some insurance company of repute or with Lloyd's Underwriters through such agency (if any) as the Landlord may from time to time determine (whether or not a Group Company of the Landlord) (subject to such exclusions excesses and limitations as may from time to time customarily be imposed by the insurers but otherwise upon normal reasonable commercial terms):- (a) the Building (but for the avoidance of doubt excluding the Tenant's Works) against loss or damage by the Insured Risks in such sum as shall be the full reinstatement cost of the Building excluding the Tenant's Works or such greater sum as the Tenant may in writing reasonably request including Value Added Tax architects' surveyors' and other professional fees and expenses incidental thereto the cost of shoring up demolition and site clearance and similar expenses (b) loss of the Rent Estate Service Charge Building Service 95 39 Charge and Car Park Service Charge payable under this Lease (making due allowance for increases provided for in the Third Schedule) for five (5) years or such other period as the Tenant may in writing reasonably request if greater (c) any engineering and electrical plant and machinery being part of the Base Building Services against sudden and unforeseen damage breakdown and inspection to the extent that the same is not covered by paragraph (a) of this Clause (d) property owner's liability and such other insurances as the Landlord may from time to time reasonably deem necessary to effect 7.2 COMMISSIONS AND RESTRICTION ON TENANT INSURING (a) The Landlord shall be entitled to retain and utilise as it sees fit any commission attributable to the placing of such insurance and the payment of any insurance sums and the Landlord shall use all reasonable endeavours to obtain in any property insurance policy effected pursuant to the Landlord's insurance obligations set out in Clause 7.1(a)-(d) (inclusive) and at the sole cost and expense of the Tenant a waiver of subrogation against the Tenant and the right to have the Tenant's interest noted on the insurance policy (b) The Tenant shall not take out any insurance in respect of the Demised Premises or in respect of any other matters which the Landlord is required to insure under Clause 7.1 7.3 TENANT'S WORKS 7.3.1 The Tenant shall insure and keep insured with some insurance company of repute or with Lloyd's Underwriters through such agency (if any) as the Tenant may from time to time determine (whether or not a Group Company of the Tenant) (subject to such exclusions excesses and limitations as may from time to time customarily be imposed by the insurers but otherwise upon normal reasonable commercial terms) the Tenant's 96 40 Works which definition shall for the purposes of this Clause 7 include (a) installations fittings and equipment resulting from the carrying out of the Tenant's Works (not being works to the structure of the Building) (b) any other works (but excluding works to the structure of the Building) hereafter carried out by the Tenant or any undertenant in accordance with the terms hereof and whether or not the same shall become Landlord's fixtures and fittings against loss or damage by the Insured Risks in such sum as shall be the full reinstatement cost thereof including Value Added Tax architects' surveyors' and other professional fees and expenses incidental thereto and the cost of demolition site clearance and similar expenses 7.3.2 The Tenant shall use all reasonable endeavours to obtain in any insurance policy effected pursuant to the Tenant's insurance obligations contained in this Clause 7.3 and at the sole cost and expense of the Tenant a waiver of subrogation against the Landlord and the right to have the Landlord's interest noted on the insurance policy 7.4 LANDLORD'S FIXTURES If the Landlord so requests but not more frequently than once in any consecutive period of twelve months the Tenant shall notify the Landlord in writing of the full reinstatement cost of any fixtures and fittings installed at any time by the Tenant and which may become landlord's fixtures and fittings 7.5 LANDLORD TO PRODUCE EVIDENCE OF INSURANCE At the request of the Tenant the Landlord shall produce to the Tenant and at the request of the Landlord the Tenant shall produce to the Landlord reasonable evidence of the terms of the insurance policy and the fact that the policy is subsisting and in effect as the Tenant or the Landlord (as the case may be) is required to effect pursuant to the terms hereof 97 41 7.6 CESSER OF RENT Save where and to the extent that the insurance thereof is required to be effected by the Tenant pursuant to Clause 7.3 if the Estate Common Parts the Building or the Demised Premises or in any case any part thereof shall be destroyed or damaged by any of the Insured Risks or by bomb or other terrorist action when damage caused by bomb or terrorist action is not normally insurable in the commercial insurance market so as to render the Demised Premises or any part thereof unfit for use and occupation or inaccessible and in so far as the insurance shall not have been vitiated or payment of the policy moneys refused in whole or in part as a result of some act or default of the Tenant or any undertenant or any person under its or their control then the Rent and the Estate Service Charge Building Service Charge and Car Park Service Charge or a fair proportion thereof according to the nature and extent of the damage sustained shall be suspended until the Building or the Demised Premises or the part destroyed or damaged (as the case may be) shall be rebuilt or reinstated in accordance with the Specification and the Estate Common Parts or the part destroyed or damaged (as the case may be) shall be rebuilt or reinstated so as to render the Demised Premises accessible and any dispute regarding the cesser of rent shall be referred to a single arbitrator to be appointed in default of agreement upon the application of either party, by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors in accordance with the provisions of the Arbitration Acts 1950 to 1979 7.7 DESTRUCTION OF THE BUILDING 7.7.1 Save where and to the extent that the insurance thereof is required to be effected by the Tenant pursuant to Clause 7.3 and subject to Clause 7.7.2 if the Building or the Demised Premises or any part thereof or any necessary access thereto is destroyed or damaged by any of the Insured Risks then:- (a) unless payment of the insurance moneys shall be refused in whole or in part by reason of any act or default of the Tenant or any undertenant of the 98 42 Tenant or any person under its or their control and (b) subject to the Landlord being able to obtain any necessary planning permission and all other necessary licences approvals and consents (which the Landlord shall use its reasonable endeavours to obtain) and (c) subject to the necessary labour and materials being and remaining available the Landlord shall (subject to Clause 7.8) lay out the net proceeds of such insurance other than any in respect of loss of rents in the rebuilding and reinstatement of the premises so destroyed or damaged (excluding Tenant's Works) substantially as the same were prior to any such destruction or damage (but not so as necessarily to provide accommodation identical in layout where it is impossible to do so) and shall proceed with such rebuilding or reinstating within the period of time that it shall be reasonable so to do 7.7.2 If the Tenant's Works or any part thereof are damaged by the Insured Risks then:- (a) unless payment of the insurance moneys shall be refused in whole or in part by reason of any act or default of the Landlord or any person under its control and (b) subject to the Tenant being able to obtain any necessary planning permission and all other necessary licences approvals and consents (which the Tenant shall use its reasonable endeavours to obtain) and (c) subject to the necessary labour and materials being and remaining available the Tenant shall (subject to Clause 7.8) lay out the 99 43 net proceeds of such insurance in the rebuilding and reinstatement of the Tenant's Works to no lesser standard than that described in the "Minimum Standard Developer's Finish for Tenant's Works" a copy of which is annexed hereto as Annexure [ ] or such other works in substitution thereof as shall be approved by the Landlord such approval not to be unreasonably withheld or delayed 7.8 OPTION TO DETERMINE 7.8.1.1 If the Estate or any part thereof or the Building or any part thereof or the Demised Premises or any part thereof shall be so destroyed or damaged by any of the Insured Risks or by terrorist action when terrorist action is uninsurable in normal commercial insurance markets so as to render the entirety of the Demised Premises unfit for or incapable of use and occupation then (i) if the Landlord has not rebuilt or reinstated the Estate (or relevant part thereof) the Building (or relevant part thereof) or the Demised Premises (as the case may be) so that the Demised Premises are available and fit for Tenant's fitting out works within three years and six months of such damage or destruction and there is no reasonable prospect of rebuilding or reinstatement being completed within four years of such damage or destruction then the Tenant may determine this Lease by giving to the Landlord and the Management Company not less than six (6) nor more than twelve (12) months' written notice to expire four years after the date of such destruction or damage; and (ii) the Landlord may determine this Lease by giving to the Tenant and the Management Company not less than six (6) months' written notice at any time after the date of damage or destruction and prior to commencing to rebuild or reinstate and (iii) any determination pursuant to this clause 7.8.1.1 and any determination pursuant to Clause 7.8.2 below shall be without prejudice to any claim by either party against the other in respect of any antecedent breach of covenant Provided That if this Lease shall be determined then the Landlord shall not be required to lay out the net 100 44 proceeds of such insurance and the net proceeds of such insurance shall belong to the Landlord absolutely 7.8.1.2 If there shall be any determination pursuant to Clause 7.8.1.1 or Clause 7.8.2 then the Tenant shall not be required to lay out the net proceeds of the insurance effected pursuant to the provisions of Clause 7.7.2 and the net proceeds of such insurance up to the amount representing the full reinstatement value of the Tenant's Works to a standard commensurate with the "Minimum Standard Developer's Finish for Tenant's Works" ("the MDF Works") and on the basis that the whole of the Demised Premises at the date of damage or destruction (other than the ground floor) had been so fitted out shall belong to the Landlord absolutely and the Tenant shall pay such amount to the Landlord as soon as reasonably possible after receiving the same and shall take all such reasonable steps to obtain such sum with all due speed and to the extent that the cost of reinstating the whole of the Demised Premises at the date of damage or destruction (other than the ground floor) to a standard commensurate with the MDF Works shall exceed the amount (if any) received by the Tenant from its insurers (for whatever reason including if the Tenant shall not at the time of such damage or destruction have carried out or completed the Tenant's Works but other than by reason of the act or default of the Landlord or any person under its control) then the Tenant will within fourteen (14) days of receipt of a written demand pay the difference to the Landlord 7.8.2 Without prejudice to the provisions of Clause 7.8.1 above the Landlord shall within six (6) months of the date of destruction of the Building or the Demised Premises give written notice to the Tenant stating whether or not it intends to rebuild and reinstate the same and if such notice indicates that the Landlord does not intend to rebuild and reinstate the Tenant may determine this Lease by giving written notice to the Landlord to that effect at any time after the date of service of the Landlord's notice but if such notice 101 45 indicates that the Landlord does intend to rebuild and reinstate the Landlord will proceed diligently in endeavouring to obtain all necessary planning permissions approvals and consents and to rebuild and reinstate the Demised Premises or the Building (as the case may be) and if the Landlord fails to give the Tenant notice in accordance with this Clause 7.8.2 the Tenant shall be entitled to assume that the Landlord does not intend to rebuild and reinstate whereupon the Tenant may determine this Lease by giving written notice as aforesaid 7.9 PAYMENT OF INSURANCE MONEYS REFUSED If the payment of any insurance moneys is refused as a result of some act or default of the Tenant or any undertenant or any person under its or their control so as to cause a breach of any term or provision of the insurance policy the contents of which have been notified in writing to the Tenant the Tenant shall pay to the Landlord as soon as possible after receipt by the Tenant of written demand the amount so refused except to the extent that it relates to Tenant's insured fittings 7.10 INSURANCE BECOMING VOID The Tenant shall not do or omit to do anything that could cause any policy of insurance in respect of or covering the Demised Premises or the Building or any Adjoining Property to become void or voidable wholly or in part nor (unless the Tenant has previously notified the Landlord and agreed to pay the increased premium) anything whereby any increased or loaded premium may become payable and the Tenant shall as soon as possible after receipt of written demand pay to the Landlord all increased expenses incurred by the Landlord in renewing any such policy 7.11 REQUIREMENTS OF INSURERS The Tenant shall at all times comply with all the requirements of the Landlord's insurers so far as such requirements are made known in writing by the Landlord or the Management Company to the Tenant and relate to the Demised Premises or the conduct of persons using the Building or the Estate 102 46 7.12 NOTICE BY TENANT The Tenant shall give notice to the Landlord as soon as reasonably possible after becoming aware of the happening of any event or thing which might reasonably affect or give rise to a claim under any insurance policy relating to the Demised Premises or the Building or any Adjoining Property 8. PROVISOS PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED as follows:- 8.1 FORFEITURE (a) Subject to the provisions of sub-clause 8.1(b) without prejudice to any other right remedy or power herein contained or otherwise available to the Landlord:- (i) if the rents reserved by this Lease or any part thereof shall be unpaid for twenty eight (28) days after becoming payable or (ii) if any of the covenants by the Tenant contained in this Lease shall not be performed and observed in all material respects or (iii) if the Tenant and/or the Surety (if any) (being a body corporate) has a winding-up petition or petition for an administration order presented against it or passes a winding-up resolution (other than a resolution for the purposes of an amalgamation or reconstruction resulting in a solvent corporation) or resolves to present its own winding-up petition or is wound up (whether in England or elsewhere) or the directors of the Tenant or the Surety resolve to present a petition for an administration order in respect of the Tenant or the Surety (as the case may be) or an Administrative Receiver or a Receiver or a Receiver and Manager is appointed in respect of the property (or any part thereof) of the Tenant 103 47 or the Surety or (iv) if the Tenant and/or the Surety (if any) (being a body corporate) calls or a nominee calls on its behalf a meeting of its creditors or any of them or makes an application to the Court under Section 425 of the Companies Act 1985 or submits to its creditors or any of them a proposal pursuant to Part I of the Insolvency Act 1986 or enters into any arrangement scheme compromise moratorium or composition with its creditors or any of them (whether pursuant to Part I of the Insolvency Act 1986 or otherwise) or (v) if the Tenant and/or the Surety (if any) (being an individual or if more than one individual then any one of them) notifies the Official Receiver or makes an application to the Court for an interim order under Part VIII of the Insolvency Act 1986 or convenes a meeting of his creditors or any of them or enters into any arrangement scheme compromise moratorium or composition with his creditors or any of them (whether pursuant to Part VIII of the Insolvency Act 1986 or otherwise) or is adjudged bankrupt THEN and in any such case the Landlord may at any time thereafter until such time as the circumstances referred to in this clause 8.1 and giving rise to the Landlord's right of forfeiture have ceased to exist re-enter the Demised Premises or any part thereof in the name of the whole and thereupon the Term shall absolutely cease and determine but without prejudice to any rights or remedies which may then have accrued to any party to this Lease in respect of any antecedent breach of any of the covenants contained in this Lease (b) (i) The Landlord shall give to every Leasehold Mortgagee who has previously given and not withdrawn written notification to the Landlord of a subsisting Leasehold Mortgage a copy of each notice of default by the Tenant which the Landlord may be required to serve on the Tenant at the same time as and whenever any such notice of default is given by the Landlord to the Tenant addressed to such Leasehold Mortgagee at the address 104 48 last furnished to the Landlord and no such notice by the Landlord shall be deemed to have been given unless and until a copy thereof shall have been so given to such Leasehold Mortgagee (ii) The Landlord's right of re-entry shall not be enforceable save pursuant to an order of the Court and before enforcing such order of the Court the Landlord shall serve on the Surety and also every Leasehold Mortgagee who has previously given and not withdrawn written notification to the Landlord of a subsisting Leasehold Mortgage in his favour a notice enclosing a copy of the order of the Court and:- (1) stating that the Landlord's right to re-enter has arisen; and (2) offering a reasonable period (which shall not be less than twenty-one (21) days from the date of such notice) to the Leasehold Mortgagee to remedy the Tenant's default and agreeing not to exercise its right to re-enter the Demised Premises before the expiry of such reasonable period (iii) The Landlord shall accept performance by the Leasehold Mortgagee of any covenant condition or agreement on the Tenant's part as though that covenant condition or agreement had been performed by the Tenant (iv) In the event of any forfeiture of this Lease the Landlord shall give written notice thereof to the Leasehold Mortgagee and shall on written request of the Leasehold Mortgagee given at the time within sixty (60) days after the giving of such notice execute and deliver a new lease of the Demised Premises to the Leasehold Mortgagee or its nominee for the remainder of the Term of the Lease at the rent and subject to the covenants conditions limitations and agreements herein contained provided that the Leasehold Mortgagee or its nominee shall be an Acceptable Assignee and provided that the Leasehold Mortgagee shall have remedied or covenanted to remedy any breach on account of which the 105 49 forfeiture has occurred and shall have paid to the Landlord all rent and other charges due under this Lease at the date of forfeiture and which thereafter would have been due under this Lease if the same had not been forfeited up to and including the date of commencement of the term of such new lease together with costs and expenses on an indemnity basis incurred by the Landlord in connection with or arising out of forfeiture of this Lease and obtaining and enforcing an order of the Court for that purpose and all expenses including reasonable legal fees incidental to the execution and delivery of such new lease less all amounts (after deducting costs incurred in connection therewith) received by the Landlord from sub-tenants up to the said date of commencement of such new lease and provided that the Leasehold Mortgagee and Morgan Stanley Group Inc as Surety shall have first executed and delivered to the Landlord a Counterpart Lease and time shall be of the essence of the contract in respect of the service of the notice referred to in this paragraph (v) Except as otherwise specifically agreed by the relevant Leasehold Mortgagee and subject to paragraph (iv) no Leasehold Mortgagee shall become liable under the provisions of this Lease unless and until such time as it becomes and (subject to complying with clause 8.17 on any assignment or transfer of the Tenant's interest under this Lease) then only for so long as it remains the owner of the Tenant's interest under this Lease and only to the extent that the Tenant would have been liable hereunder had the Tenant remained the owner of that interest Provided always that the provisions of this Clause 8.l(b) shall only apply for so long as this Lease remains vested in Morgan Stanley UK Group or any Group Company of Morgan Stanley UK Group 8.2 NO IMPLIED EASEMENTS Nothing herein contained shall impliedly confer upon or grant to the Tenant any easement right or privilege other than those 106 50 expressly granted by this Lease 8.3 EXCLUSION OF WARRANTY AS TO USER Nothing contained in this Lease or in any agreement leading to its grant or in any consent granted by the Landlord under this Lease shall imply or warrant that the Demised Premises may be used under the Planning Acts for the use herein authorised or any use subsequently authorised 8.4 LANDLORD'S AND MANAGEMENT COMPANY'S OBLIGATIONS Neither the Landlord nor the Management Company shall be liable to the Tenant in respect of any failure of the Landlord or the Management Company to provide perform and observe any of the Building Services unless the Tenant has given notice to the Landlord or the Management Company (as the case may be) of such failure and the Landlord or the Management Company (as the case may be) has failed within a reasonable time to remedy the same and then in such case the Landlord and/or the Management Company (as the case may be) shall be liable to compensate the Tenant only for loss or damage sustained by the Tenant after such reasonable time has elapsed 8.5 EXCLUSION OF LANDLORD'S AND MANAGEMENT COMPANY'S LIABILITY Neither the Landlord nor the Management Company shall be liable to the Tenant nor shall the Tenant have any claim against the Landlord or the Management Company in respect of:- (a) any failure or interruption or delay in the provision of Estate Services or Car Park Services or Building Services caused in any case by Force Majeure but the Management Company shall use reasonable endeavours having regard to the nature of the Tenant's business to cause the service in question to be reinstated with the minimum of delay (b) any loss or damage (other than damage to the Demised Premises) or interference or annoyance suffered by the Tenant during the carrying out by the Landlord or the Management Company of works to the Estate Common Parts which the Landlord or the Management Company reasonably considers to be necessary or desirable save where such works are 107 51 carried out in a reckless or negligent manner by the Landlord or the Management Company (c) any loss or inconvenience occasioned by the closing or breakdown of any mechanical equipment or by the failure of power supply to any mechanical equipment or whilst any repairs are carried out thereto except where such loss or inconvenience is caused by the recklessness or negligence of the Landlord or Management Company (d) any loss of or damage to or theft from any car using the Car Park or any loss or damage or injury suffered by any driver of or passenger in such car except where any loss, damage or theft or injury is caused by the recklessness or negligence of the Landlord or Management Company 8.6 RIGHT FOR LANDLORD TO PERFORM OR TO NOMINATE ANOTHER COMPANY TO PERFORM MANAGEMENT COMPANY'S OBLIGATIONS At any time or times during the Term the Landlord may on giving written notice to the Tenant and the Management Company nominate another company or companies to undertake or exercise or itself undertake or exercise all or any of the obligations rights and discretions of the Management Company contained in this Lease in which event:- (a) the Landlord shall require the Management Company to transfer to it or to the nominated company (or if more than one company is nominated the relevant nominated company) any moneys held in the Estate Reserve Fund and the Car Park Reserve Fund and the Building Reserve Fund or any other similar fund established (b) any reference in this Lease to the Management Company shall be construed as reference to the Landlord or the nominated company or companies (c) in particular but without limitation any payment due from the Tenant to the Management Company in respect of the relevant obligations shall be made to the Landlord or such nominated company or companies and the benefit of the Tenant's covenants to the Management Company shall be 108 52 enforceable by the Landlord or such nominated company or companies (d) the Landlord shall procure that the nominated company or companies shall provide a covenant to the Tenant in the terms of the covenant by the Management Company with the Tenant contained in this Lease and shall execute a declaration of trust in favour of the Tenant in the same terms mutatis mutandis as are set out in clause 9.7 (e) the Tenant shall at the Landlord's cost covenant with the nominated company or companies in the terms of the covenants by the Tenant with the Landlord and the Management Company contained in this Lease (f) the Management Company shall be released from all obligations of any kind arising under or in respect of the covenants by the Management Company contained in this Lease and from all actions proceedings costs claims and demands in connection with those obligations but without prejudice to any claim actions and proceedings in respect of breaches of covenant by the Management Company which have already occurred or arisen and (g) the Tenant shall be released from all obligations of any kind to the Management Company arising under or in respect of the covenants by the Tenant to the Management Company contained in this Lease and from all actions proceedings costs claims and demands in connection with those obligations but without prejudice to any claims actions and proceedings in respect of breaches of covenant by the Tenant which have already occurred or arisen 8.7 DEVELOPMENT OF ADJOINING PROPERTY (a) The Tenant shall make no objection or representation nor institute any proceedings whether by way of injunction or for damages and shall not permit or suffer any undertenant or other occupier of or any person with any interest in any part of the Demised Premises to do any such things by reason or in consequence of any actionable noise disturbance annoyance or inconvenience occasioned by any works by or on behalf of the Landlord or the Management Company or any 109 53 owner or tenant on any Adjoining Property (b) The Tenant agrees with the Landlord and the Management Company that notwithstanding any other provision of this Lease the Tenant will have no claim against the Landlord or the Management Company in connection with or arising from any works carried out on beneath or in the vicinity of the Estate by or on behalf of London Underground Limited or London Regional Transport for the purpose of or in connection with the construction of the Jubilee Line Extension to the London Underground system 8.8 EXCLUSION OF STATUTORY COMPENSATION Except where any statutory provision prohibits or modifies the right of the Tenant to compensation being reduced or excluded by agreement neither the Tenant nor any undertenant (whether immediate or not) shall be entitled on quitting the Demised Premises or any part thereof to claim any compensation from the Landlord under the Landlord and Tenant Act 1954 8.9 USE OF PREMISES OUTSIDE BUSINESS HOURS If the Tenant shall desire to use and occupy the Demised Premises outside the Business Hours then subject as hereinafter provided the Tenant shall be entitled to use and occupy the Demised Premises and have access thereto outside Business Hours on the following terms and conditions (which the Tenant hereby covenants with the Landlord and as a separate covenant with the Management Company to observe and comply with):- (a) following any underletting or surrender and determination of this Lease in relation to Part of the Demised Premises Pursuant to Clause 10.2 the Tenant shall comply with all reasonable requirements of the Landlord or the Management Company as to use and occupation and access (b) the Tenant shall pay to the Management Company within 14 days of receipt by the Tenant of written demand the whole (or where the services are shared with other tenants a fair proportion as determined by the Management Company) of the reasonable and proper costs and expenses attributable to such use or the provision of any staff services and security 110 54 to the extent that such are provided at a level or to a degree which would not have been provided but for such use outside Business Hours (c) neither the Landlord nor the Management Company shall be obliged to provide any services to the Demised Premises or to the Building if the Landlord or the Management Company shall be unable so to do by reason of Force Majeure 8.10 NOTICES (a) Any demand or notice required to be made given to or served on the Tenant or the Surety under this Lease shall be in writing and shall be validly made given or served if addressed to the Tenant or the Surety respectively (and if there shall be more than one of them then any one of them) and delivered personally or sent by pre-paid registered mail addressed (in the case of a company) to its registered office or (whether a company or individual) its last known address or (in the case of a notice to the Tenant) the Demised Premises (b) Any notice required to be served on the Landlord or the Management Company shall be in writing and shall be validly given or served if addressed to the Landlord or the Management Company respectively and delivered personally or sent by pre-paid registered mail to its registered office 8.11 INVALIDITY OF CERTAIN PROVISIONS If any term of this Lease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable the same shall be severable and the remainder of this Lease or the application of such term to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law 8.12 PLANS DRAWINGS ETC The Landlord and the Management Company shall have an 111 55 irrevocable and assignable licence free from any copyright claim as from the expiry or sooner determination of this Lease to use and reproduce all plans drawings specifications models and other information required to be furnished by the Tenant to the Landlord under this Lease or any agreement preceding this Lease but so that the Landlord and the Management Company shall use the same only in connection with the use ownership operation maintenance and alteration of the Demised Premises and the Tenant shall deliver all such documents to the Landlord promptly upon the expiry or sooner determination of this Lease 8.13 CONFIDENTIALITY PROVISION (a) None of the parties to this Lease shall without the prior written consent of the other parties to this Lease disclose or publish ("Disclosure") or permit or cause Disclosure of any financial or other details whatsoever naming the parties hereto or otherwise relating to the transaction hereby effected save only for:- (i) any particular extracts or details which must be the subject of Disclosure in order to comply with any Stock Exchange or statutory requirements or the lawful requirements of any regulatory bodies or with the requirements of the Inland Revenue or Customs & Excise or in order to obtain clearance and clarification from the Customs & Excise of Inland Revenue (ii) any details given to auditors bankers professional advisers and key employees of each of the parties who need to know such details (and who shall only be provided with the same upon first having undertaken to be bound by the provisions of this Clause 8.13) (iii) any particular extracts or details which have come into the public domain through no fault of the relevant party (but no disclosure to Customs & Excise or the Inland Revenue) (b) In the case of a party wishing to make Disclosure as permitted by Clause 8.13(a)(i) that party shall first submit details of the proposed text of the Disclosure to the other 112 56 parties to this Lease and shall act reasonably in taking full account of all representations and comments made by such other parties upon the text (c) Notwithstanding the provisions of sub-clause (a) the Tenant or any other group company of the Tenant shall be at liberty to disclose the contents of this Lease for the purposes of enforcing the terms of this Lease if required to do so by the Court or in the annual report and accounts of any of the Tenant or such group company (d) This Clause 8.13 shall remain in effect for a period of five years from the date hereof (e) This Clause 8.13 shall not apply to Disclosure by or on behalf of any party to this Lease to any third parties and/or their professional advisers in pursuance of bona fide negotiations relating to any dealing by the relevant party with its interest in the Estate 8.14 WAIVER ETC. OF REGULATIONS (a) The Landlord reserves the right to rescind alter or waive any of the Regulations at any time where in its reasonable judgment it deems it necessary desirable or proper to do so and no alteration or waiver in favour of one tenant of the Estate shall operate as an alteration or waiver in favour of any other tenant of the Estate (b) Neither the Landlord nor the Management Company shall be responsible to the Tenant for the non-observance by any tenant of the Estate or any other person of any of the Regulations 8.15 APPLICABLE LAW AND JURISDICTION This Lease shall be governed by and construed in all respects in accordance with the Laws of England and proceedings in connection therewith shall be subject (and the parties hereby submit) to the non-exclusive jurisdiction of the English Courts and for the purposes of Order 10 Rule 3 of the Rules of the Supreme Court of England and any other relevant Rules thereof 113 57 the Tenant hereby irrevocably agrees that any process may be served upon it by leaving a copy addressed to it at its address as stated above or at such other address for service within England and Wales as may be notified in writing from time to time to the Landlord and the Management Company 8.16 REPRESENTATIONS The Tenant acknowledges that this Lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord except any such statement or representation that is expressly set out in this Lease or in written reply to enquiries raised by the Tenant's solicitors of the Landlord's solicitors 8.17 CESSER OF LIABILITY (a) The rights and obligations of Morgan Stanley UK Group as Tenant (or any Group Company of Morgan Stanley UK Group as Tenant) and Morgan Stanley Group Inc as surety of such Tenant to the Landlord and the Management Company under this Lease shall cease on the completion of an assignment or transfer of this Lease (i) to an Acceptable Assignee; or (ii) to a person who is not an Acceptable Assignee but whose obligations under this Lease are guaranteed by a person who had it taken an assignment or transfer of this Lease would have been an Acceptable Assignee and who shall have entered into a Deed of Surety and Guarantee containing the same terms as are set out in the Fourth Schedule but without prejudice to any rights and remedies of any party against any other in respect of any antecedent breach of any of the covenants or conditions in this Lease (b) Where under the terms of this clause the Tenant ceases to be liable for its liabilities and obligations under this Lease the Landlord shall if the Tenant so reasonably requests execute and deliver to the Tenant a deed releasing the Tenant from all obligations of any kind arising under or in respect of the covenants by the Tenant contained in this Lease which deed shall be in the form of the deed attached hereto as Annexure [2] (c) The obligations of any Landlord under this Lease shall cease 114 58 upon: (i) an assignment of the Landlord's interest in or grant of an overriding lease of the Estate Common Parts (but in the case of an overriding lease only whilst such lease continues to subsist) or (ii) in the case of obligations relating to the Building (including without limitation the provision of the Building Services or other items referred to in Part B of the Seventh Schedule) on assignment of the Landlord's interest in or grant of an overriding lease of the Building (but in the case of an overriding lease only whilst such lease continues to subsist) but without prejudice to any rights and remedies of any party against any other in respect of any antecedent breach of any of the covenants or conditions in this Lease and provided that where an assignment or a grant of an overriding lease referred to in (i) above occurs after an assignment or a grant of an overriding lease referred to in (ii) above the Landlord will procure that the assignee or overriding lessee referred to in (i) above shall prior to the assignment or grant of the overriding lease enter into a Deed of Covenant with the Tenant and the Surety (if any) to observe and perform such of the obligations of the Landlord herein contained as are not the responsibility of the assignee or overriding lessee referred to in (ii) above such Deed to be in such form as the Landlord shall reasonably require and the Tenant and the Surety (if any) hereby undertake to enter into such deed within 20 Working Days of a written request so to do from the Landlord (d) Where under the terms of this clause the Landlord ceases to be liable for all or any of its liabilities and obligations under this Lease the Tenant and the Surety (if any) shall if the Landlord so reasonably requests execute and deliver to the Landlord a deed releasing the Landlord from all (or as the case may be the relevant) obligations arising under or in respect of the covenants by the Landlord contained in this Lease 115 59 (e) If the Tenant shall assign or transfer this Lease prior to the fifteenth anniversary of the Term Commencement Date (notwithstanding that such assignment was not to an Acceptable Assignee) then all rights obligations and liabilities of Morgan Stanley UK Group (or any Group Company of Morgan Stanley UK Group in which this Lease shall be vested) as Tenant and Morgan Stanley Group Inc as Surety under this Lease shall forthwith cease and determine upon the date which is the fifteenth anniversary of the Term Commencement Date but without prejudice to the rights obligations and liabilities of any party to this Lease against any other party in respect of any prior breach of the terms of this Lease 9. SERVICE CHARGE 9.1 FOR the purpose of this Lease the following expressions shall have the following meanings:- (a) "Building Computing Date" means the first day of July in each year and the anniversary of that date in each succeeding year or such other date as the Management Company may from time to time nominate (b) "Building Expenditure" means the aggregate of (avoiding double counting):- (i) all reasonable costs fees expenses and outgoings whatsoever (whether or not of a recurring nature) reasonably and properly incurred in respect of or incidental to the provision of all or any of:- (A) the Building Services and (B) the costs and expenses set out in Part B of the Seventh Schedule (whether or not the Landlord or the Management Company is obliged by this Lease to incur the same) and (when any expenditure is incurred in relation to the Building and other premises) the proportion of such expenditure which is reasonably attributable to the Building as properly determined from time to time by the Building 116 60 Surveyor (ii) such reasonable sums as the Landlord or the Management Company shall reasonably and properly consider desirable to set aside from time to time (which setting aside shall be deemed to be an item of expenditure actually incurred) for the purpose of providing for periodically recurring items of expenditure, whether or not of a capital nature and whether recurring at regular or irregular intervals and for anticipated expenditure in respect of any of the Building Services to be provided or other items within Part B of the Seventh Schedule ("the Building Reserve Fund") (iii) the cost of replacement of any item where such replacement is reasonably necessary whether or not the replacement item is of a superior quality design or utility to the item being replaced but where the replacement item is of superior quality it shall be as near as practicable to the quality of the item being replaced (iv) interest payments credited to the Tenant under Clause 9.5(b) and credited or paid to any tenants of premises within the Building under the provisions of clauses similar to the said clause (v) any Value Added Tax or other tax payable on or in connection with any such items in paragraphs (i) (ii) (iii) and (iv) above (so far as not recoverable by the Landlord or the Management Company (as the case may require) as an input credit) but shall exclude:- (aa) any capital expenditure incurred in the initial construction of the Building or for the construction or carrying out of any of the Works which the Landlord has agreed to carry out in the Agreement pursuant to which this Lease has been granted and capital expenditure incurred for the purpose of the initial establishment of the services described in the Seventh Schedule 117 61 (bb) any expenditure referable to operating charges and expenses and maintenance of any Car Park (cc) any costs incurred by the Landlord in remedying any latent or inherent defects or shrinkages or other latent or inherent faults not apparent at the date hereof and which manifest themselves (a) in the Building during a period of 10 years or (b) in relation to the rebuilding or replacement of the structure of the Building during a period of 15 years from practical completion of the Building which periods commenced on 22nd July 1991 and there shall be deducted from the foregoing for the purposes of calculating the Building Expenditure the following:- (aaa) any contributions in respect of Building Services or the costs set out in Part B of the Seventh Schedule recoverable in the relevant Building Financial Year under leases or agreements for leases or other documents imposing obligations in relation to Building Services relating to premises which for that Building Financial Year are not included within the definition of Y for the purposes of the definition of Building Service Charge Percentage (bbb) any revenue received from a third party (other than a tenant in its capacity as such whether under any Lease Agreement for Lease or some other deed relating to Building Services or the Building Service Charge Percentage or the Building Expenditure) derived from the rendering of Building Services or any activity the cost of which is included in Part B of the Seventh Schedule including any insurance proceeds received by the Landlord or the Management Company in respect of the insurance of the Building to the extent that such insurance proceeds relate to an item the cost of which is included in the Building Expenditure and 118 62 (ccc) any contribution in respect of the rendering of any of the Building Services or any activity the cost of which is included in Part B of the Seventh Schedule recoverable in the Relevant Financial Year where any such Building Services or other activity was provided at the request of or for the benefit of any tenants or occupiers of the Building and which would not have been provided but for such request whether or not such service or activity is of direct or indirect benefit to the Tenant (ddd) interest payments received from the Tenant under Clause 9.5(a) and from other tenants within the Building under the provisions of clauses similar to the said clause in relation to Building Expenditure (eee) interest (if any) earned on the deposit by the Management Company of on account payments made by tenants in respect of Estimated Building Expenditure (c) "Building Financial Year" means the period from a Building Computing Date to but not including the next succeeding Building Computing Date (d) "Building Service Charge Percentage" means the figure calculated as follows:- X - x 100 Y where:- X = the Net Internal Area of the Demised Premises and Y = the aggregate Net Internal Areas of Lettable Areas within the Building used or intended to be used for office purposes or uses ancillary thereto 119 63 (e) "Building Surveyor" means a chartered surveyor or firm of chartered surveyors appointed or employed by the Landlord or Management Company to perform the functions of the Building Surveyor hereunder (f) "Car Park Computing Date" means the first day of July in each year and the anniversary of that date in each succeeding year or such other date as the Landlord or the Management Company may from time to time nominate (g) "Car Park Expenditure" means the aggregate of:- (i) all reasonable costs fees expenses and outgoings whatsoever (whether or not of a recurring nature) reasonably and properly incurred in respect of or incidental to the provision of all or any of:- (A) the Car Park Services and (B) the costs and expenses set out in Part B of the Sixth Schedule and (when any expenditure is incurred in relation to the Car Park and other premises) the proportion of such expenditure which is reasonably attributable to the Car Park as properly determined from time to time by the Car Park Surveyor (ii) such reasonable sums as the Landlord or the Management Company shall reasonably and properly consider desirable to set aside from time to time (which setting aside shall be deemed to be an item of expenditure actually incurred) for the purpose of providing for periodically recurring items of expenditure whether or not of a capital nature and whether recurring at regular or irregular intervals and for anticipated expenditure in respect of any of the Car Park Services to be provided or other items within Part B of the Sixth Schedule ("the Car Park Reserve Fund") (iii) the cost of replacement of any item where such replacement is reasonably necessary whether or not the replacement item is of a superior quality 120 64 design or utility to the item being replaced but where the replacement item is of superior quality it shall be as near as practicable to the quality of the item being replaced (iv) interest payments credited to the Tenant under Clause 9.5(b) and credited or paid to any tenants of premises within the Estate under the provisions of clauses similar to the said clause (v) any Value Added Tax or other tax payable on or in connection with any such items in paragraphs (i) (ii) (iii) and (iv) above (so far as not recoverable by the Landlord or Management Company as an input credit) but shall exclude any capital expenditure incurred in the initial construction of the Car Park or for the purpose of the initial establishment of the services described in the Sixth Schedule and there shall be deducted from the foregoing for the purposes of calculating the Car Park Expenditure the following:- (aa) any revenue (other than revenue derived from public parking) received from a third party (other than a tenant in its capacity as such) in connection with the rendering of Car Park Services or any activity the cost of which is included in Part B of the Sixth Schedule including any insurance proceeds received by the Landlord or the Management Company in respect of the insurance of the Car Park to the extent that such insurance proceeds relate to an item the cost of which is included in the Car Park Expenditure (bb) any contribution in respect of the rendering of any of the Car Park Service or activity the cost of which is included in Part B of the Sixth Schedule recoverable in the Relevant Financial Year where any such Car Park Services or other activity was provided at the request or for the benefit of any tenants or occupiers of the Estate and which would not have been provided but for such request (cc) interest payments received from the Tenant under Clause 121 65 9.5(a) and from other tenants within the Estate under the provisions of clauses similar to the said clause in relation to Car Park Expenditure (dd) interest (if any) earned on the deposit by the Management Company of on account payments made by Tenants in respect of Estimated Car Park Expenditure (h) "Car Park Financial Year" means the period from a Car Park Computing Date to but not including the next succeeding Car Park Computing Date (i) "Car Park Service Charge Percentage" means the figure calculated as follows:- X - x 100 Y where:- X = the number of cars which the Tenant has the right to park in the Car Park and Y = the total number of car parking spaces from time to time in the Car Park the number being 2014 at the date hereof (j) "Car Park Surveyor" means a chartered surveyor or firm of chartered surveyors appointed or employed by the Management Company or a Group Company of the Management Company to perform the functions of the Car Park Surveyor hereunder (k) "Estate Computing Date" means the first day of July in each year and the anniversary of that date in each succeeding year or such other date as the Management Company may from time to time nominate (l) "Estate Expenditure" means the aggregate (avoiding double counting) of:- (i) all reasonable costs fees expenses and outgoings (whether or not of a recurring nature) reasonably and properly incurred by the Landlord or the Management 122 66 Company in respect of or incidental to the provision of all or any of the Estate Services and the costs and expenses set out in Part B of the Sixth Schedule (whether or not the Landlord or the Management Company is obliged by this Lease to incur them) and (when any expenditure is incurred in relation to the Estate and other premises) the proportion of such expenditure which is reasonably attributable to the Estate as reasonably determined from time to time by the Estate Surveyor (ii) such reasonable sums as the Management Company shall reasonably and properly consider desirable to set aside from time to time (and the amount set aside shall be treated as an item of expenditure actually incurred) for the purpose of providing for periodically recurring items of expenditure whether or not of a capital nature and whether recurring at regular or irregular intervals and for anticipated expenditure in respect of any of the Estate Services to be provided or other items within Part B of the Sixth Schedule (the "Estate Reserve Fund") (iii) the cost of replacement of any items with an item of equivalent quality pursuant to the Sixth Schedule where such replacement is reasonably necessary (but where such an item is of superior quality it shall be as near as practicable to the quality of the item being replaced (iv) interest payments credited to the Tenant under clause 9.5(b) and credited or paid to any owners or tenants of premises within the Estate under the provisions of clauses similar to the said clause and (v) any Value Added Tax payable on or in connection with any such items in Paragraphs (i) (ii) (iii) and (iv) above so far as not recoverable by the Landlord or the Management Company (as the case may require) as an input credit but shall exclude: 123 67 (aa) any capital expenditure for the initial construction of the Demised Premises and any building or erection within the Estate (including for the avoidance of doubt those parts of the Estate not yet built or erected) or for the initial creation of the Common Parts and capital expenditure incurred for the purpose of the initial establishment of the services described in the Sixth Schedule (bb) any expenditure referable to operating charges and expenses and maintenance of any car parks in the Estate provided however there shall be included in the Estate Expenditure a fair and reasonable proportion of expenditure referable to the maintenance of common elements shared between any car parks and the Common Parts (cc) any capital expenditure incurred in the demolition of any buildings or erections on the Estate or the Common Parts and any capital expenditure incurred in any replacement or reconstruction of such buildings or erections save where (in accordance with the principles of good estate management) such demolition replacement or reconstruction is necessary in connection with the provision of the Estate Services and (dd) any costs incurred by the Landlord in remedying any latent or inherent defects or shrinkages or other latent or inherent faults in the Common Parts of the Estate not apparent at the date hereof and which manifest themselves before 30th June 2001 and further there shall be deducted from the foregoing aggregate for the purposes of calculating the Estate Expenditure the following:- (aaa) any contributions in respect of Estate Services or the costs set out in Part B of the Sixth Schedule recoverable in the relevant Estate Financial Year under transfers leases agreements for lease or other documents imposing obligations in relation to the Estate Services relating to 124 68 premises which for the Financial Year are not included within the definition of Y for the purposes of the definition of Estate Service Charge Percentage (bbb) any revenue received from a third party (other than an owner or a tenant in its capacity as such) (whether under a lease agreement for lease or some other deed relating to the Estate Services the Estate Service Charge Percentage or the Estate Expenditure) derived from or in connection with the rendering of Estate Services or any activity the cost of which is included in Part B of the Sixth Schedule including any insurance proceeds received by the Management Company or the Landlord in respect of the insurance of the Common Parts to the extent that such insurance proceeds relate to an item the cost of which is included in Estate Expenditure (ccc) any contribution in respect of the rendering of any Estate Service or any activity the cost of which is included in Part B of the Sixth Schedule recoverable in the relevant Financial Year where any such Estate Service or other activity was provided at the express request of and to or for the benefit of one or more owners tenants or occupiers of the Estate at a time or in circumstances when or in which such service or activity would not have been provided but for such request regardless of whether such service or activity is of direct or in direct benefit to the Tenant and (ddd) interest payments received from the Tenant under clause 9.5(a) and from other owners and tenants within the Estate under the provisions of clauses similar to the said clause in relation to Estate Expenditure 125 69 (eee) interest (if any) earned on the deposit by the Management Company of on account payments made by tenants in respect of Estimated Estate Expenditure (a) "Estate Financial Year" means the period from an Estate Computing Date to but not including the next succeeding Estate Computing Date (b) "Estate Service Charge Percentage" means the figure calculated as follows:- X - x 100 Y where:- X = the Net Internal Area of the Demised Premises and Y = the aggregate Net Internal Areas of the Lettable Areas of the buildings built and used or intended to be used for Retail Use Hotel Use or Office Use (as hereinafter defined) on those parts of the Estate known as parcels B-1 DS-7 RT-1 FC-1 FC-2 FC-3 FC-4 FC-5 and FC-6 PROVIDED THAT as from each Estate Computing Date during the Term Y shall (in addition to the buildings referred to in the above definition) include the Net Internal Area of the Lettable Areas within each additional building on the Estate used or intended to be used for Office Use Retail Use or Hotel Use where in respect of that building at that Estate Computing Date either:- (i) at least two (2) years shall have elapsed since the issue of a practical completion certificate for that entire building under the building contract relating thereto or (ii) at least 50% of the Net Internal Area of the Lettable Areas therein has become occupied and PROVIDED FURTHER that the parcels known as B-1 DS-7 RT-1 FC-1 FC-2 FC-3 FC-4 FC-5 and FC-6 shall not be removed from 126 70 the denominator (c) "Estate Surveyor" has the like meaning as "Building Surveyor" save that the word "Building" in the latter definition shall be deleted and the word "Estate" substituted therefor (d) "Estimated Building Expenditure" means for any Building Financial Year such sum as the Management Company shall notify in writing to the Tenant as a fair and reasonable estimate of the Building Expenditure for such Building Financial Year after deducting any anticipated Building Appropriation (as defined in Clause 9.3(a)) provided that the Management Company may from time to time during any such Building Financial Year notify the Tenant and other tenants and occupiers of the Building in writing of a revised figure for the Estimated Building Expenditure (e) "Estimated Car Park Expenditure" shall have the like meaning as "Estimated Building Expenditure" save that the word "Building" where it appears in the latter definition shall be deleted and the words "Car Park" substituted therefor (f) "Estimated Estate Expenditure" shall have the like meaning as "Estimated Building Expenditure" save that the word "Building" where it appears in the latter definition shall be deleted and the word "Estate" substituted therefor (g) "Hotel Use" means use as a hotel including uses within hotels of banqueting rooms conference facilities and areas used for Retail Use within hotels (h) "Office Use" means use as an office and includes banking halls and trading floors (i) "Relevant Advance Payment" shall mean (as the case may require) the aggregate of all Estate Payments on Account made in any Estate Financial Year or the aggregate of all Car Park Payments on Account made in any Car Park Financial Year or the aggregate of all Building Payments on Account made in any Building Financial Year (j) "Relevant Estimated Expenditure" means all or any of the 127 71 Estimated Estate Expenditure the Estimated Car Park Expenditure and the Estimated Building Expenditure as the case may require (k) "Relevant Expenditure" means the Estate Expenditure the Car Park Expenditure or the Building Expenditure as the case may require (l) "Relevant Financial Year" means the Estate Financial Year the Car Park Financial Year or the Building Financial Year as the case may require (m) "Relevant Service Charge Accounts" means the accounts the certificate and the statements referred to in Clause 9.3 for any Relevant Financial Year (n) "Relevant Service Charge Percentage" means:- (A) in the case of the Building Expenditure (and the Estimated Building Expenditure) the Building Service Charge Percentage (B) in the case of the Car Park Expenditure (and the Estimated Car Park Expenditure) the Car Park Service Charge Percentage and (C) in the case of the Estate Expenditure (and the Estimated Estate Expenditure) the Estate Service Charge Percentage (o) "Relevant Surveyor" means the Estate Surveyor the Car Park Surveyor or the Building Surveyor as the case may require (bb) "Retail Use" means use for:- (A) all types of retailing including hairdressers snackbars travel agents funeral directors and showrooms (B) banks building societies estate agents betting offices and similar uses where the services are provided principally to visiting members of the public 128 72 (C) restaurants cafes public houses winebars and food take aways 9.2 (a) The Tenant covenants with the Management Company to pay to the Management Company:- (A) the Relevant Service Charge Percentage (as indicated in the last available Certificate by the Relevant Surveyor issued pursuant to Clause 9.3 but subject to the provisions of Clause 9.3(d) and Clause 9.4) of each of the Relevant Estimated Expenditure in advance by equal quarterly instalments on the Quarterly Days during each Relevant Financial Year the first payment of each being a proportionate sum in respect of the period from and including 1st February 1995 to the next Quarterly Day to be made on the date hereof and (B) (if any of the Relevant Estimated Expenditure is revised as contemplated above) within 14 days after receipt of written demand the Relevant Service Charge Percentage of the amount by which any such revised figure for the Relevant Estimated Expenditure exceeds the figure previously notified to the Tenant (b) Each such payment made by the Tenant under Clause 9.2(a) is referred to in this Lease as (in the case of the Estimated Estate Expenditure) an "Estate Payment on Account" (in the case of the Estimated Car Park Expenditure) a Car Park Payment on Account and (in the case of the Estimated Building Expenditure) a Building Payment on Account 9.3 The Management Company shall as soon as reasonably practicable after the end of each Relevant Financial Year prepare and send to the Tenant:- (a) an account or accounts, each duly certified by the Accountant showing the Estate Expenditure the Car Park Expenditure and the Building Expenditure for each Relevant Financial Year and the amount (if any) which the Management Company has chosen to utilise from the Estate Reserve Fund the Car Park Reserve Fund or the Building Reserve Fund as the case may be in defraying respectively Estate Expenditure Car Park Expenditure or Building Expenditure pursuant to 129 73 Clause 9.7 (respectively "the Estate Appropriation", "the Car Park Appropriation" and "the Building Appropriation") and containing a fair summary of the various items comprising the Relevant Expenditure (b) a certificate or certificates by the Relevant Surveyor showing the Relevant Surveyor's calculation of each Relevant Service Charge Percentage for each Relevant Financial Year containing a fair summary of how such percentage was calculated (c) a statement or statements of each Relevant Service Charge Percentage of each Relevant Expenditure for each Relevant Financial Year after taking into account as the case may require the Estate Appropriation the Car Park Appropriation or the Building Appropriation and the same shall (save for obvious error and subject to the provisions of sub-clause 9.3(d)) be conclusive evidence for the purposes of this Lease of all matters of fact referred to in each said account certificate and statement (d) (i) Subject to the Tenant paying the reasonable and proper costs of the Landlord and the Management Company (including but not limited to the costs of security supervision and assistance) the Tenant may in relation to an account certificate or statement in respect of Estate Expenditure or Building Expenditure or Car Park Expenditure (as referred to in Clause 9.3(a)) within two months of receiving such account certificate or statement (time to be of the essence) by giving written notice to the Landlord and the Management Company have access to and to inspect the service charge books of account for (or the electronic equivalent thereof) and all vouchers receipts invoices and other documentation relevant to the calculation of the relevant expenditure for that Relevant Financial Year and the two immediately preceding Financial Years for the purpose of inspection and verification provided always that such right may not be exercised more frequently than once in any period of three years (ii) At any time within ninety (90) days after the Tenant has access to inspect the books of account pursuant to 130 74 paragraph (i) the Tenant may by notice to the Management Company dispute that Relevant Service Charge Account on the basis that any item of expenditure or part thereof has been improperly included in such account and the Tenant shall set out the reasons for the dispute in such notice and the items in dispute provided that if the Tenant does not give any such notice within the said period (as to which time shall be of the essence) it shall be deemed to have agreed the relevant Relevant Service Charge Account (iii) In the event that the Tenant and the Management Company are unable to agree upon the items disputed by the Tenant in this notice under Sub-clause (ii) then either of them may require the dispute to be referred to an independent expert (acting as such) who shall be a chartered surveyor with not less than ten (10) years' experience of managing substantial multi-tenanted properties and who shall be appointed in default of agreement on the application of either party by the President for the time being of the Royal Institution of Chartered Surveyors or his duly appointed deputy and if such independent expert shall be or become unable or unwilling to act the referral procedure referred to in this clause may be repeated as many times as may be necessary provided that for the avoidance of doubt it is agreed that the Management Company may require to have included in the Relevant Service Charge Account during the reference to the independent expert any item of expenditure which may properly be included in Relevant Expenditure for the year in question but which had been inadvertently omitted (iv) The costs of any expert appointed shall be borne as he shall direct Provided that in the event that the expert determines that the Relevant Service Charge Percentage of Relevant Expenditure in any disputed Relevant Service Charge Account should be reduced by less than five per cent. (5%) or should be increased the parties agree that the costs of the expert are to be borne by the Tenant in any event unless the Management Company 131 75 shall have required the inclusion of any item pursuant to the proviso in sub-clause (iii) above in which case the costs of any expert shall be borne as he shall direct (v) Notwithstanding any dispute that the Tenant shall pay the amount demanded in respect of the Relevant Service Charge Percentage of the Relevant Expenditure in the Relevant Service Charge Account and in the event that the expert determines the Relevant Service Charge Percentage of the Relevant Expenditure to be a lower or higher sum than that specified in the disputed Relevant Service Charge Account then the Management Company shall forthwith issue a duly corrected Relevant Service Charge Account and either the Management Company shall refund within fourteen (14) days of the issue of such corrected Relevant Service Charge Account all service charges overpaid by the Tenant or the Tenant shall within fourteen (14) days of receipt of the corrected Relevant Service Charge Account pay the balance due to the Management Company as the case may require 9.4 For the purposes of Clause 9.2 until such time as a certificate is issued by the Relevant Surveyor pursuant to Clause 9.3 the Estate Service Charge Percentage shall be [ %] the Car Park Service Charge Percentage shall be [ %] and the Building Service Charge Percentage shall be [ %] 9.5 (a) If the Relevant Service Charge Percentage of the Relevant Expenditure for any Relevant Financial Year (after taking into account as the case may require the Estate Appropriation the Car Park Appropriation or the Building Appropriation) shall exceed the Relevant Advance Payment for that Relevant Financial Year the excess together with interest thereon at the Base Rate calculated from and including as the case may require the Estate Computing Date the Car Park Computing Date or the Building Computing Date next following the end of that Relevant Financial Year until the date of payment shall be paid by the Tenant to the Management Company within 14 days of receipt by the Tenant of written demand or (b) If the Relevant Service Charge Percentage of the Relevant 132 76 Expenditure for any Relevant Financial Year (after taking into account as the case may require the Estate Appropriation the Car Park Appropriation or the Building Appropriation) shall be less than the Relevant Advance Payment for that Relevant Financial Year the overpayment made by the Tenant together in each case with interest thereon at the Base Rate calculated as aforesaid up to the date when the next Relevant Advance Payment on Account is due shall be credited to the Tenant against the next Estate Payment on Account Car Park Payment on Account or Building Payment on Account as the case may require 9.6 Any omission by the Management Company to include in Relevant Expenditure in any Relevant Financial Year a sum expended in that Relevant Financial Year shall not preclude the Management Company from including such sum in Relevant Expenditure in any of the three immediately subsequent Relevant Financial Years 9.7 (a) Each of the Estate Reserve Fund the Car Park Reserve Fund and the Building Reserve Fund shall be held upon trust during the period of eighty (80) years from the date of this Lease (which shall be the perpetuity period applicable hereto) respectively for the persons who from time to time shall be owners tenants or occupiers of the Estate the Car Park or the Building and each shall be held in a separately designated interest bearing bank account (and the Landlord and/or the Management Company shall notify the bank or procure that the bank is notified of such trust) and the Landlord or the Management Company shall utilise the same, with interest accruing thereon but after deducting tax payable thereon and on such interest in defraying expenditure of the nature referred to in Clause 9.1(b)(ii) (in the case of the Building Reserve Fund) and in the corresponding paragraphs of the definitions of Estate Expenditure and Car Park Expenditure (in the case of the Estate Reserve Fund and Car Park Reserve Fund respectively) and at the expiry of such perpetuity period the sums standing to the credit of each of the Estate Reserve Fund the Car Park Reserve Fund and the Building Reserve Fund and unexpended shall be paid respectively to the persons who shall then be the tenants of the Estate the Car Park or the Building in shares equal to their respective Relevant Service Charge Percentages the Management Company being 133 77 entitled absolutely to any share payable in respect of:- (i) any Lettable Area which is unlet at such time and (ii) any Car Parking Spaces which are not allocated for use by any persons at such time (b) The Management Company shall procure that upon the service by the Landlord of notice under Clause 8.6 (insofar as the same shall relate to the Estate Services) the Estate Reserve Fund and (insofar as the same shall relate to the Car Park Services) the Car Park Reserve Fund and (insofar as the same shall relate to the Building Services) the Building Reserve Fund (or in each case so much thereof as remains after the defraying of such expenditure as aforesaid) shall be transferred to the Landlord or any other company nominated by the Landlord in such notice to be held upon the relevant trusts referred to in this Clause 9.7 and upon the terms herein mentioned 9.8 If at any time or times during the Term the Management Company considers that circumstances have arisen making the Relevant Service Charge Percentage or the formula for calculating the same on the basis specified in Clause 9.1 unreasonable or inequitable the Management Company may give written notice to the Tenant requiring a variation to the Relevant Service Charge Percentage or the said formula which is fair and reasonable in all the circumstances and in the event of there being any dispute regarding such variation to the Relevant Service Charge Percentage the matter shall be referred to a single Arbitrator to be appointed in default of agreement upon the application of the Management Company or the Tenant by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors in accordance with the provisions of the Arbitration Acts 1950 to 1979 9.9 The Management Company may in its reasonable discretion having regard to the interests of good estate management discontinue withhold add to commence extend vary or make any alterations to any of the Estate Services the Car Park Services or the Building Services or any of the items referred to in Part B of the Sixth and Seventh Schedules hereto from time to time if the Management Company shall reasonably deem it desirable to do so in the 134 78 interests of (or for the comfort of) the owners and tenants on or for the efficient management security and operation of the Estate the Car Park or the Building (as the case may be) or for any other reason in the interests of good estate management 9.10 The Tenant covenants with the Landlord and as a separate covenant with the Management Company that the Tenant will pay within fourteen (14) days of receipt by the Tenant of written demand such charge as may reasonably be determined by the Management Company in respect of any service (whether or not constituting an Estate Service a Car Park Service or a Building Service) provided at the request of the Tenant to or for the benefit of the Tenant (whether or not exclusively) at a time or in circumstances when or in which such service would not have been provided but for such request 9.11 The provisions of this Clause shall continue to apply notwithstanding the expiration or sooner determination of the Term but only in respect of the period down to such expiration or sooner determination the Relevant Service Charge Percentage of the Relevant Expenditure payable for that Relevant Financial Year being apportioned for the said period on a daily basis 9.12 Notwithstanding the foregoing provisions of this Clause 9 in calculating the Building Service Charge Percentage of the Estimated Building Expenditure and the Building Service Charge Percentage of the Building Expenditure the amounts payable by the Tenant shall until such time as the Dedicated Lobby becomes part of the Common Parts of the Building be adjusted to the intent that the Tenant shall pay the whole of such Building Expenditure incurred by the Landlord and/or the Management Company and properly attributable to the Dedicated Lobby and the Dedicated Lifts and no part of such Building Expenditure attributable to the entrance lobby at the eastern side of the Building and the passenger lifts lift shafts and plant apparatus and equipment relating thereto in the eastern core of the Building 9.13 Not withstanding the foregoing provisions of this Clause 9 in calculating the Building Service Charge Percentage of the Estimated Building Expenditure and the Building Service Charge Percentage of the Building Expenditure the amounts payable by the Tenant shall be adjusted to the intent that the Tenant shall 135 79 pay the whole of such Building Expenditure incurred by the Landlord and/or the Management Company and properly attributable to the Tanks 10. OPTION TO TERMINATE 10.1 If the Tenant desires to determine the Term on or after the expiration of the fifteenth year of the Term it may give to the Landlord (time to be of the essence) not less than 12 months and 1 day prior written notice of such desire expiring on the later of the date of expiration of the fifteenth year of the Term and the date on which any underlease of the Demised Premises expires or is determined (provided always that if there shall be more than one underlease of a Permitted Part then such date shall be the latest date on which any such underlease shall determine or expire so that for the avoidance of doubt the Tenant shall be obliged to give vacant possession of the Demised Premises) and thereupon the Term shall cease but without prejudice to any rights and remedies which any party may have against any other in respect of any antecedent breach of any of the covenants or conditions in this Lease 10.2 (a) If the Tenant shall desire to surrender and determine the Term insofar as it relates to any one or more (but less than six) whole consecutive and contiguous floors (commencing either with the first floor or the sixth floor) of that part of the Demised Premises shown edged red on all or any of plans 3 4 5 6 7 and 8 on or after the expiration of the fifteenth year of the Term it may give to the Landlord (time to be of the essence) not less than 12 months and 1 day prior written notice of such desire expiring on the later of the expiration of the fifteenth year of the Term and the date on which any underlease of any Permitted Part being an underlease of some or all of the premises which are the subject of the notice requiring to surrender and determine (provided always that if there shall be more than one such underlease affecting the premises to which the notice to surrender and determine relates then such date shall be the latest date on which any such underlease shall determine or expire so that for the avoidance of doubt the Tenant shall be obliged to give vacant possession of the part or parts of the Demised Premises which are the subject of such notice) and thereupon the Term insofar as it extends to that part of 136 80 the Demised Premises which is the subject of such notice shall thereupon be surrendered and determined but without prejudice to any rights and remedies which any party may have against any other in respect of any antecedent breach of any of the covenants or conditions in this Lease (b) The parties hereto hereby agree that following such surrender and determination as to part a memorandum in such form as the Landlord shall reasonably require indicating the extent and specifying the Net Internal Area of the Demised Premises so determined shall be signed by the parties and annexed to the Lease and any counterparts thereof (c) If the Tenant surrenders and determines this Lease in relation to part of the Demised Premises pursuant to Clause 10.2(a) the Tenant may and shall if requested by the Landlord remove that part of the Staircase (if any) serving the part of the Demised Premises surrendered and determined and shall make good and reinstate to the reasonable satisfaction of the Landlord all areas affected by such works 10.3 Following a surrender of part of the Demised Premises pursuant to Clause 10.2 the Dedicated Lobby shall become one of the Common Parts of the Building and henceforth shall be treated as such for the purposes of this Lease but nonetheless after the date of such surrender the Tenant shall be entitled to retain within the Dedicated Lobby such security reception or other desk and such other reception facilities as it shall require 11. LANDLORD'S FURTHER PAYMENT 11.1 If this Lease is not determined pursuant to Clause 10.1 the following provisions of this clause shall apply 11.2 In this Clause 11 the expression "relevant part of the Demised Premises" means such part of the Demised Premises as will remain the subject of this Lease after determination pursuant to Clause 10.2 and if no notice pursuant to Clause 10.2 is served shall for the avoidance of doubt mean the whole of the Demised Premises 137 81 11.3 On or after the expiration of the fifteenth year of the Term the Landlord will pay to the Tenant in a sum equal to (pound)10 (inclusive of Value Added Tax) for each square foot of Net Internal Area of the relevant part of the ("the Landlord's Contribution") Demised Premises such payment subject to clause 11.3.3 to be made in respect of any renewal or replacement of works carried out by the Tenant by way of refurbishment or re-fitting out of the relevant part of the Demised Premises and such payments shall be made in accordance with the following provisions:- 11.3.1 the Landlord shall disburse sums on account (a "Disbursement") to the Tenant from time to time within ten Working Days after receipt of a written request for a Disbursement from the Tenant (such request setting forth in reasonable detail the Costs (in this Clause 11 meaning all costs and expenses which are properly referable to the refurbishment or refitting works) incurred by the Tenant which have not been the subject of a previous disbursement by the Landlord and the relevant works which have been incorporated into the Demised Premises) such request being accompanied by a certificate from the Tenant's architect (or other appropriate duly authorised professional adviser) confirming that the amount so specified in the request has been incurred 11.3.2 any such Disbursement by the Landlord shall not be required to be made more frequently than every 10 Working Days and save as provided in Clause 11.3.3 below shall not exceed the sums incurred by the Tenant towards the relevant Costs 11.3.3 within ten Working Days following the date of completion of the refurbishment or refitting works which date shall be certified in writing by the Tenant any necessary final adjusting payment shall be made by the Landlord to the Tenant or vice versa (as the case may be) in respect of any under-payment or over-payment of the Landlord's Contribution so that the Landlord's Contribution is paid to the Tenant in full 138 82 notwithstanding that amounts equal to the Landlord's Contribution have not been spent on refurbishment and refitting works provided that the amounts so spent are not materially less than the Landlord's Contribution 12. SERVICE CHARGE DEED 12.1 If at any time during the Term the Tenant shall so require by service of written notice on the Management Company the Management Company shall within fourteen (14) days of service of that notice enter into and complete a Service Charge Deed with such sub-tenants of the Tenant as the Tenant shall reasonably and properly require and who shall be named in the notice served by the Tenant subject to that person executing a counterpart of the deed and delivering such counterpart to the Management Company 12.2 Where the number of Service Charge Deeds in existence at any one time exceeds five the Tenant shall pay all reasonable and proper costs incurred by the Management Company in connection with the implementation of each and every Service Charge Deed in excess of that number 12.3 The obligations of the Tenant under clause 9 and the provisions of clause 8.1 shall not be affected and shall continue to have effect notwithstanding the completion of a Service Charge Deed save that the Landlord and the Management Company shall not take any steps towards proceeding against the Tenant in respect of any part of the Relevant Service Charge Percentage of the Relevant Expenditure payable under that Service Charge Deed until the expiry of twenty-eight (28) days from the relevant Quarterly Day or (as the case may be) the date of service of the first demand on the person in whose favour the Service Charge Deed has been granted for payment of it 12.4 The Landlord or the Management Company shall accept payment by a person referred to in 12.1 above of any sums due under its Service Charge Deed in satisfaction pro tanto of the corresponding amount payable by the Tenant under clause 9 of this Lease 12.5 Upon the nomination of another company or companies to undertake or exercise all or any of the obligations rights and discretions 139 83 of the Management Company contained in this Lease pursuant to clause 8.6 of this Lease the Landlord shall ensure that such company or companies shall forthwith enter into a Service Charge Deed with any person who at the date of such nomination was a party to a valid and subsisting Service Charge Deed 12.6 Notwithstanding completion of a Service Charge Deed the Management Company shall serve a copy of all Relevant Service Charge Accounts certificates statements and other notices on the Tenant at the same time as service of the Relevant Service Charge Account certificates statements and notices on any person who is a party to a Service Charge Deed 12.7 If during a Relevant Financial Year a Service Charge Deed expires or is determined then the Landlord or the Management Company shall in the Relevant Service Charge Account for the Demised Premises apportion the Relevant Service Charge Percentage of the Relevant Expenditure for the period prior to and the period after such expiry or determination and the person who was a party to the Service Charge Deed shall be responsible for the Relevant Service Charge Percentage of the Relevant Expenditure for any period prior to such expiry or determination (after deduction of the Relevant Advance Payment for that period) and the Tenant shall be responsible for the Relevant Service Charge Percentage of the Relevant Expenditure for any period after such expiry or determination (after deduction of the Relevant Advance Payment for that period) but nothing in this clause shall affect the provisions of clause 12.3 IN WITNESS whereof this Lease has been executed by the parties as a Deed and delivered on the day and year first above written 140 84 FIRST SCHEDULE RIGHTS GRANTED 1. ESTATE COMMON PARTS The right for the Tenant and all persons expressly or by implication authorised by the Tenant (in common with the Landlord and the Management Company and all other persons having a like right) at all times and for all proper purposes:- (a) to pass and repass with or without vehicles over and along all roads accesses egresses and pavements from time to time comprised in the Estate Common Parts and intended for vehicular access (b) to pass and repass on foot only over and along such areas as are from time to time comprised in the Estate Common Parts and intended for pedestrian access (c) to use such parts of the Estate Common Parts as are not referred to in sub-paragraphs (a) and (b) above until such time (if any) as any of the same are adopted by the highway or other relevant authority Provided that the Landlord may in accordance with principles of good estate management having regard to the nature and extent of the estate add to extend vary or stop-up any of the same from time to time provided that (i) in the case of sub-paragraphs (a) and (b) above alternative means of access to the Demised Premises are available ensuring the continuance of access to and use and occupation of the Demised Premises and (ii) in the case of sub-paragraph (c) above so that the Tenant's use and occupation of the Demised Premises is not thereby materially adversely affected 2. PIPES The right to the free passage and running of water sewage surface water drainage gas electricity telecommunication and other services or supplies to and from the Demised Premises (subject to the Tenant not overloading or damaging the same) in and through the Pipes in the Building or any Adjoining Property serving the Demised Premises 141 85 in common with the Landlord and all other persons having the like right PROVIDED ALWAYS that the Landlord may vary the route or alter all or any such services or supplies from time to time and the rights hereby granted shall thereupon apply to such services and supplies as varied or altered subject to any such variation of the route or alteration of the services or supplies not materially adversely affecting the Demised Premises subject to the Landlord endeavouring to minimise any disruption caused thereby and endeavouring to ensure that so far as shall be reasonably possible no interruption in such services or supplies shall result 3. COMMON PARTS OF THE BUILDING The right for the Tenant and all persons expressly or by implication authorised by the Tenant (in common with the Landlord and the Management Company and all persons having a like right):- (a) to use for pedestrian access and egress such of the Common Parts of the Building as shall be necessary for the use and enjoyment of the Demised Premises for all proper purposes and (b) to the exclusive use of the Dedicated Lifts (but upon the Dedicated Lifts ceasing to be Dedicated Lifts to the use of such passenger lifts in the Building as shall from time to time be designated for the Tenant's use) for the purpose only of obtaining access to and egress from the Demised Premises and (c) to use such of the lavatories in the Building as shall from time to time be designated for the Tenant's use (d) to use any delivery area loading bay and goods lifts designated from time to time for the Tenant's use for the purpose only of vehicular access and egress for delivery in and out and loading and unloading of goods and equipment and not for any other purposes Provided always that until such time as the Dedicated Lobby forms part of the Common Parts of the Building the Tenant shall have no right to use the east side entrance lobby area and lifts 4. ENTRY TO OTHER PARTS OF THE BUILDING The right (subject to the provisions of Clauses 4.18 and 4.19) 142 86 for the Tenant and all other persons authorised by the Tenant in common with the Landlord and the Management Company and all others having the like rights and easements at all reasonable times to enter parts of the Building at all reasonable times in order to carry out works of repair or alteration to the Demised Premises or the Pipes serving the same on the following conditions:- (a) the Tenant shall except in case of emergency give reasonable prior written notice to the Landlord and the occupiers (if any) of such adjoining premises of its intention to exercise such right (b) the Tenant shall only exercise such rights insofar as it cannot reasonably carry out such works of repair and alteration from within the Demised Premises and (c) the Tenant shall cause as little inconvenience and damage as reasonably possible and shall without delay make good all damage thereby occasioned to such adjoining premises or any other part of the Building 5. SUPPORT The right of support and protection for the benefit of the Demised Premises from any other part of the Building as now enjoyed 6. CAR PARKING The right for the Tenant and all persons expressly or impliedly authorised by the Tenant at all times to park:- 6.1 Fifty One (51) private motor cars within the car parking area comprised within the Building and which shall be designated by the Landlord in accordance with clause 6.5 and 6.2 Twenty Five (25) private motor cars within the Car Park in Cabot Square 7. LIST OF TENANT'S NAMES The right for the Tenant and its lawful undertenants within the Demised Premises to have their respective names and the premises occupied by them displayed in such manner and in such location as the 143 87 Tenant shall from time to time reasonably require in the main entrance hall of the Building 8. AFFIXING OF ITEMS TO THE STRUCTURE OF THE BUILDING The right (subject to the provisions of Clauses 4.18 and 4.19) for the Tenant and all persons authorised by the Tenant to affix to the walls columns or structural slabs enclosing the Demised Premises such items as will not impair the structural integrity of such walls columns or slabs 9. RIGHTS EXERCISABLE OVER PRIVATE ROADS ON THE ISLE OF DOGS The right for the Tenant and all persons authorised by the Tenant (in common with the Landlord and the Management Company and all other persons having a like right) to exercise the rights of way contained in paragraph 1 of Schedule 1 to the Transfer dated 17th July 1987 referred to in the Fifth Schedule subject to the provisions therein contained 10. MECHANICAL SPACE The right for the Tenant its undertenants and those authorised by it to use the Mechanical Space Area solely for the installation use and maintenance of such mechanical electrical and other systems as the Tenant may require together with all necessary rights of access to such area through such parts of the remainder of the Building as the Landlord may reasonably specify 11. RIGHTS TO USE STAIRCASE IN ATRIUM Subject to the design and specification thereof being approved by the Landlord (such approval not to be unreasonably withheld or delayed) a right to construct and thereafter the exclusive right to use the staircase within the Atrium between the third floor and the sixth floor of the Demised Premises 12. RIGHTS TO USE DEDICATED LOBBY The exclusive right to use on foot only the Dedicated Lobby for the purpose only of access to and egress from the Demised Premises and for any other reasonable purpose connected to the Tenant's use and occupation of the Demised Premises including for the avoidance of 144 88 doubt the right to display its name and business in such form as it shall require and the right to retain security and reception facilities therein 13. ATRIUM The exclusive right to use the Atrium at any time for any reasonable purposes provided that in so doing the Tenant does not cause any disturbance interruption or inconvenience to other occupiers of the Building and provided that (by way of example and not limitation) the Atrium shall not be used for the purposes of storage placement of plant and equipment or installations therefor or for offices 14. TANKS The exclusive right to use the Tanks solely for the purposes of the storage of diesel fuel together with the full and free right to inspect the Tanks at all reasonable times and full and free right of access thereto at all reasonable times and causing as little damage and inconvenience as reasonably possible 145 89 SECOND SCHEDULE EXCEPTIONS AND RESERVATIONS The following rights and easements are excepted and reserved out of the Demised Premises to the Landlord and the Superior Landlord and all other persons authorised by either of them or having the like rights and easements:- 1. PIPES The right to the free passage and running of water sewage surface water drainage gas electricity telecommunications and other services or supplies to and from the Building or any Adjoining Property in and through any of the Pipes which may at any time be in under or passing through or over the Demised Premises 2. ENTRY The right at all reasonable times upon reasonable prior notice except in cases of emergency to enter the Demised Premises the Staircase (if any) and the Dedicated Lobby in order to:- (a) inspect cleanse maintain repair connect to remove lay renew relay replace alter or execute any works to or in connection with the Pipes and any other services in or accessible from the Demised Premises (b) execute repairs decorations alterations and any other works to the Building or any Adjoining Property or to do anything which the Landlord or the Management Company may do under this Lease (c) carry out the Estate Services and to carry out the Building Services PROVIDED THAT the person exercising the foregoing rights shall cause as little inconvenience or damage as reasonably possible and shall make good without delay any damage thereby caused to the Demised Premises and provided further that the Landlord or the person exercising the foregoing rights shall only do so in so far as it or they cannot reasonably carry out such works from outside the Demised Premises 146 90 3. SCAFFOLDING The right to erect scaffolding for the purposes of repairing or cleaning the Building and any buildings now or hereafter erected on the Estate or in connection with the exercise of any of the rights mentioned in this Schedule provided that such scaffolding does not prevent the Tenant's means of access to the Demised Premises 4. LIGHT AND AIR ETC. The rights of light air and all other easements and rights now or hereafter enjoyed by other parts of the Building or the Adjoining Property 5. SUPPORT The right of support protection and shelter now or hereafter for the benefit of other parts of the Building from the Demised Premises 6. FIRE ESCAPES The right to enter the Demised Premises (in times of emergency or during fire drills) for the purpose of obtaining access to or using any of the routes of escape in the Building from time to time 7. BUILDING ON THE ADJOINING PROPERTY The right at any time to build on or execute any works to the Building or any Adjoining Property or any buildings thereon in such manner as the person exercising the right shall reasonably think fit notwithstanding the fact that the same may obstruct affect or interfere with the amenity of the Demised Premises or the passage of light and air to the Demised Premises 8. ALTERATION OF COMMON PARTS The right to extend vary or stop-up the Estate Common Parts or the Common Parts of the Building or any part or parts thereof from time to time if the Landlord shall reasonably deem it desirable for the efficient management security and operation of the Estate or the Building or for the comfort of the owners and tenants on the Estate (but not so that the Tenant's use and occupation of the Demised Premises is thereby materially adversely affected) 147 91 9. USE OF ESTATE COMMON PARTS AND COMMON PARTS OF THE BUILDING The right to regulate and control the use of the Estate Common Parts and the Common Parts of the Building and to make reasonable Regulations for that purpose 148 92 THIRD SCHEDULE RENT REVIEWS 1. DEFINITIONS In this Schedule the following expressions shall have the following meanings:- 1.1 "Review Date" means each of the Review Dates specified in the Particulars and "Relevant Review Date" shall be construed accordingly 1.2 "Adjusted Open Market Rent" means the amount calculated in accordance with the following formula: A = B + (C x D x E) Where: A = the Adjusted Open Market Rent B = the Open Market Rent C = the Open Market Rent divided by the Net Internal Area of the Assumed Premises expressed in square feet (being 325,704 square feet) D = the Net Internal Area of the Ground Floor Area expressed in square feet (being [ ] square feet) E = 25 ---- 100 1.3 "Assumed Premises" means the first second third fourth fifth and sixth floors of the Demised Premises or such of those floors as on the Relevant Review Date continue to be demised by this Lease on the assumption that:- (a) such floors of the Demised Premises have been constructed and fitted out by the Landlord at its own cost in accordance 149 93 with the drawings and specification annexed hereto entitled "Minimum Standard Developer's Finish for Tenant Work" as altered from time to time by alterations carried out by and at the expense of the Landlord and improvements and alterations carried out by the Tenant pursuant to an obligation to the Landlord (b) the Tenant's Works have not been carried out (c) the Tenant has removed all tenant's fixtures and fittings (making good any damage caused to those floors of the Demised Premises in so doing) and has left those floors of the Demised Premises (constructed and fitted out as aforesaid) as clear space 1.4 "Open Market Rent" means (subject to paragraph 4 below) the yearly rack rent at which the Assumed Premises could be expected to be let as a whole at the Relevant Review Date by a willing landlord to a willing tenant with vacant possession and without any premium or any consideration other than rent for the grant thereof for a term of years equal to the unexpired residue of the term demised by this Lease (but not being less than 15 years) and with five yearly open market rent reviews and otherwise on the terms and conditions and subject to the covenants and provisions contained in this Lease other than (i) the amount of the Rent payable hereunder (ii) the provisions of Clause 4.20(c)(i) and (n) and subject to the provisions for the review of the Rent contained in this Schedule other than paragraph 1.10 1.11 1.12 1.13 1.14 paragraph 2 and the proviso to paragraph 4 which shall be deemed to be deleted and making the Assumptions but disregarding the Disregarded Matters 1.5 "the Assumptions" means the following assumptions (if not facts) at the Relevant Review Date:- (a) that the Assumed Premises are fit for immediate occupation and use by any such willing tenant (b) that no work has been carried out to the Assumed Premises by the Tenant any undertenant or their respective predecessors in title during the Term which has affected the rental value of the Assumed Premises 150 94 (c) that if the Assumed Premises or the Building have been destroyed or damaged they have been fully rebuilt and reinstated (d) that the Assumed Premises comply with all statutory and regulatory requirements (e) that all the covenants contained in this Lease on the part of the Tenant have been fully performed and observed (f) that any rent free period or period during which the rent is not payable at the full rate or any other equivalent inducement (whether by means of a capital payment or otherwise) which it would be customary to grant to an ingoing tenant of premises comparable to the Assumed Premises at the Relevant Review Date for the purposes of fitting out only has been granted and has expired (or the full benefit of which has been enjoyed) prior to the Relevant Review Date 1.6 "the Disregarded Matters" means:- (a) any effect on rent of the fact that the Tenant any undertenant or their respective predecessors in title have been in occupation of the Building or any part thereof (b) any goodwill attached to the Demised Premises by reason of the business then carried on at the Demised Premises by the Tenant or any permitted undertenant (c) any increase in rental value of the Assumed Premises attributable to the existence at the Relevant Review Date of any improvement to the Demised Premises or any part thereof carried out after the date of this Lease otherwise than in pursuance of an obligation to the Landlord or its predecessors in title 1.7 "Surveyor" means an independent chartered surveyor of not less than ten (10) years' standing who is experienced in the valuation of property similar to the Demised Premises and is acquainted with the market in the area bounded by the M25 orbital motorway appointed from time to time to determine the 151 95 Open Market Rent pursuant to the provisions of this Schedule and the Surveyor shall act as an arbitrator in accordance with the Arbitration Acts 1950-1979 1.8 "the President" means the President for the time being of the Royal Institution of Chartered Surveyors and includes the duly appointed deputy of the President or any person authorised by the President to make appointments on his behalf 1.9 "Rent Restrictions" means the restrictions imposed by any statute for the control of rent in force on a Review Date or on the date on which any increased rent is ascertained in accordance with this Schedule and which operate to impose any limitation whether in time or amounts on the assessment or the collection of any increase in rent or any part thereof 1.10 "Base Index Date" means 1st February 2000 1.11 "Index" means the Retail Price Index (all items) published by the Central Statistical Office of the Department of the Environment contained in the monthly Digest of Statistics (or contained in any official publication substituted therefor) or such other index as may from time to time be published in substitution therefor or as may be determined in accordance with the provisions of paragraphs 2.5 and 2.6 of this Third Schedule 1.12 "Index Review Date" means 1st February 2001 and each anniversary of that date up to and including 1st February 2004 1.13 "Index Review Figure" means the figure first published or otherwise agreed or determined in respect of the index for the month in which the relevant Index Review Date shall occur 1.14 "Starting Index Figure" means the figure published in the index for the month in which the Base Index Date falls 2. THE INDEXED RENT 2.1 From and including 1st February 2000 up to and including 31st January 2005 the Rent shall be calculated in accordance with the provisions of this paragraph 2 2.2 The Rent for the year commencing 1st February 2000 shall be a 152 96 sum in pounds sterling calculated as follows:- 24 pounds sterling x the Net Internal Area of the Assumed Premises being 325,704 square feet plus 6 pounds sterling x the Net Internal Area of the Ground Floor Area being [ ] square feet 2.3 The Rent for each subsequent year up to and including the year commencing on 1st February 2004 shall be the greater of the Rent payable in the year immediately prior to the relevant year and a sum in pounds sterling calculated as follows:- B A x - C Where:- A = the Rent as calculated in accordance with the provisions of paragraph 2.2 of this Third Schedule B = the Index Review Figure for the relevant Index Review Date and C = the Starting Index Figure 2.4 Until the Index Review Figure in respect of the relevant Index Review Date is first published or otherwise agreed or determined the Tenant shall continue to pay the Rent at the yearly rate payable for the year immediately preceding the relevant Index Review Date and within seven (7) days of service of written demand after the publication agreement or determination of the said Index Review Figure as aforesaid ("the Index Ascertainment Date") any additional amount of Rent for the period commencing on the relevant Index Review Date and ending on the Quarterly Day immediately following the Index Ascertainment Date shall be paid by the Tenant to the Landlord together with interest at the Base Rate from the date 7 days after service of written demand to the Index Ascertainment Date 2.5.1 If there shall be any change in the base figure by reference to which changes in the Index are calculated 153 97 the figure taken to be shown in the Index after such change shall be the figure which would have been shown in the Index if the said base figure had been retained and the appropriate reconciliation shall be made but if for any reason the Index shall be otherwise altered or shall be abolished or replaced there shall be substituted for the purposes of this paragraph 2 of this Third Schedule such similar index of retail price costs (including the altered Retail Price Index) as may from time to time be published by or under the authority of any Ministry or Department of Her Majesty's Government and if no such index is published or if such substitute index shall not provide a reasonably accurate appropriate substitute index for the purposes of this clause there shall be substituted therefor such index or comparable method of calculating the Rent as the parties may agree or failing such agreement to be determined by an independent person (the "Independent Person") who shall be a member of the Institute of Chartered Accountants in England and Wales appointed by the President for the time being of the Institute of Chartered Accountants in England and Wales upon the application of either party 2.5.2 The Independent Person shall act as an expert and the following provisions shall have effect:- (a) the Independent Person shall consider (inter alia) any written representations made on behalf of any party (if made reasonably promptly) but shall not be bound thereby (b) the parties hereto shall use all reasonable endeavours to procure that the Independent Person shall give his decision as speedily as possible (c) the costs of appointing the Independent Person and his costs and disbursements in connection with his duties under this paragraph 2 of this Third Schedule shall be shared between the parties to the dispute in such proportions as the Independent 154 98 Person shall determine or in the absence of such determination then equally between the parties and (d) if the Independent Person shall be or become unable or unwilling to act then the procedure hereinbefore contained for the appointment of an expert may be repeated as often as necessary until a decision is obtained 2.6 If any substitution for the said Retail Price Index or any index previously substituted therefor shall occur pursuant to the provisions of this sub-clause 2.6 the parties hereto shall endeavour to agree the appropriate reconciliation between the index substituted on one hand and the Retail Price Index or any index previously substituted therefor on the other hand and any dispute or difference between the parties hereto in relation to such matters shall be determined by the independent person pursuant to Clause 2.5.2 3. THE RENT From and including the Second Review Date and each Review Date thereafter the Rent shall be equal to the higher of (i) the Rent contractually payable immediately before the Relevant Review Date (or the Rent which would be payable but for any abatement or suspension of Rent under this Lease) and (ii) the Adjusted Open Market Rent (provided always that if the Adjusted Open Market Rent cannot for any reason be ascertained pursuant to paragraph 4 below the Rent shall be as set out in (i) of this paragraph 3 4. AGREEMENT OR DETERMINATION OF THE ADJUSTED OPEN MARKET RENT The Open Market Rent at the Second Review Date and each Review Date thereafter may be agreed in writing at any time between the Landlord and the Tenant but if for any reason the Landlord and the Tenant have not so agreed then from a date three (3) months prior to the Review Date up to the next succeeding Review Date either the Landlord or the Tenant may by notice in writing to the other require the Open Market Rent to be determined by the Surveyor (provided always that the provisions of Clause 2 shall apply in respect of the First Review Date) 155 99 5. APPOINTMENT OF SURVEYOR The Surveyor (in default of agreement between the Landlord and the Tenant) shall be appointed by the President on the written application of either the Landlord or the Tenant made not earlier than six months before the Relevant Review Date and not later than the next succeeding Review Date 6. FUNCTIONS OF THE SURVEYOR (a) The Surveyor shall invite the Landlord and the Tenant to submit to him within such time limits (being not less than fifteen (15) and not more than thirty (30) days) as he shall consider appropriate a valuation accompanied if desired by a statement of reasons and such representations and cross representations as to the amount of the Open Market Rent with such supporting evidence as he may wish (b) Within sixty (60) days of appointment or if he is unable to do so within such period as soon as reasonably practicable the Surveyor shall give to each of the Landlord and the Tenant written notice of the amount of the Open Market Rent as determined by him which amount shall be the Open Market Rent 7. FEES OF SURVEYOR The fees and expenses of the Surveyor including the cost of his nomination shall be payable by the Landlord and the Tenant in such proportions as the Surveyor shall at his discretion direct or in the absence of such a direction in equal shares 8. APPOINTMENT OF NEW SURVEYOR If the Surveyor (acting as an expert) fails to give notice of his determination within eighty (80) days of his appointment or if he dies is unwilling to act or becomes incapable of acting or if for any other reason he is unable to act then either the Landlord or the Tenant may request the President to discharge the said Surveyor and appoint another surveyor in his place which procedure may be repeated as many times as necessary 156 100 9. INTERIM PAYMENTS PENDING DETERMINATION (a) In the event that by the Relevant Review Date the Rent has not been agreed or determined as aforesaid (the date of agreement or determination being herein called "the Determination Date") then in respect of the period (herein called "the Interim Period") beginning with the Relevant Review Date and ending on the day before the Quarterly Day following the Determination Date the Tenant shall pay to the Landlord Rent at the yearly rate payable immediately before the Relevant Review Date (b) As soon as reasonably possible following the Determination Date the Tenant shall pay to the Landlord the amount (if any) by which the Rent paid on account by the Tenant under the provisions of paragraph 9(a) above paid by the Tenant in respect of the Interim Period falls short of the aggregate of Rent payable in respect of the Interim Period together with interest on such shortfall (compounded with monthly rests) at the Base Rate from the date of each relevant under payment to the date of payment 10. RENT RESTRICTIONS On each occasion that Rent Restrictions shall prevent or prohibit either wholly or partially:- (a) the operation of the above provisions for review of the Rent or (b) the normal collection and retention by the Landlord of any increase in the Rent or any instalment or part thereof THEN in each such case:- (i) the operation of such provisions for review of the Rent shall be postponed to take effect on the first date or dates thereafter upon which such operation may occur (ii) the collection of any increase or increases in the Rent shall be postponed to take effect on the first date or dates thereafter that such increase or increases may be collected and/or retained in whole or in part and on as many occasions as shall be required to ensure the collection of the whole increase 157 101 AND until the Rent Restrictions shall be relaxed either partially or wholly the Rent shall be the maximum sum from time to time permitted by the Rent Restrictions 11. MEMORANDA OF REVIEWED RENT As soon as the amount of any reviewed Rent has been agreed or determined memoranda thereof shall be prepared by the Landlord or its solicitors and thereupon shall be signed by or on behalf of the Landlord and the Tenant and annexed to this Lease and the counterpart thereof and the parties shall bear their own costs in respect thereof 12. TIME NOT OF THE ESSENCE For the purpose of this Schedule time shall not be of the essence 158 102 FOURTH SCHEDULE COVENANTS BY THE SURETY 1. INDEMNITY BY SURETY The Surety hereby covenants with the Landlord (and as a separate covenant with the Management Company in relation only to payment of the sums due under clause 9) as a primary obligation that the Tenant or the Surety shall subject to the provisions of clause 8.17 at all times during the Term duly perform and observe all the covenants on the part of the Tenant contained in this Lease including the payment of the rents hereby reserved and all other sums payable under this Lease in the manner and at the times herein specified and the Surety shall indemnify and keep indemnified the Landlord and the Management Company against all proper claims demands losses damages liability costs fees and expenses whatsoever sustained by the Landlord or the Management Company by reason of or arising directly or indirectly out of any default by the Tenant in the performance and observance of any of its obligations or the payment of any rents and other sums 2. SURETY JOINTLY AND SEVERALLY LIABLE WITH TENANT (i) The Surety hereby further covenants with the Landlord and as a separate covenant with the Management Company (in relation only to payment of the sums due under Clause 9) that the Surety is jointly and severally liable with the Tenant (whether before or after any disclaimer by a liquidator or trustee in bankruptcy) for the fulfilment of all the obligations of the Tenant under this Lease and agrees that the Landlord or the Management Company in the enforcement of its rights hereunder may proceed against the Surety as if the Surety was named as the Tenant in this Lease (ii) Notwithstanding the provisions of paragraph (i) above the Landlord and/or the Management Company shall not take any steps to proceed against the Surety in respect of sums due under this Lease unless such sums are not paid within 28 days of becoming due or in respect of any other breach unless that breach has not been remedied as soon as reasonably possible pursuant to Clause 4 159 103 3. WAIVER BY SURETY Subject to paragraph 2(ii) above the Surety hereby waives any right to require the Landlord or the Management Company to proceed against the Tenant or to pursue any other remedy whatsoever which may be available to the Landlord or the Management Company before proceeding against the Surety 4. POSTPONEMENT OF CLAIMS BY SURETY AGAINST TENANT The Surety hereby further covenants with the Landlord and as a separate covenant with the Management Company that the Surety shall during any period in which the Tenant is in breach of this Lease not claim in any liquidation bankruptcy composition or arrangement of the Tenant (here meaning Morgan Stanley UK Group) in competition with the Landlord or the Management Company and shall during any period in which the Tenant is in breach of this Lease remit to the Landlord the proceeds of all judgments and all distributions it may receive from any liquidator trustee in bankruptcy or supervisor of the Tenant (here meaning Morgan Stanley UK Group) and shall hold for the benefit of the Landlord and the Management Company all security and rights the Surety may have over assets of the Tenant whilst any liabilities of the Tenant or the Surety to the Landlord or the Management Company remain outstanding 5. POSTPONEMENT OF PARTICIPATION BY SURETY IN SECURITY The Surety shall not be entitled to participate in any security held by the Landlord or the Management Company in respect of the Tenant's obligations to the Landlord or the Management Company under this Lease or to stand in the place of the Landlord or the Management Company in respect of any such security until all the obligations of the Tenant or the Surety to the Landlord and the Management Company under this Lease have been performed or discharged 6. NO RELEASE OF SURETY None of the following or any combination thereof shall release discharge or in any way lessen or affect the liability of the Surety under this Lease:- (a) any neglect delay or forbearance of the Landlord or the Management Company in endeavouring to obtain payment of the 160 104 rents or other amounts required to be paid by the Tenant or in enforcing the performance or observance of any of the obligations of the Tenant under this Lease (b) any refusal by the Landlord or the Management Company to accept rent tendered by or on behalf of the Tenant at a time when the Landlord was entitled (or would after the service of a notice under Section 146 of the Law of Property Act 1925 have been entitled) to re-enter the Demised Premises (c) any extension of time given by the Landlord or the Management Company to the Tenant (d) any change in the identity constitution structure or powers of any of the Tenant the Surety the Landlord or the Management Company or the liquidation administration or bankruptcy (as the case may be) of either the Tenant or the Surety (e) any legal limitation or any immunity disability or incapacity of the Tenant (whether or not known to the Landlord or the Management Company) or the fact that any dealings with the Landlord or the Management Company by the Tenant may be outside or in excess of the powers of the Tenant (f) any other act omission matter or thing whatsoever whereby but for this provision the Surety would be exonerated either wholly or in part (other than a release under seal given by the Landlord and/or the Management Company as the case may be) 7. DISCLAIMER OR FORFEITURE OF LEASE (a) The Surety hereby further covenants with the Landlord and the Management Company that:- (i) if a liquidator or trustee in bankruptcy shall disclaim or surrender this Lease or (ii) if this Lease shall be forfeited or (iii) if the Tenant shall cease to exist (being the Tenant in whom at the time of such cessation this Lease is vested) 161 105 THEN unless the Leasehold Mortgagee exercises its rights to call for a new lease pursuant to Clause 8.1(b) the Surety shall if the Landlord by notice in writing given to the Surety within one hundred and eighty (180) days after such disclaimer or other event so requires accept from and execute and deliver to the Landlord a counterpart of a new lease of the Demised Premises for a term commencing on the date of the disclaimer or other event and continuing for the residue then remaining unexpired of the Term such new lease to be at the cost of the Surety and to be at the same rents and subject to the same covenants conditions and provisions as are contained in this Lease (b) If the Landlord shall not require the Surety to take a new lease the Surety shall nevertheless within 14 days of receipt of written demand pay to the Landlord a sum equal to the Rent and other sums that would have been payable under this Lease but for the disclaimer or other event in respect of the period from and including the date of such disclaimer or other event until the expiration of one hundred and eighty (180) days therefrom or until the Landlord shall have granted a lease of the Demised Premises to a third party (whichever shall first occur) 8. BENEFIT OF GUARANTEE AND INDEMNITY Subject to Clause 8.17 this guarantee and indemnity shall enure for the benefit of the successors and assigns of the Landlord and the Management Company respectively under this Lease without the necessity for any assignment thereof 162 106 FIFTH SCHEDULE MATTERS TO WHICH THE DEMISED PREMISES ARE SUBJECT So far as the same relate to and affect the Demised Premises and are still subsisting in relation to the Demised Premises:- 1. the entries at the date hereof registered in or pending registration in the Property and Charges Registers of Registered Title No EGL 202850 but for the avoidance of doubt not including any of the entries relating to registered charges in favour of Lloyd's Bank Plc 163 107 SIXTH SCHEDULE CAR PARK SERVICES AND ESTATE SERVICES (a) In this Schedule:- (i) references to "maintain" shall mean maintain inspect test service repair overhaul amend rebuild (but only where (a) it shall not be economically viable to repair or (b) the Landlord is acting in accordance with the principles of good estate management) renew reinstate replace and shall include where appropriate treat wash down cleanse paint decorate empty and drain and the expression "maintenance" shall be construed accordingly (ii) "Services" shall mean Car Park Services and Estate Services jointly or individually (iii) "Serviced Areas" shall mean the Car Park and the Estate Common Parts jointly or individually (b) In deciding the extent nature and quality of the relevant service or services from time to time the Management Company shall at all times act reasonably (c) In performing the Services and any other services hereunder the Management Company shall be entitled to employ or procure or permit the employment of managers agents contractors or others PART A THE SERVICES Subject to paragraphs (b) and (c) above the following services to be carried out in accordance with the principles of good estate management shall constitute the Services:- 1. SERVICED AREAS To maintain the Serviced Areas 2. APPARATUS PLANT MACHINERY ETC. To maintain and operate all apparatus plant machinery and 164 108 equipment comprised in or otherwise serving the Serviced Areas from time to time and the buildings housing them but (in the case of the Car Park) excluding any apparatus plant machinery and equipment which is used exclusively for the purposes of short-term or hourly parking 3. PIPES To maintain all Pipes within the Serviced Areas but (within the Estate Common Parts) only those Pipes the use of which is shared by the occupiers of more than one building on the Estate 4. FIRE ALARMS ETC. To maintain any smoke and/or smoke fire alarms and ancillary apparatus and fire prevention and fire fighting equipment and apparatus and other safety equipment and ancillary apparatus and systems comprised in the Serviced Areas and in any event to maintain fire and smoke detection fire preventive and fire fighting equipment including sprinklers hydrants hosereels extinguishers fire alarms fire escapes and fire escape routes and general means of escape to the extent required to comply in relation to the Serviced Areas with statutory requirements and the requirements of responsible authorities or underwriters or insurance companies 5. LIGHTING To keep lit at appropriate times all appropriate parts of the Serviced Areas 6. ROADS MALLS ETC OPEN Without prejudice to any right of the Landlord or the Management Company hereunder so far as shall be reasonably practicable to keep open and unobstructed the access and circulation areas the roadways streets plazas malls and other vehicular and pedestrian ways and similar areas comprised in the Serviced Areas (subject only to:- (a) any temporary closure from time to time or (b) closure at certain hours for reasons of security or operational purposes) 165 109 7. SECURITY SURVEILLANCE AND VISITOR CONTROL To provide security services and personnel including where appropriate in the Management Company's discretion closed circuit television and/or other plant and equipment for the purpose of surveillance and supervision of users of the Serviced Areas provided that such services and personnel shall not extend to the Building 8. PROVISION OF SIGNS AND GENERAL AMENITIES In the Management Company's discretion to provide and maintain direction signs and notices seats and other fixtures fittings chattels and amenities for the convenience of tenants and their visitors and for the enjoyment or better enjoyment of such parts of the Serviced Areas as are available from time to time for use by the occupiers of and visitors to the Estate and/or members of the public as the Landlord or the Management Company may determine 9. ORNAMENTAL FEATURES GARDENS ETC In the Management Company's discretion to provide and maintain hard and soft landscaping and planting within the Serviced Areas including fountains sculptures architectural artistic or ornamental features or murals and to keep all such parts of the Serviced Areas as may from time to time be laid out as landscaping (including water features) neat clean planted (where appropriate) properly tended and free from weeds and the grass cut 10. FIXTURES FITTINGS ETC To provide and maintain fixtures fittings furnishings finishes bins receptacles tools appliances materials equipment and other things for the maintenance appearance upkeep or cleanliness of the Serviced Areas and the provision of the services set out in this part of the Schedule 11. WINDOWS As often as the Management Company may consider desirable to clean the exterior and interior of all windows and window frames in any building included in the Serviced Areas and to provide and maintain cradles runways and carriages in connection with such cleaning 166 110 12. REFUSE To provide and operate or procure the provision and operation of means of collection compaction and disposal of refuse and rubbish (including litter within the Serviced Areas and if necessary pest control) from the Serviced Areas and other parts of the Estate and to provide and maintain plant and equipment for the collection compaction treatment packaging or disposal of the same 13. TRAFFIC (So far as the same are not for the time being the exclusive responsibility of a public authority) to endeavour to control so far as practicable traffic flow and parking within the Car Park and traffic on the roads and service roads forming part of the Serviced Areas and parking therein and for that purpose to provide such working and mechanical systems as the Management Company considers appropriate including wheel clamping immobilising and removal of vehicles 14. ENERGY AND SUPPLY SERVICES To arrange the provision of water fuel oil gas heating cooling air conditioning ventilation electricity and other energy and supply services to the Estate Common Parts as may be required for use in running or operating any service to the Serviced Areas or distributed to occupiers of the Estate including so far as appropriate standby power generators and plant excluding any such energy and supply services required to operate the apparatus plant machinery and equipment referred to in the exclusion to paragraph 2 of this Part of this Schedule 15. WATER AREAS AND WATERSIDE AND RIVERSIDE WALKWAYS To use reasonable endeavours to procure that the responsible party maintains and operates or (in the Management Company's discretion) to maintain and operate the dock water retention system comprised in or immediately adjoining the Estate and to endeavour to keep water areas within the Estate Common Parts free from debris refuse and other material and (to the extent reasonably practicable) to take reasonable steps to treat the same as necessary and to minimise pollution therein and to provide and maintain such seating security and safety equipment on any waterside walkways as the Management Company considers appropriate 167 111 16. TRANSPORT SERVICES So far as the Landlord or the Management Company considers desirable or appropriate to provide and (as circumstances permit) operate and maintain vehicles or other modes of transport staff premises and equipment for a transport service or services within or for the benefit of the Estate 17. OTHER SERVICES To provide such other services for the benefit of the Estate or the convenience of the users or occupiers thereof as the Landlord or the Management Company may in accordance with the principles of good estate management consider desirable or appropriate 168 112 SIXTH SCHEDULE PART B 1. STAFF The cost of staff (including direct or indirect labour) for the provision of services to the Serviced Areas and for the general management (including accountancy functions) operation and security of the Serviced Areas (including traffic control and policing) and all other incidental expenditure including but not limited to:- (a) salaries insurance health pensions welfare severance and other payments contributions and premiums (b) the cost of uniforms working clothes tools appliances materials and furniture furnishings stationery items and equipment (including telephones) for the proper performance of the duties of any such staff (c) providing maintaining repairing decorating and lighting any accommodation and facilities for staff including any residential accommodation for staff employed on the Serviced Areas and all rates gas electricity and other utility charges in respect thereof and any actual or notional rent for such accommodation but excluding all costs of staff above the grade of the Estate Manager or its equivalent and (in respect of the Car Park) excluding the cost of those staff whom it would not be necessary to employ if the Car Park were used exclusively for private parking by tenants of the Estate 2. COMMON FACILITIES The amount which shall require to be paid for or towards the costs charges fees and expenses in making laying repairing maintaining and lighting as the case may be any roads ways forecourts passages pavements party walls or fences party structures Pipes or other conveniences and easements whatsoever which may belong to or be capable of being used or enjoyed by the Estate in common with any Adjoining Property 169 113 3. TRANSPORTATION FACILITIES The amount which the Landlord or Management Company pays for or towards the costs charges fees and expenses of the maintenance operation and lighting of or security for transportation facilities which provide services to or for the benefit of the Estate including (without limitation) the Canary Wharf Docklands Light Railway Station and associated premises and areas and/or the fixtures fittings and equipment thereon 4. OUTGOINGS All existing and future rates (including water rates) taxes duties charges assessments impositions and outgoings (whether parliamentary parochial local or of any other description and whether or not of a capital or non-recurring nature) payable in respect of the Serviced Areas or any part thereof 5. STATUTORY REQUIREMENTS The cost of carrying out any works to the Serviced Areas required to comply with any statute 6. REPRESENTATIONS The cost of taking any steps deemed desirable or expedient by the Landlord or the Management Company for complying with making representations against or otherwise contesting the incidence of the provisions of any statute concerning town planning rating public health highways streets drainage and all other matters relating or alleged to relate to the Serviced Areas or the Estate as a whole or in which occupiers within the Estate have a common interest 7. FEES OF THE ESTATE SURVEYOR AND THE ACCOUNTANT The proper and reasonable fees costs charges expenses and disbursements of the Car Park Surveyor the Estate Surveyor and the Accountant for or in connection with the performance of the duties ascribed to the Car Park Surveyor the Estate Surveyor and the Accountant respectively under the provisions of Clause 9 170 114 8. MANAGEMENT (a) The proper and reasonable fees of managing agents employed or retained by the Management Company for or in connection with the general overall management and administration and supervision of the Estate and the Car Park (excluding rent collection) (b) A fee to the Management Company in connection with the management of the Estate equal to 10% of the aggregate of the Car Park Expenditure and the Estate Expenditure (excluding any items in this paragraph 8) but so that if a firm of managing agents is appointed to manage the Estate the fee chargeable by the Management Company in any Car Park Financial Year or Estate Financial Year under this paragraph 8(b) shall be reduced (but not below zero) by an amount equivalent to the fees (net of Value Added Tax) charged by such managing agents and included in Car Park Expenditure and(or) Estate Expenditure for that Car Park Financial Year or Estate Financial Year pursuant to paragraph 8(a) above 9. INSURANCE (a) The cost of insuring:- (i) the Serviced Areas against loss or damage by the Insured Risks in such sum as shall be the full reinstatement cost thereof and including architects' surveyors' and other professional fees (and Value Added Tax thereon) and expenses incidental thereto the cost of shoring up demolition and site clearance compliance with local authority requirements and similar expenses and loss of income (if any) for such period as shall be reasonable having regard to the likely period required for obtaining planning permission and reinstating the Serviced Areas (ii) any engineering and electrical plant and machinery being part of the Serviced Areas against sudden and unforeseen damage breakdown and inspection to the extent that the same is not covered by paragraph 9(a)(i) above (iii) property owners liability and public liability or such 171 115 other insurances as the Landlord may from time to time deem necessary to effect (b) The cost of periodic valuations for insurance purposes (c) Works required to the Serviced Areas in order to satisfy the insurers of the Serviced Areas (d) Any amount which may be deducted or disallowed by the insurers pursuant to the excess provision in the Landlord's insurance policy upon settlement or adjudication of any claim by the Landlord 10. PUBLIC ACTIVITIES The cost of any displays concerts exhibitions or other forms of public entertainment or activity undertaken within the Serviced Areas or for the benefit or enjoyment of the Estate or its occupiers 11. PUBLIC TOILETS The cost of providing operating and maintaining public toilet facilities within the Serviced Areas or for the benefit or enjoyment of the Estate or its occupiers 12. MISCELLANEOUS ITEMS (a) Leasing or hiring any of the items referred to in Part A or Part B of this Schedule (b) Interest commission and fees in respect of any moneys included in Car Park Expenditure and/or Estate Expenditure borrowed to finance the provision of services and any of the items referred to in Part A or Part B of this Schedule 172 116 SEVENTH SCHEDULE BUILDING SERVICES (a) In this Schedule references to "maintain" shall mean maintain inspect test service repair overhaul amend rebuild renew (but only where (i) it shall not be economically viable to repair or (ii) the landlord is acting in accordance with the principles of good estate management) reinstate replace and shall include where appropriate treat wash down cleanse paint decorate empty and drain and the expression "maintenance" shall be construed accordingly (b) In deciding the extent nature and quality of the relevant service or services from time to time the Management Company shall at all times act reasonably (c) In performing the Building Services and any other services hereunder the Management Company shall be entitled to employ or procure or permit the employment of managers agents contractors or others PART A BUILDING SERVICES Subject to paragraphs (b) and (c) above the following services to be carried out in accordance with the principles of good estate management shall constitute the Building Services:- 1. THE RETAINED PARTS To maintain the Retained Parts 2. COMMON PARTS OF THE BUILDING At all times to keep clean and maintained the Common Parts of the Building including the windows thereof and to keep the same adequately lighted where appropriate during the Business Hours and such other hours as the Management Company may in its discretion from time to time decide 173 117 3. LIFTS To provide a lift service by the operation of the lifts now or from time to time installed 4. HOT AND COLD WATER To provide an adequate supply of hot and cold water to the wash basins in the Building 5. AIR CONDITIONING To provide sufficient air conditioning to the Building including the Common Parts of the Building intended to be air conditioned and to maintain all equipment plant and machinery used in connection therewith other than such as is the responsibility of the Tenant PROVIDED THAT the cost of the same shall only be included within this paragraph to the extent that a charge is not made pursuant to Clause 4.3(d) Clause 4.6(a) or Clause 4.16(c) in this Lease or the equivalent clause or clauses in any other lease of part or parts of the Building 174 118 SEVENTH SCHEDULE PART B 1. RETAINED PARTS The cost of lighting heating furnishing carpeting and equipping and (as necessary) altering the Retained Parts including but not limited to the provision in the main entrance halls and lift lobby areas of floral decorations desks tables chairs and other fixtures and fittings 2. APPARATUS PLANT MACHINERY ETC The cost of maintaining and operating all apparatus plant machinery and equipment serving the Building from time to time including (without prejudice to the generality of the foregoing and so far as for the time being serving the Building as aforesaid) lifts lift shafts escalators travelators stand-by generators and boilers and items relating to mechanical ventilation heating cooling air conditioning and humidification 3. FIRE ALARMS ETC. The cost of maintaining any fire alarms and ancillary apparatus and fire prevention and fire fighting equipment and apparatus and other safety equipment comprised in the Retained Parts or serving the Building and in any event of maintaining fire and smoke detection fire preventive and fire fighting equipment including sprinklers hydrants hosereels extinguishers fire alarms fire escapes and fire escape routes and general means of escape to the extent required to comply in relation to the Retained Parts with statutory requirements and the requirements of responsible authorities or underwriters or insurance companies 4. SECURITY AND SURVEILLANCE The cost of providing security services and personnel including in the Management Company's discretion closed circuit television and/or other plant and equipment for the purpose of surveillance and supervision of users of or visitors to the Building and for the purpose of monitoring organising and supervising the use of any 175 119 loading bays delivery areas and goods lifts within the Building Provided that such services and personnel shall not extend to the Demised Premises 5. PROVISION OF SIGNS AND GENERAL AMENITIES The cost of providing and maintaining direction signs and notices seats and other fixtures fittings chattels and amenities for the convenience of tenants and their visitors and for the enjoyment or better enjoyment of such parts of the Common Parts of the Building as are available from time to time for use by the occupiers of and visitors to the Building and/or members of the public as the Landlord or the Management Company may determine 6. ORNAMENTAL FEATURES GARDENS ETC The cost of providing and maintaining hard and soft landscaping and planting within the Retained Parts including fountains sculptures architectural artistic or ornamental features or murals and of keeping all such parts of the Retained Parts as may from time to time be laid out as landscaping (including water features) neat clean planted (where appropriate) properly tended and free from weeds and the grass cut 7. FIXTURES FITTINGS ETC The cost of providing and maintaining fixtures fittings furnishings finishes bins receptacles tools appliances materials equipment and other things for the maintenance appearance upkeep or cleanliness of the Retained Parts and the provision of any services for the Building 8. WINDOWS The cost of cleaning the exterior and (save where the responsibility of a tenant) interior of all windows and window frames in the Retained Parts and of providing and maintaining cradles runways and carriages in connection with such cleaning 9. REFUSE The cost of providing and operating or procuring the provision and operation of means of collection compaction and disposal of refuse 176 120 and rubbish (including litter within the Common Parts of the Building and if necessary pest control) from the Building and of providing and maintaining plant and equipment for the collection compaction treatment packaging or disposal of the same 10. ENERGY AND SUPPLY SERVICES Subject to the proviso to paragraph 5 of Part A of this Schedule the cost of the provision of water fuel oil gas heating cooling air conditioning ventilation electricity and other energy and supply services to the Building as may be required for use in running or operating any service to the Building or distributed to occupiers of the Building including so far as appropriate standby power generators and plant 11. OTHER SERVICES (a) The cost of providing such other services for the benefit of the Building or the convenience of the occupiers thereof including without limitation a receipt and dispatch centre for items delivered by courier as the Management Company may in accordance with the principles of good estate management consider desirable or appropriate and from which the Tenant shall receive a benefit (b) The cost of providing such of the services falling within the definition of Car Park Services and the costs and expenses set out in Part B of the Sixth Schedule as shall be appropriate to provide in respect of any car park within the Building 12. STAFF The cost of staff (including direct or indirect labour) for the provision of services to the Building and for the general management (including accountancy functions) and operation of the Building and all other incidental expenditure including but not limited to:- (a) salaries insurance health pension welfare severance and other payments contributions and premiums (b) the cost of uniforms working clothes tools appliances materials and furniture furnishings stationery items and equipment (including telephones) for the proper performance of the duties of any such staff 177 121 (c) providing maintaining repairing decorating and lighting any accommodation and facilities for staff including any residential accommodation for staff employed on the Building and all rates gas electricity and other utility charges in respect thereof and any actual or notional rent for such accommodation 13. COMMON FACILITIES The amount which shall require to be paid or contributed towards the costs charges fees and expenses in making laying repairing maintaining rebuilding decorating cleansing and lighting as the case may be any roads ways forecourts loading docks and bays passages pavements party walls or fences party structures Pipes or other conveniences and easements which may belong to or be capable of being used or enjoyed by the Building in common with any Adjoining Property but not any amounts in respect of any of the matters referred to in the Sixth Schedule 14. OUTGOINGS All existing and future rates (including water rates) taxes duties charges assessments impositions and outgoings whatsoever (whether parliamentary parochial local or of any other description and whether or not of a capital or non-recurring nature) payable in respect of the Retained Parts of any part thereof 15. STATUTORY REQUIREMENTS The cost of carrying out any works to the Retained Parts required to comply with any statute 16. REPRESENTATIONS The cost of taking any steps deemed desirable or expedient by the Landlord or the Management Company for complying with making representations against or otherwise contesting the incidence of the provisions of any statute concerning town planning rating public health highways streets drainage and all other matters relating or alleged to relate to the Retained Parts or the Building as a whole or in which occupiers within the Building have a common interest 178 122 17. REGULATIONS The cost of compliance with the Regulations so far as the same relate to the provision of the services and other items referred to in this Schedule 18. ENFORCEMENT OF COVENANTS ETC The cost of enforcing the covenants in any other leases of Lettable Areas within the Building for the general benefit of the tenants thereof as determined by the Landlord or the Management Company 19. FEES OF THE BUILDING SURVEYOR AND THE ACCOUNTANT The proper and reasonable fees costs charges expenses and disbursements of the Building Surveyor and the Accountant for or in connection with the performance of the duties ascribed to the Building Surveyor and the Accountant respectively under the provisions of Clause 9 of this Lease 20. MANAGEMENT (a) The proper and reasonable fees of managing agents employed or retained by the Management Company for or in connection with the general overall management and administration and supervision of the Building (excluding rent collection) (b) A fee to the Management Company in connection with the management of the Building such fee being equal to 10% of the Building Expenditure (excluding any items in this paragraph 20) but so that if a firm of managing agents is appointed to manage the Building the fee chargeable by the Management Company in any Building Financial Year under this paragraph 20(b) shall be reduced (but not below zero) by an amount equivalent to the fees (net of Value Added Tax) charged by such managing agents and included in Building Expenditure for that Building Financial Year pursuant to paragraph 20(a) above 21. MISCELLANEOUS ITEMS (a) Leasing or hiring any of the items referred to in Part A or Part B of this Schedule 179 123 (b) Interest commission and fees in respect of any moneys included in Building Expenditure borrowed to finance the provision of services and any of the items referred to in Part A or Part B of this Schedule 22. INSURANCE (a) Works required to the Building in order to satisfy the insurers of the Building (b) Any amount which may be deducted or disallowed by the insurers pursuant to any excess provision in the Landlord's insurance policy upon settlement or adjudication of any claim by the Landlord 23. DECORATIONS Providing and maintaining Christmas and other special decorations for the Building 24. NAME BOARDS The cost of providing and installing name boards of such size and design as the Landlord or the Management Company may in its absolute discretion determine in the main entrance to the Building and at such other locations as the Landlord or the Management Company may reasonably consider desirable 25. GENERALLY Any reasonable and proper costs and expenses (not referred to above) which the Management Company may incur in providing such other services and in carrying out such other works as the Management Company in its absolute discretion may deem desirable or necessary for the benefit of the Building or any part of it or the tenants or occupiers thereof or for securing or enhancing any amenities of or within the Building or in the interest of good estate management 180 124 EIGHTH SCHEDULE FORM OF THE SERVICE CHARGE DEED TO BE EXECUTED UNDER CLAUSE 12 THIS DEED is made the day of 199 BETWEEN: (1) [ ] (registration number [ ]) whose registered office is at [ ] (the "Management Company") and (2) [ ] (registration number [ ]) whose registered office is at [ ](the "Sub-tenant") NOW THIS DEED WITNESSETH AND IT IS HEREBY AGREED AND DECLARED as follows:- 1. INTERPRETATION 1.1 In this Deed except where the context otherwise requires the following words and expressions have the following meanings:- "Accountant" means a Chartered Accountant or a firm of Chartered Accountants appointed or employed by the Landlord or the Management Company to perform the functions of the Accountant under this Deed "Base Rate" means the base rate for the time being of Barclays Bank PLC or some other London clearing bank nominated from time to time by the Landlord or, in the event of such base rate being abolished, such other reasonable comparable rate of interest as the Landlord shall from time to time determine "Building" means the land and premises known as 20 Cabot Square Canary Wharf West India 181 125 Dock Isle of Dogs London E14 being more particularly described in the Lease and shown edged red on Plan 1 attached to the Lease together with the building erected thereon of which the property demised by the Lease forms part and of which the Demised Premises forms part and each and every part of them and the appurtenances belonging to them and all additions, alterations and improvements to them "Building Computing Date" means the first day of July in each year and the anniversary of that date in each succeeding year or such other date as the Management Company may from time to time nominate "Building Expenditure" means the aggregate of (avoiding double counting):- (i) all reasonable costs fees expenses and outgoings whatsoever (whether or not of a recurring nature) reasonably and properly incurred in respect of or incidental to the provision of all or any of:- (a) the Building Services and (b) the costs and expenses set out in Part B of the Seventh Schedule to the Lease (whether or not the Landlord or the Management Company is obliged by the Lease to incur the same) and (when any expenditure is incurred in relation to the Building and other premises) the proportion of 182 126 such expenditure which is reasonably attributable to the Building as properly determined from time to time by the Building Surveyor (ii) such reasonable sums as the Landlord or the Management Company shall reasonably and properly consider desirable to set aside from time to time (which setting aside shall be deemed to be an item of expenditure actually incurred) for the purpose of providing for periodically recurring items of expenditure, whether or not of a capital nature and whether recurring at regular or irregular intervals and for anticipated expenditure in respect of any of the Building Services to be provided or other items within Part B of the Seventh Schedule to the Lease ("the Building Reserve Fund") (iii) the cost of replacement of any item where such replacement is reasonably necessary whether or not the replacement item is of a superior quality design or utility to the item being replaced but where the replacement item is of superior quality it shall be as near as practicable to the quality of the item being replaced (iv) interest payments credited to the Sub-tenant under Clause 4.4(b) and credited or paid to any tenants of premises within the Building under the provisions of clauses similar 183 127 to the said clause (v) any Value Added Tax or other tax payable on or in connection with any such items in paragraphs (i) (ii) (iii) and (iv) above (so far as not recoverable by the Landlord or the Management Company (as the case may require) as an input credit) but shall exclude:- (aa) any capital expenditure incurred in the initial construction of the Building or for the construction or carrying out of any of the works which the Landlord agreed to carry out in the agreement pursuant to which the Lease was granted and capital expenditure incurred for the purpose of the initial establishment of the services described in the Seventh Schedule to the Lease (bb) any expenditure referable to operating charges and expenses and maintenance of any Car Park (cc) any costs incurred by the Landlord in remedying any latent or inherent defects or shrinkages or other latent or inherent faults not apparent at the date hereof and which manifest themselves (a) in the Building during a period of 10 years or (b) in relation to the rebuilding or replacement 184 128 of the structure of the Building during a period of 15 years from practical completion of the Building which periods commenced on 22nd July 1991 and there shall be deducted from the foregoing for the purposes of calculating the Building Expenditure the following:- (aaa) any contributions in respect of Building Services or the costs set out in Part B of the Seventh Schedule to the Lease recoverable in the relevant Building Financial Year under leases or agreements for leases or other documents imposing obligations in relation to Building Services relating to premises which for that Building Financial Year are not included within the definition of Y for the purposes of the definition of Building Service Charge Percentage (bbb) any revenue received from a third party (other than a tenant in its capacity as such whether under 185 129 any lease agreement for lease or some other deed relating to Building Services or the Building Service Charge Percentage or the Building Expenditure) derived from the rendering of Building Services or any activity the cost of which is included in Part B of the Seventh Schedule to the Lease including any insurance proceeds received by the Landlord or the Management Company in respect of the insurance of the Building to the extent that such insurance proceeds relate to an item the cost of which is included in the Building Expenditure and (ccc) any contribution in respect of the rendering of any of the Building Services or any activity the cost of which is included in Part B of the Seventh Schedule to the Lease recoverable in the 186 130 Relevant Financial Year where any such Building Services or other activity was provided at the request of or for the benefit of any tenants or occupiers of the Building and which would not have been provided but for such request whether or not such service or activity is of direct or indirect benefit to the Sub-tenant (ddd) interest payments received from the Sub-tenant under Clause 4.4(a) and from other tenants within the Building under the provisions of clauses similar to the said clause in relation to Building Expenditure (eee) interest (if any) earned on the deposit by the Management Company of on account payments made by tenants in respect of Estimated Building Expenditure "Building Financial means the period from a Building Year" Computing Date to but not including the 187 131 next succeeding Building Computing Date "Building Services" means the services set out in Part A of the Seventh Schedule to the Lease "Building Service means the figure calculated as follows:- Charge Percentage" X - x 100 Y where:- "X" = the Net Internal Area of the Demised Premises and Y" = the aggregate Net Internal Areas of Lettable Areas within the Building used or intended to be used for office purposes or uses ancillary thereto "Building Surveyor" means a chartered surveyor or firm of chartered surveyors appointed or employed by the Landlord or Management Company to perform the functions of the Building Surveyor hereunder "Car Park" means the car parks within the Estate (other than the car parking area (if any) within the Building) reasonably designated as such from time to time in writing by the Landlord "Car Park Computing means the first day of July in each year Date" and the anniversary of that date in each succeeding year or such other date as the Landlord or the Management Company 188 132 may from time to time nominate "Car Park Expenditure" means the aggregate of:- (i) all reasonable costs fees expenses and outgoings whatsoever (whether or not of a recurring nature) reasonably and properly incurred in respect of or incidental to the provision of all or any of:- (a) the Car Park Services and (b) the costs and expenses set out in Part B of the Sixth Schedule to the Lease and (when any expenditure is incurred in relation to the Car Park and other premises) the proportion of such expenditure which is reasonably attributable to the Car Park as properly determined from time to time by the Car Park Surveyor (ii) such reasonable sums as the Landlord or the Management Company shall reasonably and properly consider desirable to set aside from time to time (which setting aside shall be deemed to be an item of expenditure actually incurred) for the purpose of providing for periodically recurring items of expenditure whether or not of a capital nature and whether recurring at regular or irregular intervals and for anticipated expenditure in respect of any of the Car Park Services to be provided or other items within Part B of the Sixth Schedule to the 189 133 Lease ("the Car Park Reserve Fund") (iii) the cost of replacement of any item where such replacement is reasonably necessary whether or not the replacement item is of a superior quality design or utility to the item being replaced but where the replacement item is of superior quality it shall be as near as practicable to the quality of the item being replaced (iv) interest payments credited to the Tenant under Clause 4.4(b) and credited or paid to any tenants of premises within the Estate under the provisions of clauses similar to the said clause (v) any Value Added Tax or other tax payable on or in connection with any such items in paragraphs (i) (ii) (iii) and (iv) above (so far as not recoverable by the Landlord or Management Company as an input credit) but shall exclude any capital expenditure incurred in the initial construction of the Car Park or for the purpose of the initial establishment of the services described in the Sixth Schedule to the Lease and there shall be deducted from the foregoing for the purposes of calculating the Car Park Expenditure the following:- (aa) any revenue (other than revenue derived from public 190 134 parking) received from a third party (other than a tenant in its capacity as such) in connection with the rendering of Car Park Services or any activity the cost of which is included in Part B of the Sixth Schedule to the Lease including any insurance proceeds received by the Landlord or the Management Company in respect of the insurance of the Car Park to the extent that such insurance proceeds relate to an item the cost of which is included in the Car Park Expenditure (bb) any contribution in respect of the rendering of any of the Car Park Service or activity the cost of which is included in Part B of the Sixth Schedule to the Lease recoverable in the Relevant Financial Year where any such Car Park Services or other activity was provided at the request or for the benefit of any tenants or occupiers of the Estate and which would not have been provided but for such request (cc) interest payments received from the Sub-tenant under Clause 4.4(a) and from other tenants within the Estate under the provisions of clauses similar to the said clause in relation to Car Park Expenditure 191 135 (dd) interest (if any) earned on the deposit by the Management Company of on account payments made by tenants in respect of Estimated Car Park Expenditure "Car Park Financial means the period from a Car Park Year" Computing Date to but not including the next succeeding Car Park Computing Date "Car Park Services" means the services set out in Part A of the Sixth Schedule to the Lease insofar as the same are attributable to the Car Park "Car Park Service means the figure calculated as follows:- Charge Percentage" X - x 100 Y where:- "X" = the number of cars which the Sub-tenant has the right to park in the Car Park and "Y" = the total number of car parking spaces from time to time in the Car Park the number being 2014 at the date hereof "Car Park Surveyor" means a chartered surveyor or firm of chartered surveyors appointed or employed by the Management Company or a Group Company of the Management Company to perform the functions of the Car Park Surveyor hereunder 192 136 "Common Parts of the means those parts and amenities of the Building" Building which are from time to time provided and/or properly designated by the Landlord for common use by tenants and occupiers of the Building with or without others and all persons authorised by them [including (but only after the Tenant shall have surrendered part of the property demised by the Lease pursuant to Clause 10 of the Lease) the Dedicated Lobby and the Dedicated Lifts but excluding the Estate Common Parts and the Lettable Areas] "Dedicated Lifts" means the passenger lifts in the west core of the Building and includes all lift shafts and plant apparatus and equipment relating thereto "Dedicated Lobby" menus the area shown hatched [ ] on Plan [2] of the Lease "Demised Premises" means [ ] "Estate" means the land and water areas commonly known as Canary Wharf London E14 shown edged green on Plan 2 to the Lease with any additional land and water areas in which the Landlord or a Group Company of the Landlord acquires a freehold or leasehold interest and which the Landlord from time to time reasonably designates (acting in accordance with principles of good estate management having regard to the nature and quality of the Estate) as part of the Estate and all buildings and appurtenances thereon and all additions alterations and 193 137 improvements thereto "Estate Common Parts" means those parts of the Estate (such parts not being publicly adopted) which are from time to time intended for the common use and enjoyment of the owners and tenants of the Estate and persons claiming through or under them and/or properly designated as such by the Landlord (whether or not other parties are also entitled to use and enjoy the same) (but excluding all car parks within the Estate) and for the avoidance of doubt including:- (a) roads to the point of connection with a highway maintainable at public expense (b) bridges kerbs pavements footpaths parks and esplanades landscaped areas open areas quay side areas dock water areas and river piers (c) plaza malls retail malls walkways pedestrian ways concourses and circulation areas staircases travelators escalators elevators ramps and lifts loading bays forecourts service roads service areas service decks and service bays (d) the Pipes therein and not intended to be the responsibility of a particular owner or tenant or group of owners or tenants and (e) the foundations pilings sub-structures floors walls roofs ramps access ways entrances exits and 194 138 other matters or things which make up those parts of the Estate which are not and are not intended to be the responsibility of a particular owner or tenant or group of owners or tenants "Estate Computing Date" means the first day of July in each year and the anniversary of that date in each succeeding year or such other date as the Management Company may from time to time nominate "Estate Expenditure" means the aggregate (avoiding double counting) of:- (i) all reasonable costs fees expenses and outgoings (whether or not of a recurring nature) reasonably and properly incurred by the Landlord or the Management Company in respect of or incidental to the provision of all or any of the Estate Services and the costs and expenses set out in Part B of the Sixth Schedule to the Lease (whether or not the Landlord or the Management Company is obliged by the Lease to incur them) and (when any expenditure is incurred in relation to the Estate and other premises) the proportion of such expenditure which is reasonably attributable to the Estate as reasonably determined from time to time by the Estate Surveyor (ii) suchreasonable sums as the Management Company shall reasonably and properly consider desirable to set aside from time to time (and 195 139 the amount set aside shall be treated as an item of expenditure actually incurred) for the purpose of providing for periodically recurring items of expenditure whether or not of a capital nature and whether recurring at regular or irregular intervals and for anticipated expenditure in respect of any of the Estate Services to be provided or other items within Part B of the Sixth Schedule to the Lease (the "Estate Reserve Fund") (iii) the cost of replacement of any items with an item of equivalent quality pursuant to the Sixth Schedule to the Lease where such replacement is reasonably necessary (but where such an item is of superior quality it shall be as near as practicable to the quality of the item being replaced) (iv) interest payments credited to the Sub-tenant under clause 4.4(b) and credited or paid to any owners or tenants of premises within the Estate under the provisions of clauses similar to the said clause and (v) any Value Added Tax payable on or in connection with any such items in paragraphs (i) (ii) (iii) and (iv) above (so far as not recoverable by the Landlord or the Management Company (as the case may require)) as an input credit 196 140 but shall exclude:- (aa) any capital expenditure for the initial construction of the Demised Premises and any building or erection within the Estate (including for the avoidance of doubt those parts of the Estate not yet built or erected) or for the initial creation of the Common Parts and capital expenditure incurred for the purpose of the initial establishment of the services described in the Sixth Schedule to the Lease (bb) any expenditure referable to operating charges and expenses and maintenance of any car parks in the Estate provided however there shall be included in the Estate Expenditure a fair and reasonable proportion of expenditure referable to the maintenance of common elements shared between any car parks and the Common Parts (cc) any capital expenditure incurred in the demolition of any buildings or erections on the Estate or the Common Parts and any capital expenditure incurred in any replacement or reconstruction of such buildings or erections save where (in accordance with the principles of good estate management) such demolition replacement or reconstruction is necessary in connection 197 141 with the provision of the Estate Services and (dd) any costs incurred by the Landlord in remedying any latent or inherent defects or shrinkages or other latent or inherent faults in the Common Parts of the Estate not apparent at the date hereof and which manifest themselves before 30th June 2001 and further there shall be deducted from the foregoing aggregate for the purposes of calculating the Estate Expenditure the following:- (aaa) any contributions in respect of Estate Services or the costs set out in Part B of the Sixth Schedule to the Lease recoverable in the relevant Estate Financial Year under transfers leases agreements for lease or other documents imposing obligations in relation to the Estate Services relating to premises which for the Financial Year are not included within the definition of Y for the purposes of the definition of Estate Service Charge Percentage (bbb) any revenue received from a third party (other than an owner or a tenant in 198 142 its capacity as such) (whether under a lease agreement for lease or some other deed relating to the Estate Services the Estate Service Charge Percentage or the Estate Expenditure) derived from or in connection with the rendering of Estate Services or any activity the cost of which is included in Part B of the Sixth Schedule to the Lease including any insurance proceeds received by the Management Company or the Landlord in respect of the insurance of the Common Parts to the extent that such insurance proceeds relate to an item the cost of which is included in Estate Expenditure (ccc) any contribution in respect of the rendering of any Estate Service or any activity the cost of which is included in Part B of the Sixth Schedule to the Lease recoverable in the relevant Financial Year where any such Estate Service or other activity was provided at the express request of and to or for the benefit of one or more owners tenants or occupiers of the Estate at a time or 199 143 in circumstances when or in which such service or activity would not have been provided but for such request regardless of whether such service or activity is of direct or indirect benefit to the Sub-tenant and (ddd) interest payments received from the Sub-tenant under clause 4.4(a) and from other owners and tenants within the Estate under the provisions of clauses similar to the said clause in relation to Estate Expenditure (eee) interest (if any) earned on the deposit by the Management Company of on account payments made by tenants in respect of Estimated Estate Expenditure "Estate Financial Year" means the period from an Estate Computing Date to but not including the next succeeding Estate Computing Date "Estate Services" means the services set out in Part A of the Sixth Schedule of the Lease insofar as the same are attributable to the Estate excluding the Car Park "Estate Service Charge means the figure calculated as follows:- Percentage" X - x 100 Y 200 144 where:- "X" = the Net Internal Area of the Demised Premises and "Y" = the aggregate Net Internal Areas of the Lettable Areas of the buildings built and used or intended to be used for Retail Use Hotel Use or Office Use (as hereinafter defined) on those parts of the Estate known as parcels B-1 DS-7 RT-1 FC-1 FC-2 FC-3 FC-4 FC-5 and FC-6 PROVIDED THAT as from each Estate Computing Date during the Term Y shall (in addition to the buildings referred to in the above definition) include the Net Internal Area of the Lettable Areas within each additional building on the Estate used or intended to be used for Office Use Retail Use or Hotel Use where in respect of that building at that Estate Computing Date either:- (i) at least two (2) years shall have elapsed since the issue of a practical completion certificate for that entire building under the building contract relating thereto or (ii) at least 50% of the Net Internal Area of the Lettable Areas therein has become occupied and PROVIDED FURTHER that the parcels known as B-1 DS-7 RT-1 FC-1 FC-2 FC-3 FC-4 FC-5 and FC-6 shall not be removed 201 145 from the denominator "Estate Surveyor" has the like meaning as "Building Surveyor" save that the word "Building" in the latter definition shall be deleted and the word "Estate" substituted therefor "Estimated Building means for any Building Financial Year Expenditure" such sum as the Management Company shall notify in writing to the Sub-tenant as a fair and reasonable estimate of the Building Expenditure for such Building Financial Year after deducting any anticipated Building Appropriation (as defined in Clause 4.2(a)) provided that the Management Company may from time to time during any such Building Financial Year notify the Sub-tenant and other tenants and occupiers of the Building in writing of a revised figure for the Estimated Building Expenditure "Estimated Car Park shall have the like meaning as Expenditure" "Estimated Building Expenditure" save that the word "Building" where it appears in the latter definition shall be deleted and the words "Car Park" substituted therefor "Estimated Estate shall have the like meaning as Expenditure" "Estimated Building Expenditure" save that the word "Building" where it appears in the latter definition shall be deleted and the word "Estate" substituted therefor "Group Company" in relation to a company (the "Relevant 202 146 Company") means a company within the same group of companies (as that term is defined in Section 42 of the Landlord and Tenant Act 1954) as the Relevant Company "Hotel Use" means use as a hotel including uses within hotels of banqueting rooms conference facilities and areas used for Retail Use within hotels "Interest Rate" means three per cent. (3%) per annum above the Base Rate "Landlord" means the Landlord from time to time under the Lease and includes the person for the time being entitled to the reversion immediately expectant on the determination of the term granted by the Lease "Lease" means an underlease of parts of the Ground and the whole of the First Second Third Fourth Fifth and Sixth floors of the property known as 20 Cabot Square Canary Wharf London E14 (of which the Demised Premises forms part) dated 1995 and made between Canary Wharf Limited (1) Canary Wharf Management Limited (2) Morgan Stanley UK Group (3) and Morgan Stanley Group Inc (4) for a term of 25 years commencing on 1st February 1995 "Lettable Areas" means those parts of any building (including the Building) leased or intended to be leased to occupational tenants but excluding any parts of such building leased or intended to be leased 203 147 to public utilities for the purposes of the carrying out of their statutory obligations and the corresponding parts of any building the freehold of which has been sold including parts of such building occupied by the freehold owner of the building or any Group Company of that owner "Management Company" means the party named as "Management Company" in this Deed or such other company as may be substituted therefor by the Landlord pursuant to Clause 8.6 of the Lease "Net Internal Area" has the meaning given to it by the Code of Measuring Practice published on behalf of the Royal Institution of Chartered Surveyors and the Incorporated Society of Valuers and Auctioneers (Fourth Edition November 1993) and shall be properly determined from time to time by the Estate Surveyor (ignoring works carried out by tenants or occupiers during the subsistence of the lease or underlease in existence at the time of such determination) "Office Use" means use as an office and includes banking halls and trading floors "Pipes" means all pipes sewers drains ducts conduits gutters watercourses wires cables channels flues service corridors trunking and all other conducting media and any ancillary apparatus "Quarterly Day" 204 148 means each of the first day of January, first day of April, first day of July and first day of October "Relevant Advance shall mean (as the case may require) the Payment" aggregate of all Estate Payments on Account made in any Estate Financial Year or the aggregate of all Car Park Payments on Account made in any Car Park Financial Year or the aggregate of all Building Payments on Account made in any Building Financial Year "Relevant Estimated means all or any of the Estimated Estate Expenditure" Expenditure the Estimated Car Park Expenditure and the Estimated Building Expenditure as the case may require "Relevant Expenditure" means the Estate Expenditure the Car Park Expenditure or the Building Expenditure as the case may require "Relevant Financial means the Estate Financial Year the Car Year" Park Financial Year or the Building Financial Year as the case may require "Relevant Service means the accounts the certificate and Charge Accounts" the statements referred to in Clause 4.2 for any Relevant Financial Year "Relevant Service means:- Charge Percentage" (A) in the case of the Building Expenditure (and the Estimated Building Expendi- ture) the Building Service Charge Percentage 205 149 (B) in the case of the Car Park Expenditure (and the Estimated Car Park Expendi- ture) the Car Park Service Charge Percentage and (C) in the case of the Estate Expenditure (and the Estimated Estate Expenditure) the Estate Service Charge Percentage "Relevant Surveyor" means the Estate Surveyor the Car Park Surveyor or the Building Surveyor as the case may require "Retail Use" means use for:- (A) all types of retailing including hairdressers snackbars travel agents funeral directors and showrooms (B) banks building societies estate agents betting offices and similar uses where the services are provided principally to visiting members of the public (C) restaurants cafes public houses winebars and food take aways 1.2 In this deed unless otherwise specified:- (a) any reference to a clause is a reference to a clause of this Deed and any reference to a sub-clause is to a reference to a sub-clause of the clause in which the reference appears (b) headings to clauses are for convenience only and do not affect the interpretation of this Deed (c) references to a person shall include a company or other legal entity and words importing the singular number shall 206 150 include the plural number and vice versa (d) words importing persons include firms companies and corporations and vice versa (e) words and phrases used in this Deed without further definition shall have the same meanings as are given to them in the Lease save that any reference to "the Demised Premises" shall in this Deed be interpreted as a reference to the Demised Premises as defined in this Deed and (f) reference to Value Added Tax include any tax of a similar nature substituted for or levied in addition to Value Added Tax 2. COVENANT TO PERFORM SERVICES The Management Company covenants with the Sub-tenant (subject in each case as provided in Clauses 8.4 8.5 and 8.6 of the Lease) to perform and observe or procure to be performed and observed the Building Services the Car Park Services and the Estate Services in accordance with the provisions of the Lease and to manage the Estate in such manner as shall be in accordance with principles of good estate management 3. COVENANT TO PAY SERVICE CHARGES The Sub-tenant covenants with the Management Company to pay the sums payable in accordance with Clause 4, plus Value Added Tax at the times and in the manner provided herein without any reduction abatement set-off counterclaim or deduction (save those that the Sub-tenant must make by law) 4. SERVICE CHARGE 4.1 The Sub-tenant covenants with the Management Company to pay to the Management Company:- (A) the Relevant Service Charge Percentage (as indicated in the last available certificate by the Relevant Surveyor issued pursuant to Clause 4.2 but subject to the provisions of Clause 4.5 and Clause 4.7) of each of the Relevant Estimated Expenditure in advance by equal quarterly instalments on the 207 151 Quarterly Days during each Relevant Financial Year the first payment of each being a proportionate sum in respect of the period from and including [ ] to the next Quarterly Day to be made on the [ ] and (B) (if any of the Relevant Estimated Expenditure is revised as contemplated above) within 14 days after receipt of written demand the Relevant Service Charge Percentage of the amount by which any such revised figure for the Relevant Estimated Expenditure exceeds the figure previously notified to the Sub-tenant Each such payment made by the Sub-tenant under this Clause 4.1 being referred to herein as (in the case of the Estimated Estate Expenditure) an "Estate Payment on Account" (in the case of the Estimated Car Park Expenditure) a "Car Park Payment on Account" and (in the case of the Estimated Building Expenditure) a "Building Payment on Account" 4.2 The Management Company shall, as soon as reasonably practicable after the end of each Relevant Financial Year prepare and send to the Sub-tenant:- (a) an account or accounts, each duly certified by the Accountant, showing the Estate Expenditure the Car Park Expenditure and the Building Expenditure for each Relevant Financial Year and the amount (if any) which the Management Company has chosen to utilise from the Estate Reserve Fund the Car Park Reserve Fund or the Building Reserve Fund as the case may be in defraying respectively Estate Expenditure Car Park Expenditure or Building Expenditure pursuant to Clause 4.6 (respectively "the Estate Appropriation" "the Car Park Appropriation" and "the Building Appropriation") and containing a fair summary of the various items comprising the Relevant Expenditure (b) a certificate or certificates by the Relevant Surveyor showing the Relevant Surveyor's calculation of each Relevant Service Charge Percentage for each Relevant Financial Year containing a fair summary of how such percentage was calculated 208 152 (c) a statement or statements of each Relevant Service Charge Percentage of each Relevant Expenditure for each Relevant Financial Year after taking into account as the case may require the Estate Appropriation the Car Park Appropriation or the Building Appropriation and the same shall (save for obvious error and subject to the provisions of sub-clause 4.2(d)) be conclusive evidence for the purposes of this Deed of all matters of fact referred to in each said account certificate and statement (d) (i) Subject to the Sub-tenant paying the reasonable and proper costs of the Landlord and the Management Company (including but not limited to the costs of security supervision and assistance) the Sub-tenant may in relation to an account certificate or statement in respect of Estate Expenditure or Building Expenditure or Car Park Expenditure (as referred to in Clause 4.2(a)) within two months of receiving such account certificate or statement (time to be of the essence) by giving written notice to the Landlord and the Management Company have access to and to inspect the service charge books of account for (or the electronic equivalent thereof) and all vouchers receipts invoices and other documentation relevant to the calculation of the relevant expenditure for that Relevant Financial Year and the two immediately preceding Financial Years for the purpose of inspection and verification provided always that such right may not be exercised more frequently than once in any period of three years (ii) At any time within ninety (90) days after the Sub-tenant has access to inspect the books of account pursuant to paragraph (i) the Sub-tenant may by notice to the Management Company dispute that Relevant Service Charge Account on the basis that any item of expenditure or part thereof has been improperly included in such account and the Sub-tenant shall set out the reasons for the dispute in such notice and the items in dispute provided that if the Sub-tenant does not give any such notice within the said period (as to which time shall be of the essence) it shall be deemed to have agreed the relevant Relevant Service Charge Account 209 153 (iii) In the event that the Sub-tenant and the Management Company are unable to agree upon the items disputed by the Sub-tenant in this notice under Sub-clause (ii) then either of them may require the dispute to be referred to an independent expert (acting as such) who shall be a chartered surveyor with not less than ten (10) years' experience of managing substantial multi-tenanted properties and who shall be appointed in default of agreement on the application of either party by the President for the time being of the Royal Institution of Chartered Surveyors or his duly appointed deputy and if such independent expert shall be or become unable or unwilling to act the referral procedure referred to in this clause may be repeated as many times as may be necessary provided that for the avoidance of doubt it is agreed that the Management Company may require to have included in the Relevant Service Charge Account during the reference to the independent expert any item of expenditure which may properly be included in Relevant Expenditure for the year in question but which had been inadvertently omitted (iv) The costs of any expert appointed shall be borne as he shall direct Provided that in the event that the expert determines that the Relevant Service Charge Percentage of Relevant Expenditure in any disputed Relevant Service Charge Account should be reduced by less than five per cent. (5%) or should be increased the parties agree that the costs of the expert are to be borne by the Sub-tenant in any event unless the Management Company shall have required the inclusion of any item pursuant to the proviso in sub-clause (iii) above in which case the costs of any expert shall be borne as he shall direct (v) Notwithstanding any dispute that the Sub-tenant shall pay the amount demanded in respect of the Relevant Service Charge Percentage of the Relevant Expenditure in the Relevant Service Charge Account and in the event that the expert determines the Relevant Service Charge 210 154 Percentage of the Relevant Expenditure to be a lower or higher sum than that specified in the disputed Relevant Service Charge Account then the Management Company shall forthwith issue a duly corrected Relevant Service Charge Account and either the Management Company shall refund within fourteen (14) days of the issue of such corrected Relevant Service Charge Account all service charges overpaid by the tenant or the Sub-tenant shall within fourteen (14) days of receipt of the corrected Relevant Service Charge Account pay the balance due to the Management Company as the case may require 4.3 For the purposes of Clause 4.1 until such time as a certificate is issued by the Relevant Surveyor pursuant to Clause 4.2 the Estate Service Charge Percentage shall be [ %] the Car Park Service Charge Percentage shall be [ %] and the Building Service Charge Percentage shall be [ %] 4.4 (a) If the Relevant Service Charge Percentage of the Relevant Expenditure for any Relevant Financial Year (after taking into account as the case may require the Estate Appropriation the Car Park Appropriation or the Building Appropriation) shall exceed the Relevant Advance Payment for that Relevant Financial Year the excess together with interest thereon at the Base Rate calculated from and including as the case may require the Estate Computing Date the Car Park Computing Date or the Building Computing Date next following the end of that Relevant Financial Year until the date of payment shall be paid by the Sub-tenant to the Management Company within 14 days of receipt by the Sub-tenant of written demand or (b) If the Relevant Service Charge Percentage of the Relevant Expenditure for any Relevant Financial Year (after taking into account as the case may require the Estate Appropriation the Car Park Appropriation or the Building Appropriation) shall be less than the Relevant Advance Payment for that Relevant Financial Year the overpayment made by the Sub-tenant together in each case with interest thereon at the Base Rate calculated as aforesaid up to the date when the next Relevant Advance Payment on Account is due shall be credited to the Sub-tenant against the next Estate Payment on Account Car Park Payment on Account or 211 155 Building Payment on Account as the case may require 4.5 Any omission by the Management Company to include in Relevant Expenditure in any Relevant Financial Year a sum expended in that Relevant Financial Year shall not preclude the Management Company from including such sum in Relevant Expenditure in any of the three immediately subsequent Relevant Financial Years 4.6 (a) Each of the Estate Reserve Fund the Car Park Reserve Fund and the Building Reserve Fund shall be held upon trust during the period of eighty (80) years from the date of the Lease (which shall be the perpetuity period applicable hereto) respectively for the persons who from time to time shall be owners tenants or occupiers of the Estate the Car Park or the Building and each shall be held in a separately designated interest bearing bank account (and the Landlord and/or the Management Company shall notify the bank or procure that the bank is notified of such trust) and the Landlord or the Management Company shall utilise the same with interest accruing thereon but after deducting tax payable thereon and on such interest in defraying expenditure of the nature referred to in part (ii) of the definition of Building Expenditure (in the case of the Building Reserve Fund) and in the corresponding paragraphs of the definitions of Estate Expenditure and Car Park Expenditure (in the case of the Estate Reserve Fund and Car Park Reserve Fund respectively) and at the expiry of such perpetuity period the sums standing to the credit of each of the Estate Reserve Fund the Car Park Reserve Fund and the Building Reserve Fund and unexpended shall be paid respectively to the persons who shall then be the tenants of the Estate the Car Park or the Building in shares equal to their respective Relevant Service Charge Percentages the Management Company being entitled absolutely to any share payable in respect of:- (i) any Lettable Area which is unlet at such time and (ii) any Car Parking Spaces which are not allocated for use by any persons at such time (b) The Management Company shall procure that upon the service by the Landlord of notice under Clause 8.6 of the Lease 212 156 (insofar as the same shall relate to the Estate Services) the Estate Reserve Fund and (insofar as the same shall relate to the Car Park Services) the Car Park Reserve Fund and (insofar as the same shall relate to the Building Services) the Building Reserve Fund (or in each case so much thereof as remains after the defraying of such expenditure as aforesaid) shall be transferred to the Landlord or any other company nominated by the Landlord in such notice to be held upon the relevant trusts referred to in this Clause 4.6 and upon the terms herein mentioned 4.7 If at any time or times during the subsistence of this Deed the Management Company considers that circumstances have arisen making the Relevant Service Charge Percentage or the formula for calculating the same on the basis contemplated in the definition thereof unreasonable or inequitable the Management Company may give written notice to the Sub-tenant requiring a variation to the Relevant Service Charge Percentage or the said formula which is fair and reasonable in all the circumstances and in the event of there being any dispute regarding such variation to the Relevant Service Charge Percentage the matter shall be referred to a single Arbitrator to be appointed in default of agreement upon the application of the Management Company or the Sub-tenant by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors in accordance with the provisions of the Arbitration Acts 1950 to 1979 4.8 The Management Company may in its reasonable discretion having regard to the interests of good estate management discontinue withhold add to commence extend vary or make any alterations to any of the Estate Services the Car Park Services or the Building Services or any of the items referred to in Part B of the Sixth and Seventh Schedules to the Lease from time to time if the Management Company shall reasonably deem it desirable to do so in the interests of (or for the comfort of) the owners and tenants on or for the efficient management security and operation of the Estate the Car Park or the Building (as the case may be) or for any other reason in the interests of good estate management 4.9 The Sub-tenant covenants with the Management Company that the Sub-tenant will pay within fourteen (14) days of receipt by the Sub-tenant of written demand such charge as may reasonably be 213 157 determined by the Management Company in respect of any service (whether or not constituting an Estate Service a Car Park Service or a Building Service) provided at the request of the Sub-tenant to or for the benefit of the Sub-tenant (whether or not exclusively) at a time or in circumstances when or in which such service would not have been provided but for such request 4.10 The provisions of this Clause shall continue to apply notwithstanding the expiration or sooner determination of the term of the lease or other tenancy pursuant to which the Sub-tenant occupies the Demised Premises but only in respect of the period down to such expiration or sooner determination the Relevant Service Charge Percentage of the Relevant Expenditure payable for that Relevant Financial Year being apportioned for the said period on a daily basis [4.11 Notwithstanding the foregoing provisions of this Clause 4 in calculating the Building Service Charge Percentage of the Estimated Building Expenditure and the Building Service Charge Percentage of the Building Expenditure the amounts payable by the Sub-tenant shall until such time as the Dedicated Lobby becomes part of the Common Parts of the Building be adjusted to the intent that the Sub-tenant shall pay [a pro-rata proportion by reference to the area of the Demised Premises to the area of the premises demised by the Lease] of such Building Expenditure incurred by the Landlord and/or the Management Company and properly attributable to the Dedicated Lobby and the Dedicated Lifts and no part of such Building Expenditure attributable to the entrance lobby at the eastern side of the Building and the passenger lifts lift shafts and plant apparatus and equipment relating thereto in the eastern core of the Building] 5. SERVICE OF NOTICES ON TENANT The Management Company shall provide to the Tenant under the Lease a copy of every Relevant Service Charge Account and every notice which the Management Company serves on the Sub-tenant at the same time as and whenever such account or notice is given by the Management Company to the Sub-tenant and such account and copy notice shall be addressed to the Tenant under the Lease at the address last furnished to the Management Company and no notice to the Sub-tenant shall be deemed to have been given by the Management Company unless and until a copy thereof shall have been so given to the Tenant under the Lease 214 158 and the Management Company will accept performance by the Tenant under the Lease of any covenant condition or agreement on the Sub-tenant's part contained in this Deed 6. TERMINATION 6.1 If during the subsistence of this Deed the Sub-tenant shall fail to make payment of the Relevant Service Charge Percentage of the Relevant Expenditure within twenty-eight (28) days after the relevant Quarterly Day or (as the case may be) the date of service of the first demand on the Sub-tenant for payment of it then the Management Company shall be entitled to serve notice of that default on the Sub-tenant and if the Sub-tenant has not within a period of twenty-eight (28) days from the date of service of the notice made payment of the Relevant Service Charge Percentage of the Relevant Expenditure the Management Company shall be entitled to determine this Deed by notice to the Sub-tenant but without prejudice to the rights or remedies of the Management Company or the Sub-tenant against the other 6.2 The provisions of this Deed shall in any case terminate forthwith upon the expiration or determination of the lease or other tenancy pursuant to which the Sub-tenant occupies the Demised Premises unless upon such expiration or other determination the Sub-tenant is granted a new tenancy or enters into a new arrangement for its continued occupancy of the Demised Premises or unless it continues to occupy pursuant to any statutory continuation or extension of its tenancy or occupancy arrangement 6.3 The Sub-tenant shall be entitled to determine this Deed at any time by service of written notice on the Management Company and upon service of such notice this Deed shall forthwith determine 7. INTEREST ON ARREARS Without prejudice to any other right remedy or power contained in this Deed or otherwise available to the Management Company if any sum of money payable by the Sub-tenant to the Management Company remains unpaid for fourteen (14) days after the date when payment was due the Sub-tenant shall pay interest on it at the Interest Rate from and including the date on which payment was due to the date of payment to the Management Company (both before and after any judgment) and for 215 159 the avoidance of doubt a payment under this Deed shall be deemed due from the date of written demand for it Provided that if any such sum is not paid as a result of a bona fide dispute between the Management Company and the Sub-tenant then interest shall be payable at Base Rate and not at the Interest Rate from the date on which the sum becomes payable until the end of a period of fourteen (14) days from the date on which the dispute is resolved or determined 8. NOTICES 8.1 Any demand or notice required to be made given to or served on the Sub-tenant under this Deed shall be in writing and shall be duly and validly made given or served if addressed to the Sub-tenant (and if there shall be more than one of them then any one of them) and delivered personally or sent by pre-paid registered or recorded delivery mail or sent by telex or fax addressed to its registered or principal office 8.2 Any notice required to be given to or served on the Management Company shall be in writing and shall be duly and validly given or served if sent by pre-paid registered or recorded delivery mail or sent by telex or fax addressed to the Management Company at its registered or principal office 9. CHOICE OF GOVERNING LAWS This Deed shall be governed by and construed in accordance with English Law 10. COUNTERPART This Deed may be executed in any number of counterparts and by the parties on separate counterparts each of which shall constitute an original but all the counterparts shall together constitute but one and the same document IN WITNESS of which this Deed has been executed and has been delivered on the date which appears first on page 1 216 160 THE COMMON SEAL of the ) MANAGEMENT COMPANY was affixed to ) this Deed in the presence of:- ) Director Director/Secretary THE COMMON SEAL of the ) [SUB-TENANT] was affixed to this ) Deed in the presence of:- ) Director Director/Secretary ON LEASE THE COMMON SEAL of CANARY ) WHARF LIMITED was affixed in ) the presence of:- ) Director Secretary ON COUNTERPART THE COMMON SEAL of CANARY ) WHARF MANAGEMENT LIMITED was ) affixed in the presence of:- ) Director Secretary 217 161 THE COMMON SEAL of MORGAN ) STANLEY UK GROUP was affixed in ) the presence of:- ) Director Director THE CORPORATE SEAL of ) MORGAN STANLEY GROUP INC ) was affixed in the presence:- ) Director Director 218 162 ANNEXURE 2 DEED OF RELEASE THIS DEED OF RELEASE is made the [ ] day of [ ] [ ] BETWEEN (1) [ ] (Company Registration No. [ ]) whose registered office is at [ ] (hereinafter called the "Landlord") (2) [ ] (Company Registration No. [ ]) whose registered office is at [ ] (hereinafter called the "Tenant") WHEREAS 1. This Deed is supplemental to an underlease of the premises known as part ground and first to sixth floors of 20 Cabot Square Canary Wharf (the "Premises") dated [ ] 19[ ] and made between Canary Wharf Limited (1) Canary Wharf Management Limited (2) Morgan Stanley UK Group (3) and Morgan Stanley Group Inc. (4) (the "Lease"). 2. The reversion immediately expectant on the term of years granted by the Lease [remains vested[ OR [is now vested] in the Landlord and the residue of the said term [remains vested[ OR [is now vested] in the Tenant. 3. The Tenant was released from all future liability pursuant to the Lease in accordance with Clause 8.17 of the Lease with effect from and including [ ] and it is a requirement of that clause that the Landlord should enter into this deed in order to record such release. NOW THIS DEED WITNESSETH as follows: 1. The Landlord hereby releases absolutely with effect from and including [ ] the Tenant from all of its obligations contained in and all liabilities whatsoever pursuant to the Lease or any other deed or document supplemental to the Lease and all damages 219 163 actions proceedings costs claims demands and expenses arising from such obligations and liabilities but without prejudice to any claim which the Landlord may have in respect of any antecedent breach of covenant by the Tenant. 2. It is hereby certified that the transaction hereby effected does not form part of a larger transaction or of a series of transactions in respect of which the amount or value or the aggregate amount or value of the consideration exceeds [60,000 pounds sterling]. IN WITNESS WHEREOF the parties have executed this document as a Deed the day and year first before written. 220
INDEX ----- CLAUSE PAGE - ------ ---- 1. DEFINITIONS 2. INTERPRETATION 3. DEMISE AND RENTS 4. TENANT'S COVENANTS 4.1 Rents 4.2 Interest on arrears 4.3 Outgoings 4.4 Utility authorities 4.5 Repairs 4.6 Plant and machinery 4.7 Decorations 4.8 Cleaning 4.9 Yield up 4.10 Rights of entry by Landlord and the Management Company 4.11 To comply with notices 4.12 Overloading floors and services and installation of wiring etc. 4.13 Pipes 4.14 Cooking 4.15 Dangerous materials and use of machinery 4.16 Heating cooling and ventilation and other systems 4.17 User 4.18 Alterations signs and visual amenity 4.19 Works carried out to the Demised Premises 4.20 Alienation 4.21 Registration of dispositions 4.22 Disclosure of information 4.23 Landlord's costs 4.24 Statutory requirements 4.25 Planning Acts 4.26 Statutory notices 4.27 Defective premises 4.28 Fire precautions and equipment etc. 4.29 Encroachments and easements 4.30 Reletting and sale notices 4.31 Value Added Tax 4.32 Regulations 4.33 Covenants affecting reversion 4.34 Notification of local employees 4.35 Docklands Light Railway 5. LANDLORD AND MANAGEMENT COMPANY'S COVENANTS RELATING TO SERVICES 6. LANDLORD'S COVENANTS 6.1 Quiet enjoyment 6.2 Guarantee of Management Company's Obligations 6.3 Superior Title 6.4 Atrium Dedicated Lobby and Dedicated Lifts 6.5 Facilities 6.6 Notification of Numbers of Local Employees 6.7 Value Added Tax 6.8 Naming rights 7. INSURANCE 7.1 Landlord to insure 7.2 Commissions and restriction on Tenant insuring 7.3 Tenant's Works
221 7.4 Landlord's fixtures 7.5 Landlord to produce evidence of insurance 7.6 Cesser of rent 7.7 Destruction of the Building 7.8 Option to determine 7.9 Payment of insurance moneys refused 7.10 Insurance becoming void 7.11 Requirements of insurers 7.12 Notice by Tenant 8. PROVISOS 8.1 Forfeiture 8.2 No implied easements 8.3 Exclusion of warranty as to user 8.4 Landlord's and Management Company's obligations 8.5 Exclusion of Landlord's and Management Company's liability 8.6 Right for Landlord to perform or to nominate another company to perform Management Company's obligations 8.7 Development of Adjoining Property 8.8 Exclusion of statutory compensation 8.9 Use of premises outside Business Hours 8.10 Notices 8.11 Invalidity of certain provisions 8.12 Plans drawings etc. 8.13 Confidentiality provision 8.14 Waiver etc. of regulations 8.15 Applicable Law and Jurisdiction 8.16 Representations 8.17 Cesser of Liability
9. SERVICE CHARGE 10. OPTION TO TERMINATE 11. LANDLORD'S FURTHER PAYMENT 12. SERVICE CHARGE DEED FIRST SCHEDULE Rights Granted SECOND SCHEDULE Exceptions and Reservations THIRD SCHEDULE Rent Reviews FOURTH SCHEDULE Covenants by the Surety FIFTH SCHEDULE Matters to which the Demised Premises are subject SIXTH SCHEDULE Car Park Services and Estate Services SEVENTH SCHEDULE Building Services EIGHTH SCHEDULE Form of the Service Charge Deed to be executed under Clause 12 Annexure Specification 222 Deed of Release Minimum Standard Developer's Finish 223 LEASE PARTICULARS 1. DATE: day of 199 2. LEASE OR UNDERLEASE: Underlease 3. PARTIES (a) LANDLORD: CANARY WHARF LIMITED whose registered office is at One Canada Square Canary Wharf London E14 5AB (Company registration number 1971312) (b) MANAGEMENT COMPANY: CANARY WHARF MANAGEMENT LIMITED whose registered office is at One Canada Square Canary Wharf London E14 5AB (Company registration number 2067510) (c) TENANT: MORGAN STANLEY UK GROUP whose registered office is at 25 Cabot Square Canary Wharf London E14 8QA (Company registration number 1281415) (d) SURETY: MORGAN STANLEY GROUP INC a Corporation incorporated under the laws of the State of Delaware having an office at 1251 Avenue of the Americas New York New York 10020 4. DEMISED PREMISES: Those parts of the Ground and the whole of the First Second Third Fourth Fifth and Sixth floors of the Building shown for the purpose of identification only edged red
224 and in part hatched green on plans 2 3 4 5 6 7 and 8 and after any surrender and determination of any part of the Demised Premises pursuant to Clause 10 the Demised Premises shall be those parts of the Building which remain subject to this Lease 5. BUILDING: ALL THAT land and premises including (if any) the dockbed and water thereover the quayside and the parts of the dock walls located therein known as 20 Cabot Square Canary Wharf West India Docks Isle of Dogs London E14 and more particularly shown edged red on Plan 1 together with the Building erected thereon 6. TERM and TERM 25 years commencing on 1st February COMMENCEMENT DATE: 1995 7. INITIAL RENT: For each of the first three years of the Term THIRTY SEVEN THOUSAND FIVE HUNDRED POUNDS (37,500 pounds sterling) and thereafter FIVE MILLION ONE HUNDRED AND SIXTY SEVEN THOUSAND THREE HUNDRED AND THIRTY EIGHT POUNDS (5,167,338 pounds sterling) 8. RENT COMMENCEMENT DATE: 1st February 1995 9. RENT REVIEW DATES: 1st February 2005 and every fifth anniversary of such day during the Term 10. ESTATE SERVICE CHARGE The percentage to be PERCENTAGE: established pursuant to Clause 9.1(n) (subject 225 to Clause 9.8) 11. CAR PARK SERVICE CHARGE The percentage to be PERCENTAGE: established pursuant to Clause 9.1(i) (subject to Clause 9.8) 12. BUILDING SERVICE CHARGE The percentage to be PERCENTAGE: established pursuant to Clause 9.1(d) (subject to Clause 9.8) 13. DECORATION YEARS: The year ending 31st January 2000 and thereafter every subsequent fifth year of the Term 14. PERMITTED USER: Offices including banking halls and trading floors together with associated kitchen restaurant and recreational facilities and any other uses ancillary to any of these uses as required from time to time by the Tenant EX-11 4 COMPUTATION OF EARNINGS PER SHARE 1 MORGAN STANLEY GROUP INC. Exhibit 11 COMPUTATION OF EARNINGS PER SHARE (IN MILLIONS, EXCEPT SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, JANUARY 31, JANUARY 31, 1995 1994 1993 ---------- ---------- ---------- PRIMARY: Common stock and common stock equivalents: Average common shares outstanding 76,988,251 74,643,452 76,124,581 Average common shares issuable under employee benefit plans 1,908,357 1,564,836 1,999,219 ---------- ---------- ---------- Total average common and common equivalent shares outstanding 78,896,608 76,208,288 78,123,800 ========== ========== ========== Earnings: $395 $786 $510 Net income Less: Preferred stock dividend requirements 65 55 49 ---------- ---------- ---------- Earnings applicable to common shares $330 $731 $461 ========== ========== ========== Primary earnings per share $4.18 $9.59 $5.90 ========== ========== ========== FULLY DILUTED: Common stock and common stock equivalents: Average common shares outstanding 76,988,251 74,643,452 76,124,581 Average common shares issuable under employee benefit plans 1,908,357 1,719,887 2,024,054 Common shares issuable upon conversion of preferred stock 3,808,874 3,834,109 3,811,270 ---------- ---------- ---------- Total average common and common equivalent shares outstanding 82,705,482 80,197,448 81,959,905 ========== ========== ========== Earnings: $395 $786 $510 Net income Less: Preferred stock dividend requirements 62 51 42 ---------- ---------- ---------- Earnings applicable to common shares $333 $735 $468 ========== ========== ========== Fully diluted earnings per share $4.03 $9.16 $5.71 ========== ========== ==========
EX-12 5 RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 Morgan Stanley Group Inc. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (Dollars in millions)
FISCAL YEAR ENDED JANUARY 31, YEAR ENDED DECEMBER 31, ---------------------------------- ---------------------- 1995 1994 1993 1991 1990 ------ ------ ------ ------ ------ RATIO OF EARNINGS TO FIXED CHARGES Earnings: Income before income taxes $ 594 $1,200 $ 793 $ 772 $ 470 Add: Fixed charges, net 5,916 5,055 4,397 3,963 3,759 ------ ------ ------ ------ ------ Income before income taxes and fixed charges, net $6,510 $6,255 $5,190 $4,735 $4,229 ====== ====== ====== ====== ====== Fixed charges: Total interest expense (1) $5,899 $5,020 $4,362 $3,946 $3,723 Interest factor in rents (2) 41 35 35 38 36 ------ ------ ------ ------ ------ Total fixed charges $5,940 $5,055 $4,397 $3,984 $3,759 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 1.1 1.2 1.2 1.2 1.1 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Earnings: Income before income taxes $ 594 $1,200 $ 793 $ 772 $ 470 Add: Fixed charges, net 5,916 5,055 4,397 3,963 3,794 ------ ------ ------ ------ ------ Income before income taxes and fixed charges, net $6,510 $6,255 $5,190 $4,735 $4,264 ====== ====== ====== ====== ====== Fixed charges: Total interest expense (1) $5,899 $5,020 $4,362 $3,946 $3,723 Interest factor in rents (2) 41 35 35 38 36 Preferred stock dividends (3) 97 85 82 47 35 ------ ------ ------ ------ ------ Total fixed charges and preferred stock dividends $6,037 $5,140 $4,479 $4,031 $3,794 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges and preferred stock dividends 1.1 1.2 1.2 1.2 1.1
(1) Total interest expense for the fiscal year ended January 31, 1995 and the years ended December 31, 1991 and December 31, 1990 includes capitalized interest. (2) Interest factor in rents represents one-third of rent expense, which is considered representative of the interest factor. (3) The preferred stock dividend amounts represent pre-tax earnings required to cover dividends on preferred stock. EX-13.1 6 ANNUAL REPORT - QUARTERLY RESULTS 1 Exhibit 13.1 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 11 QUARTERLY RESULTS (unaudited)
Fiscal 1993 Fiscal 1994 ------------------------------------------------ ------------------------------------------------- (Dollars in Millions, First Second Third Fourth First Second Third Fourth Except Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Revenues: Investment banking....... $ 379 $ 318 $ 296 $ 245 $ 260 $ 211 $ 190 $ 258 Principal transactions: Trading................. 370 518 285 286 258 300 297 249 Investments............. 11 18 92 37 10 23 82 24 Commissions.............. 91 91 101 110 119 112 104 114 Interest and dividends... 1,282 1,478 1,573 1,327 1,561 1,525 1,714 1,606 Asset management and administration...... 52 64 67 75 81 89 95 85 Other.................... 1 3 5 1 3 2 3 1 - -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues........... 2,186 2,490 2,419 2,081 2,292 2,262 2,485 2,337 Interest expense......... 1,135 1,343 1,386 1,156 1,404 1,349 1,575 1,547 - -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net revenues............. 1,051 1,147 1,033 925 888 913 910 790 - -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Expenses excluding interes Compensation and benefits................ 524 572 525 428 440 460 460 373 Occupancy and equipment............... 58 62 64 64 68 74 79 82 Brokerage, clearing and exchange fees........... 48 44 52 52 58 59 56 57 Communications........... 24 24 26 26 29 28 31 34 Business development..... 30 32 31 41 39 41 41 44 Professional services.... 26 30 30 34 41 39 41 43 Other.................... 23 24 29 33 29 30 32 40 Relocation charge........ -- -- -- -- -- -- -- 59 - -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total expenses excluding interest...... 733 788 757 678 704 731 740 732 - -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes.................... 318 359 276 247 184 182 170 58 Provision for income taxes.................... 119 135 94 66 67 61 52 19 - -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income................ $ 199 $ 224 $ 182 $ 181 $ 117 $ 121 $ 118 $ 39 ========================== =========== =========== =========== =========== =========== =========== =========== =========== Earnings applicable to common shares (3)........ $ 187 $ 212 $ 167 $ 165 $ 101 $ 104 $ 102 $ 23 ========================== =========== =========== =========== =========== =========== =========== =========== =========== Per common share: Primary earnings (1)..... $ 2.40 $ 2.77 $ 2.20 $ 2.18 $ 1.27 $ 1.31 $ 1.30 $ 0.29 Fully diluted earnings (1)............ $ 2.29 $ 2.65 $ 2.10 $ 2.08 $ 1.22 $ 1.26 $ 1.25 $ 0.29 Cash dividends........... $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.30 $ 0.30 $ 0.30 $ 0.30 Book value............... $38.09 $40.27 $42.16 $46.14 $46.67 $47.52 $48.42 $49.77 Average common and equivalent shares (3).... 77,889,047 76,474,964 75,944,556 75,938,109 79,828,671 79,605,505 78,354,016 77,534,004 Stock price range (2)..... $55 1/4- $59-70 1/2 $69 5/8- $69 1/4- $60 7/8- $55 5/8- $59 3/8- $55 1/4- 66 1/8 89 79 3/8 79 1/2 62 1/4 69 3/4 65 1/8
(1) Summation of the quarters' earnings per common share does not equal the annual amounts due to the averaging effect of the number of shares and share equivalents throughout the year. (2) Prices represent the range of sales per share on the New York Stock Exchange for the periods indicated. The number of stockholders of record at January 31, 1995 approximated 1,350. The number of beneficial owners of common stock is believed to exceed this number. (3) Amounts shown are used to calculate primary earnings per share. PAGE | SEVENTY-SEVEN EX-13.2 7 ANNUAL REPORT - SELECTED FINANCIAL DATA 1 Exhibit 13.2 SELECTED FINANCIAL DATA
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended January 31, January 31, January 31, (Dollars in Millions, Except Share and Employee Data) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT: Revenues: Investment banking.............................. $ 919 $ 1,238 $ 965 Principal transactions: Trading..................................... 1,104 1,459 953 Investments................................. 139 158 128 Commissions..................................... 449 393 312 Interest and dividends.......................... 6,406 5,660 4,814 Asset management and administration................................ 350 258 200 Other........................................... 9 10 10 ----------- ----------- ----------- Total revenues.............................. 9,376 9,176 7,382 ----------- ----------- ----------- Interest expense................................ 5,875 5,020 4,362 ----------- ----------- ----------- Net revenues................................ 3,501 4,156 3,020 ----------- ----------- ----------- Expenses excluding interest: Compensation and benefits....................... 1,733 2,049 1,457 Other........................................... 1,115 907 770 Relocation charge............................... 59 -- -- ----------- ----------- ----------- Total expenses excluding interest.................................. 2,907 2,956 2,227 ----------- ----------- ----------- Income before income taxes........................... 594 1,200 793 Provision for income taxes........................... 199 414 283 ----------- ----------- ----------- NET INCOME........................................... $ 395 $ 786 $ 510 =========== =========== =========== Earnings applicable to common shares (1)........................................ $ 330 $ 731 $ 461 =========== =========== =========== BALANCE SHEET: Total assets......................................... $ 116,694 $ 97,242 $ 80,353 Total capital (2).................................... $ 12,057 $ 9,813 $ 6,570 Stockholders' equity................................. $ 4,555 $ 4,469 $ 3,434 Long-term borrowings (2)............................. $ 7,502 $ 5,344 $ 3,136 Average common and equivalent shares (1)........................................ 78,896,608 76,208,288 78,123,800 PER COMMON SHARE: Primary earnings..................................... $ 4.18 $ 9.59 $ 5.90 Fully diluted earnings............................... $ 4.03 $ 9.16 $ 5.71 Cash dividends....................................... $ 1.20 $ 1.08 $ 0.955 Book Value........................................... $ 49.77 $ 46.14 $ 36.72 OTHER DATA:.......................................... Return on average common equity...................... 8.8% 23.7% 17.6% Income tax rate...................................... 33.5% 34.5% 35.7% Pre-tax margin....................................... 17.0% 28.9% 26.3% Number of employees.................................. 9,685 8,273 7,421 CHANGE FROM PRIOR YEAR: Net revenues......................................... (15.8)% 37.6% 5.6% Net income........................................... (49.7)% 54.1% 7.4% Common stockholders' equity.......................... 2.1% 28.3% 22.3%
Year Ended Year Ended December 31, December 31, (Dollars in Millions, Except Share and Employee Data) 1991 1990 - ----------------------------------------------------------------------------------------------- INCOME STATEMENT: Revenues: Investment banking.............................. $ 823 $ 652 Principal transactions: Trading..................................... 1,320 902 Investments................................. 19 2 Commissions..................................... 271 275 Interest and dividends.......................... 4,181 3,894 Asset management and administration................................ 160 131 Other........................................... 11 13 ----------- ----------- Total revenues.............................. 6,785 5,869 ----------- ----------- Interest expense................................ 3,924 3,711 ----------- ----------- Net revenues................................ 2,861 2,158 ----------- ----------- Expenses excluding interest: Compensation and benefits....................... 1,396 1,057 Other........................................... 693 631 Relocation charge............................... -- -- ----------- ----------- Total expenses excluding interest.................................. 2,089 1,688 ----------- ----------- Income before income taxes........................... 772 470 Provision for income taxes........................... 297 200 ----------- ----------- NET INCOME........................................... $ 475 $ 270 =========== =========== Earnings applicable to common shares (1)........................................ $ 447 $ 251 =========== =========== BALANCE SHEET: Total assets......................................... $ 63,709 $ 53,526 Total capital (2).................................... $ 5,422 $ 3,380 Stockholders' equity................................. $ 2,994 $ 2,171 Long-term borrowings (2)............................. $ 2,428 $ 1,209 Average common and equivalent shares (1)........................................ 75,397,381 74,228,752 PER COMMON SHARE: Primary earnings..................................... $ 5.93 $ 3.37 Fully diluted earnings............................... $ 5.61 $ 3.33 Cash dividends....................................... $ 0.795 $ 0.75 Book Value........................................... $ 30.77 $ 25.83 OTHER DATA:.......................................... Return on average common equity...................... 21.4% 13.8% Income tax rate...................................... 38.5% 42.5% Pre-tax margin....................................... 27.0% 21.8% Number of employees.................................. 7,053 7,122 CHANGE FROM PRIOR YEAR: Net revenues......................................... 32.5% (12.0)% Net income........................................... 75.7% (39.0)% Common stockholders' equity.......................... 25.3% 7.9%
(1) Amounts shown are used to calculate primary earnings per share. (2) These amounts exclude the current portion of long-term borrowings. PAGE | TWO EX-13.3 8 ANNUAL REPORT - MANAGEMENT'S DISCUSSION AND ANAL. 1 Exhibit 13.3 MORGAN STANLEY 1994 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Substantial positive and negative fluctuations can occur in the Company's business due to a variety of factors, including variations in the fair value of securities and other financial products, the volatility and liquidity of trading markets, and the level of market activity. As a result, net income and revenues in any particular period may not be representative of full-year results and may vary significantly from year to year and from quarter to quarter. In addition, results of operations in the past have been and in the future may continue to be materially affected by many factors of a national and international nature, including economic and market conditions; the availability of capital; the level and volatility of interest rates; currency values and other market indices; and the availability of credit, inflation, and legislative and regulatory developments, as well as the size, number and timing of transactions or assignments (including realization of returns from the Company's merchant banking investments). Such factors, which cannot be predicted with any certainty, generally affect the primary and secondary markets for many types of financial products, including debt and equity securities, as well as derivatives, and therefore may significantly affect the Company's revenues and earnings (see "Risk Management" herein). The Company's results of operations also may be materially affected by competitive factors, including new entrants into the Company's traditional business activities, and its ability to attract and retain highly skilled individuals. After three years of strong growth, the global securities industry experienced a setback in 1994. Rapidly rising interest rates and inflation concerns in the United States created difficult market conditions, resulting in a significant decline in client activity, including reduced levels of debt and equity underwriting worldwide. These conditions, and turmoil late in the year in Mexico and other emerging markets, contributed to the most difficult year for the securities industry since 1990. Although the difficult market conditions that characterized 1994 adversely impacted revenues from the Company's underwriting and fixed income sales and trading activities, the Company believes that the fundamental trends shaping the worldwide economy will provide considerable opportunities for long-term growth. In view of this, the Company continued to invest in its long-term global competitive position during 1994 through strategically focused additions to staff and aggressive expansion internationally. Additional hiring throughout 1994 increased employee headcount by 17% to 9,685 at January 31, 1995, and the Company expanded its offices in Hong Kong, Shanghai, Singapore, Bombay, Paris, Frankfurt and Toronto and opened new ones in Beijing, Montreal, Johannesburg, Sydney and Geneva. In addition, the Company made important additional investments in upgrading its technology, which is essential to managing risk and maintaining long-term leadership in the increasingly competitive, integrated and complex global financial markets. Although the Company continued to focus on cost-containment initiatives during 1994, the additional costs associated with its investments and global expansion contributed to the decline in the Company's 1994 results. The Company continues to believe that its strategic investments in human and technological resources will enhance its ability to provide value-added service to suppliers and users of capital in the global marketplace. At the same time, cost-control, risk management and other factors that impact profitability will remain challenging, particularly during periods of difficult market conditions. The Company's ongoing progress in these areas will be an important factor in its ability to achieve acceptable return-on-equity levels and thus will be a significant measure of the overall success of the Company's strategy. For a description of the Company's business, including its trading in cash instruments and derivative products, its merchant banking activities, and its high-yield underwriting and trading policies, and their respective risks, see Part I, Item I, of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995 ("Form 10-K"). The discussion which follows compares the results of operations for fiscal 1994 (February 1, 1994 to January 31, 1995) with those for fiscal 1993 (February 1, 1993 to January 31, 1994). PAGE | THIRTY-THREE 2 FISCAL 1994 COMPARED WITH FISCAL 1993 The Company's 1994 fiscal revenues and earnings reflect an industry-wide decline in client activity, particularly in fixed income products, driven by rising interest rates and inflation concerns. Amounts for fiscal 1993 are given in parentheses. Revenues net of interest expense (net revenues) declined 16% to $3,501 million ($4,156 million), and net income totaled $395 million ($786 million), a decline of 50%, reflecting non-interest expenses which generally remained at prior-year levels despite the decline in revenues. Investment banking revenues decreased 26% to $919 million ($1,238 million), reflecting significantly reduced revenues from debt financing activity, which partially were offset by increased revenues from merger, acquisition and restructuring assignments. The decline in debt financing activity reflected a significant change in fixed income market conditions in 1994. Higher interest rates, started by the Federal Reserve Board's early 1994 decision to raise short-term interest rates in an attempt to curb U.S. inflation and moderate economic growth, discouraged clients from raising additional capital in the debt market throughout 1994. As the volume of new issues fell, the market for debt underwriting became increasingly competitive. Aggregate revenues from debt underwriting fell 69% to $176 million ($560 million). Within this category, primary revenues generated from fixed income derivative products decreased to $61 million ($193 million), resulting from the overall lower level of debt underwriting volume (which typically is an integral component of primary structured product activity), coupled with a decrease in investor interest. Although equity financing activity also was negatively impacted by difficult market conditions, the Company increased its market share for worldwide equity underwriting and lead-managed a number of the year's largest transactions for U.S. issuers. Therefore, despite significant deterioration in the markets for new equity issues, the Company's revenues from equity underwriting fell only modestly to $364 million ($380 million). Financial advisory fees from merger, acquisition and restructuring transactions benefited from a significant industry-wide increase in corporate restructuring activity. The Company maintained its strong market position in this activity as revenues from advisory assignments rose 27% to $379 million ($298 million). Secondary revenues (combined principal trading, commissions and net interest revenues) decreased 16% to $2,084 million ($2,492 million). Principal transaction revenues from trading activities, including derivatives, fell 24% to $1,104 million ($1,459 million), reflecting substantially lower revenues from trading in fixed income products. For a discussion of the Company's derivative trading activities, see "Derivative Financial Instruments" herein. Fixed income trading revenues, which declined 56% to $347 million ($788 million), were adversely affected by reduced client activity driven by the difficult market conditions discussed above. Uncertainty in the direction of interest rates and a reduced flow of new issues into the secondary markets coupled with downward pressure on prices discouraged client-driven sales and trading activity. In December 1994 and January 1995, the devaluation of the Mexican peso and concerns over Russia's economy created very difficult conditions in emerging markets. This resulted in lower revenue levels in the Company's global corporate, emerging market and high-yield activities. U.S. government debt, foreign sovereign debt, and interest rate and currency swap-trading activities were not as adversely impacted and therefore comprised a more significant percentage of fixed income trading revenues in 1994. Revenues from foreign exchange trading declined 28% to $148 million ($205 million), largely due to reduced client activity and lower market volatility, as well as a weakening in the U.S. dollar relative to other major currencies. Equity trading revenues rose 25% to $510 million ($407 million), reflecting strong client-driven revenues arising from a wide range of cash and structured equity products in all of the international markets in which the Company operates. Revenues from commodities trading rose 68% to $99 million ($59 million), benefiting from a favorable trading environment in precious metals, energy and agricultural products during the first half of 1994. PAGE | THIRTY-FOUR 3 MORGAN STANLEY 1994 ANNUAL REPORT FISCAL 1994 COMPARED WITH FISCAL 1993 (continued) Principal transaction investment revenues aggregating $139 million were recognized in fiscal 1994 ($158 million), including revenues related to sales of the Company's investments in equity securities of Agricultural Minerals and Chemicals Inc. and Coltec Industries. Commission revenues increased 14% to $449 million ($393 million), principally reflecting increased customer activity in the global markets for equity securities as well as customer activity in new markets, such as Latin America and Southeast Asia. Interest and dividend revenues and expense are a function of the level and mix of total assets, including financial instruments owned and resale and repurchase agreements, and the prevailing level, term structure and volatility of interest rates. In fiscal 1994, the Company's net interest and dividend revenues decreased 17% to $531 million ($640 million), primarily resulting from a substantial flattening of the U.S. yield curve as short-term rates rose faster than long-term rates throughout much of the year. The resulting decline in interest rate spreads adversely affected the profitability of the Company's spread-sensitive businesses, and the flatter yield curve substantially reduced the savings from the Company's use of swaps to effectively convert much of its fixed rate debt to floating rate debt (see Note 3 to the Consolidated Financial Statements). Interest and dividend revenues rose 13% to $6,406 million ($5,660 million), and interest expense increased 17% to $5,875 million ($5,020 million), principally reflecting growth in interest-bearing assets and liabilities. Interest and dividend revenues and expense should be viewed in the broader context of principal trading and investment banking results. Decisions relating to principal transactions in securities are based on an overall review of aggregate revenues and costs associated with each transaction or series of transactions. This review includes an assessment of the potential gain or loss associated with a trade, the interest income or expense associated with financing or hedging the Company's positions, and potential underwriting, commission or other revenues associated with related primary or secondary market sales. Asset management and administration revenues, which include fees for asset management and non-interest revenues earned from correspondent clearing and custody services, increased 36% to $350 million ($258 million), reflecting growth in both asset management activities and global clearing and custody services resulting from the Company's continuing strategic emphasis on these businesses. Customer assets under management increased 4% to $49 billion ($47 billion), reflecting continued growth in international and emerging market funds. Customer assets under administration increased 25% to $90 billion ($72 billion), primarily reflecting additional assets placed under custody with the Company. Despite a 17% year-over-year strategically planned increase in the number of employees (from 8,273 at January 31, 1994 to 9,685 at January 31, 1995), total non-interest expenses fell marginally, to $2,907 million ($2,956 million). Within that total, employee compensation and benefits expense decreased 15% to $1,733 million ($2,049 million), due in part to reduced levels of incentive compensation based on lower revenues and earnings. Other non-interest expenses, excluding the non-recurring relocation charge discussed below, increased 23% to $1,115 million ($907 million). Business development and professional service expenses increased $75 million, reflecting significantly increased recruiting and travel costs directly related to the strategic growth of the Company's business in existing markets and global expansion into new markets. Occupancy and equipment expenses increased $55 million, reflecting incremental space costs related to growth in the number of employees and global expansion, as well as significantly greater spending for technology equipment. Brokerage, clearing and exchange fees increased $34 million, reflecting increased trade volumes, business mix changes and the growing international component of the Company's sales and trading activities. Fourth quarter 1994 expenses include a pre-tax relocation charge of $59 million relating to the Company's decision to vacate much of its current New York City office space at 1251 Avenue of the Americas after it completes the relocation of staff presently occupying that space to a new headquarters building at 1585 Broadway. The charge includes both the remaining post-move lease commitment (expiring in 1998) and the PAGE | THIRTY-FIVE 4 FISCAL 1994 COMPARED WITH FISCAL 1993 (continued) write-off of the remaining net book value of improvements at the old site. The relocation charge also includes similar charges relating to the Company's plans to move its Tokyo office to newly leased space in 1996; the Tokyo-related provision consists largely of the write-off of improvements and restoration costs for the space being vacated. The Company's fiscal 1994 effective income tax rate of 33.5% was below its fiscal 1993 and 1992 rates of 34.5% and 35.7%, respectively, reflecting, in part, an increase in the amount of foreign tax credits utilized against U.S. federal income taxes. FISCAL 1993 COMPARED WITH FISCAL 1992 The Company's fiscal 1993 revenues and earnings reflect continued growth in revenues from a broad range of businesses, including investment banking and principal transaction revenues from trading. Amounts for fiscal 1992 are given in parentheses. Revenues net of interest expense (net revenues) were $4,156 million ($3,020 million), and net income totaled $786 million ($510 million). Investment banking revenues increased 28% to $1,238 million ($965 million), reflecting significantly increased revenues from structured and non-investment grade debt financing activity, as well as higher revenues from equity underwritings, mergers and acquisitions, and other financial advisory activities, partially offset by substantially reduced activity in mortgage-backed underwritings. Secondary revenues (combined principal trading, commissions and net interest revenues) increased 45% to $2,492 million ($1,717 million). Principal transaction revenues from trading activities, including derivatives, were $1,459 million ($953 million), reflecting substantially higher revenues from international fixed income products, as well as increased revenues from equity products and commodities trading, partially offset by declines from trading in mortgage-backed products. Principal transaction investment revenues aggregating $158 million were recognized in fiscal 1993 ($128 million) and include revenues from the increases in carrying value related to equity offerings by two companies in the merchant banking portfolio: the initial public offering of Southern Pacific Rail Corporation and the secondary offering of Kohl's Corporation common stock. Commission revenues increased 26% to $393 million ($312 million). This increase reflects significantly higher levels of customer trading activity in the equity markets. Note that customer activity results in principal trading and interest revenues as well as commissions. Net interest and dividend revenues increased 42% to $640 million ($452 million). Interest and dividend revenues rose 18% to $5,660 million ($4,814 million), and interest expense increased 15% to $5,020 million ($4,362 million), principally reflecting growth in interest-bearing assets and liabilities. As noted above in the comparison of fiscal 1994 with fiscal 1993, interest and dividend revenues and expense reflect principal trading strategies and should be viewed in the broader context of principal trading and investment banking results. Asset management and administration revenues increased 29% to $258 million ($200 million), reflecting growth in asset management activities as well as global clearing and custody services. Customer assets under management increased 24% to $47 billion ($38 billion), reflecting growth in international and emerging markets funds. Customer assets under administration increased to $72 billion ($27 billion), reflecting significant expansion of the Company's client base in the global custody and clearing businesses. Total non-interest expenses rose 33% to $2,956 million ($2,227 million). Within that total, employee compensation and benefits expense increased 41% to $2,049 million ($1,457 million), reflecting higher incentive compensation related to the increases in revenues and earnings and in the number of employees. Other non-interest expenses increased 18% to $907 million ($770 million), reflecting overall growth in the level of business activity, including increased brokerage and clearing costs and increased spending on technology to support higher volumes of activity as well as increased business development expenses relating to the Company's continued expansion into new global markets. PAGE | THIRTY-SIX 5 MORGAN STANLEY 1994 ANNUAL REPORT LIQUIDITY AND CAPITAL RESOURCES The Balance Sheet The Company's total assets increased from $97.2 billion at January 31, 1994 to $116.7 billion at January 31, 1995, principally reflecting growth in financial instruments owned and resale and repurchase agreements. Such growth is principally attributable to the Company's fixed income activities, most notably U.S. government and mortgage-backed securities, as well as repurchase agreements used in both financing such inventories and in the Company's matched book activities. A substantial portion of the Company's total assets consists of highly liquid marketable securities and short-term receivables arising principally from securities transactions. The highly liquid nature of these assets provides the Company with flexibility in financing and managing its business. In that context, the overall size of the Company's total assets and liabilities fluctuates from time to time and at specific points in time (such as calendar quarter-ends) is higher than fiscal quarter-ends. Balance sheet leverage ratios are reviewed by counterparties and creditors in order to evaluate a securities firm's overall financial risk. Details of ending assets, average assets and leverage ratios for fiscal 1994 and fiscal 1993 are as follows:
Assets at Average Assets at Average January 31, Assets for January 31, Assets for (Dollars in Millions) 1995 Fiscal 1994 1994 Fiscal 1993 - ------------------------------------------------------------------------------------- Cash, deposits and receivables $ 12,104 $ 14,299 $11,254 $ 10,657 Financial instruments owned 47,109 49,236 39,844 49,006 Securities purchased under agreements to resell and securities borrowed............ 55,955 64,921 45,029 55,745 Property, equipment and leasehold improvements and other assets............... 1,526 1,626 1,115 880 -------- -------- ------- -------- Total assets.................... $116,694 $130,082 $97,242 $116,288 ======== ======== ======= ======== Leverage ratios: Total assets/equity............ 25.6x 29.0x 21.8x 31.1x Net assets(1)/equity........... 17.7x 19.4x 15.3x 21.3x
(1) Net assets represent total assets less the lower of securities purchased under agreements to resell or securities sold under agreements to repurchase. Funding and Capital Policies The Company's Finance and Risk Committee, which includes senior officers from each of the major capital commitment areas, among other things, establishes the overall funding, capital and credit 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, and oversees the liquidity and interest rate sensitivity of the Company's asset and liability position. Many of the Company's businesses are capital-intensive. Capital is required to finance, among other things, the Company's securities inventories, underwriting and merchant banking activities, and investments in fixed assets. As a policy, the Company attempts to maintain sufficient capital and funding sources in order to have the capacity to finance itself on a fully collateralized basis at all times. Currently, the Company believes that it has sufficient capital to meet its needs. In addition, the Company attempts to maintain total equity, on a consolidated basis, at least equal to the sum of all its subsidiaries' equity. Subsidiary equity capital requirements are determined by regulatory requirements, asset mix, leverage considerations and earnings volatility. The Company actively manages its consolidated capital position based upon, among other things, capital availability, business opportunities and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines and therefore may, in the future, expand or contract its capital base to address the changing needs of its businesses. The Company funds its balance sheet on a global basis. The Company's funding needs are satisfied from capital, including equity and long-term debt; medium- PAGE | THIRTY-SEVEN 6 LIQUIDITY AND CAPITAL RESOURCES (continued) term notes; internally generated funds; repurchase agreements; U.S., Canadian, French and Euro commercial paper; German Schuldschein loans; securities lending; buy/sell agreements; municipal reinvestments; master notes; deposits; and committed and uncommitted lines of credit. All repurchase transactions and a portion of the Company's bank borrowings are made on a collateralized basis. The Company practices a funding strategy which ensures that the tenor of the Company's liabilities equals or exceeds the expected holding period of the assets being financed. Short-term funding generally is obtained at rates related to U.S. or Euro money market rates for the currency borrowed. Repurchase transactions are effected at negotiated rates. Other borrowing costs are negotiated depending upon prevailing market conditions (see Note 2 to the Consolidated Financial Statements). The Company maintains borrowing relationships with a broad range of banks, financial institutions, counterparties and others from which it draws funds in a variety of currencies. The volume of the Company's borrowings generally fluctuates in response to changes in the amount of resale transactions outstanding, the level of the Company's securities inventories and overall market conditions. Availability and cost of financing to the Company can vary depending upon market conditions, the volume of certain trading activities, the Company's credit ratings and overall availability of credit to the securities industry. Pursuant to its liquidity policy, the Company attempts to maintain cash and unhypothecated marketable securities equal to at least 110% of short-term unsecured borrowings. In addition, the Company has in place a contingency funding strategy which provides a comprehensive one-year action plan in the event of a severe funding disruption; the plan is updated annually. The Company views long-term debt as a stable source of funding and therefore attempts to maintain a long-term debt-to-capitalization ratio of at least 60% based upon the current composition of its balance sheet. In general, fixed assets are financed with fixed rate long-term debt, and inventories and all current assets are financed with a combination of short-term funding and floating rate long-term debt. The Company uses derivative products (primarily interest rate and currency swaps) to assist in asset and liability management and to reduce borrowing costs (see Note 3 to the Consolidated Financial Statements). The Company's reliance on external sources to finance a significant portion of its day-to-day operations makes access to global sources of financing important. The cost of such financing is dependent on the Company's short-term and long-term debt ratings. In addition, the Company's debt ratings can have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance is critical, such as over-the-counter derivative transactions. The Company's short-term and long-term senior debt ratings as of March 31, 1995 are as follows:
Agency Short-Term Rating Long-Term Rating - ------------------------------------------------------------------------------- Moody's Investor's Services........... P1 A1 Standard & Poor's..................... A1+ A+ IBCA.................................. A1+ AA- Thomson Bankwatch..................... TBW1 AA Dominion Bond Rating Service(1)....... R1 (Middle) n/a
(1) Dominion Bond Rating Service rates the Company's Canadian commercial paper program. On March 28, 1995, Standard & Poor's Corporation ("S&P") affirmed the short- and long-term ratings of the Company. However, in light of continuing difficult conditions in the industry, S&P revised the long-term rating outlook for six securities firms, including the Company, from stable to negative. Noting the cyclical nature of the industry, S&P indicated that ratings may remain unchanged for individual firms that adjust costs downward while avoiding serious instability in trading results, but may be lowered for individual firms if profitability worsens or if continued market turbulence aggravates trading risk. PAGE | THIRTY-EIGHT 7 MORGAN STANLEY 1994 ANNUAL REPORT LIQUIDITY AND CAPITAL RESOURCES (continued) Fiscal 1994 and Subsequent Activity During the fiscal year ended January 31, 1995, the Company took several steps to extend the maturity of its liabilities, reduce its reliance on unsecured short-term funding and increase its capital. These steps resulted in a net increase in capital of $2,244 million to $12,057 million at January 31, 1995. The additions to capital included net issuances of senior notes and subordinated debt aggregating $1,334 million. As of January 31, 1995, the aggregate outstanding principal amount of the Company's Senior Indebtedness (as defined in the Company's public debt shelf registration statements) was approximately $15 billion. In fiscal 1994, Morgan Stanley & Co. Incorporated ("MS&Co."), the Company's U.S. broker-dealer subsidiary, issued $357 million of Series A subordinated notes due in 2002 and $243 million of Series B subordinated notes due in 2005 (collectively, the "Notes") to a group of institutional investors. The Notes have been structured to qualify as regulatory capital for purposes of the net capital rule of the Securities and Exchange Commission. In fiscal 1994, the Company and Morgan Stanley Finance plc, a U.K. subsidiary ("MS plc"), issued 9,200,000 7.80% Capital Units in an aggregate amount of approximately $230 million. Each Capital Unit consists of (a) a Subordinated Debenture of MS plc guaranteed by the Company, and (b) a related Purchase Contract issued by the Company requiring the holder to purchase one Depositary Share representing ownership of a 1/8 interest in a share of the Company's 7.80% Cumulative Preferred Stock. Subsequent to January 31, 1995, additional senior notes aggregating approximately $557 million through March 31, 1995 were issued. These notes have a weighted average coupon rate of 7.0% and maturities from 1997 to 2005. The Company also issued 5,767,200 9.00% Capital Units in an aggregate amount of approximately $144 million. The Company filed a shelf registration statement which became effective in March 1995 for up to $4 billion of additional debt securities, warrants to purchase debt securities, preferred stock and depositary shares. The Company maintains a senior revolving credit agreement with a group of banks. Under the terms of the credit agreement, the banks are committed to provide up to $2.5 billion for up to 364 days. Any loans outstanding on the commitment termination date will mature on the first anniversary of the commitment termination date. The Company recently established a master collateral facility that will enable MS&Co. to pledge certain collateral to secure loan arrangements, letters of credit and other financial accommodations. As part of this facility, MS&Co. also entered into a secured committed credit agreement with a group of banks that are parties to the master collateral facility under which such banks are committed to provide up to $1 billion for up to 364 days. Any loans outstanding on the commitment termination date will mature on the first anniversary of the commitment termination date. The Company also maintains short-term agreements with three non-U.S. banks which commit the banks to provide on a collateralized basis up to deutsche marks ("DM") 250 million (approximately $164 million), French francs ("FRF") 500 million (approximately $95 million) and $100 million (or its equivalent in DM, FRF, Swiss francs or European Currency Units), respectively. There were no borrowings outstanding under any of the foregoing facilities at January 31, 1995; however, the Company anticipates utilizing these facilities for short-term funding from time to time (see Note 2 to the Consolidated Financial Statements). During the fiscal year ended January 31, 1995, the Company repurchased shares of its common stock at an aggregate cost of $287 million. On February 28, 1995, the Board of Directors authorized the purchase, in the open market or otherwise, subject to market conditions and certain other factors, of an additional $150 million of the Company's common stock. Common stock repurchases subsequent to January 31, 1995 aggregated $37 million through March 31, 1995; the unused portion of its stock repurchase authorization at such date was approximately $279 million. The Company also issued shares of common stock and options to purchase shares of common stock pursuant to employee compensation and benefit plans (see Note 8 to the Consolidated Financial Statements). Certain assets of the Company, such as real property, equipment, leasehold improvements, certain equity investments made in connection with the Company's PAGE | THIRTY-NINE 8 LIQUIDITY AND CAPITAL RESOURCES (continued) merchant banking and other principal investment activities, high-yield debt securities, emerging market debt, and certain collateralized mortgage obligations and mortgage-related loan products, are not highly liquid. In connection with its merchant banking and other principal investment activities, the Company has equity investments (directly or indirectly through funds managed by the Company) in privately or publicly held companies. As of January 31, 1995, the aggregate carrying value of the Company's equity investments in privately held companies (including direct investments and partnership interests) was $252 million, and its aggregate investment in publicly held companies was $136 million. In its capacity as an underwriter of and a market-maker in mortgage-backed securities, collateralized mortgage obligations and related instruments, and a market-maker in commercial, residential and real estate loan products, the Company carries certain related assets with reduced levels of liquidity. The carrying value of such assets approximated $1,193 million at January 31, 1995. In addition, at January 31, 1995, the aggregate value of high-yield debt securities and emerging market loans and securitized instruments held in inventory was $1,160 million (a substantial portion of which was subordinated debt) with not more than 8%, 12% and 11% of all such securities, loans and instruments attributable to any one issuer, industry or geographic region, respectively. Non-investment grade securities generally involve greater risk than investment grade securities due to the lower credit ratings of the issuers, which typically have relatively high levels of indebtedness and are, therefore, more sensitive to adverse economic conditions. In addition, the market for non-investment grade securities and emerging market loans and securitized instruments has been, and may in the future continue to be, characterized by periods of illiquidity. The Company has in place credit and other risk policies to control total inventory positions and risk concentrations for non-investment grade securities and emerging market loans and securitized instruments. The Company also has commitments to fund certain fixed assets and other less liquid investments, including at January 31, 1995 approximately $223 million in connection with its merchant banking and other principal investment activities, and current estimates are $290 million for fit-out and related costs associated with a building located at 1585 Broadway in New York City that the Company purchased in fiscal 1993 and $90 million for a building located at 750 Seventh Avenue in New York City that the Company purchased in fiscal 1994. Additionally, the Company has provided and will continue to provide financing, including margin lending and other extensions of credit to clients (including subordinated loans on an interim basis to leveraged companies associated with its merchant banking and other principal investment activities), that may subject the Company to increased credit and liquidity risks. The gross notional and fair value amounts of derivatives used by the Company for asset and liability management and as part of its trading activities are summarized in Notes 3 and 5, respectively, to the Consolidated Financial Statements. See also "Derivative Financial Instruments" herein. Regulatory Capital Requirements MS&Co. is a registered broker-dealer and a registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the Securities and Exchange Commission and the Commodities Futures Trading Commission. It consistently has operated in excess of these requirements (see Note 7 to the Consolidated Financial Statements). Certain other U.S. and non-U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. At January 31, 1995, these subsidiaries were in compliance with all applicable securities regulations and local capital adequacy requirements. In addition, Morgan Stanley Derivative Products Inc., a Triple-A rated subsidiary through which the Company conducts some of its derivatives activities, has established certain operating restrictions which have been reviewed by various rating agencies. PAGE | FORTY 9 MORGAN STANLEY 1994 ANNUAL REPORT EFFECTS OF INFLATION AND CHANGES IN FOREIGN EXCHANGE RATES Because the Company's assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, inflation may result in increases in the Company's expenses, which may not be readily recoverable in the price of services offered. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets and on the value of financial instruments, it may adversely affect the Company's financial position and profitability. A significant portion of the Company's business is conducted in currencies other than the U.S. dollar. Non-U.S. dollar assets typically are financed by direct borrowing or swap-based funding in the same currency. Changes in foreign exchange rates affect non-U.S. dollar revenues as well as non-U.S. dollar expenses. Those foreign exchange exposures not hedged by offsetting non-U.S. dollar revenues and expenses are actively managed by the Company to minimize risk of loss due to currency fluctuations. DERIVATIVE FINANCIAL INSTRUMENTS The Company actively offers to clients and trades for its own account a variety of financial instruments described as "derivative products" or "derivatives." These products generally take the form of futures, forwards, options, swaps, caps, collars, floors, swap options and similar instruments which derive their value from underlying interest rates, foreign exchange rates or commodity or equity instruments or 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 a variety of proprietary trading activities (see Note 5 to the Consolidated Financial Statements). In addition, as a dealer in certain derivative products, most notably interest rate and currency swaps, the Company enters into derivative contracts to meet a variety of risk management and other financial needs of its clients. Given the highly integrated nature of derivative products and related cash instruments in the determination of overall business unit profitability and the context in which the Company manages its trading areas, it is not meaningful to allocate trading revenues between the derivative and underlying cash instrument components. Moreover, the risks associated with the Company's derivative activities, including market and credit risks, are managed on an integrated basis with associated cash instruments in a manner consistent with the Company's overall risk management policies and procedures (see "Risk Management" herein). The total notional value of derivative trading contracts outstanding as of January 31, 1995 was $835 billion (as compared with $740 billion as of January 31, 1994). While these amounts are an indication of the Company's degree of use of derivatives for trading purposes, they do not represent the Company's exposure to market or credit risk. The Company's exposure to market risk relates to changes in interest rates, foreign currency exchange rates or the fair value of the underlying financial instruments or commodities (see "Risk Management" herein). The Company's exposure to credit risk at any point in time is represented by the fair value of such contracts reported as assets. Total fair value outstanding as of January 31, 1995 was $8.6 billion. Approximately 80% of that credit risk exposure was with counterparties rated single-A or better, and another 5% was fully collateralized (see Note 5 to the Consolidated Financial Statements). 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 Note 3 to the Consolidated Financial Statements). The Company believes that derivatives are valuable tools that can provide cost-effective solutions to complex financial problems and remains committed to providing its clients with innovative financial products. In January 1994, the Company established Morgan Stanley Derivative Products Inc., a Triple-A rated subsidiary, to offer derivative products to clients that will enter into derivative transactions only with Triple-A rated counterparties. In addition, the Company, through its continuing involvement with activities such as the International Swaps and Derivatives Association Inc. (ISDA), the Group of 30 and, most recently, as one of the six U.S. securities firms of the Derivatives Policy Group, is providing leadership in the development of a framework for voluntary industry self-regulation of derivative activities in order to maintain confidence in the markets for derivative products, which is critical to the Company's ability to assist clients in meeting their overall financial needs. PAGE | FORTY-ONE 10 RISK MANAGEMENT Risk is an inherent part of the Company's business, and 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 success and profitability. The Company seeks to maintain a broad-based portfolio of business activities to minimize the impact that volatility in any area or related areas may have on its net revenues as a whole. From an operational perspective, the Company seeks to actively manage the principal risks involved in each area of business activity: market risk, credit risk, operational risk and legal 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 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. The Company's risk management policies and procedures are continually evolving to address the increasingly global nature of the financial services business as well as the continual development of sophisticated financial products with more varied and complex risk profiles. The Company has developed a multi-tiered approach for monitoring and managing its risk. With respect to the Company's major trading businesses, senior division risk managers monitor positions and set the overall division risk profile within established limits, verify that position hedges are appropriate and well-maintained, and report unusual market and position events. The base level of control is at the trading desks where desk risk managers and traders perform similar functions with respect to a product area or particular product. The Firm Risk Management Group has operational responsibility for reporting to senior management on the Company's exposure to risk. The Firm Risk Management Group consists of three departments that are all independent of the Company's business areas: the Market Risk and Exposure Management Department monitors certain divisional, geographic and product-line market risks; the Credit Department establishes and monitors counterparty exposure limits and collateral requirements to support counterparty contractual commitments; and the Internal Audit Department, which also reports to the Audit Committee of the Board of Directors, assesses the Company's operations and control environment through periodic examinations of business and operational areas. Other departments within the Company that also are independent of the Company's business areas and are actively involved in monitoring the Company's risk profile include the Controllers Department, the Operations Department, and the Legal and Compliance Department. In addition, the Company has certain standing 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 a particular transaction. The Company's Finance and Risk Committee, as previously indicated, among other things, establishes and reviews performance against the Company's funding, liquidity and capital policies. The Company manages the various risks associated with its activities on an individual product basis, on a divisional level and on a Company-wide basis. Specific risk limits are assigned to each trading area of the Company and trading desks within trading areas, and these limits are reviewed periodically and are adjusted as required. Market-making positions generally are hedged (that is, covered by similar, offsetting positions) to remove all or part of a position's exposure to price or yield movements. The Credit Department reviews all counterparties to establish appropriate exposure limits for a variety of transactions. In addition, the Company actively manages the credit exposure relating to its trading activities by entering into master netting agreements when feasible; monitoring the creditworthiness of counterparties and the related trading limits on an ongoing basis and requesting PAGE | FORTY-TWO 11 MORGAN STANLEY 1994 ANNUAL REPORT RISK MANAGEMENT (continued) additional collateral when deemed necessary; diversifying and limiting exposure to individual counterparties and geographic locations; and limiting the duration of exposure. The Company's Controllers and Operations Departments monitor position, profit/loss and balance sheet information on a daily basis through rigorous reconciliation procedures, and business unit profitability, position market prices and aged positions are analyzed. The Company also has established legal standards and procedures on a worldwide basis that are designed to ensure compliance with all applicable statutory and regulatory requirements. For a detailed discussion of the Company's risk management policies and procedures, see Item I, Part I, of the Form 10-K. The Company's divisional risk managers and the Market Risk and Exposure Management Department evaluate the impact of changes in market conditions on the value of the Company's financial instrument portfolios in order to determine the potential gains or losses that would arise from normal and abnormal movements in interest rates, foreign exchange rates, equity prices and commodity prices. This quantification of potential gains and losses under varying scenarios and situations is an integral component of the Company's risk management procedures. The hypothetical results of these analyses, however, are not necessarily indicative of future results. Historical results, while also not indicative of future results, provide a more meaningful measure of the Company's effectiveness in managing the risks inherent in its various businesses, including market risks related to its global portfolios of financial instruments. The diversification of the Company's activities within and across business lines and prudent risk management have helped the Company reduce volatility in net revenues. The Company's underwriting and sales and trading businesses (which include fixed income, equity, commodities and foreign exchange) historically have been more volatile than its fee-based businesses (which include investment banking advisory services, securities services and asset management). The Company's performance in mitigating volatility is demonstrated by the following weekly distribution of its underwriting and sales and trading net revenues for fiscal 1994 and fiscal 1993: [One Bar Chart -- See EDGAR Appendix] PAGE | FORTY-THREE 12 RISK MANAGEMENT (continued) The Company's management of the volatility in revenues from its underwriting and sales and trading activities is complemented by its continuing strategic emphasis on more stable fee-based businesses. The Company's recent record of lower volatilities and continuing growth in these fee-based businesses is presented in the charts below which provide a weekly distribution of fee-based net revenues for fiscal 1994 and fiscal 1993 and a three-year summary of fee-based and underwriting and sales and trading net revenues. [Two Bar Charts -- See EDGAR Appendix] PAGE | FORTY-FOUR 13 GRAPHICS APPENDIX LIST EDGAR VERSION ------------- Form 10-K for the fiscal year ended January 31, 1995, Exhibit 13.3 - (Selected Portions of Morgan Stanley's 1994 Annual Report to Stockholders) Page 43 -- One bar chart omitted Page 44 -- Two bar charts omitted TYPESET VERSION --------------- Form 10-K for the fiscal year ended January 31, 1995, Exhibit 13.3 - (Selected Portions of Morgan Stanley's 1994 Annual Report to Stockholders) Page 43 -- A bar chart depicting Distribution of Underwriting and Sales and Trading Net Revenues (including commissions and net interest revenues) for fiscal 1994 and fiscal 1993. The bars in the chart illustrate the number of weeks that such net revenues fell within the specified dollar ranges for each area presented below. All dollar amounts are expressed in millions. $(5) - 0 $0 - 10 $10 - 20 $20 - 40 $40 - 60 More than $60 Equity 3 34 60 7 Fixed Income 6 9 23 39 18 9 Commodities 14 90 Foreign 100 4 Exchange Page 44 -- Two bar charts depicting Distribution of Fee-Based Net Revenues (for fiscal 1993 and fiscal 1994) and Net Revenues (excluding merchant banking net revenues) (for fiscal 1992, fiscal 1993 and fiscal 1994), respectively. The bars in the chart depicting Distribution of Fee-Based Net Revenues illustrate the number of weeks that such net revenues fell within the specified dollar ranges for each area presented below. All dollar amounts are expressed in millions. $0 - 10 $10 - 20 More than $20 Investment Banking Advisory Services 83 17 4 Securities Services 103 1 Asset Management 104 The bars in the chart depicting Net Revenues illustrate a three-year summary of Fee-Based and Underwriting and Sales and Trading Net Revenues as follows: Fee-based net revenues were $.4 billion, $.7 billion and $ 1 billion for fiscal 1992, fiscal 1993 and fiscal 1994, respectively. Underwriting and sales and trading net revenues were $2.5 billion, $3.4 billion and $2.4 billion for fiscal 1992, fiscal 1993 and fiscal 1994, respectively. EX-13.4 9 ANNUAL REPORT - CONSOLIDATED FINANCIAL STATEMENTS 1 Exhibit 13.4 REPORT OF INDEPENDENT AUDITORS The Stockholders and Board of Directors of Morgan Stanley Group Inc. We have audited the accompanying consolidated statement of financial condition of Morgan Stanley Group Inc. as of January 31, 1995 and January 31, 1994 and the related consolidated statements of income, cash flows and changes in stockholders' equity for the years ended January 31, 1995, January 31, 1994 and January 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Morgan Stanley Group Inc. at January 31, 1995 and January 31, 1994, and the consolidated results of its operations and its cash flows for the years ended January 31, 1995, January 31, 1994 and January 31, 1993, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York February 28, 1995 PAGE | FORTY-FIVE 2 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
January 31, January 31, (Dollars in Millions, Except Share Data) 1995 1994 - ------------------------------------------------------------------------------------------- ASSETS Cash and interest-bearing equivalents........................ $ 2,510 $ 1,925 Cash and securities deposited with clearing organizations or segregated under federal and other regulations (securities at market value of $1,507 in fiscal 1994 and $108 in fiscal 1993)............. 2,116 662 Financial instruments owned: U.S. government and agency securities...................... 9,107 7,926 Other sovereign government obligations..................... 12,932 12,002 Corporate and other debt................................... 10,545 8,572 Corporate equities......................................... 5,483 4,587 Derivative contracts....................................... 8,622 6,474 Physical commodities....................................... 420 283 Securities purchased under agreements to resell.............. 35,913 28,708 Securities borrowed.......................................... 20,042 16,321 Receivables: Customers.................................................. 4,823 4,216 Brokers, dealers and clearing organizations................ 1,376 3,290 Interest and dividends..................................... 731 851 Fees and other............................................. 548 310 Property, equipment and leasehold improvements, at cost, net of accumulated depreciation and amortization of $364 in fiscal 1994 and $338 in fiscal 1993..................... 1,061 778 Other assets................................................. 465 337 -------- ------- Total assets................................................. $116,694 $97,242 ======== =======
See Notes to Consolidated Financial Statements. PAGE | FORTY-SIX 3 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES
January 31, January 31, 1995 1994 - -------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings.......................................................... $ 10,273 $ 8,566 Financial instruments sold, not yet purchased: U.S. government and agency securities........................................ 6,177 3,530 Other sovereign government obligations....................................... 7,251 5,967 Corporate and other debt..................................................... 1,174 1,143 Corporate equities........................................................... 3,006 2,144 Derivative contracts......................................................... 7,322 5,764 Physical commodities......................................................... 377 580 Securities sold under agreements to repurchase................................. 50,123 41,467 Securities loaned.............................................................. 2,860 2,202 Payables: Customers.................................................................... 11,588 11,001 Brokers, dealers and clearing organizations.................................. 953 1,059 Interest and dividends....................................................... 825 747 Other liabilities and accrued expenses....................................... 458 1,124 Accrued compensation and benefits.............................................. 938 669 Long-term borrowings........................................................... 8,814 6,810 -------- ------- 112,139 92,773 -------- ------- Commitments and contingencies Stockholders' equity: Preferred stock.............................................................. 819 820 Common stock, $1.00 par value; authorized 300,000,000 shares; issued 79,774,278 shares in fiscal 1994 and 78,277,538 shares in fiscal 1993...... 80 78 Paid-in capital.............................................................. 706 817 Retained earnings............................................................ 3,338 3,094 Cumulative translation adjustments........................................... (10) (3) -------- ------- Subtotal............................................................. 4,933 4,806 Less: Note receivable related to sale of preferred stock to ESOP............... 100 109 Common stock held in treasury, at cost (4,477,495 shares in fiscal 1994 and 3,801,687 shares in fiscal 1993).............................. 278 228 -------- ------- Total stockholders' equity........................................... 4,555 4,469 -------- ------- Total liabilities and stockholders' equity..................................... $116,694 $97,242 ======== =======
See Notes to Consolidated Financial Statements. PAGE | FORTY-SEVEN 4 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended January 31, January 31, January 31, (Dollars in Millions, Except Share Data) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Revenues: Investment banking................................... $ 919 $ 1,238 $ 965 Principal transactions: Trading.......................................... 1,104 1,459 953 Investments...................................... 139 158 128 Commissions.......................................... 449 393 312 Interest and dividends............................... 6,406 5,660 4,814 Asset management and administration.................. 350 258 200 Other................................................ 9 10 10 ----------- ----------- ----------- Total revenues................................... 9,376 9,176 7,382 Interest expense..................................... 5,875 5,020 4,362 ----------- ----------- ----------- Net revenues..................................... 3,501 4,156 3,020 ----------- ----------- ----------- Expenses excluding interest: Compensation and benefits............................ 1,733 2,049 1,457 Occupancy and equipment.............................. 303 248 228 Brokerage, clearing and exchange fees................ 230 196 165 Communications....................................... 122 100 90 Business development................................. 165 134 102 Professional services................................ 164 120 98 Other................................................ 131 109 87 Relocation charge.................................... 59 -- -- ----------- ----------- ----------- Total expenses excluding interest................ 2,907 2,956 2,227 ----------- ----------- ----------- Income before income taxes............................. 594 1,200 793 Provision for income taxes............................. 199 414 283 ----------- ----------- ----------- Net income............................................. $ 395 $ 786 $ 510 =========== =========== =========== Preferred stock dividend requirements.................. $ 65 $ 55 $ 49 =========== =========== =========== Earnings applicable to common shares (1)............... $ 330 $ 731 $ 461 =========== =========== =========== Average common and common equivalent shares outstanding (1)...................................... 78,896,608 76,208,288 78,123,800 =========== =========== =========== Primary earnings per share............................. $ 4.18 $ 9.59 $ 5.90 =========== =========== =========== Fully diluted earnings per share....................... $ 4.03 $ 9.16 $ 5.71 =========== =========== ===========
(1) Amounts shown are used to calculate primary earnings per share. See Notes to Consolidated Financial Statements. PAGE | FORTY-EIGHT 5 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended January 31, January 31, January 31, (Dollars in Millions) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income.................................................... $ 395 $ 786 $ 510 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Non-cash charges included in net income: Deferred income taxes................................... (128) (266) (110) Compensation payable in common or preferred stock.................................... 116 408 190 Depreciation and amortization........................... 104 64 61 Relocation charge....................................... 59 -- -- Changes in assets and liabilities: Cash and securities deposited with clearing organizations or segregated under federal and other regulations................... (1,454) 726 (513) Financial instruments owned, net of financial instruments sold, not yet purchased............................................. (1,086) 445 4,576 Securities borrowed, net of securities loaned........... (3,063) (3,601) 5,890 Receivables and other assets............................ 1,076 (2,889) (1,452) Payables and other liabilities, net of deferred liabilities.................................. 258 4,614 1,537 ------- ------- ------- Net cash (used for) provided by operating activities............ (3,723) 287 10,689 Cash flows from investing activities: Net payments for: Property, equipment and leasehold improvements.............................................. (415) (290) (66) ------- ------- ------- Net cash used for investing activities.......................... (415) (290) (66) Cash flows from financing activities: Net proceeds (payments) related to short-term borrowings...... 1,707 878 (3,061) Securities sold under agreements to repurchase, net of securities purchased under agreements to resell................................................... 1,451 (3,803) (7,091) Proceeds from: Issuance of preferred stock............................... -- 194 145 Issuance of common stock.................................. 20 27 28 Issuance of long-term borrowings.......................... 3,185 3,477 752 Payments for: Redemption of preferred stock............................. -- -- (250) Repurchases of common stock............................... (287) (245) (99) Repayments of long-term borrowings........................ (1,202) (636) (43) Cash dividends................................................ (151) (134) (103) ------- ------- ------- Net cash provided by (used for) financing activities............ 4,723 (242) (9,722) ------- ------- ------- Net increase (decrease) in cash and interest-bearing equivalents................................................... 585 (245) 901 Cash and interest-bearing equivalents, at beginning of period........................................ 1,925 2,170 1,269 ------- ------- ------- Cash and interest-bearing equivalents, at end of period......... $ 2,510 $ 1,925 $ 2,170 ======= ======= =======
Cash payments for income taxes totaled $657 million, $299 million and $295 million in fiscal 1994, fiscal 1993 and fiscal 1992, respectively. Cash payments for interest approximated interest expense for all periods. See Notes to Consolidated Financial Statements. PAGE | FORTY-NINE 6 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Common (Dollars in Millions, Except Share Data) Stock Stock - ----------------------------------------------------------------------------------------- Balance, January 31, 1992....................................... $ 722 $76 Issuance of 8-3/4% Cumulative Preferred Stock................. 150 Redemption of Market Auction Preferred Stock.................. (250) Conversion of ESOP Preferred Stock............................ (1) Issuance of common stock...................................... 1 Repurchases of common stock................................... Compensation payable in common stock.......................... ESOP shares allocated, at cost................................ Net income.................................................... Cash dividends................................................ Translation adjustments....................................... ----- --- Balance, January 31, 1993....................................... 621 77 Issuance of 7-3/8% Cumulative Preferred Stock ................ 200 Conversion of ESOP Preferred Stock ........................... (1) Issuance of common stock...................................... 1 Repurchases of common stock................................... Compensation payable in common stock.......................... ESOP shares allocated, at cost................................ Net income.................................................... Cash dividends................................................ Translation adjustments....................................... ----- --- Balance, January 31, 1994 ...................................... 820 78 Conversion of ESOP Preferred Stock ........................... (1) Issuance of common stock...................................... 1 Repurchases of common stock................................... Compensation payable in common stock.......................... 1 ESOP shares allocated, at cost................................ Net income.................................................... Cash dividends................................................ Translation adjustments....................................... ----- --- Balance, January 31, 1995 ...................................... $ 819 $80 ===== ===
See Notes to Consolidated Financial Statements. PAGE | FIFTY 7 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES
Note Receivable Related Common to Sale of Stock Cumulative Preferred Held in Paid-in Retained Translation Stock Treasury, (Dollars in Millions, Except Share Data) Capital Earnings Adjustments to ESOP at Cost Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1992............................. $ 341 $2,035 $ 13 $(124) $ (36) $3,027 Issuance of 8-3/4% Cumulative Preferred Stock....... (4) 146 Redemption of Market Auction Preferred Stock........ (250) Conversion of ESOP Preferred Stock.................. 1 0 Issuance of common stock............................ 30 (3) 28 Repurchases of common stock......................... (99) (99) Compensation payable in common stock................ 183 (1) 182 ESOP shares allocated, at cost...................... 8 8 Net income.......................................... 510 510 Cash dividends...................................... (103) (103) Translation adjustments............................. (15) (15) ----- ------ ---- ----- ----- ------ Balance, January 31, 1993............................. 551 2,442 (2) (116) (139) 3,434 Issuance of 7-3/8% Cumulative Preferred Stock ...... (6) 194 Conversion of ESOP Preferred Stock ................. 1 0 Issuance of common stock............................ (130) 156 27 Repurchases of common stock......................... (245) (245) Compensation payable in common stock................ 401 401 ESOP shares allocated, at cost...................... 7 7 Net income.......................................... 786 786 Cash dividends...................................... (134) (134) Translation adjustments............................. (1) (1) ----- ------ ---- ----- ----- ------ Balance, January 31, 1994 ............................ 817 3,094 (3) (109) (228) 4,469 Conversion of ESOP Preferred Stock ................. 1 0 Issuance of common stock............................ 19 20 Repurchases of common stock......................... (287) (287) Compensation payable in common stock................ (131) 237 107 ESOP shares allocated, at cost...................... 9 9 Net income.......................................... 395 395 Cash dividends...................................... (151) (151) Translation adjustments............................. (7) (7) ----- ------ ---- ----- ----- ------ Balance, January 31, 1995 ............................ $ 706 $3,338 $(10) $(100) $(278) $4,555 ===== ====== ==== ===== ===== ======
PAGE | FIFTY-ONE 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Morgan Stanley Group Inc. and its U.S. and international subsidiaries (collectively, the "Company"), including Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co. International Limited ("MSIL"). All material inter-company accounts and transactions have been eliminated in consolidation. Certain amounts in the Consolidated Financial Statements for prior years have been reclassified to conform with the fiscal 1994 presentation. CHANGE IN FISCAL YEAR-END On February 28, 1995, the Company announced a change in its fiscal year-end from January 31 to November 30, effective November 30, 1995. As such, the 10-month period from February 1, 1995 through November 30, 1995 is referred to as fiscal 1995 in the Consolidated Financial Statements. FINANCIAL INSTRUMENTS USED FOR TRADING AND INVESTMENT Financial instruments, including derivatives, used in the Company's trading activities are recorded at fair value, and unrealized gains and losses are reflected in trading revenues. Interest revenue and expense arising from financial instruments used in trading activities are reflected in the Consolidated Statement of Income as interest income or expense. The fair values of the trading positions generally are based on listed market prices. If listed market prices are not available or if liquidating the Company's positions would reasonably be expected to impact market prices, fair value is determined based on other relevant factors, including dealer price quotations and price quotations for similar instruments traded in different markets, including markets located in different geographic areas. Fair values for certain derivative contracts are derived from pricing models which consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. Purchases and sales of financial instruments are recorded in the accounts on trade date. Unrealized gains and losses arising from the Company's dealings in over-the-counter ("OTC") financial instruments, including derivative contracts related to financial instruments and commodities, are presented in the accompanying Consolidated Statement of Financial Condition net-by-counterparty in cases where there is a legal right of set-off and the Company has obtained an enforceable netting agreement, which is consistent with Financial Accounting Standards Board ("FASB") Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." Equity securities purchased in connection with merchant banking and other principal investment activities are initially carried in the Consolidated Financial Statements at their original cost; the carrying value of such investments is adjusted upward only when changes in the underlying fair values are readily ascertainable, generally as evidenced by substantial transactions occurring in the marketplace which directly affect their value. Downward adjustments relating to such equity securities are made in the event that the Company determines that the eventual realizable value is less than the carrying value. Loans made in connection with such activities are carried at unpaid principal balances less any reserves for estimated losses. FINANCIAL INSTRUMENTS USED FOR ASSET AND LIABILITY MANAGEMENT The Company uses interest rate and currency swaps to manage the interest rate and currency exposure arising from certain borrowings. Swaps used to hedge debt are designated as hedges and are matched to the debt as to notional amount and maturity. The periodic receipts or payments from each swap are recognized ratably over the term of the swap as an adjustment to interest expense. The Company also uses foreign exchange forward contracts to manage the currency exposure relating to its net investment in non-U.S. dollar functional currency subsidiaries. In accordance with Statement of Financial Accounting PAGE | FIFTY-TWO 9 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Standards ("SFAS") No. 52, the gain or loss from revaluing these contracts is deferred and reported within cumulative translation adjustments in stockholders' equity, net of tax effects, with the related unrealized amounts due from or to counterparties included in receivables from or to brokers, dealers and clearing organizations. COLLATERALIZED SECURITIES TRANSACTIONS Securities purchased under agreements to resell and securities sold under agreements to repurchase (principally government and agency securities) are treated as financing transactions and are carried at the amounts at which the securities will subsequently be resold or reacquired as specified in the respective agreements; such amounts include accrued interest. Reverse repurchase and repurchase agreements are presented net-by-counterparty in the accompanying Consolidated Statement of Financial Condition where net presentation is permitted by FASB Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." It is the Company's policy to take possession of securities purchased under agreements to resell. The Company monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral. Where deemed appropriate, the Company's agreements with third parties specify its rights to request additional collateral. Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced and received in connection with the transactions. The Company measures the fair value of the securities borrowed and loaned against the cash collateral on a daily basis. Additional cash is obtained as necessary to ensure such transactions are adequately collateralized. TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at year-end rates of exchange, and the income statements are translated at weighted average rates of exchange for the year. In accordance with SFAS No. 52, gains or losses resulting from translating foreign currency financial statements, net of hedge gains or losses and related tax effects, are reflected in cumulative translation adjustments, a separate component of stockholders' equity. Gains or losses resulting from foreign currency transactions are included in net income. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Depreciation of property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets. Amortization of leasehold improvements is provided on a straight-line basis over the lesser of the estimated useful life of the asset or, where applicable, the remaining life of the lease. COMMON SHARE DATA Earnings per share is based on the weighted average number of common shares and share equivalents outstanding and gives effect to preferred stock dividend requirements. STATEMENT OF CASH FLOWS The Company considers all highly liquid debt instruments purchased and not held for resale, with an original maturity of three months or less, to be interest-bearing equivalents for purposes of this statement. INCOME TAXES Income taxes are provided in accordance with SFAS No. 109, "Accounting for Income Taxes," which the Company adopted in fiscal 1993. SFAS No. 109 requires the calculation of deferred taxes using the asset and liability method. Under this method, deferred tax balances must be adjusted to reflect enacted changes in income tax rates, and deferred taxes generally must be provided on book and tax basis differences. The effect of the adoption of SFAS No. 109 was not material to the Company's fiscal 1993 financial statements. PAGE | FIFTY-THREE 10 NOTE 2 SHORT-TERM BORROWINGS Short-term funding generally is obtained at rates related to U.S. or Euro money rates for the currency borrowed and includes loans payable on demand. Secured borrowings included in these loans were $2,694 million and $185 million at January 31, 1995 and January 31, 1994, respectively. Short-term borrowings at January 31, 1995 and January 31, 1994 also included commercial paper of $5,228 million and $4,414 million, respectively, with approximate weighted average interest rates of 6.3% and 3.9%, respectively. The Company maintains a senior revolving credit agreement with a group of banks. Under the terms of the credit agreement, the banks are committed to provide up to $2.5 billion for up to 364 days. Any loans outstanding on the commitment termination date will mature on the first anniversary of the commitment termination date. The agreement contains restrictive covenants which require, among other things, that the Company maintain stockholders' equity of at least $3,090 million as of January 31, 1995. In fiscal 1994, the Company established a master collateral facility that will enable MS&Co. to pledge certain collateral to secure loan arrangements, letters of credit and other financial accommodations. As part of this facility, MS&Co. also entered into a secured committed credit agreement with a group of banks that are parties to the master collateral facility under which such banks are committed to provide up to $1 billion for up to 364 days. Any loans outstanding on the commitment termination date will mature on the first anniversary of the commitment termination date. The credit agreement contains restrictive covenants which require, among other things, that MS&Co. maintain specified levels of consolidated stockholders' equity and Net Capital, as defined. The Company also maintains short-term agreements with three non-U.S. banks which commit the banks to provide on a collateralized basis up to deutsche marks ("DM") 250 million (approximately $164 million), French francs ("FRF") 500 million (approximately $95 million) and $100 million (or its equivalent in DM, FRF, Swiss francs or European Currency Units), respectively. There were no borrowings outstanding under any of the foregoing facilities at January 31, 1995; however, the Company anticipates utilizing these facilities for short-term funding from time to time. NOTE 3 LONG-TERM BORROWINGS MATURITIES AND TERMS Long-term borrowings at fiscal year-end consist of the following:
U.S. Dollar Non-U.S. Dollar(1) ------------- ------------------ January 31, January 31, Fixed Floating Fixed Floating 1995 1994 (Dollars in Millions) Rate Rate Rate Rate Total Total - --------------------------------------------------------------------------------------------------- Due in fiscal 1994...... $ -- $ -- $ -- $ -- $ -- $1,466 Due in fiscal 1995...... 254 679 -- 126 1,059 682 Due in fiscal 1996...... 529 919 11 338 1,797 1,407 Due in fiscal 1997...... 483 736 244 7 1,470 181 Due in fiscal 1998...... 523 30 -- 30 583 1,237 Due in fiscal 1999...... 356 220 215 -- 791 18 Thereafter.............. 2,769 10 285 50 3,114 1,819 ------ ------ ---- ---- ------ ------ Total................... $4,914 $2,594 $755 $551 $8,814 $6,810 ====== ====== ==== ==== ====== ====== Weighted average coupon at January 31 8.0% 6.3% 4.5% 5.3% 7.0% 6.0%
(1) Weighted average coupon was calculated utilizing non-U.S. dollar interest rates. PAGE | FIFTY-FOUR 11 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 3 LONG-TERM BORROWINGS (continued) Included in U.S. dollar fixed rate debt are an aggregate of $352 million of Capital Units issued by the Company and Morgan Stanley Finance plc., a U.K. subsidiary ("MS plc"). A Capital Unit consists of (a) a Subordinated Debenture of MS plc guaranteed by the Company, and (b) a related Purchase Contract issued by the Company requiring the holder to purchase one Depositary Share representing ownership of a 1/8 interest in the Company's Cumulative Preferred Stock. U.S. dollar contractual floating rate debt bears interest based on a variety of money market indices, including London Interbank Offered Rates ("LIBOR") and Treasury bill rates. Non-U.S. dollar contractual floating rate debt bears interest based on the Euro floating rates. Certain of the Company's term debt is redeemable prior to maturity at the option of the holder. These notes contain certain provisions which effectively enable noteholders to put the notes back to the Company at six-month intervals and therefore are scheduled in the foregoing table to mature in fiscal 1996. The stated maturities of these notes, which aggregate $560 million, are from 1996 to 1998. The Company's U.S. broker-dealer subsidiary, MS&Co., issued $357 million of fixed rate subordinated Series A notes and $243 million of fixed rate subordinated Series B notes in fiscal 1994. The Series A notes pay interest of 8.22% and mature on March 1, 2002. The Series B notes pay interest of 8.51% and mature on March 1, 2005. The terms of such notes contain restrictive covenants which require, among other things, that MS&Co. main-tain specified levels of Consolidated Tangible Net Worth and Net Capital, each as defined. ASSET AND LIABILITY MANAGEMENT A substantial portion of the Company's fixed rate long-term debt is used to fund highly liquid marketable securities and short-term receivables arising from securities transactions. The Company uses interest rate swaps to more closely match the term of this debt to the terms of the assets being funded and to minimize interest rate risk. These swaps effectively convert certain of the Company's fixed rate debt into floating rate obligations. In addition, for non-U.S. dollar currency debt that is not used to fund assets in the same currency, the Company has entered into currency swaps which effectively convert the debt into U.S. dollar obligations. The Company's use of swaps for asset and liability management reduced its interest expense and effective average borrowing rate as follows:
(Dollars in Millions) 1995 1994 1993 - ------------------------------------------------------------------------------ Net reduction in interest expense from swaps for the year ended January 31................... $ 93 $ 93 $ 79 Weighted average coupon of long-term debt at January 31(1)........................... 7.0% 6.0% 7.2% Effective average borrowing rate for long-term debt after swaps at January 31(1)..... 6.7% 4.2% 4.6%
(1) Included in the weighted average and effective average calculations are non-U.S. dollar interest rates. PAGE | FIFTY-FIVE 12 NOTE 3 LONG-TERM BORROWINGS (continued) The table below summarizes the notional or contract amounts of these swaps by maturity and weighted average interest rates to be received and paid as of January 31, 1995:
(Dollars in Millions) U.S. Dollar Non-U.S. Dollar(3) - ------------------------------------------------------------------------------------- Receive Pay Receive Pay Fixed Floating Fixed Floating Pay Receive Pay Receive Floating Floating Floating Floating(1) Total - ------------------------------------------------------------------------------------- Maturing in fiscal 1995......... $ 124 $150 $ -- $ 85 $ 359 Maturing in fiscal 1996......... 484 106 11 -- 601 Maturing in fiscal 1997......... 334 -- 235 -- 569 Maturing in fiscal 1998......... 354 -- -- -- 354 Maturing in fiscal 1999......... 156 210 206 -- 572 Thereafter...................... 970 -- 285 30 1,285 ---- --- --- --- ------ Total........................... $2,422 $466 $737 $115 $3,740 ====== ==== ==== ==== ====== Weighted average at January 31, 1995(2): Receive rate 7.4% 6.6% 4.0% 3.7% Pay rate 6.2% 6.4% 5.9% 8.2%
(1) These amounts include currency swaps used to effectively convert debt denominated in one currency into obligations denominated in another currency. (2) The table was prepared under the assumption that interest rates remain constant at year-end levels. The variable interest rates to be received or paid will change to the extent that rates fluctuate. Such changes may be substantial. Variable rates presented generally are based on LIBOR or Treasury bill rates. (3) The differences between the receive rate and the pay rate may reflect differences in the rate of interest associated with the underlying currency. The estimated fair value of the Company's long-term debt, based on rates available to the Company at January 31, 1995 for debt with similar terms and maturities, and the aggregate carrying value of this debt are presented in the following table:
January 31, January 31, (Dollars in Millions) 1995 1994 - ---------------------------------------------------------------------------------- Fair value of long-term debt.......................... $8,642 $7,127 Unrecognized gain (loss).............................. 172 (317) ------ ------ Carrying value of long-term debt...................... $8,814 $6,810 ====== ======
As noted above, the Company uses interest rate and currency swaps to modify the terms of its existing debt. The notional value and fair value of these swap contracts used by the Company for asset and liability management are summarized in the table below:
(Dollars in Millions) - ------------------------------------------------------------------------------- Notional value at January 31, 1994.................................. $3,649 Additions........................................................... 931 Matured............................................................. (859) Effect of foreign currency translation on non-U.S. dollar notional values................................................... 19 ------ Notional value at January 31, 1995.................................. $3,740 ====== Unrecognized loss at January 31, 1995............................... $ (3) ======
The Company also uses interest rate swaps to modify certain of its repurchase financing agreements. As of January 31, 1995, the Company had interest rate swaps with a notional value of approximately $3.8 billion and an unrecognized loss of approximately $47 million for such purpose. The unrecognized loss on these swaps was offset by unrecognized gains on certain of the Company's repurchase financing agreements. PAGE | FIFTY-SIX 13 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 4 COMMITMENTS AND CONTINGENCIES LEASES AND RELATED COMMITMENTS The Company incurred rent expense under operating leases in the amounts of $113 million, $101 million and $104 million in fiscal 1994, fiscal 1993 and fiscal 1992, respectively. Minimum remaining rental payments, excluding amounts related to the Company's termination of certain leased office space as described below, are approximately as follows:
Fiscal Year (Dollars in Millions) - --------------------------------------- 1995.......................... $ 90 1996.......................... 90 1997.......................... 80 1998.......................... 74 1999.......................... 57 Thereafter.................... 293
Rentals are subject to periodic escalation charges. During 1995, the Company will relocate approximately 4,100 of its New York City employees from existing leased space at 1221 and 1251 Avenue of the Americas to space in the Company's newly purchased headquarters buildings at 1585 Broadway and 750 Seventh Avenue that were purchased in fiscal 1993 and fiscal 1994, respectively. The total investment in these two buildings will aggregate approximately $700 million, which is being capitalized and depreciated over the useful lives of the individual assets comprising the investment. During 1994, the Company recognized a pre-tax charge of $59 million ($39 million after tax, which reduced primary and fully diluted earnings per share by $.50 and $.47, respectively). The charge was in connection with the Company's pending move to the New York City facilities and to new leased office space in Tokyo. The charge specifically covers the Company's termination of certain leased office space and the write-off of remaining leasehold improvements in both cities. OTHER COMMITMENTS AND CONTINGENCIES At January 31, 1995, securities (principally government and agency securities) with a fair value of approximately $9 billion had been pledged to counterparties as collateral against securities borrowed from these counterparties with an approximately equal fair value. The Company had approximately $2,651 million of letters of credit outstanding at January 31, 1995 to satisfy various collateral requirements. Financial instruments sold, not yet purchased represent obligations of the Company to deliver specified financial instruments at contracted prices, thereby creating commitments to purchase the securities in the market at prevailing prices. Consequently, the Company's ultimate obligation to satisfy the sale of financial instruments sold, not yet purchased may exceed the amounts recognized in the Consolidated Statement of Financial Condition. The Company and its subsidiaries have been named as defendants in certain legal actions and have been involved in certain investigations and proceedings in the ordinary course of business. It is the opinion of management, based on current knowledge and after consultation with counsel, that the outcome of such matters will not have a material adverse effect on the Company's Consolidated Financial Statements contained herein. PAGE | FIFTY-SEVEN 14 NOTE 5 TRADING ACTIVITIES TRADING REVENUES The Company manages its trading businesses by product groupings and therefore has established distinct business units having responsibility for equity, fixed income, foreign exchange and commodities products. Because of the integrated nature of the markets for such products, each product area trades cash instruments as well as related derivative products (i.e., options, swaps, futures, forwards and other contracts with respect to such underlying instruments or commodities). Revenues related to trading are summarized below by business unit. The "Total" column includes all trading revenues plus the portion of those commission and interest revenues and expenses which result from trading activities. Commissions and Net Interest (interest revenues less interest expense) as reported in the Company's Consolidated Statement of Income also include results from the Company's securities services business and other business activities:
(Dollars in Millions) Trading Commissions Net Interest Total - ----------------------------------------------------------------------------------- FISCAL 1994 Equities...................... $ 510 $351 $ (60) $ 801 Fixed Income.................. 347 60 419 826 Foreign Exchange.............. 148 1 4 153 Commodities................... 99 2 5 106 ------ ---- ---- ------ Trading-related revenues...... 1,104 414 368 1,886 Securities services and other................... -- 35 163 198 ------ ---- ---- ------ $1,104 $449 $531 $2,084 ====== ==== ==== ====== FISCAL 1993 Equities...................... $ 407 $312 $ 7 $ 726 Fixed Income.................. 788 54 544 1,386 Foreign Exchange.............. 205 1 (1) 205 Commodities................... 59 1 13 73 ------ ---- ---- ------ Trading-related revenues...... 1,459 368 563 2,390 Securities services and other................... -- 25 77 102 ------ ---- ---- ------ $1,459 $393 $640 $2,492 ====== ==== ==== ====== FISCAL 1992 Equities...................... $347 $253 $ (16) $ 584 Fixed Income.................. 337 48 472 857 Foreign Exchange.............. 230 -- -- 230 Commodities................... 39 -- 10 49 ------ ---- ---- ------ Trading-related revenues...... 953 301 466 1,720 Securities services and other................... -- 11 (14) (3) ------ ---- ---- ------ $ 953 $312 $452 $1,717 ====== ==== ==== ======
PAGE | FIFTY-EIGHT 15 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 5 TRADING ACTIVITIES (continued) The Company's trading activities are both proprietary and client-driven. The Company enters into specific contracts and carries inventories to meet the needs of its clients. Its trading portfolios also are managed with a view toward the risk and profitability of the portfolios to the Company. The nature of the equities, fixed income, foreign exchange and commodities activities conducted by the Company, including the use of derivative products in these businesses, is discussed below. In addition, all of the activity discussed below is subject to position limits and credit risk management policies and procedures. EQUITIES The Company makes markets and trades in the global secondary markets for equities and convertible debt and is a dealer in equity warrants, exchange traded and OTC equity options, index futures, equity swaps and other sophisticated equity derivatives. The Company's activities as a dealer primarily are client-driven, with the objective of meeting clients' needs while earning a spread between the premiums paid or received on its contracts with clients and the cost of hedging such transactions in the cash market or with other derivative transactions. The Company limits its market risk related to these contracts, which stems from underlying equity/index price and volatility movements, by employing a variety of hedging strategies, such as delta hedging (delta is a measure of a derivative contract's price movement based on the movement of the price of the security or index underlying the contract). The Company also takes proprietary positions in the global equity markets by using derivatives, most commonly futures and options, in addition to cash positions, intending to profit from market price and volatility movements in the underlying equities or indices positioned. Equity option contracts give the purchaser of the contract the right to buy (call) or sell (put) the equity security or index underlying the contract at an agreed-upon price (strike price) during or at the conclusion of a specified period of time. The seller (writer) of the contract is subject to market risk, and the purchaser is subject to market risk (to the extent of the premium paid) and credit risk. Equity swap contracts are contractual agreements whereby one counterparty receives the appreciation (or pays the depreciation) on an equity investment in return for paying another rate, often based upon equity index movements or interest rates. The counterparties to the Company's equity transactions include commercial banks, other investment banks, broker-dealers, investment funds and industrial companies. FIXED INCOME The Company is a market-maker for U.S. and non-U.S. government securities, corporate bonds, money market instruments, medium-term notes and Eurobonds, high-yield securities, emerging market debt, mortgage-and other asset-backed securities, preferred stock and tax-exempt securities. In addition, the Company is a dealer in interest rate and currency swaps and other related derivative products, OTC options on U.S. and foreign government bonds and mortgage-backed forward agreements ("TBA"), options and swaps. In this capacity, the Company facilitates asset and liability management for its customers in interest rate and currency swaps and related products and OTC government bond options. Swaps used in fixed income trading are contractual agreements to exchange interest payment streams (i.e., an interest rate swap may involve exchanging fixed for floating interest payments) or currencies (i.e., a currency swap may involve exchanging yen for U.S. dollars in one year at an agreed-upon exchange rate). The Company profits by earning a spread between the premium paid or received for these contracts and the cost of hedging such contracts. The Company manages the market risk of its swap portfolio, which stems from interest rate and currency movements and volatility, by seeking to balance risks within its portfolio using modeling that quantifies the sensitivity of its portfolio to movements in interest rates and currencies and by adding positions to or PAGE | FIFTY-NINE 16 NOTE 5 TRADING ACTIVITIES (continued) selling positions from its portfolio as needed to minimize such sensitivity. Typically, the Company adjusts its positions by entering into additional swaps or interest rate and foreign currency futures, foreign currency forwards and underlying government bonds. The Company manages the risk related to its option portfolio by using a variety of hedging strategies such as delta hedging, which includes the use of futures and forward contracts to hedge market risk. The Company also is involved in using debt securities to structure products with multiple risk/return factors designed to suit investor objectives. The Company is an underwriter of and a market-maker in mortgage-backed securities and collateralized mortgage obligations ("CMO") as well as commercial, residential and real estate loan products. The Company also structures mortgage-backed swaps for its clients, enabling them to derive the cash flows from an underlying mortgage-backed security without purchasing the cash position. It earns the spread between the premium inherent in the swap and the cost of hedging the swap contract through the use of cash positions or TBA contracts. The Company also uses TBAs in its role as a dealer in mortgage-backed securities and facilitates customer trades by taking positions in the TBA market. Typically, these positions are hedged by offsetting TBA contracts or underlying cash positions. The Company profits by earning the bid-offer spread on such transactions. Further, the Company uses TBAs to ensure delivery of underlying mortgage-backed securities in its CMO issuance business. As is the case with all mortgage-backed products, market risk associated with these derivatives results from interest rate fluctuations and changes in mortgage prepayment speeds. The counterparties to the Company's fixed income transactions include investment advisors, banks, insurance companies, investment funds and various companies. FOREIGN EXCHANGE The Company is a market-maker in a number of foreign currencies. In this business, it actively trades currencies in the spot and forward markets earning a dealer spread. The Company seeks to manage its market risk by entering into offsetting positions. The Company conducts an arbitrage business in which it seeks to profit from inefficiencies between the futures, spot and forward markets. The Company also makes a market in foreign currency options. This business largely is client-driven and involves the purchasing and writing of European and American style options and some sophisticated products to meet specific client needs. The Company profits in this business by earning spreads between the options' premiums and the cost of the hedging of such positions. The Company limits its market risk by using a variety of hedging strategies, including the buying and selling of the currencies underlying the options based upon the options' delta equivalent. Foreign exchange option contracts give the purchaser of the contract the right to buy (call) or sell (put) the currency underlying the contract at an agreed-upon strike price at or over a specified period of time. Forward contracts and futures represent commitments to purchase or sell the underlying currencies at a specified future date at a specified price. The Company also takes proprietary positions in major currencies to profit from market price and volatility movements in the currencies positioned. The majority of the Company's foreign exchange business relates to major foreign currencies such as deutsche marks, yen, pound sterling, French francs, Swiss francs, lire and Canadian dollars. The balance of the business covers a broad range of other currencies. The counterparties to the Company's foreign exchange transactions include commercial banks, other investment banks, broker-dealers, investment funds and industrial companies. COMMODITIES The Company, as a major participant in the world commodities markets, trades in physical precious metals, energy products (principally oil and natural gas) and soft commodities as well as a variety of derivatives related to these commodities such as futures, forwards and exchange traded and PAGE | SIXTY 17 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 5 TRADING ACTIVITIES (continued) OTC options and swaps. Through these activities, the Company provides clients with a ready market to satisfy end users' current raw material needs and facilitates their ability to hedge price fluctuations related to future inventory needs. The former activity requires the positioning of physical commodities. Derivatives on those commodities, such as futures, forwards and options, often are used to hedge price movements in the underlying physical inventory. The Company profits as a market-maker in physical commodities by capturing the bid and offer spread inherent in the physical markets. To facilitate hedging for its clients, the Company often is required to take positions in the commodity markets in the form of forward, option and swap contracts involving oil, natural gas and electricity. The Company generally hedges these positions by using a variety of hedging techniques such as delta hedging, whereby the Company takes positions in the physical markets and/or positions in other commodity derivatives such as futures and forwards to offset the market risk in the underlying derivative. The Company profits from this business by earning a spread between the premiums paid or received for these derivatives and the cost of hedging such derivatives. The Company also maintains proprietary trading positions in commodity derivatives, including futures, forwards and options in addition to physical commodities, to profit from price and volatility movements in the underlying commodities markets. Forward, option and swap contracts on commodities are structured similarly to like-kind derivative contracts for cash financial instruments. The counterparties to OTC commodity contracts include precious metals producers, refiners and consumers as well as central banks, oil, gas and electricity producers, shippers, and coffee producers and consumers. RISK MANAGEMENT Risk management at the Company is an integrated process with independent oversight. The Company's senior management takes an active role in the risk management process and controls the various risks associated with the Company's business areas through a variety of separate but complementary procedures. Since managing risk involves constant communication, judgment and knowledge of specialized products and markets, the Company's senior management has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. The Company has developed a multi-tiered approach for monitoring and managing its risks. With respect to the Company's major trading businesses (fixed income, equity, commodities and foreign exchange), senior division risk managers monitor positions and set the overall division risk profile within established limits, verify that position hedges are appropriate and well-maintained, and report unusual market and position events to the Firm Risk Management Group (described below). The base level of control is at the trading desks where desk risk managers and traders perform similar functions with respect to a product area or particular product. The Firm Risk Management Group has operational responsibility for reporting to senior management on the Company's exposure to risk. The Company's Senior Risk Manager, who heads the Firm Risk Management Group and reports to the President of the Company, assists senior management in monitoring and controlling the Company's overall risk profile. The Firm Risk Management Group includes the Market Risk and Exposure Management Department ("MREM"), the Credit Department and the Internal Audit Department, all of which are independent of the Company's business areas. MREM monitors certain divisional, geographic and product-line market risks. The Credit Department establishes and monitors counterparty exposure limits and collateral requirements to support counterparty contractual commitments. The Internal Audit Department, which also reports to the Audit Committee of the Board of PAGE | SIXTY-ONE 18 NOTE 5 TRADING ACTIVITIES (continued) Directors, assesses the Company's operations and control environment through periodic examinations of business and operational areas. Other departments within the Company, which are independent of the Company's business areas, also are actively involved in monitoring the Company's risk profile: the Controllers Department monitors, reviews and reports trading positions (including inventory aging) and performs independent verification of the values of trading positions; the Operations Department monitors trading positions and verifies and processes executed trades; and the Legal and Compliance Department advances senior management's policies concerning legal and regulatory requirements, conduct, ethics and business practices and establishes policies and procedures addressing a variety of legal issues, including contract enforceability. In addition, the Company has certain standing committees that are involved in managing and monitoring the risks associated with the Company's diverse businesses. These committees are composed of a cross section of the Company's senior officers from various disciplines. 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 a particular transaction. The Company's Finance and Risk Committee, among other things, establishes the overall funding, capital and credit 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; and oversees liquidity and interest rate sensitivity of the Company's asset and liability position. The Company's risk management policies and procedures are continually evolving to address the increasingly global nature of the financial services business as well as the continual development of sophisticated financial products with more varied and complex risk profiles. MARKET RISK The Company manages the market risk associated with its trading activities on an individual product basis, on a divisional level and on a Company-wide basis. Specific risk limits are assigned to each trading area of the Company and trading desks within trading areas. These limits are reviewed periodically and are adjusted as required. The Company uses analytic and quantitative tools, such as option pricing and hedge models, to quantify market risk for comparison, by product, to specific internal risk limits and to assess the sensitivity of positions at risk to changes in market conditions. The Company also regularly uses a variety of measures to reduce and control the market risk associated with trading proprietary positions and making markets. Market-making positions generally are hedged (that is, covered by similar, offsetting positions). Hedges may be designed to remove all or part of a position's exposure to price or yield movements and are chosen using analytic tools similar to those used to determine the risk of the positions being hedged. The Company attempts to match the risk profiles of each portfolio of securities and any related hedges as closely as possible and to accomplish this often uses futures, options or other derivative products. Exposures in proprietary positions are managed by customizing trades to respond only to specific market movements, establishing limits and monitoring procedures, and regularly marking positions to market. CREDIT RISK The Credit Department reviews trading transactions in order to ensure that credit exposures are appropriate for the particular counterparty with whom business is conducted. All counterparties are reviewed on a regular basis to establish appropriate exposure limits for a variety of transactions. In certain cases, specific transactions are analyzed PAGE | SIXTY-TWO 19 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 5 TRADING ACTIVITIES (continued) to determine the amount of potential exposure that could arise, and the counterparty's credit is reviewed to determine whether it supports such exposure. In addition to the counterparty's credit status, the Credit Department analyzes market movements that could affect exposure levels. The Credit Department considers four main factors that may affect trades in determining trading limits: the settlement method; the time it will take for a trade to settle (i.e., the maturity of the trade); the volatility that could affect the value of the securities involved in the trade; and the size of the trade. In addition to determining trading limits, the Company actively manages the credit exposure relating to its trading activities by entering into master netting agreements when feasible; monitoring the creditworthiness of counterparties and the related trading limits on an ongoing basis and requesting additional collateral when deemed necessary; diversifying and limiting exposure to individual counterparties and geographic locations; and limiting the duration of exposure. In certain cases, the Company also may close out transactions or assign them to other counterparties when deemed necessary or appropriate to mitigate credit risk. The Credit Department also actively participates in reviewing fixed income securities underwritings in which the Company engages and has adopted certain procedures for reviewing both discrete debt offerings and continuously offered securities, including commercial paper. CONCENTRATION RISK The Company is subject to concentration risk by holding large positions in certain types of securities or commitments to purchase securities of a single issuer, including sovereign governments and other entities, issuers located in a particular country or geographic area, public and private issuers involving developing countries or issuers engaged in a particular industry. Financial instruments owned by the Company include U.S. government and agency securities and securities issued by other sovereign governments (principally Japan, Germany, France and Italy), which, in the aggregate, represented approximately 19% of the Company's total assets at January 31, 1995. The Company's positions in Japanese government securities amounted to approximately $7 billion, or 6% of total assets, as of January 31, 1995. In addition, substantially all of the collateral held by the Company for resale agreements or bonds borrowed, which together represented approximately 37% of the Company's total assets at January 31, 1995, consists of securities issued by the U.S. government, federal agencies or non-U.S. governments. Positions taken and commitments made by the Company, including positions taken and underwriting and financing commitments made in connection with its merchant banking activities, often involve substantial amounts and significant exposure to individual issuers and businesses, including non-investment grade issuers. The Company seeks to limit concentration risk through the use of the systems and procedures described in the preceding discussions of market and credit risk. CUSTOMER ACTIVITIES The Company's customer activities involve the execution, settlement, custody and financing of various securities and commodities transactions on behalf of customers. Customer securities activities are transacted on either a cash or margin basis. Customer commodities activities, which include the execution of customer transactions in commodity futures transactions (including options on futures), are transacted on a margin basis. The Company's customer activities may expose it to off-balance sheet credit risk. The Company may have to purchase or sell financial instruments at prevailing market prices in the event of the failure of a customer to settle a trade on its original terms or in the event cash and securities in customer margin accounts are not sufficient to fully cover customer losses. The Company seeks to control the risks associated with customer activities by requiring customers to maintain margin collateral in compliance with various regulations and Company policies. PAGE | SIXTY-THREE 20 NOTE 5 TRADING ACTIVITIES (continued) NOTIONAL/CONTRACT AMOUNTS AND FAIR VALUES OF DERIVATIVES The gross notional or contract amounts of derivative instruments and fair value (carrying amount) of the related assets and liabilities at January 31, 1995 and January 31, 1994, as well as the average fair value of those assets and liabilities for the year ended January 31, 1995, are presented in the table which follows. Fair value represents the cost of replacing these instruments and is further described in Note 1. Future changes in interest rates, foreign currency exchange rates or the market values of the financial instruments, commodities or indices underlying these contracts may ultimately result in cash settlements exceeding fair value amounts recognized in the Consolidated Statement of Financial Condition. Assets represent unrealized gains on purchased exchange traded and OTC options and other contracts (including interest rate, foreign exchange and other forward contracts and swaps) in gain positions net of any unrealized losses owed to these counterparties on offsetting positions in situations where there is a legal right of set-off and the Company has an enforceable netting agreement. Similarly, liabilities represent net amounts owed to counterparties. These amounts will vary based on changes in the fair values of underlying financial instruments and/or the volatility of such underlying instruments:
Year-End Average Year-End Fair Values(2) Fair Values(2)(3) Gross Notional/ ------------------------- ------------------ Contract Amount Assets Liabilities Assets Liabilities (Dollars in Billions, --------------------------------------------- 1994 1993 at January 31)(1) 1994 1993 1994 1993 1994 1994 - ------------------------------------------------------------------------------------------ $299 $225 Interest rate and currency swaps and options (including caps, floors and swap options)...... $3.9 $3.1 $2.2 $2.6 $3.8 $2.4 170 193 Foreign exchange forward and futures contracts and options......... 1.1 1.0 1.3 1.1 1.3 1.5 39 53 Mortgage-backed securities forward contracts, swaps and options................... 0.2 0.1 0.1 -- 0.1 0.1 235 203 Other fixed income securities contracts (including futures contracts and options)........ 0.4 0.1 0.6 -- 0.7 1.3 57 37 Equity securities contracts (including equity swaps, futures contracts, and warrants and options).................. 1.1 0.7 1.2 0.7 1.1 1.1 35 29 Commodity forwards, futures, options and swaps .................... 1.9 1.5 1.9 1.4 1.8 1.7 - ---- ---- ---- ---- ---- ---- ---- ---- $835 $740 Total......................... $8.6 $6.5 $7.3 $5.8 $8.8 $8.1 ==== ==== ==== ==== ==== ==== ==== ====
(1) The Company has a very limited number of leveraged transactions. The notional amounts of derivatives have been adjusted to reflect the effects of leverage, where applicable. (2) These amounts represent carrying value (exclusive of collateral) at January 31, 1995 and January 31, 1994, respectively, and do not include receivables or payables related to exchange traded futures contracts. (3) Amounts are calculated using a monthly average. PAGE | SIXTY-FOUR 21 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 5 TRADING ACTIVITIES (continued) The gross notional or contract amounts of these instruments are indicative of the Company's degree of use of derivatives for trading purposes but do not represent the Company's exposure to market or credit risk. Credit risk arises from the failure of a counterparty to perform according to the terms of the contract. The Company's exposure to credit risk at any point in time is represented by fair value of the contracts reported as assets. These amounts are presented net-by-counterparty in cases where there is a legal right of set-off and the Company has obtained an enforceable netting agreement, but are not reported net of collateral, which the Company obtains with respect to certain of these transactions to reduce its exposure to credit losses. The Company monitors the creditworthiness of counterparties to these transactions on an ongoing basis and requests additional collateral when deemed necessary. The Company believes that the ultimate settlement of the transactions outstanding at January 31, 1995 will not have a material effect on the Company's financial condition. The remaining maturities of the Company's swaps and other derivative products at January 31, 1995 are summarized in the following table, showing notional values by year of expected maturity:
Less than 1 to 3 3 to 5 Greater than (Dollars in Billions) 1 Year Years Years 5 Years Total - -------------------------------------------------------------------------------------- Interest rate and currency swaps and options (including caps, floors and swap options)......... $ 74 $108 $68 $49 $299 Foreign exchange forward and futures contracts and options.... 163 7 -- -- 170 Mortgage-backed securities forward contracts, swaps and options...................... 35 1 1 2 39 Other fixed income securities contracts (including futures contracts and options)........... 152 68 15 -- 235 Equity securities contracts (including equity swaps, futures contracts, and warrants and options)............ 50 5 1 1 57 Commodity forwards, futures, options and swaps................ 30 4 1 -- 35 ---- ---- --- --- ---- Total.............................. $504 $193 $86 $52 $835 ---- ---- --- --- ---- Percent of total................... 61% 23% 10% 6% 100% ==== ==== === === ====
PAGE | SIXTY-FIVE 22 NOTE 5 TRADING ACTIVITIES (continued) The credit quality of the Company's trading-related derivatives at January 31, 1995 is summarized in the table below, showing the fair value of the related assets by counterparty credit rating. The actual credit ratings are determined by external rating agencies or by equivalent ratings used by the Company's Credit Department:
Collater- alized Other Non- Non- Invest- Invest- ment ment (Dollars in Millions) AAA AA A BBB Grade Grade Total - ------------------------------------------------------------------------------------- Interest rate and currency swaps and options (including caps, floors and swap options)............... $ 723 $1,617 $ 965 $182 $294 $ 78 $3,859 Foreign exchange forward contracts and options............ 409 345 251 76 -- 46 1,127 Mortgage-backed securities forward contracts, swaps and options............ 14 69 75 28 -- 22 208 Other fixed income securities contracts (including options).... 302 26 42 26 -- 19 415 Equity securities contracts (including equity swaps, warrants and options).......... 379 188 217 188 145 18 1,135 Commodity forwards, options and swaps..... 300 216 667 490 -- 206 1,879 ------ ------ ------ ---- ---- ---- ------ Total................... $2,127 $2,461 $2,217 $990 $439 $389 $8,623 ====== ====== ====== ==== ==== ==== ====== Percent of total........ 25% 29% 26% 11% 5% 4% 100% ====== ====== ====== ==== ==== ==== ======
PAGE | SIXTY-SIX 23 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 6 PREFERRED STOCK Preferred stock is composed of the following issues:
Shares Outstanding at Balance at January 31, January 31, January 31, January 31, (Dollars in Millions) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------- ESOP Convertible Preferred Stock, liquidation preference $35.88........................ 3,795,588 3,819,889 $136 $137 9.36% Cumulative Preferred Stock, stated value $25....... 5,500,000 5,500,000 138 138 7-3/8% Cumulative Preferred Stock, stated value $200...... 1,000,000 1,000,000 200 200 8.88% Cumulative Preferred Stock, stated value $200...... 975,000 975,000 195 195 8-3/4% Cumulative Preferred Stock, stated value $200...... 750,000 750,000 150 150 --- --- Total......................... $819 $820 ==== ====
Each issue of preferred stock ranks in parity with all other preferred stock. In fiscal 1993, the Company issued 8,000,000 Depositary Shares, representing 1,000,000 shares of 7-3/8% Cumulative Preferred Stock, in an aggregate amount of $200 million. Each Depositary Share represents 1/8 of a share of such preferred stock. NOTE 7 COMMON STOCK AND STOCKHOLDERS' EQUITY During the period ended January 31, 1995, the Company repurchased or acquired shares of its common stock at an aggregate cost of $287 million. The Company's unused portion of its stock repurchase authorization at January 31, 1995 was approximately $166 million. On February 28, 1995, the Board of Directors authorized the purchase, in the open market or otherwise, subject to market conditions and certain other factors, of an additional $150 million of the Company's common stock. MS&Co. is a registered broker-dealer and a registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the Securities and Exchange Commission ("SEC"), the New York Stock Exchange ("NYSE") and the Commodities Futures Trading Commission. MS&Co. has consistently operated in excess of these requirements with aggregate net capital, as defined, totaling $844 million at January 31, 1995, which exceeded the amount required by $689 million. MSIL, a London-based broker-dealer subsidiary, and Morgan Stanley Japan Limited ("MSJL"), another broker-dealer subsidiary, also are subject to certain net capital requirements of their respective regulatory agencies. Certain other U.S. and non-U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. At January 31, 1995, these subsidiaries were in compliance with all applicable securities regulations and local capital adequacy requirements. Advances, dividend payments and other equity withdrawals from MS&Co., MSIL, MSJL and other regulated subsidiaries are restricted by the regulations of the SEC, NYSE, other regulatory agencies and subordinated noteholders. Morgan Stanley Derivative Products Inc., the Company's Triple-A rated derivative products subsidiary, has certain restrictions on dividend payments and other equity withdrawals. At January 31, 1995, approximately $1,528 million of equity of the Company's subsidiaries may be restricted as to the payment of dividends and advances. Cumulative translation adjustments include gains or losses resulting from translating foreign currency financial statements from their PAGE | SIXTY-SEVEN 24 NOTE 7 COMMON STOCK AND STOCKHOLDERS' EQUITY (continued) respective functional currencies to U.S. dollars, net of hedge gains or losses and related tax effects. The Company uses foreign currency contracts and designates certain non-U.S. dollar currency debt as hedges to manage the currency exposure relating to its net investment in non-U.S. dollar functional currency subsidiaries (the "Company's Net Foreign Investment"). Increases or decreases in the value of the Company's Net Foreign Investment generally are tax-deferred for U.S. purposes, but the related hedge gains and losses are taxable currently. Therefore, the gross notional amounts of the contracts and debt designated as hedges exceed the Company's Net Foreign Investment to result in effective hedging on an after-tax basis. The Company attempts to protect its net book value from the effects of fluctuations in currency exchange rates on its investment in non-U.S. dollar subsidiaries by selling the appropriate non-U.S. dollar currency in the forward market. However, under some circumstances, the Company may elect not to hedge its net investment in certain foreign operations due to market conditions, including the availability of various currency contracts at acceptable costs. Information relating to the Company's net investment in non-U.S. dollar functional currency subsidiaries and hedging activity and their effects on cumulative translation adjustments is summarized below:
January 31, January 31, 1995 1994 - ---------------------------------------------------------------------------------- Net investment in non-U.S. dollar functional currency subsidiaries................................ $1,122 $ 974 ====== ====== Gross notional amounts of foreign exchange contracts and non-U.S. dollar debt designated as hedges (1).... $1,960 $1,597 ====== ====== Cumulative translation adjustments resulting from net investments in subsidiaries with a non-U.S. dollar functional currency.................................. $ 188 $ 111 Cumulative translation adjustments resulting from realized or unrealized gains or losses on hedges, net of tax........................................... (198) (114) ------ ------ Total cumulative translation adjustments............... $ (10) $ (3) ====== ======
(1) Notional amounts represent the contractual currency amount translated at respective year-end spot rates. PAGE | SIXTY-EIGHT 25 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 8 EMPLOYEE BENEFIT PLANS CAPITAL ACCUMULATION PLAN Under the Capital Accumulation Plan ("CAP"), vested units consisting of unsecured rights to receive payments based on notional interests in existing and future risk-capital investments made directly or indirectly by the Company ("CAP Units") are granted to key employees. The value of the CAP Units awarded for services rendered in fiscal 1994, fiscal 1993 and fiscal 1992 was approximately $14 million, $15 million and $21 million, respectively, all of which relate to vested units. CARRIED INTEREST PLAN Under the Carried Interest Plan, certain key employees effectively participate in a portion of the Company's realized gains from certain of its equity investments in merchant banking transactions. Compensation expense for fiscal 1994, fiscal 1993 and fiscal 1992 related to this plan aggregated $24 million, $29 million and $22 million, respectively. EQUITY INCENTIVE COMPENSATION PLAN Pursuant to the 1988 Equity Incentive Compensation Plan ("EICP"), stock units representing employees' rights to receive unrestricted common shares ("Stock Units") are awarded annually to key employees; compensation expense for all such awards (including those subject to forfeiture) recorded in fiscal 1994, fiscal 1993 and fiscal 1992 was determined based on the fair value of the Company's common stock as defined in the plan. Stock Units generally will convert to shares of the Company's common stock within five or 10 years from the award date (or earlier in the event of the holder's death or retirement, as defined). Holders of Stock Units generally have all the rights of a common stockholder, subject to restrictions on transfer of ownership of the units for the five- or 10-year period. Holders of the Stock Units generally will forfeit ownership only in certain limited situations, including termination for cause during the restriction period. Holders of the Stock Units having a 10-year restriction period, which were first awarded in respect of fiscal 1992 services, will forfeit ownership of a portion of their Stock Units if their employment is terminated before the end of the 10-year restriction period. Activity related to Stock Units accrued pursuant to the EICP is as follows:
Stock Units ----------------------------------------------- Fiscal 1994(1) Fiscal 1993(1) Fiscal 1992(2) - ------------------------------------------------------------------------------------------ Outstanding at beginning of period..... 12,017,505 6,813,165 3,680,183 Awarded................................ 2,257,815 5,341,403 3,189,281 Issued as unrestricted shares(3)....... (181,274) (82,827) (21,027) Forfeited.............................. (179,679) (54,236) (35,272) ---------- ---------- --------- Outstanding at end of period........... 13,914,367 12,017,505 6,813,165 ========== ========== =========
(1) Approximately 24% and 21% of the Stock Units awarded in fiscal 1994 and fiscal 1993, respectively, were subject to a 10-year restriction period. (2) Amounts listed include January 1992 activity. (3) Amounts represent awards of Stock Units exchanged for unrestricted common shares. PAGE | SIXTY-NINE 26 NOTE 8 EMPLOYEE BENEFIT PLANS (continued) On May 2, 1991, the Company's stockholders approved the reservation of 24,000,000 shares of common stock for awards under the Company's equity-based employee benefit plans. At January 31, 1995, approximately 5,000,000 shares reserved for future awards under the employee benefit plans remain (net of fiscal 1994 awards). STOCK OPTION AWARDS The Company's 1986 Stock Option Plan provides for the granting of stock options having an exercise price not less than the fair value of the Company's common stock (as defined in the plan) on the date of grant. Such options generally become exercisable over a three-year period and expire 10 years from the date of the grant. The EICP also provides for the award of options; options awarded under this plan are exercisable at a price equal to the average fair value of the Company's common stock for the five trading days preceding the date of grant or the end of the fiscal year and will expire seven years (for options awarded for fiscal 1993 service and prior) or 10 years (for options awarded for fiscal 1994 service) from the date of award. Exercise prices for all options deemed outstanding at January 31, 1995, January 31, 1994 and January 31, 1993 ranged from $18.83 to $75.85. The following table sets forth activity relating to the number of shares covered by stock options:
Fiscal 1994 Fiscal 1993 Fiscal 1992(1) - ------------------------------------------------------------------------------------------ Options outstanding at beginning of period.. 7,246,924 7,567,487 8,757,261 Granted..................................... 5,638,854 606,000 -- Exercised................................... (495,528) (906,214) (1,169,985) Forfeited................................... (35,750) (20,349) (19,789) ---------- --------- --------- Options outstanding at end of period 12,354,500 7,246,924 7,567,487 ========== ========= ========= Options exercisable at end of period 9,137,329 6,922,574 7,232,855
(1) Amounts listed include January 1992 activity. PROFIT SHARING The Company has a qualified non-contributory profit sharing plan covering substantially all U.S. employees and also provides cash payment of profit sharing to employees of its international subsidiaries. Contributions are made at the discretion of management. Total profit sharing expense for fiscal 1994, fiscal 1993 and fiscal 1992 (excluding Company contributions to the Employee Stock Ownership Plan) was $23 million, $21 million and $21 million, respectively. EMPLOYEE STOCK OWNERSHIP PLAN In July 1990, the Company's Board of Directors authorized the establishment of a $140 million leveraged employee stock ownership plan, funded through an independently managed trust. The Morgan Stanley Group Inc. and Subsidiaries Employee Stock Ownership Plan ("ESOP") was established to broaden internal ownership in the Company and allow it to provide benefits to its employees in a cost-effective manner. Each of the 3,795,588 preferred shares outstanding at January 31, 1995 is held by the ESOP trust, is convertible into one share of the Company's common stock and is entitled to annual dividends of $2.78 per share. The ESOP trust funded its stock purchase through a loan of $140 million from the Company. The ESOP trust note, due September 19, 2010 (extendable at the option of the ESOP trust to September 19, 2015), bears a 10-3/8% interest rate per annum with principal payable without penalty on or before the due date. The ESOP trust expects to make principal and interest payments on the note from funds provided by dividends on the shares of convertible preferred stock and contributions from the Company. The note receivable from the ESOP trust is reflected as a reduction in the Company's stockholders' equity. Contributions to the ESOP by the Company and allocation of ESOP shares to employees are made annually at the discretion of the Board of PAGE | SEVENTY 27 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 8 EMPLOYEE BENEFIT PLANS (continued) Directors. The cost of shares allocated to participants' accounts amounted to $10 million in fiscal 1994, $7 million in fiscal 1993 and $8 million in fiscal 1992. The ESOP debt service costs for fiscal 1994, fiscal 1993 and fiscal 1992 were paid from dividends received on preferred stock held by the plan and from Company contributions. Shares allocated to employees generally may not be withdrawn until the employee's death, disability, retirement or termination. Upon withdrawal, each share of ESOP preferred stock generally will be converted into one share of the Company's common stock. If the fair value of a common share at conversion is less than the $35.88 liquidation value of an ESOP preferred share, the Company will pay the withdrawing employee the difference in additional common shares or cash. POSTRETIREMENT BENEFITS Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Expense recognized for these benefits totaled $4 million for fiscal 1994, fiscal 1993 and fiscal 1992, respectively. The accumulated benefit obligation was $28 million and $31 million for fiscal 1994 and fiscal 1993, respectively. The accrued postretirement benefit cost recognized by the Company was $26 million and $23 million for fiscal 1994 and fiscal 1993, respectively. The difference between the accumulated benefit obligation and the accrued postretirement benefit cost at January 31, 1995 and January 31, 1994 is due to changes in the assumptions used to calculate the accumulated benefit obligation which is being deferred in accordance with SFAS No. 106. POSTEMPLOYMENT BENEFITS Effective February 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Among its provisions, SFAS No. 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Postemployment benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, and continuation of benefits such as health care benefits and life insurance coverage. The effect of the adoption of SFAS No. 112 was not material to the Company's Consolidated Financial Statements. PENSION PLANS Substantially all of the employees of the Company and its U.S. affiliates are covered by a non-contributory pension plan qualified under Section 401(a) of the Internal Revenue Code (the "Qualified Plan"). Two unfunded supplementary plans (the "Supplemental Plans") cover certain executives. In addition to the Qualified Plan and the Supplemental Plans (collectively, the "U.S. Plans"), the Company also maintains a separate pension plan which covers substantially all employees of the Company's U.K. subsidiaries (the "U.K. Plan"). Seven other international subsidiaries also have pension plans covering substantially all of their employees. These pension plans generally provide pension benefits that are based on each employee's years of credited service and compensation during the final years of employment. The Company's policy is to fund the accrued cost of the Qualified Plan, the U.K. Plan and the other international plans currently. Liabilities for benefits payable under the Supplemental Plans are accrued by the Company and are funded when paid to the beneficiaries. PAGE | SEVENTY-ONE 28 NOTE 8 EMPLOYEE BENEFIT PLANS (continued)
Pension expense for fiscal 1994, fiscal 1993 and fiscal 1992 includes the following components: (Dollars in Millions) Fiscal 1994 Fiscal 1993 Fiscal 1992 - ----------------------------------------------------------------------------------- U.S. Plans Service cost, benefits earned during the period...................... $ 8 $ 6 $ 6 Interest cost on projected benefit obligation..................... 11 10 9 Return on plan assets.................. 1 (16) (7) Difference between actual and expected return on assets.............. (15) 3 (5) Net amortization....................... (3) (4) (4) --- --- --- Total U.S. Plans....................... 2 (1) (1) U.K. Plan Service cost, benefits earned during the period...................... 6 5 4 Interest cost on projected benefit obligation..................... 2 2 2 Return on plan assets.................. -- (10) (3) Difference between actual and expected return on assets.............. (3) 8 1 Net amortization....................... -- -- -- --- --- --- Total U.K. Plan 5 5 4 Other international plans 5 3 -- --- --- --- Total pension expense $ 12 $ 7 $ 3 ==== ==== ===
The following table provides the assumptions used in determining the projected benefit obligation for the U.S. Plans and the U.K. Plan as of January 31, 1995, January 31, 1994 and January 31, 1993:
January 31, 1995 January 31, 1994 January 31, 1993 --------------------- --------------------- --------------------- U.S. Plans U.K. Plan U.S. Plans U.K. Plan U.S. Plans U.K. Plan - ------------------------------------------------------------------------------------------------- Weighted-average discount rate........ 8.5% 9.0% 8.0% 9.0% 8.5% 9.0% Rate of increase in future compen- sation levels........ 5.0% 7.0% 5.0% 7.0% 5.0% 7.0% Expected long-term rate of return on plan assets.......... 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
PAGE | SEVENTY-TWO 29 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 8 EMPLOYEE BENEFIT PLANS (continued) The following table sets forth the funded status of the U.S. Plans and the U.K. Plan as of January 31, 1995 and January 31, 1994:
January 31, 1995 January 31, 1994 ------------------------------ -------------------------------- U.S. Plans U.K. Plan U.S. Plans U.K. Plan ------------------ --------- ------------------ --------- Supple- Supple- Qualified mental Qualified mental (Dollars in Millions) Plan Plans Plan Plans - ---------------------------------------------------------- -------------------------------- Actuarial present value of vested benefit obligation....... $(75) $(19) $(25) $(71) $(19) $(20) ==== ==== ==== ==== ==== ==== Accumulated benefit obligation............... $(84) $(34) $(25) $(80) $(33) $(20) Effect of future salary increases......... (22) (12) (6) (23) (9) (5) --- --- --- --- --- --- Projected benefit obligation............... (106) (46) (31) (103) (42) (25) Plan assets at fair market value (primarily listed stocks and bonds)........ 160 -- 35 164 -- 30 --- --- --- --- --- --- Projected benefit obligation (in excess of) or less than plan assets.............. 54 (46) 4 61 (42) 5 Unrecognized net (gain) or loss........... (9) (2) (11) (18) (1) (10) Unrecognized prior service cost............. (1) (1) -- 1 (4) -- Unrecognized net (asset) obligation at January 1, 1987, net of amortization............. (16) 5 -- (20) 6 -- --- --- --- --- --- --- Prepaid (accrued) pension cost at fiscal year-end................. $ 28 $(44) $ (7) $ 24 $(41) $ (5) ==== ==== ==== ==== ==== ====
PAGE | SEVENTY-THREE 30 NOTE 9 INCOME TAXES Effective February 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of the adoption of SFAS No. 109 was not material. The provision for income taxes consists of:
Liability Liability Deferral Method Method Method (Dollars in Millions) 1994 1993 1992 - ---------------------------------------------------------------------------------- Current: U.S. federal............................ $165 $266 $ (2) U.S. state and local.................... 142 175 9 Non-U.S................................. 20 239 386 --- --- --- 327 680 393 --- --- --- Deferred: U.S. federal............................ (75) (161) 120 U.S. state and local.................... (64) (97) 68 Non-U.S................................. 11 (8) (298) --- --- --- (128) (266) (110) --- --- --- $199 $414 $283 ==== ==== ====
The following table reconciles the provision to the U.S. federal statutory income tax rate:
Liability Liability Deferral Method Method Method (Dollars in Millions) 1994 1993 1992 - ------------------------------------------------------------------------------------ U.S. federal statutory income tax rate .. 35.0 % 35.0 % 34.0 % U.S. state and local income taxes, net of U.S. federal income tax benefits ...... 8.5 4.2 6.4 Lower tax rates applicable to non-U.S. earnings...................... (9.1) (5.7) (4.1) Reduced tax rate applied to dividends ... (0.6) (0.6) (0.8) Other ................................... (0.3) 1.6 0.2 ---- ---- ---- 33.5% 34.5% 35.7% ==== ==== ====
Lower tax rates applicable to non-U.S. earnings include the benefit of foreign tax credits utilized against U.S. federal income taxes. The Company intends to permanently reinvest earnings of international subsidiaries or repatriate such earnings only when it is tax effective to do so. U.S. federal income taxes that would be payable upon repatriation are estimated to be $400 million. PAGE | SEVENTY-FOUR 31 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 9 INCOME TAXES (continued) Under SFAS No. 109, deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company's deferred tax assets and liabilities as of January 31, 1995 and January 31, 1994 are as follows:
January 31, January 31, (Dollars in Millions) 1995 1994 - ---------------------------------------------------------------------------------- Deferred tax assets: Employee benefit plans................ $467 $429 Accrued expenses not yet deductible for tax purposes.................... 51 35 Other................................. -- 13 --- --- Total deferred tax assets............... 518 477 --- --- Deferred tax liabilities Valuation of inventory, investments and receivables..................... 260 364 Depreciation and amortization......... 65 54 Other................................. 6 -- --- --- Total deferred tax liabilities.......... 331 418 --- --- Net deferred tax assets................. $187 $ 59 ==== ====
The components of the provision for deferred income taxes for the year ended January 31, 1993 are as follows:
Deferral Method (Dollars in Millions) January 31, 1993 - --------------------------------------------------------------------------------------- Valuation of inventory, investments and receivables........... $ (15) Employee benefits............................................. (89) Other, principally accruals not deductible currently for tax purposes................................................ (6) ---- $(110) =====
Not included above are currency hedging-related income tax benefits of $72 million in fiscal 1994, $57 million in fiscal 1993 and $3 million in fiscal 1992, credited directly to the cumulative translation adjustments component of consolidated stockholders' equity. Also not included above are income tax benefits of $9 million in fiscal 1994, $13 million in fiscal 1993 and $17 million in fiscal 1992, attributable to the vesting of stock unit awards and the exercise of stock options, credited directly to paid-in capital; and $10 million in fiscal 1994, $8 million in fiscal 1993 and $7 million in fiscal 1992, attributable to stock unit and ESOP dividends, credited directly to retained earnings. PAGE | SEVENTY-FIVE 32 NOTE 10 GEOGRAPHIC AREA DATA The Company's business activities are highly integrated and constitute a single industry segment for purposes of SFAS No. 14. Total revenues, net revenues, income before taxes and identifiable assets of the Company's operations by geographic area are as follows:
Total Revenues Net Revenues ---------------------------------------- ---------------------------------------- Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended Ended ---------------------------------------- ---------------------------------------- 1994 1993 1992 1994 1993 1992 ----------------------------------------------------------------------------------- International Europe.............................. $ 3,942 $ 4,617 $ 3,369 $ 776 $ 1,466 $ 814 Asia................................ 603 468 392 475 396 308 ----- ----- ------ ------ ------ ----- Total............................... 4,545 5,085 3,761 1,251 1,862 1,122 North America....................... 8,332 6,341 5,616 2,516 2,538 2,037 Eliminations........................ (3,501) (2,250) (1,995) (266) (244) (139) ----- ----- ------ ------ ------ ----- Total............................... $ 9,376 $ 9,176 $ 7,382 $ 3,501 $ 4,156 $ 3,020 ======= ======= ======= ======= ======= =======
Income before Taxes Identifiable Assets ---------------------------------------- ----------------------------------------- Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended Ended ---------------------------------------- ----------------------------------------- 1994 1993 1992 1994 1993 1992 ------------------------------------------------------------------------------------ International Europe.............................. $ 11 $ 720 $ 280 $ 65,110 $ 63,279 $ 40,771 Asia................................ 56 24 10 18,413 15,910 8,530 ----- ----- ------ ------ ------ ------ Total............................... 67 744 290 83,523 79,189 49,301 North America....................... 527 456 503 120,360 100,483 92,027 Eliminations........................ -- -- -- (87,189) (82,430) (60,975) ----- ----- ------ ------- ------ ------ Total............................... $ 594 $ 1,200 $ 793 $116,694 $ 97,242 $ 80,353 ====== ======= ====== ======== ======== ========
Because of the international nature of the financial markets and the resulting geographic integration of the Company's business, the Company manages its business with a view to the profitability of the enterprise as a whole, and, as such, profitability by geographic area is not necessarily meaningful. PAGE | SEVENTY-SIX 33 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 11 QUARTERLY RESULTS (unaudited)
Fiscal 1993 Fiscal 1994 ------------------------------------------------ ------------------------------------------------- (Dollars in Millions, First Second Third Fourth First Second Third Fourth Except Share Data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - -------------------------- ------------------------------------------------------------------------------------------------------ Revenues: Investment banking....... $ 379 $ 318 $ 296 $ 245 $ 260 $ 211 $ 190 $ 258 Principal transactions: Trading................. 370 518 285 286 258 300 297 249 Investments............. 11 18 92 37 10 23 82 24 Commissions.............. 91 91 101 110 119 112 104 114 Interest and dividends... 1,282 1,478 1,573 1,327 1,561 1,525 1,714 1,606 Asset management and administration...... 52 64 67 75 81 89 95 85 Other.................... 1 3 5 1 3 2 3 1 - -------------------------- ----------------------------------------------------------------------------------------------------- Total revenues........... 2,186 2,490 2,419 2,081 2,292 2,262 2,485 2,337 Interest expense......... 1,135 1,343 1,386 1,156 1,404 1,349 1,575 1,547 - -------------------------- ----------------------------------------------------------------------------------------------------- Net revenues............. 1,051 1,147 1,033 925 888 913 910 790 - -------------------------- ----------------------------------------------------------------------------------------------------- Expenses excluding interest: Compensation and benefits................ 524 572 525 428 440 460 460 373 Occupancy and equipment............... 58 62 64 64 68 74 79 82 Brokerage, clearing and exchange fees........... 48 44 52 52 58 59 56 57 Communications........... 24 24 26 26 29 28 31 34 Business development..... 30 32 31 41 39 41 41 44 Professional services.... 26 30 30 34 41 39 41 43 Other.................... 23 24 29 33 29 30 32 40 Relocation charge........ -- -- -- -- -- -- -- 59 - -------------------------- ----------------------------------------------------------------------------------------------------- Total expenses excluding interest...... 733 788 757 678 704 731 740 732 - -------------------------- ----------------------------------------------------------------------------------------------------- Income before income taxes.................... 318 359 276 247 184 182 170 58 Provision for income taxes.................... 119 135 94 66 67 61 52 19 - -------------------------- ----------------------------------------------------------------------------------------------------- Net income................ $ 199 $ 224 $ 182 $ 181 $ 117 $ 121 $ 118 $ 39 ========================== ===================================================================================================== Earnings applicable to common shares (3)........ $ 187 $ 212 $ 167 $ 165 $ 101 $ 104 $ 102 $ 23 ========================== ===================================================================================================== Per common share: Primary earnings (1)..... $ 2.40 $ 2.77 $ 2.20 $ 2.18 $ 1.27 $ 1.31 $ 1.30 $ 0.29 Fully diluted earnings (1)............ $ 2.29 $ 2.65 $ 2.10 $ 2.08 $ 1.22 $ 1.26 $ 1.25 $ 0.29 Cash dividends........... $ 0.27 $ 0.27 $ 0.27 $ 0.27 $ 0.30 $ 0.30 $ 0.30 $ 0.30 Book value............... $38.09 $40.27 $42.16 $46.14 $46.67 $47.52 $48.42 $49.77 Average common and equivalent shares (3).... 77,889,047 76,474,964 75,944,556 75,938,109 79,828,671 79,605,505 78,354,016 77,534,004 Stock price range (2)..... $55 1/4- $59-70 1/2 $69 5/8- $69 1/4- $60 7/8- $55 5/8- $59 3/8- $55 1/4- 66 1/8 89 79 3/8 79 1/2 62 1/4 69 3/4 65 1/8
(1) Summation of the quarters' earnings per common share does not equal the annual amounts due to the averaging effect of the number of shares and share equivalents throughout the year. (2) Prices represent the range of sales per share on the New York Stock Exchange for the periods indicated. The number of stockholders of record at January 31, 1995 approximated 1,350. The number of beneficial owners of common stock is believed to exceed this number. (3) Amounts shown are used to calculate primary earnings per share. PAGE | SEVENTY-SEVEN EX-21 10 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 MORGAN STANLEY GROUP INC. SUBSIDIARIES As of April 24, 1995
JURISDICTION OF YEAR OF INCORPORATION INCORPORATION --------------- ------------- MORGAN STANLEY GROUP INC. DELAWARE 1975 FOURTH STREET DEVELOPMENT CO. INCORPORATED DELAWARE 1990 FOURTH STREET LTD. DELAWARE 1990 JOLTER INVESTMENTS INC. DELAWARE 1989 MORGAN RUNDLE INC. DELAWARE 1978 MR VENTURES INC. DELAWARE 1982 MORGAN STANLEY ADVISORY PARTNERSHIP INC. DELAWARE 1985 MORGAN STANLEY ASSET MANAGEMENT INC. DELAWARE 1980 MORGAN STANLEY BASEBALL, INC. DELAWARE 1989 MORGAN STANLEY CAPITAL GROUP INC. DELAWARE 1984 MORGAN STANLEY CAPITAL I INC. DELAWARE 1985 MORGAN STANLEY CAPITAL (JERSEY) LIMITED JERSEY, CHANNEL IS. 1987 MORGAN STANLEY CAPITAL PARTNERS III, INC. DELAWARE 1993 MORGAN STANLEY CAPITAL SERVICES INC. DELAWARE 1985 MORGAN STANLEY COMMERCIAL MORTGAGE CAPITAL, INC. DELAWARE 1994 MORGAN STANLEY COMMODITIES MANAGEMENT, INC. DELAWARE 1992 MORGAN STANLEY DERIVATIVE PRODUCTS INC. DELAWARE 1994 MORGAN STANLEY DEVELOPING COUNTRY DEBT II, INC. DELAWARE 1991 MORGAN STANLEY EMERGING MARKETS INC. DELAWARE 1990 MORGAN STANLEY EQUITY INVESTORS INC. DELAWARE 1988 MORGAN STANLEY FINANCE (JERSEY) LIMITED JERSEY, CHANNEL IS. 1990 MORGAN STANLEY GLOBAL ADVISORY SERVICES INC. DELAWARE 1992 MORGAN STANLEY GLOBAL SECURITIES SERVICES INCORPORATED DELAWARE 1987 MORGAN STANLEY BANK LUXEMBOURG S.A. LUXEMBOURG 1989 MORGAN STANLEY INSURANCE AGENCY INC. DELAWARE 1985 MORGAN STANLEY (JERSEY) LIMITED JERSEY, CHANNEL IS. 1986 MORGAN STANLEY LEF I, INC. DELAWARE 1989 MORGAN STANLEY LEVERAGED CAPITAL FUND INC. DELAWARE 1985 MORGAN STANLEY LEVERAGED EQUITY FUND II, INC. DELAWARE 1987 MORGAN STANLEY CAPITAL PARTNERS ASIA LIMITED HONG KONG 1992 MORGAN STANLEY LEVERAGED EQUITY HOLDINGS INC. DELAWARE 1987 MORGAN STANLEY MARKET PRODUCTS INC. DELAWARE 1987 MORGAN STANLEY MORTGAGE CAPITAL INC. NEW YORK 1984 MORGAN STANLEY REAL ESTATE HOLDINGS INC. DELAWARE 1990 MORGAN STANLEY REAL ESTATE HOLDINGS II, INC. DELAWARE 1994 MORGAN STANLEY REAL ESTATE INVESTMENT MANAGEMENT INC. DELAWARE 1990 MORGAN STANLEY REAL ESTATE FUND, INC. DELAWARE 1989 MORGAN STANLEY REAL ESTATE INVESTMENT MANAGEMENT II, INC. DELAWARE 1994 MORGAN STANLEY REALTY INCORPORATED DELAWARE 1969 BROOKS HARVEY & CO., INC. DELAWARE 1971 MORGAN STANLEY REALTY OF CALIFORNIA INC. CALIFORNIA 1970 MORGAN STANLEY REALTY OF ILLINOIS INC. DELAWARE 1989 BROOKS HARVEY OF FLORIDA, INC. FLORIDA 1978 BROOKS HARVEY & CO. OF HAWAII, INC. DELAWARE 1981 MORGAN STANLEY REALTY JAPAN LTD. JAPAN 1991 BH-MS REALTY INC. DELAWARE 1983 BH-MS LEASING INC. DELAWARE 1983 BH-SARTELL INC. DELAWARE 1983
2 MORGAN STANLEY GROUP INC. (CONTINUED) THE MORGAN STANLEY SCHOLARSHIP FUND INC. (NOT-FOR-PROFIT) DELAWARE 1985 MORGAN STANLEY SERVICES INC. DELAWARE 1988 MORGAN STANLEY TECHNICAL SERVICES INC. DELAWARE 1989 MORGAN STANLEY TECHNICAL SERVICES MB/VC INC. DELAWARE 1993 MORGAN STANLEY TRUST COMPANY NEW YORK 1992 MS PROSPECT & CO. DELAWARE 1993 MORGAN STANLEY VENTURE CAPITAL INC. DELAWARE 1984 MORGAN STANLEY VENTURE CAPITAL II, INC. DELAWARE 1992 MORGAN STANLEY VENTURES INC. DELAWARE 1984 MORSTAN DEVELOPMENT COMPANY, INC. DELAWARE 1971 MORANTA, INC. GEORGIA 1979 PORSTAN DEVELOPMENT COMPANY, INC. OREGON 1982 MS 10020, INC. DELAWARE 1994 MS DATA SERVICES INC. DELAWARE 1990 MS FINANCING INC. DELAWARE 1986 MORGAN STANLEY 750 BUILDING CORP. DELAWARE 1994 MS TOKYO PROPERTIES LTD. JAPAN 1989 MS URBAN HORIZONS, INC. DELAWARE 1994 MS VENTURE CAPITAL (JAPAN) INC. DELAWARE 1989 MSCP III HOLDINGS, INC. DELAWARE 1994 MSPL CO. INC. DELAWARE 1990 MSREF II, INC. DELAWARE 1994 MS/USA LEASING INC. DELAWARE 1993 PG HOLDINGS, INC. DELAWARE 1991 PG INVESTORS, INC. DELAWARE 1991 PIERPONT POWER, INC. NEW YORK 1987 ROMLEY COMPUTER LEASING INC. DELAWARE 1985 MORGAN STANLEY & CO. INCORPORATED DELAWARE 1969 HRJ CORPORATION DELAWARE 1986 MORGAN STANLEY FLEXIBLE AGREEMENTS INC. DELAWARE 1992 MORGAN STANLEY SECURITIES TRADING INC. DELAWARE 1986 MORGAN STANLEY STOCK LOAN INC. DELAWARE 1986 MS SECURITIES SERVICES INC. DELAWARE 1981 NRSD CORPORATION DELAWARE 1988 MORGAN STANLEY INTERNATIONAL INCORPORATED DELAWARE 1963 BANK MORGAN STANLEY AG SWITZERLAND 1973 MORGAN STANLEY & CO. (PTY) LIMITED SOUTH AFRICA 1994 MORGAN STANLEY AOZT RUSSIA 1995 MORGAN STANLEY ASIA (CHINA) LIMITED HONG KONG 1993 MORGAN STANLEY ASIA HOLDINGS I INC. DELAWARE 1990 MORGAN STANLEY ASIA HOLDINGS II INC. DELAWARE 1990 MORGAN STANLEY ASIA HOLDINGS III INC. DELAWARE 1990 MORGAN STANLEY ASIA HOLDINGS IV INC. DELAWARE 1990 MORGAN STANLEY ASIA HOLDINGS V INC. DELAWARE 1990 MORGAN STANLEY ASIA HOLDINGS VI INC. DELAWARE 1990 MORGAN STANLEY ASIA LIMITED HONG KONG 1984 MORGAN STANLEY ASIA (SINGAPORE) PTE LTD REP. OF SINGAPORE 1992 MORGAN STANLEY ASIA (TAIWAN) LTD. REP. OF CHINA 1990 MORGAN STANLEY ASSET MANAGEMENT SINGAPORE LTD REP. OF SINGAPORE 1990 MORGAN STANLEY AUSTRALIA LIMITED AUSTRALIA 1989 MORGAN STANLEY CANADA LIMITED CANADA 1982
2 3 MORGAN STANLEY GROUP INC. (CONTINUED) MORGAN STANLEY INTERNATIONAL INCORPORATED (CONTINUED) MORGAN STANLEY CAPITAL SA FRANCE 1989 MORGAN STANLEY CAPITAL GROUP (SINGAPORE) PTE LTD REP. OF SINGAPORE 1990 MORGAN STANLEY CAPITAL (LUXEMBOURG) S.A. LUXEMBOURG 1993 MORGAN STANLEY DEVELOPING COUNTRY DEBT, LTD. BERMUDA 1991 MORGAN STANLEY FINANCIAL SERVICES BETEILIGUNGS GMBH GERMANY 1993 MORGAN STANLEY FUTURES (HONG KONG) LIMITED HONG KONG 1988 MORGAN STANLEY FUTURES (SINGAPORE) PTE LTD REP. OF SINGAPORE 1992 MORGAN STANLEY GROUP (EUROPE) PLC ENGLAND 1988 MORGAN STANLEY ASSET MANAGEMENT LIMITED ENGLAND 1986 MORGAN STANLEY CAPITAL GROUP LIMITED ENGLAND 1993 MORGAN STANLEY (EUROPE) LIMITED ENGLAND 1993 MORGAN STANLEY FINANCE PLC ENGLAND 1993 MORGAN STANLEY PROPERTIES LIMITED ENGLAND 1986 MORGAN STANLEY PROPERTY MANAGEMENT (UK) LIMITED ENGLAND 1987 MORGAN STANLEY SERVICES (UK) LIMITED ENGLAND 1993 MORGAN STANLEY UK GROUP ENGLAND 1976 MORGAN STANLEY & CO. INTERNATIONAL LIMITED ENGLAND 1986 MORGAN STANLEY INTERNATIONAL NOMINEES LIMITED ENGLAND 1994 MORGAN STANLEY & CO. LIMITED ENGLAND 1987 MORGAN STANLEY SECURITIES LIMITED ENGLAND 1986 MORSTAN NOMINEES LIMITED ENGLAND 1986 MS LEASING UK LIMITED ENGLAND 1991 MS VOLATILITY FUND N.V. NETHERLANDS ANTILLES 1993 MORGAN STANLEY HONG KONG NOMINEES LIMITED HONG KONG 1988 MORGAN STANLEY HONG KONG SECURITIES LIMITED HONG KONG 1988 MORGAN STANLEY INDIA SECURITIES PRIVATE LIMITED INDIA 1995 MORGAN STANLEY INTERNATIONAL INSURANCE LTD. BERMUDA 1995 MORGAN STANLEY INVESTMENT ADVISORY CO., LIMITED JAPAN 1987 MORGAN STANLEY JAPAN (HOLDINGS) LTD. CAYMAN ISLANDS 1984 MORGAN STANLEY JAPAN LIMITED HONG KONG 1993 MORGAN STANLEY LATIN AMERICA INCORPORATED DELAWARE 1994 MS CARBOCOL ADVISORS INCORPORATED DELAWARE 1995 MORGAN STANLEY MAURITIUS COMPANY LIMITED MAURITIUS 1993 MORGAN STANLEY ASSET MANAGEMENT INDIA PRIVATE LIMITED INDIA 1993 MORGAN STANLEY OFFSHORE INVESTMENT COMPANY LTD. CAYMAN ISLANDS 1987 MORGAN STANLEY OVERSEAS SERVICES (JERSEY) LIMITED JERSEY, CHANNEL IS. 1986 MORGAN STANLEY PACIFIC LIMITED HONG KONG 1987 MORGAN STANLEY S.A. FRANCE 1992 MORGAN STANLEY SICAV MANAGEMENT S.A. LUXEMBOURG 1988 MORGAN STANLEY (STRUCTURED PRODUCTS) JERSEY LIMITED JERSEY, CHANNEL IS. 1994 MS ITALY (HOLDINGS) INC. DELAWARE 1990 BANCA MORGAN STANLEY S.P.A. ITALY 1990 MS LDC, LTD. DELAWARE 1991 MSL INCORPORATED DELAWARE 1976
3 EX-23.1 11 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Morgan Stanley Group Inc. of our report dated February 28, 1995, included in the 1994 Annual Report to Stockholders of Morgan Stanley Group Inc. Our audits also included the financial statement schedule of Morgan Stanley Group Inc. listed in item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the basic financial statements based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-57833, Form S-3 No. 33-51067, Form S-3 No. 33-51413, Form S-8 No. 33-13177, Form S-8 No. 33-37652, Form S-8 No. 33-18184, and Form S-8 No. 33-42464) of Morgan Stanley Group Inc. and in the related Prospectuses of our report dated February 28, 1995, with respect to the consolidated financial statements and schedule of Morgan Stanley Group Inc. included and incorporated by reference in this Annual Report on Form 10-K for the year ended January 31, 1995. /s/ Ernst & Young LLP New York, New York April 26, 1995 EX-23.2 12 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS TO THE DIRECTORS OF MORGAN STANLEY GROUP INC. We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-42464) pertaining to the Morgan Stanley UK Group Profit Sharing Scheme and in the related Prospectus of our report dated 19 April 1995, with respect to the financial statements of the Morgan Stanley UK Group Profit Sharing Scheme included in this Annual Report on Form 10-K for the year ended 31 December 1994. Ernst & Young Chartered Accountants Registered Auditor London 26 April 1995 EX-27 13 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the Consolidated Statement of Financial Condition at January 31, 1995 and the Consolidated Statement of Income for the Twelve Months Ended January 31, 1995 and is qualified in its entirety by reference to such consolidated financial statements. 1,000,000 YEAR JAN-31-1995 FEB-01-1994 JAN-31-1995 4,626 7,478 35,913 20,042 47,109 1,061 116,694 10,273 13,824 50,123 2,860 25,307 8,814 80 0 819 3,656 116,694 1,104 6,406 449 919 350 5,875 1,733 594 594 0 0 395 4.18 4.03
EX-99 14 FINANCIAL STATEMENTS - UK GROUP PROFIT SHARING SC. 1 EXHIBIT 99 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME Report and Financial Statements 31 December 1994 and 1993 2 REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS TO THE MORGAN STANLEY GROUP INC. UK PROFIT SHARING COMMITTEE AND PARTICIPANTS IN THE MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME We have audited the accompanying statement of financial condition of the Morgan Stanley UK Group Profit Sharing Scheme as of 31 December 1994 and 1993 and the related statement of income and changes in plan equity for the years ended 31 December 1994, 1993 and 1992. These financial statements are the responsibility of the Scheme s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial condition of the Scheme as of 31 December 1994 and 1993 and the income and changes in plan equity for the years ended 31 December 1994, 1993 and 1992 in conformity with United States generally accepted accounting principles. Ernst & Young Chartered Accountants Registered Auditor London 19 April 1995 3 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- STATEMENT OF THE FINANCIAL CONDITION at 31 December 1994 and 1993
1994 1993 Notes $ $ ASSETS Investments at market value Morgan Stanley Group Inc. Common Stock 2,3 8,096,334 8,257,162 Amounts due from trustee 43,112 32,149 Employee contributions receivable 2,371,487 1,834,116 ---------- ---------- 10,510,933 10,123,427 ========== ========== LIABILITIES AND PLAN EQUITY Dividend income, net of withholding taxes, payable to participants 41,020 30,589 Taxes withheld in respect of dividend income 2,090 1,558 Plan equity 10,467,823 10,091,280 ---------- ---------- 10,510,933 10,123,427 ========== ==========
See notes to the financial statements. - -------------------------------------------------------------------------------- 2 4 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY for the years ended 31 December 1994, 1993 and 1992
1994 1993 1992 Notes $ $ $ CASH DIVIDEND Distribution from Morgan Stanley Group Inc. Common Stock 167,520 127,435 103,469 Less: United States tax withheld 25,105 19,115 15,507 ---------- ---------- ---------- NET DIVIDENDS 142,415 108,320 87,962 Gain on sale/transfer of Morgan Stanley Group Inc. Common Stock 2 183,380 465,762 58,822 Change in unrealised appreciation of investments 3 (1,791,131) 1,287,954 (965,281) EMPLOYEE CONTRIBUTIONS Current year 2,371,487 1,834,116 1,340,903 ---------- ---------- ---------- INCOME FOR THE YEAR 906,151 3,696,152 522,406 Less: Dividend income payable to participants 134,006 100,238 77,617 Income tax payable 8,409 8,082 10,343 Withdrawals disbursed to employees 289,513 486,901 117,641 Value of shares transferred to employees 97,680 403,774 - Foreign Exchange loss - - 825 ---------- ---------- ---------- INCREASE IN PLAN EQUITY 376,543 2,697,157 315,980 PLAN EQUITY AT 1 JANUARY 10,091,280 7,394,123 7,078,143 ---------- ---------- ---------- PLAN EQUITY AT END OF YEAR 10,467,823 10,091,280 7,394,123 ========== ========== ==========
See notes to the financial statements. - -------------------------------------------------------------------------------- 3 5 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1994, 1993 and 1992 SCHEME DESCRIPTION On 12 November 1987, the Morgan Stanley UK Group Profit Sharing Scheme was established in the United Kingdom by a trust deed made between Morgan Stanley Group Inc., its subsidiary Morgan Stanley UK Group and Noble Lowndes Settlement Trustees Limited. The scheme allows employees of Morgan Stanley UK Group to accumulate pre-tax profit share contributions in the form of shares of Morgan Stanley Group Inc. common stock. ELIGIBILITY Full time employees of Morgan Stanley UK Group with at least one year of service, commencing from the first of the month after the date of joining, are eligible to participate in the scheme. Employees may elect to participate in the scheme for the full amount of their profit share, up to a maximum of the lesser of 10% of UK base salary or L.8,000. FUNDING POLICY Amounts invested by employees are invested by Noble Lowndes Settlement Trustees Limited, as trustee, in Morgan Stanley Group Inc. shares which are held by the trustee in their name on the employee's behalf. Shares in respect of the previous qualifying period are appropriated to employees within two weeks of 31 December (the qualifying date). Trustee fees and brokerage commissions are borne by Morgan Stanley UK Group, the employer. During the first two years after allocation (the Retention Period) certain statutory restrictions apply limiting members ability to deal in or withdraw their shares. After the Retention Period, members may withdraw their shares or instruct the trustees to sell their shares and withdraw the cash proceeds. The cost of withdrawals from the scheme is determined on a first in first out basis within the relevant employee allocation. TAXATION The United Kingdom Board of Inland Revenue has approved the scheme under Schedule 9, UK Finance Act 1978 and the scheme is thus exempt from taxation. Employee contributions to the scheme are not liable to income tax if shares are held by the Trustees for at least five years after appropriation. If employees shares are sold prior to the end of the five year period, some or all of the income tax benefits are lost. 1. ACCOUNTING POLICIES FOREIGN CURRENCIES Monetary assets and liabilities denominated in currencies other than US dollars are translated at the rate of exchange ruling at the balance sheet date except for employee contributions receivable, which are translated at the rate ruling at the time of share purchase, which occurs shortly after the balance sheet date. Transactions in foreign currencies are translated at the approximate rate of exchange ruling at the date of the transaction. VALUATION OF INVESTMENTS The investments are recorded at market value based on the closing market prices on the New York Stock Exchange. DIVIDEND INCOME Dividend income is recorded when the applicable dividends are declared. Dividends are received net of US withholding tax and are allocated to participants according to their shareholdings. - -------------------------------------------------------------------------------- 4 6 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1994, 1993 and 1992 2. CHANGES IN HOLDINGS OF MORGAN STANLEY GROUP INC COMMON STOCK
Average Number cost Total of shares per share cost At 1 January 1992 88,910 26.506 2,356,676 Add: Purchase, January 1992 21,599 65.269 1,409,305 --------------- --------------- --------------- 110,509 34.079 3,765,981 Less: Sales of shares during the year (2,174) 27.056 (58,819) --------------- --------------- --------------- At 31 December 1992 108,335 34.219 3,707,162 Add: Purchase, January 1993 23,947 55.995 1,340,903 --------------- --------------- --------------- 132,282 38.161 5,048,065 Less: Sales of shares during the year (8,474) 15.436 (130,802) Transfer of shares during the year (7,099) 41.430 (294,111) --------------- --------------- --------------- At 31 December 1993 116,709 39.613 4,623,152 Add: Purchase January 1994 26,280 69.791 1,834,116 --------------- --------------- --------------- 142,989 45.159 6,457,268 Less: Sales of shares during the year (4,297) 25.933 (111,436) Transfer of shares during the year (1,466) 63.013 (92,377) --------------- --------------- --------------- At 31 December 1994 137,226 45.570 6,253,455 =============== =============== ===============
Each stock purchase was made in one transaction representing more than 5% of the current value of the scheme at the beginning of the year. Sale/transfer of shares in Morgan Stanley Group Inc Common Stock:
1994 1993 1992 $ $ $ Aggregate proceeds of sales 289,513 486,901 117,641 Aggregate cost of sales (111,436) (130,802) (58,819) --------------- --------------- --------------- Net gain on sales 178,077 356,099 58,822 --------------- --------------- --------------- Aggregate proceeds of transfers 97,680 403,774 - Aggregate cost of transfers (92,377) (294,111) - --------------- --------------- --------------- Net gain on transfers 5,303 109,663 - --------------- --------------- --------------- 183,380 465,762 58,822 =============== =============== ===============
Cost has been determined on a first in, first out basis within the relevant employee allocation. - -------------------------------------------------------------------------------- 5 7 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1994, 1993 and 1992 3. CHANGE IN UNREALISED APPRECIATION OF INVESTMENTS At 31 December 1994 the closing price on the New York Stock Exchange for Morgan Stanley Group Inc common stock was $59.00 per share.
Average Number cost Total of shares per share cost Market value at 31 December 1994 137,226 59.000 8,096,334 Average cost at 31 December 1994 137,226 45.570 6,253,455 ----------- Unrealised appreciation at 31 December 1994 1,842,879 Unrealised appreciation at 31 December 1993 3,634,010 ----------- Decrease in unrealised appreciation (1,791,131) =========== Market value at 31 December 1993 116,709 70.750 8,257,162 Average cost at 31 December 1993 116,709 39.613 4,623,152 ----------- Unrealised appreciation at 31 December 1993 3,634,010 Unrealised appreciation at 31 December 1992 2,346,056 ----------- Increased in unrealised appreciation 1,287,954 =========== Market value at 31 December 1992 108,335 55.875 6,053,218 Average cost at 31 December 1992 108,335 34.219 3,707,162 ----------- Unrealised appreciation at 31 December 1992 2,346,056 Unrealised appreciation at 31 December 1991 3,311,337 ----------- Decrease in unrealised appreciation (965,281) ===========
4. NUMBER OF PARTICIPANTS There were 548 participants as of 31 December 1994, 406 participants as of 31 December 1993 and 354 participants as of 31 December 1992. - -------------------------------------------------------------------------------- 6 -----END PRIVACY-ENHANCED MESSAGE-----