-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SvaIX9fTN57h0LUJfCvtNHIqtEe/sqPmcL4s22PQwXg3JV2RXvwI1cyslVseEoDQ DG7hFyjYDOLrMpFnHuBazw== 0000950123-96-000744.txt : 19960228 0000950123-96-000744.hdr.sgml : 19960228 ACCESSION NUMBER: 0000950123-96-000744 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951130 FILED AS OF DATE: 19960226 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: 96525202 BUSINESS ADDRESS: STREET 1: 1585 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2127034000 10-K405 1 MORGAN STANLEY GROUP INC. 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 NOVEMBER 30, 1995 COMMISSION FILE NUMBER 1-9085 MORGAN STANLEY GROUP INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 1585 BROADWAY NEW YORK, N.Y. (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 13-2838811 (I.R.S. EMPLOYER IDENTIFICATION NO.) 10036 (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 761-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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 8.40% Capital Units; 8.20% Capital Units* AMEX Hong Kong 30 IndexSM Call Warrants Expiring November 4, 1996; American Stock Exchange AMEX Hong Kong 30 IndexSM Call Warrants Expiring October 3, 1997+ Japan IndexSM Call Warrants Expiring May 28, 1996+ American Stock Exchange Nikkei 225 Index Call Warrants Expiring August 15, 1997 American Stock Exchange 6 1/2% PERQSSM Due July 1, 1997; 6% PERQSSM Due October 1, 1997; American Stock Exchange 7% PERQSSM Due November 15, 1997; 6% PERQSSM Due February 16, 1999++ Exchangeable Notes Due September 30, 2000; Exchangeable New York Stock Exchange Notes Due December 31, 2001+++
- --------------- * 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. +++ Notes which are exchangeable on a defined date for equity securities 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 February 7, 1996 was approximately $5,409,071,114. For purposes of this information, the outstanding shares of common stock owned by certain Managing Directors and Principals of certain wholly-owned subsidiaries of the Registrant, and subject to certain restrictions on voting and disposition, were deemed to be shares of common stock held by affiliates. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: As of February 7, 1996, there were 154,087,313 shares of Common Stock, $1 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Morgan Stanley Group Inc. 1995 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 1996 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 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 ("U.S.") regional offices in Chicago, Philadelphia, Los Angeles and San Francisco. At November 30, 1995, the Company employed 9,238 people. The Company conducts its broker-dealer business principally in the U.S. through Morgan Stanley & Co. Incorporated ("MS&Co."), in Europe through Morgan Stanley & Co. International Limited ("MSIL"), in Japan through Morgan Stanley Japan Limited ("MS Japan") and in the rest of Asia through Morgan Stanley Asia Limited ("MS Asia"). Because of the increasing integration of the international financial markets, the Company manages its principal operating subsidiaries, including MS&Co., MSIL, MS Japan and MS Asia, on a coordinated global basis with a view to the profitability of the enterprise as a whole. The Company's business activities are highly integrated and constitute a single industry segment. Financial information concerning the Company for each of the three periods ended November 30, 1995,** January 31, 1995 and January 31, 1994, 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 1995 Annual Report to Stockholders and is incorporated herein by reference. __________________________________ * Unless the context otherwise requires, the term "Company" means Morgan Stanley Group Inc. and includes the consolidated subsidiaries of Morgan Stanley Group Inc. Please note that in the 1995 Annual Report to Stockholders, which is incorporated by reference in part in this Form 10-K, the term "Morgan Stanley" is generally used to refer to the Company. Except for the historical information contained in this Form 10-K, certain items herein, including (without limitation) certain matters discussed under Part I, Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" (incorporated herein by reference) ("MD&A"), are forward-looking statements. The matters referred to in such statements could be affected by the risks and uncertainties involved in the Company's business, including (without limitation) the effect of economic and market conditions, the level and volatility of interest rates and currency values, the impact of current or pending legislation and regulation and the other risks and uncertainties detailed in Part I, Item I, "Competition and Regulation" and "Risk Management" and in the MD&A. ** The Company changed its fiscal year-end from January 31 to November 30 effective for November 30, 1995. 3 INVESTMENT BANKING ACTIVITIES The Company is a leading global 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 denominated in U.S. dollars and other currencies in the U.S. and international capital markets. The Company is a leading underwriter of common stock, preferred stock, 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. The Company also underwrites tax exempt securities. 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 domestic and international corporate and institutional clients with a wide range of advisory services on key strategic matters such as mergers, acquisitions, joint ventures, privatizations, defenses, divestitures, spin-offs, restructurings, proxy mechanisms and leveraged buyouts as well as long-range financial planning. Other such services provided to clients include advice with respect to recapitalizations, dividend policy, valuations, foreign exchange exposures and financial risk management strategies. 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 to companies in connection with its investment banking activities. See also "Asset Management Activities -- Merchant Banking and Other Principal Investing." SALES, TRADING AND MARKET-MAKING ACTIVITIES SALES AND TRADING The Company provides a broad range of sales and trading services to investors worldwide and is an active dealer in fixed income, equity, foreign exchange and commodity products, including derivatives. In the U.S., the Company ranks as one of the largest dealers in equity and fixed income securities. As a member of the major U.S. securities and commodities exchanges, as well as the major foreign exchanges, including the London and Tokyo Stock Exchanges, the Company conducts its sales and trading activities both as principal and as agent on behalf of a wide range of domestic and international institutional and, primarily through its Private Client Services Department, certain individual investors. The Company trades for its own account in equity and fixed income securities and instruments, foreign currencies, commodities and associated derivative products. The Company also provides financing to clients, including margin lending and other extensions of credit. 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 2 4 ("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 international debt securities, particularly corporate debt instruments and preferred stock, and offers investment strategies to 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 a broad range of long-term and short-term tax exempt securities. The Company is also involved in structuring debt securities with multiple risk/return factors designed to suit investor objectives and repackaged asset vehicles (RAVs) through which investors can restructure asset portfolios to provide liquidity or recharacterize risk profiles. The Company is one of 37 primary dealers of U.S. government securities currently recognized by the Federal Reserve Bank of New York. As such, it is among the firms with which the Federal Reserve conducts its open market operations and is required to submit bids in Treasury auctions, make secondary markets in U.S. government securities, provide the Federal Reserve Bank of New York with market information and maintain certain capital standards. The Company is also a member of a number of selling groups responsible for the distribution of various issues of U.S. agency and other debt securities. As such, it is required to make secondary markets in these securities and to provide market information to the U.S. agency and instrumentality issuers. The Company is also a member of the primary syndicate that issues German government bonds, a member of the Japanese government bond syndicate and a primary dealer in Canadian, French and Italian government bonds. The Company also makes secondary markets in various foreign government bonds and other foreign currency denominated bonds issued in the Eurobond market and in the U.S. The Company's daily trading inventory positions in government, agency and instrumentality securities are financed substantially through the use of repurchase agreements. The Company also borrows and lends fixed income securities. In addition, the Company acts as an intermediary between borrowers and lenders of short-term funds utilizing repurchase and reverse repurchase agreements. At any given point in time, the Company may hold large positions in certain types of securities or commitments to purchase securities of a single issuer, sovereign governments and other entities, issuers located in a particular country or geographic area, public and private issuers involving developing countries or issuers engaged in a particular industry. For example, financial instruments owned by the Company include U.S. government and agency securities and securities issued by non-U.S. governments (principally France, Germany, Italy and Japan) which, in the aggregate, represented 18% of the Company's total assets at November 30, 1995. 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 November 30, 3 5 1995, consists of securities issued by the U.S. government, federal agencies or non-U.S. governments. The Company trades and distributes asset-backed securities. The Company makes markets and trades in Government National Mortgage Association ("GNMA") securities, Federal Home Loan Mortgage Corp. ("FHLMC") participation certificates and Federal National Mortgage Association ("FNMA") obligations. The Company enters into significant commitments, such as forward contracts, standby arrangements and OTC options contracts, for GNMA, FHLMC and FNMA securities. The Company also acts as an underwriter of and market-maker in mortgage-backed securities, CMOs and related instruments, and a market-maker in commercial, residential and real estate loan products. In this capacity, the Company takes positions in market segments where liquidity can vary greatly from time to time; the carrying value of such financial instruments currently experiencing lower levels of liquidity approximated $1,169 million at November 30, 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 November 30, 1995, the aggregate net market value of high-yield debt securities and emerging market loans and securitized instruments held in inventory, including the securities of issuers in which the Company has made equity investments in connection with its merchant banking and other principal investment activities (see "Asset Management Activities -- Merchant Banking and Other Principal Investing"), was $1,264 million (a substantial portion of which was subordinated debt), with not more than 7%, 12% and 9% 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 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, base metals, crude oil, oil products, natural gas and related energy products. The Company is an active market-maker in swaps and OTC options on commodities such as metals, crude oil, oil products, natural gas and electricity, and offers a range of hedging programs relating to production, consumption and reserve/inventory management. The Company is also an electricity power marketer in the U.S. 4 6 The Company actively offers to clients and trades for its own account a variety of financial instruments described as "derivative products" or "derivatives." These products, some of which may be complex in structure, generally take the form of futures, forwards, options, swaps, caps, collars, floors, swap options and similar instruments which derive their value from underlying interest rates, foreign exchange rates or commodity or equity instruments and indices.* All of the Company's trading related business units use derivative products as an integral part of their respective trading strategies, and such products are used extensively to manage the market exposure that results from proprietary trading activities. In addition, as a dealer in certain derivative products, most notably interest rate and currency swaps, the Company enters into derivative contracts to meet a variety of risk management and other financial needs of its clients. Through the Company's triple-A rated subsidiary (Morgan Stanley Derivative Products Inc.), the Company also enters into swap and related derivative transactions with certain clients seeking a triple-A rated counterparty. For a detailed discussion of the Company's use of derivatives, see 1995 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 contracts outstanding as of November 30, 1995 was $985 billion, which is an indication of the Company's degree of use of derivatives for trading purposes but is not representative of any market or credit exposure and may be more indicative of customer utilization of derivatives. The Company's exposure to market risk relates to changes in interest rates, foreign currency exchange rates, or the fair value of the underlying financial instruments or commodities which may ultimately result in cash settlements which differ from 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 November 30, 1995 was $8.0 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." __________________________________ * The Company does not include mortgage-backed securities in this category in accordance with Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." ** 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 1995 Annual Report to Stockholders, "Notes to Consolidated Financial Statements, Note 3." 5 7 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 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. 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. ASSET MANAGEMENT ACTIVITIES 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 domestic 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 $55 billion in assets under management at November 30, 1995. On January 3, 1996, a wholly owned subsidiary of Morgan Stanley Asset Management Inc. ("MSAM Inc."), together with two of its affiliates, completed the acquisition of Miller Anderson & Sherrerd, LLP ("MAS"), an institutional investment manager, for approximately $350 million, payable in a combination of cash, stock of the Company and notes. On a pro forma basis, the combination of MAS with MSAM will increase the Company's assets under management at November 30, 1995 to approximately $90 billion. MAS's activities have been included in the Company's consolidated results since January 1996. GLOBAL SECURITIES SERVICES Through Morgan Stanley Services ("MS 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, investment managers, investment funds, insurance companies, banks, foundations, endowments, family trusts, government agencies, public and private pension funds and broker- 6 8 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 MS Services, the Company maintains a network of agent banks in 64 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 4,200 companies in 46 developed and emerging countries through a variety of print, electronic and software vendor-supported products. Through MS Services, the Company had approximately $111 billion in global assets under custody at November 30, 1995. MERCHANT BANKING AND OTHER PRINCIPAL INVESTING 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. ("MSCP III") was formed in 1994 with $1.9 billion in capital commitments to invest primarily in private equity or equity-related securities of companies. As of November 30, 1995, MSCP III had invested $545 million in 15 companies in the U.S., Europe and Asia. The Morgan Stanley Leveraged Equity Fund II, L.P. was formed in 1987 to invest in and provide financing for leveraged transactions and companies and invested $1.9 billion in the equity of 31 companies of which 19 companies representing $1.3 billion of cost basis remain in its portfolio at November 30, 1995; this fund is no longer making new investments, but is actively managing its existing investment portfolio. As of November 30, 1995, the merchant banking portfolio consisted of 41 companies in a wide range of industries. In the venture capital area, Morgan Stanley Venture Capital Fund II, L.P. ("MSVCF II") was formed in 1993 with $126 million in capital commitments to invest primarily in private equity or equity-related securities of U.S. emerging growth companies, principally in the healthcare and information technology sectors. As of November 30, 1995, MSVCF II had invested $86 million in 16 companies. Morgan Stanley Venture Capital Fund L.P. was formed in 1986 and invested $84 million in the equity of 38 companies of which 12 companies representing $32 million of cost basis remain in its portfolio at November 30, 1995; this fund is no longer making new investments, but is actively managing its existing investment portfolio. Princes Gate Investors, L.P. ("Princes Gate") was formed in 1992 with $300 million (subsequently increased to $750 million) in aggregate investment capacity to invest in special situation opportunities.Princes Gate generally makes minority equity and equity-related investments which are short- to medium-term in duration and which arise out of the Company's worldwide investment banking activities. As of November 30, 1995, Princes Gate had invested 7 9 $269 million in eight companies. Subsequent to November 30, 1995, Princes Gate Investors II, L.P. was formed with $600 million in aggregate investment capacity (including $50 million available from the Company) to continue the investment strategy of Princes Gate. Princes Gate is no longer making new investments, but is actively managing its existing investment portfolio. In the real estate area, The Morgan Stanley Real Estate Fund II, L.P. ("MSREF II") was formed in 1994 with approximately $1 billion in capital commitments to invest in real estate assets. As of November 30, 1995, MSREF II had invested or committed to invest $220 million in real estate totaling $900 million (including third party financing) relating to four real estate transactions. The Morgan Stanley Real Estate Fund, L.P. was formed in 1991 and has invested $490 million in real estate totaling $2.8 billion (including third party financing) relating to 19 real estate transactions of which 18 investments representing $1.5 billion of real estate (including third party financing) remain in its portfolio at November 30, 1995; this fund is no longer making new investments, but is actively managing its existing investment portfolio. 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 November 30, 1995, the aggregate carrying value of the Company's investments (directly and indirectly through the above-referenced funds) in 79 privately held companies was $156 million and in 18 publicly held companies was $242 million. At November 30, 1995, the Company had aggregate commitments of approximately $209 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. 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. 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. It is not possible to determine whether or when the Company will realize the value of the investments, including any appreciation, dividends or other distributions thereon, since, among other things, such investments are generally subject to restrictions on such realization relating to the circumstances of particular transactions. Moreover, estimates of the eventual realizable value of the investments fluctuate significantly over time in light of business, market, economic and financial conditions generally or in relation to specific transactions or other factors, including the financial leverage involved in the underlying transactions. For a discussion of the various risks associated with the Company's merchant banking and other principal investment activities and the Company's policies and procedures with respect to the management and monitoring of these risks, see "Risk Management." 8 10 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/investment revenues. The Company may also underwrite, trade, invest and make markets, and publish research with respect to, the securities of issuers in which the Company or the funds have an investment. Such securities may include equity and high-yield debt securities of such issuers. In addition, the Company may provide financial advisory services to, and have securities and commodity trading relationships with, these issuers. From time to time, the Company 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 plus accrued interest less reserves, if deemed necessary, for estimated losses. Subsequent to November 30, 1995, the Company formed Morgan Stanley Bridge Fund, L.L.C. ("MSBF"), a bridge facility with $600 million in aggregate investment capacity (including $150 million available from the Company) that will provide financing consisting primarily of subordinated loans or debt financing to clients that require commitments on a timely basis, generally in connection with strategic and financial acquisitions, leveraged buyouts, recapitalizations and other special situations. Such financing will generally be provided in connection with the Company's investment banking and merchant banking activities. MSBF will have an investment period ending in January 1999 (subject to earlier termination in certain instances), which may be extended for an additional year by agreement of the members. The Company also has plans to become active in the senior syndicated lending area in connection with its investment banking activities. FINANCE, ADMINISTRATION AND OPERATIONS The Company's finance, administration and operations departments include Controllers, Credit, Corporate Services, Corporate Treasury, Facilities, General Services, Information Technology, Internal Audit, Market Risk, Legal and Compliance, Tax, Office of Development, Operations and Security. These departments support the Company's diverse global businesses through the processing of securities, foreign exchange and commodities transactions; receipt and delivery of funds and securities; safeguarding of customers' securities; internal financial controls, including management of global expenses, capital structure and funding; and ensuring compliance with regulatory and legal requirements. In addition, the Company has integrated recruitment, staffing, compensation and benefits, and career development and training initiatives to ensure that its human resources are aligned with strategic objectives. Certain of these areas also assist in the management and monitoring of the risks associated with the Company's business activities (see "Risk Management"). 9 11 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 international, a significant number of which have greater capital and other resources. Among the principal competitive factors affecting the Company's business are the Company's general reputation, the overall quality of its professionals, its ability to maintain existing client relationships and develop new ones and its capability in originating and marketing innovative products and services. Moreover, the Company's ability to commit capital is an important competitive factor in relation to not only generating potentially higher sales and trading revenues but also attracting business opportunities involving the facilitation of major transactions by clients. In addition to competition from firms traditionally engaged in the 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 U.S. 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. In addition, the two complementary trends in the financial services industry of consolidation and globalization present, among other things, technological and other infrastructure challenges that will require effective resource allocation in order for the Company to remain competitive. The Company's business is, and the securities, commodities and financial services industries generally are, subject to extensive regulation in the U.S. at both the Federal and state levels and internationally. Various regulatory bodies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. MS&Co. is registered as a broker-dealer with the Securities and Exchange Commission ("SEC") and in all 50 states, the District of Columbia and Puerto Rico and is a member of the National Association of Securities Dealers, Inc. ("NASD") and the New York Stock Exchange, Inc. ("NYSE"). The Company and certain other subsidiaries, including MS&Co. and MSAM Inc., 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 and self-regulatory authorities (such as changes to the U.S. Internal Revenue Code and related regulations or rules promulgated by the Financial Accounting Standards Board) or changes in the interpretation or 10 12 enforcement of existing laws and rules may directly affect the manner of operation and profitability of the Company.* As a futures commission merchant, MS&Co. is registered with the Commodity Futures Trading Commission ("CFTC") and its activities in the futures and options-on-futures markets are subject to regulation by the CFTC and various domestic boards of trade and other commodity exchanges. Certain subsidiaries of the Company are registered as commodity trading advisers and/or commodity pool operators with the CFTC. The Company's futures and options-on-futures business is also regulated by the National Futures Association ("NFA"), a not-for-profit membership corporation, which has been designated a registered futures association by the CFTC and of which MS&Co. is a member. As a broker-dealer, MS&Co. is subject to the SEC's temporary risk assessment rules which require, among other things, that a broker-dealer maintain and preserve certain information, describe risk management policies and procedures and report on the financial condition of certain affiliates whose financial and securities activities are reasonably likely to have a material impact on the financial and operational condition of the broker-dealer. As a futures commission merchant, MS&Co. is also subject to the CFTC's risk assessment rules which have certain requirements similar to the SEC's rules and also require the reporting of certain "trigger events" when net capital is reduced by substantial amounts. With respect to OTC derivatives, the Company is an active member of the International Swaps and Derivatives Association (ISDA), the Group of 30 and the Derivatives Policy Group, a group of securities firms formed at the request of the SEC and CFTC to address concerns regarding the OTC derivatives activities of U.S. broker-dealer affiliates not subject to direct regulatory oversight. In March 1995, the Derivatives Policy Group agreed to adhere to a voluntary oversight framework relating to reporting, capital, management controls and counterparty relationships. Margin lending by certain subsidiaries of the Company is subject to the margin rules of the Board of Governors of the Federal Reserve System and the NYSE. Morgan Stanley Trust Company, the Company's principal subsidiary that engages in custodial activities, is subject to regulation by the New York State Banking Department. Certain of the Company's government securities activities are conducted through Morgan Stanley Market Products Inc. which is a member of the NASD and is registered as a government securities broker-dealer with the SEC and in certain states. The Department of the Treasury has promulgated regulations concerning, among other things, capital adequacy, custody and use of government securities and transfers and control of government securities subject to repurchase transactions. The rules of the Municipal Securities Rulemaking Board, which are enforced by the NASD, govern the municipal securities activities of the Company. __________________________________ * For a discussion of two recent accounting proposals that could have a material impact on the Company's future financial condition, see 1995 Annual Report to Stockholders, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Potential Impact of Financial Accounting Standards Board Exposure Drafts on the Company's Financial Statements." 11 13 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. For example, one merchant banking portfolio company owns several insurance companies which subjects the Company to certain state insurance holding company regulations that require the Company, among other things, to register with certain state regulatory authorities. These state insurance regulations also generally prohibit the acquisition of a controlling interest in the Company (which may be deemed to occur upon the acquisition of 10% or more of the outstanding voting stock of the Company) without the prior approval of the relevant state commissioners of insurance. The Company's business is also subject to extensive regulation by various non-U.S. governments, securities exchanges, central banks and regulatory bodies, especially in those jurisdictions in which the Company maintains an office. For example, the Company's business in the United Kingdom is regulated by The Securities and Futures Authority Limited, the Bank of England and the Investment Management Regulatory Organisation, and a number of exchanges, including the London Stock Exchange 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 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., the Hong Kong Futures Exchange and the Hong Kong Monetary Authority. As registered broker-dealers and member firms of the NYSE, certain subsidiaries of the Company, including MS&Co., are subject to the SEC's net capital rule, and as a futures commission merchant MS&Co. is subject to the net capital requirements of the CFTC and various commodity exchanges. Many non-U.S. securities exchanges and regulatory authorities also either have imposed or are considering imposing rules relating to capital requirements that apply to subsidiaries of the Company (such as rules that have been or will be promulgated in connection with the European Union Capital Adequacy Directive), including certain European subsidiaries that are considered banking organizations under local law. These rules, which specify minimum capital requirements, are designed to measure general financial integrity and liquidity and require that at least a minimum amount of assets be kept in relatively liquid form. Compliance with the capital requirements may limit those operations of the Company that require the intensive use of capital, such as underwriting, merchant banking and trading activities, and the financing of customer account balances, and also restricts the Company's ability to withdraw capital from its subsidiaries, which in turn may limit the Company's ability to pay dividends, repay debt or redeem or purchase shares of its outstanding capital stock. A change in such rules, or the imposition of new rules, affecting the scope, coverage, calculation or amount of capital requirements, or a significant 12 14 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 soundness and profitability. The Company's broad-based portfolio of business activities helps reduce the impact that volatility in any particular area or related areas may have on its net revenues as a whole. From an operational perspective, the Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures, the following principal risks involved in each area of business activity: market risk, credit risk, operational risk 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 manage and monitor 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. In recognition of the increasingly varied and complex nature of the financial services business, the Company's risk management policies and procedures are evolutionary in nature and are subject to ongoing review, modification and revision. The Company has developed a multi-tiered approach for monitoring and managing its risks. The Finance and Risk Committee, authorized by the Company's Board of Directors, is chaired by the Company's Chief Financial Officer and composed of senior officers with familiarity and expertise in dealing with risk management principles. It establishes the overall risk management policies of the Company, reviews the Company's performance relative to these policies, allocates capital among business activities of the Company, monitors the availability of sources of financing, reviews the foreign exchange risk of the Company, and oversees liquidity and interest rate sensitivity of the Company's asset and liability position. The Firm Risk Manager heads the Firm Risk Management Group (described below) and assists senior management and the Finance and Risk Committee in establishing, monitoring and controlling the Company's overall __________________________________ * For a further discussion of the Company's risk management policies and procedures, see 1995 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." 13 15 risk profile. With respect to the Company's major trading divisions (fixed income, equity, commodities and foreign exchange), division risk managers manage and monitor positions and set the overall division risk profile on a worldwide basis within established market risk limits, review major trading positions and strategies, and report unusual market and position events. Desk risk managers perform similar functions with respect to a product area or particular product at the business unit and trading desk level. The Firm Risk Management Group has operational responsibility for identifying, monitoring and 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 Department monitors the Company's market risk profile on a worldwide basis, which includes all divisional, geographic and product-line market risks; the Credit Department manages and monitors counterparty exposure limits on a worldwide basis; 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: Controllers, Corporate Treasury, Information Technology, Legal and Compliance, Tax and Operations. In addition, the Company has certain commitment committees, composed of a cross-section of the Company's senior officers from various disciplines, that are involved in managing and monitoring the risks associated with the Company's diverse businesses. The High-Yield Commitment Committee and Equity Commitment Committee determine whether the Company should participate in a transaction involving the underwriting or placement of high-yield or equity securities, respectively, where the Company's capital and reputation may be at risk, and evaluate the potential revenues and risks involved with respect to a particular transaction. The Company's control structure and various control mechanisms are subject to periodic review in connection with examinations by the Company's external auditors, as well as interactions with various regulatory authorities. The Company continues to be committed to employing qualified personnel with appropriate expertise in each of its various administrative and business areas to implement effectively the Company's risk management and monitoring systems and processes. Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. The Company manages the market risk associated with its trading activities Company-wide, on a divisional level worldwide and on an individual product basis. Specific market risk guidelines and limits have been approved for the Company and each trading division of the Company worldwide by the Finance and Risk Committee. Discrete market risk limits are assigned to business units and trading desks within trading areas which are compatible with the trading division limits. Division risk managers, desk risk managers and the Market Risk Department all monitor market risk measures against limits. The Company may use measures, such as rate sensitivity, convexity, volatility and time decay measurements, to estimate market risk and to assess the sensitivity of positions to changes in market conditions. Trading divisions generally make use of valuation and risk models. Stress testing, which measures the impact on the value of existing portfolios of specified changes in market factors, for certain products is performed periodically and reviewed by division risk managers and the Market Risk 14 16 Department. The Company also regularly uses a variety of measures to help reduce and control the market risk associated with its market-making and proprietary trading activities. The Company's exposure to credit risk arises from the possibility that a counterparty to a transaction might fail to perform under its contractual commitment, resulting in the Company incurring losses. The Finance and Risk Committee has approved Company-wide credit guidelines which limit the Company's credit exposure to any one counterparty. Specific credit risk limits based on the credit guidelines have also been approved by the Finance and Risk Committee for each type of counterparty (by rating category) as well as certain inventories of high-yield and emerging market debt. In addition, the Finance and Risk Committee has approved separate settlement risk limits. The Credit Department administers the credit limits among trading divisions on a worldwide basis. The Credit Department also has procedures to monitor credit exposures, and all counterparties of the Company are reviewed periodically to assess financial soundness. In addition to monitoring credit limits, the Company manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. In certain cases, the Company may also close out transactions or assign them to other counterparties to mitigate credit risk. Operational risk refers to the risk of human error and malfeasance or deficiencies in the Company's operating systems. There is considerable fluctuation within each year and from year to year in the volume of business that the Company must process, clear and settle with the trend toward increased transaction volume. The Company is exposed to operational risk from processing and settlement problems which may be especially acute in some non-U.S. markets, particularly emerging markets, and during periods of heavy trading volume in certain U.S. markets. The Company has developed and continues to enhance specific policies and procedures that are designed to provide, among other things, that: (1) all transactions are accurately recorded and properly reflected in the Company's books and records and confirmed on a timely basis; (2) cash disbursements/deliveries and receipts/deliveries of securities are authorized, controlled and reconciled; (3) position valuations are subject to periodic independent review procedures; (4) profit and loss information reported to management, reflected in the Company's books and records, and reported to tax authorities incorporates all activity; (5) collateral and adequate documentation (e.g., master agreements) are obtained from counterparties in appropriate circumstances; (6) valuation and risk models are periodically reviewed as appropriate; and (7) information systems function as intended and are utilized appropriately by authorized personnel. Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and the risk that a counterparty's performance obligations will be unenforceable. The Company is generally subject to extensive regulation in the different jurisdictions in which it conducts its business (see "Competition and Regulation"). The Company has established legal standards and procedures on a worldwide basis that are designed to ensure compliance with all applicable statutory and regulatory requirements. The Company, principally through the Legal and Compliance Department, has also established procedures, such as the Company's Code of Conduct, that are designed to ensure that senior management's policies relating to conduct, ethics and business practices are followed globally. The Company also conducts on a regular basis education and training programs that emphasize protection of client interests and maintenance of the 15 17 Company's reputation and global business franchise. In connection with its business, the Company has various procedures addressing a variety of issues, such as regulatory capital requirements, sales and trading practices, new products, use and safekeeping of customer funds and securities, money-laundering and record-keeping. The Company has also established certain procedures to mitigate the risk that a counterparty's performance obligations will be unenforceable. In particular, the Company has adopted procedures, which are generally product-specific and vary in accordance with risk profile and market practice, to consider counterparty legal authority and capacity, adequacy of legal documentation, the permissibility of 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, among other things, risk due to significant exposure to one issuer, industry or business. Additionally, the equity securities owned by the Company and the funds sponsored by the Company in connection with the Company's principal investment activities are generally not highly liquid. All proposed investments made by the Company and the funds sponsored by the Company are reviewed and approved by senior professionals in the departments of the Company responsible for identifying and making such investments, and any proposed loans, financing commitments or other extensions of credit made by the Company in connection with its merchant banking and investment banking activities are reviewed and approved by senior management. The Company analyzes projected cash flows and returns of the prospective investment and sensitivities to changes in economic assumptions, and reviews, among other things, the prospective portfolio company's industry and its relative position in such industry as well as its future prospects. The Company, which is generally the general partner of the investment funds which it sponsors, in the case of equity investments negotiates with the portfolio company's other equity holders certain rights related to the strategic direction of the business, significant portfolio company transactions and exit strategy. With respect to any loans, financing commitments or other extensions of credit, the Company carefully reviews the creditworthiness of the counterparty, the availability to the counterparty of financing generally, the likely overall financial return and the Company's available capital and funding sources. After any investment or loan, financing commitment or other extension of credit is made, the Company regularly monitors the investment or counterparty by, among other things, reviewing related business plans, financial performance and industry trends. The Company's trading and underwriting of high-yield debt securities and emerging market loans and securitized instruments also subject the Company to market and credit risks. For example, securities held by the Company in connection with its high-yield trading activities typically rank subordinate to bank debt of the issuer and may rank subordinate to other debt of the issuer. The market for these securities has been, and may in the future be, characterized by periods of illiquidity. The liquidity of any particular issue may be significantly better or worse than the overall liquidity of the high-yield market at any time, depending on the quality of the issuer, and during certain periods market quotations may not represent firm bids of dealers or prices of actual sales. In addition, the Company through its market-making and trading activities may be the sole or principal source of liquidity in certain issues and, as a result, may substantially affect the prices at which such issues trade. To mitigate the potential impact on the Company's operating results of the greater risk inherent in high-yield debt securities and emerging market loans and securitized 16 18 instruments, the Company has policies to control total inventory positions in these securities and instruments. Additionally, as indicated above, the Company has credit policies to control exposures to individual high-yield issuers and emerging market counterparties. Derivatives facilitate risk transfer and enhance liquidity in the marketplace, and the origination and trading of derivatives have 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 or currency risk, or to take proprietary trading positions. Widespread acceptance of derivatives has contributed to the development of more complex OTC products structured for particular clients to address specific financing and risk management needs.* Derivative transactions may have both on- and off-balance sheet implications, depending on the nature of the contract, and the Company's use of derivative products may subject the Company to various risks.** In times of market stress, liquidity in certain derivatives positions, as well as in underlying cash instruments, may be reduced. Credit risk in the context of OTC derivative transactions relates to the potential for a counterparty to default on its contract and is represented by the replacement cost of all contracts in a gain position (after considering the effects of master netting agreements where applicable) rather than by the gross notional or contractual values. The risks associated with derivative products, including credit and market risks, are managed in a manner consistent with the Company's overall risk management policies. 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 agreements with customers that permit the Company to close out positions or require additional collateral (and in many cases require excess collateral) if certain events occur. In certain instances, the Company may also limit the types of derivative products that may be traded in a particular account. __________________________________ * As previously indicated, the Company also uses derivative products (primarily interest rate and currency swaps) to assist in asset and liability management and to reduce borrowing costs. The risks associated with derivatives activities in this context are managed in a manner consistent with the Company's overall risk management policies. ** It should be noted, however, that in many cases derivatives serve to reduce, rather than increase, the Company's exposure to losses from market, credit and other risks. 17 19 ITEM 2. PROPERTIES The Company's executive offices are located at 1585 Broadway, New York, New York, where the Company occupies approximately 980,500 square feet as its New York headquarters. The Company also occupies approximately 342,000 square feet at 750 Seventh Avenue, New York, New York. Both the 1585 Broadway and 750 Seventh Avenue buildings are owned by the Company.* The Company also leases space at various other locations in Manhattan under leases expiring between 1996 and 2002 and aggregating approximately 974,680 square feet. In addition, the Company leases space in Brooklyn, New York aggregating approximately 383,112 square feet under a lease expiring in 2013. The Company's London headquarters are located at 25 Cabot Square, Canary Wharf (approximately three miles east of the City of London) and occupy approximately 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 the freehold interest in the land and the Building. The Company also leases approximately 350,000 square feet at 20 Cabot Square, Canary Wharf, under a lease arrangement expiring in 2020. During fiscal 1995 the Company entered into a lease arrangement covering approximately 121,000 square feet in the Yebisu GPT, Ebisu, Shibuya-ku, Tokyo expiring in 1998, but renewable at the Company's option in two year increments. The Company will relocate its Tokyo office to this leased space during the first quarter of fiscal 1996. 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 (a) 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 MS&Co., 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 __________________________________ * For a discussion of the charge taken in fiscal 1994 in connection with the Company's move to its New York facilities and to its new leased office space in Tokyo, see 1995 Annual Report to Stockholders, "Notes to Consolidated Financial Statements, Note 4." At November 30, 1995 the Company had commitments of an estimated $80 million in the aggregate for fit-out and related costs associated with its buildings in New York City and leased space in Tokyo. 18 20 Consolidated Fund suffered significant losses. As against MS&Co., 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 MS&Co. on the State's ultra vires claim. On May 8, 1992, the jury awarded approximately $4.9 million in damages against MS&Co. on the State's constructive fraud claim, but found that MS&Co. 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 MS&Co.'s motion for judgment notwithstanding the verdict or, alternatively, for a new trial. On June 5, 1995, the Supreme Court of Appeals of West Virginia reversed the judgment and remanded the matter for a new trial. On August 21, 1995, MS&Co. filed a motion to recuse the Circuit Court judge who had theretofore presided over the litigation. On September 6, 1995, the Supreme Court of Appeals, having been advised that the judge would not voluntarily recuse himself, ordered that the motion be heard by a designated judge in a different judicial district. The motion to recuse is pending. II. 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. MS&Co. 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 MS&Co.'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 Securities Exchange Act of 1934, as amended (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, MS&Co. 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. III. 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 MS&Co. 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 19 21 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. On December 15, 1995, defendants filed motions for summary judgment. IV. 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 MS&Co., Kidder, Peabody & Co. Incorporated ("Kidder"), and Prudential Securities Incorporated ("Prudential"). The action was brought against Donahue, MS&Co., 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 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 MS&Co. and the other defendants was filed in the same court. That litigation included an action by the bankruptcy trustee for HIA and certain related partnerships 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 was thereafter reached to settle Higley and the competing class action. Following a fairness hearing on April 28, 1995, the court entered a final order and judgment approving a settlement of Higley and the competing class action. On June 5, 1995, the court denied a request made by one class member to intervene for purposes of appealing both a court-approved plan for allocation of the settlement proceeds and the final order and judgment. On June 12, 1995, the class member filed a notice of appeal to the Colorado Court of Appeals, appealing the plan of allocation, the final order and judgment, and the order denying intervention. Oral argument on the motion was heard on January 30, 1996. 20 22 The action filed by the bankruptcy trustee for HIA and certain related partnerships is captioned Sender v. Kidder, Peabody & Co. Incorporated, et al. On November 1, 1995, the court in Sender granted defendants' motion for summary judgment. On December 11, 1995, final judgment was entered in favor of defendants. The bankruptcy trustee has appealed. V. 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 MSAM Inc. and three present and former MSAM Inc. employees. The complaint alleged that NCB established a managed account at MSAM Inc. in or about February 1993 to trade United States Treasury securities and that in August 1993 that account suffered substantial losses. The complaint alleged violations of sections 10(b) and 20(a) of the Exchange Act and rule 10b-5 promulgated thereunder, common law fraud, common law constructive fraud, breach of fiduciary duty, breach of contract, negligence and negligent misrepresentation, and sought compensatory damages in excess of $39 million, punitive damages in an unspecified amount, costs, attorneys' fees and interest. On June 28, 1994, defendants filed answers to the complaint. On July 11, 1994, defendants filed third-party complaints against two employees of NCB, asserting claims over and for contribution and indemnity in the event defendants are determined to be liable to NCB. The complaint, answers and third-party complaints were thereafter amended. The claims against MSAM Inc.'s two present employees have been dismissed without prejudice as have their claims against the two employees of NCB. Discovery is proceeding. VI. NASDAQ Antitrust Litigation. On December 16, 1994, a consolidated amended complaint was filed in the United States District Court for the Southern District of New York against a total of 33 defendants, including MS&Co. The consolidated amended complaint alleged that MS&Co. and other participants and market makers on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") engaged in a conspiracy to fix the "spread" between bid and asked prices for securities traded on the NASDAQ in violation of Section 1 of the Sherman Act. The plaintiff class was alleged to include persons throughout the United States who are customers of the defendants or their affiliates and who purchased or sold securities on the NASDAQ during the period from May 1, 1989 through May 27, 1994. Plaintiffs were alleged to have been damaged in that they paid more for securities purchased on the NASDAQ, or received less for securities sold, than they would have but for the alleged conspiracy. The consolidated amended complaint sought compensatory damages, treble damages, declaratory and injunctive relief, attorneys' fees and costs. Judgment against each of the defendants was sought on a joint and several basis. On February 2, 1995, MS&Co. and the other named defendants filed a motion to dismiss, which was granted on August 10, 1995 with leave to replead. On August 22, 1995, plaintiffs filed a Refiled Consolidated Complaint which is identical in substance to the dismissed pleading except that it lists by name the stocks that plaintiffs contend were the subject of the alleged conspiracy. On December 18, 1995, MS&Co. filed its answer. Discovery is proceeding. VII. MGN Pension Trustees Ltd., et al. v. Morgan Stanley Trust Company. On October 20, 1995, a complaint was filed against Morgan Stanley Trust Company ("MSTC") in the United States District Court for the Eastern District of New York by MGN Pension Trustees Ltd. (as trustee of the Mirror Group Pension Scheme) and The Law Debenture Trust Corporation plc (as trustee of the Maxwell Communication Pension Plan). The complaint alleges that MSTC breached a variety of duties purportedly owed to certain pension plans whose assets were 21 23 managed by an entity controlled by the late Robert Maxwell. The complaint asserts claims for breach of contract, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty,participation in a breach of fiduciary duty, fraud and aiding and abetting a fraud, and seeks between $21.5 million and $142.3 million in compensatory damages, punitive damages in an unspecified amount, return of commissions, interest, costs and attorneys' fees. On December 18, 1995, MSTC filed a motion to dismiss the action. VIII. Global Opportunity Fund Litigation. On December 19, 1995, 20 investors in a Cayman Islands investment fund named The Global Opportunity Fund (the "Fund") brought an action against Morgan Stanley Bank Luxembourg, S.A. ("MSBL") in Luxembourg Commercial Court seeking damages in the amount of $44 million and costs. The apparent core of plaintiffs' complaint is that MSBL was responsible for providing certain net asset valuations to the Fund and performed that function in a negligent manner. IX. Other. In addition to the matters described above, the Company, including MS&Co., has been named from time to time as a defendant in various legal actions, including arbitrations, arising in connection with its activities as a global diversified financial services institution, certain of which include large claims for punitive damages. The Company, including MS&Co., is also involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases such as some of those described above in which substantial damages are sought, the Company cannot state what the eventual outcome of pending matters will be. The Company is contesting the allegations made in each pending matter and believes, based on current knowledge and after consultation with counsel, that the outcome of such matters will not have a material adverse effect on the Company's Consolidated Financial Statements incorporated by reference herein. (b) The following litigation matters were terminated during the quarter ended November 30, 1995. I. 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 Multidistrict Litigation transferred all of the actions to the United States District Court for the Eastern District of Louisiana for consolidated pretrial proceedings. 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 22 24 investment contracts ("GICs") issued by Executive Life Insurance Company ("Executive Life") as part of a purported scheme on the part of Drexel and Executive Life to use the underwriting ofmunicipal 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 was alleged to have caused losses to the members of the purported plaintiff classes. The plaintiff class in each of the actions purportedly consisted 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 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. MS&Co. 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 MS&Co. 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 complaint. On February 2, 1994, the court entered an order imposing sanctions on counsel for the Washington National plaintiffs. The parties thereafter agreed to settle the various actions in which MS&Co. was named as a defendant (excluding the Washington National action), and the settlement was preliminarily approved by the court on February 1, 1995. Following a fairness hearing on July 31, 1995, the magistrate filed a report which recommended approval of the settlement. On October 10, 1995, the settlement received final court approval. On November 1, 1995, the court entered an order suggesting that the Washington National action be transferred back to the United States District Court in Nebraska; subsequently, the court reconsidered its decision and entered another order suggesting remand of the case to New York. 23 25 II. 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, MS&Co., two MS&Co. 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 June 15, 1995, the court granted the special litigation committee's motion to dismiss the action. On August 15, 1995, a notice of appeal was filed on behalf of one of the two plaintiffs. The parties thereafter agreed to settle the action. 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 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. The parties thereafter agreed to settle the action. III. 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 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. On November 10, 24 26 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. First Tokyo thereafter amended its Statement of Claim to assert various claims against Coopers & Lybrand. On July 3, 1995, the court directed that this action be consolidated with a related action filed by Swiss Bank Corporation against Coopers & Lybrand. The parties thereafter agreed to settle the action. 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 November 30, 1995. EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides certain information about each of the Registrant's executive officers on November 30, 1995:
Name Age Position - ---- --- -------- Richard B. Fisher 59 Chairman of the Board of Directors, Managing Director and director of the Registrant and MS&Co. John J. Mack 51 President, Managing Director and director of the Registrant and MS&Co. Barton M. Biggs 63 Managing Director and director of the Registrant and MS&Co. Peter F. Karches 44 Managing Director and director of the Registrant and MS&Co. Sir David A. Walker 56 Managing Director and director of the Registrant and MS&Co. and director and Executive Chairman of Morgan Stanley Group (Europe) Plc Jonathan M. Clark 58 General Counsel and Secretary of the Registrant and MS&Co. and Managing Director and director of MS&Co. Philip N. Duff 38 Chief Financial Officer and Managing Director of the Registrant and MS&Co. and director of MS&Co. Charles B. Hintz 46 Treasurer of the Registrant and MS&Co. and Managing Director of MS&Co.
25 27 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 MS&Co. from January 1991. From January 1984 through December 1990, he served as President of the Registrant and MS&Co. He has been a director and a Managing Director of the Registrant from July 1975 and a director and a Managing Director of MS&Co. from July 1970. He has also been a member of the Registrant's Executive Committee from March 1986 and its Chairman from 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 MS&Co. from June 1993. He has been a director and a Managing Director of the Registrant from 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 MS&Co. from January 1979. He has also been a member of the Registrant's Executive Committee from December 1987. Mr. Biggs has been a director and a Managing Director of the Registrant from May 1991 and a director and Managing Director of MS&Co. from 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 from 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 from February 1994 and a director and a Managing Director of MS&Co. from January 1985. He has also been a member of the Registrant's Executive Committee from February 1994. Sir David Walker has been a director of the Registrant from November 1994, a Managing Director of the Registrant from May 1995, a director of MS&Co. from February 1995 and a Managing Director of MS&Co. from November 1994. He has been a director and the Executive Chairman of Morgan Stanley Group (Europe) Plc from December 1994. He has also been a member of the Registrant's Executive Committee from 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 MS&Co. from February 1993. From February 1993 he has been a director and a Managing Director of MS&Co. 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 MS&Co. from February 1994 and a Managing Director of the Registrant from November 1995. He has been a director of MS&Co. from November 1995 and a Managing Director of MS&Co. from February 1993. From January 1991 to February 1993 he was a Principal of MS&Co. and from January 1989 to January 1991 he was a Vice President of MS&Co. 26 28 Mr. Hintz has been the Treasurer of the Registrant and MS&Co. from January 1992. He has been a Managing Director of MS&Co. from February 1993. From January 1989 to February 1993 he was a Principal of MS&Co. and from October 1986 to January 1989 he was a Vice President of MS&Co. 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 76 of the Registrant's 1995 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 the inner cover of the 1995 Annual Report to Stockholders. Such information (other than the information contained in the column entitled "Fiscal Period Ended November 30, 1995 Annualized (Unaudited)") is hereby incorporated herein by reference and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained on pages 44 to 76 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 26 to 42 of the 1995 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 44 to 76 of such Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Registrant and its subsidiaries, together with the Notes thereto and the Report of Independent Auditors thereon, are contained in the 1995 Annual Report to Stockholders on pages 43 to 76, and such information is hereby incorporated herein by reference, including the information appearing under the caption "Quarterly Results" on page 76 of such Annual Report. The Statement of Financial Condition at December 31, 1995 and 1994 for the Morgan Stanley U.K. Group Profit Sharing Scheme (the "Plan"), the Statement of Changes in Plan Equity 27 29 for the Years Ended December 31, 1995, 1994 and 1993 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 1996 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 13 and "Compensation Committee Interlocks and Insider Participation" on page 18 of the Proxy Statement of the Registrant for its 1996 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 1996 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 of the Registrant for its 1996 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 28 30 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. 3.2 By-Laws of the Company, as amended to date (Annual Report on Form 10-k for the fiscal year ended January 31, 1995). 4.1 Restated Certificate of Incorporation of the Company, as amended to date (see Exhibit 3.1). 4.2 Stockholders' Agreement dated February 14, 1986, as amended to date (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.3* Form of Consent and Amendment dated as of January 31, 1996 between the Company and certain signatories to the Stockholders' Agreement referred to in Exhibit 4.2. 4.4 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). 4.5 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). - ----------------------- * Filed herewith. 29 31 4.6 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). 4.7 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). 4.8 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). 4.9 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). 4.10 Instruments defining the Rights of Security Holders, Including Indentures - In addition to Exhibits 4.1 through 4.9 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 (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). 30 32 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 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). 10.13 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). 10.14 Lease dated January 22, 1993 between Rock-McGraw, Inc. and Morgan Stanley & Co. Incorporated (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). - ---------------------------- + Management Contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). * Filed herewith. 31 33 10.15 Agreement of Lease dated February 10, 1995 among Canary Wharf Limited, Morgan Stanley UK Group and the Company (Annual Report on Form 10-K for the fiscal year ended January 31, 1995). 11* Statement Re: Computation of Earnings Per Share. 12* Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 13* The following portions of the Company's 1995 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 76). 13.2 "Selected Financial Data" (other than the information contained in the column entitled "Fiscal Period Ended November 30, 1995 Annualized (Unaudited)") (Inner Cover). 13.3 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 26 to 42). 13.4 Consolidated Financial Statements of the Company and its subsidiaries, together with the Notes thereto and the Report of Independent Auditors thereon (pages 43 to 76). 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, 1995 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, 1995 for the Morgan Stanley U.K. Group Profit Sharing Scheme. - -------------------- * Filed herewith. 32 34 (b) A Current Report on 8-K, dated September 26, 1995, was filed with the Securities and Exchange Commission in connection with the announcement of the Company's financial results for the period ended August 31, 1995 and the declaration of a quarterly cash dividend. A Current Report on 8-K, dated October 18, 1995, was filed with the Securities and Exchange Commission to file a Capital Unit Agreement dated October 18, 1995 among the Company, Morgan Stanley Finance Plc ("MS Plc") and Chemical Bank as Agent and Book Entry Unit Depositary, and the holders from time to time of the 8.20% Capital Units, each consisting of (i) an 8.20% Subordinated Debenture of MS Plc due November 30, 2015 in the principal amount of $25.00 guaranteed by the Company and (ii) a related Purchase Contract issued by the Company requiring the holder, at the Company's option after November 30, 1996, to purchase one Depositary Share representing ownership of 1/8 interest in a share of the Company's 8.20% Cumulative Preferred Stock, stated value $200 per share. 33 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 1996. 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 February, 1996. Signature Title --------- ----- /s/ Richard B. Fisher Chairman, Managing Director - ---------------------------- and Director (Richard B. Fisher) /s/ John J. Mack President, Managing Director - ---------------------------- and Director (John J. Mack) /s/ Barton M. Biggs Managing Director and Director - ---------------------------- (Barton M. Biggs) /s/ Peter F. Karches Managing Director and Director - ---------------------------- (Peter F. Karches) /s/ Sir David A. Walker Managing Director and Director - ---------------------------- (Sir David A. Walker) 34 36 Signature Title --------- ----- /s/ Philip N. Duff Chief Financial Officer and - ---------------------------- Managing Director (Philip N. Duff) /s/ Eileen K. Murray Chief Accounting Officer - ---------------------------- and Controller (Eileen K. Murray) /s/ Daniel B. Burke Director - ---------------------------- (Daniel B. Burke) /s/ S. Parker Gilbert Director - ---------------------------- (S. Parker Gilbert) /s/ Allen E. Murray Director - ---------------------------- (Allen E. Murray) /s/ Paul J. Rizzo Director - ---------------------------- (Paul J. Rizzo) 35 37 MORGAN STANLEY GROUP INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ITEMS (14)(a)(1) AND (14)(a)(2)
PAGE ---- FINANCIAL STATEMENTS FORM 10-K ANNUAL REPORT - -------------------- --------- ------------- Report of Independent Auditors 43 Consolidated Statement of Financial 44 Condition at November 30, 1995 and January 31, 1995 Consolidated Statement of Income for 46 the Fiscal Period Ended November 30, 1995 and the Fiscal Years Ended January 31, 1995 and January 31, 1994 Consolidated Statement of Cash Flows 47 for the Fiscal Period Ended November 30, 1995 and the Fiscal Years Ended January 31, 1995 and January 31, 1994 Consolidated Statement of Changes 48 in Stockholders' Equity for the Fiscal Period Ended November 30, 1995 and the Fiscal Years Ended January 31, 1995 and January 31, 1994 Notes to Consolidated Financial 50 Statements FINANCIAL STATEMENT SCHEDULES Schedule I - Condensed Financial F-2 - F-5 Information of Registrant Morgan Stanley Group Inc. (Parent Company Only) - Condensed Financial Statements for the Fiscal Period Ended November 30, 1995 and the Fiscal Years Ended January 31, 1995 and January 31, 1994
F-1 38 SCHEDULE I MORGAN STANLEY GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENT OF FINANCIAL CONDITION NOVEMBER 30, 1995 AND JANUARY 31, 1995 (Dollars in thousands, except share data)
November 30, January 31, 1995 1995 ------------ ------------ ASSETS: Cash and interest-bearing equivalents $ 57,994 $ 78,304 Financial instruments owned 543,073 587,906 Advances to subsidiaries 26,201,837 19,090,690 Investment in subsidiaries, at equity 4,871,122 4,310,812 Other assets 589,155 232,372 ------------ ----------- Total assets $32,263,181 $24,300,084 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Short-term borrowings $10,173,519 $ 7,298,237 Payables to subsidiaries 8,037,076 4,517,882 Other liabilities and accrued expenses 590,534 316,281 Long-term borrowings 8,287,688 7,612,838 ------------ ------------ 27,088,817 19,745,238 ------------ ----------- Commitments and contingencies Stockholders' equity: Preferred stock 817,523 818,667 Common stock, $1.00 par value; authorized 300,000,000 shares; issued 162,838,920 shares at November 30, 1995 and 159,548,556 shares at January 31, 1995* 162,839 159,548 Paid-in capital* 730,356 626,712 Retained earnings 3,815,224 3,338,028 Cumulative translation adjustments (8,984) (10,099) ------------ ------------ Subtotal 5,516,958 4,932,856 Less: Note receivable related to sale of preferred stock to ESOP 88,559 99,624 Common stock held in treasury, at cost (7,635,174 shares at November 30, 1995 and 8,954,990 shares at January 31, 1995)* 254,035 278,386 ------------ ----------- Total stockholders' equity 5,174,364 4,554,846 ------------ ----------- Total liabilities and stockholders' equity $32,263,181 $24,300,084 ============ ===========
* All amounts have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996. See Notes to Condensed Financial Statements. F-2 39 SCHEDULE I MORGAN STANLEY GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENT OF INCOME FOR THE FISCAL PERIOD ENDED NOVEMBER 30, 1995, AND THE FISCAL YEARS ENDED JANUARY 31, 1995 AND JANUARY 31, 1994 (Dollars in thousands, except share data)
Fiscal Period Ended Fiscal Year Ended Fiscal Year Ended REVENUES: November 30, January 31, January 31, 1995 1995 1994 ------------------- ----------------- ----------------- Interest and dividends $ 1,490,239 $ 1,312,628 $ 773,222 Principal transactions 22,090 11,875 (47,274) Fiduciary fees 15,137 12,683 15,105 Other 370 (93) 242 -------------- --------------- --------------- Total revenues 1,527,836 1,337,093 741,295 Interest expense 1,540,677 1,263,495 761,543 Expenses excluding interest 8,231 10,312 17,064 -------------- --------------- --------------- (Loss) income before income tax (benefit) provision and equity in earnings of subsidiaries (21,072) 63,286 (37,312) Income tax (benefit) provision (17,544) 29,296 (14,056) -------------- --------------- --------------- (Loss) income before equity in earnings of subsidiaries (3,528) 33,990 (23,256) Equity in earnings of subsidiaries, net of tax 603,665 360,884 809,308 -------------- --------------- --------------- Net income $ 600,137 $ 394,874 $ 786,052 ============== =============== =============== Preferred stock dividend requirements $ 54,155 $ 64,723 $ 55,489 ============== =============== =============== Earnings applicable to common shares (1) $ 545,982 $ 330,151 $ 730,563 ============== =============== =============== Average common and common equivalent shares outstanding (1) (2) 156,912,678 157,793,216 152,416,576 ============== =============== =============== Primary earnings per share (2) $ 3.48 $ 2.09 $ 4.80 ============== =============== =============== Fully diluted earnings per share (2) $ 3.33 $ 2.02 $ 4.58 ============== =============== ===============
(1) Amounts shown are used to calculate primary earnings per share. (2) All amounts have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996. See Notes to Condensed Financial Statements. F-3 40 SCHEDULE I MORGAN STANLEY GROUP INC. (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS FOR THE FISCAL PERIOD ENDED NOVEMBER 30, 1995, AND THE FISCAL YEARS ENDED JANUARY 31, 1995 AND JANUARY 31, 1994 (Dollars in thousands)
Fiscal Period Ended Fiscal Year Ended Fiscal Year Ended November 30, January 31, January 31, 1995 1995 1994 ------------------- ----------------- ----------------- Cash flows from operating activities: Net income $ 600,137 $ 394,874 $ 786,052 Adjustments to reconcile net income to net cash used for operating activities: Non-cash charges (credits) included in net income: Deferred income taxes (9,966) 19,747 (7,902) Compensation payable in common or preferred stock 165,420 116,481 407,573 Equity in subsidiaries' earnings, net of dividends 818,544 79,878 (514,019) (Increase) decrease in assets: Financial instruments owned 44,833 48,955 244,359 Investment in and advances to subsidiaries, at equity (8,490,001) (5,700,470) (5,755,573) Other assets (380,582) (110,979) (59,855) Increase (decrease) in liabilities: Payables to subsidiaries 3,519,194 3,885,791 137,174 Other liabilities and accrued expenses, net of deferred taxes 280,467 (139,983) 42,551 -------------- -------------- -------------- Net cash used for operating activities (3,451,954) (1,405,706) (4,719,640) Cash flows from financing activities: Net proceeds from short-term borrowings 2,875,282 822,433 2,143,962 Proceeds from: Issuance of preferred stock - - 194,436 Issuance of common stock 78,513 20,477 27,196 Issuance of long-term borrowings 1,899,417 2,153,858 3,444,793 Payments for: Repurchase of common stock (103,126) (287,123) (245,444) Repayments of long-term borrowings (1,195,501) (1,201,955) (636,160) Cash dividends (122,941) (151,297) (133,974) -------------- -------------- -------------- Net cash provided by financing activities 3,431,644 1,356,393 4,794,809 -------------- -------------- -------------- Net (decrease) increase in cash and interest-bearing equivalents (20,310) (49,313) 75,169 Cash and interest-bearing equivalents, at beginning of year 78,304 127,617 52,448 -------------- -------------- -------------- Cash and interest-bearing equivalents, at end of year $ 57,994 $ 78,304 $ 127,617 ============== ============== ==============
See Notes to Condensed Financial Statements. F-4 41 SCHEDULE I MORGAN STANLEY GROUP INC. (PARENT COMPANY ONLY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. General The condensed financial statements of Morgan Stanley Group Inc. (the "Company") should be read in conjunction with the consolidated financial statements of Morgan Stanley Group Inc. and Subsidiaries and the notes thereto. Certain amounts in the condensed financial statements for prior years have been reclassified to conform with fiscal 1995 presentation. 2. Transactions with subsidiaries The Company has transactions with its subsidiaries determined on an agreed-upon basis and has guaranteed certain unsecured lines of credit and contractual obligations of its subsidiaries. 3. Change in Fiscal Year-End On February 28, 1995, the Board of Directors approved a change in the Company's fiscal year-end from January 31 to November 30. This change became effective for the fiscal period ended November 30, 1995, and accordingly this report includes the results for the 10-month period from February 1, 1995 through November 30, 1995 ("fiscal 1995"), as well as those for the fiscal years ended January 31, 1995 and January 31, 1994 ("fiscal 1994" and "fiscal 1993", respectively). F-5 42 EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION ------- ----------- 3.1* Restated Certificate of Incorporation of the Company, as amended to date. 3.2 By-Laws of the Company, as amended to date (Annual Report on Form 10-k for the fiscal year ended January 31, 1995). 4.1 Restated Certificate of Incorporation of the Company, as amended to date (see Exhibit 3.1). 4.2 Stockholders' Agreement dated February 14, 1986, as amended to date (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 4.3* Form of Consent and Amendment dated as of January 31, 1996 between the Company and certain signatories to the Stockholders' Agreement referred to in Exhibit 4.2. 4.4 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). 4.5 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). 4.6 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). 4.7 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). 4.8 Subordinated Indenture dated as of November 15, 1993 among Morgan Stanley Finance plc, the Company, as guarantor, and - ----------------------- * Filed herewith. 43 EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION ------- ----------- 4.9 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). 4.10 Instruments defining the Rights of Security Holders, Including Indentures - In addition to Exhibits 4.1 through 4.9 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 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 (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). 44 EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION - ------- ----------- 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 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). 10.13 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). 10.14 Lease dated January 22, 1993 between Rock-McGraw, Inc. and Morgan Stanley & Co. Incorporated (Annual Report on Form 10-K for the fiscal year ended January 31, 1993). 10.15 Agreement of Lease dated February 10, 1995 among Canary Wharf Limited, Morgan Stanley UK Group and the Company (Annual Report on Form 10-K for the fiscal year ended January 31, 1995). 11* Statement Re: Computation of Earnings Per Share. - ---------------------------- + Management Contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). * Filed herewith. 45 EXHIBIT INDEX ------------- EXHIBIT NO. DESCRIPTION - ------- ----------- 12* Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 13* The following portions of the Company's 1995 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 76). 13.2 "Selected Financial Data" (other than the information contained in the column entitled "Fiscal Period Ended November 30, 1995 Annualized (Unaudited)") (Inner Cover). 13.3 "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 26 to 42). 13.4 Consolidated Financial Statements of the Company and its subsidiaries, together with the Notes thereto and the Report of Independent Auditors thereon (pages 43 to 76). 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, 1995 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, 1995 for the Morgan Stanley U.K. Group Profit Sharing Scheme. - -------------------- * Filed herewith. EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF MORGAN STANLEY GROUP INC. Pursuant to Section 245 of the General Corporation Law of the State of Delaware Morgan Stanley Group Inc., a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the "Corporation") and originally incorporated in the State of Delaware on July 10, 1975 under the name Morgan Stanley Holdings Incorporated, does hereby certify as follows: FIRST: That the Certificate of Incorporation of the Corporation was filed in the office of the Secretary of State of the State of Delaware, and a certified copy thereof was recorded in the office of the Recorder of Kent County, Delaware, on the 10th day of July, 1975. SECOND: That the Restated Certificate of Incorporation was filed in the office of the Secretary of State of the State of Delaware, and a certified copy thereof was recorded in the office of the Recorder of Kent County, Delaware, on the 30th day of October, 1989. THIRD: That Certificates of Amendment to the Restated Certificate of Incorporation were filed in the office of the Secretary of State of the State of Delaware, and certified copies thereof were recorded in the office of the Recorder of Kent County, Delaware, on the 8th day of May, 1991, and the 21st day of May, 1992. FOURTH: That Certificates of Stock Designation were filed in the office of the Secretary of State of the State of Delaware, and certified copies thereof were recorded in the office of the Recorder of Kent County, Delaware, on the 19th day of September, 1990, the 24th day of May, 1991, the 29th day of August, 1991, the 15th day of November, 1991, the 20th day of March, 1992, and the 6th day of May, 1992. FIFTH: That a Certificate of Retirement of Stock was filed in the office of the Secretary of State of the State of Delaware and a certified copy thereof was recorded in the office of the Recorder of Kent County, Delaware, on the 20th day of June, 1992. 2 2 SIXTH: That this Restated Certificate of Incorporation restates and integrates and does not further amend the provisions of the Corporation's Restated Certificate of Incorporation as heretofore amended or supplemented, and that there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation, and that the Restated Certificate of Incorporation is hereby restated to read in its entirety as follows: ARTICLE I NAME The name of the Corporation is: MORGAN STANLEY GROUP INC. ARTICLE II REGISTERED OFFICE AND REGISTERED AGENT The registered office of the Corporation in the State of Delaware is located at 32 Loockerman Sq., Ste. L-100, City of Dover, County of Kent. The name of the registered agent of the Corporation at such address is United States Corporation Company. ARTICLE III CORPORATE PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the General Corporation Law of Delaware. ARTICLE IV CAPITAL STOCK SECTION 1. Shares and Classes Authorized. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 330,000,000 shares, which shall include: (a) 30,000,000 shares of preferred stock of no par value each (hereinafter referred to as "Preferred Stock"); and 3 3 (b) 300,000,000 shares of common stock of the par value of $1.00 each (hereinafter referred to as "Common Stock"); such classes of Preferred Stock and Common Stock being sometimes hereinafter collectively referred to as "capital stock". SECTION 2. Preferences, Rights, Limitations and Restrictions of Capital Stock. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, in respect of the classes of the capital stock, and the authority with respect thereto expressly vested in the Board of Directors of the Corporation, are as follows: PART I -- PREFERRED STOCK (a) The Preferred Stock may be issued either as a class without series or, if so determined by the Board of Directors of the Corporation, from time to time in one or more series and with such designation for such class or each such series as shall be stated and expressed in the resolution or resolutions providing for the issue of such class or each such series adopted by the Board of Directors. The Board of Directors in any such resolution or resolutions is expressly authorized to state and express for such class or each such series: (i) Voting rights, if any, including, without limitation, the authority to confer multiple votes per share, voting rights as to specified matters or issues or, subject to the provisions of this Restated Certificate of Incorporation, voting rights to be exercised either together with holders of Common Stock as a single class, or independently as a separate class; (ii) The rate per annum and the times at and conditions upon which the holders of shares of such class or series shall be entitled to receive dividends, the conditions and dates upon which such dividends shall be payable and whether such dividends shall be cumulative or noncumulative, and, if cumulative, the terms upon which such dividends shall be cumulative; (iii) Redemption, repurchase, retirement and sinking fund rights, preferences and limitations, if any, the amount payable on shares of such class or series in the event of such redemption, repurchase or retirement, the terms and conditions of any sinking fund, the manner of creating such fund or funds and whether any of the foregoing shall be cumulative or noncumulative; 4 4 (iv) The rights to which the holders of the shares of such class or series shall be entitled upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (v) The terms, if any, upon which the shares of such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or classes or of any other series of the same or any other class or classes, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; and (vi) Any other designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof so far as they are not inconsistent with the provisions of this Restated Certificate of Incorporation and to the full extent now or hereafter permitted by the laws of the State of Delaware. (b) All shares of the Preferred Stock, if issued as a class without series, or all shares of the Preferred Stock of any one series, if issued in series, shall be identical to each other in all respects and shall entitle the holders thereof to the same rights and privileges, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if cumulative, shall be cumulative. 5 5 Subpart A: ESOP Convertible Preferred Stock* 1. Designation and Issuance. (A) The shares of such series shall be designated ESOP CONVERTIBLE PREFERRED STOCK (hereinafter referred to as the "ESOP Preferred Stock") and such series shall consist of 3,902,438 shares. Such number of shares may be increased or decreased from time to time by resolution of the Pricing Committee of this Board of Directors (the "Pricing Committee"), but no such increase shall result in such series consisting of more than 4,000,000 shares, and no decrease shall reduce the number of shares of ESOP Preferred Stock to a number less than that of shares of ESOP Preferred Stock then outstanding plus the number of shares issuable upon exercise of any rights, options or warrants or upon conversion of outstanding securities issued by the Corporation relating to such shares. Any shares of ESOP Preferred Stock redeemed or purchased by the Corporation shall remain issued and outstanding for all purposes (except that as long as such shares are held by the Corporation or its nominee, no dividends shall be paid on such shares and they shall neither be entitled to vote nor counted for quorum purposes) and may thereafter be transferred by the Corporation from time to time to a trustee or trustees referred to in paragraph (B) of this Section 1 (whereupon the voting and dividend rights of such shares shall be restored); provided that the Corporation may provide at the time of or at any time after such redemption or purchase that any such shares then held by the Corporation or its nominee shall be retired, and such shares shall then be restored to the status of authorized but unissued shares of preferred stock of the Corporation. (B) Shares of ESOP Preferred Stock shall be issued only to a trustee or trustees acting on behalf of an employee stock ownership trust or plan or other employee benefit plan (a "Plan") of the Corporation. In the event of any sale, transfer or other disposition (hereinafter a "transfer") of shares of ESOP Preferred Stock to any person (including, without limitation, any participant in the Plan) other than (x) any trustee or trustees of the Plan or (y) any pledgee of such shares acquiring such shares as security for any loan or - -------------------- * Terms defined in this Subpart A are so defined for purposes of this Subpart alone. 6 6 loans made to the Plan or to any trustee or trustees acting on behalf of the Plan, the shares of ESOP Preferred Stock so transferred, upon such transfer and without any further action by the Corporation or the holder, shall be automatically converted into shares of Common Stock at the Conversion Price (as hereinafter defined) and on the terms otherwise provided for the conversion of shares of ESOP Preferred Stock into shares of Common Stock pursuant to Section 5 hereof and no such transferee shall have any of the voting powers, preferences and relative, participating, optional or special rights ascribed to shares of ESOP Preferred Stock hereunder, but, rather, only the powers and rights pertaining to the Common Stock into which such shares of ESOP Preferred Stock shall be so converted; provided, however, that in the event of a foreclosure or other realization upon shares of ESOP Preferred Stock pledged as security for any loan or loans made to the Plan or to the trustee or the trustees acting on behalf of the Plan, the pledged shares so foreclosed or otherwise realized upon shall be converted automatically into shares of Common Stock at the Conversion Price and on the terms otherwise provided for conversions of shares of ESOP Preferred Stock into shares of Common Stock pursuant to Section 5 hereof. In the event of such a conversion, such transferee shall be treated for all purposes as the record holder of the shares of Common Stock into which the ESOP Preferred Stock shall have been converted as of the date of such conversion. Certificates representing shares of ESOP Preferred Stock shall be legended to reflect such restrictions on transfer. Notwithstanding the foregoing provisions of this Section 1, shares of ESOP Preferred Stock (i) may be converted into shares of Common Stock as provided by Section 5 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Corporation upon the terms and conditions provided by Sections 6, 7 and 8 hereof. 2. Dividends and Distributions. (A) (1) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of ESOP Preferred Stock (other than the Corporation or its nominee) shall be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, cash dividends ("Preferred Dividends") payable in accordance with either of the following elections, as the Board of Directors shall elect from time to time in its absolute discretion: 7 7 (i) in an amount per share initially equal to $2.78 per share per annum, and no more (such amount, as adjusted from time to time pursuant to the terms hereof, including during any period in which a Semiannual Payment Election (as defined below) shall be in effect, the "Annual Dividend Rate"), payable annually in arrears on December 31 (or such later date not more than four business days thereafter as the Board of Directors may from time to time elect in its absolute discretion; such date, the "Annual Payment Date") of each year (such election, the "Annual Payment Election") beginning on the Annual Payment Date occurring immediately after the effective date of such Annual Payment Election; or (ii) in an amount per share initially equal to $2.78 per share per annum, and no more (such amount, as adjusted from time to time pursuant to the terms hereof, including during any period in which an Annual Payment Election is in effect, the "Semiannual Dividend Rate"; and the Semiannual Dividend Rate and the Annual Dividend Rate, as in effect at any time, are each hereinafter referred to as the "Preferred Dividend Rate"), semiannually in arrears, one-half on each June 30 and December 31 (or, in either case, such later date not more than four business days after either of such dates as the Board of Directors may from time to time elect in its absolute discretion; such dates, the "Semiannual Payment Dates") of each year (such election, the "Semiannual Payment Election"), beginning on the Semiannual Payment Date occurring immediately after the effective date of such Semiannual Payment Election; provided that any Semiannual Payment Election shall be made effective only during the period beginning on January 5 and ending on June 29 in each year. The Board of Directors shall give prompt notice to the holders of the ESOP Preferred Stock of any Semiannual Payment Election or Annual Payment Election and any election to alter any Dividend Payment Date pursuant to this Section 2(A)(1). Each Annual Payment Date or Semiannual Payment Date, as applicable, is hereinafter referred to as a "Dividend Payment Date", and each payment of a Preferred Dividend shall be made to holders of record at the opening of business on such Dividend Payment Date. (2) Preferred Dividends shall begin to accrue on outstanding shares of ESOP Preferred Stock from the date of issuance of such shares, except that with respect to any shares of ESOP Preferred Stock redeemed or purchased by the Corporation and then reissued, Preferred Dividends shall 8 8 accrue on such shares from their date of reissuance. Preferred Dividends shall accrue on a daily basis, whether or not the Corporation shall then have earnings or surplus (computed on the basis of a 360-day year of twelve 30-day months in case of any period less than one year) based on the Preferred Dividend Rate in effect on such date; provided that if a Semiannual Payment Election or an Annual Payment Election becomes effective on or after such date and before the immediately succeeding Dividend Payment Date, payments in respect of dividends on the ESOP Preferred Stock made on or after the effective date of such Semiannual Payment Election or Annual Payment Election and on or before such Dividend Payment Date shall be computed using the Preferred Dividend Rate in effect on the date of such payment. Accrued but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on which they first become payable, but no interest shall accrue on accumulated but unpaid Preferred Dividends. (B) So long as any shares of ESOP Preferred Stock shall be outstanding, no dividend shall be declared or paid or set apart for payment on any other series of stock ranking on a parity with the ESOP Preferred Stock as to dividends, unless there shall also be or have been declared and paid or set apart for payment on the ESOP Preferred Stock, like dividends for all dividend payment periods of the ESOP Preferred Stock ending on or before the dividend payment date of such parity stock, ratably in proportion to the respective amounts of dividends (1) accumulated and unpaid or payable on such parity stock, on the one hand, and (2) accumulated and unpaid through the dividend payment period or periods of the ESOP Preferred Stock next preceding such dividend payment date, on the other hand. If full cumulative dividends on the ESOP Preferred Stock have not been declared and paid or set apart for payment when due, the Corporation shall not declare or pay or set apart for payment any dividends or make any other distributions on, or make any payment on account of the purchase, redemption or other retirement of, any other class of stock or series thereof of the Corporation ranking, as to dividends or upon dissolution, junior to the ESOP Preferred Stock until full cumulative dividends on the ESOP Preferred Stock shall have been paid or declared and set apart; provided, however, that the foregoing shall not apply to (i) any dividend or distribution payable solely in any shares of, or options, warrants or rights to subscribe for or purchase shares of, any stock ranking, as to dividends and upon dissolution, junior to the ESOP Preferred Stock or (ii) the acquisition of shares of any stock ranking, as to dividends and upon dissolution, junior to the ESOP Preferred Stock in 9 9 exchange solely for or by conversion solely into shares of any other stock ranking junior to the ESOP Preferred Stock as to dividends and upon dissolution. (C) Any dividend payment made on shares of ESOP Preferred Stock shall first be credited against the earliest accumulated but unpaid dividend due with respect to such shares. 3. Liquidation Preference. (A) In the event of any dissolution or liquidation of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of any series or class or classes of stock of the Corporation ranking junior to ESOP Preferred Stock upon dissolution or liquidation, the holders of ESOP Preferred Stock (other than the Corporation or its nominee) shall be entitled to receive the Liquidation Price (as hereinafter defined) per share in effect at the time of dissolution or liquidation plus an amount equal to all dividends accrued (whether or not accumulated) and unpaid on the ESOP Preferred Stock to the date of final distribution to such holders; but such holders shall not be entitled to and shall not otherwise receive any further payments. The Liquidation Price per share that holders of ESOP Preferred Stock shall receive upon dissolution or liquidation shall be $35.875, subject to adjustment as hereinafter provided. If, upon any dissolution or liquidation of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of ESOP Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares ranking, as to dissolution or liquidation, on a parity with ESOP Preferred Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of ESOP Preferred Stock and any such other shares ratably in accordance with the respective amounts that would be payable on such shares of ESOP Preferred Stock and any such other shares if all amounts payable thereon were paid in full. For the purposes of this Section 3, neither a consolidation or merger of the Corporation with or into one or more corporations, nor the sale, transfer, lease or exchange (for cash, shares of equity stock, securities or other consideration) of all or substantially all of the assets of the Corporation, nor the distribution to the stockholders of the Corporation of all or substantially all of the consideration for such sale, unless such consideration (apart from assumption of liabilities) or the net proceeds 10 10 thereof consists substantially entirely of cash, shall be deemed to be a dissolution or liquidation, voluntary or involuntary. (B) Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or senior to ESOP Preferred Stock upon dissolution or liquidation, upon any dissolution or liquidation of the Corporation, after payment shall have been made in full to the holders of ESOP Preferred Stock as provided in this Section 3, but not prior thereto, any other series or class or classes of stock ranking junior to ESOP Preferred Stock upon dissolution or liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets of the Corporation remaining to be paid or distributed, and the holders of ESOP Preferred Stock shall not be entitled to share therein. 4. Ranking and Voting of Shares. (A) The Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, and the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, shall rank on a parity with ESOP Preferred Stock as to dividends and as to distribution of assets upon dissolution or liquidation. Unless otherwise provided in the Restated Certificate of Incorporation of the Corporation, as the same may be amended, or in a Certificate of Designation of Rights and Preferences relating to any subsequent series of preferred stock, the ESOP Preferred Stock shall rank on a parity with all series of the Corporation's preferred stock as to dividends and as to the distribution of assets upon dissolution or liquidation. (B) The holders of shares of ESOP Preferred Stock (other than the Corporation or its nominee) shall have the following voting rights: (1) The holders of ESOP Preferred Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation, voting together with the holders of Common Stock as one class. The holder of each share of ESOP Preferred Stock shall be entitled to a number of votes equal to 1.35 times the number of shares of Common 11 11 Stock into which such share of ESOP Preferred Stock could be converted on the record date for determining the stockholders entitled to vote; it being understood that whenever the "Conversion Price" (as defined in Section 5 hereof) is adjusted as provided in Section 9 hereof, the number of votes of the ESOP Preferred Stock shall also be correspondingly adjusted. Notwithstanding the immediately preceding sentence, if the governing body of the New York Stock Exchange or any other securities listing service or exchange (each, an "Exchange") or any relevant governmental or regulatory entity (each such entity, and each governing body of an Exchange, a "Regulating Entity") shall have disapproved of such voting power or taken or threatened any action against the Corporation or in respect of any of its securities in accordance with Rule 19c-4 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any other rule or listing standard of any Regulating Entity regarding the voting power of securities, or if the Board of Directors determines in its sole judgment that any Regulating Entity may so disapprove or take or threaten any such action, the holder of each share of ESOP Preferred Stock shall be entitled to a maximum number of votes permissible (consistent with continued listing of the Corporation's securities on any such Exchange) in accordance with the interpretations of any such rule or listing standard by such Regulating Entity, as determined by the Board of Directors. (2) Except as otherwise required by law or set forth herein, holders of ESOP Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action, including the issuance of any preferred stock now or hereafter authorized; provided, however, that the vote of at least 66-2/3% of the outstanding shares of ESOP Preferred Stock, voting separately as a series, shall be necessary to approve any alteration, amendment or repeal of any provision of the Restated Certificate of Incorporation or any alteration, amendment or repeal of any provision of the resolutions relating to the designation, preferences and rights of ESOP Preferred Stock (including any such alteration, amendment or repeal effected by any merger or consolidation in which the Corporation is the surviving or resulting corporation, but not including any alteration or amendment of rights expressly provided for in Section (B)(1) above or in Section 2(A)(1)), if such amendment, alteration or repeal would alter or change the powers, preferences, or special rights of the ESOP Preferred Stock so as to affect them adversely. 12 12 5. Conversion into Common Stock. (A) A holder of shares of ESOP Preferred Stock shall be entitled, at any time prior to the close of business on the date fixed for redemption of such shares pursuant to Section 6, 7 or 8 hereof, to cause any or all of such shares to be converted into shares of Common Stock. The number of shares of Common Stock into which each share of the ESOP Preferred Stock may be converted shall be determined by dividing the Liquidation Price in effect at the time of conversion by the Conversion Price (as hereinafter defined) in effect at the time of conversion. The initial Conversion Price per share at which shares of Common Stock shall be issuable upon conversion of any shares of ESOP Preferred Stock shall be $35.875, subject to adjustment as hereinafter provided; that is, a conversion rate initially equivalent to one share of Common Stock for each share of ESOP Preferred Stock, which is subject to adjustment as hereinafter provided. (B) Any holder of shares of ESOP Preferred Stock desiring to convert such shares into shares of Common Stock shall surrender, if certificated, the certificate or certificates representing the shares of ESOP Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), or if uncertificated, a duly executed stock power relating thereto, at the principal executive office of the Corporation or the offices of the transfer agent for the ESOP Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the ESOP Preferred Stock by the Corporation or the transfer agent for the ESOP Preferred Stock, accompanied by written notice of conversion. Such notice of conversion shall specify (i) the number of shares of ESOP Preferred Stock to be converted and the name or names in which such holder wishes the Common Stock and any shares of ESOP Preferred Stock not to be so converted to be issued, and (ii) the address to which such holder wishes delivery to be made of a confirmation of such conversion, if uncertificated, or any new certificates which may be issued upon such conversion, if certificated. (C) Upon surrender, if certificated, of a certificate representing a share or shares of ESOP Preferred Stock for conversion, or if uncertificated, of a duly executed stock power relating thereto, the Corporation shall issue and send by hand delivery (with receipt to be acknowledged) or by first class mail, postage prepaid, to the 13 13 holder thereof or to such holder's designee, at the address designated by such holder, if certificated, a certificate or certificates for, or if uncertificated, confirmation of, the number of shares of Common Stock to which such holder shall be entitled upon conversion. If there shall have been surrendered shares of ESOP Preferred Stock only part of which are to be converted, the Corporation shall issue and deliver to such holder or such holder's designee, if certificated, a new certificate or certificates representing the number of shares of ESOP Preferred Stock that shall not have been converted, or if uncertificated, confirmation of the number of shares of ESOP Preferred Stock that shall not have been converted. (D) The issuance by the Corporation of shares of Common Stock upon a conversion of shares of ESOP Preferred Stock into shares of Common Stock made at the option of the holder thereof shall be effective as of the earlier of (i) the delivery to such holder or such holder's designee of the certificates representing the shares of Common Stock issued upon conversion thereof, if certificated, or confirmation, if uncertificated, and (ii) the commencement of business on the second business day after the surrender of the certificate or certificates, if certificated, or a duly executed stock power, if uncertificated, for the shares of ESOP Preferred Stock to be converted. On and after the effective date of conversion, the person or persons entitled to receive Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, and no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock of record on any date prior to such effective date. The Corporation shall not be obligated to pay any dividend that may have accrued or have been declared but that is not payable to holders of shares of ESOP Preferred Stock if the Dividend Payment Date for such dividend is on or subsequent to the effective date of conversion of such shares. (E) The Corporation shall not be obligated to deliver to holders of ESOP Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of ESOP Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (F) The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock or treasury Common Stock, solely for issuance upon the conversion of shares of ESOP Preferred Stock as herein 14 14 provided, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of ESOP Preferred Stock then outstanding. 6. Redemption at the Option of the Corporation. (A) The ESOP Preferred Stock shall be redeemable, in whole or in part, at the option of the Corporation at any time after September 19, 2000, out of funds legally available therefor, at a redemption price per share equal to 100% of the Liquidation Price plus an amount equal to all accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption. Payment of the redemption price shall be made by the Corporation in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (E) of this Section 6. From and after the date fixed for redemption, dividends on shares of ESOP Preferred Stock called for redemption will cease to accrue and all rights of the holder in respect of such shares shall cease, except the right to receive the redemption price. Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Corporation, to be held as treasury shares or to be retired, in either case as provided in Section 1(A). If less than all of the outstanding shares of ESOP Preferred Stock are to be redeemed, the Corporation shall either redeem a portion of the shares of each holder determined pro rata based on the number of shares held by each holder or shall select the shares to be redeemed by lot, as may be determined by the Board of Directors of the Corporation. (B) Notice of redemption will be sent to the holders of ESOP Preferred Stock at the address shown on the books of the Corporation or any transfer agent for ESOP Preferred Stock by first class mail, postage prepaid, mailed not less than twenty (20) days nor more than sixty (60) days prior to the redemption date or in any other manner provided by law. Each notice shall state: (i) the redemption date; (ii) the total number of shares of ESOP Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates, if certificated, for such shares are to be surrendered for payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; (vi) whether such redemption price should be paid in cash or in shares of Common Stock; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion 15 15 rights may be exercised and the Conversion Price and number of shares of Common Stock issuable upon conversion of a share of ESOP Preferred Stock at the time. Upon surrender of the certificates, if certificated, for any shares so called for redemption, or upon the date fixed for redemption, if uncertificated, such shares, if not previously converted, shall be redeemed by the Corporation as of the close of business on the date fixed for redemption and at the redemption price set forth in this Section 6. (C) The Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph (A) of this Section 6, at any time within one year after either of the following events: (i) there shall be a change in the federal tax law or regulations of the United States of America or of an interpretation or application of such law or regulations or of a determination by a court of competent jurisdiction that in any case has the effect of precluding the Corporation from claiming (other than for purposes of calculating any alternative minimum tax) any of the tax deductions for dividends paid on the ESOP Preferred Stock when such dividends are used as provided under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), as in effect on the date shares of ESOP Preferred Stock are initially issued, or (ii) the Corporation shall certify to the holders of the ESOP Preferred Stock that the Corporation has determined in good faith that the Plan either is not qualified as a "stock bonus plan" within the meaning of Section 401(a) of the Code or is not an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Code, elect either to (a) redeem, out of funds legally available therefor, any or all of such ESOP Preferred Stock for cash or, if the Corporation so elects, in shares of Common Stock, or a combination of such shares of Common Stock and cash, as permitted by paragraph (E) of this Section 6, at a redemption price equal to (x) if the relevant event is as provided in clause (i) above, the Liquidation Price per share on the date fixed for redemption, plus an amount equal to accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption or (y) if the relevant event is as provided in clause (ii) above, an amount calculated on the basis of the redemption prices provided in paragraph (D) of this Section 6 on the date fixed for redemption or (b) 16 16 exchange any or all of such shares of ESOP Preferred Stock for securities of at least equal value (as determined by an independent appraiser) that constitute "qualifying employer securities" with respect to a holder of ESOP Preferred Stock within the meaning of Section 409(1) of the Code and Section 407(d)(5) of the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), or any successor provisions of law. If the Corporation elects to redeem any or all of the ESOP Preferred Stock pursuant to clause (a) of the preceding sentence, notice of such redemption shall be given as required in paragraph (B) of this Section 6, and if the Corporation elects to exchange any or all of the ESOP Preferred Stock for securities of at least equal value pursuant to clause (b) of the preceding sentence, it will cause notice of such election to be sent to the holders of ESOP Preferred Stock at the address shown on the books of the Corporation or any transfer agent for ESOP Preferred Stock by first class mail, postage prepaid, mailed not less than twenty (20) days nor more than sixty (60) days prior to the date of exchange or in any other manner required by law. Each notice shall state: (i) the exchange date; (ii) the total number of shares of ESOP Preferred Stock to be exchanged and, if fewer than all the shares held by such holder are to be exchanged, the number of shares held by such holder to be exchanged; (iii) the exchange rate; (iv) the place or places where certificates, if certificated, for such shares are to be surrendered for exchange; and (v) that dividends on the shares to be exchanged will cease to accrue on such exchange date. (D) Notwithstanding anything to the contrary in paragraph (A) of this Section 6, in the event that the Plan is, or contributions thereto are, terminated, the Corporation may, in its sole discretion, call for redemption any or all of the then outstanding ESOP Preferred Stock, upon notice as required in paragraph (B) of this Section 6, out of funds legally available therefor, at a redemption price per share equal to the following percentages of the Liquidation Price in effect on the date fixed for redemption: 17 17
During the Twelve- Month Period Percentage of Beginning September 19, Liquidation Price ----------------------- ----------------- 1991 106.98 1992 106.20 1993 105.43 1994 104.65 1995 103.88 1996 103.10 1997 102.33 1998 101.55 1999 100.78 2000 100.00
and thereafter at 100%, plus, in each case, an amount equal to all accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption. Payment of the redemption price shall be made by the Corporation in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph (E) of this Section 6. From and after the date fixed for redemption, dividends on shares of ESOP Preferred Stock called for redemption will cease to accrue and all rights of the holder in respect of such shares shall cease, except the right to receive the redemption price. Upon payment of the redemption price, such shares shall be deemed to have been transferred to the Corporation, to be held as treasury shares or to be retired, in either case as provided in Section 1(A). (E) The Corporation, at its option, may make payment of the redemption price required upon redemption of shares of ESOP Preferred Stock in cash or in shares of Common Stock, or in a combination of such shares and cash, any such shares of Common Stock to be valued for such purpose at their Fair Market Value (as defined in paragraph 9(H)(2)); provided, however, that in calculating their Fair Market Value the Adjustment Period (as defined in paragraph 9(H)(2)) shall be deemed to be the five (5) consecutive trading days preceding the date of redemption. 7. Redemption at the Option of the Holder. (A) Unless otherwise provided by law, shares of ESOP Preferred Stock shall be redeemed by the Corporation at the option of the holder, at any time and from time to time upon notice to the Corporation given not less than five business days prior to the date fixed by the holder in such notice, when and to the extent necessary for such holder to 18 18 provide for distributions required to be made under, or to satisfy an investment election provided to participants in accordance with, the Plan or any successor plan or when the holder elects to redeem shares of ESOP Preferred Stock in connection with any Preferred Dividend (a "Dividend Redemption"), in shares of Common Stock legally available therefor, at a redemption price equal to the higher of (x) the Liquidation Price per share on the date fixed for redemption and (y) the Fair Market Value (as defined in paragraph 9(H)(2)) of the number of shares of Common Stock into which each share of ESOP Preferred Stock is convertible at the time the notice of such redemption is given, plus in either case an amount equal to accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for redemption (such higher price on any date, together with such accrued and unpaid dividends, the "Special Redemption Price"). At the election of the Corporation, such redemption may instead be made out of funds legally available therefor in cash or a combination of Common Stock and cash. Any shares of Common Stock shall be valued for the purposes of redemption pursuant to this paragraph (A) as provided by paragraph (E) of Section 6. In the case of any Dividend Redemption, such holder shall give the notice specified above on the fifth business day after the related Dividend Payment Date and such redemption shall be effective as to such number of shares of ESOP Preferred Stock as shall equal (x) the aggregate amount of such Preferred Dividends paid with respect to shares of ESOP Preferred Stock allocated or credited to the accounts of participants in the Plan or any successor plan that are used to repay any loan associated with such allocated or credited shares divided by (y) the Special Redemption Price specified above in this paragraph (A). (B) Unless otherwise provided by law, shares of ESOP Preferred Stock shall be redeemed by the Corporation at the option of the holder, at any time and from time to time upon notice to the Corporation given not less than five business days prior to the date fixed by the holder in such notice, upon certification by such holder to the Corporation of the following events: (i) when and to the extent necessary for such holder to make any payments of principal, interest or premium due and payable (whether voluntary, scheduled, upon acceleration or otherwise) upon any obligations of the trust established under the Plan in connection with the acquisition of ESOP Preferred Stock or any indebtedness, expenses or costs incurred by the holder for the benefit of the Plan; or (ii) when and if it shall be established to the satisfaction of the holder that the Plan 19 19 has not initially been determined by the Internal Revenue Service to be qualified as a "stock bonus plan" and an "employee stock ownership plan" within the meaning of Section 401(a) or 4975(e)(7) of the Code, respectively, in shares of Common Stock legally available therefor, at a redemption price equal to the Liquidation Price plus an amount equal to accrued and unpaid dividends thereon to the date fixed for redemption. At the election of the Corporation, such redemption may instead be made out of funds legally available therefor in cash or a combination of Common Stock and cash. Any shares of Common Stock shall be valued for the purposes of redemption pursuant to this paragraph (B) as provided by paragraph (E) of Section 6. 8. Consolidation, Merger, etc. (A) If the Corporation shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into securities of any successor or resulting company (including the Corporation) that constitute "qualifying employer securities" with respect to a holder of ESOP Preferred Stock within the meanings of Section 409(l) of the Code and Section 407(d)(5) of ERISA, or any successor provision of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, then, in such event, the terms of such consolidation or merger or similar transaction shall provide that the shares of ESOP Preferred Stock of such holder shall be converted into or exchanged for and shall become preferred securities of such successor or resulting company, having in respect of such company insofar as possible (taking into account, without limitation, any requirements relating to the listing of such preferred securities on any national securities exchange or the qualification of such preferred securities for trading in any over-the-counter market) the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 6, 7 and 8 hereof), and the qualifications, limitations or restrictions thereon, that the ESOP Preferred Stock had immediately prior to such transaction; provided, however, that after such transaction each security into which the ESOP Preferred Stock is so converted or for which it is exchanged shall be convertible, pursuant to the terms and conditions provided by Section 5 hereof, into the number and kind of qualifying employer securities receivable by a holder equivalent to the number of shares of Common Stock into which such shares of ESOP 20 20 Preferred Stock could have been converted pursuant to Section 5 hereof immediately prior to such transaction and provided further that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the ESOP Preferred Stock, then such election shall be deemed to be solely for "qualifying employer securities" (together, if applicable, with a cash payment in lieu of fractional shares) with the effect provided above on the basis of the number and kind of qualifying employer securities receivable by a holder of the number of shares of Common Stock into which the shares of ESOP Preferred Stock could have been converted pursuant to Section 5 hereof immediately prior to such transaction (it being understood that if the kind or amount of qualifying employer securities receivable in respect of each share of Common Stock upon such transaction is not the same for each such share, then the kind and amount of qualifying employer securities deemed to be receivable in respect of each share of Common Stock for purposes of this proviso shall be the kind and amount so receivable per share of Common Stock by a plurality of such shares). The rights of the ESOP Preferred Stock as preferred equity of such successor or resulting company shall successively be subject to adjustments pursuant to Section 9 hereof after any such transaction as nearly equivalent as practicable to the adjustments provided for by such Section prior to such transaction. The Corporation shall not consummate any such merger, consolidation or similar transaction unless all the terms of this paragraph (A) are complied with. (B) If the Corporation shall consummate any consolidation or merger or similar transaction, however named, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other shares or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities that are common stock or common equity (as referred to in paragraph (A) of this Section 8) and cash payments, if applicable, in lieu of fractional shares or other interests, outstanding shares of ESOP Preferred Stock shall, without any action on the part of the Corporation or any holder thereof (but subject to paragraph (C) of this Section 8), be automatically converted immediately prior to the consummation of such merger, consolidation or similar transaction into shares of Common Stock at the Conversion Price then in effect. 21 21 (C) If the Corporation shall enter into any agreement providing for any consolidation or merger or similar transaction described in paragraph (B) of this Section 8, then the Corporation shall as soon as practicable thereafter (and in any event at least ten (10) business days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of ESOP Preferred Stock and each such holder shall have the right to elect, by written notice to the Corporation, to receive, upon consummation of such transaction (if and when such transaction is consummated), out of funds legally available therefor, from the Corporation or the successor of the Corporation, in redemption of such ESOP Preferred Stock, in lieu of any cash or other securities which such holder would otherwise be entitled to receive under paragraph (B) of this Section 8, a cash payment equal to the Liquidation Price per share on the date fixed for such transaction, plus an amount equal to accrued (whether or not accumulated) and unpaid dividends thereon to the date fixed for such transaction. No such notice of redemption shall be effective unless given to the Corporation prior to the close of business of the fifth business day prior to consummation of such transaction, unless the Corporation or the successor of the Corporation shall waive such prior notice, but any notice or redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Corporation prior to the close of business on the fifth business day prior to consummation of such transaction. 9. Anti-dilution Adjustments. (A) (1) Subject to the provisions of paragraphs (E) and (F) of this Section 9, in the event the Corporation shall, at any time or from time to time while any of the shares of the ESOP Preferred Stock are outstanding, (i) pay a dividend or make a distribution in respect of the Common Stock in shares of Common Stock or (ii) subdivide the outstanding shares of Common Stock into a greater number of shares, in each case whether by reclassification of shares, recapitalization of the Corporation (excluding a recapitalization or reclassification effected by a merger or consolidation to which Section 8 applies) or otherwise, then, in such event, the Board of Directors shall, to the extent legally permissible, declare a dividend in respect of the ESOP Preferred Stock in shares of ESOP Preferred Stock (a "Special Dividend") in such a manner that a holder of ESOP Preferred Stock will become a holder of that number of shares of ESOP Preferred Stock equal to the product of the number of such shares held prior to such event times a fraction (the 22 22 "Section 9(A) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock outstanding immediately before such event. A Special Dividend declared pursuant to this Section 9(A)(1) shall be effective, upon payment of such dividend or distribution in respect of the Common Stock, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis), and in the case of a subdivision shall become effective immediately as of the effective date thereof. Concurrently with the declaration of the Special Dividend pursuant to this paragraph 9(A)(1), the Conversion Price, the Liquidation Price and the Preferred Dividend Rate of all shares of ESOP Preferred Stock shall be adjusted by dividing the Conversion Price, the Liquidation Price and the Preferred Dividend Rate, respectively, in effect immediately before such event by the Section 9(A) Fraction. (2) Subject to the provisions of paragraphs (E) and (F) of this Section 9, in the event the Corporation shall, at any time or from time to time while any of the shares of the ESOP Preferred Stock are outstanding, combine the outstanding shares of Common Stock into a lesser number of shares, whether by reclassification of shares, recapitalization of the Corporation (excluding a recapitalization or reclassification effected by a merger, consolidation or other transaction to which Section 8 applies) or otherwise, then, in such event, the Conversion Price shall automatically be adjusted by dividing the Conversion Price in effect immediately before such event by the Section 9(A) Fraction and the Liquidation Price and the Preferred Dividend Rate will not be adjusted. An adjustment to the Conversion Price made pursuant to this paragraph 9(A)(2) shall be given effect immediately as of the effective date of such combination. (B) Subject to the provisions of paragraphs (E) and (F) of this Section 9, in the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, issue to holders of shares of Common Stock as a dividend or distribution, including by way of a reclassification of shares or a recapitalization of the Corporation, any right or warrant to purchase shares of Common Stock (but not including as a right or warrant for this purpose any security convertible into or exchangeable for shares of Common Stock) for a consideration having a Fair Market Value (as hereinafter defined) per share less than the Fair Market Value of a share of Common Stock on the date of issuance of such right or warrant (other than pursuant to any 23 23 employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted), then, in such event, the Board of Directors shall, to the extent legally permissible, declare a Special Dividend in such a manner that a holder of ESOP Preferred Stock will become a holder of that number of shares of ESOP Preferred Stock equal to the product of the number of such shares held prior to such event times a fraction (the "Section 9(B) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance of warrants or rights plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the maximum aggregate consideration payable upon exercise in full of all such rights and warrants. A Special Dividend declared pursuant to this Section 9(B) shall be effective upon such issuance of rights or warrants. Concurrently with the declaration of the Special Dividend pursuant to this Section 9(B), the Conversion Price, the Liquidation Price and the Preferred Dividend Rate of all shares of ESOP Preferred Stock shall be adjusted by dividing the Conversion Price, the Liquidation Price and the Preferred Dividend Rate, respectively, in effect immediately before such event by the Section 9(B) Fraction. (C) (1) Subject to the provisions of paragraphs (E) and (F) of this Section 9, in the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, issue, sell or exchange shares of Common Stock (other than pursuant to (x) any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock) or (y) any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted) at a purchase price per share less than the Fair Market Value of a share of Common Stock on the date of such issuance, sale or exchange, then, in such event, the Board of Directors shall, to the extent legally permissible, declare a Special Dividend in such a manner that a holder of ESOP Preferred Stock will become the holder of that number of shares of ESOP Preferred Stock equal to the product of the number of such shares held prior to such event times a 24 24 fraction (the "Section 9(C)(1) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance, sale or exchange plus the number of shares of Common Stock so issued, sold or exchanged and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance, sale or exchange plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance, sale or exchange for the maximum aggregate consideration paid therefor. (2) Subject to the provisions of paragraphs (E) and (F) of this Section 9, in the event that the Corporation shall, at any time or from time to time while any ESOP Preferred Stock is outstanding, issue, sell or exchange any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock other than pursuant to (x) any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted and (y) any dividend or distribution on shares of Common Stock contemplated in Section 9(A)(1)) for a consideration having a Fair Market Value, on the date of such issuance, sale or exchange, less than the Non-Dilutive Amount (as hereinafter defined), then, in such event, the Board of Directors shall, to the extent legally permissible, declare a Special Dividend in such a manner that a holder of ESOP Preferred Stock will become the holder of that number of shares of ESOP Preferred Stock equal to the product of the number of such shares held prior to such event times a fraction (the "Section 9(C)(2) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the total of (x) the maximum aggregate consideration payable at the time of the issuance, sale or exchange of such right or warrant and (y) the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (3) A Special Dividend declared pursuant to this Section 9(C) shall be effective upon the effective date of 25 25 such issuance, sale or exchange. Concurrently with the declaration of the Special Dividend pursuant to this Section 9(C), the Conversion Price, the Liquidation Price and the Preferred Dividend Rate of all shares of ESOP Preferred Stock shall be adjusted by dividing the Conversion Price, the Liquidation Price and the Preferred Dividend Rate, respectively, in effect immediately before such event by the Section 9(C)(1) Fraction or Section 9(C)(2) Fraction, as the case may be. (D) Subject to the provisions of paragraphs (E) and (F) of this Section 9, in the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, make an Extraordinary Distribution (as hereinafter defined) in respect of the Common Stock, whether by dividend, distribution, reclassification of shares or recapitalization of the Corporation (including capitalization or reclassification effected by a merger or consolidation to which Section 8 does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of Common Stock, then, in such event, the Board of Directors shall, to the extent legally permissible, declare a Special Dividend in such a manner that a holder of ESOP Preferred Stock will become a holder of that number of shares of ESOP Preferred Stock equal to the product of the number of such shares held prior to such event times a fraction (the "Section 9(D) Fraction"), the numerator of which is the product of (a) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase minus, in the case of Pro Rata Repurchase, the number of shares of Common Stock repurchased by the Corporation multiplied by (b) the Fair Market Value of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer that is a Pro Rata Repurchase or on the date of purchase with respect to any Pro Rata Repurchase that is not a tender offer, as the case may be, and the denominator of which is (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash, or on the applicable expiration date 26 26 (including all extensions thereof) of any tender offer that is a Pro Rata Repurchase, or on the date of purchase with respect to any Pro Rata Repurchase that is not a tender offer, as the case may be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the aggregate purchase price of the Pro Rata Repurchase, as the case may be. The Corporation shall send each holder of ESOP Preferred Stock (i) notice of its intent to make any Extraordinary Distribution and (ii) notice of any offer by the Corporation to make a Pro Rata Repurchase, in each case at the same time as, or as soon as practicable after, such offer is first communicated to holders of Common Stock or, in the case of an Extraordinary Distribution, the announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or admitted to trading. Such notice shall indicate the intended record date and the amount and nature of such dividend or distribution, or the number of shares subject to such offer for a Pro Rata Repurchase and the purchase price payable by the Corporation pursuant to such offer, as well as the Conversion Price and the number of shares of Common Stock into which a share of ESOP Preferred Stock may be converted at such time. Concurrently with the Special Dividend paid pursuant to this Section 9(D), the Conversion Price, the Liquidation Price and the Preferred Dividend Rate of all shares of ESOP Preferred Stock shall be adjusted by dividing the Conversion Price, the Liquidation Price and the Preferred Dividend Rate, respectively, in effect immediately before such Extraordinary Distribution or Pro Rata Repurchase by the Section 9(D) Fraction. (E) Notwithstanding any other provision of this Section 9, the Corporation shall not be required to make (i) any Special Dividend or any adjustment of the Conversion Price, the Liquidation Price or the Preferred Dividend Rate unless such Special Dividend or adjustment would require an increase or decrease of at least one percent (1%) in the number of shares of ESOP Preferred Stock outstanding, or, (ii) if no additional shares of ESOP Preferred Stock are issued, any adjustment of the Conversion Price unless such adjustment would require an increase or decrease of at least one percent (1%) in the Conversion Price. Any lesser Special Dividend or adjustment shall be carried forward and shall be made no later than the time of, and together with, the next subsequent Special Dividend or adjustment which, together with any Special Dividend or Dividends, adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least one percent (1%) of the number of shares of ESOP Preferred Stock outstanding or, if no additional shares of ESOP Preferred Stock are being issued, 27 27 an increase or decrease of at least one percent (1%) of the Conversion Price, whichever the case may be. (F) The Corporation and the Board of Directors shall each use its best efforts to take all necessary steps or to take all actions as are reasonably necessary or appropriate for declaration of any Special Dividend provided in any of paragraphs (A), (B), (C) and (D) of this Section 9, but shall not be required to call a special meeting of stockholders in order to implement the provisions thereof. If for any reason the Board of Directors is precluded from giving full effect to the Special Dividend provided in any of such paragraphs, then no such Special Dividend shall be declared, but instead the Conversion Price shall automatically be adjusted by dividing the Conversion Price in effect immediately before the relevant event by the Section 9(A), Section 9(B), Section 9(C) or Section 9(D) Fraction, as applicable, and the Liquidation Price and the Preferred Dividend Rate will not be adjusted. An adjustment to the Conversion Price made pursuant to this paragraph (F) shall be given effect, (i) in the case of a payment of a dividend or distribution under Section 9(A), upon payment thereof as of the record date for the determination of holders entitled to receive such dividend or distribution (on a retroactive basis), and, in the case of a subdivision under Section 9(A), immediately as of the effective date thereof, (ii) in the case of Section 9(B), upon such issuance of rights or warrants, (iii) in the case of Section 9(C), upon the effective date of such issuance, sale or exchange and (iv) in the case of an Extraordinary Dividend under Section 9(D), as of the record date for the determination of holders entitled to receive such Extraordinary Dividend (on a retroactive basis), and, in the case of a Pro Rata Repurchase under Section 9(D), upon the expiration date thereof (if such Pro Rata Repurchase is a tender offer) or the effective date thereof (if such Pro Rata Repurchase is not a tender offer). If subsequently the Board of Directors is able to give full effect to the Special Dividend as provided in paragraph (A), (B), (C) or (D) of this Section 9, then such Special Dividend will be declared and other adjustments will be made in accordance with the provisions of such paragraph and the adjustment in the Conversion Price as provided in this paragraph (F) will automatically be reversed and nullified prospectively. (G) If the Corporation shall make any dividend or distribution on the Common Stock or issue any Common Stock, other capital stock or other security of the Corporation or any rights or warrants to purchase or acquire any such 28 28 security, which transaction does not result in an adjustment to the number of shares of ESOP Preferred Stock outstanding or the Conversion Price pursuant to the foregoing provisions of this Section 9, the Board of Directors of the Corporation may, in its sole discretion, consider whether such action is of such a nature that some type of equitable adjustment should be made in respect of such transaction. If in such case the Board of Directors of the Corporation determines that some type of adjustment should be made, an adjustment shall be made effective as of such date as determined by the Board of Directors of the Corporation. The determination of the Board of Directors of the Corporation as to whether some type of adjustment should be made pursuant to the foregoing provisions of this Section 9(G), and, if so, as to what adjustment should be made and when, shall be final and binding on the Corporation and all stockholders of the Corporation. The Corporation shall be entitled, but not required, to make such additional adjustments, in addition to those required by the foregoing provisions of this Section 9, as shall be necessary in order that any dividend or distribution in shares of capital stock of the Corporation, subdivision, reclassification or combination of shares of the Corporation or any reclassification of the Corporation shall not be taxable to holders of the Common Stock. (H) For purposes hereof, the following definitions shall apply: (1) "Extraordinary Distribution" shall mean any dividend or other distribution to holders of Common Stock (effected while any of the shares of ESOP Preferred Stock are outstanding) of (i) cash or (ii) any shares of capital stock of the Corporation (other than shares of Common Stock), other securities of the Corporation (other than securities of the type referred to in paragraph (B) of this Section 9), evidences of indebtedness of the Corporation or any other person or any other property (including shares of any subsidiary of the Corporation), or any combination of the foregoing, where the aggregate amount of such cash dividend or other distribution together with the amount of all cash dividends and other distributions made during the preceding period of twelve months, when combined with the aggregate amount of all Pro Rata Repurchases (for this purpose, including only that portion of the aggregate purchase price of such Pro Rata Repurchase that is in excess of the Fair Market Value of the Common Stock repurchased as determined on the applicable expiration date (including all extensions thereof) of any tender offer or exchange offer that is a Pro Rata Repurchase, or the date of purchase with respect to any 29 29 other Pro Rata Repurchase that is not a tender offer or exchange offer) made during such period, exceeds twelve and one-half percent (12-1/2%) of the aggregate Fair Market Value of all shares of Common Stock outstanding on the day before the ex-dividend date with respect to such Extraordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash. The Fair Market Value of an Extraordinary Distribution for purposes of paragraph (D) of this Section 9 shall be the sum of the Fair Market Value of such Extraordinary Distribution plus the aggregate amount of any cash dividends or other distributions that are not Extraordinary Distributions made during such twelve-month period and not previously included in the calculation of an adjustment pursuant to paragraph (D) of this Section 9, but shall exclude the aggregate amount of regular quarterly dividends declared by the Board of Directors and paid by the Corporation in such twelve-month period. (2) "Fair Market Value" shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Corporation or any other issuer that are publicly traded, the average of the Current Market Prices (as hereinafter defined) of such shares or securities for each day of the Adjustment Period (as hereinafter defined). "Current Market Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the Corporation or any other issuer for a day shall mean the last reported sales price, regular way, or, in case no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in such security selected for such purpose by the Board of Directors of the Corporation. "Adjustment Period" shall mean the period of five consecutive trading days, selected by the Board of Directors of the 30 30 Corporation, during the twenty (20) trading days preceding, and including, the date as of which the Fair Market Value of a security is to be determined. The "Fair Market Value" of any security that is not publicly traded or of any other property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors of the Corporation, or, if no such investment banking or appraisal firm is in the good faith judgment of the Board of Directors available to make such determination, as determined in good faith by the Board of Directors of the Corporation. (3) "Non-Dilutive Amount" in respect of an issuance, sale or exchange by the Corporation of any right or warrant to purchase or acquire shares of Common Stock (including any security convertible into or exchangeable for shares of Common Stock) shall mean the difference between (i) the product of the Fair Market Value of a share of Common Stock on the day preceding the first public announcement of such issuance, sale or exchange multiplied by the maximum number of shares of Common Stock that could be acquired on such date upon the exercise in full of such rights or warrants (including upon the conversion or exchange of all such convertible or exchangeable securities), whether or not exercisable (or convertible or exchangeable) at such date, and (ii) the aggregate amount payable pursuant to such right or warrant to purchase or acquire such maximum number of shares of Common Stock; provided, however, that in no event shall the Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence, in the case of a security convertible into or exchangeable for shares of Common Stock, the amount payable pursuant to a right or warrant to purchase or acquire shares of Common Stock shall be the Fair Market Value of such security on the date of the issuance, sale or exchange of such security by the Corporation. (4) "Pro Rata Repurchase" shall mean any purchase of shares or Common Stock by the Corporation or any subsidiary thereof, whether for cash, shares of capital stock of the Corporation, other securities of the Corporation, evidences of indebtedness of the Corporation or any other person or any other property (including shares of a subsidiary of the Corporation), or any combination thereof, effected while any of the shares of ESOP Preferred Stock are outstanding, pursuant to any tender offer or exchange offer subject to Section 13(e) of the Exchange Act, or any successor provision of law, or pursuant to any other offer available to substantially all holders of Common Stock; 31 31 provided, however, that no purchase of shares by the Corporation or any subsidiary thereof made in open market transactions shall be deemed a Pro Rata Repurchase. For purposes of this Section 9(H), shares shall be deemed to have been purchased by the Corporation or any subsidiary thereof "in open market transactions" if they have been purchased substantially in accordance with the requirements of Rule 10b-18 as in effect under the Exchange Act on the date shares of ESOP Preferred Stock are initially issued by the Corporation or on such other terms and conditions as the Board of Directors of the Corporation shall have determined are reasonably designed to prevent such purchases from having a material effect on the trading market for the Common Stock. (I) Whenever an adjustment increasing the number of shares of ESOP Preferred Stock outstanding is required pursuant hereto, the Board of Directors shall take action as is necessary so that a sufficient number of shares of ESOP Preferred Stock are designated with respect to such increase resulting from such adjustment. Whenever an adjustment to the Conversion Price, the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock is required pursuant hereto, the Corporation shall forthwith place on file with the transfer agent for the Common Stock and the ESOP Preferred Stock, if there be one, and with the Treasurer of the Corporation, a statement signed by the Treasurer or any Assistant Treasurer of the Corporation stating the adjusted Conversion Price, Liquidation Price and Preferred Dividend Rate determined as provided herein. Such statement shall set forth in reasonable detail such facts as shall be necessary to show the reason and the manner of computing such adjustments, including any determination of Fair Market Value involved in such computation. Promptly after each adjustment to the number of shares of ESOP Preferred Stock outstanding, the Conversion Price, the Liquidation Price or the Preferred Dividend Rate, the Corporation shall mail a notice thereof and of the then prevailing number of shares of ESOP Preferred Stock outstanding, the Conversion Price, the Liquidation Price and the Preferred Dividend Rate to each holder of shares of ESOP Preferred Stock. 10. Miscellaneous. (A) All notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt thereof or three (3) business days after the mailing thereof if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms hereof) with postage prepaid, 32 32 addressed: (i) if to the Corporation, to its office at 1251 Avenue of the Americas, New York, New York 10020 (Attention: Secretary) or to the transfer agent for the ESOP Preferred Stock, or other agent of the Corporation designated as permitted hereof or (ii) if to any holder of the ESOP Preferred Stock or Common Stock, as the case may be, to such holder at the address of such holder as listed in the stock record books of the Corporation (which may include the records of any transfer agent for Common Stock) or (iii) to such other address as the Corporation or any such holder, as the case may be, shall have designated by notice similarly given. (B) The term "Common Stock" as used herein means the Corporation's Common Stock, par value $1.00 per share, as the same exists at the date of filing of this Certificate of Designation pursuant to Section 151 of the General Corporation Law of the State of Delaware, or any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to without par value, or from without par value to par value. In the event that, at any time as a result of an adjustment made pursuant to Section 9 hereof, the holder of any shares of the ESOP Preferred Stock upon thereafter surrendering such shares for conversion shall become entitled to receive any shares or other securities of the Corporation other than shares of Common Stock, the anti-dilution provisions contained in Section 9 hereof shall apply in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock, and the provisions of Sections 1 through 8 and 10 hereof with respect to the Common Stock shall apply on like or similar terms to any such other shares or securities. (C) The Corporation shall pay any and all stock transfer and documentary stamp taxes that may be payable in respect of any issuance or delivery of shares of ESOP Preferred Stock or shares of Common Stock or other securities issued on account of ESOP Preferred Stock pursuant thereto or certificates representing such shares or securities. The Corporation shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of ESOP Preferred Stock or Common Stock or other securities in a name other than that in which the shares of ESOP Preferred Stock with respect to which such shares or other securities are issued or delivered were registered, or in respect of any payment to any person with respect to any shares or securities other than a payment 33 33 to the registered holder thereof, and shall not be required to make any such issuance, delivery or payment unless and until the person otherwise entitled to such issuance, delivery or payment has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid or is not payable. (D) In the event that a holder of shares of ESOP Preferred Stock shall not by written notice designate the name in which shares of Common Stock to be issued upon conversion or exchange of such shares should be registered or to whom payment upon redemption of shares of ESOP Preferred Stock should be made or the address to which the certificate or certificates representing such shares, or such payment, should be sent, the Corporation shall be entitled to register such shares, and make such payment, in the name of the holder of such ESOP Preferred Stock as shown on the records of the Corporation and to send the certificate or certificates or other documentation representing such shares, or such payment, to the address of such holder shown on the records of the Corporation. (E) The Corporation may appoint, and from time to time discharge and change, a transfer agent for the ESOP Preferred Stock. Upon any such appointment or discharge of a transfer agent, the Corporation shall send notice thereof by first-class mail, postage prepaid, to each holder of record of ESOP Preferred Stock. 34 34 Subpart B: 9.36% Cumulative Preferred Stock* 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 9.36% Cumulative Preferred Stock, without par value but with a stated value of $25.00 per share (the "Cumulative Preferred Stock"). The maximum number of shares of Cumulative Preferred Stock shall be 5,500,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when and as declared by the Board out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 9.36% per annum. Dividends on the Cumulative Preferred Stock, calculated as a percentage of the stated value, will be payable quarterly on February 28, May 30, August 30 and November 30, commencing August 30, 1991 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. - -------------------- * Terms defined in this Subpart B are so defined for purposes of this Subpart alone. 35 35 Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends). 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $25.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon 36 36 liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board of Directors of the Corporation at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the 37 37 event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled, only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of 38 38 Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to May 30, 1996. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $25.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. 39 39 If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. Subject to the provisions of paragraph 5, the Board reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares which constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: 40 40 (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.875 per share, the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, and the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 41 41 Subpart C: 8.88% Cumulative Preferred Stock* 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 8.88% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The maximum number of shares of Cumulative Preferred Stock shall be 975,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when and as declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 8.88% per annum. Dividends on the Cumulative Preferred Stock, calculated as a percentage of the stated value, will be payable quarterly on February 28, May 30, August 30 and November 30, commencing February 28, 1992 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid - --------------------- * Terms defined in this Subpart C are so defined for purposes of this Subpart alone. 42 42 through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired by the Corporation for any consideration or any payment by the Corporation be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment; and provided further that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and 43 43 accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and an amount equal to such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members 44 44 of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or 45 45 (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to November 30, 1996. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. 46 46 If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. All shares of Cumulative Preferred Stock redeemed, purchased or otherwise acquired by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued. 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 47 47 8. Amendment of Resolution. The Board and the Committee each reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. 48 48 The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.875 per share, the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, and the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 49 49 Subpart D: 8-3/4% Cumulative Preferred Stock* 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 8-3/4% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The number of shares of Cumulative Preferred Stock shall be 750,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when and as declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 8-3/4% per annum. Dividends on the Cumulative Preferred Stock, calculated as a percentage of the stated value, will be payable quarterly on February 28, May 30, August 30 and November 30, commencing May 30, 1992 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the - -------------------- * Terms defined in this Subpart D are so defined for purposes of this Subpart alone. 50 50 Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired by the Corporation for any consideration or any payment by the Corporation be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment; and provided further that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred 51 51 Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and an amount equal to such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of 52 52 stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or 53 53 (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to May 30, 1997. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. 54 54 If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. All shares of Cumulative Preferred Stock redeemed, purchased or otherwise acquired by the Corporation shall be retired and cancelled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be issued. 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 55 55 8. Amendment of Resolution. The Board and the Committee each reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. 56 56 The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.875 per share, the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, and the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 57 57 PART II -- COMMON STOCK (a) Dividends. Subject to the preferential dividend rights applicable to shares of any class or series of stock having preference over the Common Stock as to dividends, the holders of shares of Common Stock shall be entitled to receive such dividends when and as declared by the Board of Directors and shall share equally, share for share alike, in such dividends. (b) Liquidation, Dissolution or Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, after distribution in full of the preferential amounts to be distributed to the holders of shares of any class or series of stock having preference over the Common Stock upon voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Common Stock shall be entitled to receive all of the remaining assets of the Corporation available for distribution, ratably in proportion to the number of shares of the Common Stock held. (c) Voting. Each share of Common Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation. The holders of the shares of Common Stock shall at all times, except as otherwise provided in this Restated Certificate of Incorporation or required by law, vote as one class, together with the holders of any other class or series of stock of the Corporation accorded such general class voting right. SECTION 3. Definitions. For the purposes of this Restated Certificate of Incorporation: (a) the term "outstanding", when used in reference to shares of stock, shall mean issued shares, excluding shares held by the Corporation or a Subsidiary; and (b) the term "Subsidiary" or "Subsidiaries" shall mean a corporation(s) of which the Corporation, directly or indirectly, has the power, whether through the ownership of voting securities, contract or otherwise, to elect at least a majority of the members of such corporation's board of directors; provided, however, that for purposes of Article VI of the Restated Certificate of Incorporation, the term "Subsidiary" or "Subsidiaries" shall mean a corporation(s), all of the capital stock of which is owned by the Corporation, other than directors' qualifying shares. 58 58 ARTICLE V BOARD OF DIRECTORS SECTION 1. Number, Election and Terms of Directors. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not fewer than four nor more than fifteen persons; provided, however, that, pursuant to the provisions of Section 141(a) of the General Corporation Law of the State of Delaware, the powers and authority of the Board of Directors with respect to any stock option, performance unit or other compensation or employee benefit plan of the Corporation, to the extent not otherwise assigned or reserved to the Board of Directors by the provisions of any such plan, are hereby conferred upon and shall be exercised by a committee or committees designated by resolution passed by the Board of Directors to consist of one or more persons who may or may not be directors of the Corporation, unless the Board of Directors, by resolution passed by the Board of Directors, shall determine that any or all such powers and authority shall instead be conferred upon and exercised by the Board of Directors. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence may be established 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 or 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. SECTION 2. Calling Special Meetings of Stockholders. 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"). SECTION 3. Newly Created Directorships and Vacancies on the Board of Directors. Subject to the rights of any class or series of stock having preference over the 59 59 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 4. 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 5. 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 amend, repeal or adopt By-Laws of the Corporation; provided, that any By-Laws made, amended or repealed by the Board of Directors or the stockholders may be amended or repealed, and that any By-Laws may be made, by the stockholders of the Corporation. Notwithstanding any other provisions of this Restated Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Restated Certificate of Incorporation or the By-Laws of the Corporation), 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 or to adopt any amendment to this Restated Certificate of Incorporation inconsistent with the By-Laws of the Corporation. SECTION 6. Amendment of Certificate of Incorporation. Notwithstanding any other provisions of this Restated Certificate of Incorporation or the By-Laws of the 60 60 Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Restated Certificate of Incorporation or the By-Laws of the Corporation), 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 to amend or repeal, or to adopt any provision inconsistent with, this Article V hereof. SECTION 7. Other Powers. The By-Laws of the Corporation may confer upon the Board of Directors powers in addition to the foregoing and in addition to the powers and authorities expressly conferred upon them by law, but only to the extent permitted by law and not prohibited by the provisions of this Restated Certificate of Incorporation. 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. 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, 61 61 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 attorneys' 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. 62 62 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 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 this Restated Certificate of Incorporation is 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. SEVENTH: That this restatement has been duly adopted by resolution of the Board of Directors of the Corporation in accordance with Section 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be executed by its President and attested by its Assistant Secretary and its corporate seal to be affixed hereto this 14th day of September, 1992. /s/ Robert F. Greenhill (Seal) ---------------------------- Robert F. Greenhill President Attest: /s/ Patricia A. Kurtz - ------------------------- Patricia A. Kurtz Assistant Secretary 63 CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF MORGAN STANLEY GROUP INC. (Pursuant to Section 242 of the Delaware General Corporation Law) MORGAN STANLEY GROUP INC., a Delaware corporation, HEREBY CERTIFIES AS FOLLOWS; 1. The name of the Corporation is Morgan Stanley Group Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was July 10, 1975. The date of filing of the most recent Restated Certificate of Incorporation with the Secretary of State of the State of Delaware was September 15, 1992. 2. This Certificate of Amendment sets forth amendments to the Restated Certificate of Incorporation of the Corporation that were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 3. Article IV, Section 2, Part I, Subpart A, Section 1(A) of the Restated Certificate of Incorporation is hereby amended in full to be and read as follows: (A) The shares of such series shall be designated ESOP CONVERTIBLE PREFERRED STOCK (hereinafter referred to as the "ESOP Preferred Stock") and such series shall consist of 3,902,438 shares. Such number of shares may be increased or decreased from time to time by resolution of the Pricing Committee of this Board of Directors (the "Pricing Committee"), but no such increase shall result in such series consisting of more than 4,000,000 shares, and no decrease shall reduce the number of shares of ESOP Preferred Stock to a number less than that of shares of ESOP Preferred Stock then outstanding plus the number of shares issuable upon exercise of any rights, options or warrants or upon conversion of outstanding securities issued by the Corporation relating to such shares. Notwithstanding the preceding sentence, the Board of Directors may increase the number of shares of ESOP 64 2 Preferred Stock to a number greater than 4,000,000 shares, or may decrease the number of such shares, subject only to any limitations imposed by applicable law or this Restated Certificate of Incorporation. Any shares of ESOP Preferred Stock redeemed or purchased by the Corporation shall remain issued and outstanding for all purposes (except that as long as such shares are held by the Corporation or its nominee, no dividends shall be paid on such shares and they shall neither be entitled to vote nor counted for quorum purposes) and may thereafter be transferred by the Corporation from time to time to a trustee or trustees referred to in paragraph (B) of this Section 1 (whereupon the voting and dividend rights of such shares shall be restored); provided that the Corporation may provide at the time of or at any time after such redemption or purchase that any such shares then held by the Corporation or its nominee shall be retired, and such shares shall then be restored to the status of authorized but unissued shares of preferred stock of the Corporation. 4. Article IV, Section 2, Part I, Subpart A, Section 9, Paragraphs (A), (B), (C), (D), (E), (F), (G) and (I) of the Restated Certificate of Incorporation are hereby amended in full to be and read as follows: (A)(1) In the event the Corporation shall, at any time or from time to time while any of the shares of the ESOP Preferred Stock are outstanding, (i) pay a dividend or make a distribution in respect of the Common Stock in shares of Common Stock or (ii) subdivide the outstanding shares of Common Stock into a greater number of shares, in each case whether by reclassification of shares, recapitalization of the Corporation (excluding a recapitalization or reclassification effected by a merger or consolidation to which Section 8 applies) or otherwise, then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(A) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock outstanding immediately before such event. Such adjustment to the Conversion Price shall be effective, upon payment of such dividend or distribution in respect of the Common Stock, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a 65 3 retroactive basis), and in the case of a subdivision shall become effective immediately as of the effective date thereof. An adjustment to the Conversion Price pursuant to this Section 9(A)(1) shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (2) In the event the Corporation shall, at any time or from time to time while any of the shares of the ESOP Preferred Stock are outstanding, combine the outstanding shares of Common Stock into a lesser number of shares, whether by reclassification of shares, recapitalization of the Corporation (excluding a recapitalization or reclassification effected by a merger, consolidation or other transaction to which Section 8 applies) or otherwise, then, in such event, the Conversion Price shall, subject to the provisions of paragraph (F) of this Section 9, automatically be adjusted by dividing the Conversion Price in effect immediately before such event by the Section 9(A) Fraction. An adjustment to the Conversion Price made pursuant to this paragraph 9(A)(2) shall be given effect immediately as of the effective date of such combination and shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (B) In the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, issue to holders of shares of Common Stock as a dividend or distribution, including by way of a reclassification of shares or a recapitalization of the Corporation, any right or warrant to purchase shares of Common Stock (but not including as a right or warrant for this purpose any security convertible into or exchangeable for shares of Common Stock) for a consideration having a Fair Market Value (as hereinafter defined) per share less than the Fair Market Value of a share of Common Stock on the date of issuance of such right or warrant (other than pursuant to any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted), then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(B) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum 66 4 number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance of warrants or rights plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the maximum aggregate consideration payable upon exercise in full of all such rights and warrants. Such adjustment to the Conversion Price shall be effective upon such issuance of rights or warrants. An adjustment to the Conversion Price pursuant to this Section 9(B) shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (C)(1) In the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, issue, sell or exchange shares of Common Stock (other than pursuant to (x) any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant for this purpose any security convertible into or exchangeable for shares of Common Stock) or (y) any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted) at a purchase price per share less than the Fair Market Value of a share of Common Stock on the date of such issuance, sale or exchange, then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(C)(1) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance, sale or exchange plus the number of shares of Common Stock so issued, sold or exchanged and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance, sale or exchange plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance, sale or exchange for the maximum aggregate consideration paid therefor. (2) In the event that the Corporation shall, at any time or from time to time while any ESOP Preferred Stock is outstanding, issue, sell or exchange any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant for this purpose 67 5 any security convertible into or exchangeable for shares of Common Stock other than pursuant to any employee or director incentive, compensation or benefit plan or arrangement of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted) for a consideration having a Fair Market Value, on the date of such issuance, sale or exchange, less than the Non-Dilutive Amount (as hereinafter defined), then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion Price by a fraction (the "Section 9(C)(2) Fraction"), the numerator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants and the denominator of which is the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock that could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the total of (x) the maximum aggregate consideration payable at the time of the issuance, sale or exchange of such right or warrant and (y) the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (3) An adjustment to the Conversion Price pursuant to this Section 9(C) shall be effective upon the effective date of any issuance, sale or exchange described in paragraph (1) or (2) above. Any such adjustment shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (D) In the event the Corporation shall, at any time or from time to time while any of the shares of ESOP Preferred Stock are outstanding, make an Extraordinary Distribution (as hereinafter defined) in respect of the Common Stock, whether by dividend, distribution, reclassification of shares or recapitalization of the Corporation (including capitalization or reclassification effected by a merger or consolidation to which Section 8 does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of Common Stock, then, in such event, the Conversion Price shall, subject to the provisions of paragraphs (E) and (F) of this Section 9, automatically be adjusted by dividing such Conversion 68 6 Price by a fraction (the "Section 9(D) Fraction"), the numerator of which is the product of (a) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the Corporation multiplied by (b) the Fair Market Value of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer that is a Pro Rata Repurchase or on the date of purchase with respect to any Pro Rata Repurchase that is not a tender offer, as the case may be, and the denominator of which is (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution that is paid in cash and on the distribution date with respect to an Extraordinary Distribution that is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer that is a Pro Rata Repurchase, or on the date of purchase with respect to any Pro Rata Repurchase that is not a tender offer, as the case may be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the aggregate purchase price of the Pro Rata Repurchase, as the case may be. The Corporation shall send each holder of ESOP Preferred Stock (i) notice of its intent to make any Extraordinary Distribution and (ii) notice of any offer by the Corporation to make a Pro Rata Repurchase, in each case at the same time as, or as soon as practicable after, such offer is first communicated to holders of Common Stock or, in the case of an Extraordinary Distribution, the announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or admitted to trading. Such notice shall indicate the intended record date and the amount and nature of such dividend or distribution, or the number of shares subject to such offer for a Pro Rata Repurchase and the purchase price payable by the Corporation pursuant to such offer, as well as the Conversion Price and the number of shares of Common Stock into which a share of ESOP Preferred Stock may be converted at such time. An adjustment to the Conversion Price pursuant to 69 7 this Section 9(D) shall be effective (i) in the case of an Extraordinary Dividend as of the record date for the determination of holders entitled to receive such Extraordinary Dividend (on a retroactive basis) and (ii) in the case of a Pro Rata Repurchase upon the expiration date thereof (if such Pro Rata Repurchase is a tender offer) or the effective date thereof (if such Pro Rata Repurchase is not a tender offer). Any such adjustment shall have no effect on the Liquidation Price or the Preferred Dividend Rate of the ESOP Preferred Stock. (E) The Board of Directors shall have the authority to determine that any adjustment to the Conversion Price provided for in paragraph (A)(1), (B), (C) or (D) of this Section 9 shall not be made (or if already made, to determine that such adjustment shall be cancelled prospectively), and in lieu thereof to declare a dividend in respect of the ESOP Preferred Stock in shares of ESOP Preferred Stock (a "Special Dividend") in such a manner that a holder of ESOP Preferred Stock will become a holder of that number of shares of ESOP Preferred Stock equal to the product of the number of such shares held prior to such event times the Section 9(A), Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as applicable. The declaration of such a Special Dividend shall be authorized, if at all, by the Board of Directors no later than 30 calendar days following the authorization by the Board of Directors (or by a committee duly authorized by the Board of Directors) of the transaction or other event described in any of the foregoing paragraphs (A)(1), (B), (C) or (D) that would otherwise result in an adjustment to the Conversion Price being made pursuant to any such paragraphs, and if the Board of Directors does not authorize the declaration of a Special Dividend by the end of such 30-day period, then no such Special Dividend shall be declared and the adjustment to the Conversion Price provided for in paragraph (A)(1), (B), (C) or (D) of this Section 9 shall become final and binding on the Corporation and all stockholders of the Corporation. Concurrently with the declaration of any Special Dividend pursuant to this paragraph (E), the Conversion Price, the Liquidation Price and the Preferred Dividend Rate of all shares of ESOP Preferred Stock shall be adjusted by dividing the Conversion Price, the Liquidation Price and the Preferred Dividend Rate, respectively, in effect immediately before such event by the Section 9(A), Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as applicable. 70 8 (F) Unless the Board of Directors determines otherwise, and notwithstanding any other provision of this Section 9, any adjustment to the Conversion Price provided for in any of paragraphs (A), (B), (C) or (D) of this Section 9 shall not be made unless such adjustment would require an increase or decrease of at least one percent (1%) in the Conversion Price and, similarly, the Board of Directors shall not declare any Special Dividend pursuant to paragraph (E) of this Section 9 unless such Special Dividend or adjustment would require an increase or decrease of at least one percent (1%) in the number of shares of ESOP Preferred Stock outstanding. Any lesser adjustment to the Conversion Price or Special Dividend shall be carried forward and shall be made no later than the time of, and together with, the next subsequent adjustment to the Conversion Price or Special Dividend which, together with any adjustment or adjustments or Special Dividend or Dividends so carried forward, shall amount to an increase or decrease of at least one percent (1%) of the Conversion Price or an increase or decrease of at least one percent (1%) in the number of shares of ESOP Preferred Stock outstanding, whichever the case may be. (G) If the Corporation shall make any dividend or distribution on the Common Stock or issue any Common Stock, other capital stock or other security of the Corporation or any rights or warrants to purchase or acquire any such security, which transaction does not result in an adjustment to the Conversion Price or to the number of shares of ESOP Preferred Stock outstanding pursuant to the foregoing provisions of this Section 9, the Board of Directors of the Corporation may, in its sole discretion, consider whether such action is of such a nature that some type of equitable adjustment should be made in respect of such transaction. If in such case the Board of Directors of the Corporation determines that some type of adjustment should be made, an adjustment shall be made effective as of such date as determined by the Board of Directors of the Corporation. The determination of the Board of Directors of the Corporation as to whether some type of adjustment should be made pursuant to the foregoing provisions of this Section 9(G), and, if so, as to what adjustment should be made and when, shall be final and binding on the Corporation and all stockholders of the Corporation. The Corporation shall be entitled, but not required, to make such additional adjustments, in addition to those required by the foregoing provisions of this Section 9, as shall be necessary in order that any dividend or 71 9 distribution in shares of capital stock of the Corporation, subdivision, reclassification or combination of shares of the Corporation or any reclassification of the Corporation shall not be taxable to holders of the Common Stock. * * * (I) Whenever an adjustment to the Conversion Price of the ESOP Preferred Stock is required pursuant to this Section 9, the Corporation shall forthwith place on file with the transfer agent for the Common Stock and the ESOP Preferred Stock, if there be one, and with the Treasurer of the Corporation, a statement signed by the Treasurer or any Assistant Treasurer of the Corporation stating the adjusted Conversion Price determined as provided herein. In addition, whenever a Special Dividend is declared pursuant to paragraph (E) of this Section 9, (i) the maximum number of shares of ESOP Preferred Stock shall be adjusted by multiplying 4,000,000 (or such other number as shall be the maximum number of shares of ESOP Preferred Stock in effect prior to the authorization of such Special Dividend) by the Section 9(A), Section 9(B), Section 9(C)(1), Section 9(C)(2) or Section 9(D) Fraction, as the case may be, (ii) the Board of Directors shall take action as is necessary so that a sufficient number of shares of ESOP Preferred Stock are designated with respect to any increase in the number of shares of ESOP Preferred Stock to be outstanding as a result of such Special Dividend and (iii) the Corporation shall forthwith place on file with the transfer agent for the Common Stock and the ESOP Preferred Stock, if there be one, and with the Treasurer of the Corporation, a statement signed by the Treasurer or any Assistant Treasurer of the Corporation stating the adjusted maximum number of shares of ESOP Preferred Stock, Conversion Price, Liquidation Price and Preferred Dividend Rate determined as provided herein. The statement required by either of the two preceding sentences shall set forth in reasonable detail such facts as shall be necessary to show the reason and the manner of computing such adjustments, including any determination of Fair Market Value involved in such computation. Promptly after each adjustment to the maximum number of shares of ESOP Preferred Stock, Conversion Price, the Liquidation Price, the Preferred Dividend Rate, or the number of shares of ESOP Preferred Stock outstanding, the Corporation shall mail a notice thereof and of the then prevailing maximum number of shares of ESOP Preferred Stock, Conversion Price, Liquidation Price, Preferred Dividend Rate and 72 10 number of shares of ESOP Preferred Stock outstanding to each holder of shares of ESOP Preferred Stock. IN WITNESS WHEREOF, MORGAN STANLEY GROUP INC. has caused this Certificate to be signed by John J. Mack, its President, and attested by Jonathan M. Clark, its General Counsel and Secretary, this 30th day of June, 1993. MORGAN STANLEY GROUP INC. By: /s/ John J. Mack -------------------- Name: John J. Mack Title: President ATTEST: /s/ Jonathan M. Clark - -------------------------- Name: Jonathan M. Clark Title: General Counsel and Secretary 73 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7-3/8% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY GROUP INC. ______________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ______________________________ The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors (the "Board") of Morgan Stanley Group Inc., a Delaware corporation (hereinafter called the "Corporation"), by unanimous written consent in lieu of a meeting dated as of July 27, 1993, with certain of the designations, preferences and rights having been fixed by the Pricing Committee of the Board (the "Committee") at a meeting on August 18, 1993, pursuant to authority delegated to it by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware: RESOLVED that, pursuant to authority expressly granted to and vested in the Committee by the Board and in the Board by provisions of the Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, without par value (the "Preferred Stock"), which shall consist of 1,000,000 of the 30,000,000 shares of Preferred Stock which the Corporation now has authority to issue, is authorized, and the Board and, pursuant to the authority expressly granted to the Committee by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Committee, fix the powers, 74 2 designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 7-3/8% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The number of shares of Cumulative Preferred Stock shall be 1,000,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 7-3/8% per annum. Dividends on the Cumulative Preferred Stock, calculated as a percentage of the stated value, will be payable quarterly on February 28, May 30, August 30 and November 30 commencing November 30, 1993 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends 75 3 unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking 76 4 junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 77 5 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining 78 6 director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation, (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with 79 7 respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to August 30, 1998. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock 80 8 so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: 81 9 (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with the Corporation's ESOP Convertible 82 10 Preferred Stock, with a liquidation value of $35.88 per share, the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be made under the seal of the Corporation and signed by Barton M. Biggs, its Managing Director, and attested by Ralph L. Pellecchio, its Assistant Secretary, this 24th day of August, 1993. MORGAN STANLEY GROUP INC. By: /s/ Barton M. Biggs --------------------- Name: Barton M. Biggs Title: Managing Director, who is duly authorized to exercise the duties of a Vice President. [SEAL] Attest: /s/ Ralph L. Pellecchio ----------------------- Assistant Secretary 83 CERTIFICATE OF CORRECTION FILED TO CORRECT A CERTAIN ERROR IN THE CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7-3/8% CUMULATIVE PREFERRED STOCK ($200.00 STATED VALUE) OF MORGAN STANLEY GROUP INC, FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF DELAWARE ON AUGUST 24, 1993, AND FORWARDED TO THE OFFICE OF THE RECORDER OF DEEDS IN AND FOR KENT COUNTY, DELAWARE ON AUGUST 25, 1993 Pursuant to Section 103(f) of the General Corporation Law of the State of Delaware Morgan Stanley Group Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Morgan Stanley Group Inc. (the "Corporation"). 2. A Certificate of Designation of Preferences and Rights of the 7-3/8% Cumulative Preferred Stock ($200.00 Stated Value) of the Corporation was filed on August 24, 1993 and forwarded to the Office of the Recorder of Deeds in and for Kent County, Delaware on August 25, 1993 (the "Certificate"). 3. The Certificate requires correction as permitted by subsection (f) of the Section 103 of the General Corporation Law of the State of Delaware. 84 4. The inaccuracy or defect of the Certificate to be corrected is that the concluding clause is corrected to read as follows: "IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be made under the seal of the Corporation and signed by Barton M. Biggs, its Managing Director, and attested by Ralph Pallecchio, its Assistant Secretary, this 24th day of August, 1993." IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate of Correction to be made under the seal of the Corporation and signed by Anson M. Beard, Jr., its Managing Director, and attested by Patricia A. Kurtz, its Assistant Secretary, this 27th day of August, 1993. MORGAN STANLEY GROUP INC. By: /s/ Anson M. Beard, Jr. -------------------------------- Name: Anson M. Beard, Jr. Title: Managing Director, who is duly authorized to exercise the duties of a Vice President [SEAL] Attest: /s/ Patricia A. Kurtz ------------------------- Assistant Secretary 85 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7.82% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY GROUP INC. ______________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ______________________________ The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors (the "Board") of Morgan Stanley Group Inc., a Delaware corporation (hereinafter called the "Corporation"), by unanimous written consent in lieu of a meeting dated as of October 29, 1993, with certain of the designations, preferences and rights having been fixed by the Pricing Committee of the Board (the "Committee") at a meeting on November 19, 1993, pursuant to authority delegated to it by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware: RESOLVED that, pursuant to authority expressly granted to and vested in the Committee by the Board and in the Board by provisions of the Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, without par value (the "Preferred Stock"), which shall consist of 682,813 of the 30,000,000 shares of Preferred Stock which the Corporation now has authority to issue, is authorized, and the Board and, pursuant to the authority expressly granted to the Committee by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Committee, fix the powers, designations, preferences 86 2 and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 7.82% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The maximum number of shares of Cumulative Preferred Stock shall be 682,813. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 7.82% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative 87 3 Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to 88 4 rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 89 5 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining 90 6 director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation, (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with 91 7 respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption Shares. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to November 30, 1998. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock 92 8 so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: 93 9 (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with the Corporation's ESOP Convertible 94 10 Preferred Stock, with a liquidation value of $35.88 per share, the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be made under the seal of the Corporation and signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 23rd day of November, 1993. MORGAN STANLEY GROUP INC. /s/ Richard B. Fisher By: ------------------------ Name: Richard B. Fisher Title: Chairman [SEAL] Attest: /s/ Patricia A. Kurtz - ----------------------------- Assistant Secretary 95 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 7.80% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY GROUP INC. ------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------------- The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors (the "Board") of Morgan Stanley Group Inc., a Delaware corporation (hereinafter called the "Corporation"), by unanimous written consent in lieu of a meeting dated as of October 29, 1993, with certain of the designations, preferences and rights having been fixed by the Pricing Committee of the Board (the "Committee") at a meeting on February 1, 1994, pursuant to authority delegated to it by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware: RESOLVED that, pursuant to authority expressly granted to and vested in the Committee by the Board and in the Board by provisions of the Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, without par value (the "Preferred Stock"), which shall consist of 1,150,000 of the 30,000,000 shares of Preferred Stock which the Corporation now has authority to issue, is authorized, and the Board and, pursuant to the authority expressly granted to the Committee by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Committee, fix the powers, 96 2 designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 7.80% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The maximum number of shares of Cumulative Preferred Stock shall be 1,150,000. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 7.80% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative 97 3 Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to 98 4 rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 99 5 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant for any reason other than removal from office as aforesaid, the remaining 100 6 director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of the Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation, (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with 101 7 respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption Shares. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stocks books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to February 28, 1999. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock 102 8 so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: 103 9 (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock in such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with the Corporation's ESOP Convertible 104 10 Preferred Stock, with a liquidation value of $35.88 per share, the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and, if issued, the Corporation's 7.82% Cumulative Preferred Stock with a liquidation value of $200.00 per share. IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be made under the seal of the Corporation and signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 4 day of February, 1994. MORGAN STANLEY GROUP INC. By: /s/ Richard B. Fisher --------------------------- Name: Richard B. Fisher Title: Chairman of the Board [SEAL] Attest: /s/ Patricia A. Kurtz - ------------------------- Patricia A. Kurtz Assistant Secretary 105 CERTIFICATE OF DECREASE OF AUTHORIZED NUMBER OF SHARES OF 7.82% CUMULATIVE PREFERRED STOCK Morgan Stanley Group Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: That the Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on September 15, 1992 and forwarded for recording in the Office of the Recorder of Deeds for Kent County, Delaware on September 15, 1992 and a Certificate of Designation of Preferences and Rights ("Certificate of Designation") of the 7.82% Cumulative Preferred Stock, was filed in said Office of the Secretary of State on November 24, 1993 and forwarded for recording in the office of the Recorder of Deeds on even date therewith. That pursuant to authority expressly granted to and vested in the Pricing Committee of the Board of Directors of the Corporation (the "Pricing Committee"), by resolutions duly adopted by said Board of Directors on October 29, 1993 (the "Resolutions"), the Pricing Committee fixed certain designations, preferences and rights of the aforesaid 7.82% Cumulative Preferred Stock as set forth in the Certificate of Designation. That pursuant to authority expressly granted to and vested in the Pricing Committee by the Resolutions, the Pricing Committee by a written unanimous consent in lieu of a meeting dated as of April 12, 1994 duly adopted a resolution authorizing and directing a decrease in the authorized number of shares of the 7.82% Cumulative Preferred Stock of the Corporation, from 682,813 shares to 611,238 shares and providing that the 71,575 shares of the 7.82% Cumulative Preferred Stock designated by the Pricing Committee but not issued and outstanding resume the status of authorized and unissued Preferred Stock, all in accordance with the provisions of Section 151 of The General Corporation Law of the State of Delaware and the aforesaid Restated Certificate of Incorporation of the Corporation. 106 IN WITNESS WHEREOF, said Morgan Stanley Group Inc., has caused this certificate to be signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 12 day of April, 1994. By /s/ Richard B. Fisher ------------------------------ Name: Richard B. Fisher Title: Chairman ATTEST: By /s/ Patricia A. Kurtz ------------------------------ Name: Patricia A. Kurtz Title: Assistant Secretary 107 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 9.00% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY GROUP INC. ------------------------------ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------------ The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors (the "Board") of Morgan Stanley Group ----- Inc., a Delaware corporation (hereinafter called the "Corporation"), by ----------- unanimous written consent in lieu of a meeting dated as of October 29, 1993 with certain of the designations, preferences and rights having been fixed by the Pricing Committee of the Board (the "Committee") at a meeting on February 10, --------- 1995, pursuant to authority delegated to it by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware: RESOLVED that, pursuant to authority expressly granted to and vested in the Committee by the Board and in the Board by provisions of the Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), the issuance of a series of Preferred ----------------------------- Stock, without par value (the "Preferred Stock"), which shall consist of --------------- 738,763 of the 30,000,000 shares of Preferred Stock which the Corporation now has authority to issue, is authorized, and the Board and, pursuant to the authority expressly granted to the Committee by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Committee fix the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set 108 2 forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation ----------------------------------------- for such series of the Preferred Stock authorized by this resolution shall be the 9.00% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred -------------------- Stock"). The stated value per share of Cumulative Preferred Stock ------ shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The maximum number of shares of Cumulative Preferred Stock shall be 738,763. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock --------- will be entitled to receive, when, as and if declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 9.00% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative ---------------------- Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the 109 3 Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred ---------------------- Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) ----------------------- plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders 110 4 ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not ---------- convertible into shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred ------------- Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant 111 5 for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two- thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation, (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would 112 6 otherwise be required shall be effected, all outstanding shares of Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption Shares. The shares of the Cumulative Preferred ----------------- Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to February 28, 2000. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the 113 7 payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 7. Authorization and Issuance of Other Securities. No consent ---------------------------------------------- of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each ----------------------- reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of ---- any class or classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity ------ Preferred Stock" being used to refer to any stock on a parity --------------- with the shares of 114 8 Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, (iii) the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (v) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (vii) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 115 9 IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be made under the seal of the Corporation and signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 14th day of February, 1995. MORGAN STANLEY GROUP INC. By: /s/ Richard B. Fisher ----------------------------------------- Name: Richard B. Fisher Title: Chairman of the Board [SEAL] ATTEST: /s/ Patricia A. Kurtz - ---------------------------------- Name: Patricia A. Kurtz Title: Assistant Secretary 116 CERTIFICATE OF DECREASE OF AUTHORIZED NUMBER OF SHARES OF 9.00% CUMULATIVE PREFERRED STOCK Morgan Stanley Group Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: That the Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on September 15, 1992 and forwarded for recording in the Office of the Recorder of Deeds for Kent County, Delaware on September 15, 1992 and a Certificate of Designation of Preferences and Rights ("Certificate of Designation") of the 9.00% Cumulative Preferred Stock, was filed in said Office of the Secretary of State on February 17, 1995 and forwarded for recording in the office of the Recorder of Deeds on even date therewith. That pursuant to authority expressly granted to and vested in the Pricing Committee of the Board of Directors of the Corporation (the "Pricing Committee"), by resolutions duly adopted by said Board of Directors on October 29, 1993 (the "Resolutions"), the Pricing Committee fixed certain designations, preferences and rights of the aforesaid 9.00% Cumulative Preferred Stock as set forth in the Certificate of Designation. That pursuant to authority expressly granted to and vested in the Pricing Committee by the Resolutions, the Pricing Committee by a written unanimous consent in lieu of a meeting dated as of March 9, 1995 duly adopted a resolution authorizing and directing a decrease in the authorized number of shares of the 9.00% Cumulative Preferred Stock of the Corporation, from 738,763 shares to 720,900 shares and providing that the 17,863 shares of the 9.00% Cumulative Preferred Stock designated by the Pricing Committee but not issued and outstanding resume the status of authorized and unissued Preferred Stock, all in accordance with the provisions of Section 151 of The General Corporation Law of the State of Delaware and the aforesaid Restated Certificate of Incorporation of the Corporation. IN WITNESS WHEREOF, said Morgan Stanley Group Inc., has caused this certificate to be signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 13th day of March, 1995. By /s/ Richard B. Fisher -------------------------------- Name: Richard B. Fisher Title: Chairman ATTEST: By /s/ Patricia A. Kurtz ------------------------------- Name: Patricia A. Kurtz Title: Assistant Secretary 117 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 8.40% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY GROUP INC. ---------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ---------- The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors (the "Board") of Morgan Stanley Group Inc., a Delaware corporation (hereinafter called the "Corporation"), by unanimous written consent in lieu of a meeting dated as of April 12, 1995 with certain of the designations, preferences and rights having been fixed by the Pricing Committee of the Board (the "Committee") at a meeting on July 27, 1995, pursuant to authority delegated to it by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware: RESOLVED that, pursuant to authority expressly granted to and vested in the Committee by the Board and in the Board by provisions of the Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, without par value (the "Preferred Stock"), which shall consist of 1,006,250 of the 30,000,000 shares of Preferred Stock which the Corporation now has authority to issue, is authorized, and the Board and, pursuant to the authority expressly granted to the Committee by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Committee fix the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set 118 2 forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 8.40% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The total number of shares of Cumulative Preferred Stock shall be 1,006,250. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 8.40% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the 119 3 Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders 120 4 ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant 121 5 for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation, (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 122 6 Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption Shares. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to August 30, 2000. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 123 7 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and 124 8 (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, (iii) the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (v) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (viii) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 125 9 IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be made under the seal of the Corporation and signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 27th day of July, 1995. MORGAN STANLEY GROUP INC. By: /s/ Richard B. Fisher ----------------------------------- Name: Richard B. Fisher Title: Chairman of the Board [SEAL] Attest: /s/ Patricia A. Kurtz - ---------------------------- Patricia A. Kurtz Assistant Secretary 126 CERTIFICATE OF DECREASE OF AUTHORIZED NUMBER OF SHARES OF 8.40% CUMULATIVE PREFERRED STOCK Morgan Stanley Group Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: That the Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on September 15, 1992 and forwarded for recording in the Office of the Recorder of Deeds for Kent County, Delaware on September 15, 1992 and a Certificate of Designation of Preferences and Rights ("Certificate of Designation") of the 8.40% Cumulative Preferred Stock, was filed in said Office of the Secretary of State on July 31, 1995 and forwarded for recording in the office of the Recorder of Deeds on even date therewith. That pursuant to authority expressly granted to and vested in the Pricing Committee of the Board of Directors of the Corporation (the "Pricing Committee"), by resolutions duly adopted by said Board of Directors on April 12, 1995 (the "Resolutions"), the Pricing Committee fixed certain designations, preferences and rights of the aforesaid 8.40% Cumulative Preferred Stock as set forth in the Certificate of Designation. That pursuant to authority expressly granted to and vested in the Pricing Committee by the Resolutions, the Pricing Committee by a written unanimous consent in lieu of a meeting dated as of September 6, 1995 duly adopted a resolution authorizing and directing a decrease in the authorized number of shares of the 8.40% Cumulative Preferred Stock of the Corporation, from 1,006,250 shares to 996,776 shares and providing that the 9,474 shares of the 8.40% Cumulative Preferred Stock designated by the Pricing Committee but not issued and outstanding resume the status of authorized and unissued Preferred Stock, all in accordance with the provisions of Section 151 of The General Corporation Law of the State of Delaware and the aforesaid Restated Certificate of Incorporation of the Corporation. IN WITNESS WHEREOF, said Morgan Stanley Group Inc., has caused this certificate to be signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 6th day of September, 1995. By /s/ Richard B. Fisher --------------------------------- Name: Richard B. Fisher Title: Chairman ATTEST: By /s/ Patricia A. Kurtz ---------------------------------- Name: Patricia A. Kurtz Title: Assistant Secretary 127 CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF THE 8.20% CUMULATIVE PREFERRED STOCK ($200.00 Stated Value) OF MORGAN STANLEY GROUP INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware 128 The undersigned DOES HEREBY CERTIFY that the following resolution was duly adopted by the Board of Directors (the "Board") of Morgan Stanley Group Inc., a Delaware corporation (hereinafter called the "Corporation"), by unanimous written consent in lieu of a meeting dated as of April 12, 1995 with certain of the designations, preferences and rights having been fixed by the Pricing Committee of the Board (the "Committee") at a meeting on October 13, 1995, pursuant to authority delegated to it by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware: RESOLVED that, pursuant to authority expressly granted to and vested in the Committee by the Board and in the Board by provisions of the Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), the issuance of a series of Preferred Stock, without par value (the "Preferred Stock"), which shall consist of 862,500 of the 30,000,000 shares of Preferred Stock which the Corporation now has authority to issue, is authorized, and the Board and, pursuant to the authority expressly granted to the Committee by the Board pursuant to the provisions of Section 141(c) of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Committee fix the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, set 129 2 forth in the Certificate of Incorporation which may be applicable to the Preferred Stock) as follows: 1. Designation and Amount; Fractional Shares. The designation for such series of the Preferred Stock authorized by this resolution shall be the 8.20% Cumulative Preferred Stock, without par value, with a stated value of $200.00 per share (the "Cumulative Preferred Stock"). The stated value per share of Cumulative Preferred Stock shall not for any purpose be considered to be a determination by the Board or the Committee with respect to the capital and surplus of the Corporation. The total number of shares of Cumulative Preferred Stock shall be 862,500. The Cumulative Preferred Stock is issuable in whole shares only. 2. Dividends. Holders of shares of Cumulative Preferred Stock will be entitled to receive, when, as and if declared by the Board or the Committee out of assets of the Corporation legally available for payment, cash dividends payable quarterly at the rate of 8.20% per annum. Dividends on the Cumulative Preferred Stock will be payable quarterly on February 28, May 30, August 30 and November 30 (each a "dividend payment date"). Dividends on shares of the Cumulative Preferred Stock will be cumulative from the date of initial issuance of such shares of Cumulative Preferred Stock. Dividends will be payable, in arrears, to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board or the Committee. The amount of dividends payable for the initial dividend period or any period shorter than a full dividend period shall be calculated on the basis of a 360-day year of twelve 30-day months. No dividends may be declared or paid or set apart for payment on any Parity Preferred Stock (as defined in paragraph 9(b) below) with regard to the payment of dividends unless there shall also be or have been declared and paid or set apart for payment on the Cumulative Preferred Stock, like dividends for all dividend payment periods of the Cumulative Preferred Stock ending on or before the dividend payment date of such Parity Preferred Stock, ratably in proportion to the respective amounts of dividends (x) accumulated and unpaid or payable on such Parity Preferred Stock, on the one hand, and (y) accumulated and unpaid through the dividend payment period or periods of the Cumulative Preferred Stock next preceding such dividend payment date, on the other hand. Except as set forth in the preceding sentence, unless full cumulative dividends on the Cumulative Preferred Stock have been paid, no dividends (other than in Common Stock of the Corporation) may be paid or declared and set aside for payment or other distribution made upon the Common Stock or on any other stock of the Corporation ranking junior to or on a parity with the 130 3 Cumulative Preferred Stock as to dividends, nor may any Common Stock or any other stock of the Corporation ranking junior to or on a parity with the Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment be made to or available for a sinking fund for the redemption of any shares of such stock; provided, however, that any moneys theretofore deposited in any sinking fund with respect to any preferred stock of the Corporation in compliance with the provisions of such sinking fund may thereafter be applied to the purchase or redemption of such preferred stock in accordance with the terms of such sinking fund, regardless of whether at the time of such application full cumulative dividends upon shares of the Cumulative Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment) by the Corporation; provided that any such junior or parity Preferred Stock or Common Stock may be converted into or exchanged for stock of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends. 3. Liquidation Preference. The shares of Cumulative Preferred Stock shall rank, as to liquidation, dissolution or winding up of the Corporation, prior to the shares of Common Stock and any other class of stock of the Corporation ranking junior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up of the Corporation, so that in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Cumulative Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any distribution is made to holders of shares of Common Stock or any other such junior stock, an amount equal to $200.00 per share (the "Liquidation Preference" of a share of Cumulative Preferred Stock) plus an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid on the shares of Cumulative Preferred Stock to the date of final distribution. The holders of the Cumulative Preferred Stock will not be entitled to receive the Liquidation Preference until the liquidation preference of any other class of stock of the Corporation ranking senior to the Cumulative Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. After payment of the full amount of the Liquidation Preference and such dividends, the holders of shares of Cumulative Preferred Stock will not be entitled to any further participation in any distribution of assets by the Corporation. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Parity Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributable among such holders 131 4 ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes hereof, neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding up of the Corporation. 4. Conversion. The Cumulative Preferred Stock is not convertible into shares of any other class or series of stock of the Corporation. 5. Voting Rights. The holders of shares of Cumulative Preferred Stock shall have no voting rights whatsoever, except for any voting rights to which they may be entitled under the laws of the State of Delaware, and except as follows: (a) Whenever, at any time or times, dividends payable on the shares of Cumulative Preferred Stock or on any Parity Preferred Stock with respect to payment of dividends, shall be in arrears for an aggregate number of days equal to six calendar quarters or more, whether or not consecutive, the holders of the outstanding shares of Cumulative Preferred Stock shall have the right, with holders of shares of any one or more other class or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class), to elect two of the authorized number of members of the Board at the Corporation's next annual meeting of stockholders and at each subsequent annual meeting of stockholders until such arrearages have been paid or set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the holders of shares of Cumulative Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of shares of Cumulative Preferred Stock shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph may be removed at any time, either with or without cause. Any vacancy thereby created may be filled only by the affirmative vote of the holders of shares of Cumulative Preferred Stock voting separately as a class (together with the holders of shares of any other class or series of stock upon which like voting rights have been conferred and are exercisable). If the office of any director elected by the holders of shares of Cumulative Preferred Stock voting as a class becomes vacant 132 5 for any reason other than removal from office as aforesaid, the remaining director elected pursuant to this paragraph may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. At elections for such directors, each holder of shares of Cumulative Preferred Stock shall be entitled to one vote for each share held (the holders of shares of any other class or series of preferred stock having like voting rights being entitled to such number of votes, if any, for each share of such stock held as may be granted to them). (b) So long as any shares of Cumulative Preferred Stock remain outstanding, the consent of the holders of at least two-thirds of the shares of Cumulative Preferred Stock outstanding at the time and all other classes or series of stock upon which like voting rights have been conferred and are exercisable (voting together as a class) given in person or by proxy, either in writing or at any meeting called for the purpose, shall be necessary to permit, effect or validate any one or more of the following: (i) the issuance or increase of the authorized amount of any class or series of shares ranking prior (as that term is defined in paragraph 9(a) hereof) to the shares of the Cumulative Preferred Stock; or (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Certificate of Incorporation, (including this resolution or any provision hereof) that would materially and adversely affect any power, preference, or special right of the shares of Cumulative Preferred Stock or of the holders thereof; provided, however, that any increase in the amount of authorized Common Stock or authorized Preferred Stock or any increase or decrease in the number of shares of any series of Preferred Stock or the creation and issuance of other series of Common Stock or Preferred Stock, in each case ranking on a parity with or junior to the shares of Cumulative Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such powers, preferences or special rights. (c) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of 133 6 Cumulative Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. 6. Redemption Shares. The shares of the Cumulative Preferred Stock may be redeemed at the option of the Corporation, as a whole, or from time to time in part, at any time, upon not less than 30 days' prior notice mailed to the holders of the shares to be redeemed at their addresses as shown on the stock books of the Corporation; provided, however, that shares of the Cumulative Preferred Stock shall not be redeemable prior to November 30, 2000. Subject to the foregoing, on or after such date, shares of the Cumulative Preferred Stock are redeemable at $200.00 per share together with an amount equal to all dividends (whether or not earned or declared) accrued and accumulated and unpaid to, but excluding, the date fixed for redemption. If full cumulative dividends on the Cumulative Preferred Stock have not been paid, the Cumulative Preferred Stock may not be redeemed in part and the Corporation may not purchase or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of the Cumulative Preferred Stock. If fewer than all the outstanding shares of Cumulative Preferred Stock are to be redeemed, the Corporation will select those to be redeemed by lot or a substantially equivalent method. If a notice of redemption has been given pursuant to this paragraph 6 and if, on or before the date fixed for redemption, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares of Cumulative Preferred Stock so called for redemption, then, notwithstanding that any certificates for such shares have not been surrendered for cancellation, on the redemption date dividends shall cease to accrue on the shares to be redeemed, and at the close of business on the redemption date the holders of such shares shall cease to be stockholders with respect to such shares and shall have no interest in or claims against the Corporation by virtue thereof and shall have no voting or other rights with respect to such shares, except the right to receive the moneys payable upon surrender (and endorsement, if required by the Corporation) of their certificates, and the shares evidenced thereby shall no longer be outstanding. Subject to applicable escheat laws, any moneys so set aside by the Corporation and unclaimed at the end of two years from the redemption date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of the amounts payable upon such redemption. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. 134 7 7. Authorization and Issuance of Other Securities. No consent of the holders of the Cumulative Preferred Stock shall be required for (a) the creation of any indebtedness of any kind of the Corporation, (b) the creation, or increase or decrease in the amount, of any class or series of stock of the Corporation not ranking prior as to dividends or upon liquidation, dissolution or winding up to the Cumulative Preferred Stock or (c) any increase or decrease in the amount of authorized Common Stock or any increase, decrease or change in the par value thereof or in any other terms thereof. 8. Amendment of Resolution. The Board and the Committee each reserves the right by subsequent amendment of this resolution from time to time to increase or decrease the number of shares that constitute the Cumulative Preferred Stock (but not below the number of shares thereof then outstanding) and in other respects to amend this resolution within the limitations provided by law, this resolution and the Certificate of Incorporation. 9. Rank. For the purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of the Cumulative Preferred Stock; (b) on a parity with shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Cumulative Preferred Stock, if the holders of stock of such class or classes shall be entitled by the terms thereof to the receipt of dividends or of amounts distributed upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority of one over the other as between the holders of such stock and the holders of shares of Cumulative Preferred Stock (the term "Parity Preferred Stock" being used to refer to any stock on a parity with the shares of Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, as the context may require); and 135 8 (c) junior to shares of the Cumulative Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, or both, if such class shall be Common Stock or if the holders of the Cumulative Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of stock of such class or classes. The Cumulative Preferred Stock shall rank prior, as to dividends and upon liquidation, dissolution or winding up, to the Common Stock and on a parity with (i) the Corporation's ESOP Convertible Preferred Stock, with a liquidation value of $35.88 per share, (ii) the Corporation's 9.36% Cumulative Preferred Stock, with a liquidation value of $25.00 per share, (iii) the Corporation's 8.88% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (iv) the Corporation's 8-3/4% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (v) the Corporation's 7-3/8% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vi) if issued, the Corporation's 7.82% Cumulative Preferred Stock, with a liquidation value of $200.00 per share, (vii) if issued, the Corporation's 7.80% Cumulative Preferred Stock, with a liquidation value of $200.00 per share (viii) if issued, the Corporation's 9.00% Cumulative Preferred Stock, with a liquidation value of $200.00 per share and (ix) if issued, the Corporation's 8.40% Cumulative Preferred Stock, with a liquidation value of $200.00 per share. 136 9 IN WITNESS WHEREOF, Morgan Stanley Group Inc. has caused this Certificate to be made under the seal of the Corporation and signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 13th day of October, 1995. MORGAN STANLEY GROUP INC. By /s/ Richard B. Fisher -------------------------------- Name: Richard B. Fisher Title: Chairman of the Board [SEAL] Attest: By /s/ Patricia A. Kurtz ---------------------------------- Name: Patricia A. Kurtz Title: Assistant Secretary 137 CERTIFICATE OF DECREASE OF AUTHORIZED NUMBER OF SHARES OF 8.20% CUMULATIVE PREFERRED STOCK Morgan Stanley Group Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: That the Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on September 15, 1992 and forwarded for recording in the Office of the Recorder of Deeds for Kent County, Delaware on September 15, 1992 and a Certificate of Designation of Preferences and Rights ("Certificate of Designation") of the 8.20% Cumulative Preferred Stock, was filed in said Office of the Secretary of State on October 17, 1995 and forwarded for recording in the office of the Recorder of Deeds on even date therewith. That pursuant to authority expressly granted to and vested in the Pricing Committee of the Board of Directors of the Corporation (the "Pricing Committee"), by resolutions duly adopted by said Board of Directors on April 12, 1995 (the "Resolutions"), the Pricing Committee fixed certain designations, preferences and rights of the aforesaid 8.20% Cumulative Preferred Stock as set forth in the Certificate of Designation. That pursuant to authority expressly granted to and vested in the Pricing Committee by the Resolutions, the Pricing Committee by a written unanimous consent in lieu of a meeting dated as of October 27, 1995 duly adopted a resolution authorizing and directing a decrease in the authorized number of shares of the 8.20% Cumulative Preferred Stock of the Corporation, from 862,500 shares to 847,500 shares and providing that the 15,000 shares of the 8.20% Cumulative Preferred Stock designated by the Pricing Committee but not issued and outstanding resume the status of authorized and unissued Preferred Stock, all in accordance with the provisions of Section 151 of The General Corporation Law of the State of Delaware and the aforesaid Restated Certificate of Incorporation of the Corporation. IN WITNESS WHEREOF, said Morgan Stanley Group Inc., has caused this certificate to be signed by Richard B. Fisher, its Chairman, and attested by Patricia A. Kurtz, its Assistant Secretary, this 31st day of October, 1995. By /s/ Richard B. Fisher ____________________________ Name: Richard B. Fisher Title: Chairman ATTEST: By /s/ Patricia A. Kurtz ______________________________ Name: Patricia A. Kurtz Title: Assistant Secretary EX-4.3 3 FORM OF CONSENT AND AMENDMENT DATED AS OF 1/31/96 1 Exhibit 4.3 CONSENT AND AMENDMENT To Morgan Stanley Group Inc.: Reference is made to each of the following agreements and certificates to which the undersigned is a party or which evidences an award previously made to the undersigned (collectively, the "Agreements"): 1. Stockholders' Agreement, dated as of February 14, 1986, among Morgan Stanley Group Inc. and its stockholders a party thereto. 2. Each nonqualified stock option agreement, including all appendices and amendments thereto and each voting agreement entered into pursuant thereto, under the Morgan Stanley Group Inc. 1986 Stock Option Plan, as amended. 3. Each award agreement, including all appendices and amendments thereto and each voting agreement entered into pursuant thereto, under the Morgan Stanley Group Inc. Performance Unit Plan, as amended. 4. Each award agreement or certificate (including without limitation each option agreement, stock unit agreement, stock restriction agreement, option certificate and stock unit certificate), including all appendices and amendments thereto and each voting agreement entered into pursuant thereto, under the Morgan Stanley Group Inc. 1988 Equity Incentive Compensation Plan, as amended. The undersigned hereby consents to the amendment of each of the Agreements, effective January 31, 1996, (1) so that each Agreement shall be governed by the laws of the State of Delaware (including without limitation the 1994 amendments to Section 218 of the Delaware General Corporation Law (the "DGCL")) and (2) so as to confirm (notwithstanding the lmitation on the term of stockholder voting agreements and voting trust agreements imposed by Delaware law prior to the 1994 amendments to Section 218 of the DGCL) that the undertakings and covenants of the undersigned set forth in the Agreements, including without limitation the covenants of the undersigned with respect to the voting of shares of common stock, par value $1.00 per share, of Morgan Stanley Group Inc., shall continue in full force and effect until they have terminated or expired in accordance with the terms of the Agreements, as so amended. IN WITNESS WHEREOF, the undersigned has executed this Consent and Amendment as of the date indicated below. Signature: _______________________________ Name (please print): _______________________________ Date: January 31, 1996 EX-11 4 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 MORGAN STANLEY GROUP INC. COMPUTATION OF EARNINGS PER SHARE (IN MILLIONS, EXCEPT SHARE DATA)
FISCAL FISCAL FISCAL PERIOD ENDED YEAR ENDED YEAR ENDED NOVEMBER 30, JANUARY 31, JANUARY 31, 1995 1995 1994 ----------------- ----------------- ----------------- PRIMARY (1): Common stock and common stock equivalents: Average common shares outstanding 154,307,918 153,976,502 149,286,904 Average common shares issuable under employee benefit plans 2,604,760 3,816,714 3,129,672 ------------ ------------ ------------ Total average common and common equivalent shares outstanding 156,912,678 157,793,216 152,416,576 ============ ============ ============ Earnings: Net income $ 600 $ 395 $ 786 Less: Preferred stock dividend requirements 54 65 55 ------------ ------------ ------------ Earnings applicable to common shares $ 546 $ 330 $ 731 ============ ============ ============ Primary earnings per share $ 3.48 $ 2.09 $ 4.80 ============ ============ ============ FULLY DILUTED (1): Common stock and common stock equivalents: Average common shares outstanding 154,307,918 153,976,502 149,286,904 Average common shares issuable under employee benefit plans 3,122,650 3,816,714 3,439,774 Common shares issuable upon conversion of preferred stock 7,557,596 7,617,748 7,668,218 ------------ ------------ ------------ Total average common and common equivalent shares outstanding 164,988,164 165,410,964 160,394,896 ============ ============ ============ Earnings: Net income $ 600 $ 395 $ 786 Less: Preferred stock dividend requirements 51 62 51 ------------ ------------ ------------ Earnings applicable to common shares $ 549 $ 333 $ 735 ============ ============ ============ Fully diluted earnings per share $ 3.33 $ 2.02 $ 4.58 ============ ============ ============
(1) All share and per share amounts have been retroactively adjusted to give effect for a two-for-one common stock split effected in the form of a 100% stock dividend, which became effective on January 26, 1996. 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 PERIOD ENDED YEAR ENDED NOVEMBER 30, FISCAL YEAR ENDED JANUARY 31, DECEMBER 31, ---------------------------------- 1995 1995 1994 1993 1991 ------ ------ ------ ------ ------ RATIO OF EARNINGS TO FIXED CHARGES Earnings: Income before income taxes $ 883 $ 594 $1,200 $ 793 $ 772 Add: Fixed charges, net 5,538 5,916 5,055 4,397 3,963 ------ ------ ------ ------ ------ Income before income taxes and fixed charges, net $6,421 $6,510 $6,255 $5,190 $4,735 ====== ====== ====== ====== ====== Fixed charges: Total interest expense (1) $5,512 $5,899 $5,020 $4,362 $3,946 Interest factor in rents (2) 37 41 35 35 38 ------ ------ ------ ------ ------ Total fixed charges $5,549 $5,940 $5,055 $4,397 $3,984 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 1.2 1.1 1.2 1.2 1.2 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Earnings: Income before income taxes $ 883 $ 594 $1,200 $ 793 $ 772 Add: Fixed charges, net 5,538 5,916 5,055 4,397 3,963 ------ ------ ------ ------ ------ Income before income taxes and fixed charges, net $6,421 $6,510 $6,255 $5,190 $4,735 ====== ====== ====== ====== ====== Fixed charges: Total interest expense (1) $5,512 $5,899 $5,020 $4,362 $3,946 Interest factor in rents (2) 37 41 35 35 38 Preferred stock dividends (3) 80 97 85 82 47 ------ ------ ------ ------ ------ Total fixed charges and preferred stock dividends $5,629 $6,037 $5,140 $4,479 $4,031 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges and preferred stock dividends 1.1 1.1 1.2 1.2 1.2
(1) Total interest expense for the fiscal period ended November 30, 1995, the fiscal year ended January 31, 1995 and the year ended December 31, 1991 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 1995 ANNUAL REPORT QUARTERLY RESULTS 1 Exhibit 13.1 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 13 QUARTERLY RESULTS (UNAUDITED)
================================================================================================================================ - -------------------------------------------------------------------------------------------------------------------------------- Fiscal 1995(1) ------------------------------------------------------------------------------------------- Month Quarter Quarter Quarter Ended Ended Ended Ended (Dollars in Millions, Feb. 28, May 31, Aug. 31, Nov. 30, Except Share Data) 1995 1995 1995 1995 ------------------------------------------------------------------------------------------- Revenues: Investment banking $ 80 $ 273 $ 355 $ 503 Principal transactions: Trading 114 438 352 218 Investments -- (6) 69 39 Commissions 37 131 130 139 Interest and dividends 588 1,742 1,899 1,710 Asset management and administration 31 88 96 95 Other 1 1 1 -- ------------------------------------------------------------------------------------------- Total revenues 851 2,667 2,902 2,704 Interest expense 558 1,656 1,751 1,536 ------------------------------------------------------------------------------------------- Net revenues 293 1,011 1,151 1,168 ------------------------------------------------------------------------------------------- Expenses excluding interest: Compensation and benefits 138 475 575 607 Occupancy and equipment 27 80 84 85 Brokerage, clearing and exchange fees 20 66 64 61 Communications 11 34 31 32 Business development 14 34 30 32 Professional services 14 40 37 40 Other 11 31 32 35 Relocation charge -- -- -- -- ------------------------------------------------------------------------------------------- Total expenses excluding interest 235 760 853 892 ------------------------------------------------------------------------------------------- Income before income taxes 58 251 298 276 Provisions for income taxes 20 85 89 89 ------------------------------------------------------------------------------------------- Net income $ 38 $ 166 $ 209 $ 187 ------------------------------------------------------------------------------------------- Earnings applicable to common shares(2) $ 33 $ 150 $ 192 $ 171 ------------------------------------------------------------------------------------------- Per common share:(3) Primary earnings(4) $ 0.22 $ 0.95 $ 1.23 $ 1.08 Fully diluted earnings(4) $ 0.21 $ 0.91 $ 1.17 $ 1.04 Cash dividends $ -- $ 0.16 $ 0.16 $ 0.16 Book value $ 24.13 $ 25.19 $ 26.34 $ 28.18 Average common and equivalent shares(2)(3) 154,037,668 157,595,614 157,236,918 158,415,826 Stock price range(3)(5) $30 7/16-33 11/16 $33 1/16-39 13/16 $37 15/16-43 7/16 $41 7/8-49 3/4 - -------------------------------------------------------------------------------------------------------------------------------- ================================================================================================================================ - -------------------------------------------------------------------------------------------------------------------------------- Fiscal 1994(1) ---------------------------------------------------------------------------------------- Quarter Quarter Quarter Quarter Ended Ended Ended Ended (Dollars in Millions, April 30, July 31, Oct. 31, Jan. 31, Except Share Data) 1994 1994 1994 1995 ---------------------------------------------------------------------------------------- Revenues: Investment banking $ 260 $ 211 $ 190 $ 258 Principal transactions: Trading 258 300 297 249 Investments 10 23 82 24 Commissions 119 112 104 114 Interest and dividends 1,561 1,525 1,714 1,606 Asset management and administration 81 89 95 85 Other 3 2 3 1 ---------------------------------------------------------------------------------------- Total revenues 2,292 2,262 2,485 2,337 Interest expense 1,404 1,349 1,575 1,547 ---------------------------------------------------------------------------------------- Net revenues 888 913 910 790 ---------------------------------------------------------------------------------------- Expenses excluding interest: Compensation and benefits 440 460 460 373 Occupancy and equipment 68 74 79 82 Brokerage, clearing and exchange fees 58 59 56 57 Communications 29 28 31 34 Business development 39 41 41 44 Professional services 41 39 41 43 Other 29 30 32 40 Relocation charge -- -- -- 59 ---------------------------------------------------------------------------------------- Total expenses excluding interest 704 731 740 732 ---------------------------------------------------------------------------------------- Income before income taxes 184 182 170 58 Provisions for income taxes 67 61 52 19 ---------------------------------------------------------------------------------------- Net income $ 117 $ 121 $ 118 $ 39 ---------------------------------------------------------------------------------------- Earnings applicable to common shares(2) $ 101 $ 104 $ 102 $ 23 ---------------------------------------------------------------------------------------- Per common share:(3) Primary earnings(4) $ 0.64 $ 0.66 $ 0.65 $ 0.15 Fully diluted earnings(4) $ 0.61 $ 0.63 $ 0.63 $ 0.15 Cash dividends $ 0.15 $ 0.15 $ 0.15 $ 0.15 Book value $ 23.34 $ 23.76 $ 24.21 $ 24.89 Average common and equivalent shares(2)(3) 159,657,342 159,211,010 156,708,032 155,068,008 Stock price range(3)(5) $30 7/16-39 3/4 $27 13/16-31 1/8 $29 11/16-34 7/8 $27 5/8-32 9/16 - --------------------------------------------------------------------------------------------------------------------------------
(1) Fiscal 1995's quarterly periods reflect the change in the Company's fiscal year-end (see Note 1). Since fiscal 1995 consists of the ten-month period from February 1, 1995 to November 30, 1995, the first quarter consists only of the results for the month ended February 28, 1995. Fiscal 1994's quarterly periods are presented based upon the previous fiscal year-end date. (2) Amounts shown are used to calculate primary earnings per share. (3) Amounts shown have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996. (4) 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. (5) Prices represent the range of sales per share on the New York Stock Exchange for the periods indicated. The number of stockholders of record at November 30, 1995 approximated 1,235. The number of beneficial owners of common stock is believed to exceed this number. EX-13.2 7 1995 ANNUAL REPORT SELECTED FINANCIAL DATA 1 Exhibit 13.2 Selected Financial Data
FISCAL PERIOD ENDED NOVEMBER 30, FISCAL Fiscal Fiscal Fiscal 1995 PERIOD ENDED Year Ended Year Ended Year Ended Year Ended ANNUALIZED NOVEMBER 30, January 31, January 31, January 31, December 31, (Dollars in Millions) (UNAUDITED) 1995 1995 1994 1993 1991 Except Share and Employee Data) ------------------------------------------------------------------------------------------- INCOME STATEMENT: (12 MONTHS) (10 MONTHS) Revenues: Investment banking $ 1,453 $ 1,211 $ 919 $ 1,238 $ 965 $ 823 Principal transactions: Trading 1,346 1,122 1,104 1,459 953 1,320 Investments 122 102 139 158 128 19 Commissions 525 437 449 393 312 271 Interest and dividends 7,127 5,939 6,406 5,660 4,814 4,181 Asset management and administration 372 310 350 258 200 160 Other 4 3 9 10 10 11 ------------------------------------------------------------------------------------------- Total revenues 10,949 9,124 9,376 9,176 7,382 6,785 Interest expense 6,601 5,501 5,875 5,020 4,362 3,924 ------------------------------------------------------------------------------------------- Net revenues 4,348 3,623 3,501 4,156 3,020 2,861 ------------------------------------------------------------------------------------------- Expenses excluding interest Compensation and benefits 2,154 1,795 1,733 2,049 1,457 1,396 Other 1,134 945 1,115 907 770 693 Relocation charge -- -- 59 -- -- -- ------------------------------------------------------------------------------------------- Total expenses excluding interest 3,288 2,740 2,907 2,956 2,227 2,089 ------------------------------------------------------------------------------------------- Income before income taxes 1,060 883 594 1,200 793 772 Provision for income taxes 340 283 199 414 283 297 ------------------------------------------------------------------------------------------- Net income $ 720 $ 600 $ 395 $ 786 $ 510 $ 475 ------------------------------------------------------------------------------------------- Earnings applicable to common shares $ 655 $ 546 $ 330 $ 731 $ 461 $ 447 ------------------------------------------------------------------------------------------- BALANCE SHEET: Total assets $143,753 $143,753 $116,694 $ 97,242 $ 80,353 $ 63,709 Total capital: $ 14,345 $ 14,345 $ 12,057 $ 9,813 $ 6,570 $ 5,422 Stockholders' equity $ 5,174 $ 5,174 $ 4,555 $ 4,469 $ 3,434 $ 2,994 Long-term borrowings $ 9,171 $ 9,171 $ 7,502 $ 5,344 $ 3,136 $ 2,428 Average common and equivalent shares 156,912,678 156,912,678 157,793,216 152,416,576 156,247,600 150,794,762 PER COMMON SHARE:(3) Primary earnings $ 4.18 $ 3.48 $ 2.09 $ 4.80 $ 2.95 $ 2.97 Fully diluted earnings $ 4.00 $ 3.33 $ 2.02 $ 4.58 $ 2.86 $ 2.81 Cash dividends $ 0.64(4) $ 0.48 $ 0.60 $ 0.54 $ 0.478 $ 0.398 Book value $ 28.18 $ 28.18 $ 24.89 $ 23.07 $ 18.36 $ 15.39 OTHER DATA: Return on average common equity 16.2% $ 16.2%(5) $ 8.8% 23.7% 17.6% 21.4% Income tax rate 32.0% 32.0% 33.5% 34.5% 35.7% 38.5% Pre-tax margin 24.4% 24.4% 17.0% 28.9% 26.3% 27.0% Number of employees 9,238 9,238 9,685 8,273 7,421 7,053 CHANGE FROM PRIOR YEAR: Net revenues 24.2% 3.5% (15.8%) 37.6% 5.6% 32.5% Net income 82.3% 51.9% (49.7%) 54.1% 7.4% 75.7% Common stockholders' equity 15.9% 15.9% 2.1% 28.3% 22.3% 25.3%
(1) Amounts shown are used to calculate primary earnings per share (2) Amounts exclude current portion of long-term borrowings (3) All share and per share amounts have been retroactively adjusted to give effect for a two-for-one common stock split, effected in the form of a 100% stock dividend which became effective on January 26, 1996 (4) Quarterly dividend annualized (5) Return on average common equity for fiscal period ended November 30, 1995 has been annualized - -------------------------------------------------------------------------------- FISCAL 1995 WAS A TEN-MONTH PERIOD RESULTING FROM THE CHANGE IN MORGAN STANLEY'S FISCAL YEAR-END FROM JANUARY 31 TO NOVEMBER 30. THE INFORMATION PRESENTED FOR "FISCAL PERIOD ENDED NOVEMBER 30, 1995 ANNUALIZED" IS INTENDED TO FACILITATE MORE MEANINGFUL COMPARISON WITH THE FULL YEAR OPERATING RESULTS OF PRIOR YEARS. - -------------------------------------------------------------------------------- EX-13.3 8 1995 A/R MANAGEMENT'S DISCUSSION & ANALYSIS 1 Page 26 Exhibit 13.3 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS* RESULTS OF OPERATIONS The Company's business, particularly its involvement in primary and secondary markets for all types of financial products, including derivatives, is subject to substantial positive and negative fluctuations due to a variety of factors that cannot be predicted with great certainty, including variations in the fair value of securities and other financial products, 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; 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 principal and merchant banking investments). In addition, such factors also may have an impact on the Company's ability to achieve its strategic objectives, including (without limitation) profitable global expansion. 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 and by the ability to cost-effectively develop and maintain the technology necessary to support its trading, clearing and risk management systems. After experiencing a difficult year in 1994, characterized by a significant decline in client activity, including decreased levels of worldwide debt and equity underwriting, the global securities industry benefited from improved market conditions in 1995. Slower economic growth, lower interest rates, improvements in productivity and expanding corporate profit margins propelled the U.S. equity markets to record levels. Additionally, low inflation, coupled with slower economic growth, sent bond prices surging and bond yields to their lowest point in nearly two years. Favorable conditions created by rising stock prices and falling interest rates continued through most of 1995, resulting in improved investment banking conditions. In addition, the Company benefited from a number of strategic investments in its businesses made in 1994, including investments in human and technological resources. The Company's expansion internationally continued to be productive, evidenced by the fact that approximately 50% of the Company's fiscal 1995 income before taxes was derived from non-U.S. locations. The Company's continued focus on cost-containment initiatives also contributed to its positive 1995 results as business development, professional service expenses and other expenses were reduced by approximately 9%, on an annualized basis. The Company's return on equity for fiscal 1995 (16.2% on an annualized basis) reflects, in part, returns on strategic investments as well as some progress with cost-containment initiatives. As the financial services industry continues to consolidate on a global basis, the Company continues to be committed to a long-term strategy of expanding and enhancing its franchise and presence. In January 1996, the Company completed its purchase of Miller Anderson & Sherrerd, LLP ("MAS"), a premier Philadelphia-based institutional investment management firm, to support the Company's long-term strategic goal of expanding recurring fee-based businesses. Although the Company's 1995 results recovered from the depressed levels of 1994, maintaining business activity in areas such as mergers and acquisitions and product profit margins as well as cost control, the results of risk management and effective resource allocation will continue to affect the overall financial results of the Company. For a description of the Company's business, including its trading in cash instruments and derivative products, its merchant banking and other principal investment 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 period ended November 30, 1995 ("Form 10-K"). - -------------------------------------------------------------------------------- * Except for the historical information contained herein, this Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that discuss the risks and uncertainties involved in the Company's business, including (without limitation) the risks and uncertainties set forth herein. 2 Page 27 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT In February 1995, the Board of Directors approved a change in the Company's fiscal year-end from January 31 to November 30, effective for the current fiscal period. The discussion which follows compares the results of operations for fiscal 1995 (the ten-month period from February 1, 1995 to November 30, 1995) with those for fiscal 1994 (the twelve-month period from February 1, 1994 to January 31, 1995). Since fiscal 1995 consists of a ten-month reporting period, results of operations for this period are not directly comparable with the financial results of prior fiscal years. FISCAL 1995 COMPARED WITH FISCAL 1994
- --------------------------------------------------------------------------------------- REVENUES AND EARNINGS - --------------------------------------------------------------------------------------- FISCAL 1995 Fiscal 1994 (10 MONTHS (12 Months ENDED Ended (Dollars in Millions) NOV. 30, 1995) Jan. 31, 1995) ------------------------------- Total revenues $9,124 $9,376 Net revenues (total revenues less interest expense) $3,623 $3,501 Total expenses excluding interest $2,740 $2,907 Income before taxes $ 883 $ 594 Net income $ 600 $ 395 - ---------------------------------------------------------------------------------------
The Company's fiscal 1995 revenues and earnings reflect a strong global market for mergers and acquisitions, improved sales and trading results primarily driven by increased customer trading volume, and a reduction in business development and professional services expenses resulting from the Company's cost-control initiatives. These results were partially offset by increased costs for incentive-based compensation and occupancy and equipment expenses related to the Company's relocation to its New York headquarters at 1585 Broadway. The Company's fiscal 1995 effective income tax rate of 32% was below its fiscal 1994 and fiscal 1993 rates of 33.5% and 34.5%, respectively, reflecting, in part, a more favorable mix of earnings in lower tax rate jurisdictions.
- ------------------------------------------------------------------------------ INVESTMENT BANKING REVENUES - ------------------------------------------------------------------------------ FISCAL 1995 Fiscal 1994 (10 MONTHS (12 Months ENDED Ended (Dollars in Millions) NOV. 30, 1995) Jan. 31, 1995) -------------------------------- Debt underwriting revenues $ 364 $176 Equity underwriting revenues 371 364 Advisory fees from merger, acquisition and restructuring transactions 476 379 -------------------------------- Total investment banking revenues $1,211 $919 - ------------------------------------------------------------------------------
Investment banking revenues increased due to significantly higher levels of merger and acquisition revenues and increased debt and equity underwriting revenues, reflecting a higher level of debt and equity financing activity as well as a stronger market share resulting from strategic investments made in personnel during 1994 to strengthen client service capabilities. 3 Page 28 - -------------------------------------------------------------------------------- FISCAL 1995 COMPARED WITH FISCAL 1994 (CONTINUED) Financial advisory fees from merger, acquisition and restructuring transactions, areas in which the Company maintains a strong global franchise, benefited from an active worldwide market. The increase in advisory revenues was due in part to the broad range of strategic advisory services provided to clients in many of the year's most active industry sectors, including banking and other financial services, media, telecommunications, health care and technology. Equity financing activity was positively affected by favorable market conditions in both the U.S. and Europe, which included continued strong demand for initial public offerings, increased corporate restructurings, diminished concerns about inflation and lower interest rates. The Company increased its market share for worldwide equity underwriting and lead-managed a number of innovative and notable transactions. The increase in debt financing activity reflected favorable market conditions and a more stable interest rate environment as the Federal Reserve Board held short-term interest rates constant in the first half of the year and subsequently reduced short-term interest rates in July as economic growth and inflation remained stable. Debt underwriting generated primary revenues from fixed income derivative products of $101 million as compared with $61 million in fiscal 1994, resulting from increased financing activity by corporations and sovereign governments, coupled with increased investor demand for structured investments.
- -------------------------------------------------------------------------- SECONDARY REVENUES - -------------------------------------------------------------------------- FISCAL 1995 Fiscal 1994 (10 MONTHS (12 Months ENDED Ended (Dollars in Millions) NOV. 30, 1995) Jan. 31, 1995) ---------------------------------- Principal trading revenues: Equities $ 409 $ 510 Fixed income 489 347 Foreign exchange 156 148 Commodities 68 99 ---------------------------------- Total principal trading revenues 1,122 1,104 Commissions revenues 419 414 Net interest revenues 396 368 ---------------------------------- Total secondary revenues $1,937 $1,886 - --------------------------------------------------------------------------
Secondary revenues (combined principal trading and trading-related commissions and net interest revenues) and principal trading revenues, including from derivatives, both improved. The increase in secondary revenues primarily reflected improved revenues from trading in equity and fixed income products. For a discussion of the Company's derivative trading activities, see "Derivative Financial Instruments" herein. Equity trading revenues, which reached record levels in fiscal 1994, remained strong, reflecting increased customer-driven activity as most major global equity markets rallied, positively impacting revenues from virtually all types of cash and derivative products. Options and futures benefited from relatively higher volatilities and increased trading volumes. Fixed income trading revenues were positively affected by increased trading volumes as investors returned to the fixed income markets after 1994's difficult trading environment. The Company's global corporate, emerging market and high-yield activities produced substantially higher revenue levels as conditions stabilized globally, including Mexico and the emerging markets. Revenues from foreign exchange trading improved, primarily attributable to periods of increased volatility in the first half of 1995, most notably in U.S. dollar/deutsche 4 Page 29 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT mark and U.S. dollar/yen, as well as the subsequent strengthening of the U.S. dollar versus the yen and the deutsche mark during the latter half of 1995. Revenues from commodities trading declined, resulting from difficult market conditions in most energy-related products. Principal transaction investment revenues aggregating $102 million were recognized in fiscal 1995 as compared with $139 million in fiscal 1994, including revenues related to the increase in the carrying value of the Company's merchant banking investment in Southern Pacific Rail Corporation and several real estate investments. Commission revenues strengthened, primarily reflecting higher levels of activity throughout the ten-month period as market participation by investors increased. Additionally, increased primary equity activity contributed toward higher volumes in secondary markets. 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 1995, the continuing effect of a flat yield curve in the U.S. had a negative impact on the Company's net interest and dividend revenues. Interest and dividend revenues and expense should be viewed in the broader context of principal trading 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 - ------------------------------------------------------------------------------------------------ FISCAL 1995 Fiscal 1994 (10 MONTHS (12 Months ENDED Ended (Dollars in Millions) NOV. 30, 1995) Jan. 31, 1995) -------------------------------- Asset management and administration revenues $310 $350 - ------------------------------------------------------------------------------------------------ (Dollars in Billions) Customer assets under management (at fiscal year-ends) $ 55 $ 49 -------------------------------- Customer assets under administration (at fiscal year-ends) $111 $ 90 - ------------------------------------------------------------------------------------------------
Asset management and administration revenues, which include fees for asset management and non-interest revenues earned from correspondent clearing and custody services, reflected 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, reflecting appreciation in the value of customer portfolios, particularly in equity funds, as well as continued growth in international and emerging market funds. Customer assets under administration increased, primarily reflecting additional assets placed under custody with the Company, as well as appreciation in the value of customer portfolios. Subsequent to November 30, 1995, the Company completed its purchase of MAS, an institutional investment manager with a domestic focus. The purchase price was approximately $350 million, payable in a combination of cash, notes and stock of the Company. On a pro forma basis, the combination of MAS with the Company's asset management business would have increased the Company's assets under management at November 30, 1995 to approximately $90 billion. 5 Page 30 - -------------------------------------------------------------------------------- FISCAL 1995 COMPARED WITH FISCAL 1994 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------- Expenses Excluding Interest - ----------------------------------------------------------------------------------------------------------------- (Dollars in Millions) (Dollars in Thousands) - ----------------------------------------------------------------------------- --------------------------------- FISCAL 1995 Fiscal 1994 FISCAL 1995 Fiscal 1994 (10 MONTHS (12 Months (10 MONTHS (12 Months ENDED Ended ENDED Ended NOV. 30, 1995) Jan. 31, 1995) -------------------------------- NOV. 30, 1995) Jan. 31, 1995) PER EMPLOYEE Per Employee ------------------------------------------------------------------------ Compensation and benefits $1,795 $1,733 $194 $179 Occupancy and equipment 276 303 30 31 Brokerage, clearing and exchange fees 211 230 23 24 Communications 108 122 12 13 Business development 110 165 12 17 Professional services 131 164 14 17 Other 109 131 12 14 Relocation charge -- 59 -- 5 ------------------------------------------------------------------------ Total expenses excluding interest $2,740 $2,907 $297 $300 - -----------------------------------------------------------------------------------------------------------------
Fiscal 1995's total non-interest expenses decreased from prior-year levels, primarily due to the Company's change in fiscal year-end, resulting in a ten-month fiscal period. For a more meaningful comparison with non-interest expense of prior fiscal years, fiscal 1995 non-interest expenses are discussed below on an annualized basis. Total non-interest expenses increased in fiscal 1995 on an annualized basis. Within that category, employee compensation and benefits expense increased, reflecting increased levels of incentive compensation based on higher revenues and earnings, as well as the annualized impact of salaries and benefits relating to additional personnel hired during 1994. Excluding fiscal 1994's non-recurring relocation charge discussed below, other non-interest expenses increased marginally on an annualized basis. Occupancy and equipment expenses increased $28 million on an annualized basis, principally reflecting costs associated with the Company's New York relocation. Brokerage, clearing and exchange fees increased $23 million on an annualized basis, reflecting increased trade volumes, both domestically and in Europe, business mix changes and the continued growth in the international component of the Company's sales and trading activities. These increases in non-interest expenses on an annualized basis were substantially offset, however, as business development and professional service expenses decreased $40 million on an annualized basis, reflecting significantly lower recruiting and travel costs directly related to the Company's cost-containment initiatives. Fourth quarter fiscal 1994 expenses include a pre-tax relocation charge of $59 million relating to the Company's decision to vacate much of its New York City office space at 1251 Avenue of the Americas and to relocate staff formerly 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 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 move of 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. As of November 30, 1995, approximately $33 million of costs relating to the relocation charge have yet to be expended. 6 Page 31 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT FISCAL 1994 COMPARED WITH FISCAL 1993 The Company's fiscal 1994 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 were partially 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. 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 the international markets in which the Company operates. 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 over 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. 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. 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. 7 Page 32 - -------------------------------------------------------------------------------- FISCAL 1994 COMPARED WITH FISCAL 1993 (CONTINUED) 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. Note that customer activity results in principal trading and interest revenues as well as commissions. 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 1994. 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. As noted above in the comparison of fiscal 1995 with fiscal 1994, 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 36% to $350 million ($258 million), reflecting growth in both asset management activities and global clearing and custody services resulting from the Company's 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 $59 million non-recurring relocation charge, 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. LIQUIDITY AND CAPITAL RESOURCES THE BALANCE SHEET The Company's total assets increased from $116.7 billion at January 31, 1995 to $143.8 billion at November 30, 1995, primarily reflecting growth in financial instruments owned, resale and repurchase agreements, and securities borrowed. The growth is primarily attributable to the Company's fixed income activities, most notably U.S. government securities and reverse repurchase agreements used in both financing activities and in the Company's matched book activities. Corporate equities inventory increased due to continued client demand for such securities. Securities borrowed also rose during 1995, reflecting an increase in collateralized lending to facilitate customer activity. 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. Balance sheet leverage ratios are often 8 Page 33 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT reviewed by counterparties and creditors in order to evaluate a securities firm's overall financial risk. Details of ending assets, month-end average assets and leverage ratios for fiscal 1995 and fiscal 1994 are as follows: [One Pie Chart--See EDGAR Appendix]
- ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ Fiscal 1995 Fiscal 1994 ------------------------------ ----------------------------- Assets at Average Assets at Average November 30, Assets for January 31, Assets for (Dollars in Millions) 1995 Fiscal 1995 1995 Fiscal 1994 ------------------------------------------------------------------ Cash, deposits and receivables $ 10,286 $ 12,690 $ 12,104 $ 14,299 Financial instruments owned 58,600 52,387 47,109 49,236 Securities purchased under agreements to resell and securities borrowed 72,955 66,539 55,955 64,921 Property, equipment and leasehold improvements and other assets 1,912 1,725 1,526 1,626 ------------------------------------------------------------------ Total assets $143,753 $133,341 $116,694 $130,082 ------------------------------------------------------------------ Leverage ratios: Total assets/equity 27.8x 27.8x 25.6x 29.0x Net assets(1)/equity 18.9x 18.6x 17.7x 19.4x - ---------------------------------------------------------------------------------------------------------------------------
(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 and capital policies of the Company, reviews the Company's performance relative to these policies, allocates capital among business activities of the Company, monitors the availability of sources of financing, reviews the foreign exchange risk of the Company, and oversees the liquidity and interest rate sensitivity of the Company's asset and liability position. See also "Risk Management" herein. The primary goal of the Company's funding and liquidity 9 Page 34 - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) activities is to ensure the stability of the Company's funding base and provide adequate financing sources over a wide range of potential credit ratings and market environments. Many of the Company's businesses are capital-intensive. Capital is required to finance, among other things, the Company's securities inventories, underwriting, principal investments, 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, including periods of financial stress. 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, business opportunities, capital availability 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 returns internally generated equity capital which is in excess of the needs of its businesses through common stock repurchases and dividends. 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-term notes; internally generated funds; repurchase agreements; U.S., Canadian, French and Euro commercial paper; letters of credit; unsecured bond borrows; 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 and securities lending are made on a collateralized basis. The Company practices a funding strategy which is designed to ensure that the tenor of the Company's liabilities equals or exceeds the expected holding period of the assets being financed. Short-term funding generally is obtained at rates related to U.S., Euro or Asian money market rates for the currency borrowed. Repurchase transactions are effected at negotiated rates. Other borrowing costs are negotiated depending upon prevailing market conditions (see 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 its outstanding 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 continually seeks to expand its global secured borrowing capacity. In support of this strategy, Morgan Stanley & Co. Incorporated ("MS&Co."), the Company's U.S. broker-dealer subsidiary, maintains a master collateral facility. This facility enables MS&Co. to pledge certain collateral to secure loan arrangements, letters of credit and other financial accommodations. Morgan Stanley & Co. International Limited ("MSIL"), the Company's U.K. broker-dealer subsidiary, can secure committed funding from a syndicate of banks by providing a broad range of collateral under repurchase agreements. The Company views long-term debt as a stable source of funding for core inventories and illiquid assets and therefore maintains 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, floating rate long-term debt, or fixed rate debt swapped to a floating basis. The Company uses derivative products (primarily interest rate and currency swaps) to assist in asset 10 Page 35 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT 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 and availability of financing is generally 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 January 31, 1996 are as follows:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Short-Term Long-Term Agency Rating 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 November 13, 1995, Standard & Poor's Corporation ("S&P") affirmed the short- and long-term ratings of the Company. In addition, noting the improved conditions in the securities industry, the Company's diversified lines of business, global market position and ability to control expenses, S&P revised the long-term rating outlook for the Company from negative to stable. As the Company continues its global expansion and as revenues are increasingly derived from various currencies, foreign currency management is a key element of the Company's financial policies. The Company benefits from operating in a number of different currencies because weakness in any particular currency is often offset by strength in another currency. The Company closely monitors its exposure to fluctuations in currencies and, where cost-justified, adopts strategies to reduce the impact of these fluctuations on the Company's financial performance. These strategies include engaging in various hedging activities to manage income and cash flows denominated in foreign currencies and using foreign currency borrowings, when appropriate, to finance investments outside the U.S. FISCAL 1995 AND SUBSEQUENT ACTIVITY During the fiscal year ended November 30, 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 $2,288 million to $14,345 million at November 30, 1995. The additions to capital included net issuances of senior notes and subordinated debt aggregating $1,720 million (including the Notes described below). As of November 30, 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 $18.5 billion. 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. In fiscal 1995, MS&Co. issued approximately $263 million of Series C, $96 million of Series D, $82 million of Series E and $25 million of Series F subordinated notes due in 2001, 2003, 2006 and 2016, respectively (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 December 1995, an additional $50 million of Series C notes was issued. In fiscal 1995, the Company and Morgan Stanley Finance plc, a U.K. subsidiary ("MS plc"), issued 9.00%, 8.40% and 8.20% Capital Units in an aggregate amount of approximately $513 million. Each Capital Unit consists of (a) a Subordinated Debenture of MS plc guaranteed by the Company, and (b) a related Purchase Contract 11 Page 36 - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) 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 9.00%, 8.40% and 8.20% Cumulative Preferred Stock, respectively. Between November 30, 1995 and January 31, 1996, additional debt obligations (all of which were senior notes) aggregating approximately $524 million were issued. These notes have a weighted average coupon rate of 5.8% and maturities from 1997 to 2011. 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 also maintains a master collateral facility that enables 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 maintains a secured committed credit agreement with a group of banks that are parties to the master collateral facility under which such banks are committed to provide up to $1 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. Subsequent to November 30, 1995, the credit agreement was renewed with the commitment increased to $1.25 billion. Subsequent to November 30, 1995, the Company established a revolving committed financing facility that enables MSIL to secure committed funding from a syndicate of banks by providing a broad range of collateral under repurchase agreements. Such banks are committed to provide up to an aggregate of $1.25 billion available in twelve major currencies for up to 364 days. Any amounts outstanding on the commitment termination date may, at MSIL's option, be extended to mature on or before the first anniversary of the commitment termination date. There were no borrowings outstanding under any of the foregoing credit, collateral or committed financing facilities at November 30, 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 November 30, 1995, the Company repurchased shares of its common stock at an aggregate cost of $103 million. On January 4, 1996, the Board of Directors authorized the purchase, in the open market or otherwise, subject to market conditions and certain other factors, of an additional $400 million of the Company's common stock. Common stock repurchases between November 30, 1995 and January 31, 1996 aggregated $303 million; the unused portion of its stock repurchase authorization at such date was approximately $310 million. The Company also issued shares of common stock pursuant to employee compensation 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 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 and publicly held companies. As of November 30, 1995, the aggregate carrying value of the Company's equity investments in privately held companies (including direct investments and partnership interests) was $156 million, and its aggregate investment in publicly held companies was $242 million. In its capacity as an underwriter of and as a market-maker in mortgage-backed securities, collateralized mortgage obligations and related instruments, and as a market-maker in commercial, residential and real estate loan products, the Company takes positions in market segments where liquidity can vary greatly from time to time. The carrying value of such financial instruments traded in markets currently experiencing lower levels of liquidity approximated $1,169 million at November 30, 1995. In addition, at November 30, 1995, the aggregate value of high-yield debt securities and emerging market loans and securitized instruments held in inventory was 12 Page 37 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT $1,264 million (a substantial portion of which was subordinated debt) with not more than 7%, 12% and 9% 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 be, characterized by periods of volatility and illiquidity. The Company has in place credit and other risk policies and procedures to control total inventory positions and risk concentrations for non-investment grade securities and emerging market loans and securitized instruments. The Company also has commitments to fund certain fixed assets and other less liquid investments, including at November 30, 1995 approximately $209 million in connection with its merchant banking and other principal investment activities, and an estimated $80 million for fit-out and related costs associated with its buildings located in New York City and Tokyo. 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. Subsequent to November 30, 1995, the Company formed Morgan Stanley Bridge Fund, LLC ("MSBF"), a bridge facility with $600 million in aggregate investment capacity (including $150 million available from the Company), that will provide financing, consisting primarily of subordinated loans or debt financing to clients that require commitments on a timely basis, generally in connection with strategic and financial acquisitions, leveraged buyouts, recapitalizations and other special situations. Such financing will generally be provided in connection with the Company's investment banking and merchant banking activities. The Company also has plans to become active in the senior syndicated lending area in connection with its investment banking activities. 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 Commodity Futures Trading Commission. MSIL, a London-based broker-dealer subsidiary, is regulated by the Securities and Futures Authority ("SFA") in the United Kingdom and, accordingly, is subject to the Financial Resources Requirements of the SFA. Morgan Stanley Japan Limited ("MSJL"), a Tokyo-based broker-dealer, is regulated by the Japanese Ministry of Finance. MS&Co., MSIL and MSJL have consistently operated in excess of their respective regulatory 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. These subsidiaries have consistently operated in excess of their applicable local capital adequacy requirements. In addition, Morgan Stanley Derivative Products Inc., a triple-A rated subsidiary through which the Company conducts some of its derivatives activities, has established certain operating restrictions which have been reviewed by various rating agencies. EFFECTS OF INFLATION AND CHANGES IN FOREIGN EXCHANGE RATES Because the Company's assets 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. 13 Page 38 - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) 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 that arise and are not hedged by an offsetting foreign currency exposure are actively managed by the Company to minimize risk of loss due to currency fluctuations. DERIVATIVE FINANCIAL INSTRUMENTS The Company actively offers to clients and trades for its own account a variety of financial instruments described as "derivative products" or "derivatives." These products generally take the form of futures, forwards, options, swaps, caps, collars, floors, swap options and similar instruments which derive their value from underlying interest rates, foreign exchange rates or commodity or equity instruments and indices. All of the Company's trading-related 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). It should be noted that while particular risks may be associated with the use of derivatives, in many cases derivatives serve to reduce, rather than increase, the Company's exposure to losses from market, credit and other risks. [One Pie Chart--See EDGAR Appendix] The total notional value of derivative trading contracts outstanding as of November 30, 1995 was $985 billion (as compared with $835 billion as of January 31, 1995). 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 any market or credit exposure and may be more indicative of customer utilization of derivatives. The Company's exposure to market risk relates to changes in interest rates, foreign currency exchange rates or the fair value of the underlying financial instruments or 14 Page 39 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT commodities. The Company's exposure to credit risk at any point in time is represented by the fair value of such contracts reported as assets. Total fair value outstanding as of November 30, 1995 was $8.0 billion. Approximately 79% of that credit risk exposure was with counterparties rated single-A or better, and another 3% 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 1994, the Company established Morgan Stanley Derivative Products Inc., a triple-A rated subsidiary, to offer derivative products to clients who will enter into derivative transactions only with triple-A rated counterparties. In addition, the Company, through its continuing involvement with regulatory, self-regulatory and industry activities such as the International Swaps and Derivatives Association Inc. (ISDA), the Group of 30 and the U.S. securities firms' Derivatives Policy Group, provides leadership in the development of derivative policies and practices in order to maintain confidence in the markets for derivative products, which is critical to the Company's ability to assist clients in meeting their overall financial needs. RISK MANAGEMENT Risk is an inherent part of the Company's businesses and activities, 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 soundness and profitability. The Company seeks to maintain a broad-based portfolio of business activities to help reduce the impact that volatility in any particular area or related areas may have on its net revenues as a whole. From an operational perspective, the Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures, the 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. In recognition of the increasingly varied and complex nature of the financial services business, the Company's risk management policies and procedures are evolutionary in nature and are subject to ongoing review, modification and revision. The Company has developed a multi-tiered approach for monitoring and managing its risk. The Finance and Risk Committee, authorized by the Company's Board of Directors, is chaired by the Company's Chief Financial Officer and composed of senior officers with familiarity and expertise in dealing with risk management principles. It establishes the overall risk management policies of the Company and reviews the Company's performance relative to these policies (see also "Liquidity and Capital Resources - Funding and Capital Policies"). The Firm Risk Manager heads the Firm Risk Management Group (described below) and assists senior management and the Finance and Risk Committee in establishing, monitoring and controlling the Company's overall risk profile. With respect to the Company's major trading businesses, division risk managers monitor and manage positions, set the overall division risk profile on a worldwide basis within established market risk limits, review major trading positions and strategies, and report unusual market and position events. Desk risk managers perform similar functions with respect to a product area or particular product at the business unit and trading desk level. The Firm Risk Management Group, which has operational responsibility for identifying, monitoring and reporting to senior management on the Company's exposure to risk, consists of three departments that are all independent of the Company's business areas: the Market Risk Department monitors the Company's market risk profile on a worldwide basis, which includes all divisional, geographic and product-line market risks; the Credit Department manages and monitors counterparty exposure limits on a worldwide basis; and the Internal Audit 15 Page 40 - -------------------------------------------------------------------------------- RISK MANAGEMENT (CONTINUED) 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: Controllers, Corporate Treasury, Information Technology, Legal and Compliance, Tax and Operations. The Company continues to be committed to employing qualified personnel with appropriate expertise in each of the various administrative and business areas to implement effectively the Company's risk management and monitoring systems and processes. The Company also has certain commitment committees, composed of a cross section of the Company's senior officers from various disciplines, that are involved in managing and monitoring the risks associated with the Company's diverse businesses. The High-Yield Commitment Committee and Equity Commitment Committee determine whether the Company should participate in a transaction involving the underwriting or placement of high-yield or equity securities, respectively, where the Company's capital and reputation may be at risk and evaluate the potential revenues and risks involved with respect to a particular transaction. The Company manages the various risks associated with its activities on a Company-wide basis, on a divisional level worldwide and on an individual product basis. Specific market risk guidelines and limits have been approved for the Company and each trading division of the Company worldwide by the Finance and Risk Committee and discrete market limits are assigned to business units and trading desks within trading areas which are compatible with the trading division limits. The Company may use measures, such as rate sensitivity, convexity, volatility and time decay measurements, to estimate market risk and to assess the sensitivity of positions to changes in market conditions. The Company also regularly uses a variety of measures to help reduce and control the market risk associated with its market-making and proprietary trading activities. The Finance and Risk Committee has also approved Company-wide credit guidelines which limit the Company's credit exposure to any one counterparty. Specific credit limits based on the credit guidelines have also been approved by the Finance and Risk Committee for each type of counterparty (by rating category) as well as certain inventories of high-yield and emerging market debt. The Company manages the credit exposure relating to its trading activities by monitoring the creditworthiness of counterparties and credit limits on an ongoing basis; entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances; and limiting the duration of exposure. In addition, the Company's Controllers and Operations Departments monitor position, profit/loss and balance sheet information through 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 division risk managers and the Market Risk Department evaluate the impact of historical 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 under- 16 Page 41 - -------------------------------------------------------------------------------- MORGAN STANLEY 1995 ANNUAL REPORT writing 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 1995 and fiscal 1994. [One Bar Chart--See EDGAR Appendix] The bars represent the number of weeks in which net revenues from each activity fell within a particular range. 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 1995 and fiscal 1994 and a three-year summary of fee-based and underwriting and sales and trading net revenues. [One Bar Chart--See EDGAR Appendix] 17 Page 42 - -------------------------------------------------------------------------------- [One Bar Chart--See EDGAR Appendix] POTENTIAL IMPACT OF FINANCIAL ACCOUNTING STANDARDS BOARD EXPOSURE DRAFTS ON THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS In October 1995, the Financial Accounting Standards Board ("FASB") released an exposure draft entitled "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (the "Securitization ED"). The Securitization ED, among other issues, addresses the accounting for repurchase and reverse repurchase agreements. The Securitization ED would require that repurchase transactions with an original maturity of 90 days or longer be accounted for as a sale of the underlying loan collateral, rather than a financing transaction. It would also require that an entity record on its balance sheet the collateral obtained in certain reverse repurchase, securities borrowed, margin and other collateralized transactions to the extent that such collateral could be used by the entity to deliver against short sales or as collateral in financing transactions of its own. A corresponding liability to return such assets to their actual owners would also be required to be recorded. The Company does not believe that the accounting proposed in the Securitization ED reflects the underlying substance of collateralized financing transactions and has expressed its concerns in a comment letter to the FASB. As currently proposed, the Company would be required to adopt the Securitization ED for its fiscal year ended November 30, 1997. The Company believes that if adopted in its current form, the Securitization ED would not have a material effect on its results of operations. It would, however, likely have a material effect on the Consolidated Statement of Financial Condition of the Company and other companies in the securities industry, but the effect has not been quantified at this time. In October 1995, the FASB also released an exposure draft entitled "Consolidated Financial Statements: Policies and Procedures" (the "Consolidation ED"). The Consolidation ED, among other things, would significantly change current consolidation practices with respect to determining which entities are to be included in a set of consolidated financial statements. The Consolidation ED could potentially require the Company to consolidate certain of its merchant banking investments, which, as part of the Company's trading and investment activities, are currently carried in its consolidated financial statements at fair value. The Company believes that application of the Consolidation ED would result in a confusing and inappropriate financial statement presentation. Compliance with the proposal would also involve significant incremental resources and costs. The Company has expressed these concerns in a comment letter to the FASB. As currently proposed, the Company would be required to adopt the Consolidation ED for its fiscal year ended November 30, 1998. The Company believes that, if adopted in its current form, the Consolidation ED would have a material effect on both its results of operations as well as its financial condition. These effects, however, have not been quantified at this time. The Company intends to follow both proposals closely in 1996. 18 GRAPHICS APPENDIX LIST EDGAR VERSION --------------- Form 10-K for the fiscal year ended November 30, 1995, Exhibit 13.3- (Selected Portions of Morgan Stanley's 1995 Annual Report to Stockholders) Page 33 -- One pie chart omitted Page 38 -- One pie chart omitted Page 41 -- Two bar charts omitted Page 42 -- One bar chart omitted TYPESET VERSION --------------- Form 10-K for the fiscal year ended November 30, 1995, Exhibit 13.3- (Selected Portions of Morgan Stanley's 1995 Annual Report to Stockholders) Page 33 -- A pie chart representing the composition of Financial Instruments Owned on a percentage basis as of November 30, 1995 as follows: Derivative contracts......................... 13.7% Physical commodities......................... 0.7% U.S. government and agency securities........ 21.3% Other sovereign government obligations....... 23.5% Corporate and other debt..................... 18.3% Corporate equities........................... 22.5%
Page 38 -- A pie chart representing the composition of Derivative Financial Instruments Owned--Net Replacement Cost on a percentage basis as of November 30, 1995 as follows: Foreign exchange forward contracts and options................................. 23.2% Mortgage-backed securities, forward contracts, swaps and options................ 1.5% Interest rate and currency swaps and options................................. 47.7% Other fixed income securities contracts................................... 1.7% Commodity forwards, options and swaps........ 8.2% Equity securities contracts.................. 17.7%
Page 41 -- A bar chart depicting Distribution of Underwriting and Sales and Trading Net Revenues (including principal trading, commissions, net interest revenues and underwriting revenues) for fiscal 1995 (which represents the ten-month period ended November 30, 1995) and fiscal 19 1994. 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 19 67 7 Fixed Income 5 12 23 45 8 3 Commodities 20 76 Foreign Exchange 1 93 2
Page 41 -- A bar chart depicting Distribution of Fee-Based Net Revenues for fiscal 1995 (which represents the ten-month period ended November 30, 1995) and fiscal 1994. The bars in the chart depicting Distribution of Fee-Based Net Revenues illustrate the number of weeks that such net revenues fell within 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 65 19 12 Securities Services 96 Asset Management 96
Page 42 -- A bar chart depicting Net Revenues (excluding merchant banking net revenues) for fiscal 1993, fiscal 1994 and fiscal 1995 (Fiscal 1995 represents the ten-month period ended November 30, 1995, annualized). 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 $.7 billion, $1 billion and $1.2 billion for fiscal 1993, fiscal 1994 and fiscal 1995, respectively. Underwriting and sales and trading net revenues were $3.4 billion, $2.4 billion and $3 billion for fiscal 1993, fiscal 1994 and fiscal 1995, respectively. EX-13.4 9 1995 A/R CONSOLIDATED FINANCIAL STATEMENTS 1 Exhibit 13.4 Page 43 - -------------------------------------------------------------------------------- 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 November 30, 1995 and January 31, 1995 and the related Consolidated Statements of Income, Cash Flows and Changes in Stockholders' Equity for the ten-month period ended November 30, 1995 and the years ended January 31, 1995 and January 31, 1994. 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 November 30, 1995 and January 31, 1995, and the consolidated results of its operations and its cash flows for the ten-month period ended November 30, 1995 and the years ended January 31, 1995 and January 31, 1994, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York January 4, 1996 43 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - --------------------------------------------------------------------------------
NOVEMBER 30, January 31, (Dollars in Millions, Except Share Data) 1995 1995 ---------------------------------- ASSETS Cash and interest-bearing equivalents $ 2,471 $ 2,510 Cash and securities deposited with clearing organizations or segregated under federal and other regulations (securities at fair value of $859 at November 30, 1995 and $1,507 at January 31, 1995) 1,339 2,116 Financial instruments owned: U.S. government and agency securities 12,480 9,107 Other sovereign government obligations 13,792 12,931 Corporate and other debt 10,690 10,545 Corporate equities 13,185 5,483 Derivative contracts 8,043 8,623 Physical commodities 410 420 Securities purchased under agreements to resell 45,886 35,913 Securities borrowed 27,069 20,042 Receivables: Customers 3,413 4,823 Brokers, dealers and clearing organizations 1,475 1,376 Interest and dividends 1,082 731 Fees and other 506 548 Property, equipment and leasehold improvements, at cost, net of accumulated depreciation and amortization of $462 at November 30, 1995 and $364 at January 31, 1995 1,286 1,061 Other assets 626 465 ---------------------------------- Total assets $143,753 $116,694 ----------------------------------
- -------------------------------------------------------------------------------- * All amounts have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996. See Notes to Consolidated Financial Statements. 3 - -------------------------------------------------------------------------------- MORGAN STANLEY GROUP INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------- NOVEMBER 30, January 31, 1995 1995 ---------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings $ 11,703 $ 10,273 Financial instruments sold, not yet purchased: U.S. government and agency securities 6,459 6,177 Other sovereign government obligations 8,972 7,251 Corporate and other debt 1,076 1,174 Corporate equities 3,585 3,006 Derivative contracts 7,537 7,322 Physical commodities 71 377 Securities sold under agreements to repurchase 60,738 50,123 Securities loaned 9,340 2,860 Payables: Customers 13,818 11,588 Brokers, dealers and clearing organizations 1,974 953 Interest and dividends 1,019 825 Other liabilities and accrued expenses 595 458 Accrued compensation and benefits 1,192 938 Long-term borrowings 9,635 8,462 ---------------------------------- 137,714 111,787 ---------------------------------- Capital Units 865 352 ---------------------------------- Commitments and contingencies Stockholders' equity: Preferred stock 818 819 Common stock, $1.00 par value; authorized 300,000,000 shares; issued 162,838,920 shares at November 30, 1995 and 159,548,556 shares at January 31, 1995* 163 160 Paid-in capital* 730 626 Retained earnings 3,815 3,338 Cumulative translation adjustments (9) (10) ---------------------------------- Subtotal 5,517 4,933 Less: Note receivable related to sale of preferred stock to ESOP 89 100 Common stock held in treasury, at cost (7,635,174 shares at November 30, 1995 and 8,954,990 shares at January 31, 1995)* 254 278 ---------------------------------- Total stockholders' equity 5,174 4,555 ---------------------------------- Total liabilities and stockholders' equity $ 143,753 $ 116,694 ----------------------------------
- -------------------------------------------------------------------------------- 45 4 - -------------------------------------------------------------------------------- MORGAN STANLEY GROUP INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------- FISCAL PERIOD ENDED Fiscal Year Ended Fiscal Year Ended NOVEMBER 30, January 31, January 31, (Dollars in Millions, Except Share Data) 1995 1995 1994 --------------------------------------------------------------- Revenues: Investment banking $ 1,211 $ 919 $ 1,238 Principal transactions: Trading 1,122 1,104 1,459 Investments 102 139 158 Commissions 437 449 393 Interest and dividends 5,939 6,406 5,660 Asset management and administration 310 350 258 Other 3 9 10 --------------------------------------------------------------- Total revenues 9,124 9,376 9,176 Interest expense 5,501 5,875 5,020 --------------------------------------------------------------- Net revenues 3,623 3,501 4,156 --------------------------------------------------------------- Expenses excluding interest: Compensation and benefits 1,795 1,733 2,049 Occupancy and equipment 276 303 248 Brokerage, clearing and exchange fees 211 230 196 Communications 108 122 100 Business development 110 165 134 Professional services 131 164 120 Other 109 131 109 Relocation charge -- 59 -- --------------------------------------------------------------- Total expenses excluding interest 2,740 2,907 2,956 --------------------------------------------------------------- Income before income taxes 883 594 1,200 Provision for income taxes 283 199 414 --------------------------------------------------------------- Net income $ 600 $ 395 $ 786 --------------------------------------------------------------- Preferred stock dividend requirements $ 54 $ 65 $ 55 --------------------------------------------------------------- Earnings applicable to common shares (1) $ 546 $ 330 $ 731 --------------------------------------------------------------- Average common and common equivalent shares outstanding (1) (2) 156,912,678 157,793,216 152,416,576 --------------------------------------------------------------- Primary earnings per share (2) $ 3.48 $ 2.09 $ 4.80 --------------------------------------------------------------- Fully diluted earnings per share (2) $ 3.33 $ 2.02 $ 4.58 - -------------------------------------------------------------------------------------------------------------
(1) Amounts shown are used to calculate primary earnings per share. (2) All share and per share amounts have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996. See Notes to Consolidated Financial Statements. 5 - -------------------------------------------------------------------------------- MORGAN STANLEY GROUP INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
FISCAL PERIOD ENDED Fiscal Year Ended Fiscal Year Ended NOVEMBER 30, January 31, January 31, (Dollars in Millions) 1995 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 600 $ 395 $ 786 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Non-cash charges included in net income: Deferred income taxes (111) (128) (266) Compensation payable in common or preferred stock 165 116 408 Depreciation and amortization 107 104 64 Relocation charge -- 59 -- Changes in assets and liabilities: Cash and securities deposited with clearing organizations or segregated under federal and other regulations 777 (1,454) 726 Financial instruments owned, net of financial instruments sold, not yet purchased (9,098) (1,086) 445 Securities borrowed, net of securities loaned (547) (3,063) (3,601) Receivables and other assets 813 1,076 (2,889) Payables and other liabilities, net of deferred liabilities 3,947 258 4,614 ----------------------------------------------------------- Net cash (used for) provided by operating activities (3,347) (3,723) 287 Cash flows from investing activities: Net payments for: Property, equipment and leasehold improvements (336) (415) (290) ----------------------------------------------------------- Net cash used for investing activities (336) (415) (290) Cash flows from financing activities: Net proceeds related to short-term borrowings 1,430 1,707 878 Securities sold under agreements to repurchase, net of securities purchased under agreements to resell 642 1,451 (3,803) Proceeds from: Issuance of preferred stock -- -- 194 Issuance of common stock 79 20 27 Issuance of long-term borrowings 2,402 2,955 3,355 Issuance of Capital Units 513 230 122 Payments for: Repurchases of common stock (103) (287) (245) Repayments of long-term borrowings (1,196) (1,202) (636) Cash dividends (123) (151) (134) ----------------------------------------------------------- Net cash provided by (used for) financing activities 3,644 4,723 (242) ----------------------------------------------------------- Net (decrease) increase in cash and interest-bearing equivalents (39) 585 (245) Cash and interest-bearing equivalents, at beginning of period 2,510 1,925 2,170 ----------------------------------------------------------- Cash and interest-bearing equivalents, at end of period $ 2,471 $ 2,510 $ 1,925 - --------------------------------------------------------------------------------------------------------------------------
Cash payments for income taxes totaled $233 million, $657 million and $299 million in fiscal 1995, fiscal 1994 and fiscal 1993, respectively. Cash payments for interest approximated interest expense for all periods. See Notes to Consolidated Financial Statements. 47 6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
Preferred Common (Dollars in Millions) Stock Stock(1) --------------------------- Balance, January 31, 1993 $ 621 $154 Issuance of 7-3/8% Cumulative Preferred Stock 200 -- Conversion of ESOP Preferred Stock (1) -- Issuance of common stock -- 2 Repurchases of common stock -- -- Compensation payable in common stock -- -- ESOP shares allocated, at cost -- -- Net income -- -- Cash dividends -- -- Translation adjustments -- -- ------------------------------------------------------------------------------ Balance, January 31, 1994 820 156 Conversion of ESOP Preferred Stock (1) -- Issuance of common stock -- 2 Repurchases of common stock -- -- Compensation payable in common stock -- 2 ESOP shares allocated, at cost -- -- Net income -- -- Cash dividends -- -- Translation adjustments -- -- ------------------------------------------------------------------------------ Balance, January 31, 1995 819 160 Conversion of ESOP Preferred Stock (1) -- Issuance of common stock -- 3 Repurchases of common stock -- -- Compensation payable in common stock -- -- ESOP shares allocated, at cost -- -- Net income -- -- Cash dividends -- -- Translation adjustments -- -- --------------------------- Balance, November 30, 1995 $ 818 $163 - -------------------------------------------------------------------------------
(1) All amounts have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996. See Notes to Consolidated Financial Statements. 7 - -------------------------------------------------------------------------------- MORGAN STANLEY GROUP INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED) - --------------------------------------------------------------------------------
Note Receivable Common Stock Cumulative Related to Sale Held in Paid-in Retained Translation of Preferred Treasury, (Dollars in Millions) Capital(1) Earnings Adjustments Stock to ESOP at Cost Total -------------------------------------------------------------------------------- Balance, January 31, 1993 $ 474 $ 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 (131) -- -- -- 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 739 3,094 (3) (109) (228) 4,469 Conversion of ESOP Preferred Stock 1 -- -- -- -- 0 Issuance of common stock 18 -- -- -- -- 20 Repurchases of common stock -- -- -- -- (287) (287) Compensation payable in common stock (132) -- -- -- 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 626 3,338 (10) (100) (278) 4,555 Conversion of ESOP Preferred Stock 1 -- -- -- -- 0 Issuance of common stock 76 -- -- -- -- 79 Repurchases of common stock -- -- -- -- (103) (103) Compensation payable in common stock 27 -- -- -- 127 154 ESOP shares allocated, at cost -- -- -- 11 -- 11 Net income -- 600 -- -- -- 600 Cash dividends -- (123) -- -- -- (123) Translation adjustments -- -- 1 -- -- 1 -------------------------------------------------------------------------------- Balance, November 30, 1995 $ 730 $ 3,815 $ (9) $ (89) $(254) $ 5,174 - -----------------------------------------------------------------------------------------------------------------------------------
49 8 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND 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"). The Company, 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. All material intercompany 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 1995 presentation. CHANGE IN FISCAL YEAR-END On February 28, 1995, the Board of Directors approved a change in the Company's fiscal year-end from January 31 to November 30. This change became effective for the fiscal period ended November 30, 1995, and, accordingly, this report includes the results for the ten-month period from February 1, 1995 through November 30, 1995 ("fiscal 1995"), as well as those for the fiscal years ended January 31, 1995 and January 31, 1994 ("fiscal 1994" and "fiscal 1993," respectively). 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 on a net-by-counterparty basis 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 plus accrued interest less reserves, if deemed necessary, for estimated losses. 9 MORGAN STANLEY GROUP INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- 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. Gains and losses resulting from the termination of hedge contracts prior to their stated maturity are recognized ratably over the remaining life of the instrument being hedged. The Company also uses foreign exchange forward contracts to manage the currency exposure relating to its net monetary investment in non-U.S. dollar functional currency operations. In accordance with Statement of Financial Accounting 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 payables 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 consistent with 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. Common share and stock option share data for all periods presented have been retroactively adjusted throughout the Consolidated Financial Statements to reflect a two-for-one 51 10 =============================================================================== common stock split, effected in the form of a 100% stock dividend, declared on January 4, 1996 and payable on January 26, 1996 to holders of record on January 16, 1996. CONSOLIDATED 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." 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 all book and tax basis differences. NOTE 2 SHORT-TERM BORROWINGS Short-term funding is generally obtained at rates related to U.S., Euro or Asian money rates for the currency and term borrowed and includes loans payable on demand. Secured borrowings included in these loans, which may fluctuate significantly from time to time, were $29 million and $2,694 million at November 30, 1995 and January 31, 1995, respectively. Short-term borrowings at November 30, 1995 and January 31, 1995 also included commercial paper of $8,412 million and $5,228 million, respectively, with approximate weighted average interest rates of 5.9% and 6.3%, 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 $3,391 million as of November 30, 1995. The Company maintains a master collateral facility that enables MS&Co. to pledge certain collateral to secure loan arrangements, letters of credit and other financial accommodations. As part of this facility, MS&Co. maintains a secured committed credit agreement with a group of banks that are parties to the master collateral facility under which such banks are committed to provide up to $1 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. Subsequent to November 30, 1995, the credit agreement was renewed with the commitment increased to $1.25 billion. Subsequent to November 30, 1995, the Company established a revolving committed financing facility that enables MSIL to secure committed funding from a syndicate of banks by providing a broad range of collateral under repurchase agreements. Such banks are committed to provide up to an aggregate of $1.25 billion available in twelve major currencies for up to 364 days. Any amounts outstanding on the commitment termination date may, at MSIL's option, be extended to mature on or before the first anniversary of the commitment termination date. The facility agreements contain restrictive covenants which require, among other things, that MSIL maintain specified levels of Shareholders' Equity and Financial Resources, each as defined. There were no borrowings outstanding under any of the foregoing facilities at November 30, 1995; however, the Company anticipates utilizing these facilities for short-term funding from time to time. 11 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 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) ------------------------------------ ---------------------- Index/ NOV. 30, Jan. 31, Fixed Floating Equity Fixed Floating 1995 1995 (Dollars in Millions) Rate Rate Linked Rate Rate TOTAL Total ------------------------------------------------------------------------------------------- Due in fiscal 1995 $ -- $ -- $-- $-- $-- $ -- $1,059 Due in fiscal 1996 496 401 83 12 337 1,329 1,797 Due in fiscal 1997 636 1,430 160 56 422 2,704 1,470 Due in fiscal 1998 354 599 30 299 142 1,424 583 Due in fiscal 1999 356 200 21 211 -- 788 791 Due in fiscal 2000 60 10 -- -- -- 70 20 Thereafter 2,937 -- 26 337 20 3,320 2,742 ------------------------------------------------------------------------------------------- Total $4,839 $2,640 $320 $915 $921 $9,635 $8,462 ------------------------------------------------------------------------------------------- Weighted average coupon at fiscal year-end 7.8% 6.0% n/a 5.9% 4.5% 6.8% 7.0% - -----------------------------------------------------------------------------------------------------------------------------
(1) Weighted average coupon was calculated utilizing non-U.S. dollar interest rates. MEDIUM TERM NOTES Included in the table above are medium term notes of $2,882 million at November 30, 1995 and $2,774 million at January 31, 1995. The effective weighted average interest rate on all medium term notes was 6.2% in fiscal 1995. Maturities of these notes range from fiscal 1996 through fiscal 2023. STRUCTURED DEBT U.S. dollar index/equity linked debt includes various structured instruments whose payments and redemption values are linked to the performance of a specific index (i.e., Standard & Poor's 500), a basket of stocks or a specific equity security. To minimize the exposure resulting from movements in the underlying equity position or index, the Company has entered into various equity swap contracts and purchased options which effectively convert the borrowing costs into floating rates based upon London Interbank Offered Rates ("LIBOR"). OTHER DEBT U.S. dollar contractual floating rate debt bears interest based on a variety of money market indices, including LIBOR and Fed Funds rates. Non-U.S. dollar contractual floating rate debt bears interest based on Euro floating rates. Included in the Company's long-term debt are subordinated notes of $1,298 million at November 30, 1995 and $832 million at January 31, 1995. The effective weighted average interest rate on these subordinated notes was 7.0% in fiscal 1995. Maturities of the subordinated notes range from fiscal 1999 to fiscal 2016. Certain of the Company's long-term debt is redeemable prior to maturity at the option of the holder. These notes contain certain provisions which effectively 53 12 ================================================================================ enable noteholders to put the notes back to the Company and therefore are scheduled in the foregoing table to mature in fiscal 1996 and fiscal 1997. The stated maturities of these notes, which aggregate $540 million, are from 1998 to 2000. In fiscal 1995, MS&Co., the Company's U.S. broker-dealer subsidiary, issued approximately $263 million of 6.81% fixed rate subordinated Series C notes, $96 million of 7.03% fixed rate subordinated Series D notes, $82 million of 7.28% fixed rate subordinated Series E notes and $25 million of 7.82% fixed rate subordinated Series F notes. These notes have maturities from 2001 to 2016. The terms of such notes contain restrictive covenants which require, among other things, that MS&Co. maintain specified levels of Consolidated Tangible Net Worth and Net Capital, each as defined. In December 1995, MS&Co. issued an additional $50 million of Series C notes. 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 duration of this debt to the duration 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: - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
FISCAL Fiscal Fiscal (Dollars in Millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------- Net reduction in interest expense from swaps for the fiscal year $ 22 $ 93 $ 93 Weighted average coupon of long-term debt at fiscal year-end(1) 6.8% 7.0% 6.0% Effective average borrowing rate for long-term debt after swaps at fiscal year-end(1) 6.5% 6.7% 4.2% - --------------------------------------------------------------------------------------------
(1) Included in the weighted average and effective average calculations are non-U.S. dollar interest rates. The effective weighted average interest rate on the Company's index/equity linked notes, which are not included in the table above, was 6.0% in fiscal 1995 after giving effect to the related hedges. 13 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 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 November 30, 1995: - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
U.S. Dollar Non-U.S. Dollar (1) ------------------------------------ ---------------------- Receive Receive Receive Receive Fixed Floating Index/ Fixed Floating NOV. 30, Jan. 31, Pay Pay Equity Pay Pay 1995 1995 (Dollars in Millions) Floating Floating Linked Floating Floating(2) TOTAL Total ------------------------------------------------------------------------------------ Maturing in fiscal 1995 $ -- $ -- $ -- $ -- $ -- $ -- $ 359 Maturing in fiscal 1996 494 106 69 12 -- 681 601 Maturing in fiscal 1997 636 -- 160 56 386 1,238 569 Maturing in fiscal 1998 269 154 30 299 108 860 354 Maturing in fiscal 1999 156 200 21 211 -- 588 572 Maturing in fiscal 2000 60 10 -- -- -- 70 10 Thereafter 1,025 -- 26 337 -- 1,388 1,275 ------------------------------------------------------------------------------------ Total $2,640 $ 470 $ 306 $ 915 $ 494 $4,825 $ 3,740 ------------------------------------------------------------------------------------ Weighted average at fiscal year-end(3) Receive rate 7.6% 5.4% n/a 5.9% 3.4% Pay rate 6.1% 6.4% n/a 5.3% 6.3% - --------------------------------------------------------------------------------------------------------------------
(1) The differences between the receive rate and the pay rate may reflect differences in the rate of interest associated with the underlying currency. (2) These amounts include currency swaps used to effectively convert debt denominated in one currency into obligations denominated in another currency. (3) The table was prepared under the assumption that interest rates remain constant at year-end levels. The variable interest rates to be received or paid will change to the extent that rates fluctuate. Such changes may be substantial. Variable rates presented generally are based on LIBOR or Treasury bill rates. As noted above, the Company uses interest rate and currency swaps to modify the terms of its existing debt. Activity during the periods in the notional value of the swap contracts used by the Company for asset and liability management (and the unrecognized gain (loss) at period end) are summarized in the table below: - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
FISCAL Fiscal (Dollars in Millions) 1995 1994 ------------------------- Notional value at beginning of period $ 3,740 $ 3,649 Additions 1,546 931 Matured (359) (859) Terminated (108) -- Effect of foreign currency translation on non-U.S. dollar notional values 6 19 ------------------------- Notional value at fiscal year-end $ 4,825 $ 3,740 ------------------------- Unrecognized gain (loss) at fiscal year-end $ 225 $ (3) - ----------------------------------------------------------------------------------------
The Company also uses interest rate swaps to modify certain of its repurchase financing agreements. The Company had interest rate swaps with notional values of approximately $2.1 billion and $3.8 billion as of November 30, 1995 and January 31, 1995, respectively, and unrecognized gains (losses) of approximately $45 million and $(47) million as 55 14 ============================================================================== of November 30, 1995 and January 31, 1995, respectively, for such purpose. The unrecognized gains (losses) on these swaps were offset by unrecognized (losses) gains on certain of the Company's repurchase financing agreements. The estimated fair value of the Company's long-term debt, based on rates available to the Company at November 30, 1995 for debt with similar terms and maturities, and the aggregate carrying value of this debt are presented in the following table: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
NOV. 30, Jan. 31, (Dollars in Millions) 1995 1995 ---------------------------- Fair value of long-term debt $ 9,954 $8,334 Unrecognized (loss) gain (319) 128 ---------------------------- Carrying value of long-term debt $ 9,635 $8,462 - --------------------------------------------------------------------------------
NOTE 4 COMMITMENTS AND CONTINGENCIES LEASES AND RELATED COMMITMENTS The Company incurred rent expense under operating leases in the amounts of $97 million, $113 million and $101 million in fiscal 1995, fiscal 1994 and fiscal 1993, 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) --------------------- 1996 $116 1997 98 1998 84 1999 60 2000 52 Thereafter 241 - ----------------------------------------------------
Rentals are subject to periodic escalation charges. During 1995, the Company relocated the majority of its New York City employees from existing leased space at 1221 and 1251 Avenue of the Americas to space in the Company's 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 fiscal 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 $.25 and $.24, respectively). The charge was in connection with the Company's 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 The Company had approximately $2.2 billion of letters of credit outstanding at November 30, 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 also has commitments to fund certain fixed assets and other less liquid investments, including at November 30, 1995 approximately $209 million in connection with its merchant banking and other principal investment activities, and an estimated $80 million for fit-out and related costs associated with its buildings located in New York City and Tokyo. 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 15 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES banking and other principal investment activities), that may subject the Company to increased credit and liquidity risks. 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. NOTE 5 TRADING ACTIVITIES TRADING REVENUES The Company manages its trading businesses by product groupings and therefore has established distinct, worldwide 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 1995 Equities $ 409 $367 $ 103 $ 879 Fixed Income 489 52 306 847 Foreign Exchange 156 -- 3 159 Commodities 68 -- (16) 52 ----------------------------------------------------- Trading-related revenues 1,122 419 396 1,937 Securities services and other -- 18 42 60 ----------------------------------------------------- $1,122 $437 $ 438 $1,997 ----------------------------------------------------- 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 - ---------------------------------------------------------------------------------------
57 16 ================================================================================ The Company's trading activities are both client-driven and proprietary. 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, and the market, credit and concentration risk management policies and procedures covering these activities, are discussed below. EQUITIES The Company makes markets and trades in the global secondary markets for equities and convertible debt and is a dealer in equity warrants, exchange traded and OTC equity options, index futures, equity swaps and other sophisticated equity derivatives. The Company's activities as a dealer primarily are client-driven, with the objective of meeting clients' needs while earning a spread between the premiums paid or received on its contracts with clients and the cost of hedging such transactions in the cash or forward market or with other derivative transactions. The Company limits its market risk related to these contracts, which stems primarily from underlying equity/index price and volatility movements, by employing a variety of hedging strategies, such as delta hedging (delta is a measure of a derivative contract's price movement based on the movement of the price of the security or index underlying the contract). The Company also takes proprietary positions in the global equity markets by using derivatives, most commonly futures and options, in addition to cash positions, intending to profit from market price and volatility movements in the underlying equities or indices positioned. Equity option contracts give the purchaser of the contract the right to buy (call) or sell (put) the equity security or index underlying the contract at an agreed-upon price (strike price) during or at the conclusion of a specified period of time. The seller (writer) of the contract is subject to market risk, and the purchaser is subject to market risk (to the extent of the premium paid) and credit risk. Equity swap contracts are contractual agreements whereby one counterparty receives the appreciation (or pays the depreciation) on an equity investment in return for paying another rate, often based upon equity index movements or interest rates. The counterparties to the Company's equity transactions include commercial banks, investment banks, broker-dealers, investment funds and industrial companies. FIXED INCOME The Company is a market-maker for U.S. and non-U.S. government securities, corporate bonds, money market instruments, medium-term notes and Eurobonds, high-yield securities, emerging market 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, for the most part, contractual agreements to exchange interest payment streams (i.e., an interest rate swap may involve exchanging fixed for floating interest payments) or currencies (i.e., a currency swap may involve exchanging yen for U.S. dollars in one year at an agreed-upon exchange rate). The Company profits by earning a spread between the premium paid or received for these contracts and the cost of hedging such contracts. The Company seeks to manage the market risk of its swap portfolio, which stems from interest rate and currency movements and volatility, by using modeling that quantifies the sensitivity of its portfolio to movements in interest rates and currencies, and by adding positions to or selling positions from its portfolio as needed to minimize such sensitivity. Typically, the Company adjusts its positions by entering into additional swaps or interest rate and foreign currency futures, foreign currency forwards and underlying government bonds. The Company manages the risk related to its option portfolio by using a 17 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 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 instruments results from interest rate fluctuations and changes in mortgage prepayment speeds. The counterparties to the Company's fixed income transactions include investment advisors, commercial banks, insurance companies, investment funds and industrial companies. FOREIGN EXCHANGE The Company is a market-maker in a number of foreign currencies. In this business, it actively trades currencies in the spot and forward markets earning a dealer spread. The Company seeks to manage its market risk by entering into offsetting positions. The Company conducts an arbitrage business in which it seeks to profit from inefficiencies between the futures, spot and forward markets. The Company also makes a market in foreign currency options. This business largely is client-driven and involves the purchasing and writing of European and American style options and certain sophisticated products to meet specific client needs. The Company profits in this business by earning spreads between the options' premiums and the cost of 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, investment banks, broker-dealers, investment funds and industrial companies. COMMODITIES The Company, as a major participant in the world commodities markets, trades in physical metals, electricity, 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 OTC options and swaps. Through these activities, the Company provides clients with a ready market to satisfy end users' current raw material needs and facilitates their ability to hedge price fluctuations related to future inventory needs. The former activity at times requires the positioning of physical commodities. 59 18 ================================================================================ 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 shippers, central banks, and oil, gas and electricity producers. RISK MANAGEMENT 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 administration and business functions to assist in the identification, assessment and control of various risks. The Company has developed a control infrastructure to manage and monitor each type of risk on a global basis throughout the Company. In recognition of the increasingly varied and complex nature of the financial services business, the Company's risk management policies and procedures are evolutionary in nature and are subject to ongoing review, modification and revision. The Company has developed a multi-tiered approach for monitoring and managing its risks. The Finance and Risk Committee, authorized by the Company's Board of Directors, is chaired by the Company's Chief Financial Officer and composed of senior officers with familiarity and expertise in dealing with risk management principles. It establishes the overall risk management policies of the Company, reviews the Company's performance relative to these policies, allocates capital among business activities of the Company, monitors the availability of sources of financing, reviews the foreign exchange risk of the Company, and oversees liquidity and interest rate sensitivity of the Company's asset and liability position. The Firm Risk Manager heads the Firm Risk Management Group (described below) and assists senior management and the Finance and Risk Committee in establishing, monitoring and controlling the Company's overall risk profile. With respect to the Company's major trading divisions (fixed income, equity, commodities and foreign exchange), division risk managers monitor and manage positions and set the overall division risk profile within established market risk limits, review major trading positions and strategies, and report unusual market and position events. Desk risk managers perform similar functions with respect to a product area or particular product at the business unit and trading desk level. The Firm Risk Management Group has operational responsibility for identifying, monitoring and reporting to senior management on the Company's exposure to risk. The Firm Risk Management Group includes three departments that are all independent of the Company's business areas: the Market Risk Department monitors the Company's 19 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES market risk profile, which includes all divisional, geographic and product-line market risks; the Credit Department manages and monitors counterparty exposure limits on a worldwide basis; 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: Controllers, Corporate Treasury, Information Technology, Legal and Compliance, Tax and Operations. In addition, the Company has certain commitment 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. MARKET RISK Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, volatilities, correlations or other market factors, such as liquidity, will result in losses for a specified position or portfolio. The Company manages the market risk associated with its trading activities Company-wide, on a divisional level worldwide and on an individual product basis. Specific market risk guidelines and limits have been approved for the Company and each trading division of the Company worldwide by the Finance and Risk Committee. Discrete market risk limits are assigned to business units and trading desks within trading areas which are compatible with the trading division limits. Division risk managers, desk risk managers, and the Market Risk Department all monitor market risk measures against limits. The Company may use measures, such as rate sensitivity, convexity, volatility and time decay measurements, to estimate market risk and to assess the sensitivity of positions to changes in market conditions. Trading divisions generally make use of valuation and risk models. Stress testing, which measures the impact on the value of existing portfolios of specified changes in market factors, for certain products is performed periodically and reviewed by division risk managers and the Market Risk Department. The Company also regularly uses a variety of measures to help reduce and control the market risk associated with its market-making and proprietary trading activities. CREDIT RISK The Company's exposure to credit risk arises from the possibility that a counterparty to a transaction might fail to perform under its contractual commitment, resulting in the Company incurring losses. The Finance and Risk Committee has approved Company-wide credit guidelines which limit the Company's credit exposure to any one counterparty. Specific credit risk limits based on the credit guidelines have also been approved by the Finance and Risk Committee for each type of counterparty (by rating category) as well as certain inventories of high-yield and emerging market debt. The Credit Department administers the credit limits among trading divisions. The Credit Department has procedures to monitor credit exposures, and all counterparties of the Company are reviewed periodically to assess financial soundness. In addition to monitoring credit limits, the Company manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral 61 20 ================================================================================ arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. In certain cases, the Company also may close out transactions or assign them to other counterparties to mitigate credit risk. CONCENTRATION RISK The Company is subject to concentration risk by holding large positions in certain types of securities or commitments to purchase securities of a single issuer, including sovereign governments and other entities, issuers located in a particular country or geographic area, public and private issuers involving developing countries or issuers engaged in a particular industry. Financial instruments owned by the Company include U.S. government and agency securities and securities issued by other sovereign governments (principally Japan, Germany, France and Italy), which, in the aggregate, represented approximately 18% of the Company's total assets at November 30, 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 November 30, 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. 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 November 30, 1995 and January 31, 1995, as well as the average fair value of those assets and liabilities for the period ended November 30, 1995 and 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 netting is consistent with FASB Interpretation No. 39. Similarly, liabilities rep- 21 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES resent net amounts owed to counterparties. These amounts will vary based on changes in the fair values of underlying financial instruments and/or the volatility of such underlying instruments:
=============================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------- Fiscal Year-End Fiscal Year-End Average Gross Notional/ Fair Values(2) Fair Values(2)(3) Contract Amount --------------------------- -------------------------- Assets Liabilities Assets Liabilities --------------------------- -------------------------- 1995 1994 (Dollars in Billions, at fiscal year-end)(1) 1995 1994 1995 1994 1995 1994 1995 1994 --------------------------------------------------------- $ 401 $ 299 Interest rate and currency swaps and options (including caps, floors and swap options) $ 3.8 $3.9 $3.8 $2.2 $ 3.7 $3.8 $3.8 $ 2.4 260 170 Foreign exchange forward and futures contracts and options 1.9 1.1 1.9 1.3 2.0 1.3 2.2 1.5 21 39 Mortgage-backed securities forward contracts, swaps and options 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 199 235 Other fixed income securities contracts (including futures contracts and options) 0.1 0.4 0.4 0.6 0.3 0.7 0.3 1.3 57 57 Equity securities contracts (including equity swaps, futures contracts, and warrants and options) 1.4 1.1 0.8 1.2 1.5 1.1 0.9 1.1 47 35 Commodity forwards, futures, options and swaps 0.7 1.9 0.5 1.9 1.0 1.8 0.9 1.7 - ------------------------------------------------------------------------------------------------------------------------------- $ 985 $ 835 Total $ 8.0 $8.6 $7.5 $7.3 $ 8.6 $8.8 $8.2 $ 8.1 - -------------------------------------------------------------------------------------------------------------------------------
(1) The Company has a 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 November 30, 1995 and January 31, 1995, respectively, and do not include receivables or payables related to exchange traded futures contracts. (3) Amounts are calculated using a monthly average. The gross notional or contract amounts of these instruments are indicative of the Company's degree of use of derivatives for trading purposes but do not represent the Company's exposure to market or credit risk. Credit risk arises from the failure of a counterparty to perform according to the terms of the contract. The Company's exposure to credit risk at any point in time is represented by fair value of the contracts reported as assets. These amounts are presented on a net-by-counterparty basis consistent with FASB Interpretation No. 39, 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 November 30, 1995 will not have a material effect on the Company's financial condition. 63 22 ================================================================================ The remaining maturities of the Company's swaps and other derivative products at November 30, 1995 and 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 ----------------------------------------------------------- NOVEMBER 30, 1995 Interest rate and currency swaps and options (including caps, floors and swap options) $ 97 $138 $ 74 $ 92 $ 401 Foreign exchange forward and futures contracts and options 253 4 3 -- 260 Mortgage-backed securities forward contracts, swaps and options 16 -- 2 3 21 Other fixed income securities contracts (including futures contracts and options) 142 34 16 7 199 Equity securities contracts (including equity swaps, futures contracts, and warrants and options) 54 3 -- -- 57 Commodity forwards, futures options and swaps 38 7 2 -- 47 ----------------------------------------------------------- Total $ 600 $186 $ 97 $102 $ 985 ----------------------------------------------------------- Percent of total 61% 19% 10% 10% 100% ----------------------------------------------------------- JANUARY 31, 1995 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% - ------------------------------------------------------------------------------------------------------------------
23 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES The credit quality of the Company's trading-related derivatives at November 30, 1995 and 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 ----------------------------------------------------------------- NOVEMBER 30, 1995 Interest rate and currency swaps and options (including caps, floors and swap options) $ 660 $1,269 $ 1,148 $535 $ 88 $ 141 $ 3,841 Foreign exchange forward contracts and options 548 531 674 83 -- 27 1,863 Mortgage-backed securities forward contracts, swaps and options 23 31 36 7 12 14 123 Other fixed income securities contracts (including options) 25 33 33 42 -- 4 137 Equity securities contracts (including equity swaps, warrants and options) 612 98 232 143 178 159 1,422 Commodity forwards, options and swaps 103 129 152 126 -- 147 657 ----------------------------------------------------------------- Total $1,971 $2,091 $ 2,275 $936 $ 278 $ 492 $ 8,043 ----------------------------------------------------------------- Percent of total 25% 26% 28% 12% 3% 6% 100% ----------------------------------------------------------------- JANUARY 31, 1995 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% - ------------------------------------------------------------------------------------------------------------------
65 24 ================================================================================ NOTE 6 PREFERRED STOCK AND CAPITAL UNITS Preferred stock is composed of the following issues:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Shares Outstanding at Balance at ----------------------- ----------------------- NOV. 30, Jan. 31, NOV. 30, Jan. 31, (Dollars in Millions) 1995 1995 1995 1995 ----------------------------------------------------- ESOP Convertible Preferred Stock, liquidation preference $35.88 3,758,133 3,795,588 $ 135 $ 136 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 $ 818 $ 819 - ------------------------------------------------------------------------------------------------------------------
Each issue of preferred stock ranks in parity with all other preferred stock. The Company has Capital Units outstanding which were 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 in the principal amount of $25 guaranteed by the Company and having maturities from 2013 to 2015, and (b) a related Purchase Contract issued by the Company, which may be accelerated by the Company beginning approximately one year after the issuance of each Capital Unit, requiring the holder to purchase one Depositary Share representing ownership of a 1/8 interest in the Company's Cumulative Preferred Stock. The aggregate amount of Capital Units outstanding was $865 million and $352 million at November 30, 1995 and January 31, 1995, respectively. The estimated fair value of the Capital Units was $872 million and $308 million at November 30, 1995 and January 31, 1995, respectively. NOTE 7 COMMON STOCK AND STOCKHOLDERS' EQUITY During the period ended November 30, 1995, the Company repurchased or acquired shares of its common stock at an aggregate cost of $103 million. The Company's unused portion of its stock repurchase authorization at November 30, 1995 was approximately $213 million. On January 4, 1996, the Board of Directors authorized the purchase, in the open market or otherwise, subject to market conditions and certain other factors, of an additional $400 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 Commodity Futures Trading Commission. MS&Co. has consistently operated in excess of these requirements with aggregate net capital, as defined, totaling $1,332 million at November 30, 1995, which exceeded the amount required by $1,134 million. MSIL, a London-based broker-dealer subsidiary, is subject to the capital requirements of the Securities and Futures Authority, and Morgan Stanley Japan Limited ("MSJL"), a Tokyo-based broker-dealer, is subject to the capital requirements of the Japanese Ministry of Finance. MSIL and MSJL have consistently operated in excess of their respective regulatory capital requirements. Certain other U.S. and non-U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in excess of their local capital adequacy requirements. 25 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 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 by subordinated noteholders and certain banks. Morgan Stanley Derivative Products Inc., the Company's triple-A rated derivative products subsidiary, also has established certain operating restrictions which have been reviewed by various rating agencies. At November 30, 1995, approximately $1,630 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 respective functional currencies to U.S. dollars, net of hedge gains or losses and related tax effects. The Company uses foreign currency contracts and designates certain non-U.S. dollar currency debt as hedges to manage the currency exposure relating to its net monetary investments in non-U.S. dollar functional currency subsidiaries. Increases or decreases in the value of the Company's net foreign investments generally are tax-deferred for U.S. purposes, but the related hedge gains and losses are taxable currently. Therefore, the gross notional amounts of the contracts and debt designated as hedges exceed the Company's net foreign investments to result in effective hedging on an after-tax basis. The Company attempts to protect its net book value from the effects of fluctuations in currency exchange rates on its net monetary investments in non-U.S. dollar subsidiaries by selling the appropriate non-U.S. dollar currency in the forward market. However, under some circumstances, the Company may elect not to hedge its net monetary investments in certain foreign operations due to market conditions, including the availability of various currency contracts at acceptable costs. Information relating to the hedging of the Company's net monetary investments in non-U.S. dollar functional currency subsidiaries and their effects on cumulative translation adjustments is summarized below:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ NOV. 30, Jan. 31, (Dollars in Millions) 1995 1995 ---------------------- Net investment in non-U.S. dollar functional currency subsidiaries $1,243 $ 1,122 ---------------------- Gross notional amounts of foreign exchange contracts and non-U.S. dollar debt designated as hedges(1) $2,082 $ 1,960 ---------------------- Cumulative translation adjustments resulting from net investments in subsidiaries with a non-U.S. dollar functional currency $ 185 $ 188 Cumulative translation adjustments resulting from realized or unrealized gains or losses on hedges, net of tax (194) (198) --------------------- Total cumulative translation adjustments $ (9) $ (10) - ------------------------------------------------------------------------------------------------------------------
(1) Notional amounts represent the contractual currency amount translated at respective fiscal year-end spot rates. NOTE 8 EMPLOYEE COMPENSATION PLANS The Company has adopted a variety of compensation plans for certain of its employees. These plans are designed to facilitate a pay-for-performance policy, provide compensation commensurate with other leading financial service industry companies and align the interests of employees with the long-term interests of the Company's stockholders. The following summarizes these 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 67 26 ================================================================================ 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 1995, fiscal 1994 and fiscal 1993 was approximately $9 million, $14 million and $15 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 1995, fiscal 1994 and fiscal 1993 related to this plan aggregated $10 million, $24 million and $29 million, respectively. REAL ESTATE FUND PLANS On September 26, 1995, the Board of Directors approved the adoption of the Morgan Stanley Real Estate Compensation Plan and the Morgan Stanley Real Estate Profits Participation Plan. Under these plans, select employees and consultants may participate in certain gains realized by the Company's real estate funds. Compensation expense relating to these plans was $9 million for fiscal 1995. 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 1995, fiscal 1994 and fiscal 1993 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 grant (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. In addition, 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 1995(1) Fiscal 1994(1) Fiscal 1993(1) ----------------------------------------------- Outstanding at beginning of period 27,828,734 24,035,010 13,626,330 Awarded 3,776,284 4,515,630 10,682,806 Issued as unrestricted shares(2) (395,122) (362,548) (165,654) Forfeited (287,720) (359,358) (108,472) ----------------------------------------------- Outstanding at end of period 30,922,176 27,828,734 24,035,010 - ------------------------------------------------------------------------------------------------------------------
(1) Approximately 29%, 24% and 21% of the Stock Units awarded in fiscal 1995, fiscal 1994 and fiscal 1993, respectively, were subject to a 10-year restriction period. (2) Amounts represent awards of Stock Units exchanged for unrestricted common shares. On May 2, 1991, the Company's stockholders approved the reservation of 48,000,000 shares of common stock for awards under the Company's equity-based employee benefit plans. At November 30, 1995, approximately 5,000,000 shares reserved for future awards under such employee benefit plans remain (net of fiscal 1995 awards). 27 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 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 fair value of the Company's common stock (as defined in the plan) and will generally expire seven years (for options awarded for fiscal 1993 service and prior) or 10 years (for options awarded for fiscal 1995 and fiscal 1994 service) from grant. Exercise prices for all options deemed outstanding at November 30, 1995, January 31, 1995 and January 31, 1994 ranged from $9.42 to $37.93. The following table sets forth activity relating to the number of shares covered by stock options:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Fiscal 1995 Fiscal 1994 Fiscal 1993 ----------------------------------------------- Options outstanding at beginning of period 24,709,000 14,493,848 15,134,974 Granted 124,360 11,277,708 1,212,000 Exercised (3,215,456) (991,056) (1,812,428) Forfeited (184,784) (71,500) (40,698) ----------------------------------------------- Options outstanding at end of period 21,433,120 24,709,000 14,493,848 ----------------------------------------------- Options exercisable at end of period 15,045,750 18,274,658 13,845,148 - ------------------------------------------------------------------------------------------------------------------
The Company has also established a worldwide profit sharing plan and an employee stock ownership plan for the benefit of substantially all its U.S. employees. The following summarizes these plans: PROFIT SHARING PLAN The Company has a qualified non-contributory profit sharing plan covering substantially all its 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 based upon the financial performance of the Company. Total profit sharing expense for fiscal 1995, fiscal 1994 and fiscal 1993 (excluding Company contributions to the Employee Stock Ownership Plan, which increased in fiscal 1995) was $10 million, $23 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 3,758,133 preferred shares outstanding at November 30, 1995 is held by the ESOP trust, is convertible into two shares 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 Directors. The cost of shares allocated to participants' accounts amounted to $11 million in fiscal 1995, $10 million in fiscal 1994 and $7 million in fiscal 1993. The ESOP debt service costs for fiscal 1995, fiscal 1994 and fiscal 1993 were paid from 69 28 =============================================================================== 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 two shares of the Company's common stock. If the fair value of such two common shares 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. NOTE 9 EMPLOYEE BENEFIT PLANS The Company sponsors various pension plans for the majority of its worldwide employees. It provides certain other postretirement benefits, primarily health care and life insurance, to eligible employees. The Company also provides certain benefits to former or inactive employees prior to retirement. The following summarizes these plans: PENSION PLANS Substantially all of the 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"). Eight 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. Pension expense for fiscal 1995, fiscal 1994 and fiscal 1993 includes the following components:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ (Dollars in Millions) Fiscal 1995 Fiscal 1994 Fiscal 1993 -------------------------------------- U.S. Plans Service cost, benefits earned during the period $ 6 $ 8 $ 6 Interest cost on projected benefit obligation 11 11 10 Return on plan assets (34) 1 (16) Difference between actual and expected return on assets 22 (15) 3 Net amortization (3) (3) (4) -------------------------------------- Total U.S. Plans 2 2 (1) U.K. Plan Service cost, benefits earned during the period 6 6 5 Interest cost on projected benefit obligation 3 2 2 Return on plan assets (5) -- (10) Difference between actual and expected return on assets 2 (3) 8 -------------------------------------- Total U.K. Plan 6 5 5 Other international plans 5 5 3 -------------------------------------- Total pension expense $ 13 $ 12 $ 7 - ------------------------------------------------------------------------------------------------------------------
29 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES 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 November 30, 1995 and January 31, 1995:
==================================================================================================================== - -------------------------------------------------------------------------------------------------------------------- November 30, 1995 January 31, 1995 ------------------------ ------------------------ U.S. Plans U.K. Plan U.S. Plans U.K. Plan --------------------------------------------------- Weighted average discount rate 7.5% 9.0% 8.5% 9.0% Rate of increase in future compensation levels 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% - --------------------------------------------------------------------------------------------------------------------
The following table sets forth the funded status of the U.S. Plans and the U.K. Plan as of November 30, 1995 and January 31, 1995:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ November 30, 1995 January 31, 1995 ------------------------------------ ----------------------------------- U.S. Plans U.K. Plan U.S. Plans U.K. Plan ----------------------- --------- ----------------------- --------- Qualified Supplemental Qualified Supplemental (Dollars in Millions) Plan Plans Plan Plans ---------------------------------------------------------------------------- Actuarial present value of vested benefit obligation $ (100) $(24) $(31) $ (75) $(19) $ (25) ---------------------------------------------------------------------------- Accumulated benefit obligation $ (112) $(44) $(31) $ (84) $(34) $ (25) Effect of future salary increases (33) (16) (8) (22) (12) (6) ---------------------------------------------------------------------------- Projected benefit obligation (145) (60) (39) (106) (46) (31) Plan assets at fair market value (primarily listed stocks and bonds) 192 -- 43 160 -- 35 ---------------------------------------------------------------------------- Projected benefit obligation less than or (in excess of) plan assets 47 (60) 4 54 (46) 4 Unrecognized net (gain) or loss (3) 9 (13) (9) (2) (11) Unrecognized prior service cost (1) (1) -- (1) (1) -- Unrecognized net (asset) obligation at January 1, 1987, net of amortization (13) 5 -- (16) 5 -- ---------------------------------------------------------------------------- Prepaid (accrued) pension cost at fiscal year-end $ 30 $(47) $ (9) $ 28 $(44) $ (7) - ------------------------------------------------------------------------------------------------------------------
71 30 ================================================================================ POSTRETIREMENT BENEFITS The Company's obligation for certain postretirement benefits provided to eligible employees is accounted for in accordance with SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." The net postretirement benefit cost consists of the following components:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ (Dollars in Millions) Fiscal 1995 Fiscal 1994 Fiscal 1993 -------------------------------------- Service cost of benefits earned during the period $ 1 $2 $ 2 Interest cost on accumulated postretirement benefit obligation 2 2 2 -------------------------------------- Net postretirement benefit cost $ 3 $4 $ 4 - ------------------------------------------------------------------------------------------------------------------
The following table provides information on the status of the Company's postretirement benefit plans as of November 30, 1995 and January 31, 1995:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Nov. 30, Jan. 31, (Dollars in Millions) 1995 1995 ---------------------- Accumulated postretirement benefit obligation: Retirees $(13) $ (10) Fully eligible active plan participants (5) (4) Other active plan participants (17) (14) ---------------------- Total (35) (28) Unrecognized net loss 7 2 ---------------------- Accrued postretirement benefit cost $(28) $ (26) - ------------------------------------------------------------------------------------------------------------------
The accumulated postretirement benefit obligation was determined utilizing a discount rate of 7.5% at November 30, 1995 and 8.5% at January 31, 1995, and by applying the provisions of the Company's medical plans, the established maximums and sharing of costs, the relevant actuarial assumptions and the health care cost trend rates which are projected at 11.0% and which grade down to 7.0% in 2000 and decrease further to 5.5% in 2040. The effect of a 1% change in the assumed cost trend rate would change the accumulated postretirement benefit obligation by approximately $4 million as of November 30, 1995 and would change the net periodic postretirement benefit cost by $1 million for fiscal 1995. 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 fiscal 1995 or fiscal 1994 Consolidated Financial Statements. 31 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 10 INCOME TAXES The provision for income taxes consists of:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Fiscal Fiscal Fiscal (Dollars in Millions) 1995 1994 1993 --------------------------------- Current: U.S. federal $ 180 $ 165 $ 266 U.S. state and local 103 142 175 Non-U.S. 111 20 239 --------------------------------- 394 327 680 --------------------------------- Deferred: U.S. federal (40) (75) (161) U.S. state and local (33) (64) (97) Non-U.S. (38) 11 (8) --------------------------------- (111) (128) (266) --------------------------------- Provision for income taxes $ 283 $ 199 $ 414 - ------------------------------------------------------------------------------------------------------------------
The following table reconciles the provision to the U.S. federal statutory income tax rate:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Fiscal Fiscal Fiscal (Dollars in Millions) 1995 1994 1993 --------------------------------- U.S. federal statutory income tax rate 35.0% 35.0% 35.0% U.S. state and local income taxes, net of U.S. federal income tax benefits 5.1 8.5 4.2 Lower tax rates applicable to non-U.S. earnings (8.6) (9.1) (5.7) Reduced tax rate applied to dividends (0.5) (0.6) (0.6) Other 1.0 (0.3) 1.6 --------------------------------- Effective income tax rate 32.0% 33.5% 34.5% - ------------------------------------------------------------------------------------------------------------------
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 $504 million. 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 73 32 ================================================================================ will be in effect when such differences are expected to reverse. Significant components of the Company's deferred tax assets and liabilities as of November 30, 1995 and January 31, 1995 are as follows:
================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Nov. 30, Jan. 31, (Dollars in Millions) 1995 1995 ---------------------- Deferred tax assets: Employee compensation and benefit plans $ 585 $ 467 Accrued expenses not yet deductible for tax purposes 21 51 ---------------------- Total deferred tax assets 606 518 ---------------------- Deferred tax liabilities: Valuation of inventory, investments and receivables 245 260 Depreciation and amortization 28 65 Other 31 6 ---------------------- Total deferred tax liabilities 304 331 ---------------------- Net deferred tax assets $ 302 $ 187 - ------------------------------------------------------------------------------------------------------------------
The Company's income tax provision excludes a currency hedging-related income tax provision of $3 million in fiscal 1995, as well as income tax benefits of $72 million in fiscal 1994 and $57 million in fiscal 1993, credited directly to the cumulative translation adjustments component of consolidated stockholders' equity. Also not included in the Company's income tax provision are income tax benefits of $38 million in fiscal 1995, $9 million in fiscal 1994 and $13 million in fiscal 1993, attributable to the vesting of Stock Unit awards and the exercise of stock options, credited directly to paid-in capital; and $9 million in fiscal 1995, $10 million in fiscal 1994 and $8 million in fiscal 1993, attributable to Stock Unit and ESOP dividends, credited directly to retained earnings. 33 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 11 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 Fiscal Fiscal Fiscal Fiscal Fiscal (Dollars in Millions) 1995 1994 1993 1995 1994 1993 --------------------------------------------------------------------------- International Europe $ 3,856 $ 3,942 $ 4,617 $ 1,018 $ 776 $ 1,466 Asia 649 603 468 565 475 396 --------------------------------------------------------------------------- Total 4,505 4,545 5,085 1,583 1,251 1,862 North America 8,553 8,332 6,341 2,264 2,516 2,538 Eliminations (3,934) (3,501) (2,250) (224) (266) (244) --------------------------------------------------------------------------- Total $ 9,124 $ 9,376 $ 9,176 $ 3,623 $ 3,501 $ 4,156 - ------------------------------------------------------------------------------------------------------------------ Income before Taxes Identifiable Assets ---------------------------------- ----------------------------------- Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 1995 1994 1993 1995 1994 1993 --------------------------------------------------------------------------- International Europe $ 262 $ 11 $ 720 $ 85,393 $ 65,110 $ 63,279 Asia 186 56 24 17,363 18,413 15,910 --------------------------------------------------------------------------- Total 448 67 744 102,756 83,523 79,189 North America 435 527 456 139,801 120,360 100,483 Eliminations -- -- -- (98,804) (87,189) (82,430) --------------------------------------------------------------------------- Total $ 883 $ 594 $ 1,200 $143,753 $116,694 $ 97,242 - ------------------------------------------------------------------------------------------------------------------
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. NOTE 12 SUBSEQUENT EVENT On January 3, 1996, the Company completed its purchase of Miller Anderson & Sherrerd, LLP, an institutional investment manager, for approximately $350 million, payable in a combination of cash, notes and common stock of the Company. 75 34 ================================================================================ MORGAN STANLEY GROUP INC. AND SUBSIDIARIES NOTE 13 QUARTERLY RESULTS (UNAUDITED)
================================================================================================================================ - -------------------------------------------------------------------------------------------------------------------------------- Fiscal 1995(1) ------------------------------------------------------------------------------------------- Month Quarter Quarter Quarter Ended Ended Ended Ended (Dollars in Millions, Feb. 28, May 31, Aug. 31, Nov. 30, Except Share Data) 1995 1995 1995 1995 ------------------------------------------------------------------------------------------- Revenues: Investment banking $ 80 $ 273 $ 355 $ 503 Principal transactions: Trading 114 438 352 218 Investments -- (6) 69 39 Commissions 37 131 130 139 Interest and dividends 588 1,742 1,899 1,710 Asset management and administration 31 88 96 95 Other 1 1 1 -- ------------------------------------------------------------------------------------------- Total revenues 851 2,667 2,902 2,704 Interest expense 558 1,656 1,751 1,536 ------------------------------------------------------------------------------------------- Net revenues 293 1,011 1,151 1,168 ------------------------------------------------------------------------------------------- Expenses excluding interest: Compensation and benefits 138 475 575 607 Occupancy and equipment 27 80 84 85 Brokerage, clearing and exchange fees 20 66 64 61 Communications 11 34 31 32 Business development 14 34 30 32 Professional services 14 40 37 40 Other 11 31 32 35 Relocation charge -- -- -- -- ------------------------------------------------------------------------------------------- Total expenses excluding interest 235 760 853 892 ------------------------------------------------------------------------------------------- Income before income taxes 58 251 298 276 Provisions for income taxes 20 85 89 89 ------------------------------------------------------------------------------------------- Net income $ 38 $ 166 $ 209 $ 187 ------------------------------------------------------------------------------------------- Earnings applicable to common shares(2) $ 33 $ 150 $ 192 $ 171 ------------------------------------------------------------------------------------------- Per common share:(3) Primary earnings(4) $ 0.22 $ 0.95 $ 1.23 $ 1.08 Fully diluted earnings(4) $ 0.21 $ 0.91 $ 1.17 $ 1.04 Cash dividends $ -- $ 0.16 $ 0.16 $ 0.16 Book value $ 24.13 $ 25.19 $ 26.34 $ 28.18 Average common and equivalent shares(2)(3) 154,037,668 157,595,614 157,236,918 158,415,826 Stock price range(3)(5) $30 7/16-33 11/16 $33 1/16-39 13/16 $37 15/16-43 7/16 $41 7/8-49 3/4 - -------------------------------------------------------------------------------------------------------------------------------- ================================================================================================================================ - -------------------------------------------------------------------------------------------------------------------------------- Fiscal 1994(1) ---------------------------------------------------------------------------------------- Quarter Quarter Quarter Quarter Ended Ended Ended Ended (Dollars in Millions, April 30, July 31, Oct. 31, Jan. 31, Except Share Data) 1994 1994 1994 1995 ---------------------------------------------------------------------------------------- Revenues: Investment banking $ 260 $ 211 $ 190 $ 258 Principal transactions: Trading 258 300 297 249 Investments 10 23 82 24 Commissions 119 112 104 114 Interest and dividends 1,561 1,525 1,714 1,606 Asset management and administration 81 89 95 85 Other 3 2 3 1 ---------------------------------------------------------------------------------------- Total revenues 2,292 2,262 2,485 2,337 Interest expense 1,404 1,349 1,575 1,547 ---------------------------------------------------------------------------------------- Net revenues 888 913 910 790 ---------------------------------------------------------------------------------------- Expenses excluding interest: Compensation and benefits 440 460 460 373 Occupancy and equipment 68 74 79 82 Brokerage, clearing and exchange fees 58 59 56 57 Communications 29 28 31 34 Business development 39 41 41 44 Professional services 41 39 41 43 Other 29 30 32 40 Relocation charge -- -- -- 59 ---------------------------------------------------------------------------------------- Total expenses excluding interest 704 731 740 732 ---------------------------------------------------------------------------------------- Income before income taxes 184 182 170 58 Provisions for income taxes 67 61 52 19 ---------------------------------------------------------------------------------------- Net income $ 117 $ 121 $ 118 $ 39 ---------------------------------------------------------------------------------------- Earnings applicable to common shares(2) $ 101 $ 104 $ 102 $ 23 ---------------------------------------------------------------------------------------- Per common share:(3) Primary earnings(4) $ 0.64 $ 0.66 $ 0.65 $ 0.15 Fully diluted earnings(4) $ 0.61 $ 0.63 $ 0.63 $ 0.15 Cash dividends $ 0.15 $ 0.15 $ 0.15 $ 0.15 Book value $ 23.34 $ 23.76 $ 24.21 $ 24.89 Average common and equivalent shares(2)(3) 159,657,342 159,211,010 156,708,032 155,068,008 Stock price range(3)(5) $30 7/16-39 3/4 $27 13/16-31 1/8 $29 11/16-34 7/8 $27 5/8-32 9/16 - --------------------------------------------------------------------------------------------------------------------------------
(1) Fiscal 1995's quarterly periods reflect the change in the Company's fiscal year-end (see Note 1). Since fiscal 1995 consists of the ten-month period from February 1, 1995 to November 30, 1995, the first quarter consists only of the results for the month ended February 28, 1995. Fiscal 1994's quarterly periods are presented based upon the previous fiscal year-end date. (2) Amounts shown are used to calculate primary earnings per share. (3) Amounts shown have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996. (4) 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. (5) Prices represent the range of sales per share on the New York Stock Exchange for the periods indicated. The number of stockholders of record at November 30, 1995 approximated 1,235. The number of beneficial owners of common stock is believed to exceed this number. EX-21 10 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 MORGAN STANLEY GROUP INC. SUBSIDIARIES As of February 15, 1996
YEAR OF JURISDICTION OF INCORPORATION/ INCORPORATION FORMATION 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 Asset Management Holdings Inc. Delaware 1995 *Miller Anderson & Sherrerd, LLP Pennsylvania 1971 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 (C.I.) Limited Jersey, Channel Is. 1995 Morgan Stanley Equity Investors Inc. Delaware 1988 Morgan Stanley Finance (Jersey) Limited Jersey, Channel Is. 1990 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 Investment Management Inc. Delaware 1990 Morgan Stanley Real Estate Fund, Inc. Delaware 1989 MSREF I, L.L.C. Delaware 1995 MSREF I-CO, L.L.C. Delaware 1995 Morgan Stanley Real Estate Investment Management II, Inc. Delaware 1994 MSREF II-CO, L.L.C. Delaware 1995 Morgan Stanley Realty Incorporated Delaware 1969 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 Financing Inc. Delaware 1986 Morgan Stanley 750 Building Corp. Delaware 1994 MS Tokyo Properties Ltd. Japan 1989 MS Holdings Incorporated Delaware 1995 MS SP Urban Horizons, Inc. Delaware 1996 MS Urban Horizons, Inc. Delaware 1994 MS Venture Capital (Japan) Inc. Delaware 1989 MSAM/Kokusai, Inc. Delaware 1995 MSBF Inc. Delaware 1995 MSCP III Holdings, Inc. Delaware 1994 MSPL Co. Inc. Delaware 1990 MSREF II, Inc. Delaware 1994 MSREF II, L.L.C. Delaware 1995 MS/USA Leasing Inc. Delaware 1993 PG Holdings, Inc. Delaware 1991 PG Investors, Inc. Delaware 1991 PG Investors II, Inc. Delaware 1996 Pierpont Power, Inc. New York 1987 Romley Computer Leasing Inc. Delaware 1985 Strategic Investments I, Inc. Delaware 1996 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 Prime Dealer Services Corp. Delaware 1994 MORGAN STANLEY INTERNATIONAL INCORPORATED Delaware 1963 Bank Morgan Stanley AG Switzerland 1973 Morgan Stanley AOZT Russia 1994 Morgan Stanley Asia (China) Limited Hong Kong 1991 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
2 3 MORGAN STANLEY GROUP INC. (CONTINUED) MORGAN STANLEY INTERNATIONAL INCORPORATED (CONTINUED) Morgan Stanley Asia Pacific (Holdings) Limited Cayman Islands 1995 Morgan Stanley Asia Regional (Holdings) I LLC Cayman Islands 1995 Morgan Stanley Asia Limited Hong Kong 1984 Morgan Stanley Futures (Hong Kong) Limited Hong Kong 1988 Morgan Stanley Hong Kong Securities Limited Hong Kong 1988 Morgan Stanley Pacific Limited Hong Kong 1987 Morgan Stanley Asia Regional (Holdings) II LLC Cayman Islands 1995 Morgan Stanley Asia Regional (Holdings) III LLC Cayman Islands 1995 Morgan Stanley Asia Regional (Holdings) IV LLC Cayman Islands 1995 **Morgan Stanley Japan (Holdings) Ltd. Cayman Islands 1984 Morgan Stanley Japan Limited Hong Kong 1993 Morgan Stanley Asia Pacific (Holdings) I Limited Cayman Islands 1995 Morgan Stanley Asia (Singapore) Pte Ltd Rep. of Singapore 1992 Morgan Stanley Asia (Taiwan) Ltd. Rep. of China 1990 Morgan Stanley Asset & Investment Trust Management Co., Limited Japan 1987 Morgan Stanley Asset Management Singapore Limited Rep. of Singapore 1990 Morgan Stanley Australia Limited Australia 1989 Morgan Stanley Bank Luxembourg S.A. Luxembourg 1989 Morgan Stanley Canada Limited Canada 1982 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 (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 1988 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 Holding (Deutschland) GmbH Germany 1990 Morgan Stanley Bank AG Germany 1986 Morgan Stanley Hong Kong Nominees Limited Hong Kong 1988 Morgan Stanley International Insurance Ltd. Bermuda 1995 Morgan Stanley Latin America Incorporated Delaware 1994 Morgan Stanley do Brasil Limitada Brazil 1995 MS Carbocol Advisors Incorporated Delaware 1995 MS Ferrovias Advisors Incorporated Delaware 1995 Morgan Stanley Mauritius Company Limited Mauritius 1993 ***Morgan Stanley Asset Management India Private Limited India 1993 ***Morgan Stanley India Securities Private Limited India 1995
3 4 MORGAN STANLEY GROUP INC. (CONTINUED) MORGAN STANLEY INTERNATIONAL INCORPORATED (CONTINUED) Morgan Stanley Offshore Investment Company Ltd. Cayman Islands 1987 Morgan Stanley Overseas Services (Jersey) Limited Jersey, Channel Is. 1986 Morgan Stanley S.A. France 1992 Morgan Stanley SICAV Management S.A. Luxembourg 1988 Morgan Stanley South Africa (Pty) Limited South Africa 1994 Morgan Stanley (Structured Products) Jersey Limited Jersey, Channel Is. 1994 Morgan Stanley Wertpapiere GmbH Germany 1989 MS Italy (Holdings) Inc. Delaware 1990 Banca Morgan Stanley SpA Italy 1990 MS LDC, Ltd. Delaware 1991 MSL Incorporated Delaware 1976
- ------------------------------ * 95% owned by Morgan Stanley Asset Management Holdings Inc., 3% owned by MSL Incorporated and 2% owned by MS Holdings Incorporated ** 25% owned by Morgan Stanley Asia Pacific (Holdings) I Limited *** 25% owned by non-Morgan Stanley entities 4 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 January 4, 1996, included in the 1995 Annual Report to Shareholders 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 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, presents 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. 33-58611, 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 January 4, 1996, 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 period ended November 30, 1995. /s/ Ernst & Young LLP New York, New York February 23, 1996 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 23 February 1996, 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 1995. /s/ Ernst & Young Chartered Accountants Registered Auditor London February 23, 1996 EX-27 13 FINANCIAL DATA SCHEDULE
BD 1,000,000 10-MOS NOV-30-1995 FEB-01-1995 NOV-30-1995 3,810 6,476 45,886 27,069 58,600 1,286 143,753 11,703 17,406 60,738 9,340 27,700 9,635 0 818 163 4,193 143,753 1,122 5,939 437 1,211 310 5,501 1,795 883 883 0 0 600 3.48 3.33 Amounts have been retroactively adjusted to give effect for a two-for-one stock split, effected in the form of a 100% stock dividend, which became effective on January 26, 1996
EX-99 14 FINANCIAL STATEMENTS, MS UK PROFIT SHARING SCHEME 1 Exhibit 99 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME Report and Financial Statements 31 December 1995 and 1994 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 1995 and 1994 and the related statement of income and changes in plan equity for the years ended 31 December 1995, 1994 and 1993. 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 1995 and 1994 and the income and changes in plan equity for the years ended 31 December 1995, 1994 and 1993 in conformity with United States generally accepted accounting principles. /s/ Ernst & Young Chartered Accountants Registered Auditor London February 23, 1996 3 3 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- STATEMENT OF THE FINANCIAL CONDITION at 31 December 1995
1995 1994 Notes $ $ ASSETS Investments at market value Morgan Stanley Group Inc. Common Stock 2,3 13,189,121 8,096,334 Amounts due from trustee 9,466 43,112 Employee contributions receivable 2,737,363 2,371,487 ---------- ---------- 15,935,950 10,510,933 ========== ========== LIABILITIES AND PLAN EQUITY Dividend income, net of withholding taxes, payable to participants 9,465 41,020 Taxes withheld in respect of dividend income - 2,090 Plan equity 15,926,485 10,467,823 ---------- ---------- 15,935,950 10,510,933 ========== ==========
See notes to the financial statements. - -------------------------------------------------------------------------------- 4 4 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY for the years ended 31 December 1995, 1994 and 1993
1995 1994 1993 Notes $ $ $ CASH DIVIDEND Distribution from Morgan Stanley Group Inc. Common Stock 160,989 167,520 127,435 Less: United States tax withheld 24,148 25,105 19,115 ---------- ----------- ---------- NET DIVIDENDS 136,841 142,415 108,320 Gain on sale/transfer of Morgan Stanley Group Inc. Common Stock 2 518,552 183,380 465,762 Change in unrealised appreciation of investments 3 3,158,900 (1,791,131) 1,287,954 EMPLOYEE CONTRIBUTIONS Current year 2,737,495 2,371,487 1,834,116 ---------- ----------- ---------- INCOME FOR THE YEAR 6,551,788 906,151 3,696,152 Less: Dividend income payable to participants 128,791 134,006 100,238 Income tax payable 8,050 8,409 8,082 Withdrawals disbursed to employees 828,659 289,513 486,901 Value of shares transferred to employees 127,626 97,680 403,774 ---------- ----------- ---------- INCREASE IN PLAN EQUITY 5,458,662 376,543 2,697,157 PLAN EQUITY AT 1 JANUARY 10,467,823 10,091,280 7,394,123 ---------- ----------- ---------- PLAN EQUITY AT END OF YEAR 15,926,485 10,467,823 10,091,280 ========== =========== ==========
See notes to the financial statements. - -------------------------------------------------------------------------------- 5 5 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1995, 1994 and 1993 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 (pound)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 - -------------------------------------------------------------------------------- 6 6 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1995, 1994 and 1993 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. - -------------------------------------------------------------------------------- 7 7 Morgan Stanley UK Group Profit Sharing Scheme ------------------------------------------------------------------------ NOTES TO THE FINANCIAL STATEMENTS at 31 December 1995, 1994 and 1993 2. CHANGES IN HOLDINGS OF MORGAN STANLEY GROUP INC COMMON STOCK
Number Average cost Total of shares per share cost At 1 January 1993 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 Add: Purchase January 1995 39,564 59.944 2,371,619 ------- ------ --------- 176,790 48.787 8,625,074 Less: Sales of shares during the year (11,518) 28.562 (328,974) Transfer of shares during the year (1,686) 64.507 (108,759) ------- ------ --------- At 31 December 1995 163,586 50.049 8,187,341 ======= ====== =========
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. ------------------------------------------------------------------------ 8 8 Morgan Stanley UK Group Profit Sharing Scheme - -------------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1995, 1994 and 1993 Sale/transfer of shares in Morgan Stanley Group Inc Common Stock:
1995 1994 1993 $ $ $ Aggregate proceeds of sales 828,659 289,513 486,901 Aggregate cost of sales (328,974) (111,436) (130,802) -------- -------- -------- Net gain on sales 499,685 178,077 356,099 -------- -------- -------- Aggregate proceeds of transfers 127,626 97,680 403,774 Aggregate cost of transfers (108,759) (92,377) (294,111) -------- -------- -------- Net gain on transfers 18,867 5,303 109,663 -------- -------- -------- 518,552 183,380 465,762 ======== ======== ========
Cost has been determined on a first in, first out basis within the relevant employee allocation. - -------------------------------------------------------------------------------- 9 9 Morgan Stanley UK Group Profit Sharing Scheme ---------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1995, 1994 and 1993 3. CHANGE IN UNREALISED APPRECIATION OF INVESTMENTS At 31 December 1995 the closing price on the New York Stock Exchange for Morgan Stanley Group Inc common stock was $80.625 per share.
Average Number cost Total of shares per share cost Market value at 31 December 1995 163,586 80.625 13,189,121 Average cost at 31 December 1995 163,586 50.049 8,187,342 ----------- Unrealised appreciation at 31 December 1995 5,001,779 Unrealised appreciation at 31 December 1994 1,842,879 ----------- Increase in unrealised appreciation 3,158,900 =========== 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 ----------- Increase in unrealised appreciation 1,287,954 ===========
4. NUMBER OF PARTICIPANTS - -------------------------------------------------------------------------------- 10 10 Morgan Stanley UK Group Profit Sharing Scheme ----------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS at 31 December 1995, 1994 and 1993 There were 543 participants as of 31 December 1995, 548 participants as of 31 December 1994 and 406 participants as of 31 December 1993. 5. SUBSEQUENT EVENT On 4 January 1996 a two for one stock split was declared on Morgan Stanley Group Inc. shares. - -------------------------------------------------------------------------------- 11 -----END PRIVACY-ENHANCED MESSAGE-----