-----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, JhKw7tuVzo81nYAFEhpfTrTsY3fyyzcyUTRNshY7dqzPymIEr6iA/HsDAGS8qj2B oKv3W0CQin2IBRn0JRfcsQ== 0000950130-97-001437.txt : 19970401 0000950130-97-001437.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950130-97-001437 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEAN WITTER DISCOVER & CO CENTRAL INDEX KEY: 0000895421 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 363145972 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11758 FILM NUMBER: 97570726 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2123922222 10-K405 1 FORM 10-K COMMISSION FILE NUMBER 1-11758 ================================================================================ 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 DECEMBER 31, 1996 DEAN WITTER, DISCOVER & CO. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ----------------------------------- DELAWARE 36-3145972 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-2222 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------------ ------------------------------------- Common Stock--$.01 par value New York Stock Exchange Pacific Stock Exchange Rights to Purchase Series A New York Stock Exchange Junior Participating Pacific Stock Exchange Preferred Stock 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 the 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 ] As of February 28, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $12,275,079,787.75. For purposes of this information, the outstanding shares of Common Stock owned by the directors and executive officers of the Company were deemed to be held by affiliates, and the Dean Witter START Plan (Savings Today Affords Retirement Tomorrow), the SPS Transaction Services, Inc. START Plan (Savings Today Affords Retirement Tomorrow), the Dean Witter Reynolds Inc. Account Executive Productivity Compensation Plan, the Dean Witter Reynolds Inc. Branch Manager Compensation Plan and the Dean Witter, Discover & Co. Employee Stock Purchase Plan were deemed to be non-affiliates. APPLICABLE ONLY TO CORPORATE REGISTRANTS: Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. 321,595,672 shares of Common Stock, par value $.01 per share, as of February 28, 1997. DOCUMENTS INCORPORATED BY REFERENCE 1. Dean Witter, Discover & Co. 1996 Annual Report to Shareholders (for the fiscal year ended December 31, 1996). Certain information contained in this document is incorporated by reference in Parts I and II. 2. Joint Proxy Statement of Dean Witter, Discover & Co. and Morgan Stanley Group Inc. in respect of 1997 Annual Meeting of Stockholders of Dean Witter, Discover & Co. (to be filed within 120 days after December 31, 1996). Certain information contained in this document is incorporated by reference in Part III. ================================================================================ PART I ITEM 1. BUSINESS GENERAL Proposed Merger With Morgan Stanley Group Inc. On February 5, 1997, Dean Witter, Discover & Co. (the "Company") and Morgan Stanley Group Inc. ("Morgan Stanley") announced a definitive agreement to merge. The combined company would be a preeminent global financial services firm with a market capitalization of approximately $21 billion (as of the time of the merger announcement) and with leading market positions in the securities, asset management and credit services businesses. The new company would be named Morgan Stanley, Dean Witter, Discover & Co. The merger would combine the Company's leading franchises in providing investment and asset management products and services and quality consumer credit products to its customers with Morgan Stanley's leading franchises in the origination of quality underwritten products, investment banking, research and institutional sales and trading. Through a network of 28 principal offices in 19 countries, Morgan Stanley offers a wide range of financial services to sovereign governments, corporations, institutions and individuals. A leader in investment banking since its formation in 1935, Morgan Stanley ranked first in global mergers and acquisition announced transactions in 1996 according to Securities Data Corporation and held leading positions in debt and equity underwriting. In asset management, the combination would result in a business that manages more than $270 billion of assets on a pro forma basis. Under the terms of the merger agreement unanimously approved by the boards of directors of both companies, each of Morgan Stanley's common shares will be exchanged for 1.65 of the Company's common shares. Morgan Stanley preferred shares outstanding at the date of the merger will be exchanged for preferred shares of the Company having substantially identical terms. The transaction, which is expected to be completed in mid-1997, is intended to be a tax-free exchange and accounted for as a pooling of interests and is subject to customary closing conditions, including certain regulatory approvals and the approvals of shareholders of both companies. Pursuant to the pooling of interests method of accounting, prior to the time of closing each company will formally rescind stock repurchase authorizations existing at that time. Because the merger would occur subsequent to December 31, 1996, unless otherwise stated, the information presented in this Annual Report on Form 10-K does not give effect to its impact. Background and Overview The Company is a diversified financial services organization that provides a broad range of nationally marketed credit and investment products, with a primary focus on individual customers. The Company has two principal lines of business: credit services and securities. Its credit services business ("Credit Services") consists primarily of the issuance, marketing and servicing of general purpose credit cards. Credit Services is the largest single domestic issuer of general purpose credit cards as measured by number of accounts and cardmembers. Discover(R) Card is the Company's most widely held proprietary general purpose credit card and generated a majority of Credit Services' revenues and net income in 1996. The Company's securities business ("Securities") is conducted primarily through its wholly owned subsidiaries, Dean Witter Reynolds Inc. ("DWR") and Dean Witter InterCapital Inc. ("InterCapital"). DWR is a full-service securities firm that engages in a wide variety of securities activities, with a particular focus on serving the investment needs of its individual clients through over 9,000 account executives. DWR is among the largest members of the New York Stock Exchange (the "NYSE") and is a member of other major securities, futures and options exchanges. InterCapital, with total assets of $90.0 billion under management and administration as of December 31, 1996, is one of the largest asset management operations in the United States. 2 The Company traces its origins to Dean Witter & Co., organized in 1924. In 1978, Dean Witter & Co. Incorporated (the successor to Dean Witter & Co.) merged with Reynolds Securities Inc., and in 1981 Dean Witter Reynolds Organization Inc. was acquired by Sears, Roebuck and Co. ("Sears"). Until early 1993, the Company was a wholly owned subsidiary of Sears. On March 1, 1993, the Company completed an initial public offering of approximately 20% of its Common Stock. On June 30, 1993, Sears divested the remaining Company shares it then owned in a special dividend to its shareholders. Information concerning revenues and net income for each of the Company's business segments for the five years ended December 31, 1996, and concerning identifiable assets for each business segment as of December 31, 1996, 1995 and 1994, is included, respectively, in Management's Discussion and Analysis on pages 19 and 25, and in Note 14 of Notes to Consolidated Financial Statements on page 45, of the Company's 1996 Annual Report to Shareholders and is incorporated herein by reference. Employees As of December 31, 1996, the Company had 33,084 employees, of whom 14,450 were employed by Credit Services and 18,634 by Securities. None of the Company's employees is covered by a collective bargaining agreement. CREDIT SERVICES OVERVIEW Credit Services, which accounted for 52% and 47% of the Company's net income in 1995 and 1996, respectively, focuses on the delivery of financial products to consumers through its four business units. The business units are: NOVUS Services: a nationwide credit card business involving the issuance of proprietary general purpose credit cards bearing the NOVUS(R) logo and the operation of the NOVUS Network, the Company's proprietary merchant and cash access network (the "NOVUS Network"). NOVUS Services' credit cards, which include the Discover Card, Private Issue(R) Card, BRAVO(R) Card and affinity program cards, are accepted nationwide at NOVUS Network locations for purchases and cash advances. Prime Option Services: an organization that markets a co-branded MasterCard(R) general purpose credit card under the brand name Prime Option(R). SPS Transaction Services, Inc. ("SPS"): a 74% owned, publicly held subsidiary of the Company. SPS provides technology-based outsourcing services. SPS' primary services include electronic point-of-sale transaction processing, consumer private label credit card program administration, commercial accounts receivable processing and call center teleservices. NOVUS Financial Corporation ("NOVUS Financial"): a consumer lending organization that focuses primarily on real estate secured consumer lending. Credit Services is the largest single issuer of general purpose credit cards in the United States as measured by number of accounts and card holders (holders of the Company's general purpose proprietary credit cards are referred to as "cardmembers"). Consumers use the Company's general purpose credit cards to purchase goods and services and to obtain cash advances. 3 The table below sets forth the number of cardmembers, the number of accounts, the number of active accounts, and the transaction dollar amounts for the Company's general purpose credit cards, and the dollar amount of general purpose credit card loans managed by the Company for or at the end of the periods indicated:
1992 1993 1994 1995 1996 ------ ----- ----- ----- ----- Cardmembers (millions)........................ 39.2 40.2 43.3 47.0 49.5 Number of accounts (millions)................. 27.7 29.3 32.6 36.1 38.9 Number of active accounts (millions)(1)....... 18.1 19.3 21.2 23.0 23.8 Transaction dollars (billions)(2)............. $27.5 $32.8 $40.1 $47.5 $53.6 Managed loans (billions)...................... $16.4 $19.0 $23.4 $27.8 $32.6
- ------ (1) Active accounts are those with a debit or credit balance during their last monthly billing cycle for the period indicated. (2) Includes purchases, cash advances, and balance transfers. The table below sets forth total revenues of the Credit Services business units for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------- 1995 1996 -------- ------ (DOLLARS IN MILLIONS) NOVUS Services............................................... $3,632.0 $4,259.9 SPS(1)....................................................... 464.4 568.7 Prime Option Services........................................ 125.1 219.9 NOVUS Financial.............................................. 125.5 128.3
- ---------- (1) Includes revenues from private label credit card programs serviced by SPS for an indirect wholly owned subsidiary of the Company. NOVUS SERVICES Overview NOVUS Services offers an array of general purpose credit cards designed to appeal to different market segments of consumers for use on the NOVUS Network. The NOVUS Network is the third largest domestic credit card network and consists of merchant and cash locations that accept card brands that carry the NOVUS logo. The Company's strategy is to expand its business by increasing the use of existing cards and by offering new cards through the NOVUS Network. NOVUS Services issues several proprietary cards, each of which bears the NOVUS logo indicating acceptance by the NOVUS Network. These cards include the Discover Card, the Private Issue Card, the BRAVO Card and the National Alliance For Species Survival SM Card, an affinity program card launched in September 1996 in conjunction with the American Zoo and Aquarium Association. In January 1997, NOVUS Services announced it had agreed to issue an affinity program card in conjunction with the Smithsonian Institution. NOVUS Services plans to continue to offer additional affinity program and co-branded cards in the future. NOVUS Services promotes its proprietary cards through the use of different and distinctive features that are designed to appeal to different consumer bases. The Discover Card is designed to appeal to the value-conscious consumer with the Cashback Bonus(R) award, no annual fee structure and interest rates indexed to the prime rate. The Private Issue Card offers consumers a choice of three sets of terms, based on their specific interests, and four card designs, three designed by celebrity artists. The BRAVO Card is a general purpose credit card designed to appeal to consumers who tend to carry balances on their card. NOVUS Services offers cardmembers various financial services, including a revolving line of credit, availability of cash advances, credit insurance, and card registration to protect against losses in connection with 4 card theft or loss. Discover and Private Issue cardmembers are also offered money market deposit accounts and time deposits. NOVUS Services accrues revenues through finance charges on cardmembers' revolving balances, the fees paid by merchants to the Company for transactions effected through the NOVUS Network, transaction fees paid by cardmembers for cash advances or late payments, overlimit fees, fees from providing product enhancements to cardmembers (e.g., credit life insurance and card registration), merchant fees for processing transactions for other credit and charge cards, and proceeds from the sale of point-of-sale terminals and related equipment to merchants. NOVUS Services, as the issuer of cards for use on the NOVUS Network, is distinguished from MasterCard and Visa card issuers in that it directly controls the brand image, features, service level and pricing of its cards to both cardmembers and merchants. MasterCard and Visa issuers compete directly with each other using the same brands and sharing common processes. The ability to control its product provides NOVUS Services with competitive advantages that are not available to any single MasterCard or Visa issuer, including efficiencies in operations, product positioning and marketing execution. Cardmembers use cards issued by the Company bearing the NOVUS logo to purchase goods and services at participating merchant locations and to obtain cash advances at certain merchant and bank locations and at automated teller machines or by means of checks drawn against their lines of credit. Cardmembers receive account statements monthly and may elect to pay all or part of the outstanding balance each month. The unpaid portion of the outstanding balance is carried over to the next month, and finance charges are assessed on the revolving balance. A late fee is charged if less than a stated minimum portion of the outstanding balance is paid each month. Cardmembers are assessed other fees if their credit card use violates the terms of the cardmember agreement. Cardmember rewards, primarily the Cashback Bonus award, pursuant to which the Company annually pays Discover cardmembers and Private Issue cardmembers electing this feature a percentage of their purchase amounts ranging up to one percent (up to two percent for the Private Issue Card), are based upon a cardmember's level of annual purchases. The Cashback Bonus award is remitted to cardmembers in the form of a check or as a credit to their accounts in the anniversary month of the account opening. Cardmembers enter into agreements governing the terms and conditions of their accounts. Cardmember agreements for each type of card are generally uniform from state to state. The Company's proprietary general purpose credit cards (other than Discover Corporate Card) are issued by Greenwood Trust Company ("Greenwood Trust"). Because of certain banking law restrictions, such cards (other than Discover Corporate Card) may be used only for personal and household (as opposed to commercial) transactions. The Discover Corporate Card, which is issued by a different subsidiary of the Company, is primarily for the use of employees of the Company and formerly affiliated companies. In 1996, the Company made an investment in Mondex USA Services Limited Liability Company (in formation), announced to commercially develop and implement the Mondex advanced electronic payment and "smart card" system in the United States. The Company anticipates that the Mondex electronic payment system will be able to be deployed over the Internet. With Mondex, the Company believes that consumers will be able to store "electronic cash" onto a "smart card" embedded with a microprocessor chip, which will then be usable to make small dollar purchases at stores or over the Internet. The Company is one of seven major U. S. organizations holding an ownership stake in Mondex USA. The Mondex system is being piloted internationally and in the United States. Merchants The NOVUS Network has expanded rapidly since its nationwide introduction in 1986. During 1996, NOVUS Services enrolled approximately 425,000 merchant outlets to the NOVUS Network, which consisted of over 2.0 million merchant locations as of December 31, 1996. As of December 31, 1996, the NOVUS Network also included over 119,000 cash access locations where cardmembers could obtain cash advances. 5 Acting as both the issuing and acquiring entity, NOVUS Services retains the entire merchant fee paid to the NOVUS Network in a given transaction. Because of its independence from the bankcard associations, NOVUS Services has greater flexibility than MasterCard or Visa participants in dealing with merchants. The Company believes that this gives the Company greater opportunities to provide customized programs to merchants in such areas as processing arrangements and to attract certain merchants by tailoring program terms to meet their specific needs. NOVUS Services employs its own national sales and support force to maintain and increase its merchant base. In contrast, MasterCard's and Visa's marketing efforts to merchants are generally indirect and rely largely on the unaffiliated sales forces of participating acquiring banks and their agents. In addition, the Company conducts telemarketing operations for the purpose of acquiring merchant business and participates in sales and trade association meetings. Marketing The Company believes NOVUS Services has a distinct advantage over its bankcard association credit card competitors because of its ability to direct and deliver a consistent, nationwide message for each brand. Because the Company manages all aspects of both the cardmember and merchant relationship, it can determine and promote its advertising campaign and control the campaign's content, timing and promotional features. The Company believes this ability gives it an advantage over competitors, particularly those that issue bankcard association credit cards, which control only one part of the overall relationship. This controlled marketing effort has several significant consequences: --NOVUS Services can project a single, clear nationwide image to the consumer for each proprietary card brand; --NOVUS Services can continuously review card features to design and introduce new cards to different market segments; --NOVUS Services faces no marketing competition from competing issuers using its brand names, unlike MasterCard and Visa issuers; --NOVUS Services can conduct joint marketing promotions with NOVUS Network merchants aimed at targeted cardmembers; and --NOVUS Services can coordinate its media advertising, such as television, in support of direct mail solicitations. Credit Cardmembers undergo credit reviews to establish that they meet standards of ability and willingness to pay. "Take-one" applications are evaluated using credit scoring systems (statistical evaluation models that assign point values to information contained in applications). The Company's credit scoring systems are based on credit scoring systems developed by scoring-model vendors and are customized using the Company's criteria and historical data. Applications not approved under the credit scoring systems may be reviewed and approved by the Company's credit analysts. Applicants receiving pre-approved solicitations must satisfy criteria specified by NOVUS Services. All recipients of pre-approved solicitations have been pre-screened through credit bureaus before mailing. Pre-screening is a process by which an independent credit reporting agency identifies persons satisfying creditworthiness criteria, in the form of point scoring models or other screening factors, supplied by the Company that are intended to provide a general indication, based on available information, of the willingness and ability of such persons to pay their obligations. 6 Each cardmember's credit line is reviewed at least annually, and may be reviewed more frequently if requested by the cardmember or if the Company deems more frequent review appropriate. Such reviews include scoring the cardmember's payment behavior on the applicable card as well as reviewing the cardmember's credit bureau record. Actions resulting from account review may include lowering a cardmember's credit line or closing the account. During 1996, the Company, including NOVUS Services, Prime Option and SPS, experienced an increase in its net charge-off rate which was consistent with the industry-wide trend of increasing credit loss rates that the Company believes is related, in part, to increased consumer debt levels and bankruptcy rates. In response to this environment and as part of its ongoing review of cardmember credit quality, the Company implemented initiatives in 1996, including raising credit quality standards for new accounts, selectively reducing credit limits and increasing collection efforts. For additional information regarding credit losses and the Company's response, see Management's Discussion and Analysis incorporated by reference in Part II, Item 7 of this Report. NOVUS Services maintains a separate operations center that handles all charged-off accounts. The Company believes that this centralization improves the handling of charged-off accounts, accounts of deceased cardmembers and management of the relationship with outside attorneys and collection agencies. Operations The Company performs the functions required to service and operate its proprietary cards' accounts either by itself or through processing agreements that the Company has with third parties. These functions include new account solicitation, application processing, new account fulfillment, transaction authorization and processing, cardmember billing, payment processing, cardmember service and collection of delinquent accounts. NOVUS Services maintains several operations centers throughout the country. Additionally, NOVUS Services operations are supported by systems at computer centers operated by an unaffiliated communication services provider. The Company has contracted with Sears' operations centers for much of the new account fulfillment and customer billing functions and for certain remittance processing services. The Company's operations center in Dover, Delaware is also responsible for remittance processing services. PRIME OPTION SERVICES In 1994, the Company launched, together with NationsBank of Delaware, N.A. ("NationsBank"), a co-branded MasterCard program under the brand name "Prime Option MasterCard." Issued by NationsBank under an agreement with MountainWest Financial Corporation, an indirect wholly owned subsidiary of the Company ("MountainWest"), which participates in the marketing, funding and servicing of the accounts, Prime Option MasterCard offers special value and flexibility to consumers through targeted offers of features and pricing based on behavioral and demographic characteristics. These offers provide most customers with no annual fee, an annual percentage rate between prime plus 3.9% and prime plus 12.9% and other targeted features. Prime Option offers cardmembers their choice of billing date and various products and services, including a revolving credit line, availability of cash balances, reduced rate balance transfers, credit insurance, card registration to protect against losses in connection with card theft or loss, and both Company and third party vendor home, automobile and dining products. Prime Option ranks among the 25 largest MasterCard programs in the United States based on number of cards. 7 SPS TRANSACTION SERVICES, INC. General SPS is a 74% owned, publicly held subsidiary of the Company; it sold 25.7% of its common stock in an initial public offering in 1992. SPS provides technology-based outsourcing services. SPS' primary services include electronic processing of point-of-sale transactions (primarily credit card transactions), consumer private label credit card program administration, commercial accounts receivable processing and call center teleservices. Network Transaction Services In its point-of-sale transaction processing business, SPS captures credit and charge card transaction information electronically, transmits the information utilizing the facilities of unaffiliated communication services providers to the card issuer or other appropriate on-line processor for authorization or verification, communicates the response to the merchants electronically, stores the information for reporting purposes and submits processed data to the appropriate settlement entity. The authorization process is usually completed within seven seconds after the transaction data leaves the merchant's premises. SPS typically markets these services directly to large regional and national merchants and competes with other large networks and merchant acquirers for this business. Consumer Credit Card Services SPS offers customized consumer private label credit card programs to its clients. In some cases, SPS' wholly owned subsidiary, Hurley State Bank ("Hurley Bank"), issues the credit card on behalf of the client and owns the receivables generated through the use of the card. In programs that are managed but not owned, SPS administers the programs but does not act as the card issuer or own the receivables. In such cases, SPS generates revenues on a fee-per-specified-services basis, on a per-account-administered basis or on some combination thereof. Whether the portfolio is owned or managed, SPS offers its clients a full range of credit card services. SPS maintains its own risk management department, which oversees the development and validation of new account approval models that are customized for individual merchant clients. Commercial Accounts Processing Services SPS offers billing and accounts receivable management systems for clients with business customers. According to client preference, SPS provides monthly revolving account statements or invoice-based billing. SPS generates revenues from these services on a fee-per-specified-service basis, on a per-account-administered basis or some combination thereof. For certain commercial accounts programs administered by SPS, MountainWest is the owner of loans associated with those programs. Teleservices SPS also markets call-center based teleservicing programs that focus on business-to-consumer applications. These services are predominantly outsourcing programs in which SPS provides its clients with operational and customer service functions that SPS can more effectively provide with its existing systems capabilities and inbound and outbound telecommunication resources. SPS services a wide range of client teleservices programs including customer billing inquiries, dispatch services, technical help-desk inquiries and catalog order processing. NOVUS FINANCIAL NOVUS Financial is a consumer finance organization engaged in the business of originating and servicing consumer loans, with a broad range of products designed to meet the needs of its customer base. Most of its loans are secured by mortgages on one-to-four family residential properties, and by automobiles, boats and recreational vehicles. 8 For distribution of its products, NOVUS Financial utilizes DWR account executives, Allstate Insurance Company agents, and direct mail solicitations. Mortgage loans originated through DWR account executive referrals increased to $180.8 million in 1996 from $151.1 million in 1995, representing 38% of total new loan origination in 1996. COMPETITION The Company's Credit Services business units compete in highly competitive businesses. In particular, the Company's credit cards compete in a highly competitive industry. The market includes other bank-issued credit cards (the vast majority of which bear the MasterCard or Visa service mark) and charge cards issued by travel and entertainment companies. The credit card industry has experienced increased competitive use of advertising, targeted marketing and pricing competition in interest rates, annual fees and rebates as new credit card issuers seek to enter the market and established credit card issuers seek to expand. More recently, issuers have increased their efforts to attract balances from competing sources of credit via low-priced balance transfer programs. In addition, banks have issued and aggressively marketed co-branded credit cards, which offer certain benefits relating to the business of the bank's co-branding partner. The Company's strategy is to develop proprietary credit cards targeted to different market segments with features that are designed to satisfy the needs of different consumers and to promote Prime Option to compete in the Visa and MasterCard segments of the market. The Company believes its proprietary merchant base enables it to promote its proprietary card brand names on a national basis, thereby building customer acceptance and use. REGULATION The Company conducts portions of its Credit Services businesses through banking institutions. Greenwood Trust is a state bank chartered under the laws of the State of Delaware. Hurley Bank is a state bank chartered under the laws of the State of South Dakota. Bank of New Castle is a state bank chartered under the laws of the State of Delaware. MountainWest is an industrial loan company chartered under the laws of the State of Utah. Greenwood Trust, Hurley Bank, Bank of New Castle and MountainWest (each a "Bank" and, collectively, the "Banks") each have their deposits insured by the Federal Deposit Insurance Corporation ("FDIC") and pay FDIC assessments. Each Bank is subject to comprehensive regulations and periodic examinations by the state banking commissioner of the state in which it is chartered and by the FDIC. Generally, a company which controls a "bank," as defined in the Bank Holding Company Act of 1956 (the "BHCA"), is required to register as a bank holding company under that act and becomes subject to regulation and examination as a bank holding company by the Federal Reserve Board. Greenwood Trust is a "bank" as defined in the BHCA. However, because Greenwood Trust did not come within the BHCA's definition of the term "bank" prior to the amendment of the BHCA by the Competitive Equality Banking Act of 1987 ("CEBA"), under certain grandfathering provisions of CEBA the Company is not treated as a bank holding company as long as the Company and Greenwood Trust comply with certain restrictions set forth in CEBA. Hurley Bank, Bank of New Castle and MountainWest are not "banks" under the BHCA as long as each complies with certain other restrictions set forth in CEBA. Under the BHCA, a bank holding company is generally prohibited from engaging in any activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Should Greenwood Trust fail to continue to qualify for grandfather rights under CEBA or should any of the other Banks fail to continue to be operated so as to maintain its exempt status as a non-bank under the BHCA, the Company, in order to continue in those of its present businesses that would not be permissible for a bank holding company under the BHCA, could be required to divest control of those institutions or, in the case of Greenwood Trust, to change its activities significantly. The relationships among cardholders, credit card issuers and sellers of merchandise in transactions financed by the extension of credit under credit accounts are extensively regulated by federal and state consumer protection laws and regulations. Under federal law, each of the Banks may charge interest at the rate allowed by the law of the state in which it is located. The states where the Banks are domiciled do not limit the amount of interest that may 9 be charged on loans of the types offered by the Banks. As a result, each of the Banks is permitted to export interest rates pursuant to federal law. The application of federal and state bankruptcy and debtor relief laws affect the Company to the extent such laws result in any loans being charged off as uncollectible. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal bank regulatory agencies are required to take "prompt corrective action" in respect of banks that do not meet minimum capital requirements, and certain restrictions are imposed upon banks that meet certain capital requirements but are not "well capitalized" for purposes of FDICIA. A bank that is not well capitalized, as defined for purposes of FDICIA, is, among other consequences, generally prohibited from accepting brokered deposits and offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited). Greenwood Trust, MountainWest and Hurley Bank currently use brokered deposits as a funding source. If Greenwood Trust, MountainWest or Hurley Bank were unable to use brokered deposits as a funding source, the funding costs of the institution, particularly those of Greenwood Trust, would likely increase. Certain acquisitions of the Company's common stock may be subject to regulatory approval and notice. In addition, Greenwood Trust would no longer qualify for grandfather rights under CEBA if direct or indirect control of Greenwood Trust were transferred to a third party. In that event, the third party would either have to operate as a bank holding company under the BHCA or significantly modify the activities of Greenwood Trust. In 1996, CEBA was amended so that Greenwood Trust is no longer subject to the limitation, previously imposed by CEBA, that Greenwood Trust's average assets grow no more than 7% per year. The Company believes that elimination of the restriction should enhance the Company's future flexibility. SECURITIES OVERVIEW The Company's Securities business traces its origins to Dean Witter & Co., founded in 1924. In 1978, Dean Witter & Co. Incorporated merged with Reynolds Securities Inc. Securities business activities, which accounted for 48% and 53% of the Company's net income in 1995 and 1996, respectively, are conducted by DWR, InterCapital and other direct and indirect subsidiaries of the Company. DWR has the third largest account executive sales organization in the domestic securities industry, with over 9,000 account executives located in over 370 branch offices serving the investment needs of over 3.2 million individual and institutional clients. DWR is among the largest members of the NYSE and is a member of all other major securities, futures and options exchanges. The Company's asset management subsidiary, InterCapital, is one of the largest asset management operations in the United States with total assets of $90.0 billion under management and administration as of December 31, 1996. The Company's goal is to be recognized as the market leader among securities firms focused on the individual investor. To achieve this goal, the Company has implemented a strategy that focuses on serving the investment needs of individual clients through its professional account executive sales organization. In implementing this strategy, the Company emphasizes proprietary products, through which it believes it can better monitor and manage the quality and performance of the investment and savings products owned by its clients. This strategy has resulted in significant growth in the amount of assets under management and administration, an important source of continuing revenues. ORGANIZATION The Company's securities business, for management purposes, is organized into two units: Dean Witter Financial and Dean Witter Capital. Dean Witter Financial consists of sales, trading, research and various support activities. By combining the distribution and trading functions in Dean Witter Financial, DWR manages its trading 10 and inventory activities primarily to satisfy client needs. Dean Witter Capital consists of product origination, asset management, investment banking and fiduciary services and is responsible for establishing standards of product quality. BROKERAGE ACTIVITIES The Company's account executive sales organization offers its clients a broad range of securities and savings products that are supported by DWR's underwriting, research, execution and operational capabilities. The table below sets forth for the periods indicated the contribution of the various products as a percentage of the sum of (i) total agency commissions and (ii) the portion of principal and certain investment banking transactions allocated to the account executive sales organization and (iii) amounts advanced to the account executive sales organization in connection with sales of shares of mutual funds paying 12b-1 fees, based upon the commission that would have been earned on the sale of similar shares having a front-end load, and all other products.
YEAR ENDED DECEMBER 31, ------------------------------------------ 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ Equities.............................. 39.8% 38.4% 38.8% 46.7% 43.3% Mutual funds.......................... 34.4 36.5 29.2 23.4 28.4 Fixed income.......................... 13.0 9.8 13.6 12.6 9.8 ICS .................................. 2.5 3.5 5.1 5.0 5.1 Insurance............................. 3.1 4.8 5.2 4.8 5.0 Other products........................ 7.2 7.0 8.0 7.5 8.4 ----- ----- ----- ----- ----- Total............................. 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
EQUITY SECURITIES The Company provides execution, trading and research services to its individual and institutional clients on listed equity securities, over-the-counter equity securities, options and American Depository Receipts ("ADRs"). The Company acts as a market maker in many equity securities traded on NASDAQ and in a number of ADRs. The Company acts as a specialist in many securities listed on regional securities exchanges. The Company's equity research department provides market and quantitative research, economic analysis and commentary, makes recommendations with regard to broad industry categories and equity securities of individual companies and furnishes information to individual and institutional investors and corporate clients. FIXED INCOME SECURITIES The Company provides trading and execution services to individual and institutional clients for a broad range of fixed income securities, including U.S. government obligations, mortgage- and asset-backed securities, corporate bonds, preferred stocks, municipal securities and certificates of deposit. The Company is a primary dealer in U.S. government securities. The Company's fixed income trading activity focuses primarily on establishing and maintaining inventory based upon actual and anticipated orders from its clients, rather than risk-oriented proprietary trading. FUTURES The Company provides execution and clearing services for its individual and institutional clients trading futures contracts on U.S. exchanges and, through DWR's affiliates or clearing brokers, on other major exchanges 11 throughout the world. DWR also engages in foreign exchange currency transactions, including spot transactions, options and forward contracts, through the unregulated over-the-counter interbank market. INVESTMENT CONSULTING SERVICES The Company provides investment consulting services ("ICS") that assist clients in analyzing their investment objectives and in selecting investment advisory services offered by unaffiliated investment advisers. ICS also provides clients with quarterly performance reports. Through ICS, DWR clients can obtain professional money management services that are not typically available to individual investors. Such combined services are commonly referred to as "wrap accounts." Total ICS assets as of December 31, 1996 amounted to $10.4 billion, an increase of $1.5 billion over year-end 1995. INSURANCE SERVICES The Company, through its wholly owned, indirect insurance agency subsidiaries, acts as a national general agency for leading insurance carriers to meet the insurance and annuity needs of individual investors. The Company receives commissions with respect to the sale of such products. The Company maintains a strategic alliance with Allstate Life Insurance Company ("Allstate Life") pursuant to which the Company and Northbrook Life Insurance Company, a wholly owned subsidiary of Allstate Life, manufacture, market and distribute proprietary insurance products. The insurance products are sold exclusively by DWR's account executives. The Company has a separate agreement with ITT Hartford Life Insurance Companies to manufacture, market and distribute proprietary products through DWR account executives. MANAGED FUTURES The Company's wholly owned subsidiary, Demeter Management Corporation ("Demeter"), acts as general partner of 23 commodity pools (including a family of open-ended partnerships) organized as limited partnerships whose limited partners are individual and institutional investors. These commodity pools trade futures and forward contracts on organized futures exchanges and in the interbank foreign exchange market. Demeter retains and monitors commodity trading advisers registered under the Commodity Exchange Act to manage the assets of these partnerships. As of December 31, 1996, commodity pools operated by Demeter had approximately $1.1 billion under management. In addition, another wholly owned subsidiary, Dean Witter Futures & Currency Management Inc. ("DWFCM"), is registered as a commodity trading adviser and manages discretionary commodity futures trading accounts of individual and institutional investors and commodity pools, including six of the pools of which Demeter is general partner. As of December 31, 1996, DWFCM managed total assets of approximately $382 million. FINANCIAL INSTITUTIONS GROUP The Company's Financial Institutions Group offers comprehensive securities products and services to banks across the country. The services include investment products, technological support, branch network workstations, and operations and processing systems. Securities currently provides such services to NationsSecurities, an affiliate of NationsBank Corp., and Banc One Securities Corporation, an affiliate of Banc One Corporation. 12 INVESTMENT BANKING The Company provides financial advice to, and raises capital for, a broad range of corporate clients, most of which are in industry areas that have been selected by the Company for joint banking and research coverage. Revenues are derived from underwriting corporate securities, advisory services in connection with mergers and acquisitions, private placements of securities, corporate restructurings and real estate activities. The Company manages and participates in public underwritings of common stock, preferred stock, convertible securities, asset-backed securities and other fixed income securities. The Company provides advisory services to corporate clients on a wide range of financial matters, including mergers and acquisitions, divestitures, leveraged buy-outs, financial restructurings and recapitalizations and valuations. The Company's mergers and acquisitions services involve the identification of opportunities, financial analysis, strategic advice, delivery of fairness opinions and continuing assistance, including obtaining financing, in the final execution of a transaction. The Company acts as placement agent for issuers that offer debt and equity securities to institutional investors in the private markets. The Company generally does not commit capital to merchant banking transactions. Certain investment banking professionals are also involved in the research, development and origination of investment products specifically oriented to the individual investor. These efforts include new product development on behalf of investment companies managed by InterCapital as well as origination and distribution of non-traded limited partnerships, publicly-traded limited partnerships and other retail-oriented products. REAL ESTATE Dean Witter Realty Inc. ("Realty"), a wholly owned subsidiary of the Company, has been engaged principally in real estate asset management. During the 1980's, the Company raised capital for both public and private limited partnerships. Through the sale of interests in limited partnerships organized to invest in real estate, Realty manages $1.5 billion of real estate (at cost) consisting of office, retail, industrial, research and development, and residential properties. Subsidiaries or affiliates of Realty act as general partners of the partnerships that own the properties and provide investor services for most of the partnerships. The Company's Liberty Street Management Division serves as property manager for many of the properties owned by such partnerships. In 1996, a Realty subsidiary co-sponsored, along with affiliates of Hines Interests Limited Partnership and The TCW Group, Inc., Emerging Markets Real Estate Partners I, L.P., a limited partnership offering institutional investors the opportunity to capitalize on direct real estate investments in emerging market countries around the world. NET INTEREST REVENUES The Company derives net interest revenues primarily from the financing of client margin loans less the cost of financing such loans. The Company's daily trading inventory positions in United States government and agency securities are financed largely through the use of repurchase agreements. The Company also acts as an intermediary between borrowers and lenders of short-term funds utilizing repurchase and reverse repurchase agreements. The Company may earn interest revenues as a result of such activities. Customer securities transactions are effected on either a cash or margin basis. In margin transactions, the Company extends credit to the customer collateralized by securities and cash in the customer's account for a portion of the purchase price, and receives revenues from interest charged on such extensions of credit. During 1996, clients' interest-bearing debit balances averaged approximately $2.5 billion as compared to an average of approximately $2.3 billion in 1995. 13 ASSET MANAGEMENT The Company, through InterCapital, is one of the largest investment advisers in the country in terms of assets under management. The Company is committed to asset gathering and growing assets under management. The key element of this strategy is the Company's marketing, primarily through DWR's account executive sales organization, of a family of proprietary mutual funds focused on product diversification and quality. The Company believes that by emphasizing proprietary mutual funds, it can better monitor and manage the quality and performance of the investment and savings products owned by its clients. Investment management and administration fees generated by the Company's asset management business accounted for approximately 12.4% and 13.3% of the Company's securities business non-interest revenues in 1995 and 1996, respectively. Such fees provide a relatively stable contribution to the Company's revenues since they are based on the market value of assets under management and administration and not on the volume of transactions. As of December 31, 1996, the Company's total assets under management and administration were $90.0 billion. The following table shows the total assets under management and administration for the past five years (in billions):
AS OF DECEMBER 31, ----------------------- 1992 1993 1994 1995 1996 ---- ----- ---- ---- ----- Equity funds....................................... $13.4 $20.6 $23.0 $29.9 $38.1 Fixed income funds................................. 26.5 33.1 24.1 25.4 24.1 Money market funds................................. 16.4 15.5 17.8 21.6 24.7 Investment management services..................... 2.7 2.0 2.0 2.6 3.1 ----- ----- ----- ----- ----- Total assets under management and administration(1)............................. $59.0 $71.2 $66.9 $79.5 $90.0 ===== ===== ===== ===== =====
(1) Assets under management and administration represent Dean Witter Funds (defined below) and funds invested pursuant to InterCapital's Custom Portfolio and Portfolio Advantage programs, with respect to which InterCapital exercises investment discretion and, through DWSC (defined below), renders administrative services. Assets under administration represent Dean Witter Funds for which DWSC renders administrative services but InterCapital is not the investment adviser, consisting of 14 funds advised by Trust Company of the West and 3 other funds for which InterCapital or DWSC provides sub-investment adviser, administrator or sub-administrator services. The term "Dean Witter Funds" means those registered investment companies for which (i) InterCapital exercises investment discretion, (ii) Dean Witter Services Company Inc. ("DWSC") renders administrative services or (iii) InterCapital exercises investment discretion and DWSC renders administrative services. Fund management fees arise from investment management and administration services that InterCapital and DWSC provide to the Dean Witter Funds pursuant to various contractual arrangements. The Company receives management fees based upon each fund's average daily or weekly net assets. The following table shows the components of fund management fees for the period ending on the dates indicated (in millions):
DECEMBER 31, -------------------------- 1992 1993 1994 1995 1996 ----- ------ ----- ----- ----- Equity funds................................. $ 59.5 $ 90.1 $128.5 $147.5 $197.0 Fixed income funds........................... 98.5 129.7 126.0 110.9 113.5 Money market funds........................... 59.6 55.6 57.8 65.6 76.1 ----- ------ ------ ------ ------ Total fund management fees............... $217.6 $275.4 $312.3 $324.0 $386.6 ====== ====== ====== ====== ======
Shares of Dean Witter Funds that are open-end investment companies are distributed by Dean Witter Distributors Inc., a wholly owned subsidiary of the Company and a registered broker-dealer ("Distributors"), which has entered into selected dealer agreements with DWR, NationsSecurities and Banc One Securities Corporation. Distribution expenses of DWR and its affiliates include the payment of commissions and incentive compensation to account executives for sales of the Dean Witter Funds' shares, the costs of preparing, printing and distributing advertising or promotional materials and the costs of printing and distributing prospectuses and supplements thereto used in 14 connection with the offering and sale of the Dean Witter Funds' shares. DWR and its affiliates are compensated for their distribution related expenses through front-end sales charges, contingent deferred sales charges and fees authorized pursuant to the provisions of Rule 12b-1 under the Investment Company Act of 1940. FIDUCIARY SERVICES Dean Witter Trust Company, a wholly-owned subsidiary of the Company ("DWTC"), offers trust and other fiduciary services to both individual and corporate clients, including trustee services for personal trusts in many states and trust services for tax-qualified retirement plans. DWTC also provides transfer agent and dividend disbursing services for the Company, the Dean Witter Funds and certain other entities. In August 1996, the Company established Dean Witter Trust FSB, a federal savings bank, through which the Company plans to market enhanced trust and other fiduciary services for both personal trusts and retirement plan trusts nationwide through the Company's account executives. OPERATIONS AND INFORMATION PROCESSING The Company executes and clears all of its transactions (delivery of securities sold, receipt of securities purchased and transfer of related funds) through its own facilities and through memberships in various clearing corporations. In order to minimize the risks of systems failures, the Company maintains redundant processing systems. COMPETITION The Company encounters intense competition in all aspects of the securities business and competes directly with other securities firms, a significant number of which have substantially greater capital and other resources and some of which offer a wider range of financial services. In addition to competition from firms currently in the securities business, the Company faces increasing competition from other sources such as commercial banks, insurance companies and mutual fund groups. The Company believes that the principal factors affecting competition in the securities industry are the quality and ability of professional personnel, the relative prices of services and products offered and investment performance. The Company and its competitors also employ advertising and direct solicitation of potential customers as methods of increasing business, and many of the Company's competitors engage in more extensive advertising programs than does the Company. The Company and its competitors also furnish investment research publications in an effort to attract potential and retain existing clients. The Company also competes with several major securities firms to attract and retain account executives and other investment professionals. The investment management industry is highly competitive, with approximately 6,300 open-end management investment companies holding over $3.5 trillion in assets as of December 31, 1996. Competition in the sale of mutual funds is affected by a number of factors including investment objectives and performance, advertising and sales promotion efforts, the level of fees, distribution channels and the types and quality of services offered. In addition to fund products offered by other broker-dealers, the Dean Witter Funds are in competition with funds sold directly by investment management firms and insurance companies, as well as with other investment alternatives sold by such companies and by banks and other financial institutions. REGULATION The Company's activities in the securities and commodities industries generally are subject to extensive regulation in the United States under both federal and state laws. Various regulatory bodies are charged with safeguarding the integrity of the financial markets and with protecting the interests of investors. The Company, through DWR and other subsidiaries, is registered as a broker-dealer with the Securities and Exchange Commission ("SEC"), in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico and as an investment adviser with the SEC and in all states in which registration as an investment advisor is required. 15 Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales and trading practices, use and safekeeping of customers' funds and securities, capital structure, recordkeeping and the supervision of officers and employees. The SEC, other governmental 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 or the suspension or expulsion of a broker-dealer or member, its officers or employees or in other similar consequences. Occasionally, the Company's subsidiaries have been subject to routine investigations and proceedings and fines have been imposed for minor infractions of various regulations relating to their activities as a broker-dealer, none of which, to date, has had a material adverse effect on the Company or its business. Broker-dealers are also subject to regulation by state securities administrators in those states in which they conduct business. DWR is registered with the Commodities Futures Trading Commission ("CFTC") as a futures commission merchant and, as such, its activities in the futures and futures options markets are subject to regulation by the CFTC. DWR is also a member of, and is subject to the rules of, various domestic commodity exchanges. DWR'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 DWR is a member. In addition, certain of the Company's subsidiaries are registered with the CFTC as commodity pool operators and are also members of the NFA. The Company's broker-dealer subsidiaries, including DWR, are members of the Securities Investor Protection Corporation ("SIPC"), which provides, in the event of the liquidation of a broker-dealer, protection for customers' accounts held by the firm of up to $500,000 for each customer, subject to a limitation of $100,000 for claims for cash balances. Margin lending by certain subsidiaries is regulated by rules of the Federal Reserve Board as to the amount they may lend in connection with certain purchases of securities by customers, and such subsidiaries are also required by NYSE rules to impose maintenance requirements on the amount of securities contained in margin accounts. As registered investment advisers, InterCapital and DWR are subject to regulation in various aspects of their businesses, such as transactions with or on behalf of clients, disclosure, advertising, cash payments for solicitation activities and the terms of their advisory contracts, including certain restrictions as to performance-based fees. In addition, certain additional requirements are imposed with respect to advisory activities on behalf of investment companies, including requirements as to the terms of advisory contracts and as to shareholder and director approval of such contracts, and the imposition of a fiduciary duty with respect to the receipt of advisory fees and other compensation by the investment adviser and its affiliates. The Company conducts a portion of its Securities business through banking institutions. DWTC is a trust company chartered under the laws of the State of New Jersey, and is subject to comprehensive regulation and periodic examination by the New Jersey Department of Banking and Insurance. DWTC is also a registered transfer agent, subject to regulation in such capacity by the SEC. Dean Witter Trust FSB is subject to comprehensive regulation and periodic examination by the federal Office of Thrift Supervision ("OTS") and by the FDIC. Dean Witter Trust FSB has its deposits insured by the FDIC and pays FDIC assessments to the Savings Association Insurance Fund. As a result of its ownership of Dean Witter Trust FSB, the Company is registered with the OTS as a unitary savings and loan holding company ("USLHC") and subject to regulation and examination as a USLHC by the OTS. USLHCs are exempt from the material restrictions imposed upon the activities of savings and loan holding companies that are not USLHCs. Savings and loan holding companies other than USLHCs are generally prohibited from engaging in activities other than conducting business as a savings association, managing or controlling savings associations, providing services to subsidiaries or engaging in activities permissible for bank holding companies (as to the regulation of bank holding companies, see CREDIT SERVICES - Regulation, on page 9). Should the Company fail to continue to qualify as a USLHC, the Company, in order to continue in those of its present businesses that would not be permissible for a savings and loan holding company, could be required 16 to divest control of Dean Witter Trust FSB. Certain acquisitions of the Company's common stock may be subject to regulatory approval and notice. The Company's securities business is also subject to regulation by various foreign governments and regulatory bodies. The Company engages in trading activities in the commodity futures and equity markets through its United Kingdom subsidiary, Dean Witter International Ltd., which is regulated by The Securities and Futures Authority and is a member of the London International Financial Futures and Options Exchange and the International Petroleum Exchange. RECENT DEVELOPMENT - DWD ELECTRONIC FINANCIAL SERVICES In 1996, the Company announced the formation of a new business, DWD Electronic Financial Services ("EFS"), to focus on the growing number of customers interested in personal computer based financial services, including banking and securities transactions on the Internet. EFS' principal activities currently include serving securities customers through the Company's wholly-owned subsidiary, Lombard Brokerage, Inc. ("Lombard"). In January 1997, the Company acquired Lombard, a San Francisco-based technology company that offers financial services nationwide primarily via its site on the Internet. Lombard offers research information and discount trading services, principally to individual investors, both on-line and over the telephone, and is an example of the Company's efforts to satisfy the demand for securities services outside the traditional full-service brokerage channel. EFS plans to invest in the growth of Lombard and is studying expanding its product offerings to include banking products, among other areas. ITEM 2. PROPERTIES The Company's and Securities' executive offices are located at Two World Trade Center, New York, New York, and occupy 864,000 square feet under a lease expiring on May 31, 2006. The Company owns a 600,000 square foot building in Riverwoods, Illinois that houses Credit Services' executive offices, and an adjacent undeveloped 29 acre parcel. The Company's subsidiaries have offices, operations centers and warehouse facilities located throughout the United States. Certain of the Company's subsidiaries maintain offices in foreign countries. Except for several facilities owned by Credit Services, the Company's properties are leased on terms and for durations which are reflective of commercial standards in the communities where these offices and other properties are located. The Company believes that its properties are adequate and suitable for its business as presently conducted. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in numerous legal and arbitration proceedings. With respect to those actions that have not yet been resolved, the Company and its subsidiaries are vigorously contesting their alleged liabilities and have asserted denials and defenses they believe to be meritorious. Although the ultimate outcome of these actions cannot be ascertained at this time, the Company believes that the resolution of these actions will not have a material adverse effect on its consolidated financial condition, but may be material to the Company's operating results for any particular period, depending upon the level of the Company's income for such period. The actions to which the Company is a party include, among others, the following. Late Payment Fee Litigation On June 3, 1996, the United States Supreme Court issued a decision holding that state laws limiting late charges are preempted with respect to national banks by federal law, and the Court remanded for reconsideration lower-court decisions that had held that such state laws were not similarly preempted with respect to other federally insured banks. In light of these rulings, all of the outstanding legal and administrative proceedings challenging, on the basis of state law limitations that were asserted to apply notwithstanding federal law, 17 Greenwood Trust's imposition of late fees and other incidental charges on Discover cardmembers were resolved in 1996 in Greenwood Trust's favor. No such proceedings are currently pending. Department of Justice Antitrust Investigation Twenty-four market makers, including DWR, resolved an investigation by the U.S. Department of Justice of possible anti-competitive activities in the over-the-counter securities market by agreeing, without trial or adjudication, to the entry of an Order and Stipulation filed in the United States District Court for the Southern District of New York on July 17, 1996. The Order and Stipulation requires certain ongoing undertakings including the appointment of an antitrust compliance officer to monitor trading practices and assure continued compliance with the antitrust laws. The Order and Stipulation is awaiting court approval. Market Makers Antitrust Litigation A consolidated class action (the "NASDAQ Action") entitled In re NASDAQ Market Makers Antitrust Litigation was commenced on December 16, 1994 in the United States District Court for the Southern District of New York against DWR and 32 other broker-dealers alleging that NASDAQ market makers conspired to fix the "spread" in certain NASDAQ securities. On August 3, 1995 the court dismissed the complaint and an amended consolidated complaint was subsequently filed alleging the same cause of action. The amended complaint seeks, among other things, treble damages in an unspecified amount. DWR answered the amended complaint denying the allegations of wrongdoing. Plaintiff's motion for class certification was granted on November 27, 1996. On December 10, 1996, four institutional investors filed a new complaint making the same allegations made in the consolidated class action amended complaint; this action was automatically consolidated with the pending action. On December 18, 1996, the plaintiffs sought clarification of the court's class certification decision. TCW/DW North American Government Income Trust Litigation Several purported class action lawsuits, which have been consolidated for pretrial purposes (together, the "TNORA Action"), were instituted in January 1995 in the United States District Court for the Southern District of New York against the TCW/DW North American Government Income Trust, DWR, some of the Trust's trustees and officers, its underwriter and distributor, the Trust's unaffiliated Adviser, the Trust's Manager, and other defendants, by certain shareholders of the Trust. The consolidated amended complaint asserts claims under the Securities Act of 1933 and generally alleges that the defendants made inadequate and misleading disclosures in the prospectuses for the Trust, in particular as such disclosures related to the nature and risks of the Trust's investments in mortgage-backed securities and Mexican securities. The plaintiffs also challenge certain fees paid by the Trust as excessive. Damages are sought in an unspecified amount. All defendants moved to dismiss the consolidated amended complaint. Although on May 8, 1996 the motions to dismiss were denied, upon reconsideration on August 28, 1996 the court dismissed several of the plaintiffs' claims and clarified its earlier opinion denying the defendants' motion to dismiss. In addition, on August 28, 1996, the court granted the plaintiffs' motion for class certification. On December 4, 1996, in light of a new decision by the United States Court of Appeals for the Second Circuit, defendants filed a new motion for reconsideration of the court's decision denying the defendants' motion to dismiss. Term Trust Class Actions A putative class action, Lonnie Sheppard, et al. v. TCW/DW Term Trust 2000, et al., was commenced on July 22, 1994 in the United States District Court for the Southern District of New York. Plaintiffs purported to represent certain purchasers of TCW/DW Term Trusts 2000 and 2003. The defendants included the Trusts, the trustees of the Trusts, TCW Funds Management, Inc. and its chairman, DWR, Distributors and InterCapital. Plaintiffs alleged violations of Sections 11, 12(2) and 15 of the Securities Act of 1933 and sought unspecified compensatory and punitive damages. Defendants' motion to dismiss was granted with prejudice on August 16, 1996 and no appeal was taken. Another putative class action, Thomas D. Keeley, et al. v. DWR et al., (the "Keeley Action") was commenced in the Superior Court of California for Orange County on October 27, 1994 and later consolidated with three similar class actions. Defendants are the Company, DWR, Distributors, InterCapital, DWSC, TCW Management Co., Trust Company of the West, TCW Asset Management Co., Inc., TCW Funds Management, Inc. and eight individuals, including two DWR employees. Plaintiffs allege breach of fiduciary duty, unjust enrichment, fraud, deceit and violation of the California Corporation Code in the marketing and selling of the TCW/DW Term Trusts 2000, 2002 and 2003. Plaintiffs seek unspecified compensatory and punitive damages. Defendants filed an answer to the first amended class complaint denying all wrongdoing on December 6, 1995, and motions for judgment on the pleadings on March 13, 1997. Litigation Regarding Proposed Merger On February 12, 1997, certain stockholders of the Company filed a putative class action suit (the "Brody Action") in the Court of Chancery of the State of Delaware in and for New Castle County against the Company and certain of its directors. The complaint alleges certain breaches of fiduciary duty to the Company's stockholders by the Company and the named directors in connection with entering into the Agreement and Plan of Merger between the Company and Morgan Stanley dated as of February 4, 1997, and seeks a variety of equitable relief. The defendants have not yet responded to the complaint, but intend to vigorously defend the Brody Action. 18 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning executive officers of the Company as of January 17, 1997.
NAME AND AGE PRESENT TITLE AND PRINCIPAL OCCUPATION SINCE 1990 - ------------ ------------------------------------------------------------------ Philip J. Purcell, 53...... Chairman, Chief Executive Officer and Director of the Company since 1986. Mr. Purcell is also Chairman and a Director of SPS. Mr. Purcell is a trustee or director of 85 registered investment companies for which InterCapital serves as investment manager or investment adviser. Thomas R. Butler, 54....... Executive Vice President and President, NOVUS Services, since July 1990. Mr. Butler is also a Director of SPS. Mr. Butler served as a Director of the Company until February 1993. Richard M. DeMartini, 44... Executive Vice President and President, Dean Witter Capital since 1989. Mr. DeMartini served as a Director of the Company until February 1993. Mr. DeMartini is a trustee or director of 14 registered investment companies for which InterCapital serves as investment manager. Christine A. Edwards, 44... Executive Vice President, General Counsel and Secretary of the Company since January 1991. Mrs. Edwards served as a Director of the Company until February 1993. James F. Higgins, 48....... Executive Vice President and President, Dean Witter Financial since 1989. Mr. Higgins served as a Director of the Company until February 1993. Mitchell M. Merin, 43...... Executive Vice President and Chief Administrative Officer since October 1994. Director of Taxable Fixed Income and Futures of DWR from July 1990 until September 1994. Executive Vice President from July 1990 until July 1993. Mr. Merin is also a Director of SPS. Stephen R. Miller, 52.... Executive Vice President and President and Chief Operating Officer, DWD Electronic Financial Services since 1997. Previously, for more than five years Mr. Miller served as Senior Executive Vice President and Pacific Regional Director of DWR and director of DWR. Thomas C. Schneider, 59.... Executive Vice President and Chief Financial Officer of the Company since 1987. Mr. Schneider is also a Director of SPS. Mr. Schneider served as a Director of the Company until February 1993.
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 December 31, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is contained on pages 46 and 47 of the 1996 Annual Report to Shareholders (the "Annual Report") and is incorporated by reference herein. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is contained on page 17 of the Annual Report under the caption "Five-Year Summary of Financial Information" and is incorporated by reference herein. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required by this item is contained on pages 18 through 29 of the Annual Report under the caption "Management's Discussion and Analysis" and is incorporated by reference herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is contained on page 30 under the caption "Independent Auditor's Report" and on pages 31 through 45 of the Annual Report and is incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Information required by Part III is incorporated by reference from the sections of the Company's definitive 1997 proxy statement involving the election of directors (to be filed within 120 days after December 31, 1996) having the following headings: "PROPOSAL NO. 2 - ELECTION OF DIRECTORS," "EXECUTIVE COMPENSATION" (excluding the information under the subheadings "Compensation Committee's Report on Executive Compensation" and "Stock Performance Graph"), "BENEFICIAL OWNERSHIP OF DEAN WITTER DISCOVER COMMON STOCK" AND "CERTAIN TRANSACTIONS." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. FINANCIAL STATEMENTS The financial statements required to be filed hereunder are listed on page S-1 hereof. 2. FINANCIAL STATEMENT SCHEDULES The financial statement schedules required to be filed hereunder are listed on page S-1 hereof. 3. EXHIBITS An exhibit index has been filed as part of this report on page E-1 hereto and is incorporated herein by reference. (b) A Current Report on Form 8-K, dated October 23, 1996, was filed with the Securities and Exchange Commission in connection with the announcement of the Company's third quarter financial results. 20 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 THE 31ST DAY OF MARCH, 1997. DEAN WITTER, DISCOVER & CO. (Registrant) By /S/ PHILIP J. PURCELL ----------------------------- PHILIP J. PURCELL Chairman of the Board and Chief Executive Officer 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 IN THE CAPACITIES INDICATED ON THE 31ST DAY OF MARCH, 1997. SIGNATURES TITLE /S/ PHILIP J. PURCELL Chairman of the Board, Chief Executive - ------------------------------ Officer and Director (Principal PHILIP J. PURCELL Executive Officer) /S/ THOMAS C. SCHNEIDER Executive Vice President and Chief - ------------------------------ Financial Officer (Principal Financial THOMAS C. SCHNEIDER Officer) /S/ ROBERT P. SEASS Senior Vice President and Controller - ------------------------------ (Principal Accounting Officer) ROBERT P. SEASS /S/ NANCY KASSEBAUM BAKER Director - ------------------------------ NANCY KASSEBAUM BAKER /S/ EDWARD A. BRENNAN Director - ------------------------------ EDWARD A. BRENNAN /S/ ALFRED C. DECRANE, JR. Director - ------------------------------ ALFRED C. DECRANE, JR. /S/ ROBERT M. GARDINER Director - ------------------------------ ROBERT M. GARDINER /S/ C. ROBERT KIDDER Director - ------------------------------ C. ROBERT KIDDER /S/ MILES L. MARSH Director - ------------------------------ MILES L. MARSH /S/ MICHAEL A. MILES Director - ------------------------------ MICHAEL A. MILES /S/ SYBIL C. MOBLEY Director - ------------------------------ SYBIL C. MOBLEY /S/ CLARENCE B. ROGERS, JR. Director - ------------------------------ CLARENCE B. ROGERS, JR. 21 DEAN WITTER, DISCOVER & CO. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (a) FINANCIAL STATEMENTS. The following Consolidated Financial Statements of Dean Witter, Discover & Co., Notes to Consolidated Financial Statements and Independent Auditors' Report are incorporated by reference herein from the Company's 1996 Annual Report to Shareholders:
ANNUAL REPORT DESCRIPTION PAGE(S) ----------- ------- Independent Auditors' Report................................................... 30 Consolidated Statements of Income.............................................. 31 Consolidated Balance Sheets.................................................... 32 Consolidated Statements of Changes in Shareholders' Equity..................... 33 Consolidated Statements of Cash Flows.......................................... 34 Notes to Consolidated Financial Statements..................................... 35-45 Quarterly Information (unaudited).............................................. 46
(b) FINANCIAL STATEMENT SCHEDULES. The following Financial Statement Schedules are filed with this Form 10-K on the pages indicated:
DESCRIPTION PAGE(S) ----------- ------- Schedule III--Condensed Financial Statements of Dean Witter, Discover & Co. (Parent Company Only)........................................................ S-2 - S-5 Schedule VIII--Valuation and Qualifying Accounts................................ S-6 Independent Auditors' Report................................................... S-7
All other Financial Statements Schedules have been omitted since the information is not applicable, is not required or is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements listed under section (a) above. S-1 SCHEDULE III DEAN WITTER, DISCOVER & CO. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 1996 1995 1994 ------ ----- ------ Revenue Dividends received from subsidiaries........................... $ 415.5 $ 685.9 $ 593.4 Interest from subsidiaries..................................... 713.6 649.7 390.7 Other.......................................................... 2.6 2.8 13.6 ------- ------- ------ Total revenues............................................. 1,131.7 1,338.4 997.7 ------- ------- ------ Expense Interest....................................................... 621.7 546.4 335.3 Other.......................................................... 3.8 3.9 4.9 ------- ------- ------ Total expenses............................................. 625.5 550.3 340.2 ------- ------- ------ Income before income tax expense and equity in undistributed net earnings of subsidiaries........................................... 506.2 788.1 657.5 Income tax expense................................................. 32.1 35.8 23.2 Income before equity in undistributed net earnings of subsidiaries. 474.1 752.3 634.3 Equity in undistributed net earnings of subsidiaries............... 477.3 104.1 106.6 ------- ------- ------ Net income......................................................... $ 951.4 $ 856.4 $ 740.9 ======== ======= =======
See notes to condensed financial statements. S-2 SCHEDULE III DEAN WITTER, DISCOVER & CO. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF FINANCIAL POSITION (IN MILLIONS)
DECEMBER 31, -------------------- 1996 1995 ---- ---- ASSETS Cash $ 11.8 $ 3.2 Investments in and advances to subsidiaries..................... 17,307.9 15,468.3 Other assets.................................................... 24.2 35.2 --------- --------- Total assets............................................ $17,343.9 $15,506.7 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Commercial paper............................................ $ 3,511.6 $ 3,444.9 Other short-term borrowings................................. 410.0 385.0 Other liabilities and accrued expenses...................... 113.7 110.7 Long-term borrowings........................................ 8,144.2 6,732.4 --------- --------- Total liabilities....................................... 12,179.5 10,673.0 --------- --------- Shareholders' equity............................................ 5,164.4 4,833.7 --------- --------- Total liabilities and shareholders' equity.............. $17,343.9 $15,506.7 ========= =========
See notes to condensed financial statements. S-3 SCHEDULE III DEAN WITTER, DISCOVER & CO. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 -------- --------- --------- Cash flows provided by (used in) operating activities Net income.................................................. $ 951.4 $ 856.4 $ 740.9 Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in undistributed earnings of subsidiaries........ (477.3) (104.1) (106.6) Employee compensation settled through the issuance of common stock........................................... 87.1 57.2 37.0 Decrease in other assets................................ 1.3 4.0 24.5 Increase in other liabilities and accrued expenses...... 97.4 107.7 94.3 --------- --------- --------- Net cash provided by operating activities................... 659.9 921.2 790.1 --------- --------- --------- Net cash flows used in investing activities--investments in and advances to subsidiaries....................................... (1,362.3) (3,502.7) (2,404.0) --------- --------- --------- Cash flows provided by (used in) financing activities Proceeds from issuance of common stock...................... 44.1 40.6 17.7 Net proceeds from (repayment of) commercial paper........... (18.7) 1,347.0 (306.0) Net increase (decrease) in other short-term borrowings...... 25.0 (15.0) (75.0) Dividends paid.............................................. (134.0) (102.3) (81.1) Proceeds from issuance of long-term borrowings, net......... 1,420.1 1,433.5 2,142.1 Purchase of treasury stock.................................. (625.5) (121.2) (82.0) --------- --------- --------- Net cash provided by financing activities................... 711.0 2,582.6 1,615.7 --------- --------- --------- Increase in cash................................................ 8.6 1.1 1.8 Cash, beginning of the period................................... 3.2 2.1 0.3 --------- --------- --------- Cash, end of the period......................................... $ 11.8 $ 3.2 $ 2.1 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest...................................... $ 598.1 $ 533.9 $ 321.2 ========= ========= ========= Cash paid for income taxes.................................. $ 20.6 $ 35.7 $ 20.3 ========= ========= =========
See notes to condensed financial statements. S-4 SCHEDULE III DEAN WITTER, DISCOVER & CO. (PARENT COMPANY ONLY) NOTES TO CONDENSED FINANCIAL INFORMATION 1. INTRODUCTION AND BASIS OF PRESENTATION The condensed financial statements of Dean Witter, Discover & Co. (the "Parent Company") should be read in conjunction with the consolidated financial statements of Dean Witter, Discover & Co. and subsidiaries (the "Company") and notes thereto found in pages 31- 45 of the Company's 1996 Annual Report to Shareholders (the "Annual Report") and incorporated by reference. 2. DIVIDENDS RECEIVED FROM SUBSIDIARIES The Company received cash dividends from its consolidated subsidiaries totaling $415.5 million, $685.9 million and $593.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. 3. DIVIDENDS PAID For 1996 and 1995, the Company paid quarterly dividends to common shareholders in the amounts of $0.11 and $0.08 per share, respectively. In January 1997, the Company increased its quarterly dividend to $0.14 per share, effective for the first quarter of 1997. 4. STOCK SPLIT The Company declared a two-for-one split of its common stock, which was effected in the form of a stock dividend, effective January 14, 1997. All prior period per share and share outstanding data has been restated to reflect this split. S-5 SCHEDULE VIII DEAN WITTER, DISCOVER & CO. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN MILLIONS)
DESCRIPTION 1996 1995 1994 ----------- ------ ------ ----- Allowance for doubtful accounts--securities clients: Balance, beginning of period....................................... $16.2 $11.7 $10.1 Additions--provision for losses..................................... 11.7 13.2 11.4 Deductions--write-offs, net......................................... 12.6 8.7 9.8 ----- ----- ----- Balance, end of period............................................. $15.3 $16.2 $11.7 ===== ===== =====
S-6 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Dean Witter, Discover & Co.: We have audited the consolidated financial statements of Dean Witter, Discover & Co. and subsidiaries as of December 31, 1996 and December 31, 1995, and for each of the three years in the period ended December 31, 1996 and have issued our report thereon dated February 21, 1997; such consolidated financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included Schedules III and VIII listed in the Index to Financial Statements and Financial Statement Schedules. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP New York, New York February 21, 1997 S-7 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 1-11758 DEAN WITTER, DISCOVER & CO. ================================================================================ INDEX Exhibit Sequential No. Description Page No. - ------- ----------- ---------- 2.1* Agreement and Plan of Merger between Dean Witter, Discover & Co. and Morgan Stanley Group Inc., dated as of February 4, 1997. Filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated February 4, 1997 and incorporated herein by reference. 3.1* Amended and Restated Certificate of Incorporation. Filed as Exhibit 3.1 to the Registrant's Registration Statement No. 33-56104 on Form S-1 and incorporated herein by reference. 3.2* Certificate of Designation of the Registrant relating to the Registrant's Series A Junior Participating Preferred Stock. Filed as Exhibit 3(b) to the Registrant's Registration Statement No. 33-92172 on Form S-3 and incorporated herein by reference. 3.3* Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant as filed with the Secretary of State of the State of Delaware on May 24, 1995. Filed as Exhibit 3(c) to the Registrant's Registration Statement No. 33- 92172 on Form S-3 and incorporated herein by reference. 3.4* Amended and Restated By-Laws. Filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference. 4.1* Specimen certificate representing the Common Stock. Filed as Exhibit 4 to the Registrant's Registration Statement No. 33-56104 on Form S-1 and incorporated herein by reference. 4.2* Rights Agreement, dated as of April 25, 1995, between Registrant and Chemical Bank, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate. Filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated April 25, 1995 and incorporated herein by reference. 4.3* Amendment, dated as of February 4, 1997, to the Rights Agreement, dated as of April 25, 1995, as amended, between Dean Witter, Discover & Co. and the Chase Manhattan Bank, as successor to Chemical Bank (as Rights Agent). Filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated February 4, 1997 and incorporated herein by reference. 4.4* Indenture, dated as of February 24, 1993, between Dean Witter, Discover & Co. and The First National Bank of Chicago, as Trustee. Filed as Exhibit 4 to the Registrant's Registration Statement No. 33- 57202 on Form S-3 and incorporated herein by reference. 4.5* Form of Dean Witter, Discover & Co.'s Medium-Term Note Series I (Fixed Rate). Filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated November 18, 1993 and incorporated herein by reference. 4.6* Form of Dean Witter, Discover & Co.'s Medium-Term Note Series I (Floating Rate). Filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated November 18, 1993 and incorporated herein by reference. 4.7* Form of Dean Witter, Discover & Co.'s 6-1/2% Notes due November 1, 2005. Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated November 2, 1993 and incorporated herein by reference. 4.8* Form of Dean Witter, Discover & Co.'s 6-3/4% Debentures due October 15, 2013. Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. i Exhibit Sequential No. Description Page No. - ------- ----------- ---------- 4.9* Form of Dean Witter, Discover & Co.'s 6-1/4% Notes due March 15, 2000. Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated March 9, 1993 and incorporated herein by reference. 4.10* Form of Dean Witter, Discover & Co.'s 6% Notes due March 1, 1998. Filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 25, 1993 and incorporated herein by reference. 4.11* Form of Dean Witter, Discover & Co.'s 6-7/8% Notes due March 1, 2003. Filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated February 25, 1993 and incorporated herein by reference. 4.12* Form of Dean Witter, Discover & Co.'s LIBOR Floating Rate Notes due March 1, 2000. Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated February 22, 1995 and incorporated herein by reference. 4.13* Form of Dean Witter, Discover & Co.'s 6.75% Notes due August 15, 2000. Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated August 16, 1995 and incorporated herein by reference. 4.14* Form of Dean Witter, Discover & Co.'s 6.75% Debentures due January 1, 2016. Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated January 4, 1996 and incorporated herein by reference. 4.15* Form of Dean Witter, Discover & Co.'s 6.30% Notes due January 15, 2006. Filed as Exhibit 4 to the Registrant's Current Report on Form 8-K dated January 18, 1996 and incorporated herein by reference. 10.1* Guaranty of Lease dated March 19, 1992, by the Registrant in favor of Harborside Exchange Place Limited Partnership and Plaza II and III Urban Renewal Associates L.P. Filed as Exhibit 10.1 to the Registrant's Registration Statement No. 33- 56104 on Form S-1 and incorporated herein by reference. 10.2* Lease Agreement, dated March 19, 1979, between the Port Authority of New York and New Jersey and Dean Witter Reynolds Inc. Filed as Exhibit 10.2 to the Registrant's Registration Statement No. 33-56104 on Form S-l and incorporated herein by reference. 10.3* Master Separation Agreement between the Registrant and Sears, Roebuck and Co. Filed as Exhibit 10.3 to the Registrant's Registration Statement No. 33- 56104 on Form S-1 and incorporated herein by reference. 10.4 Amended Agreement for Systems Operations Services, dated as of January 1, 1996, by and between the Registrant and Advantis, a New York general partnership. (Portions of this Exhibit have been omitted pursuant to a request for confidential treatment of such omitted information under Rule 24b-2) 10.5* Form of Pooling and Servicing Agreement used in connection with the securitization of Discover Card receivables. Filed as Exhibit 10.6 to the Registrant's Registration Statement No. 33-56104 on Form S-1 and incorporated herein by reference. 10.6* Pooling and Servicing Agreement between Greenwood Trust Company as Master Servicer, Servicer and Seller and Continental Bank, National Association, as Trustee, dated as of October 1, 1993. Filed as Exhibit 4.1 to the Discover Card Master Trust I Registration Statement No. 33-71502 on Form S-1 and incorporated herein by reference. ii Exhibit Sequential No. Description Page No. - ------- ----------- ---------- 10.7* First Amendment to Pooling and Servicing Agreement, dated as of August 15, 1994, between Greenwood Trust Company, as Master Servicer, Servicer and Seller and Bank of America Illinois (formerly, Continental Bank, National Association) as Trustee. Filed as Exhibit 4.4 to the Discover Card Master Trust I Current Report on Form 8-K dated August 1, 1995 and incorporated herein by reference. 10.8* Second Amendment to Pooling and Servicing Agreement, dated as of February 29, 1996, between Greenwood Trust Company as Master Servicer, Servicer and Seller and First Bank National Association (successor trustee to Bank of America Illinois, formerly Continental Bank, National Association) as Trustee. Filed as Exhibit 4.4 to the Discover Card Master Trust I Current Report on Form 8-K dated April 30, 1996 and incorporated herein by reference. 10.9+ Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (amended and restated as of January 1, 1997). 10.10*+ Dean Witter Financial Services Group Inc. Capital Accumulation Plan (currently known as the Dean Witter, Discover & Co. Capital Accumulation Plan), Amended and Restated as of December 31, 1991. Filed as Exhibit 10.24 to the Registrant's Registration Statement No. 33-56104 on Form S-1 and incorporated herein by reference. 10.11*+ First Amendment to the Dean Witter, Discover & Co. Capital Accumulation Plan (adopted November 10, 1993). Filed as Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.12*+ Dean Witter Reynolds Inc. Supplemental Pension Plan (formerly known as the Dean Witter Reynolds Financial Services Inc. Supplemental Pension Plan for Executives), Amended and Restated as of December 14, 1993. Filed as Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.13*+ Dean Witter, Discover & Co. Omnibus Equity Incentive Plan. Filed as Exhibit 4.1 to the Registrant's Registration Statement No. 33-63024 on Form S-8 and incorporated herein by reference. 10.14*+ Dean Witter, Discover & Co. Employees Replacement Stock Plan. Filed as Exhibit 4.2 to the Registrant's Registration Statement No. 33-63024 on Form S-8 and incorporated herein by reference. 10.15*+ First Amendment to Dean Witter, Discover & Co. Employees Replacement Stock Plan (adopted June 18, 1993). Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated November 18, 1993 and incorporated herein by reference. 10.16*+ Dean Witter, Discover & Co. 1993 Stock Plan for Non-Employee Directors. Filed as Exhibit 4.3 to the Registrant's Registration Statement No. 33-63024 on Form S-8 and incorporated herein by reference. 10.17*+ Amendment to the Dean Witter, Discover & Co. 1993 Stock Plan for Non-Employee Directors. Filed as Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.18*+ Sears Consumer Financial Corporation Supplemental Retirement Income Plan (currently known as the NOVUS Credit Services Inc. Supplemental Retirement Income Plan), effective as of January 1, 1989. Filed as Exhibit 10.36 to the Registrant's Registration Statement No. 33-56104 on Form S-1 and incorporated herein by reference. iii Exhibit Sequential No. Description Page No. - ------- ----------- ---------- 10.19*+ First Amendment to the NOVUS Credit Services Inc. Supplemental Retirement Income Plan (adopted December 8, 1992). Filed as Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.20*+ Second Amendment to the NOVUS Credit Services Inc. Supplemental Retirement Income Plan (adopted June 15, 1993). Filed as Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.21*+ Third Amendment to the NOVUS Credit Services Inc. Supplemental Retirement Income Plan (adopted February 13, 1995). Filed as Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.22*+ Dean Witter, Discover & Co. Transferred Executives Pension Supplement, Amended and Restated as of January 1, 1995. Filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference. 10.23* Tax Sharing Agreement between the Registrant and Sears, Roebuck and Co. Filed as Exhibit 10.40 to the Registrant's Registration Statement No. 33- 56104 on Form S-1 and incorporated herein by reference. 10.24* Lease Agreement, dated July 8, 1985, by and between Fund for Regional Development acting by and through The Port Authority of New York and New Jersey and Dean Witter Reynolds Inc. Filed as Exhibit 10.41 to the Registrant's Registration Statement No. 33- 56104 on Form S-l and incorporated herein by reference. 10.25*+ Employee Benefits Allocation Agreement between the Registrant and Sears, Roebuck and Co. Filed as Exhibit 10.44 to the Registrant's Registration Statement No. 33-56104 on Form S-1 and incorporated herein by reference. 10.26*+ Dean Witter, Discover & Co. 1994 Omnibus Equity Plan. Filed as Exhibit 10.52 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.27*+ Dean Witter, Discover & Co. Tax Deferred Equity Participation Plan (amended and restated October 21, 1994). Filed as Exhibit 4.1 to the Post- Effective Amendment No. 1 to the Registrant's Registration Statement No. 33-82240 on Form S-8 and incorporated herein by reference. 10.28*+ Dean Witter, Discover & Co. 1994 Formula Compensation Plan, as amended. Filed as Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.29*+ Dean Witter, Discover & Co. Employee Stock Purchase Plan (amended and restated as of January 1, 1996). Filed as Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.30* $3.25 billion Credit Agreement, dated May 5, 1995, among the Registrant, Morgan Guaranty Trust Company of New York, as documentation agent, Chemical Bank, as administrative agent, and the other banks named therein. Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and incorporated herein by reference. 10.31* $4.0 billion Credit Agreement, dated April 19, 1996, between Dean Witter, Discover & Co. and Morgan Guaranty Trust Company of New York, Chemical Bank and other banks named therein. Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference. iv Exhibit Sequential No. Description Page No. - ------- ----------- ---------- 10.32*+ Key Executive Employment Plan, as amended April 19, 1996. Filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference. 10.33*+ Dean Witter, Discover & Co. Directors' Equity Capital Accumulation Plan. Filed as Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.34+ Dean Witter, Discover & Co. Employees Equity Accumulation Plan. 10.35* Stock Option Agreement, dated as of February 4, 1997, between Dean Witter, Discover & Co., as issuer, and Morgan Stanley Group Inc., as grantee. Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated February 4, 1997 and incorporated herein by reference. 10.36* Stock Option Agreement, dated as of February 4, 1997, between Morgan Stanley Group Inc., as issuer, and Dean Witter, Discover & Co., as grantee. Filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated February 4, 1997 and incorporated herein by reference. 11 Statement Re: Computation of Earnings Per Common Share. 12 Statement Re: Computation of Ratio of Earnings to Fixed Charges. 13 1996 Annual Report to Shareholders. Except for those portions expressly incorporated by reference herein, the 1996 Annual Report is furnished for the information of the Commission and is not deemed "filed" as part of this Annual Report on Form 10-K. 21 Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP. - ---------------------- * Incorporated by reference. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). v EX-10.4 2 AMENDED AGREEMENT FOR SYSTEMS OPERATION SERVICES EXHIBIT 10.4 (Certain confidential portions of this Exhibit have been omitted, as indicated by an [*] on the margin or in the text, and filed with the Commission.) ADVANTIS / DEAN WITTER, DISCOVER & CO. AMENDED AGREEMENT FOR SYSTEMS OPERATIONS SERVICES - -------------------------------------------------------------------------------- This Amended Agreement for Systems Operations Services ("Amended Agreement"), dated as of January 1, 1996, is by and between Dean Witter, Discover & Co., a Delaware corporation having a place of business at Two World Trade Center, New York, NY 10006 ("DWD"), and Advantis, a New York general partnership having its principal place of business at 231 North Martingale Road, Schaumburg, Illinois, 60173-2254 ("Advantis"). DWD and Advantis (collectively, the "Parties" and each, a "Party") agree that the following terms and conditions will apply to services provided by Advantis under this Amended Agreement. TABLE OF CONTENTS Background and Objectives.................................................. 4 Definitions, Documents and Term............................................ 5 Advantis Responsibilities.................................................. 10 DWD Responsibilities....................................................... 20 Charges and Expenses....................................................... 21 Invoicing and Payment...................................................... 25 [ * ]............................................................[ * ] Confidentiality/Data Security.............................................. 28 Termination................................................................ 30 - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED Liability.................................................................. 34 Warranty................................................................... 35 Indemnities................................................................ 38 Insurance and Risk of Loss................................................. 43 Publicity.................................................................. 43 Dispute Resolution......................................................... 44 General.................................................................... 45 2 LIST OF EXHIBITS Exhibit 1 Data Network Exhibit 2 Information Processing Systems and Services (IPSS) Exhibit 3 Voice Network Exhibit 4 Charging Methodology Exhibit 5 Performance Standards Exhibit 6 Advantis Software, DWD Software and Supported Software; Proprietary Products Exhibit 7 Special Services Agreements 3 1. BACKGROUND AND OBJECTIVES DWD and Advantis desire to amend and restate the Master Agreement for Systems Operations Services between the Parties dated as of November 30, 1992 (the "Master Agreement"). This amended and restated document does not terminate that Master Agreement, but only conforms the terms and conditions to the revised business arrangement. The rights and responsibilities of the Parties from and after the Amended Agreement Commencement Date shall be defined solely by this Amended Agreement; the rights and responsibilities of the Parties prior to the Amended Agreement Commencement Date shall be defined solely by the Master Agreement. Under this Amended Agreement, Advantis will continue to perform those Services it provided to DWD under the Master Agreement prior to the Amended Agreement Commencement Date in a manner consistent with prior practice between the Parties and with at least the same levels of quality as Advantis performed under the Master Agreement prior to the Amended Agreement Commencement Date. The charges for all activities necessary for Advantis to meet this commitment are included in the Annual Service Charges, in the Voice Services charges set forth in Exhibit 3, or are separately indicated as an additional charge under this Amended Agreement (e.g., are covered by an ARC/RRC, Direct Charge, SSA or Advantis tariff amount). It is the Parties' intent that any activities or functions that were performed by Advantis at no additional or separate charge to DWD prior to the Amended Agreement Commencement Date under the Master Agreement will continue to be performed by Advantis under this Amended Agreement at no additional or separate charge to DWD. The Parties acknowledge and agree that the Direct Charge items set forth in Exhibit 7 may not be a complete listing of all special bid types of services being provided to DWD by Advantis as of the Amended Agreement Commencement Date, and that there may be some services currently provided by Advantis to DWD for which no formal documentation exists, and thus reference to which is not included in Exhibit 7. The Parties shall work together to formalize in writing all such special bid service arrangements as soon after the Amended Agreement Commencement Date as possible, but no later than ninety (90) days after the Amended Agreement Commencement Date; however, in the interim, Advantis shall continue to provide such services to DWD according to the business arrangements (same scope of service for same charge) existing just immediately prior to the Amended Agreement Commencement Date, unless the Parties mutually agree otherwise. Except as stated in the prior two sentences, any charges for Services to be charged to DWD by Advantis under this Amended Agreement must be expressly stated. a) This Amended Agreement shall serve as the basic terms and conditions for Services performed by Advantis for DWD. 4 b) In the event of any inconsistency or conflict in the provisions of the respective documents applicable to the provision of the Services, the order of precedence shall be: 1) this Amended Agreement; and 2) the Exhibits attached to this Amended Agreement. 2. DEFINITIONS, DOCUMENTS AND TERM 2.1 GENERAL DEFINITIONS As used in this Amended Agreement, the following terms shall have the meanings set forth below. a) "Additional Resource Charge" or "ARC" means the charge for additional utilization of Resource Units above the applicable Monthly Baseline and associated Deadband, if any, for a specific Individual Service Element. b) "Affiliate" means, with respect to a Person, any other Person at any time Controlling, Controlled by or under common Control with, such Person. c) "Annual Revenue Commitment" shall have the meaning set forth in Exhibit 4. d) "Annual Service Charge" or "ASC" means the annual fixed charge to DWD for each Contract Year of the Term for Advantis' providing to DWD the Data Network and IPSS Services. There are two separate Annual Service Charges: the Data Network Annual Service Charge and the IPSS Annual Service Charge. e) "Applications Software" means those programs and programming, including all supporting documentation and media, that perform specific user-related data processing and telecommunication tasks, and which are being run, as of the Commencement Date, by Advantis, and which will be run by Advantis on and after the Commencement Date. Applications Software does not include DWD Software. f) "Audit Notice" shall have the meaning set forth in Section 12.7 (a). g) "Baseline" means the specific quantity and level of Resource Units of a particular Individual Service Element which is being provided to DWD by Advantis and which is included in an Annual Service Charge. 5 h) "Baseline Adjustment" means a change made to a specific Baseline for an Individual Service Element. i) "Claim" shall have the meaning set forth in Section 12.6 (a). j) "Commencement Date" means January 1, 1996. k) "Confidential Information" shall have the meaning set forth in Section 8.1. l) "Control" means the legal, beneficial or equitable ownership, directly or indirectly, of more than 50% of the aggregate of all voting equity interests in such entity. m) "Cost of Living Adjustment" or "COLA" and "COLA Index" shall have the meanings set forth in Section 5.2. n) "Data Center" means the Equipment and Software to be located at an Advantis location. "Data Center" does not include any DWD Equipment or DWD Software. o) "Data Network" means all Equipment, associated attachments, features and accessories, Software, lines and cabling, including communication controllers, multiplexors, lines and modems/DSUs used to connect and transmit data. The Data Network does not include DWD Equipment or DWD Software. p) "DWD Equipment" means machines and equipment that are owned or leased by DWD and for which DWD, rather than Advantis, retains financial and administrative responsibility. q) "DWD Locations" means those DWD locations to which Services are provided. r) "DWD Software" means the software and programs owned or licensed by DWD for which DWD, rather than Advantis, retains financial and administrative responsibility. Subject to Section 7(a), DWD Software is identified in Exhibit 6. s) "End Users" means those individuals within DWD who are users of Services. t) "End User Equipment" means all workstations, terminals, LAN servers, printers and associated peripheral equipment located at DWD Locations. 6 u) "Equipment" means any machine, its features, conversions, upgrades, elements, licensed internal code, or accessories, or any combination of them provided by Advantis hereunder (including End User Equipment) owned or leased by Advantis and used to provide the Services to DWD. The term "Equipment" includes Advantis and non-Advantis equipment provided by Advantis. The term does not include DWD Equipment, as defined above. v) "Force Majeure Event" shall have the meaning set forth in Section 16.4 (a). w) "Hazardous Materials" shall have the meaning set forth in Section 11.2 (b). x) "Include" and its derivatives shall mean including without limitation. This term is as defined, whether or not capitalized in this Amended Agreement. y) "Indemnified Party" and "Indemnifying Party" shall have the respective meanings set forth in Section 12.6 (a). z) "Indemnifiable Taxes" shall have the meaning set forth in Section 12.7 (b). aa) "Individual Service Element(s)" or "ISE(s)" means a specific type of Service within a Service Category, such as CPU Prime A or 56KB. ab) "Initial Pricing Period" means, for each Service Category, the period from the Commencement Date through December 31, 1999 for which prices are effective. ac) "Losses" means all losses, liabilities, damages and claims (including taxes), and all related costs and expenses (including any and all reasonable attorneys' fees and reasonable costs of investigation, litigation, settlement, judgment, interest and penalties). ad) "Out-of-Pocket Costs" shall mean reasonable and actual out-of-pocket expenses incurred by Advantis for equipment, materials, supplies, or other Services provided to DWD under this Amended Agreement, but not including Advantis' overhead costs (or allocations thereof), administrative expenses or other mark-ups. ae) "Party" or "Parties" shall have the meaning given in the preamble to this Amended Agreement. af) "Performance Standards" means the service levels and performance responsibilities under which the Services 7 will be provided. The Performance Standards will be described and listed in the attached Exhibit 5. ag) "Person" means any firm, company, corporation, unincorporated association, partnership, trust, joint venture, governmental authority or other entity, or a division of any of the foregoing, or any individual, and shall include any successor (by merger or otherwise) of such entity. ah) "Reduced Resource Credit" or "RRC" means the credit for reduced utilization of Resource Units below the applicable Monthly Baseline and associated Deadband, if any, for a specific Individual Service Element. ai) "Required Consents" means any consents or approvals required for the licensing or transfer to Advantis of the right to use or access any applicable facilities, space, equipment, software or third party services. aj) "Resource Unit" or "RU" means, for each Individual Service Element, a particular unit of resource used to measure Services provided by Advantis pursuant to a particular Baseline. ak) "Services" shall have the meaning set forth in Section 3.1 of this Amended Agreement. al) "Service Category" means one of the three categories of Services set forth in this Amended Agreement: Voice, Data Network, or Information Processing Systems and Services ("IPSS"). am) "Software" means either of or both Applications Software and Systems Software, as applicable. an) "Special Services Amendment" or "SSA" means agreements entered into between Advantis and DWD which are in response to specific DWD requirements for which the standard Advantis Services are not applicable. Exhibit 7 includes those agreements executed under the 1992 Master Agreement and which continue under this Agreement, unless otherwise mutually agreed. ao) "Supported Software" means Software other than DWD Software, for which Advantis has financial, administrative, operational, and maintenance obligations as set forth in Section 3.7. Subject to Section 7(a), Supported Software includes the Software so identified in Exhibit 6. 8 ap) "Systems Software" means those programs and programming, including all supporting documentation and media, that perform tasks basic to the functioning of the data processing and telecommunication equipment and which are required to operate the Applications Software or otherwise support the provision of Services by Advantis. Systems Software does not include DWD Software. aq) "Tax Claim" shall have the meaning set forth in Section 12.7 (b). ar) "Tax Indemnified Party" and "Tax Indemnifying Party" shall have the respective meanings set forth in Section 12.7 (a). as) "Term" shall have the meaning set forth in Section 2.4. at) "Termination Assistance" shall have the meaning set forth in Section 9.3 (a). au) "Voice Services" means those voice-related Services generally described in Exhibit 3. 2.2 [INTENTIONALLY OMITTED.] 2.3 ASSOCIATED CONTRACT DOCUMENTS This Amended Agreement includes Exhibits 1 through 7 which will be updated by Advantis and DWD as necessary or appropriate during the Term in compliance with the amendment process set forth in Section 16.3. In the context of this Amended Agreement, as of the Commencement Date, Schedules A through E of the Master Agreement are superseded and no longer in force. 2.4 TERM The term of this Amended Agreement will begin as of 12:01 a.m. on the Commencement Date and will end as of 12:00 midnight on December 31st 2002 (the "Term"), unless earlier terminated or extended, in whole or in part, in accordance with this Amended Agreement. 2.5 RENEWAL AND EXPIRATION a) Advantis agrees to notify DWD in writing whether it desires to renew this Amended Agreement and of the proposed prices and terms to govern such renewal not less than 18 months prior to the expiration of the Term. If Advantis so notifies DWD that it desires to renew this Amended Agreement, DWD agrees to inform Advantis in writing whether it desires to renew not 9 less than 12 months prior to the expiration of the Term. Failure by either Advantis or DWD to provide notice at the time specified above shall be deemed to be notice of intent not to renew this Amended Agreement. If either DWD or Advantis does not wish to renew this Amended Agreement, it shall expire at the end of the Term. If both Advantis and DWD desire to renew this Amended Agreement but are unable to agree upon renewal prices, terms and conditions no later than six months prior to the expiration of the Term, DWD may elect to extend this Amended Agreement for one year at the prices, terms and conditions in effect during the last year of the Term. If Advantis and DWD are unable to reach agreement on renewal during such extension period, if any, this Amended Agreement will expire at the end of such extension period. b) In the event of a failure to renew this Amended Agreement as described in paragraph (a) above, if DWD elects to solicit bids or proposals from competitive providers for the performance of any or all of the Services, DWD agrees to provide Advantis with the same proposal requirements and information, access to facilities and pertinent personnel and other notices and materials as provided to other potential vendors, and treat Advantis as it treats the other potential vendors in the proposal or bidding process. 2.6 REQUIRED CONSENTS DWD shall be responsible for obtaining any and all Required Consents necessary to enable Advantis to use DWD Software and DWD Equipment. DWD shall bear the costs, if any, of obtaining all of its Required Consents described above. In the event that any Required Consent is not obtained, then unless and until such Required Consents are obtained, Advantis and DWD shall cooperate with each other in achieving a reasonable alternative arrangement for DWD to continue to process its work with minimum interference to its business operations. 3. ADVANTIS RESPONSIBILITIES 3.1 GENERAL a) Advantis will provide those services listed in this Section 3, those described in Exhibits 1 through 3 and 7 (SSAs), and those implied or necessary to deliver such services, unless specifically excluded from the Advantis responsibilities (each such service a "Service" and in sum, the "Services"). The Parties anticipate and expect that technology will evolve and advance over the Term and that this will require 10 evaluation and, if warranted based on the evaluation, testing and piloting of technologies, methodologies and tools that are different from those in use as of the Commencement Date. As applicable to the Services and consistent with industry practice, Advantis shall be responsible for such tasks and will offer, subject to the mutual agreement of the Parties with respect to scope, quality and price, such technologies, methodologies and tools to DWD. Exhibits 1 through 3 and 7 are not meant to be an exclusive listing of the services Advantis may provide or is capable of providing, and the Exhibits will be amended as new services are offered by Advantis and accepted by DWD. b) As of the Commencement Date, Advantis will provide the Services to DWD, DWD's Affiliates, and to the clients of all such entities who receive Services; provided that (i) DWD shall remain Advantis' sole point of contact with respect to the Services, except that for specific technical issues Advantis may work directly with the appropriate technical liaison within an Affiliate of DWD as designated by DWD, (ii) DWD shall remain responsible for payment of all such Services as though provided to DWD itself, and (iii) DWD shall be solely responsible for the fulfillment of all obligations, terms, and conditions under this Amended Agreement. For purposes of this Amended Agreement, references to DWD in its capacity as a beneficiary or recipient of services are to be read as references to DWD and the entities referenced in this Section 3.1 (b), and Services provided to such entities will be deemed to be Services provided to DWD. 3.2 INFORMATION PROCESSING SYSTEMS AND SERVICES Advantis will provide the following as requested by DWD: a) Processing Services; b) DASD Storage Services; c) Tape Storage Services; d) Printing Services; e) Microfiche Services f) Help Desk Support Services; g) Distributed Processing Services; h) Contingency (disaster recovery) Services; 11 i) Application Support Services; j) Information Processing Services (charged as Direct Charges); k) Consulting and Project Management Services; and l) Any other commercially available IPSS Service which Advantis offers on or after the Commencement Date. 3.3 DATA NETWORK SERVICES AND VOICE SERVICES Advantis will provide the following as requested by DWD: a) Private Line Services; b) Switched Access and Usage Services; c) Transaction Usage Services; d) On-Premises Services; e) Network Services (charged as Direct Charges); f) Voice Services; g) Video Conferencing Services; h) Voice Consulting and Optimizations Services; and i) Any other commercially available Data Network Services or Voice Services which Advantis offers on or after the Commencement Date. 3.4 STANDARDS Advantis agrees that its performance of the Services for DWD will meet or exceed each of the applicable Performance Standards. Within 120 days of the Commencement Date, the Parties will review the existing Performance Standards, Service Level Agreements and Service Level Objectives, including those set forth in Exhibit 5, revise them in a manner mutually agreed to by the Parties, and document such agreement as a revised Exhibit 5 to the Amended Agreement ("Amended Agreement Performance Standards" or "AAPS"). The AAPS will specifically define a broad range of service levels, a more limited set of business-oriented critical service levels, and the measurement methodologies associated with the service levels and critical service levels. If Advantis breaches a service level it will: (a) report such failure, (b) determine the root cause of the problem, and (c) take such action as necessary to promptly bring its performance back into conformance with the service level. The critical service levels agreed to by the Parties will have a specified "lower limit" (that will be set below related service levels) and a specified "higher limit" (that will be set above related service levels). [*] - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 12 3.5 MANAGEMENT AND CONTROL a) Advantis, with the cooperation and assistance of DWD, will establish operating processes and procedures relating to the performance of the Services. Such processes and procedures will include change control procedures, scheduling for projects and other operational matters relating to the Data Center, Data Network and Voice Services. Advantis will furnish a written description of these processes and procedures to DWD for its review and comment, and any reasonable comments or suggestions of DWD will be incorporated therein. b) Within 180 days after the Commencement Date, Advantis and DWD will agree upon an appropriate set of periodic Services-related reports to be provided by Advantis. In the absence of such agreement, Advantis will provide DWD with the same periodic Services-related reports that Advantis was providing to DWD prior to the Commencement Date. c) Within 60 days after the Commencement Date, Advantis and DWD will mutually agree upon an appropriate set of periodic meetings to be held between representatives of DWD and Advantis. d) In the absence of agreement as to such processes, procedures, reports and periodic meetings as contemplated by this Section 3.5, such functions shall be performed in the manner followed by the Parties prior to the Commencement Date. 3.6 EQUIPMENT Advantis will provide the Services using the Equipment. Additional or replacement Equipment, including upgrades, will be added by Advantis to the Data Center and Data Network as necessary to perform the Services in accordance with the Performance Standards. For purposes of assigning financial responsibility for the Equipment, and for no other purposes, the Parties agree as follows: a) Other than with respect to DWD Equipment, financial responsibility for (i) acquisition, lease, and ownership costs for Equipment, including: current and future Equipment, upgrades, enhancements, growth and technology refreshments ("Equipment Capital" costs); and (ii) all costs and expenses related to operational support, including: installation, support, hardware maintenance, disaster recovery of the Equipment, service levels, and moves, adds and changes ("Equipment 13 Operational Support" costs) shall be borne by Advantis and will be recovered by Advantis through the pricing provisions set forth in the Exhibits. b) Other than with respect to DWD Equipment, Advantis shall be administratively and operationally responsible for the Equipment used to provide the Services, including provisioning, staging, configuring, installing, operating, maintaining, upgrading, and enhancing the Equipment, all as set forth in more detail in Exhibits 1 through 3 and 7. 3.7 SOFTWARE a) SUPPORTED SOFTWARE. Advantis will be financially responsible for (i) acquisition and ownership costs for Supported Software, including: current and future packages, new releases, growth and technology refreshment ("Software Capital" costs); and (ii) all costs and expenses related to operational support, including: installation, support, Software maintenance, and service levels ("Software Operational Support" costs). Advantis will: 1) operate, maintain and enhance as necessary to perform in accordance with the Performance Standards, all Supported Software in the Data Center and Data Network; 2) apply preventive maintenance and program temporary fixes to correct defects in the Supported Software running in the Data Center and Data Network; 3) provide or obtain new versions and releases, upgrades, replacements or additional Supported Software as necessary in order to perform the Services in accordance with the Performance Standards; and 4) operate all Applications Software in the Data Center and Data Network. b) DWD SOFTWARE. DWD will be financially responsible for the Software Operational Support and Software Capital costs for DWD Software, including: current and future packages, new releases, support, software maintenance, service levels, growth and technology refreshment. 14 3.8 AUDITS a) Advantis will assist DWD in meeting its audit and regulatory requirements, including providing access to the Data Center locations sufficient to enable DWD and its auditors and examiners to conduct appropriate audits and examinations of the operations of Advantis to verify: 1) the accuracy of the application of Advantis' charges to DWD; and 2) that Services are being provided in accordance with this Amended Agreement. Such access will require a minimum 72-hour notice to Advantis and will be provided at reasonable hours, provided that any audit does not interfere with Advantis' ability to perform (i) the Services in accordance with this Amended Agreement or (ii) services for any of its other customers, or compromise any reasonable security processes or procedures or the integrity of any information or data. DWD will make every reasonable effort to coordinate and reach agreement with Advantis regarding the timing and scope of any such audit, and also limit the number, scope and duration of such audits, and otherwise attempt to minimize any disruption to Advantis' business caused by such audit(s). Further, the initial request for an audit will be directed only to the Advantis Business Controls Department for consideration and processing. Upon request, Advantis will notify DWD of the appropriate individual(s) within such department who will act as the liaison for audit requests. b) Advantis will provide access only to information reasonably necessary to perform the audit. In the event Advantis believes that a request from DWD, its auditors or examiners would involve the disclosure of Confidential Information, DWD agrees that its auditors and examiners will be required to execute an appropriate confidentiality agreement before receiving such Confidential Information. In no event shall Advantis allow DWD, its auditors or examiners access to (i) other Advantis customers' proprietary data or information, or (ii) Advantis' proprietary data and systems (other than the proprietary data and systems described in (a) (1) and (2) above as they specifically relate to DWD). Advantis will also provide reasonable assistance to DWD's employees, auditors, or examiners in testing DWD's data files and programs, including installing and running audit software. Following any 15 such audit, DWD shall conduct or request its auditors and examiners to conduct an exit conference with Advantis to obtain factual concurrence with any issues identified in the audit. Advantis and DWD shall meet to review each audit report promptly after the issuance thereof and to mutually agree upon the appropriate manner, if any, in which to respond to the changes suggested by the audit report. c) In connection with such audits, in the event DWD requests Advantis to make changes or take other actions necessary in order to maintain compliance with applicable laws or regulations (other than those changes or actions required due to a breach of Advantis' obligations, in which event the costs associated with such change shall be Advantis' responsibility), Advantis agrees to make any reasonable changes and take other reasonable actions which are necessary in order to maintain compliance with applicable laws or regulations. DWD may submit additional findings or recommendations to Advantis for its consideration and Advantis shall consider such findings. d) If an audit or examination reveals that Advantis' invoices are not correct, and: 1) If the aggregate invoice amount in error is a net credit to DWD equal to or less than [ * ] Advantis shall promptly pay that net credit amount to DWD, without interest, and DWD shall pay the cost of the audit. 2) If the aggregate invoice amount in error is a net credit to DWD of more than [ * ], Advantis shall promptly pay that net credit amount, without interest, and shall further reimburse the reasonable cost of the audit to DWD. 3) If the aggregate invoice amount in error is a net credit to Advantis equal to or less than [ * ], DWD shall pay the cost of the audit without any further obligation to pay the amount of such credit to Advantis. 4) If the aggregate invoice amount in error is a net credit to Advantis of more than [ * ], DWD shall promptly pay to Advantis, without interest, that - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 16 net credit amount less the reasonable cost of the audit. 3.9 DISCLAIMER OF RESPONSIBILITIES Unless otherwise agreed to in writing, Advantis shall have no obligation to: a) provide data, data entry, or database management or coordinate such activities with its systems design and production functions; b) designate or document application information requirements, including report design or content, frequency of reports, or accessibility to information; c) provide or perform upgrades, replacements, acquisitions or maintenance of DWD Equipment; d) operate the DWD Equipment necessary for Services required to be provided by Advantis; e) provide or perform new revisions, releases, upgrades, enhancements or maintenance for DWD Software; f) provide End User office support including clerical and administrative tasks, such as courier and internal distribution; g) provide support to End Users for questions and problems related to Applications Software; h) provide personnel or equipment to ensure the physical security of DWD Locations; i) be responsible for the creation or administration of user access and password management or security programs; j) provide any preprinted and paper forms or supplies required by End Users; k) be responsible for any mail, messenger, postage, courier or print distribution services; l) be responsible for storage, retrieval, distribution or filing of any microfilm/microfiche output; m) provide move, add and change service support for End User Equipment not otherwise supported under the "on-premises services"; or 17 n) be responsible for DWD activities or functions as described in this Amended Agreement. 3.10 [*] 4. DWD RESPONSIBILITIES 4.1 PROJECT EXECUTIVE Each Party agrees to designate, prior to the Commencement Date, an authorized individual to whom all communications may be addressed and who will have the authority to act for and bind that Party and its subcontractors in connection with all aspects of this Amended Agreement. In addition, each Party will designate, prior to the Commencement Date, a Project Executive to have overall responsibilities with respect to this Amended Agreement. A Party may change either of the designated individuals by giving the other Party written notice. 4.2 APPLICATIONS SOFTWARE During the Term, DWD will be responsible for selecting or defining its requirements for its Applications Software and DWD Software. 4.3 FACILITIES AND SUPPORT SERVICES The Parties acknowledge that permanent leasing of space on DWD Locations for Advantis employees and node license arrangements shall be subject to separate agreements. In addition, DWD agrees to provide, at no charge to Advantis, the use of its DWD Locations and such additional space as may be reasonably necessary for the performance of the Services. This includes reasonable office space, storage space, and all reasonable and customary office support services, employee-type services, such as parking privileges and cafeteria services, office supplies and furniture. DWD agrees that if it decides to relocate a current DWD Location it will provide comparable space, facilities and resources in the new DWD Location, under the same terms and conditions of this Amended Agreement. It is understood that Advantis' use of the DWD Locations does not constitute or create a leasehold interest. In the event, however, Advantis needs to place Equipment on DWD Locations in order to provide specific Services under this Amended Agreement, DWD will allow Advantis to do so and use reasonable care to protect such Equipment. 4.4 BIDDING OF FRAME RELAY SERVICES If DWD elects to solicit bids or proposals from competitive providers for the performance of frame relay services (beyond the ongoing, current efforts), DWD agrees to provide Advantis with 18 - -------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED the same proposal requirements and information, access to facilities and pertinent personnel and other notices and materials as provided to other potential vendors, and treat Advantis as it treats the other potential vendors in the proposal or bidding process. 5. CHARGES AND EXPENSES 5.1 SERVICES CHARGES a) DWD agrees to pay the charges for the Services specified in the applicable Exhibits together with the amounts described in this Section 5. The Charging Methodology shall be set forth in Exhibits 1,2,3 and 4. b) Where an Affiliate of DWD (e.g., SPS Transactions Services, Inc.) has a separate contractual relationship with Advantis, that Affiliate may at its option receive Services and pricing for such Services pursuant to this Amended Agreement. Nothing in this Amended Agreement shall otherwise change or affect the terms of such other agreements, including that any termination of this Amended Agreement shall have no effect on the separate contractual relationship between Advantis and such Affiliate of DWD, and that the termination of such separate contractual relationship shall have no effect on this Amended Agreement. 5.2 COST OF LIVING ADJUSTMENT a) The Parties intend that commencing January 1, 1997, certain identified charges listed in the Exhibits ("Identified Charges") will increase if inflation, measured from January 1, 1993, exceeds 4% per year, compounded annually. These Identified Charges include protection against inflation at a rate of 4% per year, compounded annually (the "COLA Index"). The COLA Index for each year of the Term shall be provided in Exhibit 4. DWD agrees to pay Advantis a Cost of Living Adjustment ("COLA") beginning 12 months after the Commencement Date if actual cumulative inflation exceeds the inflation covered by the COLA Index as set forth in Exhibit 4. Advantis and DWD agree to use the Consumer Price Index, as published by the Bureau of Labor Statistics, U.S. Department of Labor, For All Urban Consumers, U.S. City Average, All Items, 1982-84=100 ("CPI-U") for purposes of calculating actual inflation. The COLA will be calculated using the COLA Factor specified below. This COLA shall be applied on a prospective basis, i.e., the identified charges payable by DWD will be surcharged by the Factor as determined below, if such Factor is in excess of 19 zero. The COLA Factor will be determined as soon as practicable after the end of each calendar year. If applicable, Advantis will invoice DWD for COLA beginning with Services rendered on or after January 1, 1997 in accordance with Section 6.1. The COLA Factor is equal to: ((Actual Inflation - Protected Inflation) / Prior Year's Protected Inflation) x .50, where: Actual Inflation = CPI-U for the December preceding the year for which COLA is being calculated; and Protected Inflation = the Base Year Index multiplied by the COLA Index for the December preceding the year for which COLA is being calculated. Prior Year's Protected Inflation = the Base Year Index multiplied by the COLA Index for the December preceding the year for which the Protected Inflation is being calculated. Base Year Index = CPI-U for December, 1992. b) In the event the Bureau of Labor Statistics stops publishing the CPI-U or substantially changes its content and format, Advantis and DWD will substitute another comparable index published at least annually by a mutually agreeable source. If the Bureau of Labor Statistics merely redefines the base year for the CPI-U from 1982-84 to another year, Advantis and DWD will continue to use the CPI-U, but will convert the COLA Index to the new base year by using an appropriate conversion formula. c) [*] - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 20 5.3 TAXES a) Advantis shall be responsible and pay for: (i) any sales, use, personal or other taxes based upon or measured by Advantis' cost in acquiring or providing equipment, materials, supplies or services (including Equipment and Software) furnished or used by Advantis in performing or furnishing the Services; and (ii) taxes, assessments and other levies on its net income and real and personal property. b) DWD shall be responsible and pay for any sales, use, excise or services-related tax levied or assessed on (i) the provision of the Services by Advantis to DWD or (ii) the use of Data Network lines or circuits by Advantis for the benefit of DWD. c) DWD shall also be responsible and pay for: (i) taxes, assessments and other levies on its net income and real property, and (ii) all personal property or use taxes due on or with respect to DWD Equipment and DWD Software. d) The Parties agree to reasonably cooperate with each other to more accurately determine each Party's tax liability and to minimize such liability to the extent legally permissible. e) Advantis and DWD shall provide and make available to the other any resale certificates, information regarding out of state sales or use of equipment, materials or services, and other exemption certificates or other information reasonably requested by either Advantis or DWD. In addition, Advantis will provide to DWD such documentation as DWD may reasonably request to establish that Advantis is registered to collect any tax described in Section 5.3 (b) above which Advantis seeks to collect from DWD. f) When the Parties mutually agree, invoices for Services rendered by Advantis to DWD shall segregate the charges for: (i) taxable Services; (ii) non-taxable Services; and 21 (iii) items for which Advantis functions merely as a paying agent for DWD in receiving goods, supplies or services (including leasing and licensing arrangements) that are nontaxable or have previously been subject to tax. [*] 5.4 OTHER EXPENSES AND CHARGES DWD will be financially responsible for all costs and expenses associated with its responsibilities specified in Section 4, and for all costs and expenses necessitated by compliance with Section 3.8 (c). 6. INVOICING AND PAYMENT 6.1 MONTHLY SERVICES CHARGE INVOICES Advantis will invoice DWD on a monthly basis. The invoices will state for DWD the monthly charge applicable (including the basis for that charge) and applicable taxes (as set forth in Section 5.3(b)) by tax jurisdiction. 6.2 OTHER CHARGES Any amount due under this Amended Agreement for which a time for payment is not otherwise specified will be due and payable no later than seven (7) business days from receipt of the invoice. 6.3 INVOICE PAYMENT a) DWD will pay its invoices by wire funds transfer or other electronic means acceptable to Advantis to an account specified by Advantis no later than seven (7) business days from receipt of an invoice. If payment is not received by the seventh day after the receipt of the invoice, Advantis will promptly notify DWD in writing of such nonpayment on or about such seventh day; provided however, that Advantis' failure to give such notice does not affect the payment obligations of DWD in any way. b) [Intentionally omitted.] c) In the event that any payments are not received by Advantis within five days following the due date, such payment shall include interest at the rate of 1% per - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 22 month on the amount of such arrears accruing from the original due date until the date of payment. d) In the event that DWD challenges any invoice, DWD will pay the entire invoiced amount (absent manifest error, in which event DWD will promptly notify Advantis of such error), and shall pursue resolution of such disputed invoice pursuant to the dispute resolution process set forth in Section 15. In the event DWD is successful in challenging the disputed invoice, Advantis will provide DWD with a credit against the charges otherwise payable to Advantis. Such credit shall include interest at the rate of 1% per month accruing from the original due date until the date the credit is applied. 6.4 PRORATION All periodic charges under this Amended Agreement are to be computed on a calendar month basis, and will be prorated for any partial month, unless specifically stated otherwise in this Amended Agreement. 6.5 CREDITS Except as otherwise set forth in this Amended Agreement, with respect to any amount to be paid or reimbursed to DWD by Advantis, Advantis may, at its option, pay that amount to DWD by giving it a credit against the charges otherwise payable to Advantis hereunder the next time an amount is due and payable by DWD. In the event such credit to DWD from Advantis exceeds the charges payable by DWD to Advantis over a three-month period, then Advantis shall apply such credits to the charges to DWD over a period not to exceed three months, with any excess being paid to DWD at the end of such three-month period. [*] 8. CONFIDENTIALITY/DATA SECURITY 8.1 CONFIDENTIAL INFORMATION Each Party acknowledges that the other Party possesses and will continue to possess information that has been created, discovered, or developed by that Party or provided to it by a third party, or in which property rights have been assigned or otherwise conveyed to it, which information has commercial value in its business and is not in the public domain. Except as - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 23 otherwise specifically provided by the Parties, "Confidential Information" shall mean: a) all information and documents marked confidential, restricted, or proprietary by either Party; or b) DWD's customer lists, DWD information, account information, and information regarding business planning and operations of DWD and its administrative, financial or marketing activities. 8.2 OBLIGATIONS a) Each Party will use the same care to prevent disclosing to third parties the Confidential Information of the other as it employs to avoid disclosure, publication or dissemination of its own information of a similar nature. Notwithstanding the foregoing, a Party may disclose such information to subcontractors involved in providing Services under this Agreement where: 1) such disclosure is necessary to permit the subcontractor to perform its duties hereunder; and 2) that Party assumes full responsibility for the acts or omissions of its subcontractor, no less than if the acts or omissions were those of such Party. b) Without limiting the generality of the foregoing, no Party will: 1) make any use of the Confidential Information of the other except as contemplated by this Amended Agreement; 2) acquire any right in or assert any lien against the Confidential Information of the other; or 3) refuse to promptly return, provide a copy of or destroy such Confidential Information upon the request of the other Party. c) Nothing in this Amended Agreement shall be construed so as to restrict a Party from using any data processing or network management ideas, concepts, know-how and techniques retained in the unaided memories of such Party's personnel or subcontractors, without limitation, in the development, manufacturing and marketing of products and services, provided that such products or services do not breach that Party's obligations of confidentiality or infringe on the other 24 Party's patent, copyright, trademark, trade secret or other proprietary rights. 8.3 EXCLUSIONS Notwithstanding the foregoing, this Section 8 will not apply to any Confidential Information of a Party which the other Party can demonstrate was: a) at the time of disclosure to it, in the public domain; b) after disclosure to it, published or has otherwise become part of the public domain through no fault of its own; c) in the possession of it at the time of disclosure to it without any obligation of it to maintain such confidentiality; d) received after disclosure to it from a third party who had a lawful right to disclose such information to it; or e) independently developed by it without reference to Confidential Information of the other Party. Further, either Party may disclose Confidential Information of the other to the extent required by law or order of a court or governmental agency; provided, however, that such Party must give the other Party prompt notice and make a reasonable effort to obtain a protective order or otherwise protect the confidentiality of such information, all at its own cost and expense. It is understood that the receipt of Confidential Information under this Amended Agreement will not limit or restrict assignment or reassignment of employees of the Parties within or among the respective Parties. 8.4 LOSS OF CONFIDENTIAL INFORMATION In the event of any disclosure or loss of Confidential Information, the Party which has lost or disclosed such Confidential Information will promptly notify the other Party. 8.5 LIMITATION Neither Advantis nor DWD will be responsible for corruption, loss or mistransmission of data or for the security of data while such data is being transmitted via public telecommunications facilities. 25 9. TERMINATION 9.1 TERMINATION FOR CAUSE a) In the event of a material breach of this Amended Agreement by DWD, Advantis may terminate this Amended Agreement upon written notice to DWD in accordance with Section 9.1 (c). In the event Advantis terminates this Amended Agreement as set forth in this Section 9.1 (a), the Termination Charge(s) as set forth in Exhibit 4 of this Amended Agreement shall be paid to Advantis. b) In the event of a material breach of this Amended Agreement by Advantis, DWD may terminate this Amended Agreement upon written notice to Advantis, in accordance with Section 9.1 (c), without obligation to pay the Termination Charge(s) set forth in Exhibit 4. c) The written notice provided in (a) and (b) above will specifically describe such material breach. The recipient of such notice shall have 20 days to cure the breach unless it would be unreasonable to cure such breach within 20 days, in which event, the breaching Party shall be given an additional 20 days to cure such breach. In the event the material breach is not cured within the period specified above, the nonbreaching Party may terminate this Amended Agreement, as provided for in Section 9.1 (a) and (b) above, which termination shall be in writing, as of a date specified in such notice of termination. The terminating Party shall have all rights and remedies generally afforded by law or equity, subject to the limitations expressed in this Amended Agreement. 9.2[*] TERMINATION FOR SPECIAL CIRCUMSTANCES a) [*] b) [Intentionally Omitted.] c) [Intentionally Omitted.] d) Any Termination Charge paid by DWD for a partial termination will decrease the Baseline and revenue commitment levels set forth in Exhibits 1, 2, 3, and 4, as applicable, for DWD for such year on a pro-rata basis. Additionally, in the event DWD terminates any Services and pays any Termination Charge (or that Termination Charge is paid by another provider), Advantis shall adjust the relevant pricing provisions set forth in the applicable Exhibits for DWD to reflect the loss of the revenue commitment of those Services, 26 - ------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED in order to maintain the current price levels for Services to DWD. e) [*] 9.3 TERMINATION ASSISTANCE a) With respect to the expiration or termination (in whole or in part) of this Amended Agreement, Advantis will cooperate with DWD to assist with the orderly transfer of the Services, functions and operations provided by Advantis hereunder to another provider or to DWD itself. Prior to termination or expiration of this Amended Agreement, DWD may request Advantis to perform, and if so requested Advantis shall perform (but may require advance payment in the event of a termination by Advantis due to a failure by DWD to pay amounts due and payable under this Amended Agreement) reasonable services in connection with migrating the work of DWD to another provider or to DWD itself ("Termination Assistance"). Termination Assistance shall be provided until the effective date of termination or expiration with respect to the Services. Upon termination, DWD will allow Advantis access to DWD Locations to remove Equipment, Software and other Advantis assets. Upon termination, Advantis will return to DWD any DWD Software or DWD Equipment that Advantis possesses. b) [*] 10. LIABILITY 10.1 GENERAL INTENT The liability of DWD, Advantis, and each of their subcontractors to the other Party and their exclusive remedies are set forth in this Section 10 and Section 12. Subject to the specific provisions of this Section, it is the intent of DWD and Advantis that the breaching Party will be liable for any damages incurred by the nonbreaching Party as a result of the breaching Party's failure to perform its obligations in the manner required by this Amended Agreement. 10.2 DAMAGES a) The liability of DWD and Advantis for actual, direct damages resulting from the breaching Party's performance or nonperformance under this Amended Agreement, regardless of the form of action, and - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 27 whether in contract, tort (including, without limitation, negligence), warranty or other legal or equitable grounds, will be limited for each event which is the subject matter of the cause of action[*] b) In no event will DWD or Advantis have any liability whether based on contract, tort (including, without limitation, negligence), warranty or any other legal or equitable grounds, for any loss of interest, profit or revenue by the other Party or for any consequential, indirect, incidental, special, punitive or exemplary damages suffered by the other Party arising from or related to this Amended Agreement, even if such Party has been advised of the possibility of such losses or damages; provided, however, that this clause will not prevent DWD or Advantis from recovering amounts owed under this Amended Agreement. c) Notwithstanding anything to the contrary contained herein, the limitations set forth in this Section 10.2 will not apply to: 1) any failure by DWD to pay any amounts due and owing Advantis pursuant to the terms of this Amended Agreement; 2) losses for bodily injury or damage to real property or tangible personal property, as described in Section 12.3; 3) either Party's obligation to indemnify the other for patent and copyright infringement Losses and Losses relating to tax liabilities, as provided in Sections 12.1 and 12.7 respectively; or 4) intentional misappropriations of Confidential Information. d) In no event will Advantis or its subcontractors be liable for damages if and to the extent caused by the failure of DWD to perform its responsibilities, nor shall DWD be liable for damages if and to the extent caused by any failure of Advantis or its subcontractors to perform their responsibilities. - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 28 10.3 NONRECOURSE Notwithstanding anything to the contrary contained in this Amended Agreement, no partner of Advantis shall have any duties, obligations or liabilities under or in respect of this Amended Agreement as a result of its status as a partner of Advantis, nor shall any direct or indirect owner of any such partner have any duties, obligations or liabilities as a result of its direct or indirect beneficial ownership; it being understood and agreed that all duties, obligations and liabilities of Advantis are expressly nonrecourse to the partners of Advantis and their respective direct and indirect beneficial owners. 11. WARRANTY 11.1 WORK STANDARDS Advantis represents and warrants that all Services performed by Advantis for DWD will be in a workmanlike manner in accordance with industry standards and practices applicable to the performance of such Services. 11.2 ENVIRONMENTAL a) In the event that Hazardous Materials are discovered at any DWD Location during the term of this Amended Agreement, Advantis may cease the performance of that portion of the Services affected by such discovery if, in the reasonable judgment of Advantis, Advantis' ability to perform such portion of the Services safely and properly is substantially adversely impacted by the presence of such Hazardous Materials. Advantis shall not be responsible for remedying any violation of federal, state or local law with respect to the presence of such Hazardous Materials to be remedied, it being understood that matters relating to the investigation, detection, abatement and remediation of any Hazardous Materials discovered at any DWD Location are not within the scope of this Amended Agreement and that Advantis shall not be liable or responsible for any expense incurred by DWD in this connection, unless investigation reveals that the presence of the Hazardous Materials was caused by the conduct of an Advantis employee, invitee, or subcontractor or that Hazardous Materials were knowingly and willfully disturbed by an Advantis employee, invitee or subcontractor. In such event, the limitations of this paragraph will not apply. b) For purposes of this Section, "Hazardous Materials" means: 29 1) any "hazardous substance" as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time (42 U.S.C. 9601 et seq.) and the regulations promulgated thereunder; 2) any asbestos or asbestos-containing materials; 3) petroleum, crude oil or any fraction thereof, natural gas or synthetic gas used for fuel; and 4) any additional substances or materials which at such time are classified or considered to be hazardous or toxic under the laws of the state wherein the facilities are located. 11.3 NONINFRINGEMENT The Parties represent and warrant that they will perform their responsibilities under this Amended Agreement in a manner that does not infringe, or constitute an infringement or misappropriation of, any patent, trade secret, copyright or other proprietary right of any third party. 11.4 COMPLIANCE WITH OBLIGATIONS DWD represents and warrants that its entry into this Amended Agreement does not violate or constitute a breach of any of its contractual obligations with third parties. Advantis represents and warrants that its entry into this Amended Agreement does not violate or constitute a breach of any of its contractual obligations with third parties. 11.5 SOFTWARE Advantis will ensure that Advantis-owned Proprietary Products, Advantis-owned derivative works thereof, or other Software created by Advantis will continue to function in accordance with Advantis' intended use of such software and such software's specifications prior to, during, and after the year 2000; provided, however, to the extent that any such specified software fails to meet this obligation, Advantis shall timely replace it with other software of equivalent or better functionality at no additional cost to DWD. Further, Advantis shall work with its third party Supported Software licensors to assist them in ensuring that their respective Supported Software is year 2000 compatible. Where Advantis believes that any third party Supported Software will not be year 2000 compatible or interoperable with Supported Software or Equipment, Advantis will notify DWD and work with DWD to identify alternative third party software, as needed. Advantis will pass through to DWD any third party Supported Software warranties related to such 30 Software which it has the right to pass through. Upon DWD's reasonable request, Advantis will notify DWD of the year 2000 compatibility status of any specified Supported Software utilized by Advantis in its performance hereunder. 11.6 DISCLAIMER a) Advantis shall not be responsible for the inaccuracy of any advice, report, date or other product delivered to DWD, which is attributable to data and/or software provided by DWD. Such products are delivered "AS IS", and Advantis shall not be liable for any inaccuracy thereof. b) Subject to the obligations of Advantis contained in this Amended Agreement including the Performance Standards, Advantis does not assure uninterrupted or error-free operation of the Equipment. c) EXCEPT AS PROVIDED IN THIS AMENDED AGREEMENT, THERE ARE NO OTHER EXPRESS WARRANTIES AND THERE ARE NO IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 11.7 AUTHORIZATION AND ENFORCEABILITY DWD and Advantis each hereby respectively represent, as to itself, that: a) it has all requisite power and authority to enter into this Amended Agreement and to carry out the transactions contemplated hereby; and b) the execution, delivery and performance of this Amended Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on its part. 11.8 REGULATORY AND CORPORATE PROCEEDINGS Each Party agrees to obtain all necessary regulatory approvals applicable to its business, obtain any necessary permits, and comply with any regulatory requirement applicable to the performance of the Services. 31 12. INDEMNITIES 12.1 INDEMNITY BY ADVANTIS Advantis agrees to indemnify, defend and hold DWD, its Affiliates and their respective officers, directors, employees, agents, successors and assigns harmless, in accordance with the procedures described in Section 12.6 from and against any and all Losses arising from or in connection with: a) any claims of infringement made against DWD of any Canadian or United States patent, or any copyright, trademark, service mark, trade name or similar proprietary rights conferred by contract or by common law or by any law of Canada or any Canadian Providence, the United States, or any state of the United States, alleged to have occurred because of Equipment, systems, Software, products or other resources or items provided to DWD by Advantis; provided, however, that Advantis will have no obligation with respect to any Losses to the extent the same arise out of or in connection with the modification of Software or Equipment by DWD or DWD's combination, operation or use with devices, data or programs not furnished by Advantis or its subcontractors; b) any amounts, including but not limited to, taxes, interest and penalties that are obligations of Advantis pursuant to Section 5.3 and that either (i) are assessed against DWD, or (ii) DWD elects to pay pursuant to Section 5.3 (h); and c) the inaccuracy or untruthfulness of any representation or warranty made by Advantis under this Amended Agreement. 12.2 INDEMNITY BY DWD DWD agrees to indemnify, defend and hold Advantis, its Affiliates and their respective officers, directors, employees, agents, successors and assigns harmless, in accordance with the procedures described in Section 12.6 from and against any and all Losses arising from or in connection with: a) any claims of infringement made against Advantis of any Canadian or United States patent, or any copyright, trademark, service mark, trade name or similar proprietary rights conferred by contract or by common law or by any law of Canada or any Canadian Providence, the United States, or any state of the United States, alleged to have occurred because of equipment, systems, programs, products or other resources or items provided 32 to Advantis by DWD; provided, however, that DWD will have no obligation with respect to any Losses to the extent the same arise out of or in connection with the modification of a program or equipment by Advantis or any Advantis Affiliate, or Advantis' or Advantis Affiliates' combination, operation or use with devices, data or programs not furnished by DWD or any of its subcontractors; b) any amounts, including but not limited to, taxes, interest and penalties that are obligations of DWD pursuant to Section 5.3 and that either (i) are assessed against Advantis or any Advantis Affiliate, or (ii) Advantis or any Advantis Affiliate elects to pay pursuant to Section 5.3 (h). Notwithstanding the foregoing, if Advantis has determined pursuant to Section 5.3 (g) that a potential tax of the type described in Section 5.3 (b) should not be collected from DWD, then any penalties and interest with respect to such tax shall not be indemnified hereunder; and c) the inaccuracy or untruthfulness of any representation or warranty made by DWD under this Amended Agreement. 12.3 CROSS INDEMNITY AND CONTRIBUTION Each Party agrees to contribute to the amount paid or payable by the other Party for any and all Losses for which such Party is legally liable and in proportion to such Party's comparative fault in causing such Losses, arising in favor of any person, corporation or other entity, including the Parties hereto and their employees, contractors and agents, on account of personal injuries, death, or damage to tangible personal or real property in any way incident to, or in connection with or arising out of: a) the Services provided by Advantis hereunder; b) the presence of such Party, its employees, contractors or agents on the premises of any other Party; or c) the act or omission of such Party, its employees, contractors or agents. 12.4 SUBROGATION In the event that an Indemnifying Party shall be obligated to indemnify an Indemnified Party pursuant to Sections 12.1, 12.2 or 12.3, the Indemnifying Party shall, upon payment of such indemnity in full, be subrogated to all rights of the Indemnified Party with respect to all the claims and defenses to which such indemnification relates. 33 12.5 EXCLUSIVE REMEDY The indemnification rights of each Indemnified Party pursuant to Sections 12.1, 12.2 or 12.3 shall be the exclusive remedy of such Indemnified Party with respect to the claims to which such indemnification relates. 12.6 GENERAL INDEMNIFICATION PROCEDURES a) If any civil, criminal, administrative or investigative action or proceeding (any of the above being a "Claim") is commenced against either Party entitled to indemnification under Sections 12.1 (a), 12.1 (c), 12.2 (a), 12.2 (c) or 12.3 (an "Indemnified Party") written notice thereof shall be given to the Party that is obligated to provide indemnification under such Sections (the "Indemnification Party") as promptly as practicable. After such notice, if the Indemnifying Party shall acknowledge in writing to such Indemnified Party that this Amended Agreement applied with respect to such Claim (such acknowledgment not to be deemed an acknowledgment of liability by such Indemnifying Party), then the Indemnifying Party shall be entitled, if it so elects, in a written notice delivered to the Indemnified Party not fewer than 10 days prior to the date on which the first response to such Claim is due, to take control of the defense and investigation of such Claim and to employ and engage attorneys of its sole choice to handle and defend the same, at the Indemnifying Party's sole cost and expense. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party and its attorneys in the investigation, trial and defense of such Claim and any appeal arising therefrom; provided, however, that the Indemnified Party may, at its own cost and expense, participate, through its attorneys or otherwise, in such investigation, trial and defense of such Claim and any appeal arising therefrom. No settlement of a Claim that involves a remedy other than the payment of money by the Indemnifying Party shall be entered into without the consent of the Indemnified Party, which consent will not be unreasonably withheld. b) After notice by the Indemnifying Party to the Indemnified Party of its election to assume full control of the defense of any such Claim, the Indemnifying Party shall not be liable to the Indemnified Party for any legal expenses incurred thereafter by such Indemnified Party in connection with the defense of that Claim. If the Indemnifying Party does not assume full control over the defense of a Claim subject to such defense as provided in this 34 Section 12.6, the Indemnifying Party may participate in such defense, at its sole cost and expense, and the Indemnified Party shall have the right to defend the Claim in such manner as it may deem appropriate, at the cost and expense of the Indemnifying Party. [*] 13. INSURANCE AND RISK OF LOSS 13.1 INSURANCE When this Amended Agreement requires performance by employees or subcontractors of Advantis or DWD on the other Party's premises, the performing Party shall carry and maintain Worker's Compensation and Employer's Liability Insurance covering its employees or subcontractors engaged in such performances in amounts not less than required by law in the application location. Self insurance is permissible, if permitted by law. 13.2 RISK OF LOSS DWD is responsible for risk of loss of, or damage to, DWD Equipment, unless due to the negligence or willful misconduct of Advantis, in which case Advantis shall be responsible. Advantis is responsible for risk of loss of, or damage to, Equipment, unless due to the negligence or willful misconduct of DWD, in which case DWD shall be responsible. 14. PUBLICITY Each Party will submit to the other Party all advertising, written sales promotion, press releases and other publicity matters relating to this Amended Agreement in which such other Party's name or mark is mentioned or language from which the connection of said name or mark may be inferred or implied, and will not publish or use such advertising, sales promotion, press releases, or publicity matters without prior approval of such other Party. However, either Party may include the other Party's name and a factual description of the work performed under this Amended Agreement on Employee Bulletin Boards, in its list of references and in the experience section of proposals to third parties, in internal business planning documents and in its Annual Report to Stockholders, and whenever required by reason of legal, accounting or regulatory requirements. 15. DISPUTE RESOLUTION 15.1 DISPUTE RESOLUTION - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 35 a) Any dispute between the Parties with respect to this Amended Agreement or with respect to the performance by Advantis or by DWD hereunder shall be resolved as specified in this Section 15.1. 1) Upon the written request of either Party, each Party will appoint a designated representative who does not devote substantially all of his or her time to performance under the Amended Agreement, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. 2) The designated representative shall meet within 7 days after notification of dispute and as often as necessary to gather and furnish to the others all information with respect to the matter in issue which is appropriate and germane in connection with its resolution. 3) Such representative shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding relating thereto. 4) During the course of such negotiation, all reasonable requests made by one Party to the other Party for nonprivileged information reasonably related to this Amended Agreement and for which the disclosing Party is not prevented from disclosing pursuant to an obligation of confidentiality and non-disclosure will be honored in order that both Parties may be fully advised of the other's positions. 5) The specific format for such discussions will be left to the discretion of the designated representatives but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other Party. b) If the designated representatives cannot resolve the dispute within 30 days, then the dispute shall be escalated to the Chief Executive Officer of DWD and the Chief Executive Officer of Advantis, or their respective designees, for their review and resolution. Formal proceedings for the judicial resolution of any such dispute may not be commenced until the earlier of: 1) the designated representatives concluding in good faith that amicable resolution through continued 36 negotiation of the matter in issue does not appear likely; or 2) 60 days after the initial request to negotiate such dispute; or 3) 30 days before the statute of limitations governing any cause of action relating to such dispute would expire. 15.2 CONTINUED PERFORMANCE Except where clearly prevented by the area in dispute, each Party agrees to continue performing its respective obligations under this Amended Agreement while the dispute is being resolved unless and until such obligations are terminated or expire in accordance with the provisions hereof. 16. GENERAL 16.1 CONTROL OF SERVICES a) This Amended Agreement shall not be construed as constituting either Party as partner of the other Party or to create any other form of legal association that would impose liability upon one Party for the act or failure to act of the other or as providing either Party with the right, power or authority (express or implied) to create any duty or obligation of the other Party. b) Each Party shall be responsible for the management, direction and control of its employees and such employees shall not be employees of the other Party. c) The Services will be under the control, management and supervision of Advantis. 16.2 RIGHT TO PERFORM SERVICES FOR OTHERS Each Party recognizes that Advantis personnel providing Services to DWD under this Amended Agreement may perform similar services for others and this Amended Agreement shall not prevent Advantis from using the personnel and Equipment provided to DWD under this Amended Agreement for such purposes, unless otherwise expressly agreed by the Parties. Advantis may perform its obligations through its subsidiaries, Affiliates or through the use of Advantis-selected independent contractors; provided, however, that Advantis shall not be relieved of its obligations under this Amended Agreement by use of such subsidiaries, Affiliates or subcontractors. 37 16.3 AMENDMENTS AND REVISIONS Changes or modifications to this Amended Agreement and Exhibits may be made only by a written amendment or revision signed by both Advantis and DWD. Any terms and conditions varying from this Amended Agreement and Exhibits on any order or written notification from Advantis and DWD are void. 16.4 FORCE MAJEURE a) No Party shall be liable for any default or delay in the performance of its obligations hereunder: 1) if and to the extent such default or delay is caused, directly or indirectly, by fire, flood, earthquake, elements of nature or acts of God, acts of war, terrorism, riots, civil disorders, rebellions or revolutions in the United States, strikes, lockouts, or labor difficulties, or any other similar cause beyond the reasonable control of such Party; and 2) provided such default or delay could not have been prevented by reasonable precautions and cannot reasonably be circumvented by the nonperforming Party through the use of alternate sources, work-around plans or other means (individually, each such default or delay being a "Force Majeure Event"). b) In such event, the nonperforming Party will be excused from any further performance or observance of the obligation(s) so affected for as long as such circumstances prevail and such Party continues to use commercially reasonable efforts to recommence performance or observance whenever and to whatever extent possible without delay. The Party so delayed in its performance will immediately notify the other Party by telephone (to be confirmed in writing within five days of the inception of such delay) and describe at a reasonable level of detail the circumstances causing such delay. Such Party will then provide a plan to address the delay in performance within twenty-four hours after the telephone notification, and will meet with the other Party impacted by the delay to review the plan. Any difference in opinion regarding the plan shall immediately be reviewed with the Chief Executive Officers of Advantis and DWD for immediate resolution. 38 c) If any Force Majeure Event substantially prevents, hinders, or delays performance of the Services necessary for the performance of DWD's critical functions for more than 30 consecutive days, then at DWD's option: 1) DWD may procure such Services from an alternate source and Advantis will be liable for [ * ] of the payment for such Services in excess of Advantis' charges under this Amended Agreement for up to 180 days, and if such Force Majeure is continuing thereafter, at DWD's option, DWD may exercise its rights pursuant to (2) below, or 2) this Amended Agreement will terminate (in whole or in part) as of a date specified by DWD in a written notice of termination to Advantis and DWD will pay the Termination Charge. Any Termination Charge paid by DWD for a termination in part of this Amended Agreement will decrease the revenue commitment level as set forth in Exhibit 4 for DWD for such year on a pro-rata basis and, each year after payment of the Termination Charge, by an amount equal to the pro-rata portion of revenue attributable to the terminated Services for each such year. Additionally, in the event DWD terminates any Services (in whole or in part) and pays any Termination Charge, Advantis shall adjust the relevant pricing provisions set forth in the applicable Exhibits for DWD to reflect the loss of the usage in order to maintain the current price levels for Services to DWD. d) In the event of a Force Majeure Event, if DWD elects to procure Services from an alternate source provider, then Advantis shall use reasonable efforts to cause Integrated Systems Solutions Corporation to provide such Services. In the event the Force Majeure Event continues for more than 5 days, to the extent that use of the Services is made impossible by the Force Majeure Event, DWD may, upon written notice to Advantis, suspend its obligation to procure Services from Advantis hereunder retroactively from the time of the initiation of the Force Majeure Event until the Force Majeure Event is remedied. During the period that DWD's obligation to procure Service is suspended, the revenue commitment level set forth in Exhibit 4 for DWD shall be suspended for that portion of the Services that Advantis is unable to provide due to the Force - ----------------------------- [*] = CONFIDENTIAL TREATMENT HAS BEEN REQUESTED 39 Majeure Event until such force Majeure Event is remedied. Advantis shall also adjust the relevant pricing provisions set forth in the applicable Exhibits for DWD to reflect the suspension of the usage during such suspended period in order to maintain the current price levels for Services to DWD. If such Force Majeure Event is remedied during the 180-day period, then, if DWD has not yet terminated this Amended Agreement pursuant to Section 16.4 (c) (2) above, DWD shall, as soon as practicable, terminate any Services it is procuring from the alternate source provider and resume procuring Services from Advantis. Upon resuming Services with Advantis, the Term of the Amended Agreement shall be extended by an amount of time equal to the amount of time Advantis was unable to provide such Services to DWD due to the Force Majeure Event. In addition, DWD shall be obligated to Advantis during such extended Term for that portion of the revenue commitment suspended due to the Force Majeure Event. Upon resuming Services with Advantis, the relevant pricing provisions for the balance of the calendar year shall be adjusted to maintain the current price levels to DWD. If the Term is extended pursuant to this Section 16.4 (e), the relevant pricing provisions for such extended term shall be fixed to maintain, during such Term, the prices that would otherwise have been paid during the period of suspended service. 16.5 NONPERFORMANCE To the extent any nonperformance by either Party of its nonmonetary obligations under this Amended Agreement results from or is caused by the other Party's failure to perform its obligations under this Amended Agreement, such nonperformance shall be excused. 16.6 REMARKETING DWD may not remarket all or any portion of the Services provided under this Amended Agreement without the prior written consent of Advantis. It is understood that the phrase 'remarketing of services' does not include either (i) the provision of Services pursuant to Section 3.1 (b) or (ii) the adding of material and substantial value to any of the Services by DWD and the subsequent resale of these value-added services to customers of DWD to the extent the resale of such value-added services constitute a part of the core business of DWD. 16.7 WAIVER No waiver of any breach of any provision of this Amended Agreement shall constitute a waiver of any prior, concurrent or 40 subsequent breach of the same or any other provisions hereof. 16.8 SEVERABILITY If any provision of this Amended Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and such provision shall be deemed to be restated to reflect the original intentions of the Parties as nearly as possible in accordance with applicable law(s). 16.9 LIMITATIONS PERIOD No Party may bring an action, regardless of form, arising out of this Amended Agreement more than two years after the later of the date the cause of action arose or the date such cause of action was or should have been discovered. 16.10 COUNTERPARTS This Amended Agreement may be executed in duplicate counterparts. Each such counterpart shall be an original and both together shall constitute but one and the same document. 16.11 GOVERNING LAW This Amended Agreement shall be governed by the laws of the State of Illinois as such laws are applied to contracts which are entered into and performed entirely within the State of Illinois. 16.12 BINDING NATURE. ASSIGNMENT AND FEES PAYABLE UPON CHANGE IN CONTROL a) DWD (the "Assigning Entity") shall have the right, upon thirty (30) days' prior written notice, to assign this Amended Agreement (the "Assigned Agreement") to: (1) an Affiliate of the Assigning Entity, or (2) to a successor or another entity into which DWD may be merged, (x) so long as such successor or other entity has net assets equal to or greater than the Assigning Entity on the effective date of the assignment or is not engaged in the business of developing manufacturing, selling or leasing information processing hardware and has, together with all Affiliates thereof, annual revenues for the most recently completed fiscal year in excess of $1 billion, or (y) if such assignment does not materially impair Advantis' ability to conduct its business in substantially the same manner it had enjoyed prior to the proposed assignment. 41 b) Should Advantis, in its reasonable discretion, determine that an assignment does not meet the requirements of Section 16.12 (a) above, Advantis shall either consent to such assignment or escalate the matter to the Advantis Board. Upon such escalation, Advantis may, upon majority vote of the Advantis Board in favor of termination, give twelve (12) months' written notice, effective upon such assignment, of termination of the Assigned Agreement, without any obligation of the Assigning Entity to pay the Termination Charge. If Advantis does not advise the Assigning Entity, within thirty (30) days of receipt of notice from the Assigning Entity of the proposed assignment, that the Advantis Board has voted to terminate the Assigned Agreement, then Advantis shall be deemed to have consented to such proposed assignment and to have waived its right to terminate the Amended Agreement with such Assigning Entity upon such Assignment. c) With respect to any proposed assignment of this Amended Agreement by DWD that is not permitted under Section 16.12 (a) above, the Assigning Party shall first obtain Advantis' prior written consent to such proposed assignment, such consent not to be unreasonably withheld or delayed. If Advantis withholds its consent to such proposed assignment, the matter will be escalated to the Advantis Board for consent to the proposed assignment. If the Advantis Board determines not to consent to the assignment, such consent not to be unreasonably withheld, the Assigning Entity shall be precluded from such proposed assignment. d) A change in Control of DWD shall be deemed the assignment by DWD of this Amended Agreement to the Person who, after such change in Control, would Control DWD. If DWD seeks the consent of Advantis in advance for such change of Control, Sections 16.12 (a) and (b) above shall apply as if such change of Control were a merger of DWD into such Person. If DWD does not seek the consent of Advantis in advance for such change of Control, or such Person does not meet the requirements of Section 16.12 (a), Advantis may upon a majority vote of the Advantis Board in favor of termination, give twelve (12) months' written notice of termination of the Amended Agreement, without any obligation of DWD to pay the Termination Charge. e) Advantis shall have the right to assign this Amended Agreement to any Affiliate of Advantis provided that DWD is given thirty (30) days' prior written notice of such proposed assignment and the entity to which this 42 Amended Agreement is to be assigned is capable of assuming, and agrees to assume, all of the obligations of Advantis under the Assigned Agreement. f) In addition to the rights specified in Section 16.12 (e) above, Advantis shall have the right, upon thirty (30) days' prior written notice to DWD, to assign this Amended Agreement in connection with the acquisition of Control of Advantis by any entity, or the transfer of substantially all of the assets of Advantis to any entity ("Advantis Successor") so long as (1) the Advantis Successor assumes all the obligations of Advantis under this Amended Agreement, (2) the Advantis Successor has a net worth equal to or greater than Advantis on the effective date of the assignment, and (3) the assignment to the Advantis Successor will not have a negative effect on the proprietary information or Confidential Information of DWD and (4) such assignment to the Advantis Successor will not materially impair DWD's ability to conduct its business in substantially the same manner it had enjoyed prior to the proposed assignment. g) For any proposed assignment of the Amended Agreement by Advantis which is not covered by Section 16.12 (e) and (f) above, Advantis must first obtain DWD's consent prior to the effective date of such assignment, such consent not to be unreasonably withheld. If DWD reasonably withholds its assignment, Advantis will be precluded from such assignments. h) Any attempted assignment that does not comply with the terms of this Section 16.12 shall be null and void. It is understood by DWD that Advantis may condition its consent to an assignment or change in Control requested by DWD, if granted, as it deems necessary or appropriate, including, without limitation, imposing conditions requiring changes in the charges payable by DWD under this Amended Agreement after an assignment due to increased costs or expenses incurred by Advantis as a result of such assignment or change of Control. 16.13 NOTICES a) Under this Amended Agreement whenever one Party is required or permitted to give notice to the other, such notice will be deemed given when (i) delivered in hand; (ii) received after being mailed by United States mail, registered or certified mail, return receipt requested, postage prepaid or (iii) received after delivery by an express courier with a reliable system for tracking deliveries. 43 b) Notification will be addressed as follows: In the case of Advantis: In the case of DWD: Advantis Dean Witter, Discover & Co. 231 North Martingale Road Two World Trade Center Schaumburg, Illinois 60173-2254 New York, New York 10006 Attention: General Counsel Attention: General Counsel Either Party hereto may from time to time change its address for notification purposes by giving the other Party prior written notice of the new address and the date upon which it will become effective. 16.14 NO THIRD PARTY BENEFICIARIES Except as specified in Section 12 with respect to Persons entitled to indemnification, the Parties do not intend, nor will any clause be interpreted, to create for any third party any obligations to or benefits from either Advantis or DWD. This does not affect or limit the obligations of or benefits to any entity receiving Services pursuant to Section 3.1 (b). 16.15 HEADINGS All headings herein and the table of contents are not to be considered in the construction or interpretation of any provision of this Amended Agreement. This Amended Agreement was drafted with the joint participation of DWD and Advantis and shall be construed neither against nor in favor of either, but rather in accordance with the fair meaning thereof. In the event of any apparent conflicts or inconsistencies between this Amended Agreement and any Exhibits or other Attachments to this Amended Agreement, to the extent possible such provisions shall be interpreted so as to make them consistent, and if such is not possible, the provisions of this Amended Agreement shall prevail. 16.16 NON-EXCLUSIVITY Subject to DWD's obligation to meet its respective revenue commitment obligations and subject to DWD's obligation to pay any Termination Charge as set forth in this Amended Agreement, nothing herein shall prohibit DWD from procuring information processing, data networking and voice services from other providers or providing such services for itself. THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDED AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS, FURTHER THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF (1) THIS AMENDED AGREEMENT, AND (2) THE EXHIBITS, INCLUDING THOSE MADE EFFECTIVE BY THE PARTIES IN THE FUTURE. THIS AMENDED RESTATEMENT OF THE MASTER AGREEMENT SUPERSEDES ALL PROPOSALS OR THE PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDED AGREEMENT. Accepted by: Accepted by: ADVANTIS DEAN WITTER, DISCOVER & CO. By: By: - ---------------------------------- ----------------------------------- Name: Name: - ---------------------------------- ----------------------------------- Title: Title: - ---------------------------------- ----------------------------------- Date: Date: - ---------------------------------- ----------------------------------- 44 EX-10.9 3 DEAN WITTER START PLAN EXHIBIT 10.9 ________________________________________________________________________________ DEAN WITTER START PLAN (Saving Today Affords Retirement Tomorrow) Amended and Restated Effective as of January 1, 1997 (Execution Copy) ________________________________________________________________________________ TABLE OF CONTENTS ----------------- Page ---- SECTION 1. INTRODUCTION.................................................. 1 ------------ SECTION 2. PARTICIPATION................................................. 2 ------------- SECTION 3. PERIOD OF SERVICE............................................. 4 ----------------- SECTION 4. COMPANY CONTRIBUTIONS......................................... 9 --------------------- SECTION 5. EMPLOYEE CONTRIBUTIONS........................................ 12 ---------------------- SECTION 6. INVESTMENT OF EMPLOYEE CONTRIBUTIONS.......................... 21 ------------------------------------ SECTION 7. TRUST FUND.................................................... 23 ---------- SECTION 8. ACCOUNTS...................................................... 27 -------- SECTION 9. ROLLOVER AND QUALIFIED PLAN TRANSFER ------------------------------------- CONTRIBUTIONS................................................. 29 ------------- SECTION 10. PLAN BENEFITS................................................. 31 ------------- SECTION 11. DISTRIBUTION OF PLAN BENEFITS................................. 33 ----------------------------- SECTION 12. WITHDRAWALS AND LOANS......................................... 36 ---------------------- SECTION 13. INCORPORATION OF CERTAIN CODE ----------------------------- REQUIREMENTS BY REFERENCE..................................... 45 -------------------------- SECTION 14. FIDUCIARY RESPONSIBILITIES AND PLAN ----------------------------------- ADMINISTRATION................................................ 47 -------------- SECTION 15. FUNDING POLICY AND METHOD..................................... 49 ------------------------- SECTION 16. CLAIMS PROCEDURE.............................................. 49 ---------------- SECTION 17. REVIEW PROCEDURE.............................................. 50 ---------------- SECTION 18. EXPENSES OF PLAN AND TRUST.................................... 52 -------------------------- i SECTION 19. AMENDMENT AND TERMINATION..................................... 53 ------------------------- SECTION 20. MISCELLANEOUS................................................. 55 ------------- SECTION 21. DEFINITIONS................................................... 57 ----------- SECTION 22. EXECUTION..................................................... 73 --------- SUPPLEMENT A. SPECIAL CONTRIBUTION..................................... A-1 -------------------- SUPPLEMENT B. PAYROLL-BASED ------------- EMPLOYEE STOCK OWNERSHIP PLAN............................ B-1 ----------------------------- SUPPLEMENT C. TOP-HEAVY PROVISIONS..................................... C-1 -------------------- SUPPLEMENT D. PARTICIPANTS RESIDING IN PUERTO RICO..................... D-1 ------------------------------------ SUPPLEMENT E. 1993 MATCHING CONTRIBUTIONS FOR CREDIT -------------------------------------- SERVICES EMPLOYEES....................................... E-1 ------------------ ii DEAN WITTER START PLAN (SAVING TODAY AFFORDS RETIREMENT TOMORROW) ------------------------------------------ AMENDED AND RESTATED EFFECTIVE AS OF JANUARY 1, 1997 SECTION 1. INTRODUCTION ------------ The Dean Witter START Plan (Saving Today Affords Retirement Tomorrow) (the "Plan") was originally established as the Dean Witter Stock Accumulation Plan, effective September 1, 1971. The Plan has subsequently been amended and restated several times, including an amendment and restatement to reflect the fact that, on December 31, 1981, DWRO (the parent company of Dean Witter Reynolds Inc.) was merged into a wholly-owned subsidiary of Sears, Roebuck and Co., and all outstanding shares of DWRO common stock were converted into shares of common stock of Sears. Effective January 1, 1984, the Plan was renamed the Dean Witter Reynolds Inc. Employee Retirement Investment Plan. Effective January 1, 1987, the Plan was amended and restated to comply with certain requirements of the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 1988 and other applicable changes in the law. Thereafter, the Plan was amended on fourteen occasions starting with the First Amendment dated March 21, 1990 and continuing through the Fourteenth Amendment adopted on April 11, 1994. Effective June 1, 1994, the Plan was renamed as the Dean Witter START Plan (Saving Today Affords Retirement Tomorrow). Effective July 1, 1994, the Plan was again amended and restated, incorporating into a single document all amendments made since the amendment and restatement of January 1, 1987. The Plan was amended on April 20, 1995, effective as of June 30, 1995. The Plan was again amended and restated as of January 1, 1996 and January 1, 1997. This document sets forth the terms of the Plan as of January 1, 1997. The Plan is subject to further amendment in accordance with Section 19, including amendments required to meet applicable rules and regulations of the Internal Revenue Service or the United States Department of Labor. Capitalized terms used in the text of the Plan are defined in Section 21 in alphabetical order. The Plan is intended to be a profit-sharing plan for purposes of Code section 401(a)(27). SECTION 2. PARTICIPATION ------------- (a) Commencement of Participation. ----------------------------- Effective January 1, 1996, subject to Section 2(b): (i) an Immediately Eligible Employee may elect to become a Participant in the Plan on any Entry Date coincident with or following such Employee's Employment Commencement Date; (ii) an Eligible Employee may elect to become a Participant in the Plan on any Entry Date coincident with or following the date on which such Employee becomes an Eligible Employee. If an individual is not employed as an Eligible Employee on the first Entry Date on or after such individual has become an Eligible Employee, such individual may elect to become a Participant as of any Entry Date following the date on which such individual next becomes an Eligible Employee or an Immediately Eligible Employee. If an Employee who severs employment is an Immediately Eligible Employee or an Eligible Employee on such Employee's Severance Date and such Employee is later rehired, such Employee shall be deemed an Immediately Eligible Employee as of such Employee's Reemployment Commencement Date, regardless of the employee status into which such Employee has been rehired, and may elect to commence or resume participation immediately upon such rehire or upon any Entry Date thereafter. 2 Effective July 1, 1994, an Eligible Employee may elect to become a Participant in the Plan on the Entry Date coincident with or next following the Eligible Employee's Employment Commencement Date. Notwithstanding anything to the contrary contained herein, Eligible Employees whose Employment Commencement Dates precede July 1, 1994 may elect to become Participants as of July 1, 1994 or any Entry Date thereafter. Effective January 1, 1987, an Eligible Employee shall become a Participant in the Plan on the Entry Date coincident with or next following the earlier of (i) the date he or she completes two years of continuous full-time employment with one or more members of the Affiliated Group or (ii) the date the Eligible Employee has attained age 21 and completed one Year of Service. If an individual is not employed as an Eligible Employee on the first Entry Date after meeting the age and service requirements, such individual shall become a Participant on the next date such individual becomes an Eligible Employee. If a Participant terminates employment and is later rehired as an Eligible Employee, such Participant shall resume participation in the Plan immediately upon such rehire. Notwithstanding anything to the contrary herein, an Eligible Employee who commenced employment with the Company prior to January 1, 1987 will automatically become a Participant in the Plan on the first day of the month following the month in which falls the earliest of (i) the date the Eligible Employee completes two years of continuous full-time employment with one or more members of the Affiliated Group regardless of age, (ii) the date the Eligible Employee has attained age 21 and completed three continuous months of employment with one or more members of the Affiliated Group or (iii) the date the Eligible Employee has attained age 21 and completed one Year of Service. An Employee who commenced employment with the Company Prior to January 1, 1987 but who was not an Eligible Employee on the first day of the month described in the preceding sentence, but who becomes an Eligible Employee after having satisfied the requirements of such preceding sentence, shall 3 automatically become a Participant in the Plan on the first day of the month following the month in which such Employee becomes an Eligible Employee. (b) Enrollment Process. Notwithstanding the foregoing, no Immediately ------------------- Eligible Employee or Eligible Employee shall become a Participant in the Plan until such Employee has completed the enrollment process established by the Plan Administrator. (c) Termination of Participation. A Participant's participation shall ---------------------------- terminate on the date no amount is payable to the Participant hereunder. SECTION 3. PERIOD OF SERVICE ----------------- An Employee's service shall be determined under the following rules: (a) Definitions. For purposes of this Section 3 the following terms ----------- have the following meanings unless the context clearly indicates a different meaning: "Affiliated Group" means Affiliated Group as defined in Section 21 and ---------------- any other entity required to be aggregated with any Participating Company pursuant to section 414(o) of the Code and the regulations thereunder. "Employment Commencement Date" means the date on which an Employee ---------------------------- first is credited with an Hour of Service. "Hour of Service" means each hour for which an Employee is paid or --------------- entitled to payment for the performance of duties for the Company or for any member of the Affiliated Group. "One Year Break" means a Period of Severance of twelve consecutive -------------- months. "Period of Service" means a period beginning on an Employee's ----------------- Employment Commencement Date or Reemployment Commencement Date and ending on the Employee's Severance Date. An Employee's Period of Service also includes any other period which constitutes a "Period of Service" under written rules or regulations adopted from time to time by the Plan Administrator. 4 "Period of Severance" means each period from an Employee's Severance ------------------- Date to the Employee's next Reemployment Commencement Date. "Reemployment Commencement Date" means the date on which an Employee ------------------------------ first is credited with an Hour of Service after a Severance Date. "Severance Date" means the earlier of the date on which an Employee -------------- quits, retires, is discharged or dies; or the first anniversary of the first date of a period in which an Employee remains continuously absent from service with an Employer (with or without pay) for any reason other than quit, retirement, discharge or death. Notwithstanding the foregoing, an Employee shall not have a Severance Date when the Employee: (i) Takes a leave of absence without pay approved by the appropriate member of the Affiliated Group. In the case of an approved leave of absence without pay for a period in excess of twelve months, the Employee shall be deemed to have a Severance Date as of the end of such twelve-month period if the Employee fails to abide by the terms and conditions of such leave, which may include a requirement to return to active employment. (ii) Enters the military service of the United States, provided the Employee returns to active employment with any member of the Affiliated Group within the time the Employee's reemployment rights are protected under applicable law. If the Employee does not so return, the Employee shall be deemed to have a Severance Date as of the date of entry into military service. (iii) Is unable to work due to disability or sickness. (iv) Is on jury duty, a leave of absence with pay, an approved vacation or a holiday. (v) Is absent from work for maternity or paternity reasons. For purposes of this paragraph (v), an absence from work for maternity or paternity reasons means an absence; 5 (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. If the Employee does not return to employment with a member of the Affiliated Group before the second anniversary of the beginning of such absence the Employee shall have a Severance Date on such second anniversary. Notwithstanding the foregoing, if an Employee quits, is discharged, dies or retires while on leave, vacation, holiday or jury duty, or while disabled or sick, the Employee shall have a Severance Date on the earlier of the date of such quit, discharge, death or retirement, or twelve months after the commencement of such leave, vacation, holiday, jury duty, disability or sickness. An Employee shall be deemed to have been discharged as of the earlier of the date the Employee received oral or written notice of discharge or the date a written notice of discharge is deposited in the United States mail (on a registered or certified basis) to the Employee's last known address. "Year of Service" means a Period (or Periods) of Service, whether or --------------- not consecutive, equal to twelve months. (b) Service of Rehired Employees ---------------------------- (i) An Employee's Period of Service shall include any period following the Employee's Severance Date and prior to the Employee's first Reemployment Commencement Date following such Severance Date if such Reemployment Commencement Date occurs no later than twelve months after such Severance Date. 6 (ii) For participation purposes only, an Employee's Period of Service shall not include any period prior to a One Year Break unless the Employee completes a Year of Service after returning to employment. (iii) For vesting purposes only, an Employee's Period of Service shall not include any period prior to a One Year Break unless the Employee completes an Hour of Service after returning to employment. (c) Service with Reynolds. In the case of any individual who was an --------------------- employee of Reynolds Securities International Inc. or any subsidiary thereof at any time prior to the merger of Reynolds Securities International Inc. with Dean Witter Organization Inc., Years of Service for periods prior to January 3, 1978 shall be determined by applying the rules of this Section 3 to that period of employment. The Years of Service so determined shall be added to such individual's Years of Service determined under this Plan, computed as though the individual's Employment Commencement Date was the later of January 1, 1978 or the date such individual was first credited with an Hour of Service. (d) Service with Sears or its Subsidiaries. -------------------------------------- (i) If an individual was employed by Sears or any subsidiary thereof prior to December 31, 1981, and is treated by any member of the Affiliated Group as having been continuously employed by a member of the Affiliated Group since December 31, 1981, such individual's Years of Service shall be determined by applying the rules of this Section 3 to the entire period of such employment before and after December 31, 1981. If such an individual is not so treated, such individual's Years of Service shall be determined by applying the rules of this Section 3 only to the period of such employment after December 31, 1981. (ii) If, prior to the Spin-off, a Participant transferred employment to Sears or any subsidiary of Sears, other than DWD or a subsidiary of DWD and was employed by Sears or a 7 subsidiary of Sears on the Spin-off date and remained continuously employed by Sears or any subsidiary of Sears after the Spin-off date, then, for purposes of vesting in Company Matching Contributions, such transferred Participant's Period of Service shall include service with Sears or a subsidiary of Sears after the Spin-off but not more than the lesser of such transferred Participant's service with Sears or a subsidiary of Sears or the service necessary for such transferred Participant to fully vest in his or her Matching Contribution Account, such post-Spin-off service to be determined in accordance with this Section 3. (e) Aggregation of Periods of Service. Subject to Section 3(b), all --------------------------------- of an Employee's Periods of Service determined pursuant to this Section 3 shall be aggregated on the basis of complete months, whether or not such Periods of Service are consecutive, except that if an Employee's Period of Service commences on other than the first day of a calendar month and ends on other than the last day of a calendar month, the days in such months shall be aggregated and one additional month of service shall be credited if the number of such days is at least 30 but less than 60, and two additional months shall be credited if the number of such days equals 60. (f) Transferred Employees. If a Participant transfers employment to --------------------- SPS Transaction Services, Inc. (or any of its subsidiaries) ("SPS") or NationsSecurities, A Dean Witter/NationsBank Company ("Nations") such transferred Participant's Period of Service shall include service with SPS or Nations but not more than the lesser of such transferred Participant's service with SPS or Nations or the service necessary for such transferred Participant to fully vest in the Matching Contribution Account, such post-transfer service to be determined in accordance with this Section 3. (g) Service with SPS. In the case of any individual who was an ----------------- employee of SPS and who either transfers employment to a member of the Affiliated Group or severs employment with SPS and is rehired as an Employee by a member of the Affiliated Group within 12 months of such 8 severance, such Employee's Service used to determine a Year of Service under this Section 3 shall include service with SPS determined by applying the rules set forth in this Section 3 to such Employee's employment by SPS as if such employment was employment by a member of the Affiliated Group. SECTION 4. COMPANY CONTRIBUTIONS. --------------------- (a) Amount. For each Plan Year, the Participating Companies shall ------ make Matching Contributions to the Trust Fund equal to the amount required to be allocated as Matching Contributions under Section 4(b)(i) and may, in their sole and absolute discretion, make additional Matching, Qualified Non-Elective or Qualified Matching Contributions. All Company Contributions shall be made in cash. (b) Allocation. ---------- (i) Basic Matching Contributions. Matching Contributions and ---------------------------- forfeitures, if any, for each Plan Year shall be allocated to each Participant who was either an Employee as of the last day of the Plan Year or ceased to be an Employee during the Plan Year as a result of such Participant's death Total and Permanent Disability, Retirement or Release. (1) For Plan Years beginning before January 1, 1991, the amount required to be allocated by this section shall be equal to 50 percent of the first $2,000, and 20 percent of the remaining amount, of Basic Contributions for each Plan Year made by the Participant. (2) For Plan Years beginning after December 31, 1990 and before January 1, 1993, the amounts required to be allocated under this section shall be an amount equal to at least 24.9% but not more than 116.2% of the first $2,000, and at least 9.9% but not more than 46.2% of the remaining amount, of Basic Contributions for each Plan Year made by the Participant, said 9 percentages to be determined relative to the amount of Pretax Income for the fiscal year in which the Plan Year ends, as follows: (A) In advance of each Plan Year, the Company shall determine the levels of Pretax Income, expressed as a series of ranges, to be used for purposes of this Section 4(b)(i) and the percentages to be used to calculate Matching Contributions based upon the range into which the amount of Pretax Income for the year falls. (B) For purposes of this Section 4(b)(i) only, "Pretax Income" means revenues, less expenses, exclusive of Company matching contributions under the Plan and before the provision for payment of Federal, state and local income taxes, attributable to securities activities of Dean Witter Financial Services Group as certified by the Company's independent public accountants. (3) For Plan Years beginning after December 31, 1992, the amount required to be allocated under this section shall be an amount equal to at least 24.9% but not more than 116.2% of the first $2,000, and at least 9.9% but not more than 46.2% of the remaining amount, of Basic Pretax Contributions for each Plan Year made by the Participant, said percentages to be determined relative to the amount of Pretax Income for the fiscal year in which the Plan Year ends of the Business Segment in which the Participant was an Employee on the last day of the Plan Year or on such Participant's last day of employment immediately preceding the Participant's death, Total and Permanent Disability, Retirement or Release. The amount required to be allocated for each Plan Year shall be determined as follows: (A) For each Plan Year commencing after December 31, 1992, the Company shall determine one or more Business Segments for which Matching Contributions shall be calculated. For each such Business Segment, the Company shall determine the levels of Pretax Income, expressed as a series of ranges, to be used for purposes of this Section 4(b)(i)(3) and the 10 percentages to be used to calculate Matching Contributions based upon the range into which the amount of Pretax Income for the year falls. (B) For purposes of this Section 4(b)(i)(3) only, "Pretax Income" means revenues, less expenses, exclusive of Company Matching Contributions under the Plan and before the provision for accounting adjustments, extraordinary items and the payment of Federal, state and local income taxes, attributable to the consolidated activities of each Business Segment as audited by the Company's independent public accountants. (C) For purposes of this Section 4(b)(i)(3) only, "Business Segment" shall mean Dean Witter, Discover & Co., in whole or in part, and any subsidiary, group of subsidiaries, divisions, departments, units, business activity or group of business activities of Dean Witter, Discover & Co. as determined by the Company for each Plan Year. (ii) Additional Company Contributions. The Company may, in its sole -------------------------------- discretion, make Matching Contributions in excess of the amount required to be allocated under Section 4(b)(i), Qualified Matching Contributions ("QMACs") or Qualified Non-Elective Contributions ("QNECs"). Any such Matching Contributions or any QMACs may be made with respect to any or all Participants as determined by the Company. Any such Matching Contributions or any QMACs shall be allocated in proportion to each such Participant's Basic Contribution for the Plan Year. QNECs may be made with respect to any or all Immediately Eligible Employees or Eligible Employees, as determined by the Company, and shall be allocated in a manner to be determined by the Company. (c) Payment of Company Contributions. The portion of the Company -------------------------------- Contribution to be made by each Participating Company for each Plan Year shall be determined by the Company and shall be paid to the Trustee at such time or times as the Participating Company shall determine, but in 11 any event before the date for filing such Participating Company's Federal income tax return for the Plan Year, including any extensions of such date. SECTION 5. EMPLOYEE CONTRIBUTIONS. ---------------------- (a) Basic and Supplemental Contributions. ------------------------------------ (i) Pretax Contributions. Each Participant who is an Eligible ---------------------- Employee may make Basic Contributions to the Plan equal to any whole percentage from 1% to 6%, of the Participant's Earnings for the appropriate Plan Year. Except to the extent provided in Section 5(b) below, each Participant's Basic Contributions shall constitute Basic Pretax Contributions. A Participant who is not a Highly Compensated Employee and who is making Basic Pretax Contributions equal to 6% of Earnings may also elect to make Supplemental Pre- tax Contributions to the Plan equal to any whole percentage, from 1% to 6%, of Earnings. (ii) After-Tax Contributions. A Participant who is not a Highly ------------------------ Compensated Employee may make After-Tax Contributions to the Plan equal to any whole percentage from 1% to 10% of the Participant's Earnings regardless of whether the Participant is making any Pretax Contributions. However, in no event shall the aggregate amount of a Participant's Pretax and After-Tax Contributions exceed 17% of the Participant's Earnings. (b) Basic After-Tax Adjustment Contributions. In order that the Plan ---------------------------------------- may comply with the requirements of sections 401(k) and 415 of the Code and the regulations thereunder, at any time during the Plan Year the Plan Administrator (at its sole discretion) may reduce the rate at which any Participant who is a Highly Compensated Employee may contribute Basic Pretax Contributions, or discontinue all such contributions, for the remainder of such Plan Year. Such a reduction or discontinuance may be applied selectively to individual Participants or to particular classes of Participants, as the Plan Administrator may determine. Any Participant whose Basic Pretax 12 Contributions are reduced or discontinued under this Section 5(b) shall make Basic After-Tax Adjustment Contributions to the Plan during the remainder of the Plan Year equal to the percentage of the Participant's Earnings that the Plan Administrator has determined cannot be made as Basic Pretax Contributions; provided, that in order that the Plan may comply with the requirements of section 401(m) of the Code and the regulations thereunder, at any time during the Plan Year the Plan Administrator (at its sole discretion) may reduce the rate at which a Participant may contribute Basic After-Tax Adjustment Contributions, or discontinue all such contributions, for the remainder of such Plan Year. Any reduction or discontinuance of Basic Pretax or Basic After-Tax Adjustment Contributions made pursuant to this Section 5(b) shall automatically cease to apply upon the close of the Plan Year in which it is made, or on such earlier date in such Plan Year as the Plan Administrator may determine. (c) Changing the Rate and Suspension of Employee Contributions. As of ---------------------------------------------------------- the beginning of any Quarter, a Participant may elect to change the Participant's rate of Basic Pretax Contributions, any Supplemental Pretax Contributions and/or After-Tax Contributions to any other rate that is within the limitations described in Section 5(a) provided, however, that the Plan Administrator shall have the discretion to permit Participants to make one or more additional elections, provided, further, that the right to make such additional elections is made available to all Participants on a nondiscriminatory basis. If a Participant elects to reduce the Participant's rate of Basic Pretax Contributions to a rate that is below 6%, any Supplemental Pretax Contributions being made by the Participant shall automatically cease on the effective date of such election. If a Participant is making Basic After-Tax Adjustment Contributions, and elects to reduce the rate of such Basic Contributions, and if, as a result of such election, the Plan Administrator determines that it is no longer necessary for the Participant to make some or all of such Basic After-Tax Adjustment Contributions, the appropriate amount of the Participant's Basic After-Tax Adjustment Contributions shall automatically cease, effective as of the 13 effective date of the Participant's election to change the Participant's rate of Basic Contributions. As of any pay period, the Participant may elect to discontinue all After-Tax Contributions, Supplemental Pretax Contributions and/or Basic Pretax Contributions, provided however, that an election to discontinue Basic Pretax Contributions shall automatically cause discontinuance of any Supplemental Pretax Contributions. (d) Maximum Amount of Elective Deferrals. Notwithstanding anything to ------------------------------------ the contrary herein, the amount of Elective Deferrals made with respect to any individual during a calendar year under the Plan and all other plans, contracts or arrangements of any member of the Affiliated Group may not exceed the amount of the limitation in effect under section 402(g)(1) of the Code for taxable years beginning in such calendar year. Such limit shall not apply to any such Elective Deferrals made which are amounts attributable to service performed by such Participant prior to January 1, 1987. (e) Distribution of Excess Elective Deferrals. A Participant may ----------------------------------------- assign to the Plan any Excess Elective Deferrals made during a taxable year of the Participant by notifying the Plan Administrator on or before March 1 following the close of such taxable year of the amount of the Excess Elective Deferrals to be assigned to the Plan. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 following such taxable year to any Participant to whose account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. The amount of Excess Elective Deferrals that may be distributed with respect to a Participant for a taxable year shall be reduced by any Excess Contributions previously distributed under Subsection 5(g)(1) or re- characterized under Subsection 5(g)(2) with respect to the Participant for the Plan Year beginning with or within the Participant's taxable year for which such Excess Elective Deferrals have been made. 14 (f) Actual Deferral Percentage Test ------------------------------- (1) Elective Deferrals hereunder shall not exceed the limits set forth in section 401(k)(3) of the Code. For purposes of applying such limits, section 401(k)(3) of the Code and the regulations thereunder are incorporated herein by reference and are hereinafter referred to as the "ADP test." (2) All or part of the Qualified Matching Contributions and Qualified Non-Elective Contributions made with respect to any or all Eligible Employees may be treated as Elective Deferrals for purposes of the ADP test provided that each of the following requirements is met: (i) the amount of nonelective contributions, including the Qualified Non-Elective Contributions treated as Elective Deferrals for purposes of the ADP test, satisfies the requirements of Code section 401(a)(4); (ii) the amount of nonelective contributions, excluding those Qualified Non-Elective Contributions treated as Elective Deferrals for purposes of the ADP test and those Qualified Non-Elective Contributions treated as Matching Contributions for purposes of the ACP test (described in Section 5(h) below), satisfies the requirements of Code section 401(a)(4); (iii) all such Qualified Non-Elective Contributions and Qualified Matching Contributions are nonforfeitable when made and subject to the same distribution restrictions that apply to Elective Deferrals, without regard to whether such Qualified Non-Elective Contributions or Qualified Matching Contributions are actually taken into account as Elective Deferrals; (iv) all such Qualified Non-Elective Contributions and Qualified Matching Contributions are allocated to the accounts of Eligible Employees as of a date within the Plan Year (pursuant to Regulations section 1.401(k)- (b)(4)(i)(A)) as if such contributions were Elective Deferrals; and, 15 (v) for Plan Years beginning after December 31, 1988, if the Plan uses the provisions of this Subsection 5(f)(2) for purposes of the ADP test, then, for purposes of Code section 410(b) (other than the average benefit percentage test), the Plan may be aggregated with other plans of the Affiliated Group to which qualified nonelective contributions and qualified matching contributions are made. If the Plan Year is changed to satisfy the section 410(b) requirement that aggregated plans have the same plan year, this Subsection 5(f)(2) may apply during the resulting short plan year only if the Qualified Non-Elective Contributions and Qualified Matching Contributions during the short plan year satisfy Regulations section 1.401(k)-1(b)(4)(i) as if such contributions were Elective Deferrals and such aggregated plans could otherwise be aggregated for purposes of section 410(b). (g) Distribution of Excess Contributions. ------------------------------------- (1) Notwithstanding any other provision of the Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of any Plan Year beginning after December 31, 1987 to Participants to whose accounts Basic Pretax, Qualified Matching and Qualified Non-Elective Contributions were allocated for the preceding Plan Year. The Excess Contributions shall be adjusted for income or loss up to the date of distribution. The income or loss allocable to Excess Contributions shall be determined by multiplying the income or loss allocable to the Participant's Basic Pretax, Supplemental Pretax, Qualified Matching and Qualified Non- Elective Contributions for the Plan Year by a fraction, the numerator of which is the Excess Contribution on behalf of the Participant for the preceding Plan Year and the denominator of which is the sum of the Participant's account balances attributable to Basic Pretax, Supplemental Pretax, Qualified Matching and Qualified Non-Elective Contributions on the last day of the preceding Plan Year. Amounts distributed under this Section 5(g) shall be made from the Participant's Basic Pretax, 16 Qualified Matching and Qualified Non-Elective Contribution Accounts in proportion to the Participant's Basic Pretax, Qualified Matching and Qualified Non-Elective Contributions for the Plan Year. (2) A Participant may treat Excess Contributions as an amount distributed to the Participant and then contributed by the Participant to the Plan as Basic After-Tax Adjustment Contributions. Such re-characterized amounts will remain nonforfeitable and subject to the same distribution requirements as Supplemental Pretax Contributions. Amounts may not be re-characterized by a Highly Compensated Employee to the extent that such amount in combination with other Basic After-Tax Adjustment and Matching Contributions made with respect to that Employee would exceed the limits under Section 5(h). Re-characterization must occur no later than two and one-half months after the last day of the Plan Year in which the Excess Contributions arose and is deemed to occur no earlier than the date the last Highly Compensated Employee is informed in writing of the amount which may be re-characterized and the consequences thereof. (3) The amount of Excess Contributions to be distributed under Subsection 5(g)(l) or re-characterized under Subsection 5(g)(2) shall be reduced by Excess Elective Deferrals previously distributed under Section 5(e) for the Participant's taxable year ending with or within the Plan Year for which such Excess Contributions have been made. (h) Actual Contributions Percentage Test ------------------------------------- (1) Matching Contributions and Basic After-tax Adjustment Contributions hereunder shall not exceed the limits set forth in section 401(m)(2) of the Code. For purposes of applying such limits, section 401(m)(2) of the Code and the regulations thereunder are incorporated herein by reference and are hereinafter referred to as the "ACP test." (2) Contributions made by or on behalf of Highly Compensated Employees shall not exceed the limits imposed upon multiple use of the alternative limitation by section 401(m)(9) of 17 the Code. For this purpose, Code section 401(m)(9) and Regulations section 401(m)-2(b) are incorporated herein by reference. If one or more Highly Compensated Employees' Contributions exceed the multiple use limit, then the Actual Contribution Ratio ("ACR") of Highly Compensated Employees shall be reduced (starting with such Highly Compensated Employee whose ACR is the highest) so that the limit is not exceeded. The amount of any such reduction shall be treated as an Excess Aggregate Contribution. The Actual Deferral Ratio ("ADR") and ACR of Highly Compensated Employees shall be determined hereunder after any adjustments required to pass the tests described in Subsections 5(f)(l) and 5(h)(l). Multiple use shall not occur if the ADP and ACP of Highly Compensated Employees is not greater than 125 percent of the ADP and ACP of non- Highly Compensated Employees. (3) All or part of the Qualified Non-Elective Contributions and Elective Deferrals made with respect to any or all Eligible Employees may be treated as Matching Contributions for purposes of the ACP test provided that each of the following requirements is met: (i) the amount of nonelective contributions, including the Qualified Non-Elective Contributions treated as Matching Contributions for purposes of the ACP test, satisfies the requirements of Code section 401(a)(4); (ii) the amount of nonelective contributions, excluding those Qualified Non-Elective Contributions treated as Matching Contributions for purposes of the ACP test and those Qualified Non-Elective Contributions treated as Elective Deferrals under Regulations section 1.401(k)-1(b)(5) for purposes of the ADP test satisfies the requirements of Code section 401(a)(4); (iii) all Elective Deferrals whether or not treated as Matching Contributions hereunder, satisfy the ADP test. (iv) the Qualified Non-Elective Contributions are allocated to the Accounts of Eligible Employees as of a date within the Plan Year (pursuant to Regulations Section 1.401(k)- 18 1(b)(4)(i)(A)), and the Elective Deferrals satisfy Regulations section 1.401(k)- 1(b)(4)(i) for the Plan Year; and, (v) for Plan Years beginning after December 31, 1988, if the Plan uses the provisions of this Subsection 5(h)(3) for purposes of the ACP test, then for purposes of Code section 410(b) (other than the average benefit percentage test), the Plan may be aggregated with other plans of the Affiliated Group to which qualified nonelective contributions and elective contributions are made. If the Plan Year is changed to satisfy the section 410(b) requirement that aggregated plans have the same plan year, this Subsection 5(h)(3) may apply during the resulting short plan year only if Elective Deferrals during the short plan year satisfy Regulations section 1.401(k)-1(b)(4) with respect to the short plan year and Qualified Non-Elective contributions satisfy Regulations section 1.401(k)-1(b)(4)(i)(A) with respect to the short plan year as if such contributions were Elective Deferrals. (4) Participating Companies may, in their sole discretion, satisfy the ACP test either by making additional Qualified Non-Elective Contributions, Matching Contributions or Qualified Matching Contributions pursuant to Section 4(b)(ii) or by distributing Excess Aggregate Contributions pursuant to Section 5(i). The determination of Excess Aggregate Contributions shall be made after first determining the Excess Elective Deferrals and then determining the Excess Contributions for the Plan Year. (i) Distribution of Excess Aggregate Contributions ---------------------------------------------- (1) Notwithstanding any other provision of this Plan, Excess Aggregate Contributions made on behalf of Highly Compensated Employees plus any income or minus any loss allocable thereto shall be forfeited, if forfeitable, or, if not forfeitable, distributed not later than the last day of each Plan Year beginning after December 31, 1987 on the basis of the respective portions of such Excess Aggregate Contributions attributable to the Accounts of each Highly Compensated 19 Employee whose Contributions for a Plan Year must be reduced under Section 5(h) to enable the Plan to satisfy the ACP test. (2) The income or loss allocable to a Highly Compensated Employee's Excess Aggregate Contributions shall be determined by multiplying such income or loss by a fraction, the numerator of which is the Excess Aggregate Contributions on behalf of the Highly Compensated Employee for the preceding Plan Year and the denominator of which is the sum of the Highly Compensated Employee's Account balances attributable to Contributions taken into account for purposes of the ACP test on the last day of the preceding plan year. (3) Excess Aggregate Contributions shall be distributed from the Highly Compensated Employee's Basic After-Tax Adjustment Account and forfeited, if otherwise forfeitable under the terms of the plan or, if not forfeitable, distributed from the Highly Compensated Employee's Matching Contribution Account in proportion to the Highly Compensated Employee's Basic After-Tax Adjustment and Matching Contributions for the Plan Year. (j) Salary Reduction and Tax Status of Pretax Contributions. For ------------------------------------------------------- Federal tax purposes (and, wherever permitted, for state and local tax purposes), Basic Pretax Contributions and Supplemental Pretax Contributions shall be deemed to be Company Contributions to the Plan, and a Participant's election to make such contributions shall constitute an election to have the amount of his or her compensation that otherwise would have been reported as taxable compensation on Form W-2 (or its equivalent) reduced by the amount of such contributions. (k) Administrative Procedures. The Plan Administrator may require ------------------------- Participants to complete such process as may be established by the Plan Administrator before any election under this Section 5 may take effect. SECTION 6. INVESTMENT OF EMPLOYEE CONTRIBUTIONS ------------------------------------ 20 (a) Initial Selection of Investment of Employee Contributions. A --------------------------------------------------------- Participant shall, in a manner prescribed by the Plan Administrator, direct the investment of said Participant's Employee Contributions in the Dean Witter Discover Stock Fund, one or more other Investment Funds designated by the Company pursuant to Section 7(c)(ii) of the Plan, or any combination thereof; provided, however, that the Participant's Employee Contributions shall be invested in not more than five Investment Funds and the portion invested in any Investment Fund shall be a whole number multiple of 10%, but shall not exceed 100%, of such contributions. (b) Changing Investment Directions for Future Contributions. A ------------------------------------------------------- Participant may elect to change the Investment Fund in which said Participant's future Employee Contributions will be invested, or the percentage of such contributions that will be invested in any Investment Fund. A Participant shall only be allowed to make one election pursuant to this Section 6(b) for each quarterly record provided to the Participant by the Plan Administrator, provided, however, that the Plan Administrator shall have the discretion to permit Participants to make one or more additional elections, provided, further, that the right to make such additional elections is made available to all Participants on a nondiscriminatory basis. (c) Fund Balance Transfers. A Participant may elect to transfer all ---------------------- or any portion of said Participant's Employee Contribution Accounts between two or more funds established pursuant to Section 7(c) (a "Fund Balance Transfer" or "FBT") subject to the conditions set forth herein. A Participant shall only be allowed to make one FBT for each quarterly statement provided to the Participant by the Plan Administrator, provided, however, that the Plan Administrator shall have the discretion to permit Participants to make one or more additional FBTs, provided, further, that the right to make such additional FBTs is made available to all Participants on a nondiscriminatory basis. When making an FBT, a Participant shall specify the Investment Fund (or Funds) from which the transfer is 21 to be made and further specify the number of whole shares or the percentage of shares (up to 100%) in the particular Fund to be transferred. Transfers may be made from an Investment Fund to up to five other Investment Funds in increments of 10% of the total amount to be transferred. A Participant may also elect to transfer a specified number of whole shares or a percentage of shares (up to 100%) from the Sears, Allstate or SPS Stock Funds to up to five Investment Funds in increments of 10% of the total amount to be transferred at any time at which an election to transfer may be made under this Section 6(c). In transferring assets between or among Funds, or from the Sears, Allstate or SPS Stock Funds, the Plan Administrator shall deduct the amount(s) to be transferred from the Participant's Employee Contribution Accounts in the following order: (1) Supplemental After-Tax; (2) Basic After-Tax; (3) Basic After-Tax Adjustment; (4) Supplemental Pretax; and, (5) Basic Pretax. A Participant who has terminated employment may not make any transfers between or among Investment Funds or from the Sears, Allstate or SPS Stock Funds unless the Participant's distribution is deferred under Section 11(c). (d) Administrative Procedures. The Plan Administrator may require ------------------------- Participants to complete such process as may be established by the Plan Administrator before any election under this Section 6 may take effect. SECTION 7. TRUST FUND ---------- 22 (a) General. All Company and Employee Contributions, and the income ------- and gains attributable thereto (adjusted to reflect losses) shall be held and invested by the Trustee as part of the Trust Fund in accordance with the terms of the Plan and the Trust Agreement. (b) Investment of Trust Fund. All Company Contributions shall be ------------------------ invested entirely in the Dean Witter Discover Stock Fund; all Dean Witter Discover Stock, Sears Stock, SPS stock or Allstate Stock included in Rollover or Qualified Plan Transfer Contributions, or cash in lieu of fractional shares of Stock, shall be invested in the Dean Witter Discover Stock Fund, the Sears Stock Fund, the SPS Stock Fund or the Allstate Stock Fund, as appropriate; and, all other contributions shall be invested in such Investment Funds as the Company shall specify in accordance with the investment directions of the appropriate Participant. (c) Investment Funds. The Trust Fund shall be composed of the Dean ---------------- Witter Discover Stock Fund, the Sears Stock Fund, the SPS Stock Fund, the Allstate Stock Fund and such other Investment Funds as shall be designated by the Company pursuant to Section 7(c)(ii). (i) The Dean Witter Discover Stock Fund. The Dean Witter Discover ----------------------------------- Stock Fund shall be invested and reinvested exclusively in Common Stock, except that pending investments in Common Stock, amounts held in the Dean Witter Discover Stock Fund may be invested and reinvested temporarily in interest- bearing short-term investments, including (without limitation) savings accounts, certificates of deposit, money market instruments, United States treasury bills and such group annuity contracts, insurance company pooled separate accounts, bank common or collective trust funds, mutual funds and other pooled investment funds as the Trustee deems suitable for temporary investments of the Dean Witter Discover Stock Fund. The Dean Witter Discover Stock Fund shall consist of all Dean Witter Discover Stock Fund investments held by the Trustee and all cash held by the Trustee which is derived from dividends, interest or other income from Dean Witter Discover Stock Fund investments, 23 from Matching, Qualified Non-elective and Qualified Matching Contributions, from any Basic, Supplemental Pretax, Rollover and Qualified Plan Transfer Contributions directed by the Participants to be invested in the Dean Witter Discover Stock Fund, and from the proceeds of the sale or redemption of Dean Witter Discover Stock Fund investments. Any such cash held by the Trustee shall be invested as provided in this Section 7(c)(i). (ii) Other Investment Funds. The Company, acting through its Board of ---------------------- Directors, shall designate other Investment Funds into which Participants may direct the investment of their Employee Contributions and may, from time to time, designate one or more additional Investment Funds or remove the designation of one or more Investment Funds. The number of Investment Funds designated hereunder shall be, at all times, at least three. The Investment Funds designated hereunder may include, but are not limited to, registered investment companies for which the Company or an affiliate of the Company acts as investment adviser, administrator or transfer agent. (iii) The Sears Stock Fund. The Sears Stock Fund shall be invested -------------------- and reinvested exclusively in Sears Common Shares except that pending investments in Sears Common Shares, amounts held in the Sears Stock Fund may be invested and reinvested temporarily in interest-bearing short-term investments, including (without limitation) savings accounts, certificates of deposit, money market instruments, United States treasury bills and such group annuity contracts, insurance company pooled separate accounts, bank common or collective trust funds, mutual funds and other pooled investment funds as the Trustee deems suitable for temporary investments of the Sears Stock Fund. The Sears Stock Fund shall consist of all Sears Stock Fund investments held by the Trustee and all cash held by the Trustee which is derived from dividends, interest or other income from Sears Stock Fund investments, from Matching Qualified Non-elective and Qualified Matching Contributions, from any Basic, Supplemental Pretax, Rollover and Qualified Plan Transfer Contributions directed by the 24 Participants to be invested in the Sears Stock Fund, and from the proceeds of the sale or redemption of Sears Stock Fund investments. Any such cash held by the Trustee shall be invested as provided in this Section 7(c)(iii). (iv) The Allstate Stock Fund. The Allstate Stock Fund shall be ------------------------ invested and reinvested exclusively in Allstate Stock except that, pending investment in Allstate Stock, amounts held in the Allstate Stock Fund may be invested and reinvested temporarily in interest-bearing short-term investments, including (without limitation): savings accounts, certificates of deposit, money market instruments, United States treasury bills and such group annuity contracts, insurance company pooled separate accounts, bank common or collective trust funds, mutual funds and other pooled investment funds as the Trustee deems suitable for temporary investments of the Allstate Stock Fund. The Allstate Stock Fund shall consist of all Allstate Stock Fund investments held by the Trustee and all cash held by the Trustee which is derived from dividends, interest or other income from Allstate Stock Fund investments and from Rollover or Qualified Plan Transfer Contributions consisting of Allstate Stock or cash in lieu of fractional shares of Allstate Stock and from the proceeds of the sale or redemption of Allstate Stock Fund investments. Any such cash held by the Trustee shall be invested as provided in this Section 7(c)(iv). (v) The SPS Stock Fund. The SPS Stock Fund shall be invested and ------------------ reinvested exclusively in SPS Stock, except that, pending investments in SPS Stock, amounts held in the SPS Stock Fund may be invested and reinvested temporarily in interest-bearing short-term investments, including (without limitation), savings accounts, certificates of deposit, money market instruments, United States treasury bills and such group annuity contracts, insurance company pooled separate accounts, bank common or collective trust funds, mutual funds and other pooled investment funds as the Trustee deems suitable for temporary investments of the SPS Stock Fund. The SPS Stock Fund shall consist of all SPS 25 Stock Fund investments held by the Trustee and all cash held by the Trustee which is derived from dividends, interest or other income from SPS Stock Fund investments, from any Rollover Contribution paid to the Trustee in the form of SPS Stock and cash in lieu of a fractional share of SPS Stock, and from the proceeds or the sale or redemption of SPS Stock Fund investments. Any such cash held by the Trustee shall be invested as provided in this Section 7(c)(v). (d) Stock Purchases. The Trustee shall have the exclusive authority --------------- to determine the time, manner and amounts in which Stock will be purchased, including (without limitation) the price to be paid for Stock purchased and the broker, dealer or private seller through or from which a purchase of Stock is to be made. Notwithstanding the foregoing, the Trustee is authorized, upon the request of the trustee or trustees of The Savings and Profit Sharing Fund of Sears Employees (the "Profit Sharing Fund"), the Sears, Roebuck and Co. Employee Stock Ownership Trust (the "ESOP"), the successor of either such trust or any other trust maintained by Sears or any subsidiary of Sears as part of a plan qualified under Code section 401(a), and in a manner and on such terms and conditions as in the opinion of the Trustee, are consistent with applicable fiduciary requirements and applicable federal and state securities laws to (A) exchange shares of Sears Common Shares held by the Plan in Matching Contribution Accounts and, (B) to the extent directed by Participants, exchange shares of Sears Common Shares held in the Trust Fund and allocated to any other Accounts for (I) shares of Common Stock held in participants' tax credit employee stock ownership accounts (the "PAYSOP") in the Profit Sharing Fund and in the unallocated suspense account of the ESOP or any successor plans and related trusts and/or (II) shares of Common Stock allocated to any other accounts of participants in the Profit Sharing Fund, the ESOP or any successor plans and related trusts (other than PAYSOP accounts). (e) Voting and Tendering of Stock in Accounts. In accordance with ------------------------------------------ procedures established by the Plan Administrator, each Participant may instruct the Trustee as to how the Stock credited to the 26 Participant's Accounts shall be voted or tendered. The Trustee shall hold all such instructions in confidence. The Trustee shall vote or tender all Stock for which proper instructions have been received in accordance with such instructions and shall vote or tender all Stock as to which no proper instructions are received in proportion to Stock for which proper instructions have been received. SECTION 8. ACCOUNTS -------- (a) Separate Accounts. The following separate Accounts shall, as ----------------- applicable, be maintained for a Participant under the Plan, reflecting the contributions indicated and the income and gains attributable thereto (adjusted to reflect losses): (i) A Basic Pretax Account for any Basic Pretax Contributions. (ii) A Basic After-Tax Adjustment Account for any Basic After- Tax Adjustment and any Basic Employee Contributions made prior to January l, 1984. (iii) A Basic After-Tax Account for any Employee After-Tax Contributions made on or after July 1, 1994. (iv) A Supplemental Pretax Account for any Supplemental Pretax Contributions, any Rollover Contributions made prior to January 1, 1989, and any Qualified Plan Transfer Contributions credited to such Account as provided under Section 9(b). (v) A Supplemental After-Tax Account for any Supplemental After-Tax Contributions made to the Plan for Plan Years commencing prior to January 1, 1987, any Qualified Plan Transfer Contributions credited to such Account as provided under Section 9(b), any Voluntary Employee Contributions made prior to January 1, 1984, any amount that a Participant elected to transfer to the Plan from a plan qualified under section 401(a) of the Code prior to January 1, 1984, any Rollover Contributions made on or after January 1, 1989, and any amount that a Participant properly 27 elected to transfer to the Plan from the Participant's Company Contribution or Employee Contribution Account under the terminated Dean Witter Reynolds Inc. Profit Sharing Plan. (vi) A Matching Contribution Account for any Matching Contributions and forfeitures, and any Qualified Plan Transfer Contributions credited to such Account as provided under Section 9(b). (vii) A Qualified Company Contribution Account for any Qualified Matching or Qualified Non-Elective Contributions. (viii) Such other Accounts ("Section 8(a)(viii) Accounts") as the Plan Administrator may deem necessary and sufficient to hold all or a portion of a Participant's Qualified Plan Transfer Contributions for the purpose of segregating such Qualified Plan Transfer Contributions as to which benefits, rights and features within the meaning of Section 411(d)(6) of the Code and regulations promulgated thereunder (other than such benefits, rights and features provided by the Plan), must be maintained. For purposes of the fund balance transfer rules set forth in Section 6(c) and the withdrawal rules set forth in Section 12, Section 8(a)(viii) Accounts shall be treated as Supplemental Pretax or Supplemental After-tax Accounts, as appropriate, depending upon whether such Accounts consist of employee after-tax contributions (and the earnings thereon) or employee pretax contributions (and the earnings thereon). A Section 8(a)(viii) Account holding employer contributions (and the earnings thereon) shall be treated for purposes of Section 12 as a Supplemental Pretax or a Matching Contribution Account, depending on whether such contributions (and the earnings thereon) are eligible to be withdrawn by a Participant who has not terminated employment with the Affiliated Group. (b) Reevaluation of Accounts. Each of a Participant's Accounts shall ------------------------ be revalued at each Valuation Date. By this revaluation, the balance in each of the Participant's Accounts will be increased or decreased by such Participant's proportionate share of any realized investment income, gains and 28 losses of the appropriate Investment Fund, the Sears Stock Fund or the Allstate Stock Fund and by any increase or decrease in the fair market value of the assets of such Investment Fund, the Sears Stock Fund or the Allstate Stock Fund which has occurred since the immediately preceding Valuation Date. SECTION 9. ROLLOVER AND QUALIFIED PLAN TRANSFER CONTRIBUTIONS ------------------------------------------------------------- (a) Rollover Contributions. With the prior written consent of the ---------------------- Plan Administrator, an Employee may contribute Rollover Contributions; provided, that any such contribution may be made only if the contribution is paid entirely in the form of (i) cash, (ii) check, (iii) if a distribution of Stock was received by the Participant from a plan maintained by SPS or the Affiliated Group and qualified under section 401(a) of the Code, such Stock, or (iv) by the direct transfer, in accordance with Code section 401(a)(31), of a note evidencing a participant loan under the SPS Transaction Services, Inc. START Plan in accordance with Section 12(h). (b) Qualified Plan Transfer Contribution. With the prior written ------------------------------------ consent of the Plan Administrator, and under such terms and conditions as the Plan Administrator may, in its sole discretion, determine on a nondiscriminatory basis, all or any portion of the assets held for the benefit of a Participant under a plan maintained by any member of the Affiliated Group, Sears or Allstate that satisfies the requirements of section 401(a) of the Code, may be transferred directly from the trustee of such plan to the Trustee of this Plan as a Qualified Plan Transfer Contribution. Any Qualified Plan Transfer Contributions shall be credited to the appropriate Account, as determined by the Plan Administrator, and shall be subject to any applicable requirements of the Code including but not limited to section 411(d)(6) and the regulations promulgated thereunder. Any portion of a Qualified Plan Transfer Contribution that consists of Stock, or 29 cash in lieu of fractional shares of Stock, shall be invested in the Dean Witter Discover Stock Fund, the Sears Stock Fund or the Allstate Stock Fund, as appropriate. Any portion of a Qualified Plan Transfer Contribution that does not consist of Stock, or cash in lieu of fractional shares of Stock, shall be invested as the Participant shall elect in accordance with the provisions of Section 6 applicable to Employee Contributions, provided, however, that in the absence of such an election, the non-Stock portion of a Qualified Plan Transfer Contribution shall be invested by the Trustee in a money market fund designated as an Investment Fund under the Plan. In the event that the Plan, as a result of accepting a Qualified Plan Transfer Contribution, becomes the direct or indirect transferee of benefits held on or after January 1, 1985 by a defined benefit plan or a defined contribution plan subject to the requirements of sections 401(a)(ll) and 417 of the Code, the Plan shall separately account for such benefits and shall apply the requirements of sections 401(a)(ll) and 417 of the Code and the regulations thereunder to the distribution of such benefits. SECTION 10. PLAN BENEFITS ------------- (a) Amount of Benefit. Participant's Plan Benefit shall be 100% of ----------------- the Participant's Accounts if the Participant attains Normal Retirement Age while employed by any member of the Affiliated Group or if the Participant terminates employment as a result of death, Total and Permanent Disability, Retirement or Release. If a Participant terminates employment for any other reason, the Participant's Plan Benefit shall be (i) 100% of the Participant's Accounts other than the Matching Contribution Account and (ii) the vested portion of the Participant's Matching Contribution Account, as determined under (i), (ii), (iii) or (iv) below. (i) Participants Who Were Employees Before January 1, 1989. The ------------------------------------------------------ vested portion of the Matching Contribution Account of any Participant who was an Employee before January 1, 1989 shall be the difference between 100% of the Matching Contribution Account and the portion of such Account that is attributable to Matching Contributions and forfeitures allocated with respect to the three Plan Years ended immediately prior to the Plan Year in which the Participant terminates employment. 30 (ii) Participants With At Least One Hour of Service on or after ---------------------------------------------------------- January 1, 1989. The vested portion of the Matching Contribution Account of any - --------------- Participant who has at least one Hour of Service in any Plan Year commencing on or after January 1, 1989 shall be determined based on his Years of Service as follows: Years of Service Vested Percentage ---------------- ----------------- Less than 5 0% 5 or more 100% (iii) Participants to Whom Both (i) and (ii) Apply. The vested --------------------------------------------- portion of the Matching Contribution Account of any Participant to whom both (i) and (ii) apply shall be the greater of the amount determined under (i) or (ii). (iv) Credit Services Employees. The vested portion of the Matching ------------------------- Contribution Account of a Credit Services Employee employed as a Credit Services Employee on the date of the Spin-off shall be 100% of such Credit Services Employee's Matching Contribution Account. (b) Forfeitures. The non-vested portion of the Matching Contribution ----------- Account of any Participant who was an Employee before January 1, 1989 but did not have at least one Hour of Service on or after January 1, 1989 shall be forfeited in accordance with the rules applicable under the Plan immediately prior to this amendment and restatement. The non-vested portion of the Matching Contribution Account of any other Participant shall be forfeited as of the last day of the Plan Year in which such Participant terminates employment; provided, that if the Participant shall subsequently be credited with one Year of Service before incurring five consecutive One Year Breaks, the amount so forfeited shall be restored without adjustment for income, gains or losses; and provided, that such restoration shall be made out of forfeitures arising in the Plan Year in which the restoration occurs and, 31 to the extent necessary, out of a special Company contribution which shall be made for that purpose. The foregoing forfeiture provisions shall only apply to the extent permitted by applicable law. (c) Payee's Location Not Ascertainable for 60 Months. In the event ------------------------------------------------ any Plan Benefit has been due and payable under the Plan for a period of more than 60 months and cannot be paid because the location of the payee cannot be ascertained, the entire amount of such Plan Benefit shall be forfeited; provided, that in the event the location of such payee is ascertained, the Plan Benefit forfeited shall be restored, without adjustments for income, gains or losses and shall be paid to such payee in a single lump sum payment; and provided, that such restoration shall be made out of forfeitures arising in the Plan Year in which the restoration occurs and, to the extent necessary, out of a special Company contribution which shall be made for that purpose. SECTION 11. DISTRIBUTION OF PLAN BENEFITS. ----------------------------- (a) Form of Distribution. Each Participant's Plan Benefit shall be -------------------- distributed in the form of a lump sum consisting of: (i) a certificate or certificates for whole shares of Stock representing the portions of a Participant's Accounts that are invested in the Dean Witter Discover Stock Fund, Sears Stock Fund, SPS Stock Fund or Allstate Stock Fund and (ii) a check for any fractional share of Stock and uninvested cash in the portions of a Participant's Accounts that are invested in the Dean Witter Discover Stock Fund, Sears Stock Fund, SPS Stock Fund or Allstate Stock Fund and for the entire value of the portions of the Participant's Accounts that are invested in all other Investment Funds. (b) Time of Distribution. Subject to Section 11(c), a Participant's -------------------- Plan Benefit shall be distributed approximately 90 days after the earlier of (i) the end of the Quarter in which the Participant terminates employment or (ii) if the Participant transfers employment from a member of the Affiliated Group to a subsidiary of DWD (other than a member of the Affiliated Group), including but not limited 32 to SPS, the later of the date of such transfer or the date the Participant becomes 100% vested in the Participant's Matching Contribution Account. Any allocation of contributions and forfeitures made subsequent to the distribution of a Participant's Account in a lump sum shall be paid as soon as practicable after the date of such allocation. (c) Right to Deferred Distribution. If a Participant whose vested ------------------------------ Accounts exceed $3,500 in value on the date the Participant terminates employment does not consent to the distribution of the Participant's Plan Benefit under Section 11(b), then payment of the Participant's Plan Benefit shall, subject to Section 13(a), be deferred to such date as the Participant shall elect. A Participant who elects to defer a distribution shall have a single opportunity to change the date so elected to an earlier or later date. If no consent is given and no election to defer is made, such Participant's Plan Benefit shall be distributed as of the Valuation Date coincident with or next following the date the Participant attains Normal Retirement Age. Notwithstanding anything to the contrary herein, the distribution of a Participant's Plan Benefit shall begin not later the 60th day after the close of the Plan Year in which the latest of the following events occurs: (i) The Participant attains Normal Retirement Age. (ii) The 10th anniversary of the date on which the Participant commenced participation in the Plan. (iii) The termination of the Participant's employment with the Affiliated Group. (iv) The date specified by the Participant in an election made pursuant to this Section 11(c). If a distribution is one to which Code sections 401(a)(11) and 417 do not apply, such distribution may commence less than thirty (30) days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: 33 (x) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (y) the Participant, after receiving the notice, affirmatively elects a distribution. Accounts pending distribution shall continue to share in the investment experience of the Trust Fund until the Valuation Date as of which distributed. (d) Death of Participant. If a Participant dies prior to receiving -------------------- the Participant's entire Plan Benefit, the remaining portion of the Participant's Plan Benefit shall be paid to the Participant's surviving spouse, but if there is no surviving spouse, or, if the surviving spouse consents in a manner conforming to a qualified election under the Retirement Equity Act of 1984, as amended, then to the Participant's Beneficiary. Upon the death of a Participant, the Participant's surviving spouse, if any, shall be entitled to make such elections or decisions as the Participant was authorized to make under this Section 11, and any provision as to deferrals and elections shall be made with reference to the date of death of the Participant (instead of the date he or she terminated employment). Notwithstanding the foregoing, if prior to being notified of the death of a Participant the Plan Administrator has made a distribution or instructed the Trustee to make a distribution to any such Participant, the provisions of this Section 11(d) shall not be applicable and such distribution shall be considered to have been made in accordance with the other provisions of this Section 11. (e) Designation of Beneficiary. Any designation of a Beneficiary -------------------------- shall be made in writing and filed with the Plan Administrator. A Beneficiary designation may be revoked by the Participant at any time without notice to or consent of any previously designated Beneficiary; provided, that any new designation of Beneficiary must comply with any applicable spousal consent requirement. If no Beneficiary is designated, or the designated Beneficiary does not survive the Participant and no 34 alternative Beneficiary is designated, the Beneficiary shall be the Participant's surviving spouse, or, if none, the Participant's estate. If the designated Beneficiary cannot be located by the Plan Administrator for a period of one year following death, despite mailing to such Beneficiary's last known address, and the Beneficiary has not made written claim within such period to the Plan Administrator, the Beneficiary shall be treated as having predeceased the Participant. (f) Administrative Procedures. The Plan Administrator may require ------------------------- Participants to complete such process as may be established by the Plan Administrator before any election under this Section 11 may take effect; provided, that such process shall conform to applicable rules under the Code and that the Plan Administrator shall provide the Participant and the Participant's surviving spouse or Beneficiary such information, within such time periods, as it is required to under the Code and applicable law. (g) Optional Direct Rollover of Eligible Rollover Distributions. ------------------------------------------------------------ Effective for distributions made after December 31, 1992, a Participant who receives a distribution described in Section 11(a) or a withdrawal described in Section 12 may direct the Plan Administrator to directly rollover all or any portion of the distribution or withdrawal to an individual retirement plan described in Code sections 408(a) or 408(b) or to another employer's qualified plan described in Code sections 401(a)(31)(D) and 402(c)(8)(B) provided such plan agrees to accept the direct rollover contribution. This election shall not be applicable to any distribution which represents the minimum amount required to be distributed under Section 13(a). The election described herein shall be available with respect to any distribution or withdrawal made to or by a spouse of a Participant following the death of the Participant or pursuant to a qualified domestic relations order (as defined in section 414(p) of the Code) if the election described herein would have been available to the Participant had the Participant been the recipient of the distribution or withdrawal. The Plan Administrator may, in its sole discretion, adopt such 35 administrative rules as may be permitted by Code section 401(a)(31) or regulations promulgated thereunder which limit or restrict the applicability of this Section 11(g) to all or a portion of certain distributions or withdrawals. SECTION 12. WITHDRAWALS AND LOANS --------------------- (a) General Rule. Subject to the following provisions of this ------------ Section 12, a Participant who is an Employee may make a withdrawal of all or any portion of the balance of any or all of his or her Employee Accounts; a Participant may not withdraw any portion of his or her Company Accounts. (b) Limitations of Withdrawals. Withdrawals shall be subject to the -------------------------- following limitations: (i) To make a withdrawal, a Participant must complete such process as may be established by the Plan Administrator. (ii) A Participant may not make more than one withdrawal for any quarterly record. (iii) A Participant may not make a withdrawal from the Participant's Basic Pretax or Supplemental Pretax Account except (A) after attaining age 59-1/2 or (B) upon suffering a hardship, as provided in Section 12(g). (c) Suspension of Contributions. If a Participant makes a withdrawal --------------------------- from the Participant's Basic Pretax Account or Supplemental Pretax Account, the Participant shall not be permitted to make any Employee Contributions for the three months beginning on the first day of the first payroll period following the date the withdrawal request is processed by the Plan Administrator, and, in addition, a Participant who makes a hardship withdrawal as provided in Section 12(g) may not make elective or employee contributions to the extent and for the period provided in Section 12(g). Unless otherwise directed by the Participant, Employee Contributions suspended due to a withdrawal 36 or hardship withdrawal shall automatically recommence at the end of the suspension period at the same rate and be invested in the same manner as the Participant's Employee Contributions immediately prior to the suspension, subject to the limitations described in Section 12(g)(ii). (d) Source and Amount of Withdrawal. In making a withdrawal or ------------------------------- hardship withdrawal under this Section 12, a Participant shall specify the Investment Fund (or Funds) from which the withdrawal or hardship withdrawal is to be made and the amount (a specified number of whole shares or the entire balance in a particular Investment Fund as of the Valuation Date of the Quarter preceding the Quarter in which the withdrawal or hardship withdrawal is made) in accordance with such procedures as the Plan Administrator shall provide. In the case of a withdrawal, in withdrawing assets from an Investment Fund (or Funds) the Plan Administrator shall withdraw assets from the Participant's Employee Contribution Accounts in the following order: (1) Supplemental After-Tax; (2) Basic After-Tax; (3) Basic After-Tax Adjustment; (4) Supplemental Pretax; and, (5) Basic Pretax. In the case of a hardship withdrawal, the Plan Administrator shall, after determining that the Participant has both taken any loan permitted under Section 12(g) and withdrawn all available assets from Employee After-Tax Accounts, withdraw assets from an Investment Fund (or Funds) first from the Participant's Supplemental Pretax Account and then from the Participant's Basic Pretax Account. (e) Time of Payment of Withdrawals. Withdrawals of amounts described ------------------------------ in Section 12(d) will normally be paid approximately eight weeks after the Plan Administrator receives a Participant's request for a withdrawal. 37 (f) Form of Payment of Withdrawals. All withdrawals from Employee ------------------------------ Accounts that are invested in the Dean Witter Discover Stock Fund, Sears Stock Fund, SPS Stock Fund and/or Allstate Stock Fund shall be paid in the form of (i) one or more certificates for whole shares of Stock and (ii) a check for any fractional shares and any amount that was not invested in Stock on the relevant Valuation Date. Withdrawals designated to be made from the portions of a Participant's Employee Accounts invested in Investment Funds other than the Dean Witter Discover Stock Fund, Sears Stock Fund, SPS Stock Fund or Allstate Stock Fund shall be paid in the form of a check. (g) Hardship. For hardship withdrawals prior to January 1, 1989, the -------- rules of the Plan then in effect shall apply. Effective January 1, 1989: (i) Hardship withdrawals hereunder may only be made from: (A) Basic and Supplemental Pretax Contributions, (B) income allocable to Basic and Supplemental Pretax Contributions credited to the Participant's Basic and Supplemental Pretax Contribution Accounts as of December 31, 1988, and (C) amounts attributable to Rollover Contributions made prior to January 1, 1989, including any income allocable thereto. (ii) (A) A distribution will be considered to be necessary to satisfy an immediate and heavy financial need of a Participant only if the Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans available under all plans maintained by any member of the Affiliated Group, and the distribution is not in excess of the amount of the immediate and heavy financial need; (B) upon a hardship withdrawal, the Participant may not make elective contributions or employee contributions under any qualified or unqualified plans of deferred 38 compensation maintained by the Affiliated Group for twelve months after the receipt of the hardship distribution, and the Participant may not make elective contributions under any such plan for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limits set forth under section 402(g) of the Code for such taxable year less the amount of such Participant's elective contributions for the taxable year of the hardship distribution. (iii) For purposes of this Section 12(g), the term "hardship" shall mean immediate and heavy financial needs of the Participant where such Participant lacks other reasonably available financial resources, arising out of any one or more of the following: (A) expenses for medical care described in Code section 213(d) previously incurred by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Code section 152) or necessary for these persons to obtain medical care described in Code section 213(d); (B) costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments); (C) payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, Participant's spouse, children or dependents (as defined in Code section 152); (D) payments necessary to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage on that residence; (E) any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from a hardship withdrawal under this Section 12(g); or, 39 (F) such other instances of deemed immediate and heavy financial needs together with such additional methods for the hardship withdrawal to be deemed necessary to satisfy such needs as the Commissioner of Internal Revenue shall provide through the publication of revenue rulings, notices and other documents of general applicability. (h) Loans ----- (i) Availability of Loans. A Participant may elect, in such form --------------------- and manner as the Plan Administrator may prescribe, to borrow from the Trust solely for the purposes listed under clause (vii) of this Section 12(h), an amount in cash not to exceed the amount permitted under clause (ii) of this Section 12(h). A Participant taking a loan under this Section 12(h) shall be ineligible to take another loan under this Section 12(h) until the expiration of twelve (12) full calendar months following the date of such loan. A Participant shall not be eligible to have more than one loan under this Section 12(h) outstanding at any time. (ii) Limitations on Loans. Each loan under this Section 12(h) -------------------- shall be limited to an amount not to exceed (when added to the outstanding balance of all other loans made to the Participant by any plan maintained by the Affiliated Group) the lesser of: (A) $50,000 reduced by the excess, if any, of the highest outstanding balance of loans from any such plan to the Participant during the one-year period ending on the day before the date on which the loan is made, over the outstanding balance of loans from any such plan to the Participant on the date on which the loan is made, and (B) one-half of the vested balance of the Participant's Accounts as of the most recent Valuation Date. Notwithstanding the foregoing, no loan shall be granted under this Section 12(h) in an amount less than $1,000. 40 (iii) Sources of Loan Proceeds and Designation of Payments. Loans made ----------------------------------------------------- pursuant to this Section 12(h) and payments thereof, shall be appropriately charged and credited against the Participant's Supplemental After-Tax, Basic After-Tax, Basic After-Tax Adjustment, Supplemental Pretax, Basic Pretax and Matching Contribution Account in that order, or from such Account(s) or in such order as the Plan Administrator may, in its discretion, permit Participants to designate on a nondiscriminatory basis. Prior to the disbursement of the proceeds of a loan, an amount equal to the loan amount shall be transferred from the Participant's Accounts in the Investment Funds in which it is invested in proportion to the loan amount to a special loan fund (consisting solely of the Participant's loans) established for the purpose of disbursing the loan to the Participant. Any such transfer shall be disregarded for purposes of any transfer limitations under Section 6. (iv) Loans Evidenced by Note and Secured by Interest in Account. A ---------------------------------------------------------- loan granted pursuant to this Section 12(h) shall be evidenced by such documents as the Plan Administrator shall designate including a note which shall bear a reasonable rate of interest as determined by the Plan Administrator from time to time in a nondiscriminatory manner and which otherwise shall conform to the repayment terms set forth in this Section 12(h). A loan made to a Participant pursuant to this Section 12(h) shall be secured by an interest in the Participant's Accounts and/or by such other interests as the Plan Administrator may determine to constitute adequate security. The occurrence of an event of default under the loan note shall entitle the Trustee of the Plan to reduce the balance of the Participant's Accounts up to the amount of the Plan's security interest therein. The loan note shall be an asset solely of the borrowing Participant's Accounts and interest on the loan shall be credited to the Participant's Accounts. (v) Loan Repayment Terms. A loan made pursuant to this Section 12(h) -------------------- shall be repaid over a period not to exceed five years from the date of the loan, unless the Participant certifies 41 in writing to the Plan Administrator that the loan proceeds are to be used solely to acquire a dwelling unit which is to be used, within a reasonable period of time, as the Participant's principal residence, in which case, the loan shall be repaid over a period not to exceed fifteen years from the date of such loan. Such repayment shall be made in level installments of principal and interest which the Participant shall authorize to be repaid by payroll deductions or by such other method as is determined by the Plan Administrator on a uniform and nondiscriminatory basis. Loan repayments (principal and interest) will be proportionately credited among the Participant's Accounts from which the loan proceeds were transferred pursuant to (iii) above and reinvested in Investment Funds based on the Participant's then-current directions with respect to the investment of contributions. The entire outstanding amount of the loan may be prepaid without penalty at any time. The note shall provide that in all events the outstanding principal and interest due thereon shall be repaid not later than the date of the Participant's termination of employment or such other date as the Plan Administrator shall specify. In the event of default, foreclosure on the note and attachment of security will not occur until a distributable event occurs under the Plan. (vi) Loans Available on Nondiscriminatory Basis. All loans made ------------------------------------------ pursuant to this Section 12(h), shall be made available to all Participants on a reasonably equivalent, nondiscriminatory basis. (vii) Circumstances Under Which Loans are Permitted. The Plan ---------------------------------------------- Administrator may approve a loan under this Section 12(h) for the purpose of satisfying one or more "hardships" described in Section 12(g)(iii) or for the purposes of satisfying an immediate or heavy financial need of the Participant caused by or resulting from an accident, illness, death, educational, housing or shelter requirements or other economic adversity that the Plan Administrator determines to be a financial 42 hardship. The Plan Administrator may reasonably rely on the written representations of the Participant in determining whether a loan is requested for a purpose permitted under this clause (vii). (viii) Other Provisions Relating to Loans. To the extent required by ----------------------------------- ERISA section 408 or Code section 4975, notwithstanding the preceding provisions of this Section 12(h), loans may be made to a Participant who is, at the time of the loan, both a former employee and a "party in interest" as defined in section 3(14) of ERISA with respect to the Plan. In the case of any such loan, the preceding provisions of this Section 12(h) dealing with payment by payroll deduction and acceleration on termination of employment shall not apply. Loans shall not be made available to highly compensated employees (as defined in Code section 414(q) in an amount greater than the amount made available to other employees. (ix) Transfers to SPS. Unless the Plan Administrator specifies ---------------- otherwise in the applicable loan documents, the following rules shall apply in cases where a Participant terminates employment with the Affiliated Group due to a transfer to SPS Transaction Services, Inc. or an affiliate thereof. If such a Participant has an outstanding loan under this Plan, the Participant may elect to have the note evidencing such loan directly transferred to the SPS Transaction Services, Inc. START Plan (the "SPS START Plan") in accordance with Code section 401(a)(31) and this Section 12(h). In such a case, the outstanding principal and interest due on the note evidencing such loan shall not, by reason of such termination of employment, become immediately payable and the transfer of such note to the SPS START Plan shall not be an event of default under such note. (x) Transfers from SPS. Unless the Plan Administrator specifies ------------------ otherwise in the applicable loan documents, the following rules shall apply in cases where a Participant becomes an employee of a Participating Company by reason of the Participant's transfer of employment from SPS Transaction Services, Inc. or an affiliate thereof. If such a Participant has an outstanding loan under the 43 SPS START Plan, the Participant may elect a direct transfer to this Plan in accordance with Section 9(a) of the note evidencing the outstanding amount of such loan. The electing Participant must acknowledge that (i) the Trustee of this Plan shall be treated as the payee of the note evidencing such loan, (ii) all other terms of the note, including the repayment schedule and interest rate, shall continue to apply to the note and (iii) the loan shall be treated as a loan granted under this Plan. (xi) Suspension of Loan Repayments during Military Service. Loan ----------------------------------------------------- repayments will be suspended under this Plan as permitted under Section 414(u)(4) of the Code. SECTION 13. INCORPORATION OF CERTAIN CODE REQUIREMENTS BY REFERENCE. ----------------------------- (a) Incorporation of Section 401(a)(9). Anything in the Plan to the ---------------------------------- contrary notwithstanding, distributions under this Plan shall meet the requirements of section 401(a)(9) of the Code, which requirements are incorporated herein by reference; provided, that distributions with respect to Participants who attained age 70-1/2 during 1988 shall begin (and be calculated as if they were required to begin) as of April 1, 1989. Effective January 1, 1997, a Participant who attains age 70 1/2 after December 31, 1995 and who is an Employee as of April 1 of the year following the year in which the Participant attains age 70 1/2, may elect, on or after such April 1, to begin receiving distributions under the Plan as if such Participant's required beginning date under Code section 401(a)(9) were such April 1 or such later date. Any such elections shall be irrevocable to the extent permitted by law. (b) Incorporation Of Section 415 Limitations. The limitations on ---------------------------------------- allocations and contributions of section 415 of the Code are incorporated herein by reference. For purposes of applying those limitations the following rules shall apply: 44 (i) Definitions. For purposes of this Section 13, compensation ----------- shall be determined on the basis of compensation actually paid and includible in gross income during the year; the limitation year shall be the Plan Year: and excess amount shall mean the difference between a Participant's annual additions and the maximum permissible amount of such annual additions. (ii) Disposition of Excess Amounts. If there is an excess ----------------------------- amount, the excess will be disposed of as follows: (A) The Plan Administrator shall remove the excess amount from the Participant's Accounts, together with any gains attributable to such excess amount. The Plan Administrator shall cause the Trustee to hold such excess amount in a suspense account until the next limitation year at which time such excess amount shall be allocated to all Participants in the Plan who become entitled to a Matching Contribution for the next limitation year. The reallocated excess amount shall be used to reduce Company contributions for the next limitation year (and each succeeding limitation year until the suspense account is exhausted). Excess amounts held in the suspense account shall be held in cash and invested in such cash equivalents or short-term investment fund as the Trustee shall determine. Investment earnings, gains or losses shall be allocated to the suspense account. (B) Notwithstanding the foregoing, the Plan Administrator may determine to dispose of any excess amount by distributing Elective Deferrals and/or returning After-Tax Contributions, together with any gains attributable to such contributions, to the Participant, to the extent that such distribution or return would reduce the excess amount in the Participant's Account or by any other method permitted by any applicable rule or regulation. (iii) Coordination With Another Defined Contribution Plan. If, --------------------------------------------------- in addition to this Plan, the Participant is covered under another qualified defined contribution plan or a welfare benefit 45 fund, as defined in section 419(e) of the Code, maintained by the employer during any limitation year and a Participant's annual additions under this Plan and such other plans would result in an excess amount for a limitation year, the excess amount will be deemed to consist of the annual additions last allocated, except that annual additions attributable to a welfare benefit fund will be deemed to have been allocated first regardless of the actual allocation date. If an excess amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the excess amount attributed to this Plan will be the product of (A) the total excess amount allocated as of such date, times (B) the ratio of (i) the annual additions allocated to the Participant for the limitation year as of such date under this Plan to (ii) the total annual additions allocated to the Participant for the limitation year as of such date under this and all the other qualified defined contribution plans. Any excess amount attributed to this Plan will be disposed of in the manner described in Section 13 (b)(ii). (iv) Coordination with a Qualified Defined Benefit Plan. If the -------------------------------------------------- employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, benefits under the defined benefit plan shall be reduced to the extent necessary to comply with section 415(e) of the Code. (c) Military Service. Notwithstanding any provision of this Plan to ----------------- the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. SECTION 14. FIDUCIARY RESPONSIBILITIES AND PLAN ADMINISTRATION. ---------------------------------------------------- (a) Named Fiduciary/Plan Administrator. The Company is the named ---------------------------------- fiduciary which has the authority to control and manage the operation and administration of the Plan, and is the "plan 46 sponsor" as that term is used in ERISA. The Company, as Plan Administrator, shall make such rules, regulations, interpretations and computations, and shall take such other action to administer the Plan, as it may deem appropriate. In administering the Plan, the Company shall act in a non-discriminatory manner to the extent required by section 401 and related sections of the Code and shall at all times discharge its duties with respect to the Plan in accordance with the standards, set forth in section 404(a)(1) of ERISA. (b) Named Fiduciary/Management of Plan Assets. The Company is the ----------------------------------------- named fiduciary with respect to the control and management of the assets of the Plan only to the extent of having the duty to (i) appoint one or more trustees to hold the assets of the Plan in trust and to enter into a trust agreement with each such trustee with respect to the assets held in trust hereunder, (ii) establish a funding policy and method as provided in Section 15, and (iii) designate investments that meet the requirements for the Investment Funds as provided in Section 7(c). Each trustee appointed under clause (i) above shall have the exclusive authority and discretion to manage and control the assets of the Plan which it holds in trust. (c) Service in Several Fiduciary Capacities. Nothing herein shall --------------------------------------- prohibit any person or group of persons from serving in more than one fiduciary capacity with respect to the Plan (including service both as plan administrator and trustee). (d) Duties and Responsibilities of the Plan Administrator. The ----------------------------------------------------- responsibilities of the Company under the Plan shall be carried out on its behalf by its directors, officers, employees and agents, none of whom shall be fiduciaries unless appointed to the Hearing Panel. The Company may engage the services of such persons or organizations to render advice or perform services with respect to its responsibilities under the Plan as it shall determine to be necessary or appropriate. Such persons 47 or organizations may include (but shall not be limited to) actuaries, attorneys, accountants and consultants. (e) Delegation of Fiduciary Responsibilities. In lieu of carrying out ---------------------------------------- any of its fiduciary responsibilities under the Plan, the Company may delegate its fiduciary responsibilities (except "trustee responsibilities" as defined in section 405(c)(3) of ERISA) to any person or persons pursuant to a written contract with such other person which specifies the fiduciary responsibilities so delegated. SECTION 15. FUNDING POLICY AND METHOD. ------------------------- From time to time, the Plan Administrator shall establish a funding policy and method for the Plan which is consistent with the objectives of the Plan, with its short-term and long-term financial needs and with the requirements of ERISA. The funding policy and method, as established and amended from time to time, shall be communicated in writing to the Trustee in order that the Trustee may coordinate the investment policies for the Trust Fund with such funding policy and method. SECTION 16. CLAIMS PROCEDURE. ---------------- (a) Claims and Inquiries. All claims for benefits and all inquiries -------------------- concerning the Plan shall be submitted to the Plan Administrator addressed as follows: "Dean Witter Reynolds Inc., Plan Administrator under the Dean Witter START Plan, 5 World Trade Center, 6th Floor, New York, New York 10048." Claims for benefits must be in writing on the form(s) prescribed by the Plan Administrator and must be signed by the person or persons indicated on such form(s). (b) Denial of Claims. In the event any claim for benefits is denied, ---------------- in whole or in part, the Plan Administrator shall notify the claimant of such denial in writing and shall advise the claimant of his or her right to a review thereof. Such written notice shall set forth, in a manner calculated to be understood by the claimant, the specific reason or reasons for the denial, specific reference(s) to the pertinent Plan provision(s) upon which the denial is based, a description of any additional information 48 or material that is necessary for the claimant to perfect his or her claim for benefits, an explanation of why such information or material is necessary and an explanation of the Plan's review procedure. Such written notice shall be furnished to the claimant within 90 days after the Plan Administrator receives the claim, unless special circumstances require an extension of time for processing the claim. In no event shall such an extension exceed a period of 90 days from the end of the initial 90-day period. If such an extension is required, written notice thereof shall be furnished to the claimant before the end of the initial 90-day period. Such notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render a decision. If written notice of the denial of the claim for benefits is not furnished within the time specified in this Section 16(b), the claim shall be deemed denied and the claimant shall be permitted to appeal such denial in accordance with the review procedure described in Section 17 below. SECTION 17. REVIEW PROCEDURE. ---------------- (a) The Hearing Panel. The Company shall appoint a "Hearing Panel," ----------------- which shall consist of three or more individuals who may (but need not) be Employees of the Company. The Hearing Panel may adopt such rules and procedures, consistent with ERISA and the Plan, as it deems necessary or appropriate in carrying out its responsibilities under this Section 17. (b) Appeals from Claim Denials. Any person whose claim for benefits -------------------------- is denied, in whole or in part, or such person's duly authorized representative, may appeal from such denial by submitting a request for review of the claim to the Hearing Panel within six months after receiving the written notice of denial from the Plan Administrator (or in the case of a deemed denial, within six months after the claim is deemed denied). The Plan Administrator shall give the claimant (or the claimant's representative) an opportunity to review pertinent documents (except legally privileged materials) and to submit issues and comments in writing. A request for review shall be in writing and 49 shall be addressed as follows: "Hearing Panel under the Dean Witter START Plan, 5 World Trade Center, 6th Floor, New York, New York 10048." The request for review shall set forth all of the grounds on which it is based, all facts in support thereof and any other matters which the claimant deems pertinent. The Hearing Panel may require the claimant (or the claimant's representative) to submit such additional facts, documents or other material as it deems necessary or appropriate in making its review. (c) Decision on Review. The Hearing Panel shall act upon a request ------------------ for review within 60 days after receipt thereof, unless special circumstances require an extension of time for processing, in which event a decision shall be rendered not more than 120 days after the receipt of the request for review. If such an extension is required, written notice thereof shall be furnished to the claimant (or his or her representative) before the end of the initial 60-day period. The Hearing Panel shall give written notice of its decision to the claimant (or the claimant's representative) and to the Plan Administrator. In the event that the Hearing Panel confirms the denial of the claim for benefits in whole or in part, such notice shall set forth, in a manner calculated to be understood by the claimant, the specific reason or reasons for the denial and specific reference(s) to the pertinent Plan provision(s) upon which such denial is based. If written notice of the Hearing Panel's decision is not given to the claimant (or the claimant's representative) within the time prescribed in this Section 17(c), the claim shall be deemed denied on review. (d) Exhaustion of Administrative Remedies. No legal or equitable ------------------------------------- action for benefits under the Plan shall be brought unless and until the claimant (i) has submitted a written claim for benefits in accordance with Section 16(a), (ii) has been notified that the claim has been denied (or the claim is deemed denied as provided in Section 16(b) above), (iii) has filed a written request for a review of the claim in accordance with Section 17(b) above and (iv) has been notified in writing that the 50 Hearing Panel has affirmed the denial of the claim (or the claim is deemed denied on review as provided in Section 17(c) above). (e) The Hearing Panel shall be the "named fiduciary", as defined under Section 402 (a)(1) of ERISA, and shall have the authority to act with respect to any appeal from the denial of a claim for benefits under the Plan. The Hearing Panel, in its capacity as named fiduciary, shall have the discretionary authority to interpret and construe the terms of the Plan and to determine eligibility for and entitlement to Plan benefits in accordance with the terms of the Plan. Any reasonable construction or interpretation of the Plan's terms or determination made by the Hearing Panel as to eligibility or entitlement, adopted in good faith, shall be final and binding upon the Company, all Participating Companies, Employees, Participants, and their spouses, beneficiaries, heirs, successors and assigns. SECTION 18. EXPENSES OF PLAN AND TRUST. -------------------------- The reasonable expenses of administering the Plan and the Trust Fund shall be charged to and paid out of the Trust Fund, unless they are paid by the Company. The expenses of administering the Plan shall include, without limitation, the compensation of the Trustee, the expenses (such as brokerage fees and stock transfer taxes) incurred by the Trustee in the performance of its duties hereunder, all real or personal property taxes, income taxes (if any) and other taxes of any kind whatsoever that may be levied or assessed under existing or future laws upon or in respect of the Trust, the Trust Fund or any property in the Trust Fund, and all other proper charges and disbursements of the Trustee. Legal fees and related legal expenses arising out of legal services rendered to the Trustee (whether or not rendered in connection with judicial or administrative proceedings, and whether or not incurred prior to the termination of the Trust Agreement) shall be considered to be reasonable expenses of administering the Plan and Trust Fund only to the extent (a) they are reasonable in amount, and (b) the payment of such fees and expenses out of the Trust Fund is permitted by applicable law. 51 SECTION 19. AMENDMENT AND TERMINATION. ------------------------- (a) Amendment of Plan. The Company reserves the right to make from ------------------ time to time any amendment or amendments to all or any part of the Plan, including amendments which are retroactive in effect. Such amendment or amendments may be effected by action of the Company's Board of Directors. Also, the Company's Board of Directors has specifically authorized the Compensation Committee of the Company's Board of Directors to take such actions. Notwithstanding the foregoing: (i) no amendment shall have the effect of vesting in the Participating Companies any interest in any property of the Trust; and, (ii) no amendment shall have any retroactive effect so as to deprive any Participant or Beneficiary of any amount credited to the Participant's or Beneficiary's Accounts, except as provided in Section 19(c) or as otherwise permitted by law. (b) Termination of Plan. The Plan is intended to be permanent, but the ------------------- Company reserves the right to terminate the Plan, in whole or in part, at any time. Such termination may be effected by action of the Company's Board of Directors. Also, the Company's Board of Directors has specifically authorized the Compensation Committee of the Company's Board of Directors to take such action. No such action shall have the effect of: (i) vesting in the Participating Companies any interest in any property of the Trust; or, (ii) retroactively depriving any Participant or Beneficiary of any amount credited to the Participant's or Beneficiary's Accounts, except as provided in Section 19(c) or as otherwise permitted by law. (c) Amendment Required for Qualification. All provisions of this ------------------------------------ Plan, and all benefits and rights granted hereunder, are subject to any amendments, modifications or alterations which are 52 necessary from time to time to qualify the Plan under section 401(a) or 501(a) of the Code to continue the Plan as so qualified, or to comply with any other provision of law. Accordingly, notwithstanding Section 19(a) or any other provision of this Plan, the Company may amend, modify or alter the Plan, with or without retroactive effect, in any respect or manner necessary to qualify the Plan under section 401(a) of the Code. (d) No Reversion of Funds. No part of the Trust Fund shall revert to --------------------- any Participating Company nor be used for or diverted to purposes other than the exclusive purpose of providing benefits to Participants and Beneficiaries who have an interest in the Plan and defraying the reasonable expenses of administering the Plan; provided, that funds may be returned to Participating Companies under the following circumstances: (i) Any contribution made as a result of a mistake of fact may be refunded to the appropriate Participating Company, providing such refund occurs within one year after the date of such contribution; (ii) All employer contributions are expressly conditioned on their deductibility under section 404 of the Code, and any employer contribution shall be returned to the appropriate Participating Company, upon its written request, to the extent that the contribution is disallowed as a deduction, within one year after such disallowance; (iii) In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Code, any contribution made incident to that initial qualification must be returned to the appropriate Participating Company within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Company's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe; 53 (iv) Amounts held unallocated pursuant to Sections 13(b)(ii) and (iii) upon termination of the Plan shall be returned to the appropriate Participating Company. (e) Full Vesting Upon Termination. Upon termination, partial ----------------------------- termination or the complete discontinuance of Company Contributions to the Plan (the "terminating events") the account balance of each affected Participant shall be 100% vested and nonforfeitable. In the event a terminating event occurs, no part of the Trust Fund shall revert to any Participating Company or be used for or diverted to purposes other than providing benefits to Participants and Beneficiaries and defraying the reasonable expenses of administering the Plan and the Trust Fund. Upon the occurrence of a terminating event the Trust shall continue until the Trust Fund has been distributed as provided in Section 11 subject to section 403(d)(1) of ERISA provided, however, that in the event of a partial termination the Trust shall continue with respect to unaffected Participants and Beneficiaries notwithstanding any distributions made as a result of the partial termination to affected Participants and Beneficiaries. SECTION 20. MISCELLANEOUS ------------- (a) Inalienability of Rights. The interest and property rights of any ------------------------ person in the Plan, in the Trust Fund or in any distribution to be made under the Plan shall not be subject to option nor be assignable, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any act in violation hereof shall be void. Notwithstanding the foregoing, the creation, assignment or recognition of a right to all or any portion of a Participant's Plan Benefit made pursuant to a state domestic relations order shall not constitute a violation of this Section 20(a), provided that such order is determined to be a "qualified domestic relations order" (as defined in section 414(p) of the Code) under written procedures adopted by the Plan Administrator. 54 (b) Plan Mergers. The Plan shall not merge or consolidate with, nor ------------ transfer assets or liabilities to, any other plan unless each Participant would receive a Plan Benefit immediately after the merger, consolidation or transfer (if the Plan then terminated) which is equal to or greater than the Plan Benefit such Participant would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). (c) Payments to and from the Plan. All Employee and Company ----------------------------- Contributions shall be paid to the Trustee for investment and reinvestment as part of the Trust Fund pursuant to the Trust Agreement. All benefits and withdrawals payable under the Plan shall be paid out of the Trust Fund by the Trustee pursuant to the directions of the Plan Administrator and the terms of the Trust Agreement. (d) No Right in Trust Fund or to Employment. No person shall have any --------------------------------------- rights in or to the Trust Fund, or any part thereof, or under the Plan, except as, and only to the extent, expressly provided for in the Plan. The establishment of the Plan, the granting of benefits and any action of any member of the Affiliated Group or any other person shall not be held or construed to confer upon any person any right to be continued as an Employee nor to confer any right or interest in the Trust Fund other than as provided herein. No provision of the Plan shall restrict the right of any member of the Affiliated Group to discharge any Employee at any time, with or without cause. (e) Competency to Handle Benefits. If, in the opinion of the Plan ----------------------------- Administrator, any person becomes unable to handle properly any property distributable to such person under the Plan, the Plan Administrator may make any reasonable arrangement for distribution on such person's behalf as it deems appropriate. (f) Governing Law. This Plan shall be construed in accordance with ------------- ERISA and, to the extent permissible under ERISA, the laws of the State of New York. 55 SECTION 21. DEFINITIONS ----------- When used herein, the following terms shall have the following meanings unless the context clearly indicates a different meaning: "Accounts" means any or all of the Accounts maintained for a -------- Participant pursuant to Section 8. "Affiliated Group" means any trade or business (including any ---------------- Participating Company), whether or not incorporated, which, at the time of reference controls, is controlled by or under common control with a Participating Company, within the meaning of sections 414(b) or 414(c) of the Code, or is a member of an affiliated service group which includes a Participating Company, within the meaning of section 414(m) of the Code. To the extent required by law, all employees of all corporations which are members of a controlled group of corporations (as defined in section 414(b) of the Code) and all employees of all trades and businesses (whether or not incorporated) which are under common control (as defined in section 414(c) of the Code) will be treated as employed by a single employer. "Allstate" means The Allstate Corporation, an Illinois corporation. -------- "Allstate Stock" means the common stock of Allstate, par value $.01 -------------- per share. "Allstate Stock Fund" means the separate part of the Trust Fund that ------------------- is invested as provided in Section 7(c)(iv). "Basic Accounts" means (to the extent applicable) the Basic Pretax -------------- Account and the Basic After-Tax Adjustment Account of a Participant. "Basic After-Tax Adjustment Account" means the account maintained for ---------------------------------- a Participant pursuant to Section 8(a)(ii). "Basic After-Tax Adjustment Contributions" means the contributions so ---------------------------------------- described in Section 5. 56 "Basic Contributions" means Basic Pretax Contributions and Basic ------------------- After-Tax Adjustment Contributions. "Basic Pretax Account" means the account maintained for a Participant --------------------- pursuant to Section 8(a)(i). "Basic Pretax Contributions" means the contributions so described in --------------------------- Section 5. "Beneficiary" means the person or persons (which may include one or ----------- more trusts) designated by a Participant pursuant to section 11(e). "Code" means the Internal Revenue Code of 1986, as amended from time ---- to time. "Company" means Dean Witter Reynolds Inc., a Delaware corporation. ------- "Company Accounts" means (to the extent applicable) the Matching ---------------- Contribution Account and the Qualified Company Contribution Account. "Common Stock" means the common stock of Dean Witter, Discover & Co., -------------- a Delaware corporation, par value $.01 per share. "Credit Services Employee" means an Employee who is either: -------------------------- (a) a United States or Puerto Rico Employee employed by NOVUS Credit Services Inc. ("NCSI") or any subsidiary of NCSI which is both a member of the Affiliated Group and a Participating Company; (b) an Employee employed by any other member of the Affiliated Group whose services are primarily rendered to NCSI or a subsidiary of NCSI; or (c) an Employee, or classification of Employees, who has been designated in writing by the Plan Administrator as a Credit Services Employee. "Dean Witter Discover Stock Fund" means that part of the Trust Fund ------------------------------- invested as provided in Section 7(c)(i). 57 "Determination Year" means a Plan Year. ------------------ "DWD" means Dean Witter, Discover & Co. (the successor of Dean Witter --- Financial Services Inc., the successor of Dean Witter Reynolds Organization Inc.), a Delaware corporation, and, where appropriate, also means the predecessor corporations as they existed prior to the 1981 merger with, and the 1993 Spin-off from, Sears. "Earnings" means the sum of: ---------- (i) cash compensation paid as salary (including but not limited to overtime, double time, shift premiums, supplemental earnings, additional earnings, LA trip pay, weekend, holiday and vacation pay and any retroactive pay), commission (including but not limited to sales commissions, trails, deferred payouts, referral fees, finders fees, futures overrides, residuals and retroactive commissions), bonus (including but not limited to annual incentive bonuses, long term incentive payouts, results sharing, gain sharing and payouts of deferred cash bonuses) or a cash award (including but not limited to contests, incentive and performance awards); (ii) any amounts contributed to the Plan as Basic Pretax or Supplemental Pretax Contributions; and (iii) any employee contributions to a plan maintained by any member of the Affiliated Group which is intended to meet the requirements of Code section 125. Notwithstanding anything contained herein to the contrary, the term "Earnings" shall exclude: (i) any Earnings paid to an Employee for any period prior to the date such Employee becomes a Participant or for any period during which such Employee is not an Immediately Eligible Employee or an Eligible Employee; 58 (ii) any non-cash compensation (including but not limited to merchandise, trips, goods and services); (iii) imputed income (including but not limited to group term life insurance premiums, forgiven loans, employee discounts and the personal use of Company vehicles, equipment, facilities or services); (iv) cash payments made to or on behalf of an Employee for an employment related expense (including but not limited to relocation expenses, club dues, preventive care or other medical expense reimbursements); (v) benefits paid under any plan, or pursuant to any payroll practice, maintained by any member of the Affiliated Group on account of or following the Retirement, Disability or death of an Employee, a spouse of an Employee or a dependent of an Employee (except that "Earnings" shall include payments of salary or commission earned by such Employee prior to but paid after such Employee's Retirement, Disability or death); and (vi) compensation recognized by an Employee on account of the granting, exercise, vesting or delivery of an award under any equity-based compensation plan maintained by any member of the Affiliated Group (including dividends and other earnings paid as a result of such awards, payments of cash pursuant to an award determined by the value or performance of a security and payments of cash in lieu of fractional shares). Notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual compensation of each Participant taken into account under the Plan shall not exceed $150,000 or such other amount required by Code section 401(a)(17), as adjusted by the Commissioner of Internal Revenue for increases in the cost-of-living in accordance with Code section 401(a)(17). 59 In determining the compensation of a Participant for purposes of this limitation the rules of section 414(g)(6) of the Code shall apply, except that in applying such rules the term "family" shall include only the spouse of the Participant and the lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. Notwithstanding the foregoing, for purposes of determining whether an individual is a Highly Compensated Employee or a member of the Top Paid Group, Earnings shall be determined without regard to the limits imposed by Code section 401(a)(17). "Elective Deferrals" means elective deferrals within the meaning of ------------------ section 402(g)(2) of the Code. "Eligible Employee" means (i) any Employee of a Participating Company ----------------- and (ii) any Employee of a member of the Affiliated Group who has been designated in writing by the Plan Administrator as an Eligible Employee; provided, in either case, that such Employee shall have both attained age 21 and completed at least one Year of Service. An Employee shall not be an Eligible Employee with respect to any period; (A) during which the Employee accrues benefits (whether or not vested) with respect to compensation that constitutes Earnings hereunder under any funded retirement plan to which contributions have been made by any member of the Affiliated Group (other than this Plan, the Dean Witter Reynolds Inc. Pension Plan or Federal Social Security), (B) during which the Employee is covered by a collective bargaining agreement with respect to which a member of the Affiliated Group is a party, except to the extent that such agreement provides that Employees covered thereby shall be considered to be Eligible Employees as to such period, or (C) during which the Employee is an Employee solely by reason of the application of section 414(n) or (o) of the Code, or 60 (D) during which the Employee is a nonresident alien (within the meaning of Code section 7701(b)(1)(B)) who received no earned income from sources within the United States (within the meaning of Code section 861(a)(3)). An individual's status as an Eligible Employee or an Immediately Eligible Employee shall be determined by the Plan Administrator and, such determination shall be conclusive and binding upon all persons. "Employee" means any individual employed by any member of the -------- Affiliated Group or any other employer required to be aggregated with any member of the Affiliated Group under sections 414(b), (c), (m) or (o) of the Code. The term Employee shall also include any Leased Employee deemed to be an employee of any such employer as provided in section 414(n) or (o) of the Code. "Employee Accounts" means (to the extent applicable) the Basic ----------------- Accounts and the Supplemental Accounts. "Entry Date" means: ------------ (a) with respect to an Immediately Eligible Employee, either the first practicable pay date following such Employee's Employment Commencement Date or any pay date thereafter; or (b) with respect to an Eligible Employee, either the first practicable pay date following such Employee's completion of the age and service requirements set forth in Section 2(a) or any pay date thereafter. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "Excess Aggregate Contributions" means the amount by which ------------------------------ Contributions made by or on behalf of Highly Compensated Employees exceed the limits described in Code section 401(m)(2). 61 The amount of Excess Aggregate Contributions shall be determined by first reducing the Actual Contribution Ratio ("ACR"), as defined by section 401(m)(3) of the Code and regulations thereunder, of the Highly Compensated Employee with the highest ACR to the extent necessary to satisfy the ACP test described in Section 5(h) or cause such ratio to equal the ACR of the Highly Compensated Employee with the next highest ACR and, second, repeating this process until the ACP test is satisfied. The amount of Excess Aggregate Contributions for a Highly Compensated Employee is then equal to the total of the Highly Compensated Employee's Contributions taken into account for purposes of the ACP test minus the product of the Highly Compensated Employee's reduced ACR as determined above and the Highly Compensated Employee's Earnings. In the case of a Highly Compensated Employee whose ACR is determined under the family aggregation rules, the determination of the amount of Excess Aggregate Contributions shall be made by allocating the Excess Aggregate Contributions determined under the "leveling" method described herein among the Family Members in proportion to the Contributions of each Family Member taken into account for purposes of the ACP test. "Excess Contributions" means the amount by which Contributions made by --------------------- or on behalf of Highly Compensated Employees exceed the limits described in Code section 401(k)(3). The amount of Excess Contributions shall be determined by first reducing the Actual Deferral Ratio ("ADR") as defined by section 401(k)(3)(B) of the Code and regulations thereunder of the Highly Compensated Employee with the highest ADR to the amount necessary to satisfy the ADP test described in Section 5(f) or cause such ratio to equal the ADR of the Highly Compensated Employee with the next highest ADR and, second, repeating this process until the ADP test is satisfied. The amount of Excess Contributions for a Highly Compensated Employee is then equal to the total of Elective Deferrals and other Contributions taken into account for the ADP test minus the product of the Highly Compensated Employee's reduced ADR as determined above and the Highly Compensated Employee's Earnings. In 62 the case of a Highly Compensated Employee whose ADR is determined under the family aggregation rules, the determination of the amount of Excess Contributions shall be made by allocating the Excess Contributions determined under the "leveling" method described herein among the Family Members in proportion to the Contributions of each Family Member taken into account for purposes of the ADP test. "Excess Elective Deferrals" means those Elective Deferrals that are ------------------------- includible in a Participant's gross income under section 402(g) of the Code to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code section. "Family Member" means a spouse, lineal ascendant, lineal descendent or -------------- spouse of a lineal ascendant or lineal descendent of a Highly Compensated Employee. "Five Percent Owner" means any person who owns (or is considered as ------------------ owning within the meaning of Code Section 318) more than five percent of the outstanding stock of an Affiliated Group member or stock possessing more than five percent of the total combined voting power of all stock of an Affiliated Group member or, in the case of an unincorporated business, any person who owns more than five percent of the capital or profits interest in an Affiliated Group member. In determining percentage of ownership hereunder, Affiliated Group members that would otherwise be aggregated under Code sections 414(b), (c), (m) and (o) shall be treated as separate employers. "Highly Compensated Active Employee" means any individual who is an ---------------------------------- Employee during the Determination Year and who, during the Look-back Year: (1) received Earnings in excess of $75,000 (as adjusted pursuant to section 415(d) of the Code); (2) received Earnings in excess of $50,000 (as adjusted pursuant to section 415(d) of the Code) and was a member of the Top Paid Group; or 63 (3) was an officer of any member of the Affiliated Group and received Earnings greater than 50 percent of the dollar limitation in effect under section 415(b)(l)(A) of the Code provided that the number of Employees classified as officers hereunder shall not exceed the lesser of (i) 50 or (ii) the greater of 3 or 10 percent of all Employees and further provided that if no officer satisfies the compensation requirement set forth herein during either the Look-back Year or the Determination Year the highest paid officer for such year shall be a Highly Compensated Active Employee. In determining who is a Highly Compensated Active Employee, the Company may elect to substitute $50,000 for $75,000 in l above and not apply 2 above provided that the Affiliated Group maintains significant business activities in at least two significantly separate geographic areas and meets such other requirements as the Secretary of the Treasury may prescribe. The term "Highly Compensated Active Employee" shall also include: (4) An Employee who is both (i) described in 1, 2 or 3 above if the term "Determination Year" is substituted for the term "Look-back Year" and (ii) one of the 100 Employees who received the most earnings during the Determination Year; (5) An Employee who is a Five Percent Owner at any time during the Determination Year or the Look-back Year; or (6) An Employee who during a Determination Year or a Look-back Year is a Family Member of either (i) a Five Percent Owner who is an active or former employee or (ii) a Highly Compensated Active Employee who is one of the ten employees who received the most Earnings during such year provided, however, that the Family Member and the Five Percent Owner or top ten highly compensated employee shall be treated as a single Highly Compensated Active Employee 64 whose earnings, benefits and contributions is the sum of such compensation, benefits and contributions of the Family Member and the Five Percent Owner or top ten highly compensated employee. "Highly Compensated Employee" means a Highly Compensated Active --------------------------- Employee or a Highly Compensated Former Employee. "Highly Compensated Former Employee" means a former Employee who ----------------------------------- terminated employment prior to the Determination Year and was a Highly Compensated Active Employee in the year of termination of employment or in any Determination Year after attaining age 55. Notwithstanding the foregoing, an Employee who terminated employment prior to 1987 will be treated as a Highly Compensated Former Employee only if during the year (or year preceding the termination) or any year after the Employee attains age 55 (or the last year ending before the Employee's 55th birthday), the Employee either received Earnings in excess of $50,000 (as adjusted pursuant to section 415(d) of the Code) or was a Five Percent Owner. Highly Compensated Former Employees shall be treated as Highly Compensated Employees. The method set forth in this section for determining who is a Highly Compensated Former Employee shall be applied on a uniform and consistent basis for all purposes for which the Code section 414(q) definition is applicable. "Hour of Service" means an Hour of Service as defined in Section 3(a). --------------- "Immediately Eligible Employee" means a full-time or flex full-time ------------------------------- Credit Services Employee, a full-time Securities Employee, a part-time Securities Employee regularly scheduled to perform at least 30 Hours of Service a week or such other Employee, or classification of Employees, who have been so designated by the Plan Administrator. "Investment Funds" means the Dean Witter Discover Stock Fund and such ---------------- other Investment Funds as are designated under Section 7(c)(iii) but shall not include the Sears Stock Fund or the Allstate Stock Fund. 65 "Leased Employee" means any person (other than an employee of the --------------- recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A leased employee shall not be considered an employee of the recipient if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in section 415(c)(3) of the Code, but including amounts contributed by the employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under sections 125, 402(a)(8), 402(h) or 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (ii) leased employees do not constitute more than 20 percent of the recipient's nonhighly compensated workforce. "Look-back Year" means the twelve month period immediately preceding a --------------- determination year. "Matching Contribution Account" means the account maintained for a ----------------------------- Participant pursuant to section 8(a)(v). 66 "Matching Contributions" means contributions to the Plan made by any ---------------------- Participating Company and allocated to a Participant's Account by reason of his or her Basic Contributions that are subject to the vesting provisions set forth in Section 10(a). "One Year Break" means a One Year Break as defined in Section 3(a). -------------- "Participant" means an individual so described in Section 2. ----------- "Participating Company" means the Company and any member of the --------------------- Affiliated Group that has been designated in writing as a Participating Company by the Company and has accepted such designation in writing. "Period of Service" means the period as defined in Section 3(a). ----------------- "Period of Severance" means a Period of Severance as defined in ------------------- Section 3(a). "Plan" means the Dean Witter START Plan (Saving Today Affords ---- Retirement Tomorrow), including Supplements A, B, C, D and E, as amended from time to time. "Plan Administrator" means Dean Witter Reynolds Inc., a Delaware ------------------ corporation. "Plan Benefit" means the amount so described in Section 10. ------------ "Plan Year" means the twelve-month period ending December 31. --------- "Qualified Company Contribution Account" means the Account maintained -------------------------------------- for a Participant pursuant to Section 8(a)(vi). "Qualified Matching Contributions" means contributions to the Plan -------------------------------- made by any Participating Company and allocated to a Participant's Account by reason of his or her Basic Contributions that are nonforfeitable when made. "Qualified Non-Elective Contributions" means contributions (other than ------------------------------------ Matching Contributions or Qualified Matching Contributions) made by any Participating Company on behalf of any or all Immediately Eligible Employees or Eligible Employees that are nonforfeitable when made. 67 "Qualified Plan Transfer Contributions" means the contributions so ------------------------------------- described in Section 9(b). "Quarter" means a calendar quarter ending March 31, June 30, September ------- 30, or December 31. "Release" means any termination of an Employee's employment which is ------- initiated by a member of the Affiliated Group by reason of its decision to close permanently a branch office or other facility, or to reduce permanently the number of Employees which it employs due to substantial change in economic conditions. "Retirement" means termination of an Employee's employment with the ---------- Affiliated Group upon or after the date he would be eligible to retire immediately under the Dean Witter Reynolds Inc. Pension Plan. "Rollover Contributions" means contributions to the Plan made by a ---------------------- Participant which qualify for rollover treatment under section 402(a)(5), 403(a)(4) or 408(d)(3)(A)(ii) of the Code. "Sears" means Sears, Roebuck and Co., a New York corporation. ----- "Sears Common Shares" means the common stock, par value $.075, of ------------------- Sears. "Sears Stock Fund" means that part of the Trust Fund invested as ---------------- provided in Section 7(c)(ii). "Securities Employee" means: -------------------- (a) a United States or Puerto Rico Employee employed by Dean Witter Reynolds Inc., Dean Witter Realty Inc., Dean Witter InterCapital Inc., Dean Witter Distributors Inc., Dean Witter Trust Company or any of their direct or indirect subsidiaries which subsidiaries are members of the Affiliated Group; 68 (b) an Employee of Dean Witter, Discover & Co. or any of its directly or indirectly owned subsidiaries, other than NCSI and its subsidiaries, which subsidiaries are members of the Affiliated Group and which Employee is engaged primarily in securities-related activities; or (c) an Employee, or classification of Employees, who has been designated in writing by the Plan Administrator as a Securities Employee. "Spin-off" means the distribution by Sears of all of the shares of -------- Common Stock owned by Sears, to the shareholders of Sears. "SPS Stock" means the common stock of SPS Transaction Services, Inc., ---------- par value $.01 per share. "SPS Stock Fund" means the separate part of the Trust Fund that is -------------- invested as provided in Section 7(c)(v). "Stock" means Common Stock, Sears Common Shares, SPS Stock, Allstate ----- Stock or any combination thereof. "Supplemental Accounts" means (to the extent applicable) the --------------------- Supplemental After-Tax Account and the Supplemental Pretax Account of a Participant. "Supplemental After-Tax Account" means the Account maintained for a ------------------------------ Participant pursuant to Section 8(a)(iv). "Supplemental Pretax Contributions" means the Contributions so ---------------------------------- described in Section 5. "Supplemental Pretax Account" means the account maintained for a ---------------------------- Participant pursuant to Section 8(a)(iii). "Termination of Employment" and similar references mean an Employee's ------------------------- ceasing to be employed by any member of the Affiliated Group (and, where applicable, any other entity required to 69 be aggregated with the Employer pursuant to Code section 414(o) and the regulations thereunder) for any reason other than death. A transfer between employment of members of the Affiliated Group (or, where applicable, such other entity) shall not be a termination of employment. "Top Paid Group" means the top twenty percent of employees who -------------- performed services for the Affiliated Group during the applicable year ranked according to the amount of Earnings received from the Affiliated Group during such year. For purposes of this definition Leased Employees shall be considered Employees unless such Leased Employees are covered by a plan described in Code section 414(n)(5) and are not covered in any qualified plan maintained by the Affiliated Group. Employees who are nonresident aliens and who received no earned income within the meaning of Code section 911(d)(2) from the Affiliated Group constituting United States source income within the meaning of Code section 861(a)(3) shall not be treated as Employees. Additionally, for the purpose of determining the number of active Employees in any year the following additional Employees shall also be excluded; however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top Paid Group: (1) Employees with less than six months of service; (2) Employees who normally work less than 17 1/2 hours per week; (3) Employees who normally work less than six months during a year; (4) Employees who have not yet attained 21; and, (5) except to the extent provided in regulations, Employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and any member of the Affiliated Group. 70 "Total and Permanent Disability" (or "Totally and Permanently ------------------------------ Disabled") means that, due to a medically determinable physical or mental impairment which is reasonably expected to last for a continuous period of not less than twelve months or to result in death, the Employee is unable to perform his or her regularly assigned job or another job for which the Employee will be paid Earnings approximately equivalent to the Earnings paid with respect to such regularly assigned job. The Plan Administrator shall determine whether a person ceased to be an Employee by reason of Total and Permanent Disability based on competent medical evidence and, subject to Section 17, such determination shall be conclusive on all parties. "Trust" means the trusts created by the Trust Agreement. ----- "Trust Agreement" means any trust agreement entered into between the --------------- Company and a Trustee, as amended from time to time. "Trustee" means one or more persons appointed by the Company to act as ------- a trustee under the Plan (provided each person so appointed accepts such appointment pursuant to a Trust Agreement) and any successor trustee or trustees appointed from time to time who so accept such appointment. "Trust Fund" means the trust fund or trust funds established pursuant ---------- to the Trust Agreement to hold and reflect all assets of the Plan (and the income, gains or losses attributable thereto). "Valuation Date" means the last day of any Quarter on which the New -------------- York Stock Exchange was open and Stock was traded and such other dates as the Plan Administrator shall determine. "Year of Service" means a Year of Service as defined in Section 3(g). --------------- SECTION 22. EXECUTION --------- 71 To record the amendment and restatement of the Plan to read as set forth herein, the Company has caused its authorized officers to affix the corporate name and seal hereto, effective as of January 1, 1997. DEAN WITTER REYNOLDS INC. By_____________________________________ 72 DEAN WITTER START PLAN ---------------------- (Saving Today Affords Retirement Tomorrow) ------------------------------------------ SUPPLEMENT A ------------ SPECIAL CONTRIBUTION -------------------- 1. Establishment and Purpose. This Supplement A is established, ------------------------- effective as of October 16, 1981, to provide for the special contribution (the "Special Contribution") to the Plan by DWRO which was authorized by the Board of Directors of DWRO by resolution adopted October 8, 1981 (the "October 8 Resolution"). This Supplement A is a part of the Plan and, except as otherwise provided herein, shall be construed and administered in accordance with the terms of the Plan. 2. Amount and Time of Special Contribution. The amount of the --------------------------------------- Special Contribution shall be determined in accordance with the October 8 Resolution and shall be paid to the Trustee as soon as reasonably practicable after October 30, 1981. 3. Allocation. The Special Contribution shall be allocated, as of ---------- November 30, 1981, to the Company Contribution Accounts of Participants who received (or are entitled to receive) an allocation of the Company Contribution for the Plan Year ended August 31, 1981, and of Participants who made Employee Contributions to the Plan during the month of September, 1981. The amount allocated to each such Participant's Company Contribution Account shall be determined by multiplying the entire Special Contribution by a fraction, the numerator of which is the sum of (a) the amount of the Participant's Employee Contributions to the Plan during the Plan Year ended August 31, 1981 and (b) the amount of the Participant's Employee Contributions to the Plan during the month of September 1981, minus the amount of any such Employee Contributions that the Participant had withdrawn from A-i the Plan (in accordance with Section 13 of the Plan) by October 6, 1981, and the denominator of which is the sum of all such Employee Contributions made by all such Participants during such periods, minus the total amount of all such Employee Contributions so withdrawn. 4. Source of Special Contribution. The Special Contribution shall ------------------------------ be made out of the Net Income of DWRO for the Plan Year ending December 31, 1981, or, to the extent necessary, out of the retained earnings of DWRO as of such date. 5. Treatment of Special Contribution. Except as otherwise provided --------------------------------- above, for all purposes under the Plan (including the determination of vesting under Section 11(b)), the Special Contribution provided under this Supplement shall be treated as if it were a Company Contribution to the Plan for the Plan Year ending December 31, 1981. The Special Contribution shall be held and administered as part of the Trust Fund in accordance with the terms of the Plan (including this Supplement A) and the Trust Agreement. 6. Definitions. All terms used in this Supplement A, other than ----------- those defined herein, shall have the same meaning such terms have as used or defined in the Plan. A-ii DEAN WITTER START PLAN ---------------------- (Saving Today Affords Retirement Tomorrow) ------------------------------------------ SUPPLEMENT B ------------ PAYROLL-BASED EMPLOYEE STOCK OWNERSHIP PLAN ------------------------------------------- The Payroll-Based Employee Stock Ownership Plan (the "PAYSOP") was established effective January 1, 1983. Contributions to the PAYSOP were discontinued effective January 1, 1987. The PAYSOP was terminated effective December 31, 1991 and all assets held in the PAYSOP were distributed to Participants and Beneficiaries on or about November 4, 1993. B-i DEAN WITTER START PLAN ---------------------- (Saving Today Affords Retirement Tomorrow) ------------------------------------------ SUPPLEMENT C ------------ TOP-HEAVY PROVISIONS -------------------- Section 1. Top-Heavy Provisions. (1) Determination of Top-Heavy Status. Notwithstanding any other --------------------------------- provision of the Plan to the contrary, the following provisions shall become effective for any Plan Year after the Plan Year ending December 31, 1983 in which the Plan is a Top-Heavy Plan. (2) Minimum Allocations. Notwithstanding any other provision of the ------------------- Plan to the contrary, for any Plan Year during which the Plan is a Top-Heavy Plan, the Company contributions and allocable Forfeitures (and for any Plan Year commencing on or after January 1, 1985, the Basic Pretax Contributions) allocated on behalf of any Participant who is employed on the last day of the Plan Year and who is not a Key Employee shall not be less than a percentage of such Participant's Compensation equal to the lesser of (i) three percent, or (ii) the largest percentage of Compensation (as limited by Section 1(e) of this Supplement C) that is allocated to any Key Employee for that Plan Year of Company contributions and allocable Forfeitures (and, for Plan Years beginning on or after January 1, 1985, Basic Pretax Contributions). This minimum allocation shall be determined without regard to any contributions made or benefits available under the Social Security Act, and shall be made even though, under other Plan provisions, the Participant would not be entitled to receive an allocation or would have received a lesser allocation for the Plan Year because of (i) the Participant's failure to complete a Year of Service, or (ii) the Participant's failure to make mandatory Participant contributions C-i to the Plan, or (iii) the Participant's receipt of Earnings in an amount less than the minimum required by the Plan for a Participant to qualify for an allocation of Company contributions or Forfeitures. (3) Minimum Vesting. Notwithstanding any provision of Section 10 of --------------- the Plan to the contrary, if a Participant (other than a Participant who did not complete any Period of Service after the Plan became a Top-Heavy Plan) terminates employment with the Affiliated Group while the Plan is a Top-Heavy Plan, and after such Participant has completed three or more Years of Service, such Participant shall be 100 percent vested in the balance of his or her Company Contribution Account. If a Participant terminates employment with the Affiliated Group while the Plan is a Top-Heavy Plan and before the Participant has completed three Years of Service, such Participant's vested percentage in his or her Company Contribution Account shall be a percentage determined in accordance with Section 10 of the Plan. (4) Effect of Change in Top-Heavy Status on Vesting. If the Plan is a ----------------------------------------------- Top-Heavy Plan at any time and thereafter ceases to be a Top-Heavy Plan, each Participant who is credited with three or more Years of Service as of December 31 of the last Plan Year in which the Plan is a Top-Heavy Plan shall thereafter continue to be 100 percent vested in the balance of his or her Company Contribution Account. Each Participant who is credited with fewer than three Years of Service as of December 31 of the last Plan Year in which the Plan is a Top-Heavy Plan shall have his or her vested percentage determined under Section 10 of the Plan (unless and until the Plan again becomes a Top-Heavy Plan) provided that, as long as such Participant had an hour of Service after the Plan became a Top-Heavy Plan, no decrease in a Participant's nonforfeitable percentage may occur in the event the Plan's status as a Top-Heavy Plan alters during any Plan Year. (5) Impact of Top-Heavy or Super Top-Heavy Status on Maximum Benefits. ----------------------------------------------------------------- For any Plan Year in which the Plan is a Top-Heavy Plan or Super Top-Heavy Plan, the number "1.00" shall C-ii be substituted for the number "1.25" wherever it appears in sections 415(e)(2) and (3) of the Code; provided, however, that such substitution shall not have the effect of reducing any benefit accrued under a defined benefit plan maintained by any member of the Affiliated Group prior to the first day of the Plan Year in which this provision becomes applicable. Section 2. Plan Distributions. ------------------ Notwithstanding any other provision of the Plan to the contrary, the distribution of the Plan Benefit of a Participant who is a five percent owner of the Company (as defined in section 416(i) of the Code) shall be made no later than April 1 of the Plan Year following the Plan Year in which he or she attains age 70-1/2, whether or not he or she is still an Employee. In no event shall any stock allocated to a Participant's PAYSOP Account (or cash attributable hereto) that would otherwise be required to be distributed under the preceding sentence be distributed prior to the earlier of: (a) the date he ceases to be an Employee, or (b) the last day of the 84th month beginning after the month in which such stock (or cash) was first allocated to the Participant's PAYSOP Account. Section 3. Definitions. ----------- For purpose of this Supplement C, the following definitions shall apply: (a) "Aggregation Group" means a group of qualified plans consisting ----------------- of: Each Plan of the Affiliated Group in which a Key Employee participates, and each other plan of any member of the Affiliated Group that enables any plan in which a Key Employee participates to meet the requirements of sections 401(a) (4) and 410 of the Code; or All plans of the Affiliated Group included under (i), above, plus at the election of the Company, one or more additional plans of the Affiliated Group that satisfy the requirements of sec tions 401(a)(4) and 410 of the Code when considered together with the plans included under (i) above. C-iii (b) "Compensation" means the total compensation actually paid to the ------------ Participant by the Affiliated Group member that employs such Participant, as reported on the Internal Revenue Service Form W-2 (or its equivalent) issued with respect to such Participant. (c) "Determination Date" means, for any Plan Year subsequent to the ------------------ first Plan Year, the last day of the preceding Plan Year, and for the first Plan Year of the Plan, the last day of such year. (d) "Key Employee" means any Employee or former Employee (and the ------------ beneficiaries of such Employee) who at any time during the Determination Period was an officer of the Company or Participating Company if such individual's average Compensation exceeds 50% of the dollar limitation under section 415(b)(1)(A) of the Code, an owner (or considered an owner under section 318 of the Code) of one of the ten largest interests in the Company or Participating Company if such individual's Compensation exceeds 100% of the dollar limitation under section 415(c)(1)(A) of the Code, a 5% owner of the Company or Participating Company, or a 1% owner of the Company or Participating Company who has an Annual Compensation of more than $150,000. "Annual Compensation" means Compensation as defined in section 415(c)(3) of the Code, but including amounts contributed by the Company or Participating Company pursuant to a salary reduction agreement which are excludable from the Employee's gross income under sections 125, 402(a)(8), 402(h) or 403(b) of the Code. The "Determination Period" is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee will be made in accordance with section 416(i) of the Code and the regulations thereunder. (e) "Permissive Aggregation Group" means the Required Aggregation ---------------------------- Group of plans plus any other plan or plans of the Company or Participating Company which, when considered as a C-iv group with the Required Aggregation Group, would continue to satisfy the requirements of sections 401(a)(4) and 410 of the Code. (f) "Present Value" shall be computed only using the interest and ------------- mortality rates specified by the Plan Administrator. (g) "Required Aggregation Group" means (1) each qualified plan of the -------------------------- Company or Participating Company in which at least one Key Employee participates or participated at any time during the Determination Period (regardless of whether the plan has terminated), and (2) any other qualified plan of the Company or Participating Company which enables a plan described in (1) to meet the requirements of sections 401(a)(4) and 410 of the Code. (h) "Super Top-Heavy Plan" means a Top-Heavy Plan for which the Top- -------------------- Heavy Ratio exceeds 90%. (i) "Top-Heavy Plan" means, for any Plan Year beginning after December -------------- 31, 1983, the Plan if any of the following conditions exist: (A) If the Top-Heavy Ratio for the Plan exceeds 60% and the Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans; (B) If the Plan is part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds 60%; or If the Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. (j) "Top-Heavy Ratio" means as follows: --------------- (A) If the Company or Participating Company maintains one or more defined contribution plans (including any simplified employee pension plans) and the Company or Participating Company has not maintained any defined benefit plan which, during the five-year period ending on the C-v Determination Date(s) has or has had Vested Benefits, the Top-Heavy Ratio for the Plan alone or for the Required Aggregation Groups or Permissive Aggregation Groups as appropriate is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) (including any part of any account balance distributed in the five-year period ending on the Determination Date(s)), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the five-year period ending on the Determination Date(s)), both computed in accordance with section 416 of the Code and the regulations thereunder. Both the numerator and the denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under section 416 of the Code and the regulations thereunder. (B) If the Company or Participating Company maintains one or more defined contribution plans (including any simplified employee pension plans) and the Company or Participating Company maintains or has maintained one or more defined benefit plans which, during the five-year period ending on the Determination Date(s) has or has had any Vested Benefits, the Top-Heavy Ratio for any Required Aggregation Groups or Permissive Aggregation Groups as appropriate is a fraction, the numerator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the Present Value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with (i) above, and the Present Value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in accordance with section 416 of the Code and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator C-vi and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the five-year period ending on the Determination Date. (C) For purposes of (i) and (ii) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent valuation date that falls within or ends with the twelve-month period ending on the Determination Date, except as provided in section 416 of the Code and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one hour of service with any Company or Participating Company maintaining the Plan at any time during the five-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with section 416 of the Code and the regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the Top- Heavy Ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (x) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Company or Participating Company, or (y) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of section 411(b)(1)(C) of the Code. (k) "Valuation Date" means the date elected by the Company or -------------- Participating Company as of which account balances or Vested Benefits are valued for purposes of calculating the Top-Heavy Ratio, which is December 31 of each year. C-vii DEAN WITTER START PLAN ---------------------- (Saving Today Affords Retirement Tomorrow) ------------------------------------------ SUPPLEMENT D ------------ PARTICIPANTS RESIDING IN PUERTO RICO ------------------------------------ 1. Establishment and Purpose. This Supplement D is established effective ------------------------- July 1, 1990, to provide for the inclusion of Puerto Rico resident employees of Dean Witter Reynolds, Inc. (in Puerto Rico) and of Dean Witter Puerto Rico, Inc. in the Plan. Such participants will be subject to the provisions of the Plan to which this Supplement D is attached, except as noted below in this Supplement D. 2. New Definitions. For the purposes of this Supplement, certain terms --------------- are defined and added to Section 21 of the plan document to which this Supplement is attached. "Puerto Rico Code" means the Puerto Rico Income Tax Act of 1954, as ---------------- amended from time to time. "Puerto Rico Highly Compensated Employee" means any Employee residing --------------------------------------- in Puerto Rico who is "highly compensated" within the meaning of Section 165(e) of the Puerto Rico Code. "Puerto Rico Participant" means an individual described in Section 2 ----------------------- of the plan document and who is a resident of Puerto Rico. 3. Altered Definitions. For the purposes of this Supplement only, ------------------- certain definitions contained in Section 21 of the plan document are altered as follows: (a) "Earnings" means the sum of: (i) total compensation paid to an -------- Employee by any Participating Company which is subject to tax under the Code, or any successor provision thereto (or which would be subject to tax thereunder if the Employee were fully subject to income tax with respect to such compensation). For an Employee who is a resident of Puerto Rico, "Earnings" shall mean total D-i compensation paid to the Employee by any Participating Company which is subject to tax under the Puerto Rico Code, as amended. In either case, "Earnings" excludes any such compensation paid to the Employee for any period prior to the date he or she becomes a Participant or for any period during which he or she is not an Eligible Employee; plus (ii) any amounts contributed to the Plan by such Employee as Basic Pretax and Supplemental Pretax Contributions, plus (iii) for any Plan Year commencing after December 31, 1988, compensation deferred under a plan intended to qualify under section 125 of the Code. Effective January l, 1989, the annual total compensation of a Participant that may be taken into account under the Plan as Earnings for any Plan Year shall not exceed $200,000, as adjusted by the Secretary of the Treasury at the same time and in the same manner as under section 415(d) of the Code. In determining the compensation of a Participant for purposes of this limitation the rules of Section 414(g)(6) of the Code shall apply, except that in applying such rules the term "family" shall include only the spouse of the Participant and the lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. (b) "Elective Deferrals" means elective deferrals within the meaning ------------------ of Section 401(k) of the Code or within the meaning of Section 165(e) of the Puerto Rico Code. (c) "Employee" means any individual employed by any member of the -------- Affiliated Group or any other employer required to be aggregated with any member of the Affiliated Group under Sections 414(b), (c), (m) or (o) of the Code. The term "Employee" shall also include any Leased Employee deemed to be an employee of such employer as provided in Section 414(n) or (o) of the Code. The term "Employee" shall also include any employee of Dean Witter Reynolds, Inc. resident in Puerto Rico or any employee of Dean Witter Puerto Rico, Inc. (d) "Excess Contributions" means excess contributions within the -------------------- meaning of Section 401(k)(8)(B) of the Code or within the meaning of Section 165(e) of the Puerto Rico Code. D-ii (e) "Excess Elective Deferrals" means those Elective Deferrals that ------------------------- are incredible in the Participant's gross income under Section 401(k) of the Code (or that are incredible in the Puerto Rico Participant's gross income under Section 165(e) of the Puerto Rico Code) to the extent that such Participant's or Puerto Rico Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such respective section. (f) "Participant" means an individual so described in Section 2 of the ----------- plan document. "Participant" shall include any such individual who resides in Puerto Rico. 4. Revised Section 4(c) Payment of Company Contributions. For the ----------------------------------------------------- purposes of this Supplement only, Section 4(c) will read as follows: (c) Payment of Company Contributions. The portion of the Company -------------------------------- contribution to be made by each Participating Company for each Plan Year shall be determined by the Company and shall be paid to the Trustee at such time or times as the Participating Company shall determine, but in any event before the date for filing such Participating Company's Federal income tax return for the Plan Year, including any extension of such date. In the case of the Company Contribution made by a Participating Company in Puerto Rico on behalf of Puerto Rico Participants, such a contribution shall be paid before the date for filing such Participating Company's Puerto Rico income tax return for the Plan Year, including any extensions of such date. 5. Revised Section 5 Employee Contributions. For the purposes of this ---------------------------------------- Supplement only, Section 5 of the plan document will read as follows: SECTION 5: Employee Contributions. ---------------------- (a) Basic Contributions and Supplemental Pretax Contributions. Each Participant who is an Eligible Employee may make Basic Contributions to the Plan equal to 2%, 4% or 6% of his or her Earnings for the appropriate Plan Year. Except to the extent provided in Section D-iii 5(b) below, each Participants Basic Contributions shall constitute Basic Pretax Contributions. A Participant who is not a Highly Compensated Employee and who is making Basic Pretax Contributions equal to 6% of his or her Earnings may also elect to make Supplemental Pretax Contributions to the Plan equal to any whole percentage, from 1% to 6% of his or her Earnings. However, for a Puerto Rico Participant such Supplemental Pretax Contributions cannot exceed 4% of his or her Earnings. (b) Basic After-Tax Adjustment Contributions. In order that the Plan ---------------------------------------- may comply with the requirements of Sections 401(k) and 415 of the Code and the regulations thereunder at any time during the Plan Year the Plan Administrator (at its sole discretion) may reduce the rate at which any Participant who is a Highly Compensated Employee may contribute Basic Pretax Contributions, or discontinue all such contributions, for the remainder of such Plan Year. Also, in order that the Plan may comply with the requirements of Section 165(e) of the Puerto Rico Code, at any time during the Plan Year the Plan Administrator (at its sole discretion) may reduce the rate at which any Puerto Rico Participant who is a Puerto Rico Highly Compensated Employee may contribute Basic Pretax Contributions or Supplemental Pretax Contributions, or discontinue all such contributions, for the remainder of such Plan Year. Such a reduction or discontinuance may be applied selectively to individual Participants or to particular classes of Participants, as the Plan Administrator may determine. Any Participant whose Basic Pretax Contributions are reduced or discontinued under this Section 5(b) shall make Basic After-Tax Adjustment Contributions to the Plan during the remainder of the Plan Year equal to the Percentage of the Participants Earnings that the Plan Administrator has determined cannot be made as Basic Pretax Contributions (or, if applicable, as Supplemental Pretax Contributions); Provided, that in order that the Plan may comply with the requirements of Section 401(m) of the Code and the regulations thereunder, at any time during the Plan Year the Plan Administrator (at its sole discretion) may reduce the rate at which a Participant may contribute Basic D-iv After-Tax Adjustment Contributions, or discontinue all such contributions, for the remainder of such Plan Year. Any reduction or discontinuance of Basic Pre- Tax or Basic After-Tax Adjustment Contributions made pursuant to this Section 5(b) shall automatically cease to apply upon the close of the Plan Year in which it is made, or on such earlier date in such Plan Year as the Plan Administrator may determine. (c) Changing the Rate and Suspension of Basic Contributions and/or -------------------------------------------------------------- Supplemental Pretax Contributions. As of the beginning of any Quarter, a - --------------------------------- Participant may elect to change the rate of his or her Basic Pretax Contributions and/or any Supplemental Pretax Contributions to any other rate that is within the limitations described in Sections 5(a) and 5(b). If a Participant elects to reduce the rate of his or her Basic Pretax Contributions to a rate that is below 6%, any Supplemental Pretax Contributions being made by the Participant shall automatically cease on the effective date of such election. If a Participant is making Basic After-Tax Adjustment Contributions, and he or she elects to reduce the rate of his or her Basic Contributions, and if, as a result of such election, the Plan Administrator determines that it is no longer necessary for the Participant to make some or all of such Basic After- Tax Adjustment Contributions, the appropriate amount of the Participant's Basic After-Tax Adjustment Contributions shall automatically cease, effective as of the effective date of his or her election to change the rate of his or her Basic Contributions. As of any pay period, the Participant may elect to discontinue all Supplemental Pretax Contributions, or may discontinue his or her Basic Pre- Tax Contributions and, as a consequence, shall discontinue any Supplemental Pre- Tax Contributions. (d) Maximum Amount of Elective Deferrals. Notwithstanding anything to ------------------------------------ the contrary herein, the amount of Elective Deferrals made with respect to any individual during a calendar year under the Plan and all other plans, contracts or arrangements of any member of the Affiliated D-v Group may not exceed the amount of the limitation in effect under Section 402(g)(1) of the Code for taxable years beginning in such calendar year. Such limit shall not apply to any such Elective Deferrals made which are amounts attributable to service performed by such Participant prior to January 1, 1987. In addition, for Puerto Rico Participants, all such Elective Deferrals made during a calendar year may not exceed the amount of the limitation in effect under Section 165(e) of the Puerto Rico Code. (e) Distribution of Excess Elective Deferrals. A Participant may ----------------------------------------- assign to the Plan any Excess Elective Deferrals made during a taxable year of the Participant by notifying the Plan Administrator on or before March 1 following the close of such taxable year of the amount of the Excess Elective Deferrals to be assigned to the Plan. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 following such taxable year to any Participant to whose account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. (f) Actual Deferral Percentage Test. Basic Pretax Contributions for ------------------------------- Highly Compensated Employees hereunder shall not exceed the limits set forth in Section 401(k)(3) of the Code. For purposes of applying such limits, Section 401(k)(3) of the Code and Treasury Regulation Section 1.401(k)-1(b) are incorporated herein by reference. For Puerto Rico Participants, Basic Pretax Contributions and Supplemental Pretax Contributions (if any), in total for Puerto Rico Highly Compensated Employees shall not exceed the limits set forth in Section 165(e)(3) of the Puerto Rico Code. (g) Distribution of Excess Contributions. ------------------------------------ (1) Notwithstanding any other provision of the Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than D-vi the last day of any Plan Year beginning after December 31, 1987 to Participants to whose accounts Basic Pretax, Qualified Matching and Qualified Non-Elective Contributions were allocated for the preceding Plan Year. The Excess Contributions shall be adjusted for income or loss up to the date of distribution. The income or loss allocable to Excess Contributions shall be determined by multiplying the income or loss allocable to the Participant's Basic Pretax, Supplemental Pretax, Qualified Matching and Qualified Non-Elective Contributions for the Plan Year by a fraction, the numerator of which is the Excess Contribution on behalf of the Participant for the Preceding Plan Year and the denominator of which is the sum of the Participants account balances attributable to Basic Pretax, Supplemental Pretax, Qualified Matching and Qualified Non-Elective Contributions on the last day of the preceding Plan Year. Amounts distributed under this Section 5(g) shall be made from the Participant's Basic Pretax, Qualified Matching and Qualified Non-Elective Contribution Accounts in proportion to the Participant's Basic Pretax, Qualified Matching and Qualified Non-Elective Contributions for the Plan Year. (2) A Participant may treat his or her Excess Contributions as an amount distributed to the Participant and then contributed by the Participant to the Plan as Basic After-Tax Adjustment Contributions. Such re- characterized amounts will remain nonforfeitable and subject to the same distribution requirements as Supplemental Pretax Contributions. Amounts may not be re-characterized by a Highly Compensated Employee or by a Puerto Rico Highly Compensated Employee to the extent that such amount in combination with other Basic After-Tax Adjustment and Matching Contributions made with respect to that Employee would exceed the limits under Section 5(h). Re-characterization must occur no later than two and one-half months after the last day of the Plan Year in which the Excess Contributions arose and is deemed to occur no earlier than the date the last Highly D-vii Compensated Employee is informed in writing of the amount which may be recharacterized and the consequences thereof. (h) Actual Contributions Percentage Test. ------------------------------------- (1) Matching Contributions and Basic After-Tax Adjustment Contributions hereunder shall not exceed the limits set forth in section 401(m)(2) of the Code. For purposes of applying such limits, section 401(m)(2) of the Code and the regulations thereunder are incorporated herein by reference and are hereinafter referred to as the "ACP test." (2) Contributions made by or on behalf of Highly Compensated Employees shall not exceed the limits imposed upon multiple use of the alternative limitation by section 401(m)(9) of the Code. For this purpose, Code section 401(m)(9) and Regulations section 401(m)-2(b) are incorporated herein by reference. If one or more Highly Compensated Employees' Contributions exceed the multiple use limit, then the Actual Contribution Ratio ("ACR") of Highly Compensated Employees shall be reduced (starting with such Highly Compensated Employee whose ACR is the highest) so that the limit is not exceeded. The amount of any such reduction shall be treated as an Excess Aggregate Contribution. The Actual Deferral Ratio ("ADR") and ACR of Highly Compensated Employees shall be determined hereunder after any adjustments required to pass the tests described in Subsections 5(f)(l) and 5(h)(l). Multiple use shall not occur if the ADP and ACP of Highly Compensated Employees is not greater than 125 percent of the ADP and ACP of non-Highly Compensated Employees. (3) All or part of the Qualified Non-Elective Contributions and Elective Deferrals made with respect to any or all Eligible Employees may be treated as Matching Contributions for purposes of the ACP test provided that each of the following requirements is met: D-viii (i) the amount of nonelective contributions, including the Qualified Non-Elective Contributions treated as Matching Contributions for purposes of the ACP test, satisfies the requirements of Code section 401(a)(4); (ii) the amount of nonelective contributions, excluding those Qualified Non-Elective Contributions treated as Matching Contributions for purposes of the ACP test and those Qualified Non-Elective Contributions treated as Elective Deferrals under Regulations section 1.401(k)-1(b)(5) for purposes of the ADP test satisfies the requirements of Code section 401(a)(4); (iii) all Elective Deferrals whether or not treated as Matching Contributions hereunder, satisfy the ADP test. (iv) the Qualified Non-Elective Contributions are allocated to the Accounts of Eligible Employees as of a date within the Plan Year (pursuant to Regulations section 1.401(k)-1(b)(4)(i)(A)), and the Elective Deferrals satisfy Regulations section 1.401(k)-1(b)(4)(i) for the Plan Year; and, (v) for Plan Years beginning after December 31, 1988, if the Plan uses the provisions of this Subsection 5(h)(3) for purposes of the ACP test, then for purposes of Code section 410(b) (other than the average benefit percentage test), the Plan may be aggregated with other plans of the Affiliated Group to which qualified non-elective contributions and elective contributions are made. If the Plan Year is changed to satisfy the section 410(b) requirement that aggregated plans have the same plan year, this Subsection 5(h)(3) may apply during the resulting short plan year only if Elective Deferrals during the short plan year satisfy Regulations section 1.401(k)-1(b)(4) with respect to the short plan year and Qualified Non-Elective Contributions satisfy Regulations section 1.401(k)-1(b)(4)(i)(A) with respect to the short plan year as if such contributions were Elective Deferrals. D-ix (4) Participating Companies may, in their sole discretion, satisfy the ACP test either by making additional Qualified Non-Elective Contributions, Matching Contributions or Qualified Matching Contributions pursuant to Section 4(b)(ii) or by distributing Excess Aggregate Contributions pursuant to Section 5(i). The determination of Excess Aggregate Contributions shall be made after first determining the Excess Elective Deferrals and then determining the Excess Contributions for the Plan Year. (i) Distribution of Excess Aggregate Contributions ---------------------------------------------- (1) Notwithstanding any other provision of this Plan, Excess Aggregate Contributions made on behalf of Highly Compensated Employees plus any income or minus any loss allocable thereto shall be forfeited, if forfeitable, or, if not forfeitable, distributed not later than the last day of each Plan Year beginning after December 31, 1987 on the basis of the respective portions of such Excess Aggregate Contributions attributable to the Accounts of each Highly Compensated Employee whose Contributions for a Plan Year must be reduced under Section 5(h) to enable the Plan to satisfy the ACP test. (2) The income or loss allocable to a Highly Compensated Employee's Excess Aggregate Contributions shall be determined by multiplying such income or loss by a fraction, the numerator of which is the Excess Aggregate Contributions on behalf of the Highly Compensated Employee for the preceding Plan Year and the denominator of which is the sum of the Highly Compensated Employee's Account balances attributable to Contributions taken into account for purposes of the ACP test on the last day of the preceding plan year. (3) Excess Aggregate Contributions shall be distributed from the Highly Compensated Employee's Basic After-Tax Adjustment Account and forfeited, if otherwise forfeitable under the terms of the plan or, if not forfeitable, distributed from the Highly Compensated Employee's D-x Matching Contribution Account in proportion to the Highly Compensated Employee's Basic After-Tax Adjustment and Matching Contributions for the Plan Year. (j) Payroll Deductions. All Basic Contributions and Supplemental Pre- ------------------ Tax Contributions shall be made solely through periodic payroll deductions, unless the Plan Administrator consents to another method of payment. All Basic Contributions and Supplemental Pretax Contributions withheld during any calendar month shall be paid to the Trustee not later than the last day of the next following month and shall be credited to the appropriate Employee Accounts as soon as practicable thereafter. (k) Salary Reduction and Tax Status of Pretax Contributions. For -------------------------------------------------------- Federal tax purposes and for Puerto Rico tax purposes, Basic Pretax Contributions and Supplemental Pretax Contributions shall be deemed to be Company Contributions to the Plan, and a Participant's election to make such contributions shall constitute an election to have the amount of his or her compensation that otherwise would have been reported as taxable compensation on Form W-2 (or its equivalent in Puerto Rico) reduced by the amount of such contributions. (l) Administrative Procedures. The Plan Administrator may require ------------------------- Participants to complete and file such forms, within such time periods as it shall determine, before any election under this Section 5 may take effect. 6. Amendment and Termination of This Supplement. -------------------------------------------- (a) Amendment Required for Qualification. All provisions of this ------------------------------------ Supplement, and all benefits and rights granted hereunder, are subject to any amendments, modifications or alterations which are necessary from time to time to qualify the Plan and Supplement under Section 401(a) or 501(a) of the Code or under Section 165(a) of the Puerto Rico Code, to continue the Plan as so qualified, or to comply with any other provision of law. Accordingly, notwithstanding Section 19(a) of D-xi the Plan or any other provision of this Plan, the Company may amend, modify or alter the Plan, with or without retroactive effect, in any respect or manner necessary to qualify the Plan and Supplement under Section 401(a) of the Code or under Section 165(a) of the Puerto Rico Code. (b) Reversion of Funds. (i) All employer contributions are expressly conditioned on their deductibility under Section 404 of the Code and Section 23(p) of the Puerto Rico Code. Any employer contribution shall be returned to the appropriate Participating Company, upon its written request, to the extent that the contribution is disallowed as a deduction, within one year after such disallowance; (ii) In the event that, due solely to the inclusion of this Supplement D, the Commissioner of Internal Revenue determines that the Plan would cease to be qualified under the Code or the Secretary of the Puerto Rico Treasury determines that the Plan is not initially qualified under the Puerto Rico Code, any contributions made by or on behalf of a Puerto Rico Participant must be returned to the appropriate Puerto Rico Participant and to the appropriate Participating Company within one year after the date of such determination. The return of contributions to a Participating Company is further conditioned upon the Company's having made the application for the qualification by the time prescribed by law for filing the Company's return for the taxable year in which Supplement D is adopted, or such later dates as the Secretary of the Treasury or the Secretary of the Puerto Rico Treasury may prescribe. D-xii DEAN WITTER START PLAN ---------------------- (Saving Today Affords Retirement Tomorrow) ------------------------------------------ SUPPLEMENT E ------------- 1993 MATCHING CONTRIBUTIONS FOR CREDIT SERVICES EMPLOYEES --------------------------------------------------------- 1. Purpose. This Supplement E provides for the payment of a Basic ------- Matching Contribution on behalf of each employee who, during 1993: (a) made Basic Pretax Deposits to The Savings and Profit Sharing Fund of Sears Employees (the "Sears Plan"); and (b) was either employed by a member of the Affiliated Group on December 31, 1993 or terminated employment with the Affiliated Group before December 31, 1993 as a result of death, Total and Permanent Disability, Retirement or Release. Such employees are referred to in this Supplement E as "Spun-off Employees." 2. Plan Participation Not Required. Notwithstanding any provision of the -------------------------------- Plan to the contrary, Participating Companies shall make contributions on behalf of Spun-off Employees pursuant to this Supplement E without regard to whether said employees participate in, or make Basic Pretax Contributions to the Plan. 3. Definitions. For purposes of this Supplement E, the terms ------------ "Compensation" "Basic Pretax Deposits," "Basic Employer's Contribution" and "Business Group Contribution" shall have the meanings given to such terms by the Sears Plan. 4. Basic Matching Contribution. For the Plan Year ending December 31, ---------------------------- 1993, Participating Companies shall make Matching Contributions to the Trust Fund on behalf of Spun-off Employees equal to: (a) the greater of: E-i (i) the sum of the Basic Employer's Contribution and Business Group Contribution, if any, calculated under the terms of the Sears Plan for 1993 (without regard to the Spun-off Employee's cessation of employment with Sears or any of its subsidiaries, other than a member of the Affiliated Group) as applied to each Spun-off Employee's Basic Pretax Deposits made from January 1, 1993 to June 30, 1993; or (ii) the amount derived by multiplying the Spun-off Employee's Basic Pretax Deposits under the Sears Plan by the percentage(s) used to calculate 1993 Basic Matching Contributions under the Plan for the Business Segment in which the Spun-off Employee is employed on December 31, 1993 or, if earlier, such employee's last day of employment; and (b) the Basic Matching Contribution, calculated under Section 4(b)(i)(3) for the Business Segment in which the Spun-off Employee is employed on December 31, 1993 or, if earlier, such employee's last day of employment, with respect to Basic Pretax Contributions, if any, made by the Spun-off Employee to the Plan without regard to any amount paid under (a) above. 5. Additional Matching Contributions. In the event the Participating ---------------------------------- Companies determine, in their sole discretion, to make additional Matching, Qualified Non-Elective or Qualified Matching Contributions under Section 4(b)(ii) for the Plan Year ending December 31, 1993, they shall make such contributions for Spun-off Employees by taking into account the total of such employees' Compensation and Earnings and the total of such employees' Basic Pre- Tax Deposits under the Sears Plan and Basic Pretax Contributions under the Plan, earned or made during 1993. 6. Effective Dates. This Supplement E shall be effective as of January ---------------- 1, 1993 and shall apply only to Basic Matching Contributions and additional Matching, Qualified Non-Elective or Qualified Matching Contributions, if any, made by Participating Companies for the Plan Year ending December 31, 1993. E-ii EX-10.34 4 EMPLOYEES' EQUITY ACCUMULATION PLAN EXHIBIT 10.34 DEAN WITTER, DISCOVER & CO. EMPLOYEES' EQUITY ACCUMULATION PLAN SECTION 1 PURPOSE. - ------------------- The purposes of the Dean Witter, Discover & Co. Employees' Equity Accumulation Plan are to attract, retain and motivate key employees of the Company and to align the interests of key employees with stockholders through equity-based compensation and enhanced opportunities for ownership of Stock. It is the further purpose of this Plan to permit the granting of Awards that will constitute performance based compensation for certain executive officers, as described in section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder. SECTION 2 DEFINITIONS. - ----------------------- 2.1 "Act" shall mean the Securities Exchange Act of 1934, as amended, and any ------ successor thereto. 2.2 "Award" shall mean a grant of Stock or Cash, or the right to acquire Stock ------- or Cash, under such terms and conditions as shall be determined by the Committee consistent with the terms of the Plan. 2.3 "Award Certificate" shall mean a written document described in Section ------------------- 6.3, setting forth the terms and conditions of an Award made pursuant to the Plan. 2.4 "Cash" shall mean United States currency. ------ 2.5 "Cash Unit" shall mean a general, unsecured obligation of the Company to ----------- pay Cash to a Participant pursuant to an Award recorded by the Company as a bookkeeping entry. 2.6 "Board" shall mean the Board of Directors of DWD. ------- 2.7 "Code" shall mean the Internal Revenue Code of 1986, as amended, and any ------ successor thereto. 2.8 "Committee" shall mean a committee of two or more directors of DWD, as ----------- described in Section 3.1. 2.9 "Company" shall mean DWD and any corporation, trade or business which at --------- the time of reference, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with DWD. 2.10 "Consent" shall mean, with respect to the granting of any Award under the --------- Plan, the acquisition, issuance or purchase of Stock or other rights hereunder or the taking of any other action hereunder: 1 (i) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or other self-regulatory organi- zation or under any federal, state or local law, rule or regulation, (ii) the expiration, elimination or satisfaction of any prohibitions, restrictions or limitations under any federal, state or local law, rule or regulation or the rules of any securities exchange or other self-regulatory organization, (iii) any and all written agreements and representations by the Participant with respect to the disposition of Stock, or with respect to any other matter, which the Committee shall deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made, and (iv) any and all consents, clearances and approvals in respect of the granting of an Award, the acquisition, issuance or purchase of Stock or other rights hereunder or the taking of any other action under the Plan, by any governmental agencies or other regulatory bodies or any parties to any loan agreements or other contractual obligations of the Company. 2.11 "Disability" shall mean the termination of a Participant's employment ------------- with the Company under circumstances (i) that entitle the Participant to receive benefits under any long term disability plan sponsored by the Company, or (ii) if the Participant does not participate in such a plan, are determined by the Committee to have been caused by a physical or mental condition that would have entitled the Participant (if the Participant had been eligible to participate) to receive benefits under the DWD Long Term Disability Plan or any successor thereto. 2.12 "DWD" shall mean Dean Witter, Discover & Co., a Delaware corporation, or ----- any successor thereto. 2.13 "Executive Officer" shall mean an executive officer of DWD within the ------------------- meaning of Rule 3b-7 promulgated under the Act. 2.14 "Fair Market Value" shall mean, with respect to a share of Stock, the ------------------- fair market value thereof as determined by the Committee as follows: (a) if Stock is listed for trading on the New York Stock Exchange, the closing price, regular way, of the Stock as reported on the New York Stock Exchange Composite Tape on the date of reference or, if no such reported sale of the Stock shall have occurred on such date, on the next preceding date on which there was such a reported sale; or (b) if Stock is not so listed but is listed on another national securities exchange or authorized for quotation on the National Association of Securities Dealers Inc.'s NASDAQ National Market 2 System ("NNM"), the closing price, regular way of the Stock on such date on such exchange or NNM, as the case may be, on which the largest number of shares of Stock have been traded in the aggregate on the preceding twenty trading days or, if no such reported sale of the Stock shall have occurred on such date on such exchange or NNM, as the case may be, on the preceding date on which there was such a reported sale on such exchange or NNM, as the case may be; or (c) if Stock is not listed for trading on a national securities exchange or authorized for quotation on NNM, the average of the closing bid and asked prices as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if no such prices shall have been so reported for such date, on the next preceding date for which such prices were so reported; or (d) if no Fair Market Value may be determined from the foregoing, the value of a share of Stock as determined in good faith by the Committee. 2.15 "Option" shall mean a right to acquire Stock. -------- 2.16 "Participant" shall mean an individual who has been granted an Award ------------- under the Plan. 2.17 "Plan" shall mean the Dean Witter, Discover & Co. Employees' Equity ------ Accumulation Plan, as amended from time to time. 2.18 "Related Employment" shall mean the employment of an individual by an -------------------- employer other than the Company, provided: (a) such employment is undertaken by the individual at the request or with the consent of the Company; (b) immediately prior to undertaking such employment the individual was an employee of the Company, or was engaged in Related Employment as defined herein; and (c) such employment is recognized by the Committee, in its discretion, as Related Employment. 2.19 "Restricted Stock" shall mean an Award of Stock subject to conditions ----------------- determined by the Committee pursuant to Section 8. 2.20 "Restricted Stock Unit" shall mean an Award of Stock Units subject to ---------------------- conditions determined by the Committee pursuant to Section 8. 2.21 "Retirement" shall mean the termination of employment with the Company ------------ under circumstances giving rise to an entitlement to a retirement benefit, including a benefit payable by reason of Disability, under any employee pension benefit plan maintained by the Company which plan is intended to be qualified under Code section 401(a), provided, however, that, if the Participant has not accrued a benefit under any such pension plan, the term "Retirement" shall have the meaning given to such term under the Dean Witter Reynolds Inc. Pension Plan or any successor thereto; provided further, that, notwithstanding the foregoing, the transfer of an individual to Related Employment shall not be treated as a termination of employment due to Retirement. 3 2.22 "Rule 16b-3" shall mean Rule 16b-3 under the Act and any successor ----------- provision thereto. 2.23 "SAR" shall mean a stock appreciation right as described in Section 7.3. ----- 2.24 "SEC" shall mean the U.S. Securities and Exchange Commission, or any ----- United States federal governmental body that succeeds to its responsibilities. 2.25 "Section 162(m) Award" shall mean an Award described in Section 6.2. ---------------------- 2.26 "Stock" shall mean the common stock of DWD, par value $.01 per share, and ------- any stock into which such stock is transformed as a result of a corporate reorganization or other transaction. 2.27 "Stock Unit" shall mean a general, unsecured obligation of the Company to ------------ deliver one share of Stock (or the value thereof) to a Participant pursuant to an Award recorded by the Company as a bookkeeping entry. SECTION 3 ADMINISTRATION. - --------------------------- 3.1 The Plan shall be administered by the Committee. It is intended that the directors appointed to serve on the Committee shall qualify (i) as "non-employee directors" (within the meaning of Rule 16b-3), (ii) as "outside directors" (within the meaning of Code section 162(m) and the regulations thereunder) and (iii) under any similar statute or rule; in each case to the extent applicable. The fact that a Committee member shall fail to qualify under any of these requirements shall not invalidate any Award made by the Committee which Award is otherwise validly made under the Plan. 3.2 The Committee shall have the authority: (i) to exercise all of the powers granted to it under the Plan, (ii) to construe, interpret and implement the Plan and any written documents setting forth Awards under the Plan, (iii) to prescribe, amend and rescind rules relating to the Plan, (iv) to make any determination necessary or advisable in admini- stering the Plan, (v) to correct any defect, supply any omission and reconcile any inconsistency in the Plan or in any Award made under the Plan. (vi) to delegate any of its powers to DWD's chief executive officer except with respect to any person subject to the provisions of Section 16 of the Act, with respect to a Section 162(m) Award or which by law may not be so delegated. 4 3.3 The determination of the Committee on all matters relating to the Plan or any Award made under the Plan shall be final, binding and conclusive for all purposes and upon all persons interested herein. 3.4 No member of the Committee shall be liable, individually or jointly and severally with any other Committee member, for any action, determination or omission made in good faith with respect to the Plan or any Award hereunder. In the performance of their duties hereunder, Committee members shall be entitled to rely upon information and advice furnished: (a) by the Company and its officers, directors, employees, accountants, counsel and consultants; (b) by Participants and their heirs, assigns and representatives; and (c) by any other party whose information or advice is determined by the Committee to be reasonable and necessary for the administration of the Plan. 3.5 The members of the Committee shall be appointed by, and serve at the pleasure of, the Board. Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, resolve to administer the Plan, in which case, the term Committee as used herein shall be deemed to refer to the Board. SECTION 4 SHARES AVAILABLE FOR AWARDS. - --------------------------------------- 4.1 Subject to Section 10.4 (relating to adjustments upon changes in capitalization), as of any date, the total number of shares of Stock with respect to which Awards may be granted under the Plan, shall equal: (a) 30,000,000 shares, of which not less than 15,000,000 shall be treasury shares acquired by the Company in public markets or otherwise; (b) reduced by the sum (without duplication) of: (i) the number of shares of Stock subject to outstanding Awards; (ii) the number of shares of Stock in respect of which Awards have been exercised; (iii) the number of shares of Stock issued without forfeiture or similar restrictions or issued with forfeiture or similar restrictions which have lapsed; (c) increased by the sum of: (i) shares of Stock subject to previously granted Awards that have expired, terminated, been canceled or forfeited for any reason (other than by reason of exercise or vesting); (ii) shares of Stock delivered or withheld (or deliverable or required to be withheld as a condition of exercise of an Award) in payment of the exercise or purchase price of an Award granted 5 under the Plan or under any other employee benefit plan of the Company. 4.2 Without limiting the generality of the foregoing, the Committee may cancel any Award under the Plan and issue a new Award in substitution therefor upon such terms as the Committee may in its sole discretion determine, provided that the substituted Award shall satisfy all applicable Plan requirements as of the date such new Award is made. Notwithstanding the foregoing or any other provision of the Plan, in no event shall an Option or SAR be granted in substitution for a previously granted Option or SAR with the old Award being canceled or surrendered as a condition of receiving the new Award, if the new Award would have a lower Option exercise price or SAR appreciation base than the Award it replaces. The foregoing is not intended to prevent equitable adjustment of Awards upon the occurrence of certain events as herein provided, including without limitation, adjustments pursuant to Section 10.4. SECTION 5 PERSONS ELIGIBLE FOR AWARDS. - -------------------------------------- Subject to Section 6.2(a), Awards under the Plan may be made to such employees of the Company as the Committee shall from time to time, in its sole discretion, select. SECTION 6 TYPES OF AWARDS UNDER THE PLAN. - ----------------------------------------- 6.1 In General. ----------- Awards may be made under the Plan in the form of: (i) Options, (ii) SARs, (iii) Restricted Stock or Restricted Stock Units, (iv) Other Stock-based Awards, (v) Section 162(m) Awards; or (vi) any other type of Award deemed by the Committee in its discretion to be consistent with the purposes of the Plan, including but not limited to Awards granted in connection with or in lieu of awards or payments under any other employee benefit plan or compensation arrangement of the Company (other than a plan qualified under Code Section 401(a) or an excess benefit plan related to a plan qualified under Section 401(a)) and Awards made to eligible employees who are foreign nationals or are employed outside the United States. 6 6.2 Section 162(m) Awards. ---------------------- In the discretion of the Committee, any Award made under the Plan may be designated a Section 162(m) Award. A Section 162(m) Award is an Award under which all payments are intended to constitute qualified performance-based compensation which, if recognized by persons with respect to whom the limits on deductibility of Code section 162(m) apply (generally, DWD's chief executive officer and four other highest-paid Executive Officers, hereafter referred to as the "162(m) Covered Employees"), would be excluded from the Section 162(m) limit on deductibility. Section 162(m) Awards shall consist of Awards that will vest, become exercisable, cause the delivery of Stock, result in the payment of Cash or serve as the basis for one or more other Awards under the Plan, upon the attainment of one or more objective performance goals established by the Committee at a time described in Section 6.2(c) below. An objective performance goal shall be based upon one or more of the business criteria described in Section 6.2(b) below. Section 162(m) Awards may also consist of Options and SARs granted with a per share exercise price or appreciation base, as the case may be, not less than the Fair Market Value of a share of Stock on the grant date subject to the limit set forth in 7.8 below, whether or not the vesting or exercisability of such Options and SARs is also subject to the attainment of one or more performance goals. Notwithstanding anything to the contrary provided herein, (i) an Award not designated a Section 162(m) Award may nevertheless be intended to generate compensation deductible under Code section 162(m) and (ii) unless an applicable Award Certificate otherwise provides, the failure of a Section 162(m) Award to meet the requirements of Code section 162(m) shall not invalidate such Award, provided it was otherwise properly granted under the Plan. (a) All Executive Officers and other members of the Company's senior management group shall be eligible to receive Section 162(m) Awards under the Plan. (b) For purposes of Awards under this Section 6.2, performance goals shall be based upon one or more of the following business criteria: (i) earnings per share; (ii) Stock price per share; (iii) return on average equity, assets or investments; (iv) pretax income; (v) net revenue; (vi) net income; (vii) book value per share; (viii) earnings available to Stockholders; (ix) market share; (x) operating income; 7 (xi) cash flow; (xii) number of credit cardholders or any group of cardholders identified by geographic area, income, trade or occupation; (xiii) number of merchants or any group of merchants identified by geographic area, industry or trade, accepting the Company's proprietary or general purpose credit cards or both; (xiv) assets under management and administration; and (xv) number or value of managed loans. (c) The Committee shall, not later than 90 days after the start of the period of service to which the performance goal(s) relate(s) (or, if such period is less than a year, the first 25% of such period) and at a time when the attainment of such goal(s) is substantially uncertain: (i) identify the Executive Officers and/or any other senior management employees who will receive Section 162(m) Awards for such measuring period; (ii) select one or more business criteria from among those listed in Section 6.2(b) above upon which performance goal(s) will be based; (iii) determine the length of the measuring period; (iv) determine the terms and conditions of the Awards underlying the Section 162(m) Awards; (v) establish the various objective thresholds and targets that constitute the performance goals and the amounts that shall be paid to each Participant on attainment of such performance goals, which amounts may be denominated in Stock, Stock Units, Cash or Cash Units; and (vi) make such other determinations deemed by the Committee to be necessary or advisable to ensure compliance with Code Section 162(m) in connection with the granting of a Section 162(m) Award. (d) In making the determinations described in (c) above, the Committee may specify that a Section 162(m ) Award will vest, become exercisable or be paid if the applicable target is achieved for one performance goal, for any one of a number of performance goals or for more than one performance goal. The Committee may also provide that a Section 162(m) Award will vest, become exercisable or be paid in full only upon the attainment of a specified performance goal or goals or vest, become exercisable or be paid in varying percentages or amounts based upon different levels of 8 achievement of the applicable performance goal or goals. Performance goals can be based on one or more business criteria that apply to the eligible employee, a business segment or the Company as a whole. The Committee may establish different performance goals for each Section 162(m) Award or may use the same goals for more than one Award and may establish different objective thresholds and targets for one or more eligible employees resulting in different payments under each such Award. (e) After the end of each measuring period, the Committee shall certify, in writing, the performance results under each Section 162(m) Award (other than Options or SARs granted with a per share exercise price or appreciation base, as the case may be, not less than the Fair Market Value of a share of Stock) made for such period and determine the amount of Stock, Stock Units, Cash or Cash Units available to vest, become exercisable or be delivered or paid under each such Award. The Committee may, in its sole discretion, cause the delivery or payment of the amounts so determined, or reduce such amounts based on such factors as may be determined by the Committee, including a determination that such reduction is appropriate based upon: (i) the pay practices of competitors; (ii) the Company's or a business segment's (A) performance relative to competitors, (B) performance with respect to strategic business goals, (C) performance with respect to the business plan or (D) achievement of market share goals; or (iii) a Participant's individual performance. With respect to any Participant granted a Section 162(m) Award who the Committee determines is not or will not be a 162(m) Covered Employee in the calendar year in which such Participant receives or is scheduled to receive compensation under such Section 162(m) Award, the Committee may determine to make an Award under the Plan or under any other plan or arrangement of the Company in excess of, in addition to, or in lieu of such Section 162(m) Award. (f) The Committee, in its sole discretion, may make Section 162(m) Awards that are not valued, in whole or part, by reference to, or otherwise based on, the Fair Market Value of Stock ("Cash-based Section 162(m) Awards"). Under the procedures and subject to the terms and conditions described in Section 6.2(a)-(e), Cash-based Section 162(m) Awards shall be awarded in such amounts and paid pursuant to such terms and conditions as shall be determined by the Committee, including but not limited to such business criteria, performance- based goals and other conditions as shall be intended to assure that payments made under a Cash-based Section 162(m) Award shall be qualified performance- based compensation within the meaning of Code section 162(m). (g) Notwithstanding anything else contained herein, in any calendar year the maximum number of shares of Stock (or the equivalent value thereof) a Participant may be awarded under a Section 162(m) Award other than an Option, SAR or Cash-based Section 162(m) Award, shall be 100,000 shares multiplied by the number of years in the relevant measuring period but in no event more than 500,000 shares, subject to adjustment under Section 10.4. The maximum value a Participant may receive, in any calendar year, under a Cash-based Section 162(m) Award shall be $2,000,000 multiplied by the number of years in the relevant measuring period but in no event more than 9 $10,000,000. The maximum number of shares of Stock underlying Options or SARs awarded to any individual under the Plan, including Options and SARs that are Section 162(m) Awards, shall not exceed the limit set forth in Section 7.8. 6.3 Award Certificates. The terms and conditions of all Options, SARs and ------------------- Section 162(m) Awards shall be set forth in Award Certificates. Other Awards granted under the Plan shall be evidenced by Award Certificates to the extent deemed necessary or desirable by the Committee. An Award Certificate shall be executed by an officer of the Company authorized by the Committee. A copy of the Award Certificate, if any, shall be delivered to the Participant as soon as practicable after the grant of an Award. The Committee may, in its sole discretion, require a Participant to execute and return a copy of the Award Certificate to the Company as a condition of receiving payment on account of an Award. 6.4 Awards may be granted alone or in conjunction with one or more other Awards, provided that Options intended to qualify as incentive stock options shall only be granted in compliance with Section 7.1 and applicable provisions of the Code. 6.5 In granting an Award, including, without limitation, a Section 162(m) Award, the Committee may provide that, irrespective of whether an Award is denominated, in whole or in part, by reference to shares of Stock, an Award may be paid at the election of the Committee or, if permitted by the Committee, the Participant, in whole or in part, in Stock, Stock Units, Cash, Cash Units or other Awards. 6.6 Awards under the Plan, including, without limitation, Section 162(m) Awards, may, in the discretion of the Committee, be made in substitution, in whole or in part, for Cash or other compensation that would otherwise become payable to an eligible individual. An Award Certificate may provide that an eligible individual may elect to receive one form of Award permitted under the Plan in lieu of any other form of Award, or may elect to receive an Award under the Plan in lieu of all or part of any compensation which otherwise might have been paid to such eligible individual, provided however, that any such election shall not require the Committee to make any Award to such eligible individual. Any such substitute or elective Awards shall have terms and conditions consistent with the provisions of the Plan applicable to such Award. 6.7 With respect to any dividend or distribution on shares of Stock corresponding to an Award other than an Option or a SAR, the Committee may, in its discretion, authorize current or deferred payments (payable in Cash or Stock or a combination thereof) or appropriate adjustments to the outstanding Award to reflect such dividend or distribution, including the reinvestment of dividends into additional shares of Stock or Stock Units, provided, however, that non-Cash (i.e., property) dividends received with respect to Stock or Stock Units shall be subject to the same restrictions, vesting and earnout rules as the underlying Award. 6.8 Deferred Compensation. ----------------------- (a) Plan Awards. The Committee may, in an Award Certificate or by ------------ appropriate action at any time before an Award is vested, paid or exercised, or, subject to the approval of the Committee, give Participants the opportunity to defer the payment or settlement of the Award in accordance with 10 procedures specified by the Committee. The Committee shall have the right at any time to accelerate the payment or settlement of any Award granted under the Plan, including, without limitation, any Award subject to a prior deferral election, provided, however, that the amount payable on account of such Award may be discounted to reflect the time value of the accelerated payment. The Committee may provide that a Participant exercising an Option other than an incentive stock option may defer the compensation to be received upon such exercise provided that the Participant pays the exercise price by tendering shares of Stock held by the Participant for at least 6 months or such other period of time as may be determined by the Committee as necessary to avoid a charge to the Company's earnings for financial statement purposes. (b) Other Deferred Compensation. The Committee shall determine whether or not ---------------------------- an Award shall be made in conjunction with deferral of a Participant's salary, bonus or other compensation, or any combination thereof and whether or not such deferred amounts may be: (i) forfeited to the Company or, in the case of Awards other than Section 162(m) Awards, other Participants, or any combina- tion thereof under certain circumstances (which may include but need not be limited to, certain types of termination of employ- met or performance of services for the Company); and/or (ii) subject to increase or decrease in value based upon the attainment of, or failure to attain, respectively, certain performance measures. 6.9 Unfunded Status of Plan. ------------------------ The Plan is intended to constitute an "unfunded and unsecured" plan for incentive compensation. With respect to any payments in either Cash, Stock that is not Restricted Stock or other property, not yet made to a Participant by the Company, nothing herein contained shall give any Participant any rights that are greater than those of a general, unsecured creditor of the Company. In its sole discretion, the Committee may set aside assets (in trust or otherwise) to assist the Company in meeting its obligations under the Plan (either alone or in conjunction with one or more other compensation plans); provided however, that the existence of such trusts or other arrangements shall be consistent with the unfunded status of the Plan. SECTION 7 OPTIONS AND SARS. - --------------------------- 7.1 Options. -------- (a) Subject to Sections 7.8 and 7.9, the Committee may grant Options in such amounts and subject to such conditions as the Committee shall from time to time in its sole discretion determine, subject to the terms of the Plan. Such terms and conditions may include, but shall not be limited to, restrictions on the transferability and the forfeiture of Stock acquired by a Participant upon the exercise of an Option. Unless the applicable Award Certificate provides otherwise, no Option may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of by the Participant. 11 (b) Each Award Certificate relating to an Option shall specify whether the Option is a non-qualified stock option, is intended to be an incentive stock option described in Code section 422 or is intended to be any other type of option that may be described in the Code. No Option shall be treated as an incentive stock or other tax-qualified option unless the Award Certificate specifically states that the Award is intended to be an incentive stock option or other tax-qualified option. (c) In the case of incentive stock options, the terms and conditions of any such grant shall be subject to and comply with the requirements of Code sections 421, 422 and 424, any regulations thereunder and any successors thereto, including, but not limited to, the requirement that such Options be exercisable during the participant's lifetime only by the Participant, that no such Option shall be granted more than ten years after the date the Board adopts the Plan nor exercisable more than ten years after the date of grant. In no event shall incentive stock options be granted under the Plan in respect of more than 20,000,000 shares of Stock, subject to adjustment under Section 10.4. If an Option is intended to be an incentive stock option and if, for any reason, such option shall fail to so qualify as an incentive stock option, such option shall be considered to be a nonqualified stock option appropriately granted under the Plan, to the extent such option meets the Plan's requirements applicable to nonqualified stock options. 7.2 Restoration Option Rights. -------------------------- (a) Subject to Sections 7.8 and 7.9, the Committee may grant to a Participant, as a feature of an Option (under this Plan) or separately in connection with an option under any other plan of the Company (in either case, an "Original Option") a right to acquire Stock (a "Restoration Option Right") pursuant to which a Participant who pays the exercise price of the Original Option by tendering shares of Stock shall automatically be granted an option (a "Restoration Option") to acquire a number of shares of Stock equal to the sum of: (i) the number of shares tendered by the Participant to pay the exercise price; and (ii) the number of shares tendered by the Participant or, pursuant to the Participant's exercise of a tax withholding right described in Section 10.3(b)(ii), withheld by the Company from the shares being acquired upon the exercise of the Original Option to pay income or other taxes required to be withheld from the Participant's compensation as a result of the exercise of the Original Option. (b) The Committee may grant Restoration Option Rights in connection with an Original Option at the time the Original Option is granted or at any later time on or before the date on which the Original Option is exercised. (c) The Committee may, in its discretion, provide in an Award Certificate that a Restoration Option shall not be granted or, if granted, shall not become exercisable, unless the Fair Market Value of a share of Stock shall, on the date of such grant or exercise, be equal to or exceed a minimum amount determined by the Committee. (d) The Restoration Option exercise price shall not be less than the Fair Market Value of a share of Stock on the Original Option's exercise date. Restoration Options shall be subject to the terms and provisions contained in the Plan and such other terms, conditions and limitations as the Committee shall determine from time to time regarding the exercisability, forfeiture, payment provisions and other features of Restoration Options. All Restoration Options shall expire not later 12 than the expiration date of the Original Option with respect to which the Restoration Option was granted. 7.3 SARs. ----- (a) Related SARs. Subject to Sections 7.8 and 7.9, the Committee may grant a ------------ SAR in connection with all or any part of an Option granted under the Plan (a "Related SAR"), either at the time the related Option is granted or any time thereafter prior to the exercise, termination or cancellation of such Option, and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine, subject to the terms of the Plan. The grantee of a Related SAR shall, subject to the terms of the Plan and the applicable Award Certificate, have the right to surrender to the Company for cancellation all or a portion of the related SAR granted under the Plan, but only to the extent that such related Option is then exercisable, and to be paid therefor an amount equal to the excess (if any) of : (i) the aggregate Fair Market Value of the shares of Stock subject to the related Option or portion thereof (determined as of the date of exercise of such Related SAR), over (ii) the aggregate exercise price of the related Option or portion thereof. (b) Unrelated SARs. Subject to Sections 7.8 and 7.9, the Committee may grant a -------------- SAR that is not connected with an Option (an "Unrelated SAR") in such amount and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine, subject to the terms of the Plan. The grantee of an Unrelated SAR shall, subject to the terms of the Plan and the applicable Award Certificate, have the right to surrender to the Company for cancellation all or a portion of such SAR, but only to the extent that such SAR is then exercisable, and to be paid therefor an amount equal to the excess (if any) of: (i) the aggregate Fair Market Value of the shares of Stock underlying such SAR or portion thereof (determined as of the date of exercise of such SAR) over, (ii) the aggregate appreciation base of the shares of Stock underlying such SAR or portion thereof. (c) Payment due to a Participant upon exercise of a SAR shall be made in Cash, Cash Units, Stock or Stock Units (Stock or Stock Units to be valued at the Fair Market Value thereof as of the date of exercise), currently or deferred under Section 6.8, as determined by the Committee in its sole discretion consistent with the relevant Award Certificate and the Plan. 7.4 Exercise of Related SAR Reduces Shares Subject to Option. -------------------------------------------------------- Upon any exercise of a Related SAR, or any portion thereof, the number of shares of Stock subject to the related Option shall be reduced by the number of shares of Stock in respect of which the Related SAR shall have been exercised. 13 7.5 Exercisability of Options and SARs. Subject to the other provisions of the ----------------------------------- Plan: (a) Exercisability Determined by Award Certificate. Each Award Certificate ---------------------------------------------- shall set forth the period during which and the conditions subject to which the Option or SAR evidenced thereby shall be exercisable, as determined by the Committee in its discretion, provided, however, that no Option or SAR shall be exercisable until twelve months following the grant date thereof, except in the case of the Participant's death and excluding Restoration Options, and no Option shall be exercisable until twelve months following a hardship distribution from any plan of the Company subject to Treasury Regulations (S)1.401(k)- 1(d)(2)(iv)(B)(4) or any successor provision. (b) Exercise of Related SAR. Unless the applicable Award Certificate ----------------------- otherwise provides, a Related SAR shall be exercisable at any time during the period that the related Option may be exercised. (c) Partial Exercise Permitted. Unless the applicable Award Certificate -------------------------- otherwise provides, an Option or SAR granted under the Plan may be exercised from time to time as to all or part of the full number of shares as to which such Option or SAR shall then be exercisable. (d) Notice of Exercise; Exercise Date. ---------------------------------- (i) An Option or SAR shall be exercisable by the filing of a written notice of exercise with the Company, on such form and in such manner as the Committee shall in its sole discretion pre- scribe, and, in the case of an Option, by payment in accordance with Section 7.6. (ii) Unless the applicable Award Certificate otherwise provides, or the Committee in its sole discretion otherwise determines, the date of exercise of an Option or SAR shall be the date the Company receives such written notice of exercise and payment. 7.6 Payment of Option Price. ------------------------ (a) Tender Due Upon Notice of Exercise. Unless the applicable Award ---------------------------------- Certificate otherwise provides or the Committee in its sole discretion otherwise determines, any written notice of exercise of an Option shall be accompanied by payment of the full purchase price for the shares being purchased. (b) Manner of Payment. Payment of the Option exercise price shall be made in ----------------- any combination of the following: (i) by certified or official bank check payable to the Company (or the equivalent thereof acceptable to the Committee); (ii) by personal check (subject to collection), which may 14 in the Committee's discretion be deemed conditional; (iii) if and to the extent authorized by the Committee, by delivery of previously acquired shares of Stock owned by the Participant for such period of time as may be required to avoid a charge to the Company's earnings for financial statement purposes (as determined by the Committee) having a Fair Market Value (determined as of the Option exercise date) equal to the portion of the Option exercise price being paid thereby, provided that the Committee may require the Participant to furnish an opinion of counsel accept- able to the Committee to the effect that such delivery would not result in the Participant incurring any liability under Section 16 of the Act and does not require any Consent; and (iv) if and to the extent authorized by the Committee, by delivery to the Company of an assignment of a sufficient amount of the proceeds from the sale of Stock acquired upon exercise to pay for all of the Stock acquired upon exercise and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be made at the Participant's direction at the time of exercise, provided that the Committee may require the Parti- cipant to furnish an opinion of counsel acceptable to the Commit- tee to the effect that such delivery would not result in the Parti- cipant incurring any liability under Section 16 of the Act and does not require any Consent. (c) Issuance of Shares. As soon as practicable after receipt of full payment, ------------------ the Company shall, subject to the provisions of Section 10.2, deliver to the Participant one or more certificates for the shares of Stock so purchased, which certificates may bear such legends as the Company may deem appropriate concerning restrictions on the disposition of the shares in accordance with the terms of the relevant Award Certificate, the Plan and applicable securities laws, rules and regulations or otherwise, provided, however, that in the event compensation received as a result of an Option exercise is deferred pursuant to Section 6.8, such delivery shall take place as soon as practicable following the end of the relevant deferral period. 7.7 Proof of Beneficial Ownership. Wherever in this Plan or any Award ------------------------------ Certificate a Participant is permitted to pay the exercise price of an Award or taxes relating to the exercise of an Award by delivering shares of Stock, the Participant may, subject to procedures satisfactory to the Committee, satisfy such delivery requirement by presenting proof of beneficial ownership of such shares of Stock, in which case the Company shall treat the Award as exercised without further payment and shall withhold such number of shares from the shares acquired by the exercise of the Award (or if the Award is paid in Cash, Cash in an amount equal to the Fair Market Value of such shares). 15 7.8 Maximum Number of Shares Subject to Awards ------------------------------------------ Grants of Options and SARs to any Participant in any five consecutive calendar years may not be made with respect to more than 3,000,000 shares of Stock, subject to adjustment under Section 10.4. 7.9 Exercise Price and Expiration Date ---------------------------------- No Option or SAR shall be granted hereunder at an exercise or base appreciation price, as the case may be, lower than 100% of the Fair Market Value of a share of Stock on the grant date thereof and no Option or SAR granted hereunder shall remain exercisable for more than 10 years after the grant date thereof. SECTION 8 RESTRICTED STOCK AND RESTRICTED STOCK UNIT AWARDS. - -------------------------------------------------------------- 8.1 Grant of Awards. --------------- The Committee may grant Restricted Stock or Restricted Stock Unit Awards, alone or in tandem with other Award made under the Plan or made under any other plan or arrangement of the Company, in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine and set forth in an Award Certificate; provided, however, that no Award of Restricted Stock or Restricted Stock Units shall vest less than one year after the grant date thereof; and provided further, that the total number of shares of Stock with respect to which the aggregate number of shares covered by Awards made to all Participants under Sections 8 and 9 of the Plan which may vest shall not exceed 10,000,000, subject to adjustment under Section 10.4. The vesting of a Restricted Stock or Restricted Stock Unit Award granted under the Plan may be conditioned upon (i) the completion of a specified period of employment with the Company, (ii) the attainment of specified performance goals including but not limited to such performance goals as would qualify the Restricted Stock or Restricted Stock Unit Award as a Section 162(m) Award under Section 6.2, and/or (iii) such other criteria as the Committee may determine in its sole discretion. The forfeiture of a Restricted Stock or Restricted Stock Unit Award shall be governed by such terms and conditions as are set forth in the Award Certificate. 8.2 Payment. ------- Each Award Certificate with respect to a Restricted Stock or Restricted Stock Unit Award shall set forth the amount (if any) to be paid by the Participant with respect to such Award. If a Participant makes any payment to the Company (other than for taxes) for a Restricted Stock or Restricted Stock Unit Award which does not vest, a refund of such payment may be made to the Participant following the forfeiture of such Award on such terms and conditions as the Committee may determine. Any payment required to be made by a Participant shall be made in a form described in Section 7.6(b). 8.3 Issuance of Shares. ------------------ The Committee may provide that one or more certificates or other evidence of ownership representing Restricted Stock Awards shall be registered in the Participant's name and bear an appropriate legend specifying that such shares are not transferable and are subject to the terms and 16 conditions of the Plan and the applicable Award Certificate, or that such certificate or certificates shall be held in escrow by the Company on behalf of the Participant until such shares vest or are forfeited, all on such terms and conditions as the Committee may determine. Unless the applicable Award Certificate otherwise provides, no share of Restricted Stock may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of by the Participant until such share has vested in accordance with the terms of such Award. Subject to the provisions of Section 10.2, as soon as practicable after any Restricted Stock Award becomes unrestricted the Company shall issue or reissue to the Participant (or to the Participant's designated beneficiary in the event of the Participant's death) one or more certificates for the Stock represented by such Restricted Stock Award. 8.4 Participants' Rights Regarding Restricted Stock. Unless the applicable ----------------------------------------------- Award Certificate otherwise provides: (i) a Participant may vote and receive dividends on Restricted Stock awarded under the Plan; and (ii) any Stock received as a distribution with respect to shares of Restricted Stock (or credited to an Award of Restricted Stock Units) shall be subject to the same restrictions as such shares of Restricted Stock (or Restricted Stock Units). SECTION 9 OTHER STOCK-BASED AWARDS. - ------------------------------------ 9.1 The Committee may grant other Awards of Stock and Awards that are valued, in whole or in part, by reference to, or are otherwise based on, the Fair Market Value of Stock ("Other Stock-Based Awards") under such terms and conditions as the Committee shall determine, provided, however, that that the total number of shares of Stock with respect to which the aggregate of Awards under Sections 8 and 9 of the Plan may vest shall not exceed 10,000,000, subject to adjustment under Section 10.4. 9.2 The Committee may grant Other Stock-Based Awards alone or in addition to any other Awards made under the Plan or any other plan or arrangement of the Company. Subject to the provisions of the Plan, the Committee shall have sole and absolute discretion to determine to whom and when such Other Stock-Based Awards will be made, the number of shares of Stock to be Awarded under (or otherwise related to) such Other Stock-Based Awards and all other terms and conditions of such Awards. The Committee shall determine whether Other Stock- Based Awards shall be denominated in Stock, Stock Units, Cash, Cash Units or a combination thereof, or settled on a deferred basis pursuant to Section 6.8. The Committee may, in its discretion, impose such performance goals or other conditions upon an Other Stock-Based Award as shall qualify it as a Section 162(m) Award under Section 6.2. 9.3 Unless the applicable Award Certificate otherwise provides, a Participant may vote and receive dividends on Other Stock-Based Awards awarded under the Plan. 17 SECTION 10 MISCELLANEOUS. - ------------------------- 10.1 Amendment of the Plan; Modification of Awards. ---------------------------------------------- (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue ---------------------- or terminate the Plan, or any portion thereof, at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder approval to the extent such approval is necessary to comply with any tax or regulatory requirement, including but not limited to any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Act, necessary to qualify Awards granted hereunder as performance based compensation for purposes of Code section 162(m) or necessary to satisfy listing or other requirements of any self-regulatory organization (provided that the Company is subject to the requirements of Section 16 of the Act, Code Section 162(m) or the jurisdiction of such self-regulatory organization, as the case may be, as of the date of such action). No amendment to the Plan shall impair any rights under an Award without the consent of the affected Participant. (b) Award Modifications. Subject to the terms and conditions of the Plan ------------------- (including Section 10.1(a)), the Committee may amend outstanding Award Certificates including, without limitation, any amendment which would: (i) accelerate the time or times at which an Award may vest or become exercisable; and/or (ii) extend the scheduled termination or expiration date of the Award, provided, however, that no modification having a material adverse effect upon the interest of a Participant in an Award shall be made without the consent of such Participant. 10.2 Consent Requirements. -------------------- If the Committee shall at any time determine that any Consent is necessary or desirable as a condition of, or in connection with, the granting of any Award under the Plan, the acquisition, issuance or purchase of Stock or other rights hereunder or the taking of any other action hereunder (each such action being hereinafter referred to as a "Plan Action"), then such Plan Action shall not be taken, in whole or in part, unless and until such Consent shall have been effected or obtained to the full satisfaction of the Committee. 10.3 Withholding Taxes. ------------------ (a) Whenever under the Plan shares of Stock are to be delivered pursuant to an Award, the Committee may require as a condition of delivery that the Participant remit to the Company an amount sufficient to enable the Company to satisfy all federal, state and other governmental withholding tax requirements related thereto. Whenever Cash is to be paid under the Plan (whether upon the exercise of a SAR or otherwise), the Company may, as a condition of its payment, deduct therefrom, or from any salary or other payments due to the Participant, an amount sufficient to enable the Company to satisfy all federal, state and other governmental withholding tax requirements related thereto or to the delivery of any shares of Stock under the Plan. 18 (b) Without limiting the generality of the foregoing, if authorized by the Committee: (i) a Participant may elect to satisfy all or part of the foregoing withholding requirements by delivery of unrestricted shares of Stock owned by the Participant for such period of time as may be required to avoid a charge to the Company's earnings for financial statement purposes (as determined by the Committee) having a Fair Market Value (determined as of the date of such delivery by the Participant) equal to all or part of the amount to be so withheld, provided that the Committee may require, as a condition of accepting any such delivery, the Participant to furnish an opinion of counsel acceptable to the Committee to the effect that such delivery would not result in the Participant incurring any liability under Section 16(b) of the Act and does not require any Consent; and (ii) the Committee may, from time to time and upon such terms and conditions as it may in its discretion determine, grant rights ("tax withholding rights") under the Plan to have the Company withhold from the receipt of proceeds on the settlement or exercise of any Award a number of shares of Stock of sufficient Fair Market Value to pay the amount of taxes the Company is required to collect or withhold on the settlement or exercise of the Award. Tax withholding rights shall be exercised simulta- neously with the exercise or receipt of an Award, giving rise to a tax withholding obligation. Shares of Stock withheld shall be deemed to have been delivered to the Company on the exercise or Award date, as appropriate. 10.4 Adjustments Upon Changes in Capitalization. ------------------------------------------ If and to the extent specified by the Committee, the number of shares of Stock which may be issued pursuant to Awards under the Plan, the maximum number of Options and/or unrelated SARs which may be granted to any one person in any period, the maximum number of shares of Stock with respect to which the aggregate of Awards made under Sections 8 and 9 may vest, the number of shares of Stock that may be subject to incentive stock options, the number of shares of Stock subject to Awards, the exercise price and appreciation base of Options and SARs granted under the Plan, the maximum number of shares of Stock which may be paid pursuant to a Section 162(m) Award, the amount payable by a Participant in respect of an Award and any appropriate feature of any Other Stock-Based Award shall be appropriately adjusted (as the Committee may determine) for any change in the number of issued shares of Stock resulting from the subdivision or combination of shares of Stock or other capital adjustments, or the payment of a stock dividend after the effective date of the Plan, or other change in such shares of Stock effected without receipt of consideration by the Company; provided that any Awards covering fractional shares of Stock resulting from any such adjustment shall be eliminated and provided further, that no Option granted under the Plan shall be adjusted in a manner that causes such Option to fail to continue to qualify as an "incentive stock option" within the meaning of Code section 422 (and no 19 Section 162(m) Award shall be adjusted pursuant to this Section 10.4 in a manner that causes such Award to fail to meet the requirements of Code section 162(m)). Adjustments under this Section shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 10.5 No Right of Employment or Continued Participation. ------------------------------------------------- Nothing in the Plan or in any Award Certificate shall confer upon any person the right to continue in the employment or other service of the Company or a Subsidiary or affect any right which the Company may have to terminate the employment or other service of such person. Nothing in the Plan shall confer upon any person a claim or right to the grant of an Award. 10.6 No Rights as a Stockholder. -------------------------- Except as otherwise provided in an applicable Award Certificate, no Participant or other person shall have any of the rights of a stockholder of the Company with respect to shares of Stock subject to an Award until the issuance of a stock certificate to the Participant for such shares or, in the case of a Restricted Stock Award granting dividend and/or voting rights to the Participant, to the escrow agent, custodian or trustee designated to hold such shares. Except as otherwise provided in an applicable Award Certificate or in Section 10.4, or with respect to Restricted Stock, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in Cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. 10.7 Nature of Payments. ------------------- (a) Any and all Awards or payments hereunder shall be granted, issued, delivered or paid, as the case may be, in consideration of services performed for the Company by the Participant. (b) All Awards and payments granted or made hereunder shall be considered special incentive payments to the Participant. Except as specifically provided in such plan or agreement, no Awards or payments shall be taken into account in computing the Participant's salary or compensation for the purposes of determining any benefits under any pension, retirement, life insurance or other benefit plan of the Company or any agreement between the Company and the Participant. (c) By exercising or accepting payment of an Award under the Plan, the Participant shall thereby waive any claim to continued exercise or vesting of an Award or to damages or severance entitlement related to non-continuation of the Award beyond the period provided herein or in the applicable Award Certificate, notwithstanding any contrary provision in any written employment contract with the Participant, whether any such contract is executed before or after the grant date of the Award. 20 10.8 Non-Uniform Determinations. -------------------------- Except for adjustments pursuant to Section 10.4, the Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Award Certificates, as to: (a) the persons receiving Awards under the Plan, and (b) the terms and provisions of Awards under the Plan. 10.9 Other Payments or Awards. ------------------------ Nothing contained in the Plan shall be deemed in any way to limit or restrict the Company, or the Committee from making any Award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. 10.10 Change in Control. ------------------ The Committee may, in its discretion, include in any Award Certificate a provision pursuant to which the Award will become exercisable, vest, be paid, have restrictions on the Stock underlying the Award removed, be canceled or forfeited, be replaced or otherwise become subject to special vesting, exercise and forfeiture rules upon the occurrence of a "change in control" (as defined by the Committee from time to time). 10.11 Section Headings. ---------------- The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said sections. 10.12 Effective Date . ---------------- The Plan shall be deemed adopted and become effective upon the approval thereof by the stockholders of DWD. 10.13 Governing Law. ------------- The Plan shall be governed by the laws of the State of Delaware applicable to agreements made and to be performed entirely within such state. 10.14 Plan Expenses. -------------- The expenses of the Plan shall be borne by the Company. 21 10.15 Related Employment. ------------------- The commencement of Related Employment by a Participant shall not be treated, for purposes of the Plan and any Award hereunder, as a termination of employment. The Retirement, Disability or death of an individual during a period of Related Employment shall be treated, for purposes of the Plan and any Award hereunder, as if such event had occurred while the individual was an employee of the Company. 10.16 Arbitration. ------------ All claims and disputes between a Participant and the Company arising out of the Plan or any Award granted hereunder shall be submitted to arbitration in accordance with the then current arbitration policy of the Company. Notice of demand for arbitration shall be given in writing to the other party and shall be made within a reasonable time after the claim or dispute has arisen, but in no event later than the end of the applicable limitation period under applicable law. The Award rendered by the arbitrator shall be made in accordance with the provisions of the Plan, shall be final and judgment may be entered upon it, in accordance with applicable law in any court having jurisdiction thereof. The provisions of this Section 10.16 shall be specifically enforceable under applicable law in any court having jurisdiction thereof. 22 EX-11 5 COMPUTATION OF EARNINGS PER COMMON SHARE Exhibit 11 DEAN WITTER, DISCOVER & CO. COMPUTATION OF EARNINGS PER COMMON SHARE (1)
Year Ended December 31, ----------------------- 1994 1995 1996 ------- ------ ------ Net Income $740.9 $856.4 $951.4 ====== ====== ====== Average common shares outstanding, excluding the dilutive effects of stock options and unissued stock awards 341.0 340.3 328.7 ====== ====== ====== Earnings per common share: Primary dilution basis (2) Earnings per common share $ 2.14 $ 2.44 $ 2.79 ====== ====== ====== Average common shares outstanding 346.7 350.7 341.2 ====== ====== ====== Full dilution basis (3) Earnings per common share $ 2.14 $ 2.44 $ 2.77 ====== ====== ====== Average common shares outstanding 346.7 350.9 343.3 ====== ====== ======
(1)Earnings per common share and shares outstanding data have been restated to reflect the Company's two-for-one stock split. (2)Earnings per common share on a primary dilution basis for the years ended December 31, 1994, 1995 and 1996 was calculated using the weighted average price per share of the Company's common stock during the period, and included the dilutive effects of stock options and unissued stock awards under deferred compensation plans. (3)Earnings per common share on a full dilution basis for the years ended December 31, 1994, 1995 and 1996 was calculated using the greater of the period-end price per share of the Company's common stock or the weighted average price per share of the Company's common stock during the period and included the dilutive effects of stock options and unissued stock awards under deferred compensation plans. EX-12 6 COMPUTATION OF RATIO EARNINGS TO FIXED CHARGES Exhibit 12 DEAN WITTER, DISCOVER & CO. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, -------------------------- 1994 1995 1996 -------- ------- ------- Earnings Income before income taxes $1,214.6 $1,395.9 $1,545.1 Interest expense 1,048.5 1,514.8 1,566.2 Interest factor in rent expense 49.5 51.0 54.2 -------- -------- -------- Total earnings $2,312.6 $2,961.7 $3,165.5 ======== ======== ======== Fixed charges Interest expense 1,048.5 1,514.8 1,566.2 Interest factor in rent expense 49.5 51.0 54.2 -------- -------- -------- Total fixed charges $1,098.0 $1,565.8 $1,620.4 ======== ======== ======== Ratio of earnings to fixed charges 2.1 1.9 2.0 ======== ======== ========
"Earnings" consist of income before income taxes and fixed charges. "Fixed charges" consist of interest costs, including interest on deposits, and that portion of rent expense estimated to be representative of the the interest factor. EX-13 7 1996 ANNUAL REPORT EXHIBIT 13 [LOGO] DEAN WITTER, DISCOVER & CO. 1996 ANNUAL REPORT [GRAPHIC] An Illustration of people walking up stairs to a new level Winning at a New Level DEAN WITTER, DISCOVER & CO. 1996 ANNUAL REPORT FINANCIAL HIGHLIGHTS (dollars in millions, except per shares data) 1996 1995 1994 - ------------------------------------------------------------------------------ NET OPERATING REVENUES Credit Services $ 2,851.5 $ 2,617.7 $ 2,240.1 Securities 3,378.6 3,058.2 2,765.6 - ------------------------------------------------------------------------------ Consolidated $ 6,230.1 $ 5,675.9 $ 5,005.7 - ------------------------------------------------------------------------------ NET INCOME Credit Services $ 449.5 $ 446.9 $ 414.7 Securities 501.9 409.5 326.2 - ------------------------------------------------------------------------------ Consolidated $ 951.4 $ 856.4 $ 740.9 - ------------------------------------------------------------------------------ Earnings per common share(1) Primary $ 2.79 $ 2.44 $ 2.14 Fully diluted 2.77 2.44 2.14 - ------------------------------------------------------------------------------ Total assets $42,413.6 $38,208.2 $31,859.4 Shareholder's equity $ 5,164.4 $ 4,833.7 4,108.0 - ------------------------------------------------------------------------------ Return on average shareholders' equity 19.0% 19.2% 19.5% - ------------------------------------------------------------------------------ (1) Per share data has been restated to reflect the Company's two-for-one stock split. See accompanying consolidated financial statements and footnotes beginning on page 31. [GRAPH -- SEGMENT NET INCOME AS A % OF CONSOLIDATED] 1996 NET INCOME $ millions % of total ---------- ---------- Credit Services $ 449.5 47% Securities 501.9 53 ------- --- Consolidated $ 951.4 100% ======= === 1996 NET OPERATING REVENUES Credit Services $2,851.5 46% Securities 3,378.6 54% ------- --- Consolidated $6,230.1 100% ======= === CONTENTS - -------------------------- Letter to Shareholders 1 Financial Review 16 Shareholder Information 47 Directors and Officers 48 To Our Shareholders March 1997 SOMETHING BIG and very exciting happened to this annual report on its way to the printer. We had prepared a full and interesting account of 1996, which was an excellent year for our company. Then, about one month after we had closed the books on the year, we announced a merger with Morgan Stanley with the stated objective of creating the world's preeminent financial services company. An event of this magnitude, with its great promise for shareholders, clients and employees, inevitably tends to overshadow our very significant achievements for 1996. Perhaps that's because, in this era of instant communication, the latter falls into the category of old news. Markets and the media care more about the future. We obviously welcome all the attention the merger announcement has received. It has been widely and accurately reported that our combined company will have a leading market position in three primary businesses -- securities, asset management and credit services -- and will have opportunities for high profitability and accelerated growth. And the market has reacted favorably to the merger announcement. Dean Witter Discover and our colleagues at Morgan Stanley believe the combination of our two highly successful firms may be as close to an ideal merger as there is. It is a combination based on powerful franchises and complementary strengths. In the securities business, it combines Morgan Stanley's strengths in product origination, investment banking and institutional sales and trading with Dean Witter's strengths in providing investment and asset management services to individual investors. In asset Dean Witter Discover and our colleagues at Morgan Stanley believe the combination of our two highly successful firms may be as close to an ideal merger as there is. It is a combination based on powerful franchises and complementary strengths. - ---------------------------------- Dean Witter, Discover & Co. 1996 -------------------------------- 1 [PHOTO] Philip J. Purcell Chairman and Chief Executive Officer [GRAPH] management, the combination will result in a business that will manage more than $270 billion -- the largest of any securities firm. In credit services, the combined companies' financial resources and Morgan Stanley's global presence create significant opportunities for expansion. The draft that was on its way to the printer before the merger announcement has been left almost entirely intact. It happens to be an excellent prologue to what happened in early February 1997 as well as a prologue to the future. The theme in that draft, "Winning at a New Level," has now become even more appropriate than it was before. In Morgan Stanley we have a partner that is well-accustomed to winning. In 1996, it was number one in global mergers and acquisitions, and a leader in underwriting initial public offerings and U.S. equity and equity-related products. Merging with Morgan Stanley is like merging with the Chicago Bulls. In addition to the concept of winning, there are other themes in our 1996 report that now resonate more strongly as a result of the proposed merger--themes such as the great value of brands and franchises, the need to expand globally, the importance of a wide range of products for our account executives, and the importance of size. In each of these areas, I believe it is clear the merger puts us at an entirely new level. We are excited about the future, and starting a year from now, I look forward to reporting to shareholders on how the combined company is doing. In the meantime, I am proud to give this report on the achievements of Dean Witter Discover in 1996. These achievements helped pave the way for the merger announcement. Dean Witter, Discover & Co. 1996 - -------------------------------- 2 January 1997 1996 was another very good year for Dean Witter Discover and our shareholders, with record earnings, record revenues, and a 41 percent gain in our share price. We began the year with a To Do List that I described in our last annual report. This list gave us focus, and brought some significant results. We've included a progress report on the To Do List in this year's report. As we look ahead to this next year, our company-wide theme is "Winning at a New Level." During the course of the year, we also encountered some new challenges, particularly the phenomenon of rising credit card write-offs. Quite frankly, the extent and timing of the write-off problem surprised us (as it did everyone else in the industry). But I believe we have responded well. I will discuss the challenge posed by write-offs at greater length below. In 1996, we did more than just proceed on our agenda and capitalize on the market. We also gave a great deal of thought to the future, and to our position in the marketplace where competitive pressures are bringing rapid consolidation. We focused on two overriding long-term objectives -- building our brands and gaining technological leadership in the financial services industry. We already have considerable strength in each area, and if we can build on these strengths, we believe we can gain significant competitive advantage. So we will focus even more intently on these two priorities in 1997, and beyond. Both are essential to winning at a new level. [GRAPHIC] We are playing from strength, with growing businesses and a large national customer base on both the asset and credit side of the balance sheet. Continued growth, market leadership and global expansion have become strategic imperatives. - --------------------------------- Dean Witter, Discover & Co. 1996 -------------------------------- 3 CONSISTENT RESULTS FOR SHAREHOLDERS - ---------------- Let me begin with the financial results for the past year. You can only win if you keep score, and one way of keeping score in business is through consistent earnings growth. By this measure, there are few companies that can match our record. . We earned $951 million in 1996. It was our eighth straight year of earnings growth -- $95 million higher than 1995 and an increase of 14 percent. We are now close to $1 billion in annual earnings, an amount which seemed a distant dream just four years ago at the time of our initial public offering. . Earnings per share increased to $2.77 in 1996, 14 percent higher than $2.44 in 1995. . Our company-wide return on equity was 19 percent, consistent with the goal we set for ourselves four years ago. We have met that goal every year. The result was a great year for Dean Witter Discover shareholders. At the end of 1996, our stock price was $33 when adjusted for the January stock split. The market value of each share was more than twice what it was when we went public. From the outset, the Dean Witter Discover Board of Directors has focused on the interests of shareholders and rewarded their commitment. We declared our first dividend, $.05 a share (adjusted for the stock split) in June of 1993 after our first quarter as a public company. Since then, we have paid a dividend every quarter, and have increased the amount every year. In the first quarter of 1997, the dividend increased to $.14 a share. That's an increase of 180 percent in less than four years. THE CHANGING PLAYING FIELD - -------------------------- On another front, 1996 was also a good year for us in Washington. We made significant progress on the legislative/regulatory front, progress that should benefit our company, our industry and our customers. Two events were particularly noteworthy. The first was the lifting of the Competitive Equality Banking Act of 1987 (CEBA) growth cap. For Discover/(R)/ Card and our other NOVUS/(R)/ cards, this means we'll [GRAPH] Dean Witter, Discover & Co. 1996 - -------------------------------- 4 be able to compete and grow like most other companies, without the legislativly-imposed red tape of having to move assets from one legal entity to another. The second was the passage of securities litigation reform. This will enable the people in our securities business to concentrate even more on serving customers, putting their interests first (as we always have), without the distraction of so many frivolous Federal lawsuits. The slow but steady dismantling of the Depression-era regulatory structure for financial services continued apace in 1996. The Federal Reserve's decision to expand the Section 20 securities powers of bank holding companies is likely to have a major impact. It will encourage commercial banks to expand their securities business and perhaps undertake new acquisitions. This is a trend that will continue, and the implications are plain: more intense competition and further consolidation in financial services. In November, there were reports of merger talks between Citicorp and American Express. We clearly must be ready for dramatic changes in the competitive landscape. This gives particular urgency to our goal of winning at a new level. As competition intensifies, I believe we are playing from strength, with growing businesses and a large national customer base on both the asset and credit side of the customer's balance sheet. Continued growth and market leadership have become strategic imperatives. [GRAPHIC] In our securities business, the first global priority is to provide an expanded array of investment opportunities for our clients. This will not only benefit clients, but it will also make our account executives even more productive. - ------------------------------------- Dean Witter, Discover & Co. 1996 -------------------------------- 5 ESTABLISHED STRENGTHS IN TWO MAJOR BUSINESSES - ----------------------- 1996 was another successful year for our securities customers and for our securities business. Total client assets entrusted to us rose from $221 billion to $251 billion. Strong financial markets helped make it another solid year for investors. When investors do well, it's good for us. In 1996, our earnings for this part of the company reached a record $502 million. We had a record-breaking year in our securities business pretty much across the board. We added more than 500 new account executives to reach 9,080. We increased the number of client accounts by a record-breaking 160,000 to give us 3.25 million. And client assets under management reached an all-time high of over $90 billion. Individual investors have become more important than ever before, and the reach and quality of our distribution network, and our ability to gather assets, are key competitive advantages. Overall, we also had a good year in our credit services business, although the results were more mixed than in our securities business. Revenues continued to grow at a very strong pace, but earnings were only fair, mainly because of credit card write-offs. Even so, we earned $450 million in credit services, slightly ahead of 1995. When you take into account the effect of a $540 million increase in write-off rates, our 1996 [PHOTO] Richard M. Demartini, President and Chief Operating Officer, Dean Witter Capital; James F. Higgins, President and Chief Operating Officer, Dean Witter Financial; Thomas R. Butler, President and Chief Operating Officer, NOVUS Services. [GRAPH] Dean Witter, Discover & Co. 1996 - -------------------------------- 6 credit services earnings represent a significant accomplishment. This is a business we understand very well, and we believe it should continue to provide strong, steady income. We took a number of steps in response to the write-off problem, including increased fees for late payments, over-limit fees and other repricing actions. These moves had a positive impact on revenues, especially in the fourth quarter, and we expect the impact to continue in 1997. The major vital signs in our credit services business are healthy. This past year we increased receivables from $27.8 billion to $32.6 billion. The number of accounts increased to 39 million. And we enrolled 425,000 merchant locations in 1996. To Do List: PROGRESS REPORT - --------------- In addition to record revenues and earnings, there were a number of more specific achievements in 1996. The most important of these concerned the progress we made on our To Do List. As I said in last year's report, some of these items are more long-term than others. But we began to focus and proceed on all of them in 1996 and we made some significant strides: In two instances--international markets and electronic delivery of products--we did more than just proceed. We took dramatic action with the Morgan Stanley merger announcement and the purchase of Lombard Brokerage, Inc. EXPAND INTO INTERNATIONAL MARKETS A year ago I described participation in global markets as one of our long-term goals. (Obviously, with the Morgan Stanley merger announcement we have met this "long-term goal" virtually overnight.) [GRAPHIC] We had a good year in our credit services business . . . This is a business we understand very well, and we believe it should continue to provide strong, steady income. - --------------------------------- Dean Witter, Discover & Co. 1996 -------------------------------- 7 [GRAPHIC] The next frontier in financial services is electronic distribution -- straight to customers via personal computers, TVs or video phones. This past year we have staked out a strong presence on the new frontier, with the Mondex USA initiative, our new Website and the Lombard acquisition. - -------------------------------------- We have also been actively exploring other opportunities abroad, particularly in our credit card business, and we are now one year closer to our goal. We achieved an important regulatory victory in Europe when, along with American Express, we were able to block a restrictive Visa bylaw that would have kept Visa issuers from joining other credit card networks. The door is open to us in Europe as well as other markets. In our securities business, the first global priority is to provide an expanded array of investment opportunities for our clients. This will not only benefit clients, but it will also make our account executives even more productive. DELIVER PRODUCTS ELECTRONICALLY Just before year end, we announced the acquisition of Lombard Brokerage, Inc., one of the leading providers of electronic securities transactions via its site on the Internet and a toll-free number. Lombard has been named "the best on-line broker" by Barron's. This acquisition gives us a significant stake in the emerging marketplace for electronic commerce. Lombard is a pioneer in providing on-line trading and research information. We also proceeded on several other fronts in electronic commerce. We announced in early December that we had become an owner of Mondex USA along with six other major financial organizations. Mondex is an advanced electronic payment and smart card system that will be deployable both on cards and over the Internet. We also developed an attractive and user-friendly company-wide Website. In addition, our Private Issue(R) Card's Website provides account information to cardmembers in a secure environment, and our other cards will soon do the same. We also continued to refine our advanced network of account executive workstations. Dean Witter, Discover & Co. 1996 - -------------------------------- 8 Once again, the key is to leverage our established franchises with new technology and new delivery systems. DEEPEN OUR COMMITMENT TO THE 401(K) BUSINESS We began 1996 with a very careful and extensive study on just what it would take to become a major player in this huge market. We set up a new group within our organization to build the 401(k) business, and we committed substantial resources. We don't expect the effort to be profitable overnight. We are prepared to stay with our commitment as long as it takes to make this business a winner. It is a natural -- and vital -- extension of our commitment to individual investors. [GRAPH] EXPAND LOANS TO SECURITIES CLIENTS This past year first mortgage and home equity loans made by our securities account executives increased by 20 percent. But our goal is to grow this business much more rapidly, and in 1996 and early 1997 we took some significant steps to do so. We've also begun to look at other types of loans that we might offer to our securities customers. At a time when the lines separating historic distribution channels are blurring, we want to make sure that we offer a full range of financial products to our customers. LEVERAGE 36 MILLION CUSTOMER BASE Loans to securities clients is one way we are leveraging our customer base. The acquisition of Lombard is an important step forward in achieving this long-term goal. At year end we announced the creation of a new business named DWD Electronic Financial Services, which consolidates all of our investments in PC-based financial services products and focuses on the growing market for customers who want to do banking and securities transactions on the Internet. As we move forward, the name of the game is to capitalize on the extensive and valuable customer franchise that we have already built. CREATE CO-BRANDED/AFFINITY NOVUS CARDS We're off to a very good start in creating new co-branded and affinity cards. In September, in a joint program with the American Zoo and Aquarium Association, we launched the National Alliance For Species Survival(SM) Card. We call it the "zoo card" for short. We also entered an agreement with Universal Studios (announced in March 1997) to launch a new co-branded card and to make Discover Card and other NOVUS brands the preferred cards of Universal Studios. Dean Witter, Discover & Co. 1996 -------------------------------- 9 And we have also entered an agreement with the Smithsonian Institution to issue the first affinity card for their members and supporters. SERVE MORE SEGMENTS IN THE SECURITIES MARKETPLACE It's been full speed ahead in our expansion into new securities channels. First, there was the Banc One agreement, signed in February 1996, that I mentioned in last year's annual report. We had earlier entered a similar agreement with NationsBank. We will soon be launching new joint efforts to provide investment products and services in the bank channel. EMPHASIZE CLOSED-LOOP ADVANTAGE Our relationships with both cardmembers and merchants give us an information advantage in our credit card business. It has enabled us to target our marketing efforts more effectively. The "closed loop" has now become even more important in our efforts to reach new market segments while preserving credit quality. GOING FORWARD: BRANDS AND TECHNOLOGY - --------------------- Our To Do List has proven to be a valuable exercise. It has focused our attention and brought results. We'll continue to proceed in each of the specific areas on the list. It has also been valuable because it has forced us to go beyond the list and think long and hard about the future. We've asked ourselves, "What are the one or two fundamental issues that cut across the list and capture everything we have to do?" We've identified two such issues. The first is making our Discover, Dean Witter and NOVUS brands preeminent in the marketplace. The second is [GRAPHIC] We're fortunate to have two great established brands in Discover and Dean Witter. Our number one priority is to build and extend their magic in the marketplace. - ------------------------------------- [GRAPH] Dean Witter, Discover & Co. 1996 - -------------------------------- 10 achieving unquestioned technological leadership in the financial services industry. Every Marketing 101 student knows there is something magic about brands. For customers, brands come to represent promise, value and expectations. For a business, a good brand becomes a non-depreciating asset, even more important than products because it is the brand that establishes a standard over time. In fact, in our Dean Witter securities business, where we "measure success one investor at a time," you could say that we have more than three million customized products (one for each customer), but one brand. We're fortunate to have two great established brands in Discover and Dean Witter. Our number one priority is to build and extend their magic in the marketplace. That is the surest way to grow, to provide value, to gain market leadership, and to achieve increased profitability in an environment that has become intensely competitive. Discover Card was the first "value card". In a marketplace now cluttered with many new cards, it still stands for value, dependability and quality -- promises that have been kept for over ten years. Discover is the largest single issuer of bank cards. It represents a huge investment on our part and on the part of customers. We must do more to leverage this investment. The investment in the Dean Witter name goes back even longer, starting with the founding of Dean Witter & Co. in San Francisco more than 70 years ago. As the firm grew, and expanded through acquisition, it came to stand for integrity, service and sound advice for individual investors. In his last memo to the firm in 1967, Dean Witter said, "The most valuable asset of an investment firm is its good name." We will certainly continue to build on this good name. It's part of the brand, and a vital link to our customers. If you look at the securities industry today, it's no accident that the best firms, the surviving firms, the firms that will be dominant players in the future, are those with good names. [GRAPH] Dean Witter, Discover & Co. 1996 -------------------------------- 11 Our third major brand, the NOVUS Network, is much newer. We are still in the process of establishing the NOVUS name in the marketplace. In some ways we are still an upstart, a new and innovative network challenging the network "duopoly" of Visa and MasterCard in the credit card market. We believe that consumers as well as issuers will benefit if the two large credit card associations no longer dominate the marketplace. So we will keep pushing for more competition and more choice for consumers through our NOVUS Network. Our second fundamental priority is technology. There is nothing new about the importance of technology. Communication and information have always been basic to financial services -- it goes back to the first ticker tape. Early this century, Dean Witter & Co. began as a "wire house" that used communications technology to create a national market for stocks and bonds. Today, Dean Witter Discover has more than three million securities customers and 39 million credit card customers throughout the country, and we serve them by using the latest network computer technology. The next frontier in financial services is electronic distribution -- straight to customers via personal computers, TVs, video phones, or other devices. No one can predict the exact shape of this market. It proceeds by fits and starts. Home banking was supposed to arrive five years ago, but has still not fulfilled its promise. On-line investing faced great skepticism just a year ago, but now there are already nearly two million on-line investors. This past year we have staked out a strong presence on this new frontier, with the Mondex USA initiative, our new Website and the Lombard acquisition. We also put into place an advanced client/server operations system for our credit card business that is the largest and most flexible in the industry. It will enable us to grow and respond quickly to new opportunities. There is much more to do, and we also recognize that the world is changing so fast that you cannot always spell out an exact agenda. But we do know that technology matters in our businesses, as never before. So we are investing in technology, as never before. You don't win in technology, or business, unless you are willing to take risks -- not foolish risks, but the sort that come from playing at the top level where you must fully commit yourself in order to win. When you play at that level, you may lose some of the time, but in the end you will prevail. [GRAPH] Dean Witter, Discover & Co. 1996 - -------------------------------- 12 EXTENDING OUR STRATEGY - ---------------------- Dean Witter Discover is a company that embraces change, but we also believe in consistency, and we are not about to embark on a strategy du jour. When you have eight straight years of record earnings there are some things you don't want to change. In our securities business, the strategy we developed in the mid-80s has proven to be very sound. . Focus on individual investors. The demand for financial services continues to expand, and this gives us a rapidly growing customer base. . Serve individual investors through professional account executives. Even with the rise of the discounters, and now on-line trading, the need for advice and service has remained a constant in the marketplace. In fact, "advice" has recently been resurrected as one of the industry buzz words. That's not surprising. In the long run, the only sure formula for success in the financial services business is to make sure your customers are winners. This means attending to their particular needs and goals, providing good service and advice. .Emphasize assets under management because mutual funds are a growth industry and provide steady, fee-based income. With this strategy, based on what we have built over the last ten years, we expect consistent, continued growth in our traditional securities business. We've had strong results for the past several years in investment banking. In 1996, our revenues from investment banking grew by 36 percent. We have also built a strong equity research department. Last year we were once again a leader among firms serving individual investors in surveys ranking the top analysts. [PHOTO] Mitchell M. Merin, Chief Administrative Officer; Thomas C. Schneider, Chief Financial Officer; Christine A. Edwards, General Counsel and Secretary. Each is an Executive Vice President of Dean Witter, Discover & Co. But we have also been adding some new things in order to spur further growth. The most recent and most dramatic is our willingness to use capital to make acquisitions. The addition of Lombard is an investment in technology, new channels and future growth. We're also adding new products and services. Our nationwide network of account executives gives us a key competitive advantage. We must continue to provide them with a full array of financial products for their clients. Our initiative into insurance, with variable annuities offered through Dean Witter, Discover & Co. 1996 -------------------------------- 13 alliances with Allstate and Hartford, has been extremely successful. This year we'll be offering more no-load and low-load mutual funds. We'll also expand our personal trust products and services to meet the needs of older customers (including the oldest of the baby boomers). Last year we acquired Union Federal Bank, which gives us trust powers in all 50 states. And as I mentioned, we've now made a major commitment to the 401(k) market, and we're actively pursuing ways to provide more international investment opportunities for our clients. Our strategy in credit services has also proven to be very sound. In just ten years, we have established a major nationwide brand, with a customer base of 39 million accounts, steady income from receivables, and profits of close to a half a billion dollars last year. The fundamentals of this business are still strong (revenue growth this past year was the highest in our history). But we face three significant challenges. The first is dealing with write-offs, or the problem of credit quality. There are indications that the higher level of write-offs is not simply a short- term, cyclical phase, but a new industry-wide plateau that will be with us for the foreseeable future. If that is true, then the competitive advantage will go to the companies that deal with the new, higher levels most effectively. We have been helped over the short term by our ability to respond quickly with new fees and repricing actions. But over the longer term, credit quality is fundamentally a technology challenge. The winning companies will be those that are able to put into place pricing based on the customer's credit worthiness and available technology that is fair, fast and consistent. We are determined to be second to none when it comes to credit quality decisions. Our second challenge is merchant parity with Visa and MasterCard. Right now, Discover and other NOVUS cards are accepted at outlets that account for about 90 percent of total U.S. bankcard transactions. [GRAPH] Dean Witter, Discover & Co. 1996 - -------------------------------- 14 That's not bad for a relative newcomer competing against two powerful, established associations. We've been expanding our merchant network every year, but we won't be satisfied until we get close to 100 percent. That sort of parity is essential in order for Discover Card, Private Issue, BRAVO/(R)/ and future NOVUS cards to reach their full potential. The third challenge is a global presence. As we get closer to merchant parity in the U.S., the next and most promising opportunity is expansion abroad. A top item on our 1997 agenda is to explore a number of possible alliances with non-U.S. companies or with U.S. companies with global operations. WINNING AT A NEW LEVEL - ---------------------- As we look to the future, there is clearly no shortage of challenges or opportunities. I can also report to shareholders that there is no shortage of ability, imagination and commitment among the 33,000 employees of Dean Witter Discover. The most important task of management is, always, to pick the right people. More important than strategy, more important than products, and more important than markets, having good people is the surest way to win. Our people are a diverse lot, from many different backgrounds and with many different talents and skills, and they share the same high level of commitment to the continued success of this enterprise. I am confident about our future. Sincerely, Philip J. Purcell [GRAPHIC] As we look to the future, there is clearly no shortage of challenges or opportunities. I can also report to shareholders that there is no shortage of ability, commitment and imagination among the 33,000 employees of Dean Witter Discover. - ---------------------------------- Dean Witter, Discover & Co. 1996 -------------------------------- 15 Financial Review CONTENTS Five Year Summary of Financial Information 17 Management's Discussion and Analysis 18 Management's Statement of Financial Reporting Responsibility 30 Independent Auditors' Report 30 Consolidated Statements of Income 31 Consolidated Balance Sheets 32 Consolidated Statements of Changes in Shareholders' Equity 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35 Quarterly Information 46 Dean Witter, Discover & Co. 1996 - -------------------------------- 16 FIVE-YEAR SUMMARY OF FINANCIAL INFORMATION (dollars in millions, except per share data)
1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Non-interest revenues $ 5,441.3 $ 4,615.4 $ 4,095.4 $ 3,912.4 $ 3,208.4 Interest revenue 3,587.3 3,319.0 2,507.2 1,909.2 1,975.1 Interest expense 1,566.2 1,514.8 1,048.5 815.3 965.8 Provision for losses on receivables 1,232.3 743.7 548.4 457.6 484.1 Net credit income 788.8 1,060.5 910.3 636.3 525.2 Net operating revenues 6,230.1 5,675.9 5,005.7 4,548.7 3,733.6 Non-interest expenses 4,685.0 4,280.0 3,791.1 3,552.5 3,062.8 Income before income taxes and cumulative effect of accounting change 1,545.1 1,395.9 1,214.6 996.2 702.9 Income tax expense 593.7 539.5 473.7 392.6 263.8 Cumulative effect of accounting change, net of income taxes -- -- -- -- 28.6 Net income 951.4 856.4 740.9 603.6 410.5 - ----------------------------------------------------------------------------------------------------------------- PER SHARE DATA(1) Earnings per common share Primary $ 2.79 $ 2.44 $ 2.14 $ 1.81 -- Fully diluted 2.77 2.44 2.14 1.81 -- Book value per common share 16.16 14.31 12.16 10.19 -- Dividends per common share 0.44 0.32 0.25 0.15 -- - ----------------------------------------------------------------------------------------------------------------- BALANCE SHEET AND OTHER OPERATING DATA Consumer loans $23,188.2 $21,556.4 $16,174.1 $12,148.2 $ 9,794.5 Total assets 42,413.6 38,208.2 31,859.4 27,662.3 23,821.5 Short-term borrowings 5,865.0 6,325.5 4,049.6 3,260.7 5,665.1 Deposits 7,212.6 6,191.1 5,208.7 4,888.1 4,857.1 Long-term borrowings 8,144.2 6,732.4 5,292.6 3,140.3 -- Shareholders' equity 5,164.4 4,833.7 4,108.0 3,477.1 2,673.3 Return on average shareholders' equity(2) 19.0% 19.2% 19.5% 19.6% 17.6% Supplemental information (in billions) Managed consumer loans $ 36.6 $ 31.8 $ 26.1 $ 21.2 $ 18.5 Assets under management and administration 90.0 79.5 66.9 71.2 59.0 - -----------------------------------------------------------------------------------------------------------------
See accompanying consolidated financial statements and notes beginning on page 31. (1) Per share data has been restated to reflect the Company's two-for-one stock split. (2) Return on average shareholders' equity for 1992 excludes the effects of a $28.6 million charge for the cumulative effect of a change in the method of accounting for postretirement benefits other than pensions, a non-recurring gain of $32.1 million from the initial public offering of SPS Transaction Services, Inc. common stock and a $133.0 million capital contribution from Sears, Roebuck and Co. on December 31, 1992. Dean Witter, Discover & Co. 1996 -------------------------------- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Dean Witter, Discover & Co. and subsidiaries (collectively referred to as the "Company") is a diversified financial services organization that provides a broad range of nationally-marketed credit and investment products, with a principal focus on individual customers. The Company has two lines of business: Credit Services -- providing general purpose credit cards, transaction processing services, private-label credit card services and real estate-secured loans -- and Securities -- providing a variety of financial products, services and investment advice. The Company's business activities are affected by changes in economic variables that directly impact the markets in which the Company operates and by competitive factors. Changes in economic variables affect consumer loan growth, credit quality and activity in securities markets, including the flow of investment dollars into mutual funds. Competition in the credit services industry centers on merchant acceptance of credit cards, credit card account acquisition and customer utilization of credit cards. Merchant acceptance is based on both competitive transaction pricing and the volume of credit cards in circulation. Credit card account acquisition and customer utilization are driven by the offering of credit cards with competitive and appealing features such as no annual fees, low introductory interest rates and other customized features targeting specific consumer groups. Competition in the securities industry, which includes traditional securities firms as well as mutual fund groups, banks and insurance companies, centers on the attraction and retention of clients and their assets. Success in attracting and retaining clients and assets revolves around the ability to meet investors' saving and investment needs through consistency of investment performance and accessibility to financial products and investment advice. Changes in economic and competitive factors may cause earnings to vary from year to year. The Company focuses on reducing the impact these changes have on earnings by managing interest rate risk, emphasizing fee-based assets that are designed to generate a continuing stream of revenues, evaluating credit product pricing and controlling costs. SUBSEQUENT EVENT On February 5, 1997, the Company and Morgan Stanley Group Inc. ("Morgan Stanley") announced a definitive agreement to merge. The combined company would be a preeminent global financial services firm with a market capitalization of approximately $21.0 billion (as of the merger announcement). The merger would combine the Company's strengths in retail distribution, asset gathering and credit services with Morgan Stanley's strengths in investment banking and institutional sales and trading. The new company will be named Morgan Stanley, Dean Witter, Discover & Co. Under the terms of the merger agreement unanimously approved by the Boards of Directors of both companies, each of Morgan Stanley's common shares will be exchanged for 1.65 common shares of the Company. Morgan Stanley preferred shares outstanding at the date of the merger will be exchanged for preferred shares of the Company having substantially identical terms. The transaction, which is expected to be completed in mid-1997, is intended to be a tax free exchange and accounted for as a pooling of interests and is subject to customary closing conditions, including certain regulatory approvals and the approval of shareholders of both companies. Prior to the time of closing each company will formally rescind its remaining stock repurchase authorizations. For certain selected pro forma financial data giving effect to the merger, see Note 2 to the Consolidated Financial Statements. RESULTS OF OPERATIONS The Company achieved record net income of $951.4 million in 1996, an 11% increase from 1995. In 1995, net income increased 16% to $856.4 million. Primary earnings per common share increased 14% to $2.79 in 1996 and 14% to $2.44 in 1995. Fully diluted earnings per common share increased 14% to $2.77 in 1996 and 14% to $2.44 in 1995. In 1996, consumer demand and retail sales continued to increase, favorably impacting credit card transaction volume and consumer loan growth. In 1996, the Company continued to invest in growth through the expansion of its NOVUS(SM) Network and by increasing its marketing and solicitation activities. The NOVUS Network is the third largest credit card network in the United States and consists of merchant and cash access locations that accept the Discover(R) Card and other cards that carry the NOVUS logo. In 1996, the Company launched its first NOVUS affinity credit card -- the National Alliance for Species Survival(SM) Card. Credit Services ended the year with record levels of NOVUS Network merchant locations, general purpose credit card accounts and transaction volume, and consumer loans. In 1996, securities equity market volumes and price indices increased to record levels favorably affecting Securities revenues and the level of assets under management and administration. Securities continued to focus on customer account and asset growth, increasing the number of its account executives, building assets Dean Witter, Discover & Co. 1996 - -------------------------------- 18 under management and administration, and controlling costs. Securities ended the year with record levels of account executives, customer accounts and assets, and assets under management and administration. Net operating revenues increased 10% to a record $6.2 billion in 1996 and 13% in 1995. The growth in both years reflected higher credit card transaction volume and consumer loan balances and favorable securities market conditions partially offset by higher credit losses. In 1996, consumer debt and personal bankruptcies continued to increase, contributing to an industry-wide decline in consumer credit quality which caused an increase in the rate of consumer loans charged off. Non-interest expenses increased 9% to $4.7 billion in 1996 and 13% in 1995. The increases in both years reflected higher variable compensation expenses related to increased Securities revenue and higher costs associated with increases in the general purpose credit card portfolio and the NOVUS Network. Non-interest expenses as a percentage of net operating revenues was 75.2% in 1996, 75.4% in 1995 and 75.7% in 1994. The Company's return on average shareholders' equity was 19.0% in 1996, 19.2% in 1995 and 19.5% in 1994. The remainder of Management's Discussion and Analysis is presented on a business segment basis. Substantially all of the operating revenues and operating expenses of the Company can be directly attributed to its two business segments. Certain reclassifications have been made to prior period amounts to conform to the current presentation. CREDIT SERVICES Credit Services focuses on the delivery of financial products to consumers through its four business units: NOVUS Services, Prime Option Services, SPS and NOVUS Financial. Credit Services is the largest single issuer of general purpose credit cards in the United States as measured by number of accounts and cardmembers. Consumers use general purpose credit cards to purchase goods and services and obtain cash advances. Credit Services proprietary general purpose credit cards are issued by NOVUS Services, which operates the NOVUS Network. These include the Discover Card, the Private Issue(R) Card, the BRAVO(SM) Card and an affinity program card. The Prime Option(SM) MasterCard(R) is a co-branded general purpose credit card issued by NationsBank of Delaware, N.A., and serviced by Prime Option Services. SPS is a 74% owned, publicly held subsidiary. SPS services include electronic transaction processing, consumer private label credit card program administration, commercial accounts receivable processing and call center teleservices. NOVUS Financial is a consumer finance business which emphasizes real estate-secured lending. NOVUS Financial originates loans through the Dean Witter Reynolds Inc. account executive sales organization, Allstate insurance agents, other third-party sales forces and direct response marketing.
CREDIT SERVICES STATEMENTS OF INCOME (in millions) YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- Merchant and cardmember fees $1,506.2 $1,135.3 $ 940.0 $ 770.4 $ 641.1 Servicing fees 819.0 696.9 586.4 533.2 412.8 Other 8.8 2.6 0.8 2.3 11.1 - ------------------------------------------------------------------------------------------------------------------------- Total non-interest revenues 2,334.0 1,834.8 1,527.2 1,305.9 1,065.0 - ------------------------------------------------------------------------------------------------------------------------- Interest revenue 2,827.8 2,498.9 1,933.0 1,473.6 1,566.0 Interest expense 1,089.7 985.5 683.1 540.7 699.5 - ------------------------------------------------------------------------------------------------------------------------- Net interest income 1,738.1 1,513.4 1,249.9 932.9 866.5 Provision for loan losses 1,220.6 730.5 537.0 443.0 472.1 - ------------------------------------------------------------------------------------------------------------------------- Net credit income 517.5 782.9 712.9 489.9 394.4 - ------------------------------------------------------------------------------------------------------------------------- Net operating revenues 2,851.5 2,617.7 2,240.1 1,795.8 1,459.4 - ------------------------------------------------------------------------------------------------------------------------- Employee compensation and benefits 505.4 438.6 374.0 326.5 295.3 Marketing and business development 736.5 645.3 514.5 377.8 317.9 Information processing and communications 487.2 419.0 340.6 303.9 257.5 Facilities and equipment 63.9 51.1 47.3 38.4 39.3 Other 344.1 342.8 292.0 238.9 219.7 - ------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 2,137.1 1,896.8 1,568.4 1,285.5 1,129.7 - ------------------------------------------------------------------------------------------------------------------------- Gain on sale of subsidiary stock -- -- -- -- 32.1 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 714.4 720.9 671.7 510.3 361.8 Income tax expense 264.9 274.0 257.0 190.6 122.4 - ------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 449.5 446.9 414.7 319.7 239.4 Cumulative effect of accounting change, net of income taxes -- -- -- -- 7.2 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 449.5 $ 446.9 $ 414.7 $ 319.7 $ 232.2 - -------------------------------------------------------------------------------------------------------------------------
Dean Witter, Discover & Co. 1996 -------------------------------- 19 In 1996, Credit Services net income of $449.5 million remained level compared to 1995. Credit Services net income increased 8% in 1995 to $446.9 million. In 1996, the effects of higher levels of general purpose credit card accounts, transaction volume and loans, and increased credit card fee revenues were offset by a higher rate of credit losses. The increase in 1995 was primarily due to higher levels of general purpose credit card accounts, transaction volume and loans, partially offset by increased investments in growth and a higher rate of credit losses. Merchant and Cardmember Fees Merchant and cardmember fees include revenues from fees charged to merchants on credit card sales, late payment fees, credit insurance fees, overlimit fees, cash advance fees, transaction processing services and the administration of credit card programs. OWNED AND MANAGED CONSUMER LOANS (at December 31) ($ billions)
Owned Managed "92" $ 9.8 $18.5 "93" 12.1 21.2 "94" 16.2 26.1 "95" 21.6 31.8 "96" 23.2 36.6
Merchant and cardmember fees increased 33% in 1996 and 21% in 1995. The increase in 1996 was due to higher revenues from overlimit fees, merchant fees, late payment fees and credit insurance fees. The increase in 1995 was due to higher revenues from merchant fees, credit insurance fees and late payment fees, partially offset by the absence of fees from Income Tax Refund Anticipation Loans. Overlimit fees were implemented in March 1996 and the amount of the fee was increased in the fourth quarter of 1996. In both years, the increases in merchant fee revenues were due to continued growth in general purpose credit card transaction volume. The increase in late payment fee revenues in 1996 was due to an increase in the amount of the late payment fee charged, an increase in the incidence of late payments and a tightening, in the fourth quarter of 1996, of late payment fee terms. The increased incidence of late payments was attributable to a higher level of delinquent accounts and an increase in active credit card accounts. The increase in late payment fee revenues in 1995 was due to an increase in the incidence of late payments due to an increased number of active credit card accounts and a higher incidence of delinquent accounts. In both years, the increases in credit insurance fees were due to higher enrollments and favorable loss experience rebates. GENERAL PURPOSE CREDIT CARD TRANSACTION VOLUME ($ billions)
"92" $27.5 "93" 32.8 "94" 40.1 "95" 47.5 "96" 53.6
Servicing Fees Servicing fees are revenues derived from consumer loans which have been sold through asset securitizations. Cash flows from the interest yield and cardmember fees generated by securitized loans are used to pay investors in these loans a predetermined fixed or floating rate of return on their investment, to reimburse the investors for losses of principal through charged off loans and to pay the Company a fee for servicing the loans. Any excess cash flows remaining are paid to the Company. The servicing fees and excess net cash flows paid to the Company are reported as servicing fees in the consolidated statements of income. The sale of consumer loans through asset securitizations therefore has the effect of converting portions of net credit income and fee income to servicing fees. The table below presents the components of servicing fees. COMPONENTS OF SERVICING FEES (in millions) YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------- Merchant and cardmember fees $ 307.4 $ 137.3 $ 109.6 $ 97.5 $ 68.8 Interest revenue 2,054.8 1,695.2 1,385.3 1,457.1 1,232.5 Interest expense (809.1) (708.6) (573.2) (641.2) (570.9) Provision for loan losses (734.1) (427.0) (335.3) (380.2) (317.6) - ----------------------------------------------------------------------------------------------- Servicing fees $ 819.0 $ 696.9 $ 586.4 $ 533.2 $ 412.8 - -----------------------------------------------------------------------------------------------
Dean Witter, Discover & Co. 1996 - -------------------------------- 20 Servicing fees are affected by the level of securitized loans, the spread between the interest yield on the securitized loans and the yield paid to the investors, the rate of credit losses on securitized loans and the level of cardmember fees earned from securitized loans. Servicing fees also include the effects of interest rate contracts entered into by the Company as part of its interest rate risk management program. Servicing fees increased 18% in 1996 and 19% in 1995. The increases in both years were due to higher net interest cash flows and cardmember fees from securitized loans partially offset by increased credit losses from securitized loans. The increased net interest cash flows were due to higher average levels of securitized loans. As discussed under merchant and cardmember fees, the higher cardmember fees were due to increased late payment fees and in 1996, overlimit fees. The increases in credit losses were due to a higher rate of credit losses on securitized loans and an increase in the average level of securitized loans. The higher rate of credit losses was consistent with the industry-wide trend of increasing credit loss rates as discussed under provision for loan losses. Net Interest Income Net interest income is equal to the difference between interest revenue derived from Credit Services consumer loan and short-term investment assets and interest expense incurred to finance those assets. Credit Services assets, primarily consumer loans, earn interest revenue at both fixed rates and market indexed variable rates. The Company incurs interest expense at fixed and floating rates to finance Credit Services assets. Interest expense also includes the effects of interest rate contracts entered into by the Company as part of its interest rate risk management program. This program is designed to reduce the volatility of earnings resulting from changes in interest rates and is accomplished primarily through matched financing which entails matching the repricing schedules of consumer loans and the related financing. The following tables present analyses of Credit Services average balance sheets and interest rates in 1996, 1995 and 1994, and changes in net interest income during those years.
CREDIT SERVICES AVERAGE BALANCE SHEET ANALYSIS (dollars in millions) YEAR ENDED DECEMBER 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE BALANCE RATE INTEREST BALANCE RATE INTEREST BALANCE RATE INTEREST - --------------------------------------------------------------------------------------------------------------------------- ASSETS Interest earning assets: General purpose credit card loans $17,083.2 13.99% $2,390.6 $14,691.5 14.75% $2,167.2 $11,913.9 14.81% $1,764.0 Other consumer loans 2,834.1 12.72 360.4 2,318.6 12.08 280.1 1,131.2 11.71 132.5 Investment securities 234.0 5.38 12.6 194.8 5.85 11.4 196.2 4.56 8.9 Other 1,149.0 5.59 64.2 667.5 6.02 40.2 577.6 4.78 27.6 - ------------------------------------------------------------------------------------------------------------------------- Total interest earning assets 21,300.3 13.28 2,827.8 17,872.4 13.98 2,498.9 13,818.9 13.99 1,933.0 Allowance for loan losses (682.2) (609.5) (471.6) Non-interest earning assets 1,379.6 1,249.3 993.7 - --------------------------------------------------------------------------------------------------------------------------- Total assets $21,997.7 $18,512.2 $14,341.0 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES & SHAREHOLDER'S EQUITY Interest bearing liabilities: Interest bearing deposits Savings $ 1,021.0 4.58% $ 46.8 $ 1,050.0 4.71% $ 49.5 $ 1,182.2 3.92% $ 46.4 Brokered 3,418.1 6.93 236.9 3,221.6 7.21 232.2 3,067.3 7.30 223.8 Other time 1,921.4 6.05 116.2 1,278.1 6.41 82.0 769.0 5.46 42.0 - --------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 6,360.5 6.29 399.9 5,549.7 6.55 363.7 5,018.5 6.22 312.2 Other borrowings 11,281.5 6.11 689.8 9,262.1 6.71 621.8 6,377.4 5.82 370.9 - --------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 17,642.0 6.18 1,089.7 14,811.8 6.65 985.5 11,395.9 5.99 683.1 Shareholder's equity/ other liabilities 4,355.7 3,700.4 2,945.1 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities & shareholder's equity $21,997.7 $18,512.2 $14,341.0 - --------------------------------------------------------------------------------------------------------------------------- Net interest income $1,738.1 $1,513.4 $1,249.9 - --------------------------------------------------------------------------------------------------------------------------- Net interest margin(1) 8.16% 8.47% 9.05% - --------------------------------------------------------------------------------------------------------------------------- Interest rate spread(2) 7.10% 7.33% 8.00% - ---------------------------------------------------------------------------------------------------------------------------
(1) Net interest margin represents net interest income as a percentage of total interest earning assets. (2) Interest rate spread represents the difference between the rate on total interest earning assets and the rate on total interest bearing liabilities. Dean Witter, Discover & Co. 1996 -------------------------------- 21
CREDIT SERVICES RATE/VOLUME ANALYSIS (in millions) YEAR ENDED DECEMBER 31, 1996 VS 1995 1995 VS 1994 - ---------------------------------------------------------------------------------------------------------- INCREASE/(DECREASE) DUE TO CHANGES IN: VOLUME RATE TOTAL VOLUME RATE TOTAL - ---------------------------------------------------------------------------------------------------------- INTEREST REVENUE General purpose credit card loans $ 353.1 $ (129.7) $ 223.4 $ 412.0 $ (8.8) $ 403.2 Other consumer loans 62.2 18.1 80.3 139.0 8.6 147.6 Investment securities 2.3 (1.1) 1.2 (0.1) 2.6 2.5 Other 29.0 (5.0) 24.0 4.3 8.3 12.6 - ---------------------------------------------------------------------------------------------------------- Total interest revenue 478.3 (149.4) 328.9 567.7 (1.8) 565.9 - ---------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest bearing deposits Savings (1.4) (1.3) (2.7) (5.2) 8.3 3.1 Brokered 14.3 (9.6) 4.7 11.3 (2.9) 8.4 Other time 41.3 (7.1) 34.2 27.7 12.3 40.0 - ---------------------------------------------------------------------------------------------------------- Total interest bearing deposits 52.8 (16.6) 36.2 33.1 18.4 51.5 Other borrowings 135.3 (67.3) 68.0 171.7 79.2 250.9 - ---------------------------------------------------------------------------------------------------------- Total interest expense 187.4 (83.2) 104.2 204.6 97.8 302.4 - ---------------------------------------------------------------------------------------------------------- Net interest income $ 290.9 $ (66.2) $ 224.7 $ 363.1 $ (99.6) $ 263.5 - ----------------------------------------------------------------------------------------------------------
Net interest income increased 15% in 1996 and 21% in 1995. The increases in both years were due to higher average levels of consumer loans outstanding partially offset by a shift in the mix of general purpose credit card loans from fixed rate loans to lower yielding variable rate loans and the effect of higher charge-offs on interest revenue. In both years, the effects of changes in market interest rates on the Company's variable rate consumer loans were substantially offset by comparable changes in the Company's cost of funds for the related financing. Variable rate consumer loans were approximately 57%, 46% and 41% of the Company's consumer loan portfolio at December 31, 1996, 1995 and 1994. The Company believes that the effect of changes in market interest rates on net interest income were mitigated due to its liquidity and interest rate risk policies. The supplemental table below provides average managed loan balance and rate information which takes into account both owned and securitized loans.
SUPPLEMENTAL CREDIT SERVICES AVERAGE MANAGED LOAN INFORMATION (dollars in millions) - ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE - ----------------------------------------------------------------------------------------------------------------------- Consumer loans $ 32,777.2 14.66% $ 27,304.9 15.17% $ 21,780.7 15.07% General purpose credit card loans 29,020.6 14.81 23,969.7 15.41 19,554.8 15.30 Total interest earning assets 34,160.2 14.29 28,167.1 14.89 22,554.5 14.71 Total interest bearing liabilities 30,501.9 6.22 25,106.5 6.75 20,131.6 6.24 - ----------------------------------------------------------------------------------------------------------------------- Consumer loan interest rate spread 8.44% 8.42% 8.83% Interest rate spread 8.07 8.14 8.47 Net interest margin 8.73 8.88 9.14 - -----------------------------------------------------------------------------------------------------------------------
Dean Witter, Discover & Co. 1996 - -------------------------------- 22 Provision for Loan Losses The provision for loan losses is the amount necessary to establish the allowance for loan losses at a level that the Company believes is adequate to absorb estimated losses in its consumer loan portfolio at the balance sheet date. The Company's allowance for loan losses is regularly evaluated by management for adequacy on a portfolio by portfolio basis and was $815.3 million, $721.8 million and $565.7 million at December 31, 1996, 1995 and 1994. The provision for loan losses is affected by net charge-offs, loan volume and changes in the amount of consumer loans estimated to be uncollectable. The provision for loan losses increased 67% in 1996 and 36% in 1995. The increase in 1996 was primarily due to higher net charge-offs which resulted from an increase in the percentage of consumer loans charged off and a higher level of consumer loans outstanding. The effect of an increase in the Company's estimate of the allowance for loan losses, primarily in the fourth quarter of 1996, was partially offset by a lower provision for losses for consumer loans intended to be securitized. (See Note 3 to the Consolidated Financial Statements, "Significant Accounting Policies.") The increase in 1995 was due to a higher level of consumer loans outstanding and an increase in net charge-off rates partially offset by a reduction in the allowance for loan losses for one of the Company's owned loan portfolios in the fourth quarter of 1995. The increases in both years in the Company's net charge-off rate were consistent with the industry-wide trend of increasing credit loss rates that the Company believes is related, in part, to increased consumer debt levels and bankruptcy rates. The Company believes this trend may continue and the Company may experience a higher net charge-off rate in 1997. In 1996, the Company took steps to reduce the impact of this trend, including raising credit quality standards for new accounts, selectively reducing credit limits and increasing collection activity. The Company believes these credit quality improvements had a minimal impact in 1996, but believes they may have an increased effect in 1997. The Company's expectations about future charge-off rates and credit quality improvements are subject to uncertainties that could cause actual results to differ materially from what has been projected above. Factors that influence the level and direction of consumer loan delinquencies and charge-offs include changes in consumer loan payment patterns, bankruptcy trends, the seasoning of the Company's loan portfolio, interest rate movements and their impact on consumer behavior, and the rate and magnitude of changes in the Company's consumer loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio. Consumer loans are considered delinquent when interest or principal payments become 30 days past due. Consumer loans are charged off when they become 180 days past due, except in the case of bankruptcies and fraudulent transactions which are charged off earlier. Loan delinquencies and charge-offs are primarily affected by changes in economic conditions and may vary throughout the year due to seasonal consumer spending and payment behaviors. The Company believes the increases in consumer loan delinquency rates in 1996 and 1995 were related to the industry-wide credit conditions discussed previously. The following table presents delinquency and net charge-off rates with supplemental managed loan information.
CREDIT SERVICES ASSET QUALITY (dollars in millions) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- OWNED MANAGED OWNED MANAGED OWNED MANAGED - -------------------------------------------------------------------------------------------------------------------- Consumer loans at period end $23,188.2 $36,572.8 $21,556.4 $31,775.9 $16,174.1 $26,050.5 Consumer loans contractually past due as a percentage of period end consumer loans 30 to 89 days 4.25% 4.29% 4.03% 4.05% 3.21% 3.26% 90 to 179 days 2.81 2.77 2.10 2.09 1.44 1.47 Net charge-offs as a percentage of average consumer loans 5.19 5.40 3.50 3.75 2.92 3.30 - --------------------------------------------------------------------------------------------------------------------
Dean Witter, Discover & Co. 1996 -------------------------------- 23 Non-Interest Expenses Total non-interest expenses increased 13% to $2.1 billion in 1996 and 21% to $1.9 billion in 1995. Employee compensation and benefits expense increased 15% in 1996 and 17% in 1995. The increases in both years were due to costs associated with processing increased credit card transaction volume and servicing additional NOVUS Network merchants and active credit card accounts. Marketing and business development expense increased 14% in 1996 and 25% in 1995. The increase in 1996 was due to higher cardmember rewards expense and increased costs associated with the growth of new and existing credit card brands. The increase in 1995 was due to higher mailing and promotional costs associated with the launch of new credit card brands, higher cardmember rewards expense and continued investment in the growth of existing credit card products. In both years cardmember rewards expense, which includes the Cashback Bonus(R) award, increased due to continued growth in credit card transaction volume and increased cardmember qualification for higher award levels. Information processing and communications expense increased 16% in 1996 and 23% in 1995. The increases in both years were due to higher costs associated with processing increased transaction volume, servicing additional NOVUS Network merchants and active credit card accounts and the development of the systems supporting the multi-card strategy. Facilities and equipment expense increased 25% in 1996 and 8% in 1995. In 1996, the Company opened several new facilities to accommodate the growth of its NOVUS Network and its multi-card strategy. Other non-interest expenses remained level in 1996 and increased 17% in 1995. These expenses include fraud losses, professional fees, credit inquiry fees and other administrative costs. The increase in 1995 was due to higher credit card fraud losses. In 1995, the Company began implementing several measures designed to reduce fraud losses. Since the Company began implementing these measures, fraud losses as a percentage of transaction volume has declined. Seasonal Factors The credit card lending activities of Credit Services are affected by seasonal patterns of retail purchasing. A substantial percentage of credit card loan growth occurs in the fourth quarter, followed by a flattening or decline of consumer loans in the subsequent first quarter. Merchant fees increase in the fourth quarter, reflecting higher sales activity. Additionally, higher cardmember rewards expense is accrued in the fourth quarter, reflecting seasonal growth in retail sales volume. Dean Witter, Discover & Co. 1996 - -------------------------------- 24 SECURITIES
SECURITIES STATEMENTS OF INCOME (in millions) YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Commissions $ 1,163.1 $ 1,022.5 $ 874.3 $ 904.0 $ 721.9 Asset management and administration fees 1,149.8 1,006.8 973.0 838.0 679.2 Principal transactions 449.3 478.9 421.9 405.1 433.4 Investment banking 246.1 181.5 197.9 394.9 254.6 Other 99.0 90.9 101.1 64.5 54.3 - -------------------------------------------------------------------------------------------------------------------------- Total non-interest revenues 3,107.3 2,780.6 2,568.2 2,606.5 2,143.4 - -------------------------------------------------------------------------------------------------------------------------- Interest revenue 759.5 820.1 574.2 435.6 409.1 Interest expense 476.5 529.3 365.4 274.6 266.3 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 283.0 290.8 208.8 161.0 142.8 - -------------------------------------------------------------------------------------------------------------------------- Provision for losses on receivables 11.7 13.2 11.4 14.6 12.0 - -------------------------------------------------------------------------------------------------------------------------- Net credit income 271.3 277.6 197.4 146.4 130.8 - -------------------------------------------------------------------------------------------------------------------------- Net operating revenues 3,378.6 3,058.2 2,765.6 2,752.9 2,274.2 - -------------------------------------------------------------------------------------------------------------------------- Employee compensation and benefits 1,702.8 1,543.0 1,390.2 1,377.4 1,168.8 Marketing and business development 120.3 89.8 92.7 92.6 79.3 Information processing and communications 280.5 268.5 256.1 242.0 215.4 Facilities and equipment 192.2 184.4 180.8 179.4 174.5 Other 252.1 297.5 302.9 375.6 295.1 - -------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 2,547.9 2,383.2 2,222.7 2,267.0 1,933.1 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 830.7 675.0 542.9 485.9 341.1 Income tax expense 328.8 265.5 216.7 202.0 141.4 - -------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 501.9 409.5 326.2 283.9 199.7 Cumulative effect of accounting change, net of income taxes -- -- -- -- 21.4 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 501.9 $ 409.5 $ 326.2 $ 283.9 $ 178.3 - --------------------------------------------------------------------------------------------------------------------------
Securities provides a wide range of financial products, services and investment advice, primarily to individual investors. Securities has the third largest sales organization in the domestic securities industry with 9,080 account executives in 371 branch offices, serving the investment needs of over three million individual and institutional clients with assets of $251.2 billion at December 31, 1996. Dean Witter Reynolds Inc. ("DWR"), the Company's primary broker-dealer, is among the largest members of the NYSE and is a member of other major securities, futures and options exchanges. Securities, through Dean Witter InterCapital Inc., has one of the largest asset management operations with total assets under management and administration of $90.0 billion at December 31, 1996. Securities achieved record net income of $501.9 million in 1996, a 23% increase from 1995. Securities net income increased 26% to $409.5 million in 1995. While the growth in net income in both years occurred in favorable business environments, enhancing and supporting earnings growth was the Company's focus on accumulating client assets, building fee-based assets under management and administration and controlling costs. Commissions Commission revenues arise from agency transactions in listed and over-the-counter ("OTC") equity securities, and sales of mutual funds, futures, insurance products and options. Commission revenues increased 14% in 1996 and 17% in 1995. The increase in 1996 was due to higher revenues from OTC and listed agency equity transactions, mutual fund sales and insurance products. The increase in 1995 was due to higher revenues from listed agency and OTC equity transactions. The increases in both years resulted from increased trading volume in the equity markets. Asset Management and Administration Fees Asset management and administration fees include fund management fees, distribution-related fees and other administrative fees. Asset management and administration fees increased 14% in 1996 and 3% in 1995. The increase in 1996 was due to higher revenues from fund management, 12b-1 distribution and Investment Consulting Services ("ICS") fees. The increase in 1995 was due to higher revenues from fund management and ICS fees. Period-end assets under management increased 13% to a record $90.0 billion in 1996 and Dean Witter, Discover & Co. 1996 -------------------------------- 25 19% to $79.5 in 1995. Average assets under management and administration increased 16% in 1996 and 3% in 1995. Components of assets under management and administration were as follows. ASSETS UNDER MANAGEMENT (in billions) AND ADMINISTRATION(1)
DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------- Equity funds $38.1 $29.9 $23.0 Fixed income funds 24.1 25.4 24.1 Money market funds 24.7 21.6 17.8 Investment management services 3.1 2.6 2.0 - -------------------------------------------------------------- Total assets under management and administration $90.0 $79.5 $66.9 - --------------------------------------------------------------
(1) Excludes ICS assets of $10.4, $8.9 and $6.5 billion. Fund management fees arise from investment management services the Company provides to registered investment companies (the "funds") pursuant to various contractual arrangements. The Company receives management fees based upon each fund's average daily net assets. Fund management fees increased 19% in 1996 and 4% in 1995. Components of fund management fees were as follows. FUND MANAGEMENT FEES (in millions)
YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------- Equity funds $197.0 $147.5 $128.5 Fixed income funds 113.5 110.9 126.0 Money market funds 76.1 65.6 57.8 - -------------------------------------------------------------- Total fund management fees $386.6 $324.0 $312.3 - --------------------------------------------------------------
The Company receives 12b-1 distribution fees for services it provides in promoting and distributing certain open-ended Dean Witter Funds. These fees are based on the lesser of average daily fund asset balances or average daily aggregate net fund sales and are affected by changes in the overall level and mix of assets under management and administration. 12b-1 distribution fees increased 14% in 1996 and remained level in 1995. ICS fees are derived from private portfolio management services arranged by the Company for individual investors and are affected by changes in the level of ICS assets. ICS fees increased 21% in 1996 and 6% in 1995. Principal Transactions Principal transactions include revenues from customers' purchases and sales of securities in which the Company acts as a principal, and gains and losses on securities held for resale. The Company holds securities for resale primarily to facilitate customer trading requirements. Principal transaction revenues decreased 6% in 1996 and increased 14% in 1995. The decrease in 1996 was due to a decline in revenues primarily from fixed income securities transactions. Increased customer interest in equity markets resulted in a decline in fixed income activity. The increase in 1995 was due to higher revenues from OTC and corporate securities which resulted from increased securities market trading volumes. Investment Banking Investment banking revenues are derived from the underwriting of public offerings of securities and fees from advisory services. Investment banking revenues increased 36% in 1996 and declined 8% in 1995. The increase in 1996 was attributable to higher advisory fees and increased underwriting activity. The decrease in 1995 was the result of declines in both the number and size of closed-end mutual fund underwritings. Net Credit Income Net credit income consists primarily of interest revenue from customer margin loans less the cost of financing these loans and credit losses. Net credit income is affected by the levels of margin loans, borrowings that finance these loans and market interest rates. Net credit income remained level in 1996 and increased 41% in 1995. The increase in 1995 was due to higher net interest income from margin lending, clearing organization deposits and real estate-related transactions. Average aggregate customer margin balances were $2.5 billion, $2.3 billion and $2.4 billion in 1996, 1995 and 1994. Non-Interest Expenses Total non-interest expenses increased 7% in both 1996 and 1995. As a percentage of net operating revenues, total non-interest expenses were 75.4% in 1996, 77.9% in 1995, and 80.4% in 1994. Employee compensation and benefits expense increased 10% in 1996 and 11% in 1995. The increases in both years were due to higher variable employee compensation expense resulting from increased revenues and higher costs related to training new account executives. Employee compensation and benefits expense as a percentage of net operating revenues was 50.4% in 1996, 50.5% in 1995 and 50.3% in 1994. Marketing and business development expense increased 34% in 1996 and remained level in 1995. The increase in 1996 was due to higher promotional expenses associated with the Company's investments in new business activities. Other non-interest expenses decreased 15% in 1996 and remained level in 1995. Other non-interest expenses include legal expenses and other professional fees and other administrative costs. The decrease in 1996 was due to a reduction in legal expenses and other professional fees. Dean Witter, Discover & Co. 1996 - -------------------------------- 26 LIQUIDITY AND CAPITAL RESOURCES OVERVIEW Financing activities are managed centrally. Funding and capital plans are developed and implemented for each business unit, consistent with its financial objectives and in coordination with business unit management. The Company pursues conservative liquidity, interest rate risk and capital policies for its businesses. The Company's liquidity policies are designed to provide funding for the Company's current and future business requirements and to ensure access to cost-effective funding in all business environments. This is accomplished through the diversification of funding sources, extension of funding terms and staggering of maturities. The Company's interest rate risk policies are designed to reduce the volatility of earnings resulting from changes in market interest rates. This is accomplished primarily through matched financing which entails matching the repricing schedules of consumer loans and the related financing. The Company's capital policies seek to maintain balance sheet ratios that the Company believes are conservative relative to the risks of each business unit's activities as well as regulatory and rating agency requirements. The Company expects that its future funding and refinancing requirements will be met through the traditional sources of funds available to the Company. The Company believes its current sources of funding are sufficient to meet its future growth plans and financing requirements. CORPORATE FUNDING POLICIES AND ACTIVITIES Liquidity Diversification of funding sources is an important element of the Company's liquidity policies. The Company accesses funding at the corporate level through the issuance of commercial paper, short-term bank borrowings and senior long-term notes, which include medium-term and underwritten notes. The Company's debt securities are sold globally and are denominated in multiple currencies. In 1996, the Company filed a shelf registration for $2.0 billion of debt securities with the Securities and Exchange Commission and increased its capacity to issue debt securities under its Euro Medium-term Note Program by $2.0 billion. The proceeds from the issuance of corporate level borrowings are loaned to Credit Services and Securities at terms which substantially match the terms of the public debt. The proceeds from the issuance of commercial paper and senior long-term notes are loaned predominantly to Credit Services. The Company's segments access financing sources which are specific to their businesses. Credit Services obtains funding from the sale of consumer loans through asset securitizations to both domestic and foreign investors, deposit taking, the issuance of asset-backed commercial paper, the purchase of federal funds and short-term bank notes. Securities funds its operations primarily through the use of repurchase and securities lending agreements. Both Credit Services and Securities utilize cash provided by operations to meet liquidity needs. The Company's credit ratings at December 31, 1996 and 1995 were as follows. CORPORATE LEVEL DEBT RATINGS
DECEMBER 31, 1996 1995 - ---------------------------------------------------------- SENIOR SENIOR COMMERCIAL LONG-TERM COMMERCIAL LONG-TERM PAPER NOTES PAPER NOTES - ---------------------------------------------------------- Moody's P1 A2 P1 A2 S&P A1 A A1 A Fitch F-1+ AA- F-1+ AA- Duff & Phelps D1 A+ D1 A+ - ----------------------------------------------------------
Subsequent to the announcement of the Company's definitive merger agreement with Morgan Stanley, Moody's placed the Company's long-term borrowings on review for possible upgrade. S&P placed the Company's long-term and short-term borrowings on CreditWatch with positive implications. At December 31, 1996 and 1995, $3,511.6 million and $3,444.9 million of unsecured commercial paper issued at the corporate level was outstanding. The Company maintains a senior bank credit facility to support general liquidity needs, including the issuance of commercial paper at the corporate level. In 1996, the Company renewed this facility and increased its amount to $4.0 billion from $3.25 billion. The facility expires in April 1997 and contains certain extension provisions. The Company currently plans to renew or replace this facility prior to its expiration. This facility contains covenants that require the Company to maintain minimum net worth requirements and specified financial ratios. The Company believes that the covenant restrictions will not impair its ability to pay its current level of dividends. As of December 31, 1996, the Company had never borrowed from its senior bank credit facility. The Company issues senior long-term notes through underwritten public offerings and continuous offerings of medium-term notes. Proceeds received from the issuance of senior long-term notes were $2,687.5 million in 1996 and $1,833.5 million in 1995. Dean Witter, Discover & Co. 1996 -------------------------------- 27 At December 31, 1996, the maturity profiles of the Company's deposits, senior long-term notes and asset securitizations were as follows.
(in millions) - ------------------------------------------------------------------ SENIOR ASSET DEPOSITS NOTES SECURITIZATIONS - ------------------------------------------------------------------ Under 1 year $3,126.8 $1,073.1 $1,274.7 1-2 years 1,720.7 1,705.2 3,482.1 2-3 years 878.9 819.6 2,132.6 3-5 years 1,112.7 2,087.9 2,248.6 5-10 years 373.5 2,032.6 3,193.9 Over 10 years -- 440.0 1,052.7 - ------------------------------------------------------------------
Senior long-term notes totaling $1,267.4 million matured in 1996 and were replaced with new borrowings. CAPITAL The Company's shareholders' equity increased to $5,164.4 million at December 31, 1996 from $4,833.7 million at December 31, 1995. At December 31, 1996 and 1995, $3,766.4 million and $3,129.8 million of the Company's shareholders' equity was invested in the equity of its subsidiaries. The remainder of the Company's shareholders' equity was advanced to its subsidiaries to finance their operations. Certain of the Company's subsidiaries have regulatory and other restrictions on the amount of net assets available for transfer to the Company in the form of dividends or loans. The aggregate amount of these restrictions was $1.7 billion at December 31, 1996. The Company believes that these restrictions will not have a material effect on its ability to meet future dividend or funding requirements. For purposes of evaluating the financial performance of its segments, the Company's shareholders' equity is allocated to its segments based on amounts the Company believes the segments would require if they were stand-alone companies. At December 31, 1996 and 1995, the Company's shareholders' equity was allocated as follows: Credit Services, $2,938.6 million and $2,574.2 million; Securities, $1,372.5 million and $1,366.4 million. On December 16, 1996, the Company's Board of Directors declared a two-for-one stock split, in the form of a dividend, payable to shareholders of record on December 26, 1996 and distributable on January 14, 1997. The Company paid quarterly dividends of $0.11 per common share for 1996. The Company raised its quarterly dividend per common share to $0.14 effective for first quarter 1997 dividends. The Company purchases shares of its common stock under a general repurchase plan and for issuance in equity-based compensation plans. In 1996, the Company purchased 23.1 million shares of common stock. Through January 31, 1997, the Company had purchased an additional 0.6 million shares of its common stock at an average price of $34.21 per share. CREDIT SERVICES LIQUIDITY The Company seeks to reduce refinancing risk at Credit Services through the application of liquidity policies that emphasize the diversification of funding sources, extension of funding terms and staggering of funding maturities. Credit Services relies upon asset securitizations, the issuance of asset-backed commercial paper, corporate borrowings, deposit taking, the purchase of federal funds, short-term bank notes, and cash generated by operations to fund its business activities. Asset Securitizations The Company sells consumer loans through asset securitizations using several transaction structures. At December 31, 1996 and 1995, outstanding asset securitizations totaled $13,384.6 million and $10,219.5 million. The Company received proceeds from asset securitizations of $4,527.5 million in 1996 and $1,827.3 million in 1995. Asset-Backed Commercial Paper Credit Services, through Riverwoods Funding Corporation ("RFC"), an entity included in the consolidated financial statements of the Company, issues asset-backed commercial paper. At December 31, 1996 and 1995, $1,225.2 million and $1,243.6 million of asset-backed commercial paper was outstanding. RFC maintains a senior bank credit facility to support the issuance of asset-backed commercial paper. In 1996, RFC renewed this facility and increased its amount to $2.1 billion from $1.75 billion. RFC currently plans to renew or replace this facility prior to its expiration in October 1997. Under the terms of its asset-backed commercial paper program, certain assets of RFC were subject to a lien in the amount of $2.2 billion at December 31, 1996. RFC has never borrowed from its senior bank credit facility. Corporate Borrowings Credit Services businesses borrow from the Company on terms that generally match the terms of the underlying corporate borrowings issued by the Company. (See "Corporate Funding Policies and Activities.") Deposits and Federal Funds The Company's bank subsidiaries solicit deposits from consumers and purchase federal funds. Interest bearing Dean Witter, Discover & Co. 1996 - -------------------------------- 28 deposits are classified by type as savings, brokered and other time. Savings deposits consist primarily of money market deposit and certificate of deposit accounts sold directly to cardmembers and savings deposits solicited from DWR clients. Brokered deposits consist primarily of certificates of deposit issued by the Company's bank subsidiaries, which are sold through the DWR account executive sales organization and a syndicate of firms managed by DWR. Other time deposits include institutional certificates of deposit. Bank Notes Credit Services, through Greenwood Trust Company, an indirect subsidiary of the Company, sells notes under a short-term bank note program. These notes have maturities of up to 270 days. INTEREST RATE RISK The Company's interest rate risk policies are designed to reduce the volatility of earnings resulting from changes in interest rates. This is accomplished primarily through matched financing. The Company is exposed to the risk that changes in market interest rates will result in declines in net interest income and servicing fees. Matched financing reduces this risk by matching the repricing schedules of consumer loans and the related financing. When necessary, the Company utilizes interest rate contracts to achieve its matched financing objectives. Interest rate contracts include interest rate exchange agreements and interest rate caps. Under interest rate exchange agreements, which include interest rate swap and cost of funds agreements, the Company effectively exchanges the interest payments on its financing with those of a counterparty. Interest rate cap agreements effectively establish a maximum interest rate on certain of the Company's floating rate financings. Interest rate swap and cap agreements are entered into with institutions that are established dealers in these instruments and that maintain certain minimum credit criteria established by the Company. Cost of funds agreements are entered into as part of agreements pursuant to which the Company provides private label credit card processing services to certain of its merchant clients. At December 31, 1996 and 1995, notional amounts of interest rate exchange agreements outstanding were as follows.
(in millions) DECEMBER 31, 1996 1995 - ------------------------------------------------------------ Agreements that converted the interest rate on financing: From fixed to floating $5,021.3 $4,164.8 From floating to fixed 1,182.8 1,469.0 From floating to floating 275.0 425.0 - ------------------------------------------------------------ Total $6,479.1 $6,058.8 - ------------------------------------------------------------
In addition to the interest rate exchange agreements described above, the Company has entered into foreign currency exchange agreements on its foreign denominated borrowings. These agreements hedge the Company's exposure to currency fluctuations and primarily converted the repricing characteristics of the related foreign denominated borrowings to floating US indexed rates. At December 31, 1996 and 1995, $492.2 million and $59.1 million of these agreements were outstanding. At December 31, 1996 and 1995, the Company had $40.0 million and $415.0 million of interest rate cap agreements outstanding, of which $40.0 million were in effect in both years. CAPITAL The Company endeavors to maintain, for all Credit Services businesses, conservative capital positions based on regulatory and rating agency guidelines. The Company's capital policies require the maintenance of capital at its regulated banking subsidiaries at levels considered, for regulatory purposes, "significantly" in excess of applicable minimum capital requirements. (See Note 11 to the Consolidated Financial Statements, "Regulatory Capital Requirements".) SECURITIES LIQUIDITY The Company's liquidity goal for its Securities operations is to maintain access to cost-effective financing in all market conditions. Historically, the Company's broker-dealer operations have been self-funding. The Company believes that these operations will continue to have the capacity to be self-funding. Consistent with its historical practices, the principal sources relied upon by the Company to fund its broker-dealer operations include repurchase and securities lending agreements and bank borrowings. In 1996, the Company had sufficient collateral to secure bank borrowings if the availability of unsecured funds had required such action. CAPITAL The Company maintains a conservative capital position for Securities based on regulatory and rating agency guidelines. (See Note 11 to the Consolidated Financial Statements, "Regulatory Capital Requirements".) Dean Witter, Discover & Co. 1996 -------------------------------- 29 MANAGEMENT'S STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY The management of Dean Witter, Discover & Co. and its subsidiaries prepared the accompanying consolidated financial statements and related footnotes and is responsible for their integrity and objectivity. The consolidated financial statements, which include amounts that are based on management's estimates and judgments, were prepared in accordance with generally accepted accounting principles. Management also prepared the other information in this annual report and is responsible for its accuracy and consistency with the consolidated financial statements. Management maintains a system of internal controls over the preparation of its consolidated financial statements. In management's opinion, these internal controls provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. Judgments are required to assess and balance the relative cost and expected benefits of these internal controls. To assure the effectiveness of the system of internal controls, the organizational structure provides for defined lines of responsibility and delegation of authority. Further, the Company maintains an internal audit function that independently assesses the effectiveness of internal controls and the Company's compliance with established policies and procedures. The Company's consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors, and their report follows. They have advised the Company that their audits were conducted in accordance with generally accepted auditing standards and considered the Company's internal accounting controls in determining the auditing procedures they deem necessary to express an opinion on the consolidated financial statements. The Audit Committee of the Board of Directors, composed solely of outside directors, meets with the internal auditors, management and the independent auditors to review their work and discuss the Company's financial controls and audit and reporting practices. The independent auditors and the internal auditors independently have full and free access to the Audit Committee, without the presence of management, to discuss any matters that they feel require attention. /s/ Philip J. Purcell Philip J. Purcell Chairman and Chief Executive Officer /s/ Thomas C. Schneider Thomas C. Schneider Executive Vice President and Chief Financial Officer /s/ Robert P. Seass Robert P. Seass Senior Vice President and Controller INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Dean Witter, Discover & Co.: We have audited the accompanying consolidated balance sheets of Dean Witter, Discover & Co. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 1996. These financial statements, appearing on pages 31 through 45, are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Dean Witter, Discover & Co. and subsidiaries at December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York February 21, 1997 Dean Witter, Discover & Co. 1996 30 CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share data)
Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------- Merchant and cardmember fees $ 1,506.2 $ 1,135.3 $ 940.0 Commissions 1,163.1 1,022.5 874.3 Asset management and administration fees 1,149.8 1,006.8 973.0 Servicing fees 819.0 696.9 586.4 Principal transactions 449.3 478.9 421.9 Investment banking 246.1 181.5 197.9 Other 107.8 93.5 101.9 ------------------------------------- Total non-interest revenues 5,441.3 4,615.4 4,095.4 ------------------------------------- Interest revenue 3,587.3 3,319.0 2,507.2 Interest expense 1,566.2 1,514.8 1,048.5 ------------------------------------- Net interest income 2,021.1 1,804.2 1,458.7 Provision for losses on receivables 1,232.3 743.7 548.4 ------------------------------------- Net credit income 788.8 1,060.5 910.3 ------------------------------------- Net operating revenues 6,230.1 5,675.9 5,005.7 ------------------------------------- Employee compensation and benefits 2,208.2 1,981.6 1,764.2 Marketing and business development 856.8 735.1 607.2 Information processing and communications 767.7 687.5 596.7 Facilities and equipment 256.1 235.5 228.1 Other 596.2 640.3 594.9 ------------------------------------- Total non-interest expenses 4,685.0 4,280.0 3,791.1 ------------------------------------- Income before income taxes 1,545.1 1,395.9 1,214.6 Income tax expense 593.7 539.5 473.7 ------------------------------------- Net income $ 951.4 $ 856.4 $ 740.9 ===================================================================================== Earnings per common share(1) Primary $ 2.79 $ 2.44 $ 2.14 Fully diluted 2.77 2.44 2.14 - ------------------------------------------------------------------------------------- Average common shares outstanding(1) Primary 341.2 350.7 346.7 Fully diluted 343.3 350.9 346.7 =====================================================================================
(1) Per share and share data have been restated to reflect the Company's two-for-one stock split. See notes to the consolidated financial statements. Dean Witter, Discover & Co. 1996 31 CONSOLIDATED BALANCE SHEETS (in millions)
December 31, 1996 1995 - -------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 1,999.2 $ 1,464.5 Cash and securities segregated under federal and other regulations 2,044.5 1,926.4 Receivables Consumer loans (net of allowances of $815.3 in 1996 and $721.8 in 1995) 22,372.9 20,834.6 Securities clients (net of allowances of $15.3 in 1996 and $16.2 in 1995) 2,839.1 2,588.8 Other 804.5 732.4 Amounts due from asset securitizations 869.2 653.4 Securities borrowed 3,866.3 2,358.2 Securities purchased under agreements to resell 3,563.6 3,571.9 Securities owned, at market value 1,913.6 1,848.8 Deferred income taxes 820.3 736.9 Office facilities, at cost (less accumulated depreciation and amortization of $446.0 in 1996 and $380.5 in 1995) 379.7 341.0 Other assets 940.7 1,151.3 - -------------------------------------------------------------------------------------------------------------------- Total assets $42,413.6 $38,208.2 ==================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Commercial paper $ 4,736.8 $ 4,688.5 Other short-term borrowings 1,128.2 1,637.0 Deposits 7,212.6 6,191.1 Payables Securities clients 3,433.3 3,183.0 Drafts 616.1 485.5 Income taxes 156.8 99.3 Securities loaned 3,932.1 2,535.0 Securities sold under agreements to repurchase 3,566.6 3,813.4 Securities sold but not yet purchased, at market value 1,274.1 1,125.2 Other liabilities and accrued expenses 3,048.4 2,884.1 Long-term borrowings 8,144.2 6,732.4 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 37,249.2 33,374.5 - -------------------------------------------------------------------------------------------------------------------- Shareholders' Equity Preferred stock ($0.01 par value, 10.0 shares authorized, none issued) -- -- Common stock(1) ($0.01 par value, 500.0 shares authorized, 342.0 shares issued, 319.7 and 337.7 shares outstanding at December 31, 1996 and 1995) 3.4 3.4 Paid-in capital(1) 2,702.5 2,716.6 Retained earnings 2,972.7 2,165.7 ------------------------- 5,678.6 4,885.7 Common stock held in treasury, at cost(1) ($0.01 par value, 22.3 and 4.3 shares at December 31, 1996 and 1995) (598.3) (106.8) Stock compensation plans 141.8 85.1 Employee stock benefit trust (46.3) (21.5) Unearned stock compensation (11.4) (8.8) ------------------------- Total shareholders' equity 5,164.4 4,833.7 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $42,413.6 $38,208.2 ====================================================================================================================
(1) Amounts have been restated to reflect the Company's two-for-one stock split. See notes to the consolidated financial statements. Dean Witter, Discover & Co. 1996 32 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK(1) TREASURY STOCK --------------- -------------- NUMBER PAID-IN RETAINED NUMBER (in millions) OF SHARES AMOUNT CAPITAL(1) EARNINGS OF SHARES(1) AMOUNT - ---------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1994 341.2 $ 3.4 $ 2,713.6 $ 762.6 -- $ -- Net income 740.9 Dividends to common shareholders (85.2) Purchase of treasury stock, at cost (4.6) (82.0) Issuance of common stock Employee stock purchase plan (0.8) 0.2 4.3 Stock option exercises 0.8 11.0 0.2 3.1 Restricted stock grants 0.5 Unearned stock compensation, net of amortization Stock compensation plans Minimum pension liability adjustment - ---------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 342.0 3.4 2,724.3 1,418.3 (4.2) (74.6) Net income 856.4 Dividends to common shareholders (109.0) Purchase of treasury stock, at cost (5.0) (121.2) Issuance of common stock Employee stock purchase plan (0.6) 0.8 15.3 Employee benefit plans 0.1 2.3 41.4 Stock option exercises (7.5) 1.8 33.2 Restricted stock grants 0.2 Unearned stock compensation, net of amortization Stock compensation plans 0.1 (0.9) Employee stock benefit trust - ---------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 342.0 3.4 2,716.6 2,165.7 (4.3) (106.8) Net income 951.4 Dividends to common shareholders (144.4) Purchase of treasury stock, at cost (23.1) (625.5) Issuance of common stock Employee stock purchase plan (2.4) 0.7 19.8 Employee benefit plans 2.4 59.0 Stock option exercises (14.7) 2.0 52.9 Restricted stock grants 2.6 Unearned stock compensation, net of amortization 0.3 0.1 Stock compensation plans 0.1 2.2 Employee stock benefit trust - ---------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 342.0 $3.4 $2,702.5 $2,972.7 (22.3) $(598.3) ================================================================================================================
TOTAL SHAREHOLDERS' (in millions) OTHER EQUITY - ------------------------------------------------------------------- BALANCE, JANUARY 1, 1994 $ (2.5) $ 3,477.1 Net income 740.9 Dividends to common shareholders (85.2) Purchase of treasury stock, at cost (82.0) Issuance of common stock Employee stock purchase plan 3.5 Stock option exercises 14.1 Restricted stock grants 0.5 Unearned stock compensation, net of amortization (4.4) (4.4) Stock compensation plans 42.2 42.2 Minimum pension liability adjustment 1.3 1.3 - ------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 36.6 4,108.0 Net income 856.4 Dividends to common shareholders (109.0) Purchase of treasury stock, at cost (121.2) Issuance of common stock Employee stock purchase plan 14.7 Employee benefit plans 41.5 Stock option exercises 25.7 Restricted stock grants 0.2 Unearned stock compensation, net of amortization (3.2) (3.2) Stock compensation plans 42.9 42.1 Employee stock benefit trust (21.5) (21.5) - ------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 54.8 4,833.7 Net income 951.4 Dividends to common shareholders (144.4) Purchase of treasury stock, at cost (625.5) Issuance of common stock Employee stock purchase plan 17.4 Employee benefit plans 59.0 Stock option exercises 38.2 Restricted stock grants 2.6 Unearned stock compensation, net of amortization (2.6) (2.2) Stock compensation plans 56.7 59.0 Employee stock benefit trust (24.8) (24.8) - ------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $ 84.1 $5,164.4 ===================================================================
(1) Amounts have been restated to reflect the Company's two-for-one stock split. See notes to the consolidated financial statements. Dean Witter, Discover & Co. 1996 33 CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)
Year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income $ 951.4 $ 856.4 $ 740.9 Adjustments to reconcile net income to net cash flows from operating activities Depreciation and amortization 83.3 70.0 58.8 Provision for losses on receivables 1,232.3 743.7 548.4 Employee compensation settled through the issuance of common stock 87.1 57.2 37.0 Deferred income taxes (83.4) (93.4) (155.6) Decrease (increase) in operating assets Cash and securities segregated under federal and other regulations (118.1) (432.0) 227.9 Receivables Securities clients (262.0) (22.2) 70.9 Other (72.1) (74.1) (111.4) Securities borrowed (1,508.1) (6.6) (250.8) Amounts due from asset securitizations (215.8) (231.4) 269.6 Matched securities purchased under agreements to resell, net (223.8) (27.1) 4.0 Securities owned and securities sold but not yet purchased, at market value, net 84.1 (299.4) 1,023.3 Other assets 128.3 106.2 (32.4) Increase (decrease) in operating liabilities Payables Securities clients 250.3 447.0 (40.9) Drafts 130.6 10.5 2.9 Income taxes 57.5 (26.2) (89.5) Securities loaned 1,397.1 (23.3) 165.0 Other liabilities and accrued expenses 289.7 421.5 408.3 ------------------------------------------ Cash provided by operating activities 2,208.4 1,476.8 2,876.4 ------------------------------------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Net principal disbursed on consumer loans (7,531.7) (7,429.2) (6,166.3) Purchases of consumer loans (51.3) (306.9) (85.8) Sales of consumer loans 4,824.1 1,827.3 1,970.1 Other (39.8) (116.2) (118.7) ------------------------------------------ Cash used in investing activities (2,798.7) (6,025.0) (4,400.7) ------------------------------------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Proceeds from issuance of commercial paper, net (77.6) 2,061.9 194.0 Net increase (decrease) in other short-term borrowings (508.8) 36.4 343.1 Deposits, net 1,021.5 982.4 320.6 Proceeds from issuance of long-term borrowings, net 1,420.1 1,433.5 2,142.1 Securities sold under agreements to repurchase, net (14.8) 347.3 (826.3) Dividends paid (134.0) (102.3) (81.1) Proceeds from issuance of common stock 44.1 40.6 17.7 Purchase of treasury stock (625.5) (121.2) (82.0) ------------------------------------------ Cash provided by financing activities 1,125.0 4,678.6 2,028.1 ------------------------------------------ Increase in cash and cash equivalents 534.7 130.4 503.8 Cash and cash equivalents, beginning of period 1,464.5 1,334.1 830.3 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $1,999.2 $1,464.5 $1,334.1 =======================================================================================================================
See notes to the consolidated financial statements. Dean Witter, Discover & Co. 1996 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INTRODUCTION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of Dean Witter, Discover & Co. and subsidiaries (the "Company"). The Company is a financial services organization that provides a broad range of credit and investment products, with a primary focus on individual customers. Through its wholly-owned subsidiary NOVUS Credit Services Inc. ("NCSI"), the Company conducts its credit services business, including the operation of the NOVUS(sm) Network, a proprietary network of merchant and cash access locations, and the issuance of proprietary general purpose credit cards. The Company's securities business is conducted primarily through its wholly-owned subsidiaries Dean Witter Reynolds Inc. ("DWR") and Dean Witter InterCapital Inc. All material intercompany balances and transactions have been eliminated. The preparation of the consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from these estimates. Certain reclassifications have been made to prior year amounts to conform to the current presentation. 2. SUBSEQUENT EVENT On February 5, 1997, the Company and Morgan Stanley Group Inc. ("Morgan Stanley") announced a definitive agreement to merge. Under the terms of the merger agreement unanimously approved by the Boards of Directors of both companies, each of Morgan Stanley's common shares will be exchanged for 1.65 common shares of the Company. Morgan Stanley preferred shares outstanding at the date of the merger will be exchanged for preferred shares of the Company having substantially identical terms. The transaction, which is expected to be completed in mid-1997, is intended to be a tax free exchange and accounted for as a pooling of interests and is subject to customary closing conditions, including certain regulatory approvals and the approval of shareholders of both companies. Prior to the time of closing each company will formally rescind its remaining stock repurchase authorizations. The following table sets forth certain unaudited pro forma combined selected financial data giving effect to the merger under the pooling of interests method of accounting. The amounts presented have been prepared by combining the Company's financial data for the years ended 1996, 1995 and 1994 with Morgan Stanley's financial data for the fiscal year ended 1996 and the twelve months ended November 30, 1995 and 1994. The pro forma combined primary and fully diluted earnings per common share for the respective periods presented are based on the combined weighted average number of common shares and share equivalents of the Company and Morgan Stanley. The number of common shares and share equivalents of Morgan Stanley is based on the exchange ratio of 1.65 shares of the Company's common shares for each issued and outstanding share and share equivalent of Morgan Stanley.
(Unaudited, in millions, except per share amounts) 1996 1995 1994 - -------------------------------------------------------------------------------- Income Statement Data(1) Net revenues $ 12,006 $ 9,798 $ 8,612 Income before income taxes 3,117 2,292 1,962 Net income 1,980 1,465 1,257 Primary earnings per share 3.22 2.30 1.96 Fully diluted earnings per share 3.14 2.25 1.93 - -------------------------------------------------------------------------------- Balance Sheet Data (at end of period)(2) Total assets $238,860 Total liabilities 227,158 Total equity 11,702 ================================================================================
(1) The income statement data presented in this table exclude the effect of (i) the positive effects of potential increased revenues or operating synergies which may be achieved upon combining the resources of the companies (ii) investment banking, legal and miscellaneous transaction costs of the merger, which will be reflected as an expense in the period the merger is consummated, and (iii) costs associated with the integration and consolidation of the companies which are not presently estimable. (2) Pro forma balances for 1996 represent the Company's balance sheet amounts at December 31, 1996 combined with Morgan Stanley's balance sheet amounts at November 30, 1996. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid investments not held for resale with maturities, when purchased, of three months or less. CONSUMER LOANS Consumer loans, which consist primarily of credit card, real estate-secured and other consumer installment loans, are reported at their principal amounts outstanding, less applicable allowances and unearned finance charges. Interest on consumer loans is credited to income as earned. Dean Witter, Discover & Co. 1996 35 Interest is accrued on credit card loans until the date of charge-off, which generally occurs at the end of the month during which an account becomes 180 days past due, except in the case of bankruptcies and fraudulent transactions, which are charged off earlier. The interest portion of charged off credit card loans is written off against interest revenue. Origination costs related to the issuance of credit cards are charged to earnings over periods not exceeding twelve months. Interest generally is not accrued on real estate-secured loans which are delinquent by six monthly payments and other consumer installment loans which are delinquent by four or more monthly payments. Origination fees, net of certain direct loan origination costs, are deferred and amortized over the estimated life of the loans using the interest method. Any unamortized net origination fees and costs on real estate-secured and other consumer installment loans fully repaid are recognized as income in the period such loans are repaid. ALLOWANCE FOR CONSUMER LOAN LOSSES The allowance for consumer loan losses is a significant estimate that is regularly evaluated by management for adequacy on a portfolio by portfolio basis and is established through a charge to the provision for loan losses. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower's ability to pay. The Company uses the results of these evaluations to provide an allowance for loan losses. The exposure for credit losses for owned loans is influenced by the performance of the portfolio and other factors discussed above, with the Company absorbing all related losses. The exposure for credit losses for securitized loans is represented by the Company retaining a contingent risk based on the amount of credit enhancement provided. Management believes that its estimates have been historically prudent in light of the need to allow the market for asset securitizations, in particular those backed by credit card receivables, to mature, and in light of the uncertainty of accounting standards for asset securitizations. In 1996, the Company revised its estimate of the allowance for losses for loans intended to be securitized. This revision was based on the Company's experience with credit losses related to securitized loans in a mature asset securitization market and the recent issuance of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", by the Financial Accounting Standards Board ("FASB"), which eliminated the uncertainty surrounding the appropriate accounting treatment for asset securitization transactions. The Company intends to maintain existing loan loss allowances for securitizations outstanding until the related loans are liquidated. SECURITIZATION OF CONSUMER LOANS The Company periodically sells consumer loans through asset securitizations and continues to service these loans. The revenues derived from servicing these loans are recorded in the consolidated statements of income as servicing fees over the term of the securitized loans rather than at the time the loans are sold. The effects of recording these revenues over the term of the securitized loans rather than at the time the loans were sold have not been material. Amounts due from asset securitizations in the consolidated balance sheets represent cash and receivables from third parties. These receivables include the Company's share of cash collections on certain securitized credit card loans which are held by third parties and paid to the Company during the month subsequent to collection, credit enhancement reserve funds maintained with third parties and advances made by the Company as the servicer of the securitized loans. SECURITIES TRANSACTIONS Clients' securities transactions are recorded on a settlement date basis with related commission revenues and expenses recorded on trade date. Principal transactions are recorded on trade date. Securities are recorded at market, with gains and losses reflected in income. Securities transactions under agreements to resell and repurchase are collateralized financing transactions and are carried at the contract amounts at which the securities will be resold or reacquired, including accrued interest. Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require the Company to deposit cash, or other collateral with the lender. With respect to securities loaned the Company receives collateral in the form of cash or other collateral in an amount generally in excess of the market value of securities loaned. OFFICE FACILITIES Office facilities are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of buildings and improvements are provided principally by the straight-line method, while depreciation and amortization of furniture, fixtures and equipment is provided principally by accelerated methods. Property and equipment are depreciated over the esti- Dean Witter, Discover & Co. 1996 36 mated useful lives of the related assets, while leasehold improvements are amortized over the lesser of the economic useful life of the asset or the term of the lease. GOODWILL Goodwill, which is included in other assets, is amortized on a straight-line basis over periods not exceeding 40 years. INCOME TAXES Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the temporary differences between the financial statement and income tax bases of assets and liabilities, using currently enacted tax rates. EARNINGS PER SHARE The calculations of earnings per common share are based on the weighted average number of common shares outstanding during the period, adjusted for the dilutive effects of stock options and unissued stock awards under deferred compensation plans. STOCK SPLIT Effective December 26, 1996, the Company declared a two-for-one stock split, which was effected in the form of a dividend, distributable on January 14, 1997. All prior period per share, share outstanding and shareholders' equity data has been restated to reflect this split. CARDMEMBER REWARDS The liability for cardmember rewards expense, included in other liabilities and accrued expenses, is accrued at the time that qualified cardmember transactions occur and is calculated on an individual cardmember basis. INTEREST RATE CONTRACTS The Company has entered into various interest rate contracts as hedges against specific assets, liabilities or anticipated transactions. These contracts include interest rate swap, foreign currency exchange, cost of funds and interest rate cap agreements. For contracts that are designated as hedges of the Company's assets and liabilities, gains and losses are deferred and recognized as adjustments to interest income or expense over the remaining life of the underlying assets or liabilities. For contracts that are hedges of asset securitizations, gains and losses are recognized as adjustments to servicing fees. EMPLOYEE STOCK PLANS Employee stock plans are accounted for under the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB No. 25"). In accordance with the provisions of APB No. 25, no charge to earnings is recorded for those stock-based benefits issued to employees which are deemed "non-compensatory". In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective January 1, 1996 and requires the determination of the fair value, as defined, of stock options granted. The Company has elected, as permitted, to provide only the pro forma disclosure of the effect of SFAS No. 123 on earnings in Note 9 to the consolidated financial statements. OTHER ACCOUNTING PRONOUNCEMENTS Effective January 1, 1996, the Company adopted SFAS Nos. 121 and 122. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", generally requires that long-lived assets be reported at the lower of their carrying cost or net realizable value. SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of SFAS No. 65", requires that rights to service mortgage loans for others, however acquired, be recorded as separate assets when the mortgage loans are sold and the servicing rights are retained. This statement also requires that capitalized mortgage servicing rights be assessed for impairment based on the fair value of those rights. The adoption of these statements was not material to the Company's financial position or results of operations. The FASB has issued SFAS No. 125, effective for transfers of financial assets made after December 31, 1996, except for transfers of certain financial assets for which the effective date has been delayed for one year. SFAS No. 125 provides financial reporting standards for the derecognition and recognition of financial assets, including the distinction between transfers of financial assets which should be recorded as sales and those which should be recorded as secured borrowings. SFAS No. 125 supersedes and incorporates the essential provisions of SFAS No. 122. The Company believes that the effect of the adoption of SFAS No. 125 will not be material to its financial position or results of operations. Dean Witter, Discover & Co. 1996 37 4. CONSUMER LOANS Consumer loans were as follows.
DECEMBER 31, 1996 1995 - ------------------------------------------------------------ Credit card $22,062.0 $20,440.4 Real estate-secured and other consumer installment 1,203.8 1,233.1 - ------------------------------------------------------------ 23,265.8 21,673.5 Less Unearned finance charges and unamortized discounts and fees 77.6 117.1 Allowance for loan losses 815.3 721.8 - ------------------------------------------------------------ Consumer loans, net $22,372.9 $20,834.6 ============================================================
Activity in the allowance for consumer loan losses was as follows.
1996 1995 1994 - ------------------------------------------------------------ Balance, January 1 $ 721.8 $565.7 $436.8 Additions Provision for loan losses 1,220.6 730.5 537.0 Purchase of loan portfolios 4.0 30.6 4.3 - ------------------------------------------------------------ Total additions 1,224.6 761.1 541.3 - ------------------------------------------------------------ Deductions Charge-offs 1,189.2 716.8 470.6 Recoveries (156.2) (121.3) (89.1) - ------------------------------------------------------------ Net charge-offs 1,033.0 595.5 381.5 - ------------------------------------------------------------ Other(1) (98.1) (9.5) (30.9) - ------------------------------------------------------------ Balance, December 31 $ 815.3 $721.8 $565.7 - ------------------------------------------------------------
(1) Primarily reflects net transfers related to asset securitizations. Interest accrued on loans subsequently charged off, recorded as a reduction of interest revenue, was $180.9 million, $114.8 million and $69.8 million in 1996, 1995 and 1994. At December 31, 1996 and 1995, $5,788.6 million and $7,000.2 million of the Company's consumer loans had minimum contractual maturities of less than one year. Because of the uncertainty regarding consumer loan repayment patterns, which historically have been higher than contractually required minimum payments, and variable rate loan pricing utilized by the Company, this amount may not necessarily be indicative of the Company's consumer loan repricing schedule. At December 31, 1996 and 1995, the Company had commitments to extend credit in the amounts of $156.6 billion and $133.3 billion. Commitments to extend credit arise from agreements to extend to customers unused lines of credit on certain credit cards and home equity lines of credit issued by the Company, provided there is no violation of conditions established in the related agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage and customer creditworthiness. The Company received proceeds from asset securitizations of $4,527.5 million, $1,827.3 million, and $1,970.1 million in 1996, 1995 and 1994. The uncollected balances of consumer loans sold through asset securitizations were $13,384.6 million and $10,219.5 million at December 31, 1996 and 1995. The allowance for loan losses related to securitized loans, included in other liabilities and accrued expenses, was $447.3 million and $341.7 million at December 31, 1996 and 1995. The Company's consumer loan portfolio, including securitized loans, is geographically diverse, with a distribution approximating that of the population of the United States. 5. SECURITIES -- AT MARKET VALUE Securities owned and securities sold but not yet purchased, at market value, were as follows.
DECEMBER 31, 1996 1995 - -------------------------------------------------------------- Owned U.S. government and agency obligations $ 950.4 $1,023.2 Corporate bonds 551.3 615.7 Municipal bonds 148.3 159.9 Other 263.6 50.0 - -------------------------------------------------------------- Total $1,913.6 $1,848.8 ============================================================== Sold but not yet purchased U.S. government and agency obligations $1,198.8 $ 994.2 Corporate bonds 61.6 116.0 Other 13.7 15.0 - -------------------------------------------------------------- Total $1,274.1 $1,125.2 ==============================================================
Securities sold but not yet purchased represent obligations of the Company to deliver specified securities at contracted prices, thereby creating a liability to purchase the securities at prevailing market prices. Dean Witter, Discover & Co. 1996 - -------------------------------- 38 6. BORROWINGS SHORT-TERM BORROWINGS Short-term borrowings and related interest rates were as follows.
DECEMBER 31, 1996 1995 - ------------------------------------------------------------------------------------ AMOUNT INTEREST AMOUNT INTEREST OUTSTANDING RATE(1) OUTSTANDING RATE(1) - -------------------------------------------------------------------------------------- Commercial paper $4,736.8 5.52% $4,688.5 5.84% Other Federal funds purchased 458.8 5.51 720.0 5.79 Bank borrowings 410.3 5.45 385.3 6.75 Bank notes 259.1 5.45 529.6 5.85 Note payable to Tandy -- -- 2.1 6.49 - -------------------------------------------------------------------------------------- Total $5,865.0 5.51% $6,325.5 5.89% ======================================================================================
(1) Interest rates are presented on a weighted average basis and exclude the effects of interest rate contracts. At December 31, 1996 and 1995, short-term borrowings were subject to interest rate exchange agreements of $778.8 million and $1,002.3 million, and interest rate cap agreements of $30.0 million and $405.0 million. The interest rate exchange agreements, which consist of interest rate swap and cost of funds agreements, primarily converted the related borrowings to fixed rates.At December 31, 1996 and 1995, the weighted average interest rates on short-term borrowings, including the effects of interest rate contracts, were 5.55% and 5.97%. The Company maintains a senior bank credit facility to support general liquidity needs, including the issuance of commercial paper at the corporate level. In 1996, the Company renewed this facility and increased its amount to $4.0 billion from $3.25 billion. The facility expires in April 1997 and contains certain extension provisions. The Company currently plans to renew or replace this facility prior to its expiration. This facility contains covenants that require the Company to maintain minimum net worth requirements and specified financial ratios. The Company believes that the covenant restrictions will not impair its ability to pay its current level of dividends. As of December 31, 1996, the Company had never borrowed from its senior bank credit facility. Riverwoods Funding Corporation ("RFC"), an entity included in the consolidated financial statements of the Company, maintains a senior bank credit facility to support the issuance of asset-backed commercial paper. In 1996, RFC renewed this facility and increased its amount to $2.1 billion from $1.75 billion. RFC currently plans to renew or replace this facility prior to its expiration in October 1997. Under the terms of the asset-backed commercial paper program, certain assets of RFC were subject to a lien in the amount of $2.2 billion at December 31, 1996. RFC has never borrowed from its senior bank credit facility. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE At December 31, 1996 and 1995, the weighted average interest rates on amounts borrowed through repurchase agreements were 5.98% and 5.55%. Substantially all of the Company's proprietary positions in U.S. government and agency obligations are pledged as collateral in connection with repurchase agreements. LONG-TERM BORROWINGS Long-term borrowings, which consisted of senior long-term notes net of unamortized discount, and related interest rates were as follows.
DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------------- AMOUNT INTEREST AMOUNT INTEREST OUTSTANDING RATE(1) OUTSTANDING RATE(1) - -------------------------------------------------------------------------------------- Floating rate notes $4,257.1 5.78% $3,275.5 6.05% Fixed rate notes 3,409.1 6.59 3,398.0 6.44 Foreign denominated 478.0 4.98 58.9 2.06 - -------------------------------------------------------------------------------------- Total $8,144.2 6.07% $6,732.4 6.21% ======================================================================================
(1) Interest rates are presented on a weighted average basis and exclude the effects of interest rate exchange agreements. At December 31, 1996 and 1995, the use of interest rate exchange agreements effectively converted $2,021.3 million and $2,071.3 million of fixed rate borrowings to floating rates and in 1995, $75.0 million of floating rate borrowings to fixed rates. At December 31, 1996 and 1995, $275.0 million and $325.0 million of floating rate borrowings were converted to floating rates with different repricing indices. At December 31, 1996 and 1995, the Company had $492.2 million and $59.1 million of foreign currency exchange agreements which effectively converted the related foreign denominated borrowing to floating US indexed interest rates. At December 31, 1996 and 1995, the weighted average interest rates on long-term borrowings, including the effects of interest rate exchange agreements, were 6.02% and 6.28%. At December 31, 1996, floating rate notes had a weighted average remaining maturity of two years, fixed rate notes had a weighted average remaining maturity of six years and foreign denominated notes had a weighted average remaining maturity of five years. Dean Witter, Discover & Co. 1996 -------------------------------- 39 At December 31, 1996, the principal amounts of long-term borrowings maturing over the next five years were as follows. - ------------------------------------------------------------ 1997 $1,073.1 1998 1,705.2 1999 819.6 2000 1,510.0 2001 577.9 ============================================================
Cash paid for interest for the Company's borrowings and deposits was $2,130.2 million, $1,997.9 million and $1,288.8 million in 1996, 1995 and 1994. 7. DEPOSITS Deposits were as follows.
DECEMBER 31, 1996 1995 - ------------------------------------------------------------ Demand, passbook, and money market accounts $1,715.9 $1,552.0 Consumer certificate accounts 1,354.0 1,222.2 $100,000 minimum certificate accounts 4,142.7 3,416.9 - ------------------------------------------------------------ Total $7,212.6 $6,191.1 ============================================================
The weighted average interest rates of interest-bearing deposits outstanding during 1996 and 1995 were 6.29% and 6.55%. At December 31, 1996 and 1995, $495.0 million and $20.0 million of the Company's deposits were converted to floating rates through the use of interest rate exchange agreements. At December 31, 1996, the weighted average interest rate of the Company's deposits including the effect of interest rate exchange agreements was 6.23%. At December 31, 1996, certificate accounts maturing over the next five years were as follows. - ------------------------------------------------------------ 1997 $1,410.9 1998 1,720.7 1999 878.9 2000 424.5 2001 688.2 ============================================================
8. EMPLOYEE BENEFIT PLANS PENSION PLANS Substantially all employees of the Company are eligible to participate, after meeting certain age and service requirements, in Company sponsored non-contributory defined benefit pension plans. Pension benefits are based on length of service and average annual compensation. The Company's policy is to contribute an amount at or above that which is required under the Employee Retirement Income Security Act. Pension expense consisted of the following.
YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------- Service cost $38.3 $ 27.5 $ 35.0 Interest on projected benefit obligation 43.2 37.1 35.7 Actual return on plan assets (76.0) (68.9) (12.7) Net amortization and deferral 38.0 34.4 (19.9) - -------------------------------------------------------------- Total $43.5 $ 30.1 $ 38.1 ============================================================
The expected long-term rate of return on plan assets was 9.0% in 1996, 1995 and 1994. The funded status of these plans was as follows.
DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $490.2 $470.5 Accumulated benefit obligation 523.3 497.5 =============================================================================== Projected benefit obligation $632.8 $595.9 Plan assets at fair value 566.3 478.7 - -------------------------------------------------------------------------------- Plan assets less than projected benefit obligation 66.5 117.2 Unrecognized transitional obligation (10.8) (13.4) Unrecognized net (loss) gain (15.1) (56.3) Unrecognized prior service cost (2.4) (3.1) Adjustment required to recognize minimum liability 0.3 1.4 - -------------------------------------------------------------------------------- Accrued pension liability $ 38.5 $ 45.8 ===============================================================================
Assumptions used in calculating the projected benefit obligation were as follows.
YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Discount rate 7.50% 7.25% 8.50% Rate of increase in compensation levels 5.00 5.00 5.00 ================================================================================
Dean Witter, Discover & Co. 1996 - -------------------------------- 40 OTHER PLANS The Company has unfunded postretirement benefit plans that provide medical and life insurance for eligible retirees, employees and dependents. At December 31, 1996 and 1995, the Company's obligation for these benefits was $36.0 million and $32.9 million. Employees of the Company are eligible to participate in the Company's 401(k) plan upon meeting certain eligibility requirements. The Company matches a portion of each participant's contribution based upon the performance of the Company. The Company's contributions to the 401(k) plan were $41.6 million, $37.3 million and $34.3 million in 1996, 1995 and 1994. 9. STOCK PLANS The Company maintains equity-based incentive plans under which various types of stock awards are granted to officers, directors and key employees of the Company. EQUITY-BASED EMPLOYEE INCENTIVE AWARDS The Company is authorized to issue up to 38.2 million shares of its common stock in connection with awards under several equity-based employee incentive plans. Stock option activity under these plans was as follows.
YEAR ENDED DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------- NUMBER AVERAGE NUMBER AVERAGE OF OPTION OF OPTION SHARES PRICE SHARES PRICE - -------------------------------------------------------------------------------- Options outstanding at beginning of the year 27.7 $15.00 16.6 $12.53 Granted 0.1 25.96 13.1 17.65 Exercised (2.0) 13.58 (1.8) 11.39 Forfeited (0.4) 17.49 (0.2) 15.43 Options outstanding at Year end 25.4 15.10 27.7 15.00 - -------------------------------------------------------------------------------- Eligible for exercise at year end 17.0 $13.82 11.2 $12.36 ================================================================================
OPTIONS OPTIONS DECEMBER 31, 1996 OUTSTANDING EXERCISABLE - ------------------------------------------------------------------------------------ AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING OPTION NUMBER OPTION EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ------------------------------------------------------------------------------------ $8.00 to $12.99 3.4 5 $10.11 3.4 $10.11 $13.00 to $19.99 21.7 7 15.78 13.5 14.69 $20.00 to $27.99 0.3 9 24.52 0.1 24.49 ====================================================================================
At December 31, 1996, 12.5 million shares were available for future grant under these plans. These plans are "non-compensatory" under APB No. 25, and, accordingly, no charge to earnings has been recorded. On a pro forma basis, under SFAS No. 123, if the fair value of options granted in 1996 and 1995 had been charged to earnings, net income as recorded would have been reduced by $14.5 million in both 1996 and 1995. Primary and fully diluted earnings per common share as reported, would have been reduced by $0.04 in both 1996 and 1995. The fair value of each option grant is estimated on the date of grant using a binomial option-pricing model with the following weighted average assumptions used for grants in 1996 and 1995: dividend yield of 1.72% and 1.82%; expected volatility of 22.19%; risk-free interest rates of 5.31% and 7.74%; and expected lives of 5.5 years. EMPLOYEE STOCK PURCHASE PLAN Under the Employee Stock Purchase Plan, employees may purchase shares of the Company's common stock at not less than 85% of the fair market value on the date of purchase. The Company is authorized to issue up to 2.2 million shares of common stock under this plan. In 1996 and 1995, employees of the Company purchased 0.7 million and 0.8 million shares of common stock. The discount to fair market value was $2.4 million for 1996 and $0.6 million for 1995. The plan is "non-compensatory" under APB No. 25, and, accordingly, no charge to earnings has been recorded for the amount of the discount to fair market value. On a pro forma basis, if the discount had been charged to earnings, net income would have been reduced by $1.5 million and $0.4 million in 1996 and 1995. DEFERRED COMPENSATION AWARDS The Company is authorized to issue up to 16.3 million shares of its common stock under the terms of its deferred compensation plans. These plans provide for the deferral of a portion of certain employees' compensation with payment made in the form of shares of the Company's common stock. In 1996 and 1995, the Company recorded compensation expense of $87.1 million and $57.2 million and unearned compensation of $7.7 million and $6.1 million in connection with the award of approximately 3.0 million and 2.4 million shares of common stock under these plans in 1996 and 1995. These shares were issued in 1997 and 1996 and are held in custodial or trust accounts pending employee eligibility to receive the shares. Unearned compensation is recognized over the related plan vesting periods. Dean Witter, Discover & Co. 1996 -------------------------------- 41 NON-EMPLOYEE DIRECTOR AWARDS The Company sponsors stock plans for non-employee directors under which 0.4 million shares of the Company's common stock have been authorized for issuance in the form of option grants, stock awards or deferred compensation. The fair value of awards granted under this plan is charged to expense over the vesting period of the related grant. The effect of these grants on results of operations was not material. 10. INCOME TAXES Income tax expense (benefit) was as follows.
YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Current: Federal $596.5 $537.5 $540.3 State and local 80.6 95.4 89.0 - -------------------------------------------------------------------------------- 677.1 632.9 629.3 - -------------------------------------------------------------------------------- Deferred: Federal (77.5) (75.0) (136.2) State and local (5.9) (18.4) (19.4) - -------------------------------------------------------------------------------- (83.4) (93.4) (155.6) - -------------------------------------------------------------------------------- Total $593.7 $539.5 $473.7 ================================================================================
Deferred income taxes were as follows.
DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------- Assets: Loan loss allowances $ 437.7 $ 366.7 Deferred compensation 248.7 207.8 Other valuation and liability allowances 282.6 279.9 Other deferred tax assets 91.9 87.2 - -------------------------------------------------------------------------------- 1,060.9 941.6 - -------------------------------------------------------------------------------- Liabilities: Prepaid commissions (143.3) (125.8) Other deferred tax liabilities (97.3) (78.9) - -------------------------------------------------------------------------------- (240.6) (204.7) - -------------------------------------------------------------------------------- Total $ 820.3 $ 736.9 ================================================================================
A reconciliation from the statutory federal income tax rate to the effective tax rate was as follows.
YEAR ENDED DECEMBER 31, 1996 1995 1994 - --------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% State and local taxes, net of federal benefit 3.3 3.5 3.5 Other 0.1 0.1 0.5 - --------------------------------------------------------------- Effective tax rate 38.4% 38.6% 39.0% ===============================================================
Prior to June 30, 1993, the Company was a subsidiary of Sears, Roebuck and Co. ("Sears"). The Company and Sears have an agreement under which the Company is responsible for additional taxes arising as the result of amendment or audit that are attributable to the business of the Company for any period during which it was owned by Sears. Sears will reimburse the Company for any tax benefits attributable to the business of the Company for the applicable periods. Cash paid for income taxes was $598.6 million, $653.9 million and $719.0 million in 1996, 1995 and 1994. 11. REGULATORY CAPITAL REQUIREMENTS Under regulatory net capital requirements adopted by the Federal Deposit Insurance Corporation ("FDIC") and other regulatory capital guidelines, FDIC insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital, as defined, to total assets ("leverage ratio") and (b) 8% combined Tier 1 and Tier 2 capital, as defined, to risk-weighted assets ("risk-weighted capital ratio"). At December 31, 1996, the leverage ratio and risk-weighted capital ratio of each of the Company's FDIC insured financial institutions exceeded these and all other regulatory minimums. DWR, the Company's primary broker-dealer, is subject to the uniform net capital rule under the Securities Exchange Act of 1934. Under the alternative method permitted by this Rule, the required net capital, as defined, shall not be less than the greater of (a) one million dollars, (b) 2% of aggregate debit balances arising from client transactions pursuant to the Securities Exchange Act of 1934 Rule 15c3-3, or (c) 4% of the funds required to be segregated pursuant to the Commodity Exchange Act. The New York Stock Exchange, Inc. may also require a member organization to reduce its business if its net capital is less than the greater of (a) 4% of aggregate debit balances or (b) 6% of the funds required to be segregated and may prohibit a member organization from expanding its business and declaring cash dividends if its net capital is less than the greater of (a) 5% of aggregate debit balances or (b) 7% of the funds required to be segregated. At December 31, 1996, DWR's net capital was $588.8 million and net capital in excess of the minimum required was $474.5 million. DWR's net capital was 19.7% of aggregate debit balances and 20.6% of funds required to be segregated. The regulatory capital requirements referred to above, and certain covenants contained in various agreements governing indebtedness of the Company, may restrict the Company's ability to withdraw capital from its subsidiaries. At December 31, 1996, approximately $1.7 billion of net assets of consolidated subsidiaries may be restricted as to the payment of cash dividends and advances to the Company. Dean Witter, Discover & Co. 1996 - -------------------------------- 42 12. COMMITMENTS AND CONTINGENT LIABILITIES The Company has non-cancelable operating leases covering office space and equipment. At December 31, 1996, future minimum rental commitments under such leases (net of subleases, principally on office rentals) were as follows. - ------------------------------------------------------------ 1997 $ 162.6 1998 143.5 1999 128.1 2000 115.4 2001 110.7 Thereafter 427.9 - ------------------------------------------------------------ Total $1,088.2 ============================================================
Occupancy lease agreements, in addition to base rentals, generally provide for rent and operating expense escalations resulting from increased assessments for real estate taxes and other charges. Total rent expense, net of sublease rental income, was $162.6 million, $153.1 million and $148.5 million in 1996, 1995 and 1994. The Company has an agreement with Advantis, a joint venture between Sears and IBM, under which the Company receives information processing, data networking and related services. Under the terms of the agreement, the Company has an aggregate minimum annual commitment of $166.0 million subject to annual cost of living adjustments. At December 31, 1996, the Company had outstanding letters of credit of approximately $61.5 million which expire on various dates through June 30, 1997. The letters of credit are written in favor of clearing associations to satisfy margin requirements and with the trustee for various unit investment trust underwritings. Annual fees of 0.25% are paid on the amounts of these letters of credit. In the normal course of business, the Company has been named as a defendant in various lawsuits. Some of these lawsuits involve claims for substantial amounts. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management, after consultation with outside counsel, that the resolution of such suits will not have a material adverse effect on the consolidated financial condition of the Company, but may be material to the Company's operating results for any particular period, depending upon the level of the Company's income for such period. 13. FINANCIAL INSTRUMENTS TRADING ACTIVITIES Certain market and credit risks arise from the Company's securities brokerage activities. These activities primarily facilitate clients' trading and financing transactions in financial instruments, which may include derivatives. The Company's client activities involve the execution, settlement and financing of various client securities and commodities transactions. Client securities activities are transacted on either a cash or margin basis, and client commodity transactions are generally transacted on a margin basis subject to individual exchange regulations. These transactions include the purchase and sale of securities, the writing of options and the purchase and sale of commodity futures and forward contracts. These activities may expose the Company to off-balance sheet risk from clients that may fail to satisfy their obligations, requiring the Company to purchase or sell financial instruments at prevailing market prices. The Company believes that the settlement of these transactions will not have a material effect on the Company's consolidated financial statements. The Company's exposure to credit risk associated with these transactions is measured on an individual basis, as well as by groups that share similar attributes. The Company services a diverse group of domestic and foreign corporations, governments, and institutional and individual investors. Credit risk may also be impacted by trading market volatility. The Company seeks to control risks associated with its clients' activities by requiring clients to maintain collateral in compliance with internal and regulatory guidelines. The Company monitors required margin levels and establishes credit limits daily and, pursuant to such guidelines, requires clients to deposit additional collateral, or reduce positions, when necessary. The Company's client financing and securities settlement activities may require the Company to pledge client securities as collateral (1) in support of various secured financing sources such as bank loans, securities loaned and repurchase agreements and (2) to satisfy margin requirements on various exchanges. In the event the counterparty is unable to meet its contractual obligation to return the client securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company controls this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. Additionally, the Company establishes credit limits for such activities and monitors compliance on a daily basis. At December 31, 1996, the market value of client securities Dean Witter, Discover & Co. 1996 -------------------------------- 43 pledged under these secured financing transactions approximated the amounts due. The Company's derivative trading activities are generally limited to facilitating client trading activity. The Company's derivative trading activities primarily involve foreign currency forward contracts and foreign currency options. All financial instruments are carried at market value. Gains and losses from financial instruments are recorded in the consolidated statements of income as principal transactions revenue. Market risk is generally controlled by holding substantially offsetting purchase and sell positions. In certain cases, the Company has entered into master netting agreements which allow for net settlement of offsetting transactions with counterparties. The table below presents the Company's trading derivatives. Where derivative instruments are subject to netting arrangements, the amounts disclosed are presented on a net settlement basis. Foreign currency forward contracts represent obligations to purchase or sell with the seller agreeing to make delivery at a specified future date and a specified price. Foreign currency options provide the holder the right, but not the obligation, to purchase or sell on a certain date and at a specified price. The fair values of these instruments represent quoted market prices. Principal transactions revenues include revenues from purchases and sales in which the Company acts as a principal, as well as gains and losses on securities held for resale. Revenues from fixed income principal trading activities were $240.5 million, $261.6 million and $247.2 million in 1996, 1995 and 1994. Revenues from equity securities principal trading activities were $208.8 million, $217.3 million and $174.7 million in 1996, 1995 and 1994. The net gains or losses from derivative financial instruments in 1996, 1995 and 1994 were not material.
DECEMBER 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ CONTRACT OR AVERAGE CONTRACT OR AVERAGE NOTIONAL FAIR FAIR NOTIONAL FAIR FAIR AMOUNT VALUE VALUE AMOUNT VALUE VALUE - ------------------------------------------------------------------------------------------------------------------------------ Foreign currency forward contracts Assets $6,298.4 $ 61.3 $ 64.5 $5,640.2 $ 62.7 $ 53.3 Liabilities 6,251.9 (61.1) (64.3) 5,584.2 (62.5) (53.3) Foreign currency options Assets 675.2 2.2 9.6 1,589.1 6.8 11.1 Liabilities 675.2 (2.2) (9.6) 1,589.1 (6.8) (11.1) ==============================================================================================================================
OTHER THAN TRADING ACTIVITIES The Company uses interest rate contracts, which consist of interest rate exchange agreements and purchased interest rate cap agreements, as part of its interest rate risk management program. This program is designed to reduce the volatility of earnings resulting from changes in interest rates, including the interest rate risk inherent in servicing fees received by the Company from consumer loans sold through asset securitizations. This is accomplished primarily through matched financing, which entails matching the repricing schedules of consumer loans and the related financing. The Company utilizes interest rate contracts where asset and funding repricing characteristics are not matched effectively. These contracts are entered into as hedges of interest rate risk, and gains or losses from these contracts generally offset counterbalancing gains or losses on hedged risk. The Company attempts to match the recognition of the gains or losses in the periods in which the hedged risk is realized. Thus, gains or losses may be recognized as part of periodic settlements or, upon early termination of an interest rate contract, deferred and amortized over the remaining period of the hedged risk to achieve the appropriate matching. Interest rate contracts are subject to credit risk for counterparty nonperformance. The fair value of these agreements is the estimated amount that the Company would receive (or pay) to terminate the underlying contract, taking into account current market conditions. Interest rate exchange agreements, which include interest rate swap and cost of funds agreements, are settled by reference to the difference between the base interest rates being exchanged, multiplied by the notional amount of the contract. These agreements subject the Company to market risk in excess of amounts recorded in the consolidated balance sheets in the event of unfavorable market interest rate movements. Interest rate swap agreements are derivative financial instruments which are entered into with institutions that are established dealers and that maintain certain minimum credit criteria established by the Company. Cost of funds agreements are entered into as part of agreements pursuant to which the Company provides private label credit card processing services to certain of its merchant clients. Dean Witter, Discover & Co. 1996 - -------------------------------- 44 Interest rate exchange agreements outstanding were as follows.
DECEMBER 31, 1996 1995 - ---------------------------------------------------------------------------------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------- Interest rate swaps Pay floating rate, receive fixed rate $5,021.3 $(32.4) $4,164.8 $ 79.3 Pay fixed rate, receive floating rate 669.0 (8.1) 837.7 (19.2) Pay floating rate, receive floating rate 275.0 (0.5) 425.0 (1.4) Cost of funds agreements 513.8 1.6 631.3 0.9 ========================================================================================
In addition to the interest rate exchange agreements described above, the Company has entered into foreign currency exchange agreements on its foreign denominated borrowings. These agreements hedge the Company's exposure to currency fluctuations and primarily converted the repricing characteristics of the related foreign denominated borrowings to floating US indexed rates. At December 31, 1996 and 1995, $492.2 million and $59.1 million of these agreements were outstanding. At December 31, 1996 and 1995, the fair value of these agreements were ($6.0) million and ($2.5) million. Purchased interest rate cap agreements are derivative financial instruments which, by their nature, have no off-balance sheet risk of loss due to unfavorable interest rate movements. The Company pays an initial premium, which is recorded on the balance sheet and amortized to interest expense over the term of the cap agreement. Benefits received are recorded as a reduction of interest expense. The Company had outstanding interest rate cap agreements with notional amounts of $40.0 million and $415.0 million at December 31, 1996 and 1995, of which $40.0 million were in effect at December 31, 1996 and 1995. At December 31, 1996 and 1995, the fair values of these agreements were $0.3 million and $0.9 million. In connection with certain asset securitizations, the Company has written interest rate cap agreements with notional amounts of $240.0 million and strike rates of 11%. Any settlement payments made under these agreements will generally be passed back to the Company through an adjustment of servicing fees, although this is subject to the risk of counterparty nonperformance. At December 31, 1996 and 1995, the fair values of these agreements were not material. No payments have been made by the Company under these agreements, which expire in 1997. FAIR VALUE The estimated fair value amounts of the Company's financial instruments have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to develop estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different assumptions or estimation methodologies may have a material effect on the estimated fair value amounts. At December 31, 1996 and 1995, the carrying amounts of the Company's financial assets and liabilities were reasonable estimates of fair value. 14. SEGMENT INFORMATION The Company is in the business of providing financial services, and operates in two distinct business segments -- Credit Services and Securities. Credit Services is engaged in the issuance and servicing of general purpose credit cards, consumer lending and electronic transaction processing services. Securities engages in delivering a broad range of financial products and services to individual and institutional investors. The following table presents certain information regarding these business segments.
YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Total revenues Credit Services $ 5,161.8 $ 4,333.7 $ 3,460.2 Securities 3,866.8 3,600.7 3,142.4 Income before income taxes Credit Services 714.4 720.9 671.7 Securities 830.7 675.0 542.9 Identifiable assets at end of period(1) Credit Services 26,091.2 23,857.5 17,901.4 Securities 16,322.4 14,350.7 13,958.0 ================================================================================
(1) Corporate assets have been fully allocated to the Company's business segments. Dean Witter, Discover & Co. 1996 -------------------------------- 45 QUARTERLY INFORMATION (in millions, except per share data)
(unaudited) QUARTER - ----------------------------------------------------------------------------------------------- 1996 FIRST SECOND THIRD FOURTH - ----------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net operating revenues $1,547.5 $1,541.7 $1,526.0 $1,614.9 Income before income taxes 400.4 388.1 393.0 363.6 Net income 245.8 238.8 239.0 227.8 PER SHARE DATA (1) Earnings per common share Primary $ 0.71 $ 0.69 $ 0.71 $ 0.68 Fully Diluted 0.70 0.69 0.71 0.68 Average shares outstanding Primary 348.3 344.2 337.7 334.3 Fully Diluted 349.6 344.3 338.4 334.9 Dividends declared per common share $ 0.11 $ 0.11 $ 0.11 $ 0.11 STOCK PRICE DATA(1) High $ 29.00 $ 31.06 $ 28.88 $ 34.38 Low 22.50 25.56 24.13 27.56 Close 28.63 28.56 27.50 33.13 ===============================================================================================
QUARTER - ----------------------------------------------------------------------------------------------- 1995 FIRST SECOND THIRD FOURTH - ----------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net operating revenues $1,367.6 $1,424.9 $1,451.2 $1,432.2 Income before income taxes 362.3 385.3 355.7 292.6 Net income 222.1 237.5 218.7 178.1 PER SHARE DATA(1) Earnings per common share Primary $ 0.64 $ 0.68 $ 0.62 $ 0.51 Fully Diluted 0.64 0.68 0.62 0.51 Average shares outstanding Primary 347.0 350.7 353.0 351.7 Fully Diluted 347.8 351.0 354.5 351.7 Dividends declared per common share $ 0.08 $ 0.08 $ 0.08 $ 0.08 STOCK PRICE DATA(1) High $ 21.69 $ 24.38 $ 29.13 $ 28.06 Low 16.75 20.00 23.19 23.25 Close 20.38 23.50 28.13 23.50 ===============================================================================================
(1) Per share and stock price data have been restated to reflect the Company's two-for-one stock split. Dean Witter, Discover & Co. 1996 -------------------------------- 46
SHAREHOLDER INFORMATION Common Stock Share Purchase and Dividend Reinvestment Ticker Symbol:DWD Plan & Shareholder Services Dean Witter Trust Company is the Record Keeper for the The common stock of Dean Witter, Discover & Co. Share Purchase and Dividend Reinvestment Plan and the is listed on the New York Stock Exchange and on the Transfer Agent for the Company's common stock. For Pacific Stock Exchange more information on the Plan or assistance with address changes, dividend checks, registration changes, lost stock Dividends certificates and share ownership, contact: Effective March 1997, Dean Witter, Discover & Co.'s Board of Directors increased the quarterly cash Dean Witter Trust Company dividend to $0.14 per share of common stock. Harborside Financial Center, Plaza Two Jersey City, NJ 07311-3977 As of December 31,1996, the Company had 197,149 800-622-2393 shareholders of record. Annual Report on Form 10-K Independent Auditors and Shareholder Inquiries Deloitte & Touche LLP For general information about the Company and to Two World Financial Center request copies of the Company's Annual Report on New York, NY 10281 Form 10-K filed with the Securities and Exchange 212-436-2000 Commission contact: Shareholder Helpline 800-733-2307 Investor Relations Security analysts, portfolio managers and representa- tives of financial institutions seeking information about the Company are invited to contact: Investor Relations 212-392-6171
Dean Witter, Discover & Co. 1996 -------------------------------- 47
BOARD OF DIRECTORS Nancy Kassebaum Baker Miles L. Marsh Former United States Senator Chairman and Chief Executive Officer James River Corporation of Virginia Edward A. Brennan Retired Chairman and Chief Executive Officer Michael A. Miles Sears, Roebuck and Co. Former Chairman and Chief Executive Officer Phillip Morris Companies Inc. Alfred C. DeCrane, Jr. Retired Chairman and Chief Executive Officer Sybil C. Mobley Texaco Inc. Dean, School of Business and Industry Florida A&M University Robert M. Gardiner Senior Advisor Philip J. Purcell Dean Witter, Discover & Co. Chairman and Chief Executive Officer Dean Witter, Discover & Co. C. Robert Kidder Chairman and Chief Executive Officer Clarence B. Rogers, Jr. Borden Inc. Chairman and Former Chief Executive Officer Equifax, Inc. EXECUTIVE OFFICERS Philip J. Purcell James F. Higgins Chairman and Chief Executive Officer Executive Vice President and President, Dean Witter Financial Thomas R. Butler Executive Vice President and Mitchell M. Merin President, NOVUS Services Executive Vice President Chief Administrative Officer Richard M. DeMartini Executive Vice President and Stephen R. Miller President, Dean Witter Capital Executive Vice President and President and Chief Operating Officer, Christine A. Edwards DWD Electronic Financial Services Executive Vice President General Counsel and Secretary Thomas C. Schneider Executive Vice President Chief Financial Officer
Dean Witter, Discover & Co. 1996 -------------------------------- 48 DEAN WITTER, DISCOVER & CO. TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 TELEPHONE 212-392-2222 [LOGO] DEAN WITTER, DISCOVER & CO. EX-21 8 LIST OF SUBSIDIARIES EXHIBIT 21 DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES - --------------------------------------------------------------------------------
SUBSIDIARY JURISDICTION OF INCORPORATION - ---------- ----------------------------- Bank of New Castle Delaware Bay One Technologies, Inc. California Cameron Leasing Corporation Delaware Civic Center Leasing Corporation Delaware Cook Street Credit Company Colorado Cool Springs Inc. Massachusetts Dean Witter Advisers Inc. Delaware Dean Witter Alliance Capital Corporation Delaware Dean Witter Asset Corporation Delaware Dean Witter Aviation Capital Inc. Delaware Dean Witter Capital Advisers Inc. Delaware Dean Witter Capital Corporation Delaware Dean Witter Capital Markets United Kingdom International Ltd. (U.K.) Dean Witter, Discover & Co. Delaware Dean Witter Distributors Inc. Delaware Dean Witter Equipment Corporation Delaware Dean Witter Futures and Currency Delaware Management Inc. Dean Witter Futures Limited United Kingdom Dean Witter Global Realty Inc. Delaware Dean Witter Holding Corporation Delaware Dean Witter InterCapital Inc. Delaware Dean Witter International Ltd. United Kingdom Dean Witter Leasing Corporation Delaware Dean Witter Realty Advisors Inc. Delaware Dean Witter Realty Credit Corporation Delaware Dean Witter Realty Fourth Income Delaware Properties Inc. Dean Witter Realty Growth Properties Delaware Inc. Dean Witter Realty Inc. Delaware Dean Witter Realty Income Associates I Delaware Inc. Dean Witter Realty Income Associates II Delaware Inc. Dean Witter Realty Income Properties I Delaware Inc. Dean Witter Realty Income Properties II Delaware Inc. Dean Witter Realty Income Properties Delaware III Inc. Dean Witter Realty Securitization Inc. Delaware Dean Witter Realty Yield Plus Assignor Delaware Inc.
DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES - --------------------------------------------------------------------------------
SUBSIDIARY JURISDICTION OF INCORPORATION - ---------- ----------------------------- Dean Witter Realty Yield Plus Inc. Delaware Dean Witter Realty Yield Plus II Inc. Delaware Dean Witter Reynolds (Geneva) S.A. Switzerland Dean Witter Reynolds GmbH Germany Dean Witter Reynolds (Hong Kong) Limited Hong Kong Dean Witter Reynolds Inc. Delaware Dean Witter Reynolds Insurance Agency Indiana (Indiana) Inc. Dean Witter Reynolds Insurance Agency Massachusetts (Massachusetts) Inc. Dean Witter Reynolds Insurance Agency Ohio (Ohio) Inc. Dean Witter Reynolds Insurance Agency Oklahoma (Oklahoma) Inc. Dean Witter Reynolds Insurance Agency Texas (Texas) Inc. Dean Witter Reynolds Insurance Services Alabama (Alabama) Inc. Dean Witter Reynolds Insurance Services Arizona (Arizona) Inc. Dean Witter Reynolds Insurance Services Arkansas (Arkansas) Inc. Dean Witter Reynolds Insurance Services Illinois (Illinois) Inc. Dean Witter Reynolds Insurance Services Delaware Inc. Dean Witter Reynolds Insurance Puerto Rico Services, Inc. (Puerto Rico) Dean Witter Reynolds Insurance Services Maine (Maine) Inc. Dean Witter Reynolds Insurance Services Montana (Montana) Inc. Dean Witter Reynolds Insurance Services New Hampshire (New Hampshire) Inc. Dean Witter Reynolds Insurance Services South Dakota (South Dakota) Inc. Dean Witter Reynolds Insurance Services Wyoming (Wyoming) Inc. Dean Witter Reynolds International, Inc. Panama Dean Witter Reynolds International Delaware Incorporated Dean Witter Reynolds International, S.A. France Dean Witter Reynolds (Italy) Inc. Delaware Dean Witter Reynolds (Lausanne) S.A. Switzerland Dean Witter Reynolds Limited United Kingdom Dean Witter Reynolds (Lugano) S.A. Switzerland Dean Witter Reynolds Partners Inc. Delaware Dean Witter Reynolds S.p.A. Italy Dean Witter Reynolds Venture Equities Delaware Inc. Dean Witter Services Company Inc. Delaware Dean Witter Trust Company New Jersey Dean Witter Trust FSB Federal Charter Dean Witter Venture Inc. Delaware Dean Witter Venture Management Inc. Delaware
DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES - --------------------------------------------------------------------------------
SUBSIDIARY JURISDICTION OF INCORPORATION - ---------- ----------------------------- Demeter Management Corporation Delaware Discover Card Bank Limited Gibraltar Discover Services Corporation Delaware Discover Receivables Financing Group Delaware Inc. Discover Receivables Financing Delaware Corporation DW Arboretum Plaza Inc. Delaware DW Administrators Inc. Delaware DW Bennington Property Inc. Delaware DW Chesterbrook Investors Inc. Delaware DWD Electronic Financial Services Inc. Delaware DW Duportail Investors Inc. Delaware DW Greycoat Inc. Delaware DW Morris Drive Incorporated Delaware DW 1200 Incorporated Delaware DW Reston Technology Park Inc. Delaware DWR Partnership Administrators Inc. Delaware DWR Special Advisors Inc. Delaware DWR Special Partners Inc. Delaware DW Tech Park II Inc. Delaware DW Window Coverings Holding, Inc. Delaware DWR Wind Technologies Inc. Delaware GF Braker Inc. Delaware Green Orchard Inc. Massachusetts Greenwood Trust Company Delaware Hurley State Bank South Dakota Lee Leasing Corporation Delaware Lewiston Leasing Corporation Delaware Lombard Brokerage, Inc. California Lombard Insurance Services, Inc. California LLJV Funding Corporation Delaware LS Atlanta Associates Inc. Delaware LS Bayport, Inc. Delaware
DEAN WITTER, DISCOVER & CO. AND SUBSIDIARIES - --------------------------------------------------------------------------------
SUBSIDIARY JURISDICTION OF INCORPORATION - ---------- ----------------------------- LS Lake, Inc. Delaware LS Richmond Mall Inc. Delaware MedCash, Inc. Delaware MedLink Technologies, Inc. Delaware Mountain Receivables Corp. Delaware MountainWest Financial Corporation Utah NOVUS Credit Services Inc. Delaware NOVUS Consumer Discount Company Pennsylvania NOVUS Development Corporation Delaware NOVUS Financial Corporation Delaware NOVUS Financial Corporation of Iowa Iowa NOVUS Financial Corporation of Minnesota Minnesota NOVUS Financial Corporation of Tennessee Tennessee NOVUS Financial Corporation of Washington Washington NOVUS Services (Canada), Inc. Canada NOVUS Services, Inc. Delaware One Water Corporation Massachusetts Quality Asset Management Inc. Delaware Realty Management Services Inc. Delaware Reynolds Securities Inc. Delaware Ruf Corporation Kansas Sartell Leasing Corporation Delaware SBA/DW/CB Temp Inc. Delaware SBA/DWR, Inc. Delaware SCFC Receivables Corp. Delaware SCFC Receivables Financing Corporation Delaware SPS Commercial Services, Inc. Delaware SPS Newco, Inc. Delaware SPS Payment Systems, Inc. Delaware SPS Receivables Financing Corporation Delaware SPS Transaction Services, Inc. Delaware Tempo-GP, Inc. Delaware Tempo-LP, Inc. Delaware Utah Receivables Financing Corporation Delaware
EX-23 9 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following Registration Statements of Dean Witter, Discover & Co. of our reports dated February 21, 1997, included in and incorporated by reference in this Annual Report on Form 10-K of Dean Witter, Discover & Co. for the year ended December 31, 1996: Filed on Form S-3: Registration Statement No. 33-57202 Registration Statement No. 33-60734 Registration Statement No. 33-89748 Registration Statement No. 33-92172 Registration Statement No. 333-7947 Registration Statement No. 333-22409 Filed on Form S-8: Registration Statement No. 33-62374 Registration Statement No. 33-63024 Registration Statement No. 33-63026 Registration Statement No. 33-78038 Registration Statement No. 33-79516 Registration Statement No. 33-82240 Registration Statement No. 33-82242 Registration Statement No. 33-82244 Registration Statement No. 333-4212 /s/ Deloitte & Touche LLP New York, New York March 31, 1997 EX-27 10 FINANICAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,999 0 26,847 831 0 0 826 446 42,414 0 8,144 0 0 0 5,164 42,414 0 9,029 0 4,685 0 1,232 1,566 1,545 594 951 0 0 0 951 2.79 2.77 EPS data has been restated to reflect the Company's two-for-one stock split.
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