Morgan Stanley 1999 Annual Report Download - page 43

page 41 |99 AR
level of annual purchases. The increase in fiscal 1998 was attrib-
utable to higher advertising and promotional expenses associated
with increased direct mail and other promotional activities related
to the Discover Card, Private Issue Card and partnership programs,
as well as higher cardmember rewards expense. The Company
increased marketing and promotional spending significantly in the
third and fourth quarters of fiscal 1998 in an effort to renew and
increase growth in the Discover Card brand.
Professional services expense increased 25% in fiscal
1999 and 33% in fiscal 1998. The increase in fiscal 1999 was
due to higher costs associated with account collections and con-
sumer credit counseling, partially offset by a decrease in expenses
associated with the sale of the operations of SPS. The increase in
fiscal 1998 was due to services related to increased partnership
program activity, higher expenditures for consumer credit counsel-
ing, collections services and consulting fees.
Other expenses primarily include fraud losses, credit
inquiry fees and other administrative costs. Other expenses
remained unchanged in fiscal 1999 as compared with fiscal 1998.
In fiscal 1999, increased operational costs associated with higher
application and transaction volumes and costs associated with the
launch of the Morgan Stanley Dean Witter Card in the United
Kingdom were offset by a decrease in expenses associated with the
sale of the operations of SPS. In fiscal 1998, other expenses
decreased 18%, reflecting a decline in the level of fraud losses as
well as a lower level of expenses resulting from the sale of Prime
Option and the operations of SPS.
Seasonal Factors
The credit card lending activities of Credit Services are affected by
seasonal patterns of retail purchasing. Historically, a substantial
percentage of credit card loan growth occurs in the fourth calendar
quarter, followed by a flattening or decline of consumer loans in the
following calendar quarter. Merchant fees, therefore, have histori-
cally tended to increase in the first fiscal quarter, reflecting higher
sales activity in the month of December. Additionally, higher card-
member rewards expense is accrued in the first fiscal quarter,
reflecting seasonal growth in retail sales volume.
LIQUIDITY AND CAPITAL RESOURCES
The Balance Sheet
The Company’s total assets increased to $367.0 billion at
November 30, 1999 from $317.6 billion at November 30, 1998,
primarily reflecting higher financial instruments owned, securities
borrowed, consumer loans and customer receivables, partially off-
set by lower levels of securities purchased under agreements to
resell. A substantial portion of the Company’s total assets consists
of highly liquid marketable securities and short-term receivables
arising principally from securities transactions. The highly liquid
nature of these assets provides the Company with flexibility in
financing and managing its business.
Funding and Capital Policies
The Company’s senior management establishes the overall funding
and capital policies of the Company, reviews the Company’s perfor-
mance relative to these policies, monitors the availability of sources
of financing, reviews the foreign exchange risk of the Company and
oversees the liquidity and interest rate sensitivity of the Company’s
asset and liability position. The primary goal of the Company’s
funding and liquidity activities is to ensure adequate financing over
a wide range of potential credit ratings and market environments.
Many of the Company’s businesses are capital-intensive.
Capital is required to finance, among other things, the Company’s
securities inventories, underwritings, principal investments, private
equity activities, consumer loans and investments in fixed assets.
As a policy, the Company attempts to maintain sufficient capital
and funding sources in order to have the capacity to finance itself
on a fully collateralized basis at all times, including periods of
financial stress. Currently, the Company believes it has sufficient
capital to meet its needs. In addition, the Company attempts to
maintain total equity, on a consolidated basis, at least equal to the
sum of all of its subsidiaries’ equity. Subsidiary equity capital
requirements are determined by regulatory requirements (if applic-
able), asset mix, leverage considerations and earnings volatility.
The Company views return on equity to be an important
measure of its performance, in the context of both the particular
business environment in which the Company is operating and its
peer group’s results. In this regard, the Company actively manages
its consolidated capital position based upon, among other things,
business opportunities, capital availability and rates of return
together with internal capital policies, regulatory requirements and