Morgan Stanley 1998 Annual Report Download - page 22

ticularly for fixed income securities, began to strengthen as condi-
tions in the global financial markets stabilized.
In fiscal 1998, U.S. consumer demand and retail
sales continued to increase at a moderate pace, despite an earlier
consensus that a slowdown may have been imminent. The favorable
interest rate environment that existed in the U.S. during fiscal
1998 enabled consumers to manage finances advantageously while
still allowing for steady growth in consumer credit. During fiscal
1998, loan losses and personal bankruptcies appeared to level off
from the record growth of industry-wide loan losses set in 1997. The
Company continued to invest in the growth of its credit card busi-
ness through the expansion of its Discover/NOVUS®Network and by
increasing its marketing and solicitation activities with respect to the
Discover Card brand.
FISCAL 1998 AND 1997 RESULTS FOR THE COMPANY
The Company achieved net income of $3,276 million in fiscal
1998, a 27% increase from fiscal 1997. Fiscal 1998’s net income
included a net gain of $345 million from the sale of the Company’s
Global Custody business, its interest in the operations of SPS
Transaction Services, Inc. (“SPS”), and certain BRAVO®Card receiv-
ables (“BRAVO”) (see “Results of Operations — Business
Dispositions” herein). Fiscal 1998 net income also included a
charge of $117 million resulting from the cumulative effect of an
accounting change. This charge represents the effect of an account-
ing change adopted in the fourth quarter (effective December 1,
1997) with respect to the accounting for offering costs paid by invest-
ment advisors of closed-end mutual funds, where such costs are not
specifically reimbursed through separate advisory contracts (see
Note 2 to the consolidated financial statements).
Excluding the net gain from the sale of the businesses
noted above and the charge resulting from the cumulative effect of
an accounting change, fiscal 1998 income was $3,048 million, an
increase of 18% from fiscal 1997. In fiscal 1997, net income was
$2,586 million, an increase of 31% from fiscal 1996. Basic earn-
ings per common share increased 28% to $5.60 in fiscal 1998 and
31% to $4.38 in fiscal 1997. Excluding the net gain from the sale
of the businesses noted above and the impact of the cumulative effect
of an accounting change, basic earnings per common share was
$5.20 in fiscal 1998, an increase of 19% from fiscal 1997. Diluted
earnings per common share increased 28% to $5.33 in fiscal 1998
and 32% to $4.16 in fiscal 1997. Excluding the net gain from the
sale of the businesses noted above and the impact of the cumula-
tive effect of an accounting change, diluted earnings per common
share was $4.95 in fiscal 1998, an increase of 19% from fiscal
1997. The Company’s return on average shareholders’ equity was
25%, 22% and 20% in fiscal 1998, fiscal 1997 and fiscal 1996,
respectively. Excluding the net gain from the sale of the businesses
noted above and the impact of the cumulative effect of an
accounting change, fiscal 1998’s return on average shareholders’
equity was 23%.
BUSINESS DISPOSITIONS
In fiscal 1998, the Company entered into several transactions reflect-
ing its strategic decision to focus on growing its core Securities and
Asset Management and Credit and Transaction Services businesses.
In the fourth quarter of fiscal 1998, the Company com-
pleted the sale of its Global Custody business. The Company also sold
its interest in the operations of SPS, a 73%-owned, publicly held
subsidiary of the Company. In addition, the Company sold certain
credit card receivables relating to its discontinued BRAVO Card. The
Company’s aggregate net pre-tax gain resulting from these transac-
tions was $685 million.
In addition, during fiscal 1998 the Company sold its
Prime OptionSM MasterCard®portfolio (“Prime Option”), a business
it had operated with NationsBank of Delaware, N.A., and its
Correspondent Clearing business. The gains resulting from the sale
of these businesses were not material to the Company’s results of
operations or financial condition.
The remainder of Results of Operations is presented on
a business segment basis. With the exception of fiscal 1997’s merger-
related expenses, substantially all of the operating revenues and
operating expenses of the Company can be directly attributed to its
two business segments: Securities and Asset Management and Credit
and Transaction Services. This discussion excludes the cumulative
effect of the accounting change in references to fiscal 1998 net
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MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT