Morgan Stanley 1998 Annual Report Download - page 76

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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
November 30, 1998, 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.
Certain other U.S. and non-U.S. subsidiaries are sub-
ject to various securities, commodities and banking regulations,
and capital adequacy requirements promulgated by the regulatory
and exchange authorities of the countries in which they operate.
These subsidiaries have consistently operated in excess of their
local capital adequacy requirements. Morgan Stanley Derivative
Products Inc., the Company’s triple-A rated derivative products sub-
sidiary, also has established certain operating restrictions which
have been reviewed by various rating agencies.
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 November 30, 1998,
approximately $4.9 billion of net assets of consolidated subsidiaries
may be restricted as to the payment of cash dividends and advances
to the Company.
Cumulative translation adjustments include gains or
losses resulting from translating foreign currency financial statements
from their respective functional currencies to U.S. dollars, net of
hedge gains or losses and related tax effects. The Company uses for-
eign currency contracts and designates certain non-U.S. dollar cur-
rency debt as hedges to manage the currency exposure relating to
its net monetary investments in non-U.S. dollar functional currency
subsidiaries. Increases or decreases in the value of the Company’s
net foreign investments generally are tax-deferred for U.S. pur-
poses, but the related hedge gains and losses are taxable currently.
Therefore, the gross notional amounts of the contracts and debt des-
ignated as hedges exceed the Company’s net foreign investments to
result in effective hedging on an after-tax basis. The Company
attempts to protect its net book value from the effects of fluctua-
tions in currency exchange rates on its net monetary investments in
non-U.S. dollar subsidiaries by selling the appropriate non-U.S.
dollar currency in the forward market. However, under some cir-
cumstances, the Company may elect not to hedge its net monetary
investments in certain foreign operations due to market conditions,
including the availability of various currency contracts at acceptable
costs. Information relating to the hedging of the Company’s net mon-
etary investments in non-U.S. dollar functional currency subsidiaries
and their effects on cumulative translation adjustments is
summarized below:
At November 30
(dollars in millions) 1998 1997
Net monetary investments in non-U.S.
dollar functional currency subsidiaries $1,364 $1,128
Gross notional amounts of foreign exchange
contracts and non-U.S. dollar debt
designated as hedges(1) $2,239 $1,881
Cumulative translation adjustments
resulting from net investments in
subsidiaries with a non-U.S. dollar
functional currency $ 29 $ 6
Cumulative translation adjustments
resulting from realized or unrealized
gains or losses on hedges, net of tax $ (41) $ (15)
Total cumulative translation adjustments $ (12) $ (9)
(1) Notional amounts represent the contractual currency amount translated at respective fiscal
year-end spot rates.
EMPLOYEE COMPENSATION PLANS
The Company has adopted a variety of compensation plans for cer-
tain of its employees as well as the Company’s non-employee direc-
tors. These plans are designed to facilitate a pay-for-performance
policy, provide compensation commensurate with other leading finan-
cial services companies and provide for internal ownership in order
to align the interests of employees with the long-term interests of the
Company’s shareholders. These plans are summarized below.
EQUITY-BASED COMPENSATION PLANS
The Company is authorized to issue up to approximately 270 million
shares of its common stock in connection with awards under its equity-
12
*EIGHTY *
MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT