MORGAN STANLEY - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-11758

Morgan Stanley

(Exact Name of Registrant as Specified in its Charter)


Delaware		36-3145972
(State of Incorporation)		(I.R.S. Employer Identification No.)


1585 Broadway		10036
New York, NY		(Zip Code)
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 761-4000

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of March 31, 2004, there were 1,099,211,461 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

MORGAN STANLEY

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended February 29, 2004


		Page
Part I—Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Statements of Financial Condition—February 29, 2004 (unaudited) and November 30, 2003	1

	Condensed Consolidated Statements of Income (unaudited)—Three Months Ended February 29, 2004 and February 28, 2003	3

	Condensed Consolidated Statements of Comprehensive Income (unaudited)—Three Months Ended February 29, 2004 and February 28, 2003	4

	Condensed Consolidated Statements of Cash Flows (unaudited)—Three Months Ended February 29, 2004 and February 28, 2003	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

	Independent Accountants’ Report	28

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4.	Controls and Procedures	61

Part II—Other Information

Item 1.	Legal Proceedings	62

Item 6.	Exhibits and Reports on Form 8-K	63

AVAILABLE INFORMATION

The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC’s internet site is www.sec.gov. The Company’s internet site is www.morganstanley.com. The Company makes available free of charge through its internet site, via a link to the SEC’s internet site at www.sec.gov, its annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company also makes available, through its internet site, via a link to the SEC’s internet site, statements of beneficial ownership of the Company’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act. The Company makes available on www.morganstanley.com its most recent annual report on Form 10-K, its quarterly reports on Form 10-Q for the current fiscal year, its most recent proxy statement and its most recent summary annual report to shareholders, although in some cases these documents are not available on our site as soon as they are available on the SEC’s site. You will need to have on your computer the Adobe Acrobat Reader software to view these documents, which are in PDF format. If you do not have Adobe Acrobat Reader, a link to Adobe’s internet site, from which you can download the software, is provided. In addition, the Company posts on www.morganstanley.com its Certificate of Incorporation, Bylaws, Charters for its Audit Committee, Compensation Committee and Nominating and Governance Committee as well as its Corporate Governance Policies, its Policy Regarding Shareholder Communication with the Board of Directors, its Policy Regarding Director Candidates Recommended by Shareholders and its Code of Ethics and Business Conduct for its directors, officers and employees. You can request a copy of these documents, excluding exhibits, at no cost, by writing or telephoning us at at 1585 Broadway, New York, NY 10036, Attention: Investor Relations (212-761-4000). The information on the Company’s website is not incorporated by reference into this report.


		i

Item 1.

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)


	February 29, 2004		November 30, 2003
	(unaudited)
Assets
Cash and cash equivalents	$	33,560	$	29,692
Cash and securities deposited with clearing organizations or segregated under federal and other regulations (including securities at fair value of $16,423 at February 29, 2004 and $18,957 at November 30, 2003)		26,168		28,526
Financial instruments owned (approximately $98 billion at February 29, 2004 and $73 billion at November 30, 2003 were pledged to various parties):
U.S. government and agency securities		34,371		24,133
Other sovereign government obligations		23,151		21,592
Corporate and other debt		75,387		80,594
Corporate equities		29,572		29,984
Derivative contracts		52,161		44,652
Physical commodities		872		671
Securities purchased under agreements to resell		76,755		78,205
Securities received as collateral		32,286		27,278
Securities borrowed		179,288		153,813
Receivables:
Consumer loans (net of allowances of $1,004 at February 29, 2004 and $1,002 at November 30, 2003)		15,850		19,382
Customers, net		42,342		37,321
Brokers, dealers and clearing organizations		11,571		5,563
Fees, interest and other		6,161		4,349
Office facilities, at cost (less accumulated depreciation of $2,590 at February 29, 2004 and $2,506 at November 30, 2003)		2,436		2,433
Aircraft under operating leases (less accumulated depreciation of $1,106 at February 29, 2004 and $1,041 at November 30, 2003)		4,316		4,407
Goodwill		1,539		1,514
Other assets		9,112		8,734

Total assets	$	656,898	$	602,843


		1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)


	February 29, 2004			November 30, 2003
	(unaudited)

Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings	$	27,204		$	28,386
Deposits		12,118			12,839
Financial instruments sold, not yet purchased:
U.S. government and agency securities		21,080			17,072
Other sovereign government obligations		20,741			17,505
Corporate and other debt		10,088			10,141
Corporate equities		30,691			25,615
Derivative contracts		43,857			36,242
Physical commodities		3,254			4,873
Securities sold under agreements to repurchase		156,329			147,618
Obligation to return securities received as collateral		32,286			27,278
Securities loaned		76,415			64,375
Payables:
Customers		101,068			96,794
Brokers, dealers and clearing organizations		2,838			5,706
Interest and dividends		2,831			2,138
Other liabilities and accrued expenses		11,041			12,918
Long-term borrowings		78,927			65,600

		630,768			575,100

Capital Units		66			66

Preferred securities subject to mandatory redemption		—			2,810

Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 at February 29, 2004 and November 30, 2003; Shares issued: 1,211,699,552 at February 29, 2004 and November 30, 2003; Shares outstanding: 1,097,652,112 at February 29, 2004 and 1,084,696,446 at November 30, 2003		12			12
Paid-in capital		4,090			4,028
Retained earnings		28,990			28,038
Employee stock trust		2,946			3,008
Accumulated other comprehensive income (loss)		(99	)		(156	)

Subtotal		35,939			34,930
Note receivable related to ESOP		(3	)		(4	)
Common stock held in treasury, at cost, $0.01 par value;
114,047,440 shares at February 29, 2004 and 127,003,106 shares at November 30, 2003		(6,124	)		(6,766	)
Common stock issued to employee trust		(2,946	)		(2,420	)
Unearned stock-based compensation		(802	)		(873	)

Total shareholders’ equity		26,064			24,867

Total liabilities and shareholders’ equity	$	656,898		$	602,843

See Notes to Condensed Consolidated Financial Statements.


		2

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in millions, except share and per share data)


	Three Months Ended
	February 29, 2004		February 28, 2003
	(unaudited)
Revenues:
Investment banking	$	829	$	589
Principal transactions:
Trading		2,347		1,556
Investments		29		(22	)
Commissions		901		673
Fees:
Asset management, distribution and administration		1,072		896
Merchant and cardmember		337		364
Servicing		572		567
Interest and dividends		3,782		3,789
Other		123		86

Total revenues		9,992		8,498
Interest expense		3,489		2,688
Provision for consumer loan losses		262		336

Net revenues		6,241		5,474

Non-interest expenses:
Compensation and benefits		2,712		2,549
Occupancy and equipment		200		196
Brokerage, clearing and exchange fees		224		191
Information processing and communications		320		315
Marketing and business development		254		263
Professional services		318		225
Other		297		309

Total non-interest expenses		4,325		4,048

Income before losses from unconsolidated investees, income taxes and dividends on preferred securities subject to mandatory redemption		1,916		1,426
Losses from unconsolidated investees		93		34
Provision for income taxes		552		465
Dividends on preferred securities subject to mandatory redemption		45		22

Net income	$	1,226	$	905

Earnings per common share:
Basic	$	1.14	$	0.84

Diluted	$	1.11	$	0.82

Average common shares outstanding:
Basic		1,078,718,046		1,079,052,442

Diluted		1,106,000,596		1,099,724,140

See Notes to Condensed Consolidated Financial Statements.


		3

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)


	Three Months Ended
	February 29, 2004		February 28, 2003
	(unaudited)
Net income	$	1,226	$	905
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		43		22
Net change in cash flow hedges		14		(41	)

Comprehensive income	$	1,283	$	886

See Notes to Condensed Consolidated Financial Statements.


		4

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)


	Three Months Ended
	February 29, 2004			February 28, 2003
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,226		$	905
Adjustments to reconcile net income to net cash used for operating activities:
Non-cash charges (credits) included in net income:
Aircraft-related charges		—			36
Compensation payable in common stock and options		65			(8	)
Depreciation and amortization		171			170
Provision for consumer loan losses		262			336
Changes in assets and liabilities:
Cash and securities deposited with clearing organizations or segregated under federal and other regulations		2,358			(2,296	)
Financial instruments owned, net of financial instruments sold, not yet purchased		2,876			(8,799	)
Securities borrowed, net of securities loaned		(13,435	)		1,640

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