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 May 31, 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

New York, NY

10036

(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 June 30, 2004, there were 1,098,427,102 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 May 31, 2004


		Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Financial Condition—May 31, 2004 and November 30, 2003	1
	Condensed Consolidated Statements of Income—Three and Six Months Ended May 31, 2004 and 2003	3
	Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended May 31, 2004 and 2003	4
	Condensed Consolidated Statements of Cash Flows—Six Months Ended May 31, 2004 and 2003	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	32
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4.	Controls and Procedures	69

Part II—Other Information
Item 1.	Legal Proceedings	70
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	73
Item 4.	Submission of Matters to a Vote of Security Holders	73
Item 6.	Exhibits and Reports on Form 8-K	74

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 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)


	May 31, 2004		November 30, 2003
	(unaudited)
Assets
Cash and cash equivalents	$	32,070	$	29,692
Cash and securities deposited with clearing organizations or segregated under federal and other regulations (including securities at fair value of $30,179 at May 31, 2004 and $18,957 at November 30, 2003)		41,782		28,526
Financial instruments owned (approximately $120 billion at May 31, 2004 and $73 billion at November 30, 2003 were pledged to various parties):
U.S. government and agency securities		39,839		24,133
Other sovereign government obligations		23,305		21,592
Corporate and other debt		82,679		80,594
Corporate equities		31,123		29,984
Derivative contracts		49,320		44,652
Physical commodities		685		671
Securities purchased under agreements to resell		96,042		78,205
Securities received as collateral		33,091		27,278
Securities borrowed		202,412		153,813
Receivables:
Consumer loans (net of allowances of $956 at May 31, 2004 and $1,002 at November 30, 2003)		17,489		19,382
Customers, net		45,931		37,321
Brokers, dealers and clearing organizations		10,124		5,563
Fees, interest and other		6,469		4,349
Office facilities, at cost (less accumulated depreciation of $2,702 at May 31, 2004 and $2,506 at November 30, 2003)		2,470		2,433
Aircraft under operating leases (less accumulated depreciation of $1,155 at May 31, 2004 and $1,041 at November 30, 2003)		4,140		4,407
Goodwill		1,531		1,514
Other assets		8,999		8,734

Total assets	$	729,501	$	602,843


		1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)


	May 31, 2004			November 30, 2003
	(unaudited)
Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings	$	34,769		$	28,386
Deposits		11,294			12,839
Financial instruments sold, not yet purchased:
U.S. government and agency securities		21,083			17,072
Other sovereign government obligations		21,833			17,505
Corporate and other debt		9,112			10,141
Corporate equities		33,681			25,615
Derivative contracts		41,615			36,242
Physical commodities		3,116			4,873
Securities sold under agreements to repurchase		190,605			147,618
Obligation to return securities received as collateral		33,091			27,278
Securities loaned		80,689			64,375
Payables:
Customers		118,863			96,794
Brokers, dealers and clearing organizations		5,111			5,706
Interest and dividends		3,651			2,138
Other liabilities and accrued expenses		14,174			12,918
Long-term borrowings		79,746			65,600

		702,433			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 May 31, 2004 and November 30, 2003; Shares issued: 1,211,703,552 at May 31, 2004 and 1,211,699,552 at November 30, 2003; Shares outstanding: 1,098,127,106 at May 31, 2004 and 1,084,696,446 at November 30, 2003		12			12
Paid-in capital		3,972			4,028
Retained earnings		29,938			28,038
Employee stock trust		2,915			3,008
Accumulated other comprehensive income (loss)		(82	)		(156	)

Subtotal		36,755			34,930
Note receivable related to ESOP		(3	)		(4	)
Common stock held in treasury, at cost, $0.01 par value;
113,576,446 shares at May 31, 2004 and 127,003,106 shares at November 30, 2003		(6,104	)		(6,766	)
Common stock issued to employee trust		(2,915	)		(2,420	)
Unearned stock-based compensation		(731	)		(873	)

Total shareholders’ equity		27,002			24,867

Total liabilities and shareholders’ equity	$	729,501		$	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 May 31,				Six Months Ended May 31,
	2004		2003		2004		2003
	(unaudited)				(unaudited)
Revenues:
Investment banking	$	983	$	536	$	1,812	$	1,125
Principal transactions:
Trading		2,064		1,670		3,896		3,382
Investments		191		59		220		37
Commissions		877		709		1,778		1,382
Fees:
Asset management, distribution and administration		1,113		881		2,185		1,777
Merchant and cardmember		306		338		643		702
Servicing		485		503		1,057		1,070
Interest and dividends		3,663		3,449		7,445		7,238
Other		120		113		243		199

Total revenues		9,802		8,258		19,279		16,912
Interest expense		2,951		2,904		5,925		5,748
Provision for consumer loan losses		200		309		462		645

Net revenues		6,651		5,045		12,892		10,519

Non-interest expenses:
Compensation and benefits		2,923		2,274		5,635		4,823
Occupancy and equipment		206		195		406		391
Brokerage, clearing and exchange fees		237		202		461		393
Information processing and communications		318		315		638		630
Marketing and business development		263		251		517		514
Professional services		356		259		674		484
Other		546		634		843		943

Total non-interest expenses		4,849		4,130		9,174		8,178

Income before losses from unconsolidated investees, income taxes and dividends on preferred securities subject to mandatory redemption		1,802		915		3,718		2,341
Losses from unconsolidated investees		81		36		174		70
Provision for income taxes		498		240		1,050		705
Dividends on preferred securities subject to mandatory redemption		—		40		45		62

Net income	$	1,223	$	599	$	2,449	$	1,504

Earnings per common share:
Basic	$	1.13	$	0.56	$	2.27	$	1.40

Diluted	$	1.10	$	0.55	$	2.21	$	1.37

Average common shares outstanding:
Basic		1,082,211,511		1,077,386,468		1,080,776,922		1,077,413,715

Diluted		1,110,357,415		1,097,478,351		1,108,270,257		1,097,824,226

See Notes to Condensed Consolidated Financial Statements.


		3

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

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