8-K 1 d8k.htm FORM 8-K Form 8-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): October 28, 2004

 

 

Morgan Stanley

(Exact name of registrant as specified in its charter)

 

 

Delaware   1-11758   36-3145972

(State or other jurisdiction of

incorporation)

   (Commission File Number)  

(IRS Employer

Identification No.)

 

1585 Broadway, New York, New York   10036
(Address of principal executive offices)   (Zip Code)

 

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

 

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Item 8.01. Other Events

 

Morgan Stanley (the “Company”) is filing this Current Report on Form 8-K to update the historical financial statements included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended November 30, 2003 (the “2003 Form 10-K/A”) and Quarterly Reports on Form 10-Q/A for the periods ended February 29, 2004 and May 31, 2004 for discontinued operations that have resulted from the classification of certain aircraft in its aircraft leasing portfolio to “held for sale” in accordance with Statement of Financial Accounting Standards No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). In the third quarter of fiscal 2004, the Company entered into an agreement with a third party for the sale of certain aircraft in its portfolio. In accordance with SFAS 144, revenues and expenses associated with the aircraft designated as “held for sale” have been classified as discontinued operations in the Company’s Quarterly Report on Form 10-Q for the period ended August 31, 2004.

 

Under requirements of the Securities and Exchange Commission (the “SEC”), the same classification as discontinued operations required by SFAS 144 is also required for previously issued financial statements for each of the three years presented in the Company’s 2003 Form 10-K/A and the Quarterly Reports on Form 10-Q/A for the periods ended February 29, 2004 and May 31, 2004, if those financial statements are incorporated by reference in subsequent filings with the SEC made under the Securities Act of 1933, as amended, even though those financial statements relate to periods prior to the sale agreement for the aircraft. This reclassification has no effect on the Company’s reported net income for any reporting period.

 

The net (loss) gain from discontinued operations that has been recast from continuing operations was as follows (dollars in millions):

 

Fiscal 2003

  

Fiscal 2002

  

Fiscal 2001

  

Fiscal 2000

  

Fiscal 1999

$(22)

   $(11)   $4   $2   $0

 

The historical financial information in Exhibits 99.1, 99.2, 99.3 and 99.4 has been revised and updated from its previous presentation solely to reflect the reclassification described above for the following periods:

 

  • fiscal years ended November 30, 2003, 2002, 2001, 2000 and 1999

 

  • three months ended February 29, 2004, February 28, 2003, May 31, 2004 and May 31, 2003

 

  • six months ended May 31, 2004 and May 31, 2003

 

There is no requirement to update or modify any other disclosures included in the 2003 Form 10-K/A and the Quarterly Reports on Form 10-Q/A for the periods ended February 29, 2004 and May 31, 2004.

 

1

Item 9.01. Financial Statements and Exhibits

 

15 Letter of awareness from Deloitte & Touche LLP, dated October 27, 2004, concerning unaudited interim financial information.

 

23.1 Consent of Deloitte & Touche LLP

 

23.2 Consent of BK Associates, Inc.

 

23.3 Consent of Morten Beyer & Agnew, Inc.

 

23.4 Consent of Airclaims Limited.

 

99.1 Consolidated Financial Statements and notes thereto recast for discontinued operations for the fiscal years ended November 30, 2003, 2002, and 2001 (which replaces and supersedes Part II, Item 8 of the 2003 Form 10-K/A filed with the SEC on October 15, 2004).

 

99.2 Condensed Consolidated Financial Statements and notes thereto recast for discontinued operations for the three months ended February 28, 2003 and February 29, 2004 (which replaces and supersedes Part I, Item 1 of the Quarterly Report on Form 10-Q/A for the quarter ended February 29, 2004 filed with the SEC on October 15, 2004).

 

99.3 Condensed Consolidated Financial Statements and notes thereto recast for discontinued operations for the three and six months ended May 31, 2003 and May 31, 2004 (which replaces and supersedes Part I, Item 1 of the Quarterly Report on Form 10-Q/A for the quarter ended May 31, 2004 filed with the SEC on October 15, 2004).

 

99.4 Selected Financial Data recast for discontinued operations for the fiscal years November 30, 2003, 2002, 2001, 2000 and 1999 (which replaces and supersedes Part II, Item 6 of the 2003 Form 10-K/A filed with the SEC on October 15, 2004).

 

2

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MORGAN STANLEY

(Registrant)

By:

  

/s/ DAVID S. MOSER

   

David S. Moser,

Principal Accounting Officer

 

Date: October 28, 2004

 

3



EXHIBIT 15

 

To the Board of Directors and Shareholders of Morgan Stanley:

 

We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of Morgan Stanley and subsidiaries for the periods ended February 29, 2004 and February 28, 2003, as indicated in our report dated April 6, 2004 (October 13, 2004, as to the effects of the restatement discussed in Note 18, October 27, 2004 as to the effects of discontinued operations discussed in Note 19); because we did not perform an audit, we expressed no opinion on that information.

 

Additionally, we have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of Morgan Stanley and subsidiaries for the periods ended May 31, 2004 and 2003, as indicated in our report dated July 12, 2004 (October 13, 2004, as to the effects of the restatement discussed in Note 18, October 27, 2004 as to the effects of discontinued operations discussed in Note 19); because we did not perform an audit, we expressed no opinion on that information.

 

We are aware that our reports referred to above, which are included in this Current Report on Form 8-K are incorporated by reference in the following Registration Statements:

 

Filed on Form S-3:

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

 

Filed on Form S-4:

Registration Statement No. 333-25003

 

Filed on Form S-8:

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-25003

Registration Statement No. 333-28141

Registration Statement No. 333-28263

Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-55972

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

 

We also are aware that the aforementioned reports, pursuant to Rule 436(c) under the Securities Act of 1933, are not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

 

/s/ DELOITTE & TOUCHE LLP

 

New York, New York

October 27, 2004



EXHIBIT 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in the following Registration Statements of Morgan Stanley of our report dated February 23, 2004 (October 27, 2004 as to the effects of discontinued operations discussed in Note 26) (which report expresses an unqualified opinion and contains an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” in 2003), included in this Current Report on Form 8-K of Morgan Stanley.

 

Filed on Form S-3:

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

 

Filed on Form S-4:

Registration Statement No. 333-25003

 

Filed on Form S-8:

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-25003

Registration Statement No. 333-28141

Registration Statement No. 333-28263

Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-55972

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

 

/s/ DELOITTE & TOUCHE LLP

 

New York, New York

October 27, 2004



Exhibit 23.2

 

CONSENT OF BK ASSOCIATES, INC.

 

We hereby consent to the reference to us appearing in: (i) Note 18 to Morgan Stanley’s consolidated financial statements and notes thereto recast for discontinued operations for the fiscal years ended November 30, 2003, 2002 and 2001 included as exhibit 99.1 in the Current Report on Form 8-K of Morgan Stanley to which this consent is attached (the “Current Report”), (ii) Note 16 to Morgan Stanley’s condensed consolidated financial statements and notes thereto recast for discontinued operations for the three months ended February 28, 2003 and February 29, 2004, included as exhibit 99.2 in the Current Report, and (iii) Note 16 to Morgan Stanley’s condensed consolidated financial statements and notes thereto recast for discontinued operations for the three and six months ended May 31, 2003 and May 31, 2004, included as exhibit 99.3 in the Current Report and to the incorporation by reference of those references in the following Registration Statements of Morgan Stanley:

 

Filed on Form S-3:

 

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

 

Filed on Form S-4:

 

Registration Statement No. 333-25003

 

Filed on Form S-8:

 

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-25003

Registration Statement No. 333-28141

Registration Statement No. 333-28263

Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

 

BK ASSOCIATES, INC.

By:

   LOGO

Name:

Title:

  

John F. Keitz

President

 

October 28, 2004

 

2



Exhibit 23.3

 

CONSENT OF MORTEN BEYER & AGNEW, INC

 

We hereby consent to the reference to us appearing in: (i) Note 18 to Morgan Stanley’s consolidated financial statements and notes thereto recast for discontinued operations for the fiscal years ended November 30, 2003, 2002 and 2001 included as exhibit 99.1 in the Current Report on Form 8-K of Morgan Stanley to which this consent is attached (the “Current Report”), (ii) Note 16 to Morgan Stanley’s condensed consolidated financial statements and notes thereto recast for discontinued operations for the three months ended February 28, 2003 and February 29, 2004, included as exhibit 99.2 in the Current Report, and (iii) Note 16 to Morgan Stanley’s condensed consolidated financial statements and notes thereto recast for discontinued operations for the three and six months ended May 31, 2003 and May 31, 2004, included as exhibit 99.3 in the Current Report and to the incorporation by reference of those references in the following Registration Statements of Morgan Stanley:

 

Filed on Form S-3:

 

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

 

Filed on Form S-4:

 

Registration Statement No. 333-25003

 

Filed on Form S-8:

 

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-25003

Registration Statement No. 333-28141

Registration Statement No. 333-28263

Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

 

MORTEN BEYER & AGNEW, INC

By:

   LOGO

Name:

  

Bryson P. Monteleone

Title:

  

Vice President-Operations, CFO

October 28, 2004

 



Exhibit 23.4

 

LOGO   LOGO

 

CONSENT OF AIRCLAIMS LIMITED

 

We hereby consent to the reference to us appearing in: (i) Note 18 to Morgan Stanley’s consolidated financial statements and notes thereto recast for discontinued operations for the fiscal years ended November 30, 2003, 2002 and 2001 included as exhibit 99.1 in the Current Report on Form 8-K of Morgan Stanley to which this consent is attached (the “Current Report”), (ii) Note 16 to Morgan Stanley’s condensed consolidated financial statements and notes thereto recast for discontinued operations for the three months ended February 28, 2003 and February 29, 2004, included as exhibit 99.2 in the Current Report, and (iii) Note 16 to Morgan Stanley’s condensed consolidated financial statements and notes thereto recast for discontinued operations for the three and six months ended May 31, 2003 and May 31, 2004, included as exhibit 99.3 in the Current Report and to the incorporation by reference of those references in the following Registration Statements of Morgan Stanley:

 

Filed on Form S-3:

 

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

 

Filed on Form S-4:

 

Registration Statement No. 333-25003

 

Filed on Form S-8:

 

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-25003

Registration Statement No. 333-28141

Registration Statement No. 333-28263

Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

 

LOGO    Airclaims Limited
   Cardinal Point, Newall Road, Heathrow Airport, London TW6 2AS
   Telephone (44) 020 8897 1066 Facsimile (44) 20 8897 0300 Telex 934679 http://www.airclaims.com
   Registered Head Office as above. Registered in England No. 710284. VAT Reg. No. GB 224 1906 87

 

LOGO

 

AIRCLAIMS LIMITED

By:

   LOGO

Name:

  

Edward Pieniazek

Title:

   Director, Consultancy & Information Services

October 28, 2004

 



EXHIBIT 99.1.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Morgan Stanley:

 

We have audited the accompanying consolidated statements of financial condition of Morgan Stanley and subsidiaries (the “Company”) as of fiscal years ended November 30, 2003 and 2002, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for each of the three fiscal years in the period ended November 30, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Morgan Stanley and subsidiaries at fiscal years ended November 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended November 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 14, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” in 2003.

 

LOGO

 

New York, New York

February 23, 2004 (October 27, 2004 as to the effects of discontinued operations discussed in Note 26)

 

1

MORGAN STANLEY

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)

 

    

November 30,

2003

   

November 30,

2002

Assets

              

Cash and cash equivalents

    $ 29,692    $ 29,212

Cash and securities deposited with clearing organizations or segregated under federal and other regulations (including securities at fair value of $18,957 in 2003 and $27,721 in 2002)

      28,526      38,411

Financial instruments owned (approximately $73 billion and $71 billion were pledged to various parties in 2003 and 2002, respectively):

              

U.S. government and agency securities

      24,133      32,474

Other sovereign government obligations

      21,592      27,694

Corporate and other debt

      80,594      55,254

Corporate equities

      29,984      21,996

Derivative contracts

      44,652      35,615

Physical commodities

      671      355

Securities purchased under agreements to resell

      78,205      76,910

Securities received as collateral

      27,278      12,200

Securities borrowed

      153,813      130,404

Receivables:

              

Consumer loans (net of allowances of $1,002 in 2003 and $928 in 2002)

      19,382      23,014

Customers, net

      37,321      22,262

Brokers, dealers and clearing organizations

      5,563      2,250

Fees, interest and other

      4,349      4,892

Office facilities, at cost (less accumulated depreciation of $2,506 in 2003 and $2,206 in 2002)

      2,433      2,270

Aircraft under operating leases (less accumulated depreciation of $984 in 2003 and $730 in 2002)

      4,407      4,849

Goodwill

      1,514      1,449

Other assets

      8,734      7,988
    
  

Total assets

    $ 602,843    $ 529,499
    
  

 

     2    LOGO

MORGAN STANLEY

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)

 

    

November 30,

2003

    

November 30,

2002

  

Liabilities and Shareholders’ Equity

                 

Commercial paper and other short-term borrowings

    $ 28,386     $ 50,789  

Deposits

      12,839       13,757  

Financial instruments sold, not yet purchased:

                 

U.S. government and agency securities

      17,072       13,235  

Other sovereign government obligations

      17,505       11,679  

Corporate and other debt

      10,141       12,240  

Corporate equities

      25,615       18,320  

Derivative contracts

      36,242       28,985  

Physical commodities

      4,873       1,833  

Securities sold under agreements to repurchase

      147,618       136,463  

Obligation to return securities received as collateral

      27,278       12,200  

Securities loaned

      64,375       43,229  

Payables:

                 

Customers

      96,794       88,229  

Brokers, dealers and clearing organizations

      5,706       4,610  

Interest and dividends

      2,138       3,363  

Other liabilities and accrued expenses

      12,918       12,245  

Long-term borrowings

      65,600       55,161  
    
 
       575,100       506,338  
    
 

Capital Units

      66       66  
    
 

Preferred securities subject to mandatory redemption

      2,810       1,210  
    
 

Commitments and contingencies

                 

Shareholders’ equity:

                 

Common stock, $0.01 par value;

                 
                    Shares authorized: 3,500,000,000 in 2003 and 2002;
                    Shares issued: 1,211,699,552 in 2003 and 1,211,685,904 in 2002;
                    Shares outstanding: 1,084,696,446 in 2003 and 1,081,417,377 in 2002		      12       12  

Paid-in capital

      4,028       3,678  

Retained earnings

      28,038       25,250  

Employee stock trust

      3,008       3,003  

Accumulated other comprehensive income (loss)

      (156 )     (251 )
    
 

Subtotal

      34,930       31,692  

Note receivable related to ESOP

      (4 )     (13 )

Common stock held in treasury, at cost, $0.01 par value;

127,003,106 shares in 2003 and 130,268,527 shares in 2002

      (6,766 )     (7,176 )

Common stock issued to employee trust

      (2,420 )     (2,618 )

Unearned stock-based compensation

      (873 )     —    
    
 

Total shareholders’ equity

      24,867       21,885  
    
 

Total liabilities and shareholders’ equity

    $ 602,843     $ 529,499  
    
 

 

See Notes to Consolidated Financial Statements.

 

LOGO    3     

MORGAN STANLEY

 

CONSOLIDATED STATEMENTS OF INCOME

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

 

     Fiscal Year
  
     2003
     2002
     2001
  

Revenues:

                         

Investment banking

    $ 2,440     $ 2,478     $ 3,413  

Principal transactions:

                         

Trading

      6,138       2,730       5,503  

Investments

      86       (31 )     (316 )

Commissions

      2,970       3,278       3,159  

Fees:

                         

Asset management, distribution and administration

      3,706       3,932       4,205  

Merchant and cardmember

      1,379       1,420       1,349  

Servicing

      2,015       2,080       1,888  

Interest and dividends

      15,744       15,879       24,132  

Other

      448       658       526  
    
 
 

Total revenues

      34,926       32,424       43,859  

Interest expense

      12,802       11,961       20,720  

Provision for consumer loan losses

      1,267       1,336       1,052  
    
 
 

Net revenues

      20,857       19,127       22,087  
    
 
 

Non-interest expenses:

                         

Compensation and benefits

      8,545       7,940       9,376  

Occupancy and equipment

      794       825       881  

Brokerage, clearing and exchange fees

      838       779       712  

Information processing and communications

      1,288       1,375       1,455  

Marketing and business development

      967       1,105       1,249  

Professional services

      1,135       1,094       1,299  

Other

      1,485       1,036       1,437  

Restructuring and other charges

      —         235       —    
    
 
 

Total non-interest expenses

      15,052       14,389       16,409  
    
 
 

Income from continuing operations before losses from unconsolidated investees, income taxes, dividends on preferred securities subject to mandatory redemption and cumulative effect of accounting change

      5,805       4,738       5,678  

Losses from unconsolidated investees

      279       77       30  

Provision for income taxes

      1,563       1,575       2,022  

Dividends on preferred securities subject to mandatory redemption

      154       87       50  
    
 
 

Income from continuing operations before cumulative effect of accounting change

      3,809       2,999       3,576  

Discontinued operations:

                         

Loss/(gain) from discontinued operations

      38       18       (6 )

Income tax (benefit)/provision

      (16 )     (7 )     2  
    
 
 

Loss/(gain) on discontinued operations

      22       11       (4 )
    
 
 

Income before cumulative effect of accounting change

      3,787       2,988       3,580  

Cumulative effect of accounting change

      —         —         (59 )
    
 
 

Net income

    $ 3,787     $ 2,988     $ 3,521  
    
 
 

Preferred stock dividend requirements

    $ —       $ —       $ 32  
    
 
 

Earnings applicable to common shares

    $ 3,787     $ 2,988     $ 3,489  
    
 
 

Basic earnings per common share:

                         

Income from continuing operations before cumulative effect of accounting change

    $ 3.54     $ 2.77     $ 3.26  

Loss from discontinued operations

      (0.02 )     (0.01 )     —    

Cumulative effect of accounting change

      —         —         (0.05 )
    
 
 

Basic earnings per share

    $ 3.52     $ 2.76     $ 3.21  
    
 
 

Diluted earnings per common share:

                         

Income from continuing operations before cumulative effect of accounting change

    $ 3.47     $ 2.70     $ 3.16  

Loss from discontinued operations

      (0.02 )     (0.01 )     —    

Cumulative effect of accounting change

      —         —         (0.05 )
    
 
 

Diluted earnings per common share

    $ 3.45     $ 2.69     $ 3.11  
    
 
 

Average common shares outstanding:

                         

Basic

      1,076,754,740       1,083,270,783       1,086,121,508  
    
 
 

Diluted

      1,099,117,972       1,109,637,953       1,121,764,086  
    
 
 

 

See Notes to Consolidated Financial Statements.

 

     4    LOGO

MORGAN STANLEY

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

 

     Fiscal Year
  
     2003
     2002
     2001
  

Net income

    $ 3,787     $ 2,988     $ 3,521  

Other comprehensive income (loss), net of tax:

                         

Foreign currency translation adjustment

      78       30       (59 )

Cumulative effect of accounting change

      —         —         (13 )

Net change in cash flow hedges

      26       —         (99 )

Minimum pension liability adjustment

      (9 )     (19 )     —    
    
 
 

Comprehensive income

    $ 3,882     $ 2,999     $ 3,350  
    
 
 

 

See Notes to Consolidated Financial Statements.

 

LOGO    5     

MORGAN STANLEY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

     Fiscal Year
  
     2003
     2002
     2001
  

CASH FLOWS FROM OPERATING ACTIVITIES

                         

Net income

    $ 3,787     $ 2,988     $ 3,521  

Loss/(gain) on discontinued operations

      22       11       (4 )
    
 
 

Income from continuing operations

      3,809       2,999       3,517  

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

                         

Non-cash charges (credits) included in net income:

                         

Cumulative effect of accounting change

      —         —         59  

Aircraft-related charges

      288       70       80  

Gain on sale of building and sale of self-directed online brokerage accounts

      —         (125 )     —    

Deferred income taxes

      205       55       (427 )

Compensation payable in common stock and options

      309       400       653  

Depreciation and amortization

      619       766       715  

Provision for consumer loan losses

      1,267       1,336       1,052  

Restructuring and other charges

      —         235       —    

Changes in assets and liabilities:

                         

Cash and securities deposited with clearing organizations or segregated under federal and other regulations

      9,885       7,915       2,311  

Financial instruments owned, net of financial instruments sold, not yet purchased

      (4,256 )     (15,380 )     (16,288 )

Securities borrowed, net of securities loaned

      (2,263 )     (3,193 )     (13,962 )

Receivables and other assets

      (16,347 )     5,321       (3,603 )

Payables and other liabilities

      8,839       (5,412 )     718  
    
 
 

Net cash provided by (used for) operating activities

      2,355       (5,013 )     (25,175 )
    
 
 

CASH FLOWS FROM INVESTING ACTIVITIES

                         

Net (payments for) proceeds from:

                         

Office facilities and aircraft under operating leases

      (603 )     (1,124 )     (1,998 )

Purchase of Quilter Holdings Limited, net of cash acquired

      —         —         (183 )

Net principal disbursed on consumer loans

      (8,498 )     (11,447 )     (7,479 )

Sale of self-directed online brokerage accounts

      —         98       —    

Sales of consumer loans

      10,864       6,777       9,148  

Sale of office building

      —         —         709  
    
 
 

Net cash provided by (used for) investing activities

      1,763       (5,696 )     197  
    
 
 

CASH FLOWS FROM FINANCING ACTIVITIES

                         

Net (payments for) proceeds from:

                         

Short-term borrowings

      (22,403 )     17,947       5,088  

Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and certain derivatives financing activities

      10,360       (8,524 )     21,839  

Deposits

      (918 )     1,481       346  

Net proceeds from:

                         

Issuance of common stock

      222       179       197  

Issuance of put options

      —         6       5  

Issuance of long-term borrowings

      21,486       11,043       18,498  

Issuance of Preferred securities subject to mandatory redemption

      2,000       —         810  

Payments for:

                         

Repayments of long-term borrowings

      (12,641 )     (6,472 )     (11,201 )

Redemption of Preferred securities subject to mandatory redemption

      (400 )     —         —    

Redemption of cumulative preferred stock

      —         (345 )     (200 )

Redemption of Capital Units

      —         —         (4 )

Repurchases of common stock

      (350 )     (990 )     (1,583 )

Cash dividends

      (994 )     (1,000 )     (1,040 )
    
 
 

Net cash (used for) provided by financing activities

      (3,638 )     13,325       32,755  
    
 
 

Net increase in cash and cash equivalents

      480       2,616       7,777  

Cash and cash equivalents, at beginning of period

      29,212       26,596       18,819  
    
 
 

Cash and cash equivalents, at end of period

    $ 29,692     $ 29,212     $ 26,596  
    
 
 

 

See Notes to Consolidated Financial Statements.

 

     6    LOGO

MORGAN STANLEY

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollars in millions)

 

   

Preferred

Stock

    

Common

Stock

  

Paid-in

Capital

    

Retained

Earnings

    

Employee
Stock

Trust

    

Accumulated

Other

Comprehensive

Income (Loss)

    

Note

Receivable

Related to
ESOP

    

Common
Stock

Held in
Treasury

at Cost

    

Common
Stock

Issued to
Employee
Trust

    

Unearned

Stock-Based

Compensation

     Total
  

BALANCE AT NOVEMBER 30, 2000

   $ 545     $ 12   $ 3,377     $ 20,802     $ 3,042     $ (91 )   $ (44 )   $ (6,024 )   $ (2,348 )   $ —       $ 19,271  

Net income

     —         —       —         3,521       —         —         —         —         —         —         3,521  

Dividends

     —         —       —         (1,053 )     —         —         —         —         —         —         (1,053 )

Redemption of 7¾% Cumulative Preferred Stock

     (200 )     —       —         —         —         —         —         —         —         —         (200 )

Issuance of common stock

     —         —       (926 )     —         —         —         —         1,123       —         —         197  

Issuance of put options

     —         —       5       —         —         —         —         —         —         —         5  

Exercise of put options

     —         —       (12 )     —         —         —         —         12       —         —         —    

Repurchases of common stock

     —         —       —         —         —         —         —         (1,583 )     —         —         (1,583 )

Compensation payable in common stock

     —         —       666       —         44       —         13       96       (166 )     —         653  

Tax benefits associated with stock-based awards

     —         —       460       —         —         —         —         —         —         —         460  

Employee tax withholdings and other

     —         —       175       —         —         —         —         (559 )     —         —         (384 )

Cumulative effect of accounting change and net change in cash flow hedges

     —         —       —         —         —         (112 )     —         —         —         —         (112 )

Translation adjustments

     —         —       —         —         —         (59 )     —         —         —         —         (59 )
   
 
 
 
 
 
 
 
 
 
 

BALANCE AT NOVEMBER 30, 2001

     345       12     3,745       23,270       3,086       (262 )     (31 )     (6,935 )     (2,514 )     —         20,716  

Net income

     —         —       —         2,988       —         —         —         —         —         —         2,988  

Dividends

     —         —       —         (1,008 )     —         —         —         —         —         —         (1,008 )

Redemption of Cumulative Preferred Stock

     (345 )     —       —         —         —         —         —         —         —         —         (345 )

Issuance of common stock

     —         —       (868 )     —         —         —         —         1,047       —         —         179  

Issuance of put options

     —         —       6       —         —         —         —         —         —         —         6  

Exercise of put options

     —         —       (5 )     —         —         —         —         5       —         —         —    

Repurchases of common stock

     —         —       —         —         —         —         —         (990 )     —         —         (990 )

Compensation payable in common stock

     —         —       486       —         (83 )     —         18       83       (104 )     —         400  

Tax benefits associated with stock-based awards

     —         —       282       —         —         —         —         —         —         —         282  

Employee tax withholdings and other

     —         —       32       —         —         —         —         (386 )     —         —         (354 )

Minimum pension liability adjustment

     —         —       —         —         —         (19 )     —         —         —         —         (19 )

Translation adjustments

     —         —       —         —         —         30       —         —         —         —         30  
   
 
 
 
 
 
 
 
 
 
 

BALANCE AT NOVEMBER 30, 2002

     —         12     3,678       25,250       3,003       (251 )     (13 )     (7,176 )     (2,618 )     —         21,885  

Net income

     —         —       —         3,787       —         —         —         —         —         —         3,787  

Dividends

     —         —       —         (999 )     —         —         —         —         —         —         (999 )

Issuance of common stock

     —         —       (977 )     —         —         —         —         1,199       —         —         222  

Repurchases of common stock

     —         —       —         —         —         —         —         (350 )     —         —         (350 )

Compensation payable in common stock and options

     —         —       923       —         5       —         16       40       198       (873 )     309  

Tax benefits associated with stock-based awards

     —         —       333       —         —         —         —         —         —         —         333  

Employee tax withholdings and other

     —         —       71       —         —         —         (7 )     (479 )     —         —         (415 )

Net change in cash flow hedges

     —         —       —         —         —         26       —         —         —         —         26  

Minimum pension liability adjustment

     —         —       —         —         —         (9 )     —         —         —         —         (9 )

Translation adjustments

     —         —       —         —         —         78       —         —         —         —         78  
   
 
 
 
 
 
 
 
 
 
 

BALANCE AT NOVEMBER 30, 2003

   $ —       $ 12   $ 4,028     $ 28,038     $ 3,008     $ (156 )   $ (4 )   $ (6,766 )   $ (2,420 )   $ (873 )   $ 24,867  
   
 
 
 
 
 
 
 
 
 
 

 

See Notes to Consolidated Financial Statements.

 

LOGO    7     

MORGAN STANLEY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Introduction and Basis of Presentation.

 

The Company. Morgan Stanley (the “Company”) is a global financial services firm that maintains leading market positions in each of its business segments—Institutional Securities, Individual Investor Group, Investment Management and Credit Services. The Company’s Institutional Securities business includes securities underwriting and distribution; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate and project finance; sales, trading, financing and market-making activities in equity securities and related products and fixed income securities and related products, including foreign exchange and commodities; principal investing and aircraft financing activities. The Company’s Individual Investor Group business provides comprehensive financial planning and investment advisory services designed to accommodate individual investment goals and risk profiles. The Company’s Investment Management business provides global asset management products and services for individual and institutional investors through three principal distribution channels: a proprietary channel consisting of the Company’s financial advisors and investment representatives; a non-proprietary channel consisting of third-party broker-dealers, banks, financial planners and other intermediaries; and the Company’s institutional channel. The Company’s private equity activities also are included within the Investment Management business segment. The Company’s Credit Services business offers Discover®-branded cards and other consumer finance products and services and includes the operation of Discover Business Services, a network of merchant and cash access locations primarily in the U.S.

 

Basis of Financial Information. The consolidated financial statements for the 12 months ended November 30, 2003 (“fiscal 2003”), November 30, 2002 (“fiscal 2002”) and November 30, 2001 (“fiscal 2001”) are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions regarding the valuations of certain financial instruments, consumer loan loss levels, the outcome of litigation, and other matters that affect the consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of the consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates.

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest. The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock unless it does not control the entity. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), for variable interests obtained after January 31, 2003, the Company also consolidates any variable interest entities for which it is the primary beneficiary (see Note 19). For investments in companies in which the Company has significant influence over operating and financial decisions (generally defined as owning a voting or economic interest of 20% to 50%), the Company applies the equity method of accounting. In those cases where the Company’s investment is less than 20% and significant influence does not exist, such investments are carried at cost.

 

The Company’s U.S. and international subsidiaries include Morgan Stanley & Co. Incorporated (“MS&Co.”), Morgan Stanley & Co. International Limited (“MSIL”), Morgan Stanley Japan Limited (“MSJL”), Morgan Stanley DW Inc. (“MSDWI”), Morgan Stanley Investment Advisors Inc. and NOVUS Credit Services Inc.

 

Certain reclassifications have been made to prior-year amounts to conform to the current year’s presentation. All material intercompany balances and transactions have been eliminated.

 

Discontinued Operations. Revenues and expenses associated with certain aircraft designated as “held for sale” have been classified as discontinued operations for all periods presented in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 26 for additional discussion of discontinued operations.

 

2. Summary of Significant Accounting Policies.

 

Consolidated Statements of Cash Flows. For purposes of these statements, cash and cash equivalents consist of cash and highly liquid investments not held for resale with maturities, when purchased, of three months or less.

 

During fiscal 2003, in accordance with SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” the Company modified its classification within the consolidated statement of cash flows of the activity associated with certain derivative financial instruments. The activity related to derivative financial instruments entered into or modified after June 30, 2003 and that have been determined to contain a financing element at inception where the Company is deemed the borrower is now included within “Cash flows from financing activities.” Prior to July 1, 2003, the activity associated with such derivative financial instruments is included within “Cash flows from operating activities.”

 

In connection with the fiscal 2001 purchase of Quilter Holdings Limited (“Quilter”), the Company issued approximately $37 million of notes payable, including approximately $13 million of notes that are convertible into common shares of the Company.

 

     8    LOGO

MORGAN STANLEY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Consumer Loans. Consumer loans, which consist primarily of general purpose credit card, mortgage and consumer installment loans, are reported at their principal amounts outstanding less applicable allowances. Interest on consumer loans is recorded to income as earned.

 

Interest is accrued on credit card loans until the date of charge-off, which generally occurs at the end of the month during which an account becomes 180 days past due, except in the case of bankruptcies, deceased cardmembers and fraudulent transactions, where loans are charged off earlier. The interest portion of charged-off credit card loans is written off against interest revenue. Origination costs related to the issuance of credit cards are charged to earnings over periods not exceeding 12 months.

 

Allowance for Consumer Loan Losses. The allowance for consumer loan losses is a significant estimate that represents management’s estimate of probable losses inherent in the consumer loan portfolio. The allowance for consumer loan losses is primarily applicable to the owned homogeneous consumer credit card loan portfolio that is evaluated quarterly for adequacy and is established through a charge to the provision for consumer loan losses.

 

In calculating the allowance for consumer loan losses, the Company uses a systematic and consistently applied approach. The Company regularly performs a migration analysis (a technique used to estimate the likelihood that a consumer loan will progress through the various stages of delinquency and ultimately charge-off) of delinquent and current consumer credit card accounts in order to determine the appropriate level of the allowance for consumer loan losses. The migration analysis considers uncollectible principal, interest and fees reflected in consumer loans. In addition, the Company estimates the losses inherent in the consumer loan portfolio based on coverage of a rolling average of historical credit losses. In evaluating the adequacy of the allowance for consumer loan losses, management also considers factors that may impact future credit loss experience, including current economic conditions, recent trends in delinquencies and bankruptcy filings, account collection management, policy changes, account seasoning, loan volume and amounts, payment rates and forecasting uncertainties. A provision for consumer loan losses is charged against earnings to maintain the allowance for consumer loan losses at an appropriate level.

 

Financial Instruments Used for Trading and Investment. Financial instruments owned and Financial instruments sold, not yet purchased, which include cash and derivative products, are recorded at fair value in the consolidated statements of financial condition, and gains and losses are reflected in principal trading revenues in the consolidated statements of income. Loans and lending commitments associated with the Company’s lending activities also are recorded at fair value. Fair value is the amount at which financial instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

 

The price transparency of the particular product will determine the degree of judgment involved in determining the fair value of the Company’s financial instruments. Price transparency is affected by a wide variety of factors, including, for example, the type of product, whether it is a new product and not yet established in the marketplace, and the characteristics particular to the transaction. Products for which actively quoted prices or pricing parameters are available or for which fair value is derived from actively quoted prices or pricing parameters will generally have a higher degree of price transparency than products that are thinly traded or not quoted that generally have reduced to no price transparency.

 

A substantial percentage of the fair value of the Company’s Financial instruments owned and Financial instruments sold, not yet purchased is based on observable market prices, observable market parameters, or is derived from such prices or parameters. The availability of observable market prices and pricing parameters can vary from product to product. Where available, observable market prices and pricing parameters in a product (or a related product) may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These analyses involve some degree of judgment.

 

The fair value of over-the-counter (“OTC”) derivative contracts is derived primarily from pricing models, which may require multiple market input parameters. In the absence of observable market prices or parameters in an active market, observable prices or parameters of other comparable current market transactions, or other observable data supporting a fair value based on a pricing model at the inception of a contract, fair value is based on the transaction price. The Company also uses pricing models to manage the risks introduced by OTC derivatives. The term “model” typically refers to a mathematical calculation methodology based on accepted financial theories. Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be modeled using a series of techniques, including closed form analytic formulae, such as the Black-Scholes option pricing model, simulation models or a combination thereof, applied consistently. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. Pricing models take into account the contract terms, including the maturity, as well as observable market parameters such as interest rates, volatility and the creditworthiness of the counterparty.

 

LOGO    9     

MORGAN STANLEY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Interest and dividend revenue and interest expense arising from financial instruments used in trading activities are reflected in the consolidated statements of income as interest and dividend revenue or interest expense. Purchases and sales of financial instruments as well as commission revenues and related expenses are recorded in the accounts on trade date. Unrealized gains and losses arising from the Company’s dealings in OTC financial instruments, including derivative contracts related to financial instruments and commodities, are presented in the accompanying consolidated statements of financial condition on a net-by-counterparty basis, when appropriate.

 

Equity securities purchased in connection with private equity and other principal investment activities initially are carried in the consolidated financial statements at their original costs, which approximate fair value. The carrying value of such equity securities is adjusted when changes in the underlying fair values are readily ascertainable, generally as evidenced by observable market prices or transactions that directly affect the value of such equity securities. Downward adjustments relating to such equity securities are made in the event that the Company determines that the fair value is less than the carrying value. The Company’s partnership interests, including general partnership and limited partnership interests in real estate funds, are included within Other assets in the Company’s consolidated statements of financial condition and are recorded at fair value based upon changes in the fair value of the underlying partnership’s net assets.

 

Financial Instruments Used for Asset and Liability Management. The Company enters into various derivative financial instruments for non-trading purposes. These instruments are included within Financial instruments owned—derivative contracts or Financial instruments sold, not yet purchased—derivative contracts within the consolidated statements of financial condition and include interest rate swaps, foreign currency swaps, equity swaps and foreign exchange forwards. The Company uses interest rate and currency swaps and equity derivatives to manage interest rate, currency and equity price risk arising from certain liabilities. The Company also utilizes interest rate swaps to match the repricing characteristics of consumer loans with those of the borrowings that fund these loans. Certain of these derivative financial instruments are designated and qualify as fair value hedges and cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.

 

The Company’s designated fair value hedges consist primarily of hedges of fixed rate borrowings, including fixed rate borrowings that fund consumer loans. The Company’s designated cash flow hedges consist primarily of hedges of floating rate borrowings in connection with its aircraft financing business. In general, interest rate exposure in this business arises to the extent that the interest obligations associated with debt used to finance the Company’s aircraft portfolio do not correlate with the aircraft rental payments received by the Company. The Company’s objective is to manage the exposure created by its floating interest rate obligations given that future lease rates on new leases may not be repriced at levels that fully reflect changes in market interest rates. The Company utilizes interest rate swaps to minimize the risk created by its longer-term floating rate interest obligations and measures that risk by reference to the duration of those obligations and the expected sensitivity of future lease rates to future market interest rates.

 

For qualifying fair value hedges, the changes in the fair value of the derivative and the gain or loss on the hedged asset or liability relating to the risk being hedged are recorded currently in earnings. These amounts are recorded in interest expense and provide offset of one another. For qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in Accumulated other comprehensive income (loss) in shareholders’ equity, net of tax effects, and amounts in Accumulated other comprehensive income (loss) are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The Company estimates that approximately $38 million of the unrealized loss recognized in Accumulated other comprehensive income (loss) as of November 30, 2003 will be reclassified into earnings within the next 12 months. Ineffectiveness relating to fair value and cash flow hedges, if any, is recorded within interest expense. The impact of hedge ineffectiveness on the Company’s consolidated statements of income was not material for all periods presented.

 

The Company also utilizes foreign exchange forward contracts to manage the currency exposure relating to its net monetary investments in non-U.S. dollar functional currency operations. The gain or loss from revaluing these contracts is deferred and reported within Accumulated other comprehensive income in shareholders’ equity, net of tax effects, with the related unrealized amounts due from or to counterparties included in Financial instruments owned or Financial instruments sold, not yet purchased. The interest elements (forward points) on these foreign exchange forward contracts are recorded in earnings.

 

In fiscal 2001, the Company recorded an after-tax charge to net income from the cumulative effect of the adoption of SFAS No. 133, as amended, of $59 million and an after-tax decrease to Accumulated other comprehensive income of $13 million.

 

Office Facilities. Office facilities are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of buildings, leasehold improvements, furniture, fixtures and equipment are provided principally by the straight-line method over the

 

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MORGAN STANLEY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

estimated useful life of the asset. Estimates of useful lives are as follows: buildings—39 years; furniture and fixtures—7 years; and computer and communications equipment—3 to 5 years. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or, where applicable, the remaining term of the lease, but generally not exceeding 15 years.

 

Aircraft under Operating Leases. Aircraft under operating leases that are to be held and used are stated at cost less accumulated depreciation and impairment charges. Depreciation is calculated on a straight-line basis over the estimated useful life of the aircraft asset, which is generally 25 years from the date of manufacture. In accordance with SFAS No. 144, the Company’s aircraft that are to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the aircraft may not be recoverable. Under SFAS No. 144, the carrying value of an aircraft may not be recoverable if its projected undiscounted cash flows are less than its carrying value. If an aircraft’s projected undiscounted cash flows are less than its carrying value, the Company will recognize an impairment charge equal to the excess of the carrying value over the fair value of the aircraft. The fair value of the Company’s impaired aircraft is based upon the average market appraisal values obtained from independent appraisal companies. Estimates of future cash flows associated with the aircraft assets as well as the appraisals of fair value are critical to the determination of whether an impairment exists and the amount of the impairment charge, if any (see Note 18 to the consolidated financial statements).

 

Aircraft under operating leases that fulfill the criteria to be classified as held for sale in accordance with SFAS No. 144 are stated at the lower of carrying value (i.e. cost less accumulated depreciation and impairment charges) or fair value less estimated cost to sell. After an aircraft is designated as held for sale, no further depreciation expense is recorded. The Company would recognize a charge for any initial or subsequent write-down to fair value less estimated cost to sell (see Notes 18 and 26 to the consolidated financial statements). A gain would be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized (for a write-down to fair value less cost to sell). A gain or loss not previously recognized that results from the sale of an aircraft would be recognized at the date of sale.

 

Revenue from aircraft under operating leases is recognized on a straight-line basis over the lease term. Certain lease contracts may require the lessee to make separate payments for flight hours and passenger miles flown. In such instances, the Company recognizes these other revenues as they are earned in accordance with the terms of the applicable lease contract.

 

Investment Banking. Underwriting revenues and fees for mergers, acquisitions and advisory assignments are recorded when services for the transactions are determined to be completed, generally as set forth under the terms of the engagement. Transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction, are deferred to match revenue recognition. Underwriting revenues are presented net of related expenses. Non-reimbursed expenses associated with advisory transactions are recorded within Non-interest expenses.

 

Income Taxes. Income tax expense is provided for using the asset and liability method, under which deferred tax assets and liabilities are determined based upon the temporary differences between the financial statement and income tax bases of assets and liabilities, using currently enacted tax rates.

 

Earnings per Share. The Company computes earnings per share (“EPS”) in accordance with SFAS No. 128, “Earnings per Share.” “Basic EPS” is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. “Diluted EPS” reflects the assumed conversion of all dilutive securities (see Note 10).

 

Cardmember Rewards. Cardmember rewards include various reward programs, including the Cashback Bonus® award program, pursuant to which the Company pays certain cardmembers a percentage of their purchase amounts based upon a cardmember’s level and type of purchases. The liability for cardmember rewards, included in Other liabilities and accrued expenses, is accrued at the time that qualified cardmember transactions occur and is calculated on an individual cardmember basis. In determining the liability for cardmember rewards, the Company considers estimated forfeitures based on historical account closure, charge-off and transaction activity. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-22, “Accounting for ‘Points’ and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future,” the Company records its Cashback Bonus award program as a reduction of Merchant and cardmember fees.

 

Stock-Based Compensation. Effective December 1, 2002, the Company adopted SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” using the prospective adoption method. The Company now records compensation expense based upon the fair value of stock-based awards (both deferred stock and stock options). In prior years, the Company accounted for its stock-based awards under the intrinsic value approach in accordance with Accounting Principles Board (“APB”) Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under the approach in APB 25 and the terms of the Company’s plans in prior years, the Company recognized compensation expense for deferred stock awards in the year of grant; however, no compensation expense was generally recognized for stock option grants.

 

LOGO    11     

MORGAN STANLEY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Translation of Foreign Currencies. Assets and liabilities of operations having non-U.S. dollar functional currencies are translated at year-end rates of exchange, and income statement accounts are translated at weighted average rates of exchange for the year. In accordance with SFAS No. 52, “Foreign Currency Translation,” gains or losses resulting from translating foreign currency financial statements, net of hedge gains or losses and related tax effects, are reflected in Accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Gains or losses resulting from foreign currency transactions are included in net income.

 

Goodwill. Effective December 1, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 does not permit the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment. Prior to the Company’s adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over periods from five to 40 years but generally not exceeding 25 years.

 

Investments in Unconsolidated Investees. The Company invests in unconsolidated investees that own synthetic fuel production plants. The Company accounts for these investments under the equity method. The Company’s share of the operating losses generated by these investments is recorded within Losses from unconsolidated investees, and the tax credits and the tax benefits associated with these operating losses are recorded within the Company’s Provision for income taxes.

 

Deferred Compensation Arrangements. In accordance with EITF Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested,” assets of rabbi trusts are to be consolidated with those of the employer, and the value of the employer’s stock held in rabbi trusts should be classified in shareholders’ equity and generally accounted for in a manner similar to treasury stock. The Company, therefore, has included its obligations under certain deferred compensation plans in Employee stock trust. Shares that the Company has issued to its rabbi trusts are recorded in Common stock issued to employee trust. Both Employee stock trust and Common stock issued to employee trust are components of shareholders’ equity. The Company recognizes the original amount of deferred compensation (fair value of the deferred stock award at the date of grant—see Note 14) as the basis for recognition in Employee stock trust and Common stock issued to employee trust. Consistent with EITF Issue No. 97-14, changes in the fair value of amounts owed to employees are not recognized as the Company’s deferred compensation plans do not permit diversification and must be settled by the delivery of a fixed number of shares of the Company’s common stock. The amount recorded in Employee stock trust is only higher than the amount in Common stock issued to employee trust at fiscal year-end because the transfer of the shares to the rabbi trusts occurs subsequent to fiscal year-end.

 

Software Costs. In accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” certain costs incurred in connection with internal-use software projects are capitalized and amortized over the expected useful life of the asset.

 

Securitization Activities. The Company engages in securitization activities related to commercial and residential mortgage loans, corporate bonds and loans, U.S. agency collateralized mortgage obligations, municipal bonds, credit card loans and other types of financial assets (see Notes 4 and 5). The Company may retain interests in the securitized financial assets as one or more tranches of the securitization, undivided seller’s interests, accrued interest receivable subordinate to investors’ interests (see Note 5), cash collateral accounts, servicing rights, and rights to any excess cash flows remaining after payments to investors in the securitization trusts of their contractual rate of return and reimbursement of credit losses. The exposure to credit losses from securitized loans is limited to the Company’s retained contingent risk, which represents the Company’s retained interest in securitized loans, including any credit enhancement provided. The gain or loss on the sale of financial assets depends in part on the previous carrying amount of the assets involved in the transfer, and each subsequent transfer in revolving structures, allocated between the assets sold and the retained interests based upon their respective fair values at the date of sale. To obtain fair values, observable market prices are used if available. However, observable market prices are generally not available for retained interests, so the Company estimates fair value based on the present value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, payment rates, forward yield curves and discount rates commensurate with the risks involved. The present value of future net servicing revenues that the Company estimates it will receive over the term of the securitized loans is recognized in income as the loans are securitized. A corresponding asset also is recorded and then amortized as a charge to income over the term of the securitized loans, with actual net servicing revenues continuing to be recognized in income as they are earned.

 

3. Goodwill.

 

The Company adopted the provisions of SFAS No. 142 and therefore discontinued the amortization of goodwill effective December 1, 2001. During fiscal 2003 and fiscal 2002, the Company completed the annual goodwill impairment test (as of December 1 in each year) that is required by SFAS No. 142. The Company’s testing did not indicate any goodwill impairment and therefore did not have an effect on the Company’s consolidated financial condition or results of operations.

 

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MORGAN STANLEY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table presents a reconciliation of reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect:

 

     Fiscal 2003
    Fiscal 2002
    Fiscal 2001
  
    

(dollars in millions,

except per share amounts)

  

Net income:

                       

Income before cumulative effect of accounting change

    $ 3,787    $ 2,988    $ 3,580  

Add: Goodwill amortization, net of tax

      —        —        81  
    
  
  
       3,787      2,988      3,661  

Cumulative effect of accounting change

      —        —        (59 )
    
  
  

Adjusted

    $ 3,787    $ 2,988    $ 3,602  
    
  
  

Basic earnings per common share:

                       

Basic before cumulative effect of accounting change

    $ 3.52    $ 2.76    $ 3.26  

Add: Goodwill amortization, net of tax

      —        —        0.07  
    
  
  
       3.52      2.76      3.33  

Cumulative effect of accounting change

      —        —        (0.05 )
    
  
  

Adjusted

    $ 3.52    $ 2.76    $ 3.28  
    
  
  

Diluted earnings per common share:

                       

Diluted before cumulative effect of accounting change

    $ 3.45    $ 2.69    $ 3.16  

Add: Goodwill amortization, net of tax

      —        —        0.07  
    
  
  
       3.45      2.69      3.23  

Cumulative effect of accounting change

      —        —        (0.05 )
    
  
  

Adjusted

    $ 3.45    $ 2.69    $ 3.18  
    
  
  

 

Changes in the carrying amount of the Company’s goodwill for fiscal 2003 and fiscal 2002 were as follows:

 

    

Institutional

Securities

   

Individual

Investor

Group

   

Investment

Management

    Total
     (dollars in millions)

Balance as of November 30, 2001

    $ 4    $ 467    $ 967    $ 1,438

Translation adjustments

      —        11      —        11
    
  
  
  

Balance as of November 30, 2002

      4      478      967      1,449

Translation adjustments

      —        61      —        61

Other

      4      —        —        4
    
  
  
  

Balance as of November 30, 2003

    $ 8    $ 539    $ 967    $ 1,514
    
  
  
  

 

4. Securities Financing and Securitization Transactions.

 

Securities purchased under agreements to resell (“reverse repurchase agreements”) and Securities sold under agreements to repurchase (“repurchase agreements”), principally government and agency securities, are treated as financing transactions and are carried at the amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements;

 

LOGO    13     

MORGAN STANLEY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

such amounts include accrued interest. Reverse repurchase agreements and repurchase agreements are presented on a net-by-counterparty basis, when appropriate. The Company’s policy is to take possession of securities purchased under agreements to resell. Securities borrowed and Securities loaned also are treated as financing transactions and are carried at the amounts of cash collateral advanced and received in connection with the transactions.

 

The Company pledges its financial instruments owned to collateralize repurchase agreements and other securities financings. Pledged securities that can be sold or repledged by the secured party are identified as Financial instruments owned (pledged to various parties) on the consolidated statements of financial condition. The carrying value and classification of securities owned by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or repledge the collateral were as follows:

 

    

At

Nov. 30,

2003

   

At

Nov. 30,

2002

     (dollars in millions)

Financial instruments owned:

              

U.S. government and agency securities

    $ 5,717    $ 9,144