Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

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 28, 2006

¨	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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x		Accelerated filer ¨		Non-accelerated filer ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of March 31, 2006, there were 1,071,093,950 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 28, 2006


		Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Financial Condition—February 28, 2006 and November 30, 2005	1
	Condensed Consolidated Statements of Income—Three Months Ended February 28, 2006 and 2005	3
	Condensed Consolidated Statements of Comprehensive Income—Three Months Ended February 28, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows—Three Months Ended February 28, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	34
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	70
Item 4.	Controls and Procedures	77

Part II—Other Information
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 4.	Submission of Matters to a Vote of Security Holders	80
Item 5.	Other Information	80
Item 6.	Exhibits	80


		i

AVAILABLE INFORMATION

Morgan Stanley 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 100 F Street, NE, Washington, DC 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 Morgan Stanley) file electronically with the SEC. Morgan Stanley’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

Morgan Stanley’s internet site is www.morganstanley.com. You can access Morgan Stanley’s Investor Relations webpage through our internet site, www.morganstanley.com, by clicking on the “About Morgan Stanley” link to the heading “Investor Relations.” You can also access our Investor Relations webpage directly at www.morganstanley.com/about/ir. Morgan Stanley makes available free of charge, on or through our Investor Relations webpage, its proxy statements, 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. Morgan Stanley also makes available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of Morgan Stanley’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

Morgan Stanley has a Corporate Governance webpage. You can access Morgan Stanley’s Corporate Governance webpage through our internet site, www.morganstanley.com, by clicking on the “About Morgan Stanley” link to the heading “Inside the Company.” You can also access our Corporate Governance webpage directly at www.morganstanley.com/about/inside/governance. Morgan Stanley posts the following on its Corporate Governance webpage:

•

Composite Certificate of Incorporation;

•

Bylaws;

•

Charters for our Audit Committee, Compensation, Management Development and Succession Committee and Nominating and Governance Committee;

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Contributions;

•

Policy Regarding Shareholder Rights Plan; and

•

Code of Ethics and Business Conduct.

You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on Morgan Stanley’s internet site is not incorporated by reference into this report.


		ii

Item 1.

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)


	February 28, 2006		November 30, 2005
	(unaudited)
Assets
Cash and cash equivalents	$	25,409	$	29,414
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements (including securities at fair value of $26,458 at February 28, 2006 and $30,223 at November 30, 2005)		38,300		40,130
Financial instruments owned (approximately $102 billion and $93 billion were pledged to various parties at February 28, 2006 and November 30, 2005, respectively):
U.S. government and agency securities		34,875		31,742
Other sovereign government obligations		25,092		22,750
Corporate and other debt		122,244		105,381
Corporate equities		56,797		52,238
Derivative contracts		42,362		45,894
Physical commodities		2,459		2,610

Total financial instruments owned		283,829		260,615
Securities received as collateral		51,890		43,557
Collateralized agreements:
Securities purchased under agreements to resell		176,260		174,330
Securities borrowed		252,896		244,241
Receivables:
Consumer loans (net of allowances of $785 at February 28, 2006 and $838 at November 30, 2005)		20,726		22,916
Customers		63,799		50,979
Brokers, dealers and clearing organizations		14,656		5,030
Fees, interest and other		7,233		6,137
Office facilities, at cost (less accumulated depreciation of $3,305 at February 28, 2006 and $3,196 at November 30, 2005)		2,744		2,733
Aircraft held for sale		3,010		3,145
Goodwill and net intangible assets		2,873		2,500
Other assets		15,988		12,796

Total assets	$	959,613	$	898,523


		1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)


	February 28, 2006			November 30, 2005
	(unaudited)
Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings	$	29,409		$	31,120
Deposits		23,331			18,663
Financial instruments sold, not yet purchased:
U.S. government and agency securities		19,561			20,425
Other sovereign government obligations		34,145			25,355
Corporate and other debt		7,852			5,480
Corporate equities		42,322			45,936
Derivative contracts		42,928			44,952
Physical commodities		2,753			4,852

Total financial instruments sold, not yet purchased		149,561			147,000
Obligation to return securities received as collateral		51,890			43,557
Collateralized financings:
Securities sold under agreements to repurchase		245,724			237,274
Securities loaned		141,021			120,454
Other secured financings		27,035			23,534
Payables:
Customers		117,135			112,246
Brokers, dealers and clearing organizations		3,562			4,789
Interest and dividends		4,377			3,338
Other liabilities and accrued expenses		14,984			16,835
Long-term borrowings		121,395			110,465

		929,424			869,275

Capital Units		66			66

Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 at February 28, 2006 and November 30, 2005;
Shares issued: 1,211,701,552 at February 28, 2006 and November 30, 2005;
Shares outstanding: 1,070,407,513 at February 28, 2006 and 1,057,677,994 at November 30, 2005		12			12
Paid-in capital		1,409			2,389
Retained earnings		36,456			35,185
Employee stock trust		4,746			3,060
Accumulated other comprehensive loss		(130	)		(190	)
Common stock held in treasury, at cost, $0.01 par value;
141,294,039 shares at February 28, 2006 and 154,023,558 shares at November 30, 2005		(7,624	)		(8,214	)
Common stock issued to employee trust		(4,746	)		(3,060	)

Total shareholders’ equity		30,123			29,182

Total liabilities and shareholders’ equity	$	959,613		$	898,523

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 28,
	2006			2005
	(unaudited)
Revenues:
Investment banking	$	982		$	821
Principal transactions:
Trading		3,067			1,846
Investments		314			153
Commissions		929			824
Fees:
Asset management, distribution and administration		1,279			1,204
Merchant, cardmember and other		289			308
Servicing and securitization income		596			494
Interest and dividends		10,549			5,843
Other		114			105

Total revenues		18,119			11,598
Interest expense		9,481			4,625
Provision for consumer loan losses		155			135

Net revenues		8,483			6,838

Non-interest expenses:
Compensation and benefits		4,183			2,854
Occupancy and equipment		232			332
Brokerage, clearing and exchange fees		292			260
Information processing and communications		347			342
Marketing and business development		238			257
Professional services		434			379
Other		310			570
September 11^th related insurance recoveries, net		—			(251	)

Total non-interest expenses		6,036			4,743

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net		2,447			2,095
Losses from unconsolidated investees		69			73
Provision for income taxes		784			673

Income from continuing operations before cumulative effect of accounting change, net		1,594			1,349
Discontinued operations:
(Loss)/gain from discontinued operations		(55	)		7
Income tax benefit/(provision)		22			(3	)

(Loss)/gain on discontinued operations		(33	)		4
Cumulative effect of accounting change, net		—			49

Net income	$	1,561		$	1,402

Earnings per basic share:
Income from continuing operations	$	1.56		$	1.26
Loss on discontinued operations		(0.03	)		—
Cumulative effect of accounting change, net		—			0.05

Earnings per basic share	$	1.53		$	1.31

Earnings per diluted share:
Income from continuing operations	$	1.50		$	1.24
Loss on discontinued operations		(0.03	)		—
Cumulative effect of accounting change, net		—			0.05

Earnings per diluted share	$	1.47		$	1.29

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