EX-99.1 3 dex991.htm UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Unaudited pro forma condensed consolidated financial information

Exhibit 99.1

 

Morgan Stanley

Unaudited Pro Forma Condensed Consolidated Financial Information

 

The accompanying unaudited pro forma condensed consolidated financial information has been prepared to reflect the June 30, 2007 (the “Distribution Date”) distribution by Morgan Stanley (the “Company”) of all the shares of Discover Financial Services (“Discover”) to the Company’s stockholders (the “Discover spin-off”). On the Distribution Date, the Company distributed one share of common stock of Discover, par value $0.01 per share, for every two shares of the Company’s common stock held by stockholders of record as of June 18, 2007. Stockholders will receive cash in lieu of fractional shares for amounts less than one full Discover share. The Company has received a ruling from the Internal Revenue Service that, based on customary representations and qualifications, the distribution will be tax-free to Morgan Stanley stockholders for U.S. federal income tax purposes. Discover common stock is listed on the New York Stock Exchange under the ticker symbol “DFS”.

 

The unaudited pro forma condensed consolidated statements of income for the fiscal years ended November 30, 2006, 2005 and 2004 and for the three months ended February 28, 2007 gives effect to the Discover spin-off as if the distribution and related transactions occurred on December 1, 2003. The unaudited pro forma condensed consolidated statement of financial condition as of February 28, 2007 gives effect to the Discover spin-off as if the distribution and related transactions occurred on February 28, 2007. The unaudited pro forma condensed consolidated financial statements are subject to the assumptions and adjustments set forth in the accompanying notes. Management believes that the assumptions used and adjustments made are reasonable under the circumstances and given the information available.

 

The unaudited pro forma condensed consolidated financial information is for illustrative and informational purposes only and is not intended to represent, or be indicative of, what the Company’s results of operations or financial position would have been had the Discover spin-off occurred on the dates indicated. The unaudited pro forma condensed consolidated financial information also should not be considered representative of the Company’s future financial position or results of operations.

 

The unaudited pro forma condensed consolidated financial information should be read in conjunction with the:

 

  •  

Accompanying notes to the unaudited pro forma condensed consolidated financial information;

  •  

The Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2006;

  •  

The Company’s Current Report on Form 8-K dated April 10, 2007;

  •  

The Company’s Quarterly Report on Form 10-Q for the three months ended February 28, 2007;

  •  

Discover’s Registration Statement on Form 10 initially filed with the Securities Exchange Commission on March 23, 2007, as amended by Amendment No. 1 filed on May 1, 2007, Amendment No. 2 filed on May 9, 2007, Amendment No. 3 filed on May 18, 2007 and Amendment No. 4 filed on June 1, 2007.

 

  1   LOGO

MORGAN STANLEY

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT

OF FINANCIAL CONDITION

(dollars in millions)

 

     February 28, 2007
     Morgan Stanley
Historical(a)		    Discover
Distribution(b)		     Pro forma
Adjustments		     Morgan Stanley
Pro forma
     (unaudited)

Assets

          

Cash and cash equivalents

    $ 16,636    $ (2,502 )   $ 3,948 (c)   $ 18,432
          350 (d)  

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

      35,739      (1 )     —         35,738

Financial instruments owned:

          

U.S. government and agency securities

      42,569      (64 )     —         42,505

Other sovereign government obligations

      32,349      —         —         32,349

Corporate and other debt

      181,963      —         —         181,963

Corporate equities

      97,082      —         —         97,082

Derivative contracts

      50,952      (39 )     —         50,913

Physical commodities

      2,839      —         —         2,839
                             

Total financial instruments owned

      407,754      (103 )     —         407,651

Securities received as collateral

      82,684      —         —         82,684

Collateralized agreements:

          

Securities purchased under agreements to resell

      192,038      —         —         192,038

Securities borrowed

      277,093      —         —         277,093

Receivables:

          

Consumer loans, net

      22,429      (21,711 )     —         718

Customers

      90,320      —         —         90,320

Brokers, dealers and clearing organizations

      14,426      —         —         14,426

Fees, interest and other

      11,087      (243 )     —         10,844

Office facilities and other equipment, at cost, net

      4,313      (658 )     —         3,655

Goodwill

      3,131      (534 )     —         2,597

Intangible assets, net

      1,131      (197 )     —         934

Other assets

      23,280      (3,815 )     —         19,465
                             

Total assets

    $ 1,182,061    $ (29,764 )   $ 4,298     $ 1,156,595
                             

 

 

LOGO   2  

MORGAN STANLEY

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT

OF FINANCIAL CONDITION—(Continued)

(dollars in millions)

 

       February 28, 2007
       Morgan
Stanley
Historical(a)		      Discover
Distribution(b)		      Pro forma
Adjustments		    

Morgan
Stanley

Pro forma

       (unaudited)

Liabilities and Shareholders’ Equity

               

Commercial paper and other short-term borrowings

      $ 33,829      $ (540 )    $ —       $ 33,289

Deposits

        37,313        (17,610 )      —         19,703

Financial instruments sold, not yet purchased:

               

U.S. government and agency securities

        18,062        —          —         18,062

Other sovereign government obligations

        26,192        —          —         26,192

Corporate and other debt

        8,436        —          —         8,436

Corporate equities

        52,086        —          —         52,086

Derivative contracts

        51,574        (27 )      —         51,547

Physical commodities

        1,457        —          —         1,457
                                  

Total financial instruments sold, not yet purchased

        157,807        (27 )      —         157,780

Obligation to return securities received as collateral

        82,684        —          —         82,684

Collateralized financings:

               

Securities sold under agreements to repurchase

        288,672        —          —         288,672

Securities loaned

        161,839        —          —         161,839

Other secured financings

        51,594        —          —         51,594

Payables:

               

Customers

        132,980        —          —         132,980

Brokers, dealers and clearing organizations

        8,806        —          —         8,806

Interest and dividends

        4,687        (145 )      —         4,542

Intercompany notes payable

        —          (4,083 )      4,083 (c)     —  

Other liabilities and accrued expenses

        24,063        (1,580 )      —         22,483

Long-term borrowings

        159,833        (250 )      —         159,583
                                  

Total liabilities

        1,144,107        (24,235 )      4,083       1,123,955
                                  

Total shareholders’ equity

        37,954        (5,529 )      215 (c)(d)     32,640
                                  

Total liabilities and shareholders’ equity

      $ 1,182,061      $ (29,764 )    $ 4,298     $ 1,156,595
                                  

 

See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Financial Condition.

 

 

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MORGAN STANLEY

 

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT

OF FINANCIAL CONDITION

 

(a) Reflects the Company’s historical condensed consolidated statement of financial condition.

 

(b) Reflects the Company’s distribution of Discover’s assets and liabilities to the Company’s stockholders.

 

(c) Reflects the net receipt of cash from Discover in connection with the settlement of intercompany funding prior to the Discover spin-off. Such intercompany balances were previously eliminated in the Company’s historical consolidated financial statements.

 

(d) Reflects the receipt of a $350 million cash dividend from Discover prior to the Discover spin-off.

 

 

LOGO   4  

MORGAN STANLEY

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

 

     Fiscal Year Ended November 30, 2006
     Morgan
Stanley
Historical(a)		    Discover
Distribution(b)		     Pro forma
Adjustments		    

Morgan
Stanley

Pro
forma

     (unaudited)

Revenues:

          

Investment banking

    $ 4,755    $ —       $ —       $ 4,755

Principal transactions:

          

Trading

      11,738      —         —         11,738

Investments

      1,669      —         —         1,669

Commissions

      3,770      —         —         3,770

Fees:

          

Asset management, distribution and administration

      5,238      —         —         5,238

Merchant, cardmember and other fees, net

      1,167      (1,167 )     —         —  

Servicing and securitization income

      2,338      (2,338 )     —         —  

Interest and dividends

      45,199      (2,458 )     —         42,741

Other

      571      (35 )     —         536
                             

Total revenues

      76,445      (5,998 )     —         70,447

Interest expense

      41,937      (952 )     245 (c)     41,230

Provision for consumer loan losses

      756      (756 )     —         —  
                             

Net revenues

      33,752      (4,290 )     (245 )     29,217
                             

Non-interest expenses:

          
         

Compensation and benefits

      14,328      (922 )     52 (d)     13,458

Occupancy and equipment

      993      (91 )     10 (d)     912

Brokerage, clearing and exchange fees

      1,305      —         —         1,305

Information processing and communications

      1,463      (387 )     4 (d)     1,080

Marketing and business development

      1,244      (604 )     3 (d)     643

Professional services

      2,242      (368 )     13 (d)     1,887

Other

      1,204      (332 )     5 (d)     877
                             

Total non-interest expenses

      22,779      (2,704 )     87       20,162
                             

Income from continuing operations before losses from unconsolidated investees and income taxes

      10,973      (1,586 )     (332 )     9,055

Losses from unconsolidated investees

      228      (3 )     —         225

Provision for income taxes

      3,265      (506 )     (101 )     2,658
                             

Income from continuing operations

    $ 7,480    $ (1,077 )   $ (231 )   $ 6,172
                             

Earnings per basic common share:

          

Income from continuing operations

    $ 7.39        $ 6.06
                 

Earnings per diluted common share:

          

Income from continuing operations

    $ 7.08        $ 5.77
                 

Average common shares outstanding:

          

Basic

      1,010        5 (e)     1,015
                       

Diluted

      1,055        12 (e)     1,067
                       

 

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

 

 

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MORGAN STANLEY

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

 

     Fiscal Year Ended November 30, 2005  
     Morgan
Stanley
Historical(a)		     Discover
Distribution(b)		     Pro forma
Adjustments		    

Morgan
Stanley

Pro
forma

  
     (unaudited)  

Revenues:

         

Investment banking

    $ 3,843     $ —       $ —       $ 3,843  

Principal transactions:

         

Trading

      7,365       —         —         7,365  

Investments

      981       —         —         981  

Commissions

      3,331       —         —         3,331  

Fees:

         

Asset management, distribution and administration

      4,915       —         —         4,915  

Merchant, cardmember and other fees, net

      1,323       (1,323 )     —         —    

Servicing and securitization income

      1,609       (1,609 )     —         —    

Interest and dividends

      28,160       (2,174 )     —         25,986  

Other

      464       (5 )     —         459  
                                

Total revenues

      51,991       (5,111 )     —         46,880  

Interest expense

      24,425       (781 )     143 (c)     23,787  

Provision for consumer loan losses

      878       (878 )     —         —    
                                

Net revenues

      26,688       (3,452 )     (143 )     23,093  
                                

Non-interest expenses:

         

Compensation and benefits

      11,267       (865 )     58 (d)     10,460  

Occupancy and equipment

      1,038       (92 )     11 (d)     957  

Brokerage, clearing and exchange fees

      1,069       —         —         1,069  

Information processing and communications

      1,400       (353 )     5 (d)     1,052  

Marketing and business development

      1,160       (587 )     3 (d)     576  

Professional services

      1,898       (294 )     14 (d)     1,618  

Other

      1,765       (343 )     6 (d)     1,428  

September 11th related insurance recoveries, net

      (251 )     —         —         (251 )
                                

Total non-interest expenses

      19,346       (2,534 )     97       16,909  
                                

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net

      7,342       (918 )     (240 )     6,184  

Losses from unconsolidated investees

      311       —         —         311  

Provision for income taxes

      1,852       (340 )     (64 )     1,448  
                                

Income from continuing operations before cumulative effect of accounting change, net

    $ 5,179     $ (578 )   $ (176 )   $ 4,425  
                                

Earnings per basic common share:

         

Income from continuing operations

    $ 4.93         $ 4.20  
                    

Earnings per diluted common share:

         

Income from continuing operations

    $ 4.80         $ 4.07  
                    

Average common shares outstanding:

         

Basic

      1,050             4 (e)     1,054  
                          

Diluted

      1,080             8 (e)     1,088  
                          

 

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

 

 

LOGO   6  

MORGAN STANLEY

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

 

     Fiscal Year Ended November 30, 2004
     Morgan
Stanley
Historical(a)		    Discover
Distribution(b)		     Pro forma
Adjustments		    

Morgan
Stanley

Pro
forma

     (unaudited)

Revenues:

          

Investment banking

    $ 3,341    $ —       $ —       $ 3,341

Principal transactions:

          

Trading

      5,510      —         —         5,510

Investments

      607      —         —         607

Commissions

      3,235      —         —         3,235

Fees:

          

Asset management, distribution and administration

      4,436      —         —         4,436

Merchant, cardmember and other fees, net

      1,317      (1,317 )     —         —  

Servicing and securitization income

      1,921      (1,921 )     —         —  

Interest and dividends

      18,575      (1,859 )     —         16,716

Other

      323      (10 )     —         313
                             

Total revenues

      39,265      (5,107 )     —         34,158

Interest expense

      14,706      (648 )     112 (c)     14,170

Provision for consumer loan losses

      926      (926 )     —         —  
                             

Net revenues

      23,633      (3,533 )     (112 )     19,988
                             

Non-interest expenses:

          

Compensation and benefits

      9,812      (752 )     41 (d)     9,101

Occupancy and equipment

      839      (84 )     8 (d)     763

Brokerage, clearing and exchange fees

      931      —         —         931

Information processing and communications

      1,304      (344 )     5 (d)     965

Marketing and business development

      1,121      (575 )     2 (d)     548

Professional services

      1,538      (263 )     8 (d)     1,283

Other

      1,278      (296 )     2 (d)     984
                             

Total non-interest expenses

      16,823      (2,314 )     66       14,575
                             

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

      6,810      (1,219 )     (178 )     5,413

Losses from unconsolidated investees

      328      —         —         328

Provision for income taxes

      1,854      (443 )     (51 )     1,360

Dividends on preferred securities subject to mandatory redemption

      45      —         —         45
                             

Income from continuing operations

    $ 4,583    $ (776 )   $ (127 )   $ 3,680
                             

Earnings per basic common share:

          

Income from continuing operations

    $ 4.24        $ 3.39
                 

Earnings per diluted common share:

          

Income from continuing operations

    $ 4.15        $ 3.30
                 

Average common shares outstanding:

          

Basic

      1,080            6 (e)     1,086
                       

Diluted

      1,105          10 (e)     1,115
                       

 

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

 

 

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MORGAN STANLEY

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

 

     Three Months Ended February 28, 2007
     Morgan
Stanley
Historical(a)		    Discover
Distribution(b)		     Pro forma
Adjustments		    

Morgan
Stanley

Pro
forma

     (unaudited)

Revenues:

          

Investment banking

    $ 1,227    $ —       $ —       $ 1,227

Principal transactions:

          

Trading

      4,158      —         —         4,158

Investments

      920      —         —         920

Commissions

      1,005      —         —         1,005

Fees:

          

Asset management, distribution and administration

      1,479      —         —         1,479

Merchant, cardmember and other fees, net

      297      (297 )     —         —  

Servicing and securitization income

      556      (521 )     —         35

Interest and dividends

      14,814      (680 )     —         14,134

Other

      222      (9 )     —         213
                             

Total revenues

      24,678      (1,507 )     —         23,171

Interest expense

      13,485      (287 )     87 (c)     13,285

Provision for consumer loan losses

      195      (195 )     —         —  
                             

Net revenues

      10,998      (1,025 )     (87 )     9,886
                             

Non-interest expenses:

          

Compensation and benefits

      4,992      (230 )     13 (d)     4,775

Occupancy and equipment

      280      (22 )     2 (d)     260

Brokerage, clearing and exchange fees

      361      —         —         361

Information processing and communications

      369      (94 )     1 (d)     276

Marketing and business development

      294      (142 )     1 (d)     153

Professional services

      499      (81 )     1 (d)     419

Other

      339      (83 )     1 (d)     257
                             

Total non-interest expenses

      7,134      (652 )     19       6,501
                             

Income from continuing operations before losses from unconsolidated investees and income taxes

      3,864      (373 )     (106 )     3,385

Losses from unconsolidated investees

      44      (1 )     —         43

Provision for income taxes

      1,261      (138 )     (35 )     1,088
                             

Income from continuing operations

    $ 2,559    $ (234 )   $ (71 )   $ 2,254
                             

Earnings per basic common share:

          

Income from continuing operations

    $ 2.52        $ 2.20
                 

Earnings per diluted common share:

          

Income from continuing operations

    $ 2.40        $ 2.08
                 

Average common shares outstanding:

          

Basic

      1,009            7 (e)     1,016
                       

Diluted

      1,058          15 (e)     1,073
                       

 

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

 

 

LOGO   8  

MORGAN STANLEY

 

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS

OF INCOME

 

(a) Reflects the Company’s historical condensed consolidated statements of income.

 

(b) Reflects the elimination of the revenues and expenses of Discover’s continuing operations from the Company’s historical results.

 

(c) Reflects an adjustment for intercompany interest expense. This amount reflects an allocation of the Company’s funding costs, which are managed on a consolidated basis, that had been charged by the Company to Discover. The intercompany funding was used to finance Discover’s receivables and operations, and such intercompany amounts have been repaid. The intercompany amounts were eliminated in the Company’s historical consolidated financial statements.

 

(d) Reflects adjustments associated with certain allocated costs related to Discover. Such allocated costs will by retained by the Company as they represent certain corporate functions that will not be transferred to Discover in conjunction with the Discover spin-off. The amount for Professional services for the three months ended February 28, 2007 includes an adjustment for approximately $2 million of costs directly associated with the Discover spin-off.

 

(e) Represents the net dilutive impact of the issuance of additional stock-based compensation awards (including stock options and restricted stock units) to Morgan Stanley employees in order to maintain the pre-Discover spin-off intrinsic value of such awards, and the recission of stock-based compensation awards held by active employees of Discover.

 

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