<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly period ended May 31, 1995
Commission file number 1-9085
MORGAN STANLEY GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2838811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 703-4000
------------------------------------
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 / /
--- ---
As of June 30, 1995, there were 76,778,494 shares of Common Stock, $1
par value, outstanding.
Page 1
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Financial Condition at May 31,
1995 (Unaudited) and January 31, 1995
Condensed Consolidated Statement of Income (Unaudited) for the
Three Months and Four Months Ended May 31, 1995 and the Three
Months Ended April 30, 1994
Condensed Consolidated Statement of Cash Flows (Unaudited) for the
Three Months and Four Months Ended May 31, 1995 and the Three
Months Ended April 30, 1994
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
May 31,
1995 January 31,
(Unaudited) 1995
----------- -----------
<S> <C> <C>
Cash and interest-bearing equivalents $ 2,548 $ 2,510
Cash and securities deposited with clearing
organizations or segregated under federal
and other regulations (securities at market
value of $1,255 in fiscal 1995 and $1,507
in fiscal 1994) 1,666 2,116
Financial instruments owned:
U.S. government and agency securities 10,172 9,107
Other sovereign government obligations 16,083 12,931
Corporate and other debt 10,298 10,545
Corporate equities 5,550 5,483
Derivative contracts 9,829 8,623
Physical commodities 259 420
Securities purchased under agreements to resell 40,856 35,913
Securities borrowed 23,025 20,042
Receivables:
Customers 4,428 4,823
Brokers, dealers and clearing organizations 2,141 1,376
Interest and dividends 1,271 731
Fees and other 239 548
Property, equipment and leasehold improvements,
at cost, net of accumulated depreciation and
amortization of $397 in fiscal 1995 and $364
in fiscal 1994 1,163 1,061
Other assets 526 465
-------- --------
Total assets $130,054 $116,694
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements. Page 3
<PAGE> 4
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(IN MILLIONS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31, 1995 January 31,
(Unaudited) 1995
------------ -----------
<S> <C> <C>
Short-term borrowings $ 10,770 $ 10,273
Financial instruments sold, not yet purchased:
U.S. government and agency securities 7,505 6,177
Other sovereign government obligations 8,805 7,251
Corporate and other debt 850 1,174
Corporate equities 4,210 3,006
Derivative contracts 9,541 7,322
Physical commodities 246 377
Securities sold under agreements to repurchase 55,141 50,123
Securities loaned 4,735 2,860
Payables:
Customers 11,264 11,588
Brokers, dealers and clearing organizations 1,074 953
Interest and dividends 937 825
Other liabilities and accrued expenses 378 458
Accrued compensation and benefits 691 938
Long-term borrowings 8,726 8,462
--------- ---------
124,873 111,787
--------- ---------
Capital units 496 352
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock 819 819
Common stock, $1.00 par value; authorized
300,000,000 shares; issued 80,151,173
shares in fiscal 1995 and 79,774,278
shares in fiscal 1994 80 80
Paid-in capital 602 706
Retained earnings 3,497 3,338
Cumulative translation adjustments 3 (10)
--------- ---------
Subtotal 5,001 4,933
Less:
Note receivable related to sale of
preferred stock to ESOP 100 100
Common stock held in treasury, at cost
(3,377,052 shares in fiscal 1995 and
4,477,495 shares in fiscal 1994) 216 278
--------- ---------
Total stockholders' equity 4,685 4,555
--------- ---------
Total liabilities and stockholders' equity $ 130,054 $ 116,694
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements. Page 4
<PAGE> 5
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Four Months Ended
May 31, April 30, May 31,
1995 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Investment banking $ 273 $ 260 $ 353
Principal transactions:
Trading 438 258 552
Investments (6) 10 (6)
Commissions 131 119 168
Interest and dividends 1,742 1,561 2,330
Asset management and administration 88 81 119
Other 1 3 2
------------ ------------ ------------
Total revenues 2,667 2,292 3,518
Interest expense 1,656 1,404 2,214
------------ ------------ ------------
Net revenues 1,011 888 1,304
------------ ------------ ------------
Expenses excluding interest:
Compensation and benefits 475 440 613
Occupancy and equipment 80 68 107
Brokerage, clearing and exchange fees 66 58 86
Communications 34 29 45
Business development 34 39 48
Professional services 40 41 54
Other 31 29 42
------------ ------------ ------------
Total expenses excluding interest 760 704 995
------------ ------------ ------------
Income before income taxes 251 184 309
Provision for income taxes 85 67 105
------------ ------------ ------------
Net income $ 166 $ 117 $ 204
============ ============ ============
Earnings applicable to common shares (1) $ 150 $ 101 $ 183
============ ============ ============
Average common and common equivalent
shares outstanding (1) 78,797,807 79,828,671 78,289,688
============ ============ ============
Primary earnings per share $ 1.90 $ 1.27 $ 2.33
============ ============ ============
Fully diluted earnings per share $ 1.82 $ 1.22 $ 2.23
============ ============ ============
</TABLE>
(1) Amounts shown are used to calculate primary earnings per share.
See Notes to Condensed Consolidated Financial Statements. Page 5
<PAGE> 6
MORGAN STANLEY GROUP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Four Months
Three Months Ended Ended
May 31, April 30, May 31,
1995 1994 1995
------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 166 $ 117 $ 204
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Non-cash charges included in net income 27 19 49
Changes in assets and liabilities:
Cash and securities deposited with
clearing organizations or segregated
under federal and other regulations 490 (1,415) 450
Financial instruments owned, net of
financial instruments sold, not yet
purchased 2,280 (229) 768
Securities borrowed, net of securities
loaned (1,006) (1,412) (1,108)
Receivables and other assets 925 (1,028) (487)
Payables and other liabilities 541 1,065 (418)
------- ------- -------
Net cash provided by (used for) operating activities 3,423 (2,883) (542)
Cash flows from investing activities:
Net payments for:
Property, equipment and leasehold
improvements (119) (154) (144)
------- ------- -------
Net cash used for investing activities (119) (154) (144)
Cash flows from financing activities:
Net (payments) proceeds related to short-term
borrowings (333) 513 497
Securities sold under agreements to
repurchase, net of securities
purchased under agreements to resell (2,382) 2,516 75
Proceeds from:
Issuance of common stock 16 8 17
Issuance of long-term borrowings 499 822 884
Issuance of Capital Units 13 230 144
Payments for:
Repurchases of common stock (67) (100) (67)
Repayments of long-term borrowings (758) (240) (782)
Cash dividends (39) (38) (44)
------- ------- -------
Net cash (used for) provided by financing
activities (3,051) 3,711 724
------- ------- -------
Net increase in cash and interest-bearing equivalents 253 674 38
Cash and interest-bearing equivalents, at
beginning of period 2,295 1,925 2,510
------- ------- -------
Cash and interest-bearing equivalents, at
end of period $ 2,548 $ 2,599 $ 2,548
======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements. Page 6
<PAGE> 7
MORGAN STANLEY GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
In February 1995, the Board of Directors approved a change in the
Company's fiscal year-end from January 31 to November 30. The change
became effective for the current fiscal year, and this report includes
the results for the quarter ended May 31, 1995 as well as the four months
ended May 31, 1995. The prior year quarter ended April 30, 1994 was
reported on the basis of the January 31 fiscal year-end. For the
four-month period ended May 31, 1994, the Company recorded pre-tax profit
and net income of $260 million and $166 million, respectively, reflecting
gross and net revenues of $3,068 million and $1,226 million,
respectively. The Company's Consolidated Statement of Cash Flows for the
four months ended May 31, 1994 reflects cash used for operating
activities of $9,100 million, cash used for investing activities of $176
million, and cash provided by financing activities of $9,989 million.
The information furnished in this quarterly report has been prepared
pursuant to the Securities and Exchange Commission's rules and
regulations. The Condensed Consolidated Financial Statements reflect all
adjustments (consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for the fair statement of the
results for the interim period and should be read in connection with the
Annual Report for the fiscal year ended January 31, 1995 on Form 10-K
(file no. 1-9085)("Form 10-K"). The nature of the business of Morgan
Stanley Group Inc. and its domestic and foreign subsidiaries
(collectively, the "Company") is such that the results of any interim
period may not be indicative of the results for the full year. Prior
period financial statements have been reclassified, where appropriate, to
conform to the fiscal 1995 presentation.
Financial instruments, including derivatives, used in the Company's
trading activities are recorded at fair value, and unrealized gains and
losses are reflected in trading revenues. Interest revenue and expense
arising from financial instruments used in trading activities are
reflected in the Condensed Consolidated Statement of Income as interest
income or expense. The fair values of the trading positions are generally
based on listed market prices. If listed market prices are not available
or if liquidating the Company's positions would reasonably be expected to
impact market prices, fair value is determined based on other relevant
factors, including dealer price quotations and price quotations for
similar instruments traded in different markets, including markets
located in different geographic areas. Fair values for certain
derivatives contracts are derived from pricing models which consider
current market and contractual prices for the underlying securities or
commodities, as well as time value and yield curve or volatility factors
underlying the positions. Purchases and sales of financial instruments
are recorded in the accounts on trade date. Unrealized gains and losses
arising from the Company's dealings in over-the-counter ("OTC") financial
instruments, including derivative contracts related to financial
instruments and commodities, are presented in the accompanying Condensed
Consolidated Statement of Financial Condition net-by-counterparty in
cases where there is a legal right of set-off and the Company has
obtained an enforceable netting agreement, which is consistent with
Financial Accounting Standards Board ("FASB") Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts". Reverse repurchase
and repurchase agreements are presented net-by-counterparty where net
presentation is permitted by FASB Interpretation No. 41, "Offsetting of
Amounts Related to Certain Repurchase and Reverse Repurchase Agreements."
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The Company also enters into various financial instrument related
derivative contracts, such as interest rate swaps, currency swaps and
forward contracts, as an end user to manage the interest rate and
currency exposure arising from certain borrowings. Net revenues from
derivatives used in the Company's own asset and liability management are
recognized ratably over the term of the contract as an adjustment to
interest expense.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried in the Condensed
Consolidated Financial Statements at their original cost; the carrying
value of such investments is adjusted upward only when changes in the
underlying fair values are readily ascertainable, generally as evidenced
by substantial transactions occurring in the marketplace which directly
affect their value. Downward adjustments relating to such equity
securities are made in the event that the Company determines that the
eventual realizable value is less than the carrying value. Loans made in
connection with such activities are carried at unpaid principal balances
less any reserves for estimated losses.
Included in the Company's Consolidated Statement of Financial Condition
at May 31, 1995 and January 31, 1995 are Capital Units issued by the
Company and Morgan Stanley Finance plc., a U.K. subsidiary ("MS plc"). A
Capital Unit consists of (a) a Subordinated Debenture of MS plc
guaranteed by the Company, and (b) a related Purchase Contract issued by
the Company requiring the holder to purchase one Depository Share
representing ownership of a 1/8 interest in the Company's Cumulative
Preferred Stock.
Earnings per share is based on the weighted average number of common
shares and share equivalents outstanding and gives effect to preferred
stock dividend requirements.
2. Long-Term Borrowings
Long-term borrowings at May 31, 1995, scheduled to mature within one year
aggregate $1,705 million.
During the four month period ended May 31, 1995, the Company issued
senior notes and subordinated debt aggregating $1,057 million, including
non-U.S. dollar currency notes aggregating $208 million, primarily
pursuant to its public debt shelf registration statements. The weighted
average coupon interest rate of these notes at May 31, 1995 was 7.25%;
the Company has entered into certain transactions to obtain floating
interest rates based on either short-term LIBOR or repurchase agreement
rates for Treasury securities. Maturities in the aggregate for the fiscal
years ending November 30 are as follows: 1996, $20 million; 1997, $638
million; 1998, $225 million; and thereafter, $174 million. As of May 31,
1995, the aggregate outstanding principal amount of the Company's Senior
Indebtedness (as defined in the aforementioned registration statements)
was $15.6 billion.
From May 31, 1995 to June 30, 1995, additional senior notes aggregating
$159 million were issued primarily pursuant to the Company's public debt
shelf registration statements. These notes have a weighted average coupon
rate of 3.2% (which includes non-U.S. dollar interest rates) and
maturities from 1996 to 2007.
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3. Commitments and Contingencies
In the normal course of business, the Company enters into a variety of
derivative contracts related to financial instruments and commodities.
The Company uses swap agreements in its trading activities and in
managing its interest rate exposure. The Company also uses forward and
option contracts, futures and swaps in its foreign currency and commodity
trading activities; these financial instruments also are used to hedge
the U.S. dollar cost of certain foreign currency exposures. In addition,
financial futures and forward contracts are actively traded by the
Company and are used to hedge proprietary inventory. The Company also
enters into delayed delivery, when-issued, and warrant and option
contracts involving securities. These instruments generally represent
future commitments to swap interest payment streams, exchange currencies
or purchase or sell other financial instruments at specific terms at
specified future dates. Many of these products have maturities that do
not extend beyond one year; swaps and options and warrants on equities
typically have longer maturities. For further discussion of these
matters, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Derivative Financial Instruments",
included in the Form 10-K.
These instruments involve varying degrees of off-balance sheet market
risk. Future changes in interest rates, foreign currency exchange rates
or the fair values of the financial instruments, commodities or
securities underlying the instruments ultimately may result in cash
settlements which exceed the amounts recognized in the Condensed
Consolidated Statement of Financial Condition, which, as described in
Note 1, are recorded at fair value, representing the cost of replacing
those instruments.
The Company's exposure to credit risk at any point in time is represented
by the fair value of the derivative contracts reported as assets. These
amounts are presented net-by-counterparty in cases where there is a legal
right of set-off and the Company has obtained an enforceable netting
agreement, but are not reported net of collateral, which the Company
obtains with respect to certain of these transactions to reduce its
exposure to credit losses.
The credit quality of the Company's trading-related derivatives at May
31, 1995 and January 31, 1995 is summarized in the tables below, showing
the fair value of the related assets by counterparty credit rating. The
actual credit ratings are determined by external rating agencies or by
equivalent ratings used by the Company's Credit Department:
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May 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Collater-
alized Other
Non- Non-
Invest- Invest-
ment ment
(Dollars in millions) AAA AA A BBB Grade Grade Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate
and currency
swaps and options
(including caps,
floors and swap
options) $ 572 $1,656 $1,036 $ 324 $ 492 $ 82 $4,162
Foreign exchange
forward contracts
and options 722 741 672 49 -- 33 2,217
Mortgage-backed
securities forward
contracts, swaps
and options 12 17 48 18 -- 8 103
Other fixed income
securities contracts
(including options) 113 21 93 22 -- 35 284
Equity securities
contracts
(including equity
swaps, warrants
and options) 515 96 297 132 522 40 1,602
Commodity forwards,
options and swaps 219 205 468 394 -- 175 1,461
------ ------ ------ ------ ------ ------ ------
Total $2,153 $2,736 $2,614 $ 939 $1,014 $ 373 $9,829
====== ====== ====== ====== ====== ====== ======
Percent of total 22% 28% 27% 9% 10% 4% 100%
====== ====== ====== ====== ====== ====== ======
</TABLE>
Page 10
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January 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Collater-
alized Other
Non- Non-
Invest- Invest-
ment ment
(Dollars in millions) AAA AA A BBB Grade Grade Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate
and currency
swaps and options
(including caps,
floors and swap
options) $ 723 $1,617 $ 965 $ 182 $ 294 $ 78 $3,859
Foreign exchange
forward contracts
and options 409 345 251 76 -- 46 1,127
Mortgage-backed
securities forward
contracts, swaps
and options 14 69 75 28 -- 22 208
Other fixed income
securities contracts
(including options) 302 26 42 26 -- 19 415
Equity securities
contracts
(including equity
swaps, warrants
and options) 379 188 217 188 145 18 1,135
Commodity forwards,
options and swaps 300 216 667 490 -- 206 1,879
------ ------ ------ ------ ------ ------ ------
Total $2,127 $2,461 $2,217 $ 990 $ 439 $ 389 $8,623
====== ====== ====== ====== ====== ====== ======
Percent of total 25% 29% 26% 11% 5% 4% 100%
====== ====== ====== ====== ====== ====== ======
</TABLE>
A substantial portion of the Company's securities and commodities
transactions are collateralized and are executed with and on behalf of
commercial banks and other institutional investors, including other
brokers and dealers. Positions taken and commitments made by the Company,
including positions taken and underwriting and financing commitments made
in connection with its merchant banking activities, often involve
substantial amounts and significant exposure to individual issuers and
businesses, including non-investment grade issuers. The Company seeks to
limit concentrations of credit risk created in its businesses through a
variety of separate but complementary financial, position and credit
exposure reporting systems, including the use of trading limits based in
part upon the Company's review of the financial condition and credit
ratings of its counterparties.
See also "Business -- Risk Management" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk
Management" in the Form 10-K for discussions of the Company's risk
management policies and procedures.
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The Company had approximately $2,504 million of letters of credit
outstanding at May 31, 1995 to satisfy various collateral requirements.
The Company and its subsidiaries have been named as defendants in certain
legal actions and have been involved in certain investigations and
proceedings in the ordinary course of business. It is the opinion of
management, based on current knowledge and after consultation with
counsel, that the outcome of such matters will not have a material
adverse effect on the Company's Condensed Consolidated Financial
Statements contained herein.
4. Preferred Stock
Preferred stock is composed of the following issues. Each issue of
preferred stock ranks in parity with all other preferred stock.
<TABLE>
<CAPTION>
Shares Outstanding at Balance at
--------- ----------- ---------- -----------
May 31, January 31, May 31, January 31,
1995 1995 1995 1995
--------- ----------- ---------- -----------
(in millions)
<S> <C> <C> <C> <C>
ESOP Convertible
Preferred Stock,
liquidation preference
$35.88 3,785,471 3,795,588 $ 136 $ 136
9.36% Cumulative
Preferred Stock,
stated value $25 5,500,000 5,500,000 138 138
7-3/8% Cumulative
Preferred Stock,
stated value $200 1,000,000 1,000,000 200 200
8.88% Cumulative
Preferred Stock,
stated value $200 975,000 975,000 195 195
8-3/4% Cumulative
Preferred Stock,
stated value $200 750,000 750,000 150 150
---------- ----------
Total $ 819 $ 819
========== ==========
</TABLE>
5. Stockholders' Equity
Morgan Stanley & Co. Incorporated ("MS & Co.") is a registered
broker-dealer and a registered futures commission merchant and,
accordingly, is subject to the minimum net capital requirements of the
Securities and Exchange Commission, the New York Stock Exchange and the
Commodities Futures Trading Commission. MS&Co. has consistently operated
in excess of these requirements with aggregate net capital, as defined,
totaling $733 million at May 31, 1995, which exceeded the amount required
by $558 million. Morgan Stanley & Co. International Limited ("MSIL"), a
London-based broker-dealer subsidiary, is subject to capital requirements
of the Securities and Futures Authority, and Morgan Stanley Japan Limited
("MSJL"), another broker-dealer subsidiary, is subject to capital
requirements of the Ministry of Finance. MSIL and MSJL have consistently
operated in excess of their respective capital requirements.
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Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of
the countries in which they operate. At May 31, 1995, these subsidiaries
were in compliance with all applicable securities regulations and local
capital adequacy requirements.
Page 13
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's business, particularly its involvement in primary and
secondary markets for all types of financial products, including
derivatives, is subject to substantial positive and negative fluctuations
due to a variety of factors that cannot be predicted with any certainty,
including variations in the fair value of securities and other financial
products, the volatility and liquidity of trading markets, and the level
of market activity. As a result, net income and revenues in any
particular period may not be representative of full-year results and may
vary significantly from year to year and from quarter to quarter. In
addition, results of operations in the past have been and in the future
may continue to be materially affected by many factors of a national and
international nature, including economic and market conditions; the
availability of capital; the level and volatility of interest rates;
currency values and other market indices; and the availability of credit,
inflation, and legislative and regulatory developments, as well as the
size, number and timing of transactions or assignments (including
realization of returns from the Company's merchant banking investments).
The Company's results of operations also may be materially affected by
competitive factors, including new entrants into the Company's
traditional business activities, and its ability to attract and retain
highly skilled individuals.
After experiencing an industry-wide setback in 1994, the global
securities industry has encountered improved conditions thus far in 1995.
Increased investor optimism concerning inflation and interest rate
stability contributed towards increased activity in the bond and stock
markets during the first quarter of 1995.
During fiscal 1994, the Company made significant strategic investments in
human and technological resources to improve its long-term global
competitive position. The Company continues to believe that these
strategic investments will enhance its ability to provide value-added
service to suppliers and users of capital in the global marketplace. In
addition, the Company's ongoing progress in cost control, risk management
and other factors that impact profitability will be an important factor
in its ability to achieve acceptable return-on-equity levels and thus
will be a significant measure of the overall success of the Company's
strategy. Accordingly, the Company has implemented certain cost control
initiatives which are intended to reduce non-compensation costs. In
addition, headcount levels are expected to remain stable throughout
fiscal 1995.
For a description of the Company's business, including its trading in
cash instruments and derivative products, its merchant banking
activities, and its high-yield underwriting and trading policies, and
their respective risks, and the Company's risk management policies and
procedures, see Part I, Item I, of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1995 ("Form 10-K").
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<PAGE> 15
In February 1995, the Board of Directors approved a change in the
Company's fiscal year-end from January 31 to November 30, effective for
the current fiscal year. The discussion that follows compares the results
of operations for the new fiscal first quarter (March 1, 1995 to May 31,
1995) to the first quarter of fiscal 1994 (February 1, 1994 to April 30,
1994). For the four-month period ended May 31, 1995, the Company recorded
pre-tax profit and net income of $309 million and $204 million,
respectively, reflecting gross and net revenues of $3,518 million and
$1,304 million, respectively. Results for the comparable four-month
period ended May 31, 1994 were pre-tax profit and net income of $260
million and $166 million, respectively, reflecting gross and net revenues
of $3,068 million and $1,226 million, respectively.
First Quarter Ended May 31, 1995 Compared with First Quarter Ended April
30, 1994 (Figures for the first quarter of fiscal 1994 are given in
parentheses).
Revenues net of interest expense (net revenues) were $1,011 million ($888
million) and net income totaled $166 million ($117 million), an increase
of 42%, reflecting increased trading revenues, partially offset by higher
incentive-based compensation.
Investment banking revenues increased to $273 million ($260 million)
reflecting among other things increased revenues from merger, acquisition
and restructuring assignments as compared to depressed levels in the
first quarter of 1994. Equity underwriting revenues decreased
significantly as compared to the first quarter of fiscal 1994 reflecting
lower levels of equity financings. Such decrease was partially offset by
increased debt underwriting revenues that reflected improved conditions
in fixed income markets. Primary revenues generated from fixed income
derivative products also increased, resulting from the overall higher
level of debt underwriting volume (which typically is an integral
component of primary structured product activity).
Secondary revenues (combined principal trading, commissions and net
interest revenues) increased to $655 million ($534 million). Principal
transaction revenues from trading activities, including derivatives, were
$438 million, substantially higher than the fiscal 1994 first quarter's
result ($258 million). Fixed income trading revenues generally were
positively affected as inflationary concerns subsided throughout the
quarter and the global bond markets strengthened. In addition, activity
in international markets strengthened as the U.S. dollar weakened against
major international currencies. The Company's global corporate, emerging
market and high-yield fixed income activities recorded higher revenue
levels also as a result of stabilizing conditions in emerging markets.
Equity trading revenues rose significantly, reflecting higher revenues
from equity structured products, options and futures arising from
increased customer volumes and market volatility, partially offset by
lower revenues in equity cash products. Revenues from foreign exchange
trading increased primarily due to higher volatilities in the major
currencies which resulted in increased customer volume.
Principal transaction investment losses aggregating $6 million ($10
million gain) were recognized in the first quarter of fiscal 1995,
principally in connection with the decrease in the carrying value of the
Company's merchant banking investments in certain publicly traded equity
securities.
Commission revenues increased to $131 million ($119 million), principally
reflecting increased customer activity in the global markets for equity
securities.
Page 15
<PAGE> 16
Interest and dividend revenues and expense are a function of the level
and mix of total assets, including financial instruments owned and resale
and repurchase agreements, and the prevailing level, term structure and
volatility of interest rates. Net interest and dividend revenues were $86
million ($157 million), primarily resulting from the continued flattening
of the U.S. yield curve as short-term rates rose faster than long-term
rates throughout the first quarter of 1995. The resulting decline in
interest rate spreads adversely affected the profitability of the
Company's spread-sensitive businesses, and the flatter yield curve
substantially reduced the savings from the Company's use of swaps to
effectively convert much of its fixed rate debt to floating rate debt.
Interest and dividend revenues rose to $1,742 million ($1,561 million),
and interest and dividend expense increased to $1,656 million ($1,404
million), principally reflecting growth in interest-bearing assets and
liabilities. Interest and dividend revenues and expense should be viewed
in the broader context of principal trading and investment banking
results. Decisions relating to principal transactions in securities are
based on an overall review of aggregate revenues and costs associated
with each transaction or series of transactions. This review includes an
assessment of the potential gain or loss associated with a trade, the
interest income or expense associated with financing or hedging the
Company's positions, and potential underwriting, commission or other
revenues associated with related primary or secondary market sales.
Asset management and administration revenues, which include fees for
asset management and non-interest revenues earned from correspondent
clearing and custody services, increased to $88 million ($81 million),
reflecting continued growth in both asset management activities and
global clearing and custody services resulting from the Company's
continuing strategic emphasis on these businesses. Customer assets under
management increased to $49 billion ($48 billion). Customer assets under
administration increased to $104 billion ($78 billion), primarily
reflecting additional assets placed under custody with the Company, as
well as appreciation in the value of customer portfolios.
Total expenses excluding interest increased to $760 million ($704
million). Within that total, compensation and benefits expense increased
$35 million to $475 million ($440 million), principally reflecting
increased levels of incentive compensation based on higher revenues and
earnings, as well as salaries and benefits relating to new employees.
Non-compensation expenses, excluding brokerage, clearing and exchange
fees, increased $13 million to $219 million. Brokerage, clearing and
exchange fees increased $8 million to $66 million, reflecting increased
trading volumes, the continued international growth of the Company's
sales and trading activities, and new endeavors in emerging markets.
Business development and professional services expenses decreased $6
million, primarily reflecting lower travel and entertainment and
consulting costs attributable to the Company's cost control
initiatives. Occupancy and equipment expense increased $12 million,
reflecting incremental space costs related to growth in the number of
employees and global expansion, as well as greater spending for
information technology equipment.
Page 16
<PAGE> 17
Liquidity and Capital Resources
The Company's total assets increased from $116.7 billion at January 31, 1995 to
$130.1 billion at May 31, 1995, reflecting growth in resale agreements,
financial instruments owned and securities borrowed. A substantial portion of
the Company's total assets consists of highly liquid marketable securities and
short-term receivables arising principally from securities transactions. The
highly liquid nature of these assets provides the Company with flexibility in
financing and managing its business. In that context, the overall size of the
Company's total assets and liabilities fluctuates from time to time and at
specific points in time (such as calendar quarter-ends) is higher than fiscal
quarter-ends. Balance sheet leverage ratios are reviewed by counterparties and
creditors in order to evaluate a securities firm's overall financial risk.
Details of ending assets, average assets and leverage ratios for the four months
ended May 31, 1995 and for fiscal 1994 are as follows:
<TABLE>
<CAPTION>
Average
Assets for
the Four
Assets at Months Ended Assets at Average
May 31, May 31, January 31, Assets for
(Dollars in millions) 1995 1995 1995 Fiscal 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash, deposits and receivables $ 12,293 $ 14,495 $ 12,104 $ 14,299
Financial instruments owned 52,191 49,638 47,109 49,236
Securities purchased under
agreements to resell and
securities borrowed 63,881 65,145 55,955 64,921
Property, equipment and
leasehold improvements
and other assets 1,689 1,591 1,526 1,626
-------- -------- -------- --------
Total assets $130,054 $130,869 $116,694 $130,082
======== ======== ======== ========
Leverage ratios:
Total assets/equity 27.8x 28.3x 25.6x 29.0x
Net assets(1)/equity 19.0x 19.2x 17.7x 19.4x
</TABLE>
(1) Net assets represent total assets less the lower of securities purchased
under agreements to resell or securities sold under agreements to
repurchase.
Page 17
<PAGE> 18
The Company's Finance and Risk Committee, which includes senior officers from
each of the major capital commitment areas, among other things, establishes the
overall funding, capital and credit policies of the Company, reviews the
Company's performance relative to these policies, allocates capital among
business activities of the Company, monitors the availability of sources of
financing, and oversees the liquidity and interest rate sensitivity of the
Company's asset and liability position.
The Company funds its balance sheet on a global basis. The Company's funding
needs are satisfied from capital, including equity and long-term debt;
medium-term notes; internally generated funds; repurchase agreements; U.S.,
Canadian, French and Euro commercial paper; German Schuldschein loans;
securities lending; buy/sell agreements; municipal re-investments; master notes;
deposits; and committed and uncommitted lines of credit. All repurchase
transactions and a portion of the Company's bank borrowings are made on a
collateralized basis.
The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others from which it draws funds in a
variety of currencies. The volume of the Company's borrowings generally
fluctuates in response to changes in the amount of resale transactions
outstanding, the level of the Company's securities inventories and overall
market conditions. Availability and cost of financing to the Company can vary
depending upon market conditions, the volume of certain trading activities, the
Company's credit ratings and the overall availability of credit to the
securities industry.
The Company's reliance on external sources to finance a significant portion of
its day-to-day operations makes access to global sources of financing important.
The cost of such financing is dependent on the Company's short-term and
long-term debt ratings. In addition, the Company's debt ratings have a
significant impact on certain trading revenues, particularly in those businesses
where longer term counterparty performance is critical, such as over-the-counter
derivatives transactions. The Company's short-term and long-term senior debt
ratings as of May 31, 1995 are as follows:
<TABLE>
<CAPTION>
Agency Short-Term Rating Long-Term Rating
- ---------------------------------------------- ------------------------------ ---------------------
<S> <C> <C>
Moody's Investor's Services P1 A1
Standard & Poor's A1+ A+
IBCA A1+ AA-
Thomson BankWatch TBW1 AA
Dominion Bond Rating Service (1) R1(Middle) n/a
</TABLE>
(1) Dominion Bond Rating Service rates the Company's Canadian commercial paper
program.
On March 28, 1995, Standard & Poor's Corporation ("S&P") affirmed the short- and
long-term ratings of the Company. However, in light of continuing difficult
conditions in the industry, S&P revised the long-term rating outlook for six
securities firms, including the Company, from stable to negative. Noting the
cyclical nature of the industry, S&P indicated that ratings may remain unchanged
for individual firms that adjust costs downward while avoiding serious
instability in trading results, but may be lowered for individual firms if
profitability worsens or if continued market turbulence aggravates trading risk.
Page 18
<PAGE> 19
During the four month period ended May 31, 1995, the Company issued senior notes
and subordinated debt aggregating $1,057 million, including non-U.S. dollar
currency notes aggregating $208 million. As of May 31, 1995, the aggregate
outstanding principal amount of the Company's Senior Indebtedness (as defined in
the Company's public debt shelf registration statements) was approximately $15.6
billion.
From May 31, 1995 to June 30, 1995, additional senior notes aggregating $159
million were issued. These notes have a weighted average coupon rate of 3.2%
(which includes non-U.S. dollar interest rates) and maturities from 1996 to
2007.
The Company maintains a senior revolving credit facility with a group of banks.
Under the terms of the credit agreement, the banks are committed to provide up
to $2.5 billion for up to 364 days. Any loans outstanding on the commitment
termination date will mature on the first anniversary of the commitment
termination date.
The Company also maintains a master collateral facility that will enable Morgan
Stanley & Co. Incorporated ("MS&Co."), the Company's U.S. broker-dealer
subsidiary, to pledge certain collateral to secure loan arrangements, letters of
credit and other financial accommodations. As part of this facility, MS&Co. also
has in place a secured committed credit agreement with a group of banks that are
parties to the master collateral facility under which such banks are committed
to provide up to $1 billion for up to 364 days. Any loans outstanding on the
commitment termination date will mature on the first anniversary of the
commitment termination date.
The Company also maintains short-term agreements with three non-U.S. banks which
commit the banks to provide on a collateralized basis up to deutsche marks
("DM") 250 million (approximately $177 million), French francs ("FRF") 500
million (approximately $101 million) and $100 million (or its equivalent in DM,
FRF, Swiss francs, or European Currency Units), respectively.
There were no borrowings outstanding under any of the foregoing bank facilities
at May 31, 1995; however, the Company anticipates utilizing these facilities for
short-term funding from time to time.
During the four month period ended May 31, 1995, the Company repurchased
approximately one million shares of its common stock at an aggregate cost of
approximately $67 million. Common stock repurchases subsequent to May 31, 1995
aggregated approximately $4 million though June 30, 1995; the unused portion of
the Company's stock repurchase authorization at such date was approximately $246
million.
Certain assets of the Company, such as real property, equipment, leasehold
improvements, certain equity investments made in connection with the Company's
merchant banking and other principal investment activities, high-yield debt
securities, emerging market debt, and certain collateralized mortgage
obligations and mortgage-related loan products, are not highly liquid. In
connection with its merchant banking and other principal investment activities,
the Company has equity investments (directly and indirectly through funds
managed by the Company) in privately or publicly held companies. As of May 31,
1995, the aggregate carrying value of the Company's equity investments in
privately held companies (including direct investments and partnership
interests) was $153 million, and its aggregate investment in publicly held
companies was $207 million.
Page 19
<PAGE> 20
In its capacity as an underwriter of and a market-maker in mortgage-backed
securities, collateralized mortgage obligations and related instruments, and a
market-maker in commercial, residential and real estate loan products, the
Company carries certain related assets with reduced levels of liquidity. The
carrying value of such assets approximated $676 million at May 31, 1995.
In addition, at May 31, 1995, the aggregate value of high-yield debt securities
and emerging market loans and securitized instruments held in inventory was
$875 million (a substantial portion of which was subordinated debt) with not
more than 6%, 24% and 6% of all such securities, loans and instruments
attributable to any one issuer, industry or geographic region, respectively.
Non-investment grade securities generally involve greater risk than investment
grade securities due to the lower credit ratings of the issuers, which typically
have relatively high levels of indebtedness and are, therefore, more sensitive
to adverse economic conditions. In addition, the market for non-investment grade
securities and emerging markets loans and securitized instruments has been, and
may in the future continue to be, characterized by periods of illiquidity. The
Company has in place credit and other risk policies to control total inventory
positions and risk concentrations for non-investment grade securities and
emerging market loans and securitized instruments.
The Company may, from time to time, also provide financing or financing
commitments to companies in connection with its investment banking activities.
Although the Company had no financing loans or financing commitments outstanding
at May 31, 1995, in June 1995 the Company entered into two commitments to
provide financing totaling approximately $260 million in connection with its
high-yield underwriting activities. There are no financing loans currently
outstanding.
At May 31, 1995, financial instruments owned by the Company included derivative
products (generally in the form of futures, forwards, swaps, caps, collars,
floors, swap options and similar instruments which derive their value from
underlying interest rates, foreign exchange rates or commodity or equity
instruments or indices) related to financial instruments and commodities with an
aggregate net replacement cost of $9.8 billion. The net replacement cost of all
derivative products in a gain position represents the Company's maximum exposure
to derivatives related credit risk. Derivative products may have both on- and
off-balance sheet risk implications, depending on the nature of the contract. It
should be noted, however, that in many cases derivatives serve to reduce, rather
than increase, the Company's exposure to losses from market, credit and other
risks. The risks associated with the Company's derivative activities, including
market and credit risks, are managed on an integrated basis with the associated
cash instruments in a manner consistent with the Company's overall risk
management policies and procedures. The Company manages its exposure to
derivative products through various means, which include entering into master
netting agreements when feasible; monitoring the creditworthiness of
counterparties on an ongoing basis and requesting initial and/or additional
collateral when deemed necessary; diversifying and limiting exposure to
individual counterparties; and limiting the duration of exposure.
Page 20
<PAGE> 21
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following developments have occurred with respect to certain
matters previously reported in the Form 10-K.
State of West Virginia v. Morgan Stanley & Co. Incorporated. On June 5,
1995, the Supreme Court of Appeals of West Virginia reversed the judgment and
remanded the matter for a new trial. On July 3, 1995, and July 5, 1995,
respectively, the State of West Virginia and Morgan Stanley filed petitions for
rehearing with the Supreme Court of Appeals.
Katell, et al. v. Morgan Stanley Group Inc., et al. On June 15, 1995,
the court granted the special litigation committee's motion to dismiss the
action.
First Tokyo Index Trust Limited v. Morgan Stanley Trust Company and
Morgan Stanley International. On April 21, 1995, First Tokyo issued a summons
seeking to amend its Statement of Claim to assert claims against Coopers &
Lybrand for breach of contract and negligence. On July 3, 1995, the court
directed that this action be consolidated with a related action filed by Swiss
Bank Corporation against Coopers & Lybrand, and scheduled the trial to commence
on June 4, 1996.
ITEM 2. CHANGES IN SECURITIES.
In February and March 1995, the Company and Morgan Stanley Finance plc
("MS plc") issued 5,767,200 9.00% Capital Units in an aggregate amount of
$144,180,000, each consisting of (i) a 9.00% Subordinated Debenture of MS plc
due February 28, 2015 in the principal amount of $25.00 guaranteed by the
Company and (ii) a related Purchase Contract issued by the Company requiring the
holder, at the Company's option after February 28, 1996, to purchase one
Depository Share representing ownership of a 1/8 interest in a share of the
Company's 9.00% Cumulative Preferred Stock, stated value $200.00 per share.
Exhibit 4.1 to this Form 10-Q sets forth the designation, preferences and rights
of the 9.00% Cumulative Preferred Stock and the following summary is qualified
in its entirety by reference thereto.
The 9.00% Cumulative Preferred Stock, if issued, will rank as to
payment of dividends and amounts payable on liquidation prior to the Company's
Common Stock and on a parity with the Company's ESOP Convertible Preferred
Stock, 9.36% Cumulative Preferred Stock, 8.88% Cumulative Preferred Stock,
8-3/4% Cumulative Preferred Stock, 7-3/8% Cumulative Preferred Stock, 7.82%
Cumulative Preferred Stock (if issued in connection with the 7.82% Capital
Units) and 7.80% Cumulative Preferred Stock (if issued in connection with the
7.80% Capital Units). The holders of the 9.00% Cumulative Preferred Stock are
entitled to receive, when declared out of funds legally available therefor, cash
dividends payable quarterly at the rate of 9.00% per annum, calculated as a
percentage of the stated value.
Unless full cumulative dividends on the 9.00% Cumulative Preferred
Stock have been paid, dividends (other than in Common Stock) may not be paid or
declared or set aside for payment and other distributions may not be made upon
the Common Stock or on any other Preferred Stock of the Company ranking junior
or on a parity with the 9.00% Cumulative Preferred Stock as to dividends, nor
may any Common Stock or such other Preferred Stock of the Company be redeemed,
purchased or otherwise acquired by the Company for any consideration or any
payment be made to or available for a sinking fund for the redemption of any
shares of such stock.
Page 21
<PAGE> 22
In the event of any liquidation, dissolution or winding up of the
Company, the holders of shares of 9.00% Cumulative Preferred Stock will be
entitled to receive (out of assets of the Company available for distribution to
stockholders) liquidating distributions in the amount of $200.00 per share
(equivalent to $25.00 per Depository Share), plus accrued and accumulated but
unpaid dividends to the date of final distribution, before any distribution is
made to holders of Common Stock.
Holders of 9.00% Cumulative Preferred Stock will have voting rights
only as required by the laws of the State of Delaware or whenever dividends
payable on the 9.00% Cumulative Preferred Stock or any other class or series of
stock ranking on a parity with the 9.00% Cumulative Preferred Stock with respect
to the payment of dividends are in arrears for any aggregate number of days
equal to six calendar quarters or more, whether or not consecutive. In this
case, each holder of 9.00% Cumulative Preferred Stock will be entitled to one
vote for each share of 9.00% Cumulative Preferred Stock held (voting together as
a class with all other series of the Company's Preferred Stock upon which like
voting rights have been conferred or are exercisable) to elect two directors of
the Company at the next annual meeting of stockholders and at each subsequent
meeting until such arrears have been paid or set apart for payment.
The 9.00% Cumulative Preferred Stock is redeemable in whole or in part
at the Company's option on or after February 28, 2000, at a redemption price
equal to $200.00 per share (equivalent to $25.00 per Depository Share), plus
accrued and accumulated but unpaid dividends. If full cumulative dividends on
the 9.00% Cumulative Preferred Stock have not been paid, the 9.00% Cumulative
Preferred Stock may not be redeemed in part and the Company may not purchase or
acquire any shares of 9.00% Cumulative Preferred Stock other than pursuant to a
purchase or exchange offer made on the same terms to all holders of the 9.00%
Cumulative Preferred Stock.
ITEM 5. OTHER INFORMATION
On June 29, 1995, the Company announced that it had signed a definitive
agreement to purchase Miller, Anderson & Sherrerd, LLP, a Philadelphia-based
investment manager with $33 billion in assets under management. The purchase
price is approximately $350 million, payable in a combination of cash, notes and
common stock of the Company. The transaction is subject to certain conditions
and is expected to close this Autumn.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 4.1 - Restated Certificate of
Incorporation, as amended to date
(incorporated by reference to
Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal
year ended January 31, 1995).
Exhibit 4.2 - Subordinated Indenture dated as of
November 15, 1993 among MS plc, as
Issuer, the Company, as Guarantor,
and Chemical Bank, as Trustee
(incorporated by reference to
Exhibit 4.1 to the Company's Current
Report on Form 8-K dated December 1,
1993).
Exhibit 4.3 - Capital Unit Agreement dated as of
February 21, 1995 among the Company,
MS plc, Chemical Bank, as Agent and
Book-Entry Unit Depositary, and the
holders from time to time of the
Capital Units (incorporated by
reference to Exhibit 4 to the
Company's Current Report on Form 8-K
dated February 24, 1995).
Page 22
<PAGE> 23
Exhibit 4.4 - Form of Certificate of 9.00%
Cumulative Preferred Stock (stated
value $200.00 per share) related to
9.00% Capital Units (incorporated by
reference to Exhibit 4-c to the
Company's Registration Statement on
Form S-3 (No. 33-65838)).
Exhibit 11 - Statement Re: Computation of
Earnings per Share.
Exhibit 12 - Statement Re: Computation of Ratio
of Earnings to Fixed Charges and
Preferred Stock Dividends.
Exhibit 27 - Financial Data Schedule.
(b) The Company filed a report on Form 8-K dated February 24, 1995
to file a Capital Unit Agreement dated as of February 21, 1995
among the Company, MS plc, Chemical Bank as Agent and
Book-Entry Unit Depositary, and the holders from time to time
of the 9.00% Capital Units, each consisting of (i) a 9.00%
Subordinated Debenture of MS plc due February 28, 2015 in the
principal amount of $25.00 guaranteed by the Company and (ii)
a related Purchase Contract issued by the Company requiring
the holder, at the Company's option after February 28, 1996,
to purchase one Depositary Share representing ownership of 1/8
interest in a share of the Company's 9.00% Cumulative
Preferred Stock, stated value 200.00 per share.
The Company filed a report on Form 8-K dated February 28, 1995
to report the issuance by the Company of a press release
summarizing the financial results of the Company for the
three-month and twelve-month periods ended January 31, 1995
and 1994 and announcing (i) the declaration by the Company's
Board of Directors of an increase in the regular quarterly
cash dividend to 32 cents per common share, (ii) the
authorization by the Board of Directors of the purchase,
subject to market and other conditions, of an additional $150
million of the Company's Common Stock and (iii) the
determination by the Board of Directors to change the
Company's fiscal year-end to November 30 from January 31.
The Company filed a report on Form 8-K dated April 4, 1995 to
file (i) a form of U.S. Distribution Agreement dated March 29,
1995 between the Company and Morgan Stanley & Co. Incorporated
relating to the issuance and sale from time to time by the
Company in the United States of its Global Medium-Term Notes,
Series C, due more than nine months from date of issue, (ii) a
form of Euro Distribution Agreement dated March 29, 1995
between the Company and Morgan Stanley & Co. International
Limited, Morgan Stanley Bank AG, Morgan Stanley S.A. and Bank
Morgan Stanley AG relating to the issuance and sale from time
to time by the Company outside the United States of its Global
Medium-Term Notes, Series D, and its Global Medium-Term Notes,
Series E, in each case due more than nine months from date of
issue and (iii) forms of various Global Medium-Term Notes
issuable from time to time by the Company.
Page 23
<PAGE> 24
SIGNATURES
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 GROUP INC.
-------------------------
Registrant
Date: July 14, 1995 /s/ Eileen K. Murray
--------------------
Eileen K. Murray
Chief Accounting Officer
and Controller
Date: July 14, 1995 /s/ Jonathan M. Clark
---------------------
Jonathan M. Clark
General Counsel and Secretary
Page 24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
Exhibit 4.1 - Restated Certificate of Incorporation, as amended to date
(incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended January
31, 1995).
Exhibit 4.2 - Subordinated Indenture dated as of November 15, 1993 among
MS plc, as Issuer, the Company, as Guarantor, and Chemical
Bank, as Trustee (incorporated by reference to Exhibit 4.1
to the Company's Current Report on Form 8-K dated December
1, 1993).
Exhibit 4.3 - Capital Unit Agreement dated as of February 21, 1995 among
the Company, MS plc, Chemical Bank, as Agent and Book-Entry
Unit Depositary, and the holders from time to time of the
Capital Units (incorporated by reference to Exhibit 4 to the
Company's Current Report on Form 8-K dated February 24,
1995).
Exhibit 4.4 - Form of Certificate of 9.00% Cumulative Preferred Stock
(stated value $200.00 per share) related to 9.00% Capital
Units (incorporated by reference to Exhibit 4-c to the
Company's Registration Statement on Form S-3 (No.
33-65838)).
Exhibit 11 - Statement Re: Computation of Earnings per Share.
Exhibit 12 - Statement Re: Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends.
Exhibit 27 - Financial Data Schedule.
</TABLE>
Page 25
<PAGE> 1
MORGAN STANLEY GROUP INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED THREE MONTHS ENDED
----------- ---------------------------
MAY 31, MAY 31, APRIL 30,
1995 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY:
Common stock and common stock equivalents:
Average common shares outstanding 76,689,268 77,088,203 77,822,050
Average common shares issuable
under employee benefit plans 1,600,420 1,709,604 2,006,621
----------- ----------- -----------
Total average common and common
equivalent shares outstanding 78,289,688 78,797,807 79,828,671
=========== =========== ===========
Earnings:
Net income $ 204 $ 166 $ 117
Less: Preferred stock dividend
requirements 21 16 16
----------- ----------- -----------
Earnings applicable to common shares $ 183 $ 150 $ 101
=========== =========== ===========
Primary earnings per share $ 2.33 $ 1.90 $ 1.27
=========== =========== ===========
Fully diluted:
Common stock and common stock equivalents:
Average common shares outstanding 76,689,268 77,088,203 77,822,050
Average common shares issuable
under employee benefit plans 1,886,731 1,987,326 2,006,621
Common shares issuable upon conversion
of preferred stock 3,790,352 3,788,801 3,818,511
----------- ----------- -----------
Total average common and common
equivalent shares outstanding 82,366,351 82,864,330 83,647,182
=========== =========== ===========
Earnings:
Net income $ 204 $ 166 $ 117
Less: Preferred stock dividend
requirements 20 16 15
----------- ----------- -----------
Earnings applicable to common shares $ 184 $ 150 $ 102
=========== =========== ===========
Fully diluted earnings per share $ 2.23 $ 1.82 $ 1.22
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 12
MORGAN STANLEY GROUP INC.
RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED YEAR ENDED
FOUR MONTHS ENDED THREE MONTHS ENDED JANUARY 31, DECEMBER 31,
MAY 31, MAY 31, APRIL 30, ---------------------------- -----------------
1995 1995 1994 1995 1994 1993 1991 1990
----------------- ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
Earnings:
Income before income taxes $ 309 $ 251 $ 184 $ 594 $1,200 $ 793 $ 772 $ 470
Add: Fixed charges, net 2,228 1,667 1,416 5,916 5,055 4,397 3,963 3,759
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes and
fixed charges, net $2,537 $1,918 $1,600 $6,510 $6,255 $5,190 $4,735 $4,229
====== ====== ====== ====== ====== ====== ====== ======
Fixed charges:
Total interest expense (1) $2,229 $1,670 $1,406 $5,899 $5,020 $4,362 $3,946 $3,723
Interest factor in rents (2) 14 11 10 41 35 35 38 36
------ ------ ------ ------ ------ ------ ------ ------
Total fixed charges $2,243 $1,681 $1,416 $5,940 $5,055 $4,397 $3,984 $3,759
====== ====== ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges 1.1 1.1 1.1 1.1 1.2 1.2 1.2 1.1
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Earnings:
Income before income taxes $ 309 $ 251 $ 184 $ 594 $1,200 $ 793 $ 772 $ 470
Add: Fixed charges, net 2,228 1,667 1,416 5,916 5,055 4,397 3,963 3,794
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes and
fixed charges, net $2,537 $1,918 $1,600 $6,510 $6,255 $5,190 $4,735 $4,264
====== ====== ====== ====== ====== ====== ====== ======
Fixed charges:
Total interest expense (1) $2,229 $1,670 $1,406 $5,899 $5,020 $4,362 $3,946 $3,723
Interest factor in rents (2) 14 11 10 41 35 35 38 36
Preferred stock dividends (3) 33 25 25 97 85 82 47 35
------ ------ ------ ------ ------ ------ ------ ------
Total fixed charges and preferred
stock dividends $2,276 $1,706 $1,441 $6,037 $5,140 $4,479 $4,031 $3,794
====== ====== ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges and
preferred stock dividends 1.1 1.1 1.1 1.1 1.2 1.2 1.2 1.1
</TABLE>
- ---------------
(1) Total interest expense for the four and three months ended May 31, 1995,
the three months ended April 30, 1994, the fiscal year ended January 31,
1995, and the years ended December 31, 1991 and 1990 includes capitalized
interest.
(2) Interest factor in rents represents one-third of rent expense which is
considered representative of the interest factor.
(3) The preferred stock dividend amounts represent pre-tax earnings required
to cover dividends on preferred stock.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
MORGAN STANLEY GROUP INC.
FINANCIAL DATA SCHEDULE
(In millions, except per share data)
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at May 31, 1995
(Unaudited) and the Condensed Consolidated Statement of Income for the Four
Months Ended May 31, 1995 (Unaudited) and is qualified in its entirety by
reference to such condensed consolidated financial statements.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> FEB-01-1995
<PERIOD-END> MAY-31-1995
<CASH> $4,214
<RECEIVABLES> $8,079
<SECURITIES-RESALE> $40,856
<SECURITIES-BORROWED> $23,025
<INSTRUMENTS-OWNED> $52,191
<PP&E> $1,163
<TOTAL-ASSETS> $130,054
<SHORT-TERM> $10,770
<PAYABLES> $13,653
<REPOS-SOLD> $55,141
<SECURITIES-LOANED> $4,735
<INSTRUMENTS-SOLD> $31,157
<LONG-TERM> $8,726
<COMMON> $80
$0
$819
<OTHER-SE> $3,786
<TOTAL-LIABILITY-AND-EQUITY> $130,054
<TRADING-REVENUE> $552
<INTEREST-DIVIDENDS> $2,330
<COMMISSIONS> $168
<INVESTMENT-BANKING-REVENUES> $353
<FEE-REVENUE> $119
<INTEREST-EXPENSE> $2,214
<COMPENSATION> $613
<INCOME-PRETAX> $309
<INCOME-PRE-EXTRAORDINARY> $309
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $204
<EPS-PRIMARY> $2.33
<EPS-DILUTED> $2.23
</TABLE>
