S-1 1 ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on July 31, 2007

Registration No. 333-            

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

MSCI Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   2741   13-4038723
(State or Other Jurisdiction of
(Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

88 Pine Street

New York, NY 10005

(212) 804-3990

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


FREDERICK W. BOGDAN

General Counsel

MSCI Inc.

88 Pine Street

New York, NY 10005

(212) 804-3990

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 


Copies to:

 

RICHARD D. TRUESDELL, JR.

Davis Polk & Wardwell

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

LESLIE N. SILVERMAN

SANDRA L. FLOW

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NY 10006

(212) 225-2000

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨             

 


CALCULATION OF REGISTRATION FEE

 

 
Title Of Each Class
Of Securities To Be Registered
   Proposed Maximum
Aggregate Offering
Price (2)
   Amount Of
Registration Fee

Class A Common Stock, par value $0.01 per share

   $ 200,000,000    $ 6,140
 
(1) Includes             shares which the underwriters have the right to purchase to cover over-allotments.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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EXPLANATORY NOTE

 

This Registration Statement covers the registration of              shares of class A common stock of MSCI Inc. (“MSCI”) to be offered for cash in an underwritten initial public offering. This Registration Statement also covers the registration of agency transactions by Morgan Stanley & Co. Incorporated in such shares of class A common stock after the completion of the initial public offering. The complete prospectus relating to the initial public offering (the “IPO prospectus”) follows immediately after this Explanatory Note. Following the IPO prospectus are pages relating solely to such agency transactions (the “agency prospectus”), including an alternate front cover page, an alternate “Risk Factors—Risks Related to This Offering and Ownership of Our Class A Common Stock—You will incur immediate and substantial dilution as a result of this offering,” an alternate “Use of Proceeds” section and an alternate “Plan of Distribution” section to replace the “Underwriters” section. All other sections of the IPO prospectus will be included in the agency prospectus.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                     , 2007

 

             SHARES

MSCI Inc.

CLASS A COMMON STOCK

 


 

This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $             and $             per share.

 

We are currently majority-owned by Morgan Stanley and, upon completion of the offering, Morgan Stanley will beneficially own     % of our outstanding class B common stock, which will represent approximately     % of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in us (     % if the underwriters’ over-allotment option is exercised in full). See “Risk Factors—Risks Related to This Offering and Our Relationship with Morgan Stanley.”

 


 

Holders of class A common stock have identical rights to holders of class B common stock, except that holders of class A common stock are entitled to one vote per share while holders of class B common stock are entitled to five votes per share on all matters submitted to a vote of shareholders. Holders of class A common stock are generally entitled to vote with the holders of class B common stock as one class on all matters as to which shareholders are entitled to vote. Following the offering, the shares of class B common stock held by Morgan Stanley will represent approximately     % of the combined voting power of all classes of voting stock (     % if the underwriters’ over-allotment option is exercised in full), and Morgan Stanley will be able, among other things, to elect all of our directors, to approve or disapprove amendments to our Amended and Restated Certificate of Incorporation and By-laws, acquisitions and dispositions of assets, mergers and other control decisions and to control our dividend policy and access to capital. Each share of class B common stock will be convertible, under certain circumstances, into one share of class A common stock. See “Arrangements Between Morgan Stanley and Us” and “Description of Capital Stock.”

 


 

We intend to apply to list the class A common stock on the          under the symbol “    .”

 


 

Investing in the class A common stock involves risks. See “ Risk Factors” beginning on page 13.

 


 

PRICE $              A SHARE

 


 

       Price to
Public
     Underwriting
Discounts
and
Commissions
     Proceeds to
MSCI

Per Share

     $               $               $         

Total

     $                          $                          $                    

 

We have granted the underwriters an option, exercisable for a period of 30 days from the date of this prospectus, to purchase up to an aggregate of              additional shares of class A common stock to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of class A common stock to purchasers on                     , 2007.

 


MORGAN STANLEY

 

                    , 2007


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In this prospectus, “MSCI,” the “Company,” “we,” “us” and “our” refer to MSCI Inc. and its consolidated subsidiaries. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the class A common stock.

 

We own or have rights to use trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: @CREDIT, @ENERGY, @INTEREST, ACWI, Alphabuilder, Barra, Barra One, BarraOne, EAFE, FEA, GICS, IndexMap, Market Impact Model, MSCI, ProStorage, TotalRisk, VaRdelta and VaRworks. All other trademarks, trade names and service marks included in this prospectus are the property of their respective owners.

 


 

Until                         , 2007 (25 days after the date of this prospectus), all dealers that buy, sell or trade our class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our class A common stock. You should read this entire prospectus carefully, including the “Risk Factors” section and the consolidated financial statements and notes thereto, before making an investment decision.

 

MSCI

 

The Company

 

We are a leading provider of investment decision support tools to investment institutions worldwide. We produce indices and risk and return portfolio analytics for use in managing investment portfolios. Our products are used by institutions investing in or trading equity, fixed income and multi-asset class instruments and portfolios around the world. Our flagship products are our international equity indices marketed under the MSCI brand and our equity portfolio analytics marketed under the Barra brand. Our products are used in many areas of the investment process, including portfolio construction and optimization, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, investment manager selection and investment research.

 

Our clients include asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, exchange traded funds (“ETFs”), hedge funds and private wealth; and financial intermediaries such as broker-dealers, exchanges, custodians and investment consultants. We have a client base of over 2,800 clients across 63 countries. Our clients include 24 of the 25 largest firms managing assets globally, measured by assets under management as published in July 2007 by Nelson MarketPlace, a leading provider of information to the global investment community. We have 18 offices in 14 countries to help serve our diverse client base, with approximately 51% of our clients in the Americas, 34% in Europe, the Middle East and Africa (“EMEA”), 9% in Japan and 6% in Asia (not including Japan), based on fiscal year 2006 revenues.

 

Our principal sales model is to license annual, recurring subscriptions to our products for use at specified locations by a given number of users for an annual fee paid upfront. The substantial majority of our revenues comes from these annual, recurring subscriptions. Over time, as their needs evolve, our clients often add product modules, users and locations to their subscriptions, which results in an increase in our revenues per client. Additionally, a rapidly growing source of our revenues comes from clients who use our indices as the basis for index-linked investment products such as ETFs. These clients commonly pay us a license fee based on the investment product’s assets.

 

We have experienced growth in recent years with operating revenues and operating income increasing to $175.8 million and $56.2 million, or by 18% and 13%, respectively, in the six months ended May 31, 2007 compared to the six months ended May 31, 2006, and to $310.7 million and $93.0 million, or by 12% and 34%, respectively, in the fiscal year ended November 30, 2006 compared to the fiscal year ended November 30, 2005.

 

We were a pioneer in developing the market for international equity index products and equity portfolio risk analytics tools. Our research organization over time has accumulated an in-depth understanding of the investment process worldwide. We monitor investment trends and their drivers globally, as well as analyze product specific needs in areas such as indexing, risk forecasting, portfolio optimization, performance attribution and value-at-risk simulation. Based on this wealth of knowledge, we have created and continue to develop, enhance and refine sophisticated index construction methodologies and risk models to meet the growing, complex and diverse needs of our clients’ investment processes. Our models and methodologies are the intellectual foundation of our

 

 

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business and include the innovative algorithms, formulas and analytical and quantitative techniques that we use, together with market data, to produce our products. Our long history has allowed us to build extensive databases of proprietary index and risk data, as well as to accumulate valuable historical market data, which we believe would be difficult to replicate and which provide us with a substantial competitive advantage.

 

Today, our primary products consist of equity indices, equity portfolio analytics and multi-asset class portfolio analytics. We also have product offerings in the areas of fixed income portfolio analytics, hedge fund indices and risk models, and energy and commodity asset valuation analytics. Our products are generally comprised of proprietary index data, risk data and sophisticated software applications. Our index and risk data are created by applying our models and methodologies to market data. Our clients can use our data together with our proprietary software applications, third-party applications or their own applications in their investment processes. Our software applications offer our clients sophisticated portfolio analytics to perform in-depth analysis of their portfolios, using our risk data, the client’s portfolio data and fundamental and market data. Our products are marketed under three leading brands: MSCI, Barra and FEA.

 

Our MSCI-branded equity index products are designed to measure returns available to investors across a wide variety of markets (e.g., Europe, Japan or emerging markets), size segments (e.g., small capitalization or large capitalization), style segments (e.g., growth or value) and industries (e.g., banks or media). We currently calculate over 90,000 equity indices daily. Our most widely used equity indices are the MSCI International Equity Indices, in particular the well-known MSCI EAFE (Europe, Australasia and Far East), MSCI World and MSCI Emerging Markets Indices. The MSCI EAFE Index is licensed as the basis of the iShares MSCI EAFE Index Fund, the second largest exchange traded fund in the world with over $46 billion of assets as of June 30, 2007. Approximately 2,100 clients worldwide subscribe to our equity index products for use in their investment portfolios and for market performance measurement and analysis. The performance of our equity indices is also frequently referenced when selecting investment managers, assigning return benchmarks in mandates, comparing performance and providing market and academic commentary.

 

Our Barra-branded equity portfolio analytics products assist investment professionals in analyzing and managing risks and returns for equities at both the asset and portfolio level in major equity markets worldwide. Barra equity risk models identify and analyze the factors that influence equity asset returns and risk. Our most widely used Barra equity products utilize our fundamental multi-factor equity risk model data to help our clients construct, analyze, optimize and manage equity portfolios. Approximately 750 clients worldwide subscribe to our equity portfolio analytics products. Asset owners often request Barra risk model measurements for portfolio risk and tracking error when selecting investment managers, prescribing investment restrictions and assigning investment mandates.

 

Our Barra-branded multi-asset class portfolio analytics products are also based on our proprietary fundamental multi-factor risk models, value-at-risk methodologies and asset valuation models. These products offer a consistent risk assessment framework for managing and monitoring investments in multiple asset classes across an organization. They enable clients to analyze portfolios and identify and manage potential risks from equities, fixed income, derivatives contracts such as futures and swaps and alternative investments such as commodities and hedge funds. The products allow clients to identify the drivers of risk and return across their investments, run optimization programs, produce daily risk reports, perform pre-trade analysis, evaluate and monitor managers and investment teams across asset classes and analyze correlations across a group of selected portfolios.

 

We also offer fixed income portfolio analytics, hedge fund indices and risk models, and energy and commodity asset valuation analytics.

 

 

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Growth Strategy

 

We believe we are well-positioned for significant growth worldwide and have a multi-faceted growth strategy that builds on our strong client relationships, products, brands and integral role in the investment process. The number, diversity, size, sophistication and amount of assets held in investment institutions that own, manage and direct financial assets have grown significantly in recent years. These investment institutions increasingly require sophisticated investment management tools such as ours to support their complex and global investment processes.

 

The principal elements of our growth strategy are:

 

   

Client Growth

 

   

Increase product subscriptions and users within our current client base. Many of our clients worldwide use only one or a limited number of our products, and we believe there are substantial opportunities to cross sell our other investment decision support tools.

 

   

Expand client base in current client types. We plan to add new clients by leveraging our brand strength, our products, our broad access to the global investment community and our strong knowledge of the investment process.

 

   

Expand into client types in which we are underrepresented. We plan to expand into client types in which we do not currently have a leading presence. In particular, we intend to continue to focus on increasing the number of hedge fund managers using our products.

 

   

Expand global presence. We intend to leverage our brands, reputation and products to expand and gain more clients in selected markets where we currently have a limited presence, including parts of Asia, the Middle East, Eastern Europe and Latin America.

 

   

Product Growth

 

   

Create innovative new product offerings and enhancements. In order to maintain and enhance our leadership position, we plan to introduce innovative new products and enhancements to existing products. We maintain an active dialogue with our clients in order to understand their needs and anticipate market developments.

 

   

Expand our presence across all asset classes. We believe our well-established reputation and client base in the equity area as well as our experienced research staff provide us with a strong foundation to become a leading provider of tools for investors in multi-asset class portfolios and other asset classes such as fixed income.

 

   

Expand our capacity to design and produce new products. We intend to increase our investments in new model research, data production systems and software application design to enable us to design and produce new products more quickly and cost-effectively.

 

   

Growth Through Acquisitions. We intend to actively seek to acquire products, technologies and companies that will enhance, complement or expand our product offerings and client base, as well as increase our ability to provide investment decision support tools to equity, fixed income and multi-asset class investment institutions.

 

Competitive Advantages

 

We believe our competitive advantages include the following:

 

   

Strong brand recognition. Our indices, portfolio analytics and energy and commodity asset valuation analytics, marketed under the MSCI, Barra and FEA brands, respectively, are well-established and recognized throughout the investment community worldwide. We are an industry leader in international equity indices and equity portfolio analytics tools worldwide.

 

 

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Strong client relationships and deep understanding of their needs. Our approach to product development, dedication to client support and range of products have helped us build strong relationships with investment institutions around the world. We believe the skills, knowledge and experience of our research, software engineering, data management and production and product management teams enable us to develop and enhance our models, methodologies, data and software applications in accordance with client demands and needs.

 

   

Client reliance on our products. Many of our clients have come to rely on our products in their investment management processes, integrating our products into their performance measurement and risk management processes, where they become an integral part of their daily portfolio management functions. In certain cases, our clients are requested by their customers to report using our tools or data.

 

   

Sophisticated models with practical applications. We have invested significant time and resources for more than three decades in developing highly sophisticated and practical index methodologies and risk models that combine financial theory and investment practice.

 

   

Open architecture and transparency. We have an open architecture philosophy. Clients can access our data through our software applications, third-party applications or their own applications. In order to provide transparency, we document and disclose many details of our models and methodologies to our clients so they can better understand and utilize the tools we offer.

 

   

Global products and operations. Our products cover most major investment markets throughout the world. For example, our international equity indices cover 56 countries, spanning both developed and emerging market countries. In addition, we produce equity risk data for 42 countries and an integrated multi-asset class risk model that covers 56 equity markets and 46 fixed income markets. Our clients are located in 63 countries and our employees are located in 14 countries in order to maintain close contact with our clients and the international markets we follow.

 

   

Highly skilled employees. Our workforce is highly skilled, highly technical and, in some instances, highly specialized. In particular, our research and software application development departments include experts in advanced mathematics, statistics, finance, portfolio investment and software engineering, who combine strong academic credentials with market experience.

 

   

Extensive historical databases. We believe our substantial and valuable databases of proprietary index and risk data, including over 35 years of certain index data history and over 30 years of certain risk data history, would be difficult and costly for another party to replicate. Historical data is a critical component of our clients’ investment processes, allowing them to research and back-test investment strategies and analyze portfolios over many investment and business cycles and under a variety of historical situations and market environments.

 

Our Corporate Information

 

Our principal executive offices are located at Wall Street Plaza, 88 Pine Street, New York, New York 10005 and our telephone number is (212) 804-3990. Our website address is www.mscibarra.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.

 

Share Reclassification

 

Currently, we have one class of common stock outstanding. Each share of our outstanding common stock will be reclassified into              shares of class B common stock in connection with this offering. We also plan to amend our certificate of incorporation (“Amended and Restated Certificate of Incorporation”) and by-laws and increase our total authorized number of shares of capital stock. After the offering, we will have no outstanding preferred stock and two classes of common stock. In this prospectus, we refer to all of these actions together as

 

 

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the “Reclassification.” The Reclassification will take place immediately prior to the closing of this offering. Except where otherwise noted, the description of the terms of our charter documents in this prospectus reflects the terms of those documents as they will exist following the Reclassification. Except where otherwise noted in the historical data presented in the accompanying financial statements and elsewhere in this prospectus, we have revised the per share data for common stock to reflect the effect of the Reclassification.

 

In this offering, we are selling shares of class A common stock, which will have fewer votes per share than our class B common stock. Under the terms of our Amended and Restated Certificate of Incorporation, one of the features of the class B common stock will be that any holder of shares of class B common stock will have the right to convert those shares into shares of class A common stock at any time prior to a tax-free distribution of the shares held by Morgan Stanley to its shareholders (including a distribution in exchange for Morgan Stanley shares or securities) or another similar transaction intended to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”), or any corresponding provision of any successor statute (a “Tax-Free Spin-Off”). In addition, prior to any Tax-Free Spin-Off, under the Amended and Restated Certificate of Incorporation, shares of class B common stock can only be transferred to Morgan Stanley, Capital Group International, Inc. (“Capital Group International”) or their respective subsidiaries, and any other transfer of such shares will result in the automatic conversion of those shares into shares of class A common stock without any action by the transferor or transferee.

 

 

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THE OFFERING

 

Class A common stock offered by us

                     shares

 

Over-allotment option

                     shares

 

Common stock to be outstanding after this offering:

 

    Class A

                     shares (                     shares if the underwriters exercise their over-allotment option in full)

 

    Class B

                     shares

 

    Total

                     shares (                     shares if the underwriters exercise their over-allotment option in full)

 

Voting rights

The holders of class A common stock, par value $0.01 per share (the “class A common stock”), have rights, including as to dividends, identical to those of holders of class B common stock, par value $0.01 per share (the “class B common stock”), except that holders of class A common stock are entitled to one vote per share, representing in the aggregate     % of the combined voting power of all classes of voting stock, and holders of class B common stock are entitled to five votes per share, representing in the aggregate     % of the combined voting power of all classes of voting stock. Holders of the class A common stock and the class B common stock vote together as a single class, except when amending or altering any provision of our Amended and Restated Certificate of Incorporation or By-laws so as to adversely affect the rights of one class. See “Description of Capital Stock—Common Stock—Voting Rights.” Under certain circumstances, class B common stock may be converted into class A common stock. See “—Relationship with Morgan Stanley” and “Description of Capital Stock—Common Stock—Conversion.”

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $             million, based on an assumed public offering price of $             per share (which is the midpoint of the range on the cover page of this prospectus). We intend to use all of the net proceeds from this offering to pay a portion of our new credit facility, which will be used to pay in full the $625.9 million demand note held by Morgan Stanley in connection with the dividend paid on July 19, 2007. See “Use of Proceeds.”

 

Dividend policy

We do not intend to pay dividends on our class A common stock or our class B common stock (collectively, the “common stock”). We intend to retain all available funds for use in the operation and expansion of our business.

 

Controlling shareholder

Currently, Morgan Stanley owns 96.6% of the outstanding shares of our common stock. Upon completion of this offering, Morgan Stanley will beneficially own     % of the outstanding shares of our class B

 

 

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common stock, which will represent approximately     % of the combined voting power of all classes of voting stock (    % if the underwriters’ over-allotment option is exercised in full). For information regarding the relationship between Morgan Stanley and us, see “Arrangements Between Morgan Stanley and Us.”

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our class A common stock.

 

Proposed              symbol for class A common stock

“            .”

 

Unless we indicate otherwise, all information in this prospectus:

 

   

gives effect to the Reclassification and is based on there being no shares of class A common stock and                      shares of class B common stock outstanding as of May 31, 2007, after giving retroactive effect to the reclassification of each share of our outstanding common stock into                      shares of our class B common stock in the Reclassification;

 

   

excludes              restricted shares of class A common stock and options to purchase                      shares of class A common stock that we anticipate granting to certain executive officers and employees in connection with this offering;

 

   

excludes              shares of class A common stock reserved for issuance pursuant to our equity incentive compensation plan; and

 

   

assumes no exercise of the underwriters’ over-allotment option.

 

 

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RELATIONSHIP WITH MORGAN STANLEY

 

Currently, Morgan Stanley owns 96.6% of the outstanding shares of our common stock. Upon completion of this offering, Morgan Stanley will beneficially own     % of the outstanding shares of our class B common stock, which will represent approximately     % of the combined voting power of all classes of voting stock and     % of the economic interest in us (    % and     %, respectively, if the underwriters’ over-allotment option is exercised in full). For as long as Morgan Stanley continues to beneficially own more than 50% of the combined voting power of all classes of voting stock, Morgan Stanley will be able to direct the election of all of the members of our Board of Directors and exercise a controlling influence over our business and affairs, including any decisions with respect to mergers or other business combinations involving us, the acquisition or disposition of assets by us, our approval or disapproval of amendments to our Amended and Restated Certificate of Incorporation and By-laws, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock or any preferred stock and the payment of dividends. Similarly, Morgan Stanley will have the power to determine or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to prevent an acquisition or any other change in control of us, and could take other actions that might be favorable to Morgan Stanley and potentially unfavorable to the class A common shareholders. See “Description of Capital Stock.”

 

Morgan Stanley has indicated to us that it may, in its discretion, sell all or a portion of its ownership interest in us or may completely divest its ownership in us through a distribution of shares of our common stock to shareholders of Morgan Stanley, including a potential distribution intended to qualify as a Tax-Free Spin-Off. Morgan Stanley has indicated to us that although it appears beneficial for Morgan Stanley to ultimately divest its ownership interest in us, no decision has been made at this time and any definitive decision by Morgan Stanley to reduce its beneficial ownership interest in us will be made in the future on the basis of all of the circumstances existing at such time, including the effect of any such divestiture on Morgan Stanley, the needs and performance of Morgan Stanley, our performance, stock market conditions and other factors. Morgan Stanley is not subject to any obligation, contractual or otherwise, to retain its ownership interest in us, except that we and Morgan Stanley, our directors, executive officers and certain other employees and equity holders, including Morgan Stanley and Capital Group International, have agreed, subject to certain exceptions and limitations, not to offer, sell, contract to sell or otherwise dispose of any shares of our common stock or any of our securities that are substantially similar to shares of our common stock for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. There can be no assurance concerning the period of time during which Morgan Stanley will maintain its ownership of our common stock following this offering.

 

Morgan Stanley will also have the option to purchase in certain circumstances additional shares of our class B common stock and any other capital stock in order to maintain at least 50% of the total value of our stock and at least 80% of the total voting power of our stock and, with respect to shares of nonvoting capital stock, 80% of each outstanding class of such stock.

 

Holders of class A common stock are entitled to one vote per share and holders of class B common stock are entitled to five votes per share. Each share of class B common stock is convertible while held by Morgan Stanley, Capital Group International or any of their subsidiaries at such holder’s option into one share of class A common stock. Each share of class B common stock transferred to a person other than Morgan Stanley, Capital Group International or any of their respective subsidiaries will automatically convert into one share of class A common stock upon such disposition, except for a disposition effected in connection with a distribution of class B common stock in a Tax-Free Spin-Off. Following any such distribution, shares of class B common stock will no longer be convertible into shares of class A common stock, and will be transferable as class B common stock, retaining their rights to five votes per share. See “Description of Capital Stock.”

 

For a description of certain provisions of our Amended and Restated Certificate of Incorporation concerning the allocation of business opportunities that may be suitable for both us and Morgan Stanley, see “Description of Capital Stock—Certain Amended and Restated Certificate of Incorporation and By-Law Provisions—Corporate Opportunities.” For other information regarding the relationship between Morgan Stanley and us, see “Arrangements Between Morgan Stanley and Us.”

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following table presents our summary historical consolidated financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statement of income data for the fiscal years ended November 30, 2004, 2005 and 2006 and the consolidated financial condition data as of November 30, 2005 and 2006 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of income data for the fiscal years ended November 30, 2002 and 2003 and the consolidated statement of financial condition data as of November 30, 2002, 2003 and 2004 are derived from our audited historical consolidated financial statements not included in this prospectus. The consolidated statement of income data for the six-month periods ended May 31, 2006 and 2007 and the consolidated financial condition data as of May 31, 2006 and 2007 are derived from our unaudited condensed consolidated financial statements which, in our opinion, have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position.

 

The historical financial information presented below may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a stand-alone company during the periods presented. Results for the six months ended May 31, 2007 are not necessarily indicative of results that may be expected for the entire year.

 

The pro forma unaudited statement of financial condition data as of May 31, 2007, reflects (i) the $973.0 million dividend paid on July 19, 2007, consisting of $325.0 million in cash and $648.0 million in demand notes payable to Morgan Stanley and Capital Group International, (ii) payment in full in cash of the $22.1 million demand note held by Capital Group International on July 19, 2007, (iii) the payment in full of the $625.9 million demand note held by Morgan Stanley with the net proceeds of a new credit facility we intend to enter into prior to the completion of this offering, (iv) the sale by us of              shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus and (v) the application of all of the estimated net proceeds from this offering to pay a portion of the credit facility.

 

 

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Consolidated Statements of Income Data

 

     For the Year Ended November 30,     For the Six Months
Ended May 31,
 
     2002(1)    2003(1)    2004(1)     2005    2006     2006      2007  
     (in thousands, except share and per share data)  

Operating revenues

   $ 83,776    $ 91,277    $ 178,446     $ 278,474    $ 310,698     $ 149,557      $ 175,821  

Cost of services

     44,808      44,670      86,432       106,598      115,426       51,593        62,607  

Selling, general and administrative

     24,560      30,411      51,304       74,678      76,130       35,268        44,453  

Amortization of intangible assets

               14,910       28,031      26,156       13,078        12,531  
                                                      

Total operating expenses

     69,368      75,081      152,646       209,307      217,712       99,939        119,591  
                                                      

Operating income

     14,408      16,196      25,800       69,167      92,986       49,618        56,230  

Interest income

     878      924      1,250       8,738      15,482       6,308        10,586  

Interest expense

     35      131      624       1,864      352       250        597  

Other income (loss)

               (13 )     398      1,043       (26 )      53  
                                                      

Interest and other income, net

     843      793      613       7,272      16,173 (2)     6,032        10,042 (2)
                                                      

Income before provision for income taxes, discontinued operations and cumulative effect of change in accounting principle

     15,251      16,989      26,413       76,439      109,159       55,650        66,272  

Provision for income taxes

     4,757      5,804      8,519       28,603      39,535       20,702        24,779  
                                                      

Income before discontinued operations and cumulative effect of change in accounting principle

     10,494      11,185      17,894       47,836      69,624       34,948        41,493  

Discontinued operations(3)

                  

Income (loss) from discontinued operations

               (84 )     5,847      12,699       664         

Provision (benefit) for income taxes on discontinued operations

               (30 )     2,054      4,626       189         
                                                      

Income (loss) from discontinued operations

               (54 )     3,793      8,073       475         
                                                      

Income before cumulative effect of change in accounting principle

     10,494      11,185      17,840       51,629      77,697       35,423        41,493  

Cumulative effect of change in accounting principle

                     313                    
                                                      

Net income

   $ 10,494    $ 11,185    $ 17,840     $ 51,942    $ 77,697 (2)   $ 35,423      $ 41,493 (2)
                                                      

Earnings (loss) per basic share:

                  

Continuing operations

   $ 1,049    $ 1,119    $ 910     $ 1,631    $ 2,375     $ 1,192      $ 1,415  

Discontinued operations

               (3 )     129      275       16         

Cumulative effect of change in accounting principle

                     11                    
                                                      

Earnings per basic share

   $ 1,049    $ 1,119    $ 907     $ 1,771    $ 2,650     $ 1,208      $ 1,415  
                                                      

Earnings (loss) per diluted share:

                  

Continuing operations

   $ 1,049    $ 1,119    $ 910     $ 1,631    $ 2,375     $ 1,192      $ 1,415  

Discontinued operations

               (3 )     129      275       16         

Cumulative effect of change in accounting principle

                     11                    
                                                      

Earnings per diluted share

   $ 1,049    $ 1,119    $ 907     $ 1,771    $ 2,650     $ 1,208      $ 1,415  
                                                      

Weighted average shares outstanding used in computing earnings per share

                  

Basic

     10,000      10,000      19,662       29,323      29,323       29,323        29,323  
                                                      

Diluted

     10,000      10,000      19,662       29,323      29,323       29,323        29,323  
                                                      

 

 

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Consolidated Statements of Financial Condition Data

 

    As of November 30,   As of May 31,
    2002   2003   2004   2005   2006   2006   2007
    (in thousands)

Cash and cash equivalents

  $ 20,535   $ 5,735   $ 33,076   $ 23,411   $ 24,362   $ 23,882   $ 29,951

Cash deposited with related parties(4)

  $ 40,058   $ 67,492   $ 98,873   $ 252,882   $ 330,231   $ 238,467   $ 367,010

Goodwill and intangible assets

          $ 781,238   $ 668,539   $ 642,383   $ 655,461   $ 629,852

Total assets

  $ 84,123   $ 122,072   $ 991,213   $ 1,039,106   $ 1,113,747   $ 1,026,949   $ 1,139,559

Deferred revenue

  $ 29,553   $ 53,007   $ 88,689   $ 87,952   $ 102,368   $ 121,937   $ 139,497

Shareholders’ equity

  $ 25,175   $ 35,972   $ 704,836   $ 750,940   $ 825,687   $ 779,656   $ 864,766

 

Other Data

 

     For the Year Ended November 30,     For the Six Months
Ended May 31,
 
     2002(1)     2003(1)     2004(1)     2005     2006     2006     2007  
     (dollar amounts in thousands)  

EBITDA(5)

   $ 15,451     $ 17,369     $ 48,544     $ 107,802     $ 136,383     $ 65,015     $ 69,903  
                                                        

Operating margin(6)

     17.2 %     17.7 %     14.5 %     24.8 %     29.9 %     33.2 %     32.0 %
                                                        

Capital expenditures

   $ 567     $ 1,231     $ 2,058     $ 346     $ 2,435     $ 692     $ 357  
                                                        

 

Historical and Pro Forma Statements of Financial Condition Data

 

     Actual as of
May 31, 2007
   Pro Forma as
Adjusted as of
May 31, 2007
     (in thousands)

Cash and cash equivalents

   $ 29,951   

Cash deposited with related parties(4)

   $ 367,010   

Goodwill and intangible assets

   $ 629,852   

Total assets

   $ 1,139,559   

Deferred revenue

   $ 139,497   

Shareholders’ equity

   $ 864,766   

  (1)   On June 3, 2004, Morgan Stanley completed the acquisition of Barra, Inc. (“Barra”). The operations of Barra have been included with our results of operations since that date. All information prior to June 3, 2004 does not include the operations of Barra.
  (2)   On July 19, 2007, we paid a dividend of $973.0 million, consisting of $325.0 million in cash and $648.0 million of demand notes. On July 19, 2007, we paid in full in cash the $22.1 million demand note held by Capital Group International. Prior to the completion of this offering, we intend to obtain a new credit facility, the net proceeds of which we will use to pay in full the $625.9 million demand note held by Morgan Stanley. As a result of the dividend and the payment of the demand notes, we expect interest income to be substantially lower and interest expense to be substantially higher in future periods. On a pro forma basis, assuming a dividend of $973 million paid on December 1, 2005 and a constant interest rate of             %, net income would have been $             million and $             million and earnings per share would have been $           and $           for the fiscal year ended November 30, 2006 and the six months ended May 31, 2007, respectively.

 

 

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  (3)   Income (loss) from discontinued operations relates to our interest in POSIT JV, a joint venture that was acquired with the purchase of Barra in 2004. On February 1, 2005, we sold our interest in POSIT JV to our joint venture partner, Investment Technology Group, Inc. (“ITG”) for $90 million. We recorded a pre-tax gain of $6.8 million at the time of sale. As part of the sale agreement, we were entitled to additional royalties for a period of 10 years subsequent to the sale pursuant to an earn-out arrangement, based on fees earned by ITG related to the POSIT system. In September 2006, ITG exercised its option to accelerate the earn-out period by making a lump sum payment to us of $11.7 million. We will receive no further payments pursuant to the earn-out arrangement.
  (4)   Historically, we have deposited most of our excess funds with our principal shareholder, Morgan Stanley, and have received interest at Morgan Stanley’s internal prevailing rates. The funds are payable on demand.
  (5)   EBITDA is defined as income before interest income, interest expense, provision for income taxes, depreciation and amortization. EBITDA is not presented as an alternative measure of operating results, as determined in accordance with accounting principles generally accepted in the U.S. We believe that EBITDA is one measure that investors use to evaluate companies that have substantial amortization of intangible assets included in their statement of income. We use EBITDA to compare ourselves to other companies in the industry. However, EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies. EBITDA is a non-GAAP measure that should not be considered as an alternative to net income, as an indication of financial performance or as an alternative to cash flow from operations as a measure of liquidity.

 

Reconciliation of EBITDA to net income is presented below:

 

    For the Year Ended November 30,     For the Six Months
Ended May 31,
 
    2002     2003     2004     2005     2006     2006     2007  
    (in thousands)  

Net income

  $ 10,494     $ 11,185     $ 17,840     $ 51,942     $ 77,697     $ 35,423     $ 41,493  

Interest income

    (878 )     (924 )     (1,250 )     (8,738 )     (15,482 )     (6,308 )     (10,586 )

Interest expense

    35       131       624       1,864       352       250       597  

Provision for income taxes (including tax on discontinued operations)

    4,757       5,804       8,489       30,657       44,161       20,891       24,779  

Depreciation and amortization of property, equipment and leasehold improvements

    1,043       1,173       2,597       2,546       3,499       1,681       1,089  

Amortization of intangible assets

                20,244       29,531       26,156       13,078       12,531  
                                                       

EBITDA

  $ 15,451     $ 17,369     $ 48,544     $ 107,802     $ 136,383     $ 65,015     $ 69,903  
                                                       
  (6)   Operating margin is defined as operating income divided by operating revenues.

 

 

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RISK FACTORS

 

Investing in our class A common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information set forth in this prospectus before deciding to invest in shares of our class A common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our class A common stock could decline due to any of these risks, and you may lose all or part of your investment. You should read the section titled “Special Note Regarding Forward-Looking Statements” immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.

 

Risks Related to Our Business

 

If we lose key outside suppliers of data and products or if the data or products of these suppliers have errors or are delayed, we may not be able to provide our clients with the information and products they desire.

 

Our ability to produce our products and develop new products is dependent upon the products of other suppliers, including certain data, software and service suppliers. Our index and analytics products are dependent upon (and of little value without) updates from our data suppliers and most of our software products are dependent upon (and of little value without) continuing access to historical and current data. We utilize and distribute certain data provided to us by over 160 data sources, including large volumes of data from certain exchanges around the world. If the products of our suppliers have errors, are delayed, have design defects, are unavailable on acceptable terms or are not available at all, our business, financial condition or results of operations could be materially adversely affected.

 

Some of our agreements with data suppliers allow them to cancel on short notice and we have not completed formal agreements with all of our data suppliers, such as certain exchanges. Many of these data suppliers compete with one another and, to some extent, with us. Termination of one or more of our significant data agreements or exclusion from, or restricted use of, a data provider’s information could decrease the available information for us to use and offer our clients and may have a material adverse effect on our business, financial condition or results of operations.

 

Although data suppliers and exchanges typically benefit from broad access to their data, some of our competitors could enter into exclusive contracts with our data suppliers, including with certain exchanges. If our competitors enter into such exclusive contracts, we may be precluded from receiving certain data from these suppliers or restricted in our use of such data, which would give our competitors a competitive advantage. Such exclusive contracts would hinder our ability to provide our clients with the data they prefer, which could lead to a decrease in our client base and could have a material adverse effect on our business, financial condition or results of operations.

 

Some data suppliers may seek to increase licensing fees for providing their content to us. If we are unable to renegotiate acceptable licensing arrangements with these data suppliers or find alternative sources of equivalent content, we may be required to reduce our profit margins or experience a reduction in our market share.

 

Some of our third-party suppliers also are our competitors, increasing the risks noted above.

 

Any failure to ensure and protect the confidentiality of client data could adversely affect our reputation and have a material adverse effect on our business, financial condition or results of operations.

 

Many of our products exchange information with clients through a variety of media, including the Internet, software applications and dedicated transmission lines. We rely on a complex network of internal process and

 

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software controls to protect the confidentiality of client data, such as client portfolio data that may be provided to us or hosted on our systems. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in implementation of our internal controls, misappropriation of client data could occur. Such internal control inadequacies could damage our reputation and have a material adverse effect on our business, financial condition or results of operations.

 

We have implemented information barrier procedures to protect the confidentiality of the material, non-public information regarding changes to the composition of our indices. If our information barrier procedures fail, our reputation could be damaged and our business, financial condition or results of operations could be materially adversely affected.

 

We change the composition of our indices from time to time. We believe that, in some cases, the changes we make to our indices can affect the prices of constituent securities and products based on our indices. Our index clients rely on us to keep information about changes to the future composition of an index confidential and to protect against the misuse of that information until the change to the composition of the index is disclosed to clients. We have implemented information barrier procedures to prevent the unauthorized disclosure and misuse of information regarding changes to the composition of our indices. If our information barrier procedures fail and we inadvertently disclose or an individual deliberately misuses information about a change to one of our indices, our reputation may suffer. Clients’ loss of trust and confidence in our information barrier policies and procedures could lead to a negative reputation throughout the investment community, which could have a material adverse effect on our business, financial condition or results of operations.

 

In addition, certain exchanges permit our clients to list exchange traded funds or other financial products based on our indices only if we provide a representation to the exchange that we have reasonable information barrier procedures in place to address the unauthorized disclosure and misuse of material, non-public information about changes to the composition of our indices. If an exchange determines that our information barrier procedures are not sufficient, the exchange might refuse to list or might delist investment products based on our indices, which may have a material adverse effect on our business, financial condition or results of operations.

 

Legal protections for our intellectual property rights and other rights may not be sufficient or available to protect our competitive advantages. Third parties may infringe on our intellectual property rights, and pending third-party litigation may adversely affect our ability to protect our intellectual property rights.

 

We consider certain aspects of our products and processes to be proprietary. We rely primarily on a combination of trade secret, patent, copyright and trademark rights, as well as contractual protections and technical measures, to protect our products and processes. Despite our efforts, third parties may still try to challenge, invalidate or circumvent our rights and protections. There is no guarantee that any trade secret, patent, copyright or trademark rights that we may obtain will protect our competitive advantages, nor is there any assurance that our competitors will not infringe upon our rights. Even if we attempt to protect our intellectual property rights through litigation, it may require considerable cost, time and resources to do so, and there is no guarantee that we would be successful. Furthermore, our competitors may also independently develop, patent or otherwise protect products and processes that are the same or similar to ours. In addition, the laws of certain foreign countries in which we operate do not protect our proprietary rights to the same extent as do the laws of the U.S. Also, some elements of our products and processes may not be subject to intellectual property protection.

 

   

Trademarks and Service Marks—We have registered “MSCI,” “Barra” and “FEA” as trademarks and service marks in the U.S. and in certain foreign countries. We have also registered other product trademarks and certain service marks in the U.S. and in certain foreign countries. When we enter a new geographic market or introduce a new product brand, there can be no assurance that our existing trademark or service mark of choice will be available. Furthermore, the fact that we have registered trademarks is not an assurance that other companies may not use similar names.

 

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Patents—We currently hold eight U.S. and foreign utility patents and one design patent. We currently have 13 U.S. and foreign utility patent applications pending. Patent applications can be extremely costly to process and defend. There can be no assurance that we will be issued any patents that we apply for or that any of the rights granted under any patent that we obtain will be sufficient to protect our competitive advantages.

 

   

Copyrights—We believe our proprietary software and proprietary data are copyright protected. If a court were to determine that any of our proprietary software or proprietary data, such as our index level data, is not copyright protected, it could have material adverse effect on our business, financial condition or results of operations.

 

   

Confidentiality and Trade Secrets—Our license agreements limit our clients’ right to copy or disclose our proprietary software and data. It is possible, however, that a client might still make unauthorized copies of our proprietary software or data, which could have a material adverse effect on our business, financial condition or results of operations. For example, if a client who licensed a large volume of our proprietary historical data made that information publicly available, we might lose potential clients who could freely obtain a copy of the data. We also seek to protect our proprietary software and data through trade secret protection and through non-disclosure agreements with our employees. However, if an employee breaches his or her non-disclosure agreement and reveals a trade secret, we could lose the trade secret protection, which could have a material adverse effect on our business, financial condition or results of operations. Furthermore, it may be very difficult to ascertain if a former employee is inappropriately using or disclosing our proprietary information. Additionally, the enforceability of our license and non-disclosure agreements and the remedies available to us in the event of a breach vary due to the many different jurisdictions in which our clients and employees are located.

 

   

License Agreements—Our products are generally made available to end users on a periodic subscription basis under a nontransferable license agreement signed by the client. We also permit access to some data, such as certain index information, through the Internet under on-line licenses that are affirmatively acknowledged by the licensee or under terms of use. The enforceability of on-line licenses and terms of use has not been conclusively determined by the courts. There can be no assurance that third parties will abide by the terms of our licenses or that all of our license agreements will be enforceable.

 

   

Pending Third-Party Litigation—There is currently litigation pending in the U.S. and abroad regarding whether issuers of index-linked investment products are required to obtain a license from the index owner or whether companies may issue and trade investment products based on a publicly-available index without the need for permission from (or payment to) the index owner. We are not a party to these suits, but they may have a material impact on our business. In a relevant case last year, a federal appeals court ruled against Dow Jones & Company, Inc. (Dow Jones) and The McGraw-Hill Companies (McGraw-Hill) in their attempt to prevent International Securities Exchange, Inc. from offering options on ETFs based on Dow Jones’ and McGraw-Hill’s indices. If the courts further determine that a license is not required to issue investment products linked to indices, this could have a material adverse effect on our business, financial condition or results of operations. It might also lead to changes in current industry practices such that we would no longer make our index level data publicly available, such as via our website or news media.

 

Third parties may claim we infringe upon their intellectual property rights.

 

Third parties may claim we infringe upon their intellectual property rights. Businesses operating in the financial services sector, including our competitors and potential competitors, have in recent years increasingly pursued patent protection for their technologies and business methods. If any third parties were to obtain a patent on an index methodology, risk model or software application, we could be sued for infringement. Furthermore, there is always a risk that third parties will sue us for infringement or misappropriation of other intellectual property rights, such as trademarks, copyrights or trade secrets.

 

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From time to time we receive such notices from others alleging intellectual property infringement or potential infringement. The number of these claims may grow. We have made and expect to continue making expenditures related to the use of technology and intellectual property rights as part of our strategy to manage this risk.

 

Responding to intellectual property claims, regardless of merit, can consume valuable time, result in costly litigation or cause delays. We may be forced to settle such claims on unfavorable terms, and there can be no assurance that we would prevail in any litigation arising from such claims if such claims are not settled. We may be required to pay damages, required to stop selling or using the affected products or applications or required to enter into royalty and licensing agreements. There can be no assurance that any royalty or licensing agreements will be made, if at all, on terms that are commercially acceptable to us. We may also be called upon to defend partners, clients, suppliers or distributors against such third-party claims under indemnification clauses in our contracts. Therefore, the impact of claims of intellectual property infringement could have a material adverse effect on our business, financial condition or results of operations.

 

Our use of open source code could impose unanticipated delays or costs in deploying our products, or impose conditions or restrictions on our ability to commercialize our products or keep them confidential.

 

We rely on open source code to develop software and to incorporate it in our products, as well as to support our internal systems and infrastructure. We monitor our use of open source code to attempt to avoid subjecting our products to conditions we do not intend. The terms of many open source code licenses, however, are ambiguous and have not been interpreted by U.S. courts. Accordingly, there are risks that there may be a failure in our procedures for controlling the usage of open source code or that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In either event, we could be required to seek licenses from third parties in order to continue offering our products, to make generally available (in source code form) proprietary code that links to certain open source code modules, to re-engineer our products or systems or to discontinue the licensing of our products if re-engineering could not be accomplished on a timely basis. Any of these requirements could materially adversely affect our business, financial condition or results of operations.

 

We are dependent on the use of third-party software and data, and any reduction in third-party product quality or any failure by us to comply with our licensing requirements could have a material adverse effect on our business, financial condition or results of operations.

 

We rely on third-party software and data in connection with our product development and offerings. We depend on the ability of third-party software and data providers to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis, and respond to emerging industry standards and other technological changes. The third-party software and data we use may become obsolete or incompatible with future versions of our products. We also monitor our use of third-party software and data to comply with applicable license requirements. Despite our efforts, there can be no assurance that such third parties may not challenge our use, resulting in our loss of rights or costly legal actions. Our business could be materially adversely affected if we are unable to timely or effectively replace the functionality provided by software or data that becomes unavailable or fails to operate effectively for any reason. In addition, our operating costs could increase if license fees for third-party software or data increase or the efforts to incorporate enhancements to third-party or other software or data are substantial. Some of these third-party suppliers also are our competitors, increasing the risks noted above.

 

If our products fail to perform properly due to undetected errors or similar problems, it could have a material adverse effect on our business, financial condition or results of operation.

 

Products we develop or license may contain undetected errors or defects despite testing. Such errors can exist at any point in a product’s life cycle, but are frequently found after introduction of new products or

 

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enhancements to existing products. We continually introduce new products and new versions of our products. Despite internal testing and testing by current and potential clients, our current and future products may contain serious defects or malfunctions. If we detect any errors before we release a product, we might have to delay the product release for an extended period of time while we address the problem. We might not discover errors that affect our new or current products or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Errors may occur in our products that could have a material adverse effect on our business and could result in: harm to our reputation, lost sales, delays in commercial release, third-party claims, contractual disputes, negative publicity, delays in or loss of market acceptance of our products, license terminations or renegotiations, or unexpected expenses and diversion of resources to remedy errors.

 

Furthermore, our clients may use our products together with their own software, data or products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our products do not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation, cause significant client relations problems or result in legal claims against us.

 

Our revenues and earnings are affected by changes in the capital markets, particularly the equity capital markets.

 

Clients that use our indices as the basis for certain index-linked investment products, such as exchange traded funds and mutual funds, commonly pay us a fee based on the investment product’s assets. These asset-based fees make up a significant and increasing portion of our revenues. They were 18% in the six month period ended May 31, 2007, 15% in the six month period ended May 31, 2006, 15% in the fiscal year ended November 30, 2006 and 14% in the fiscal year ended November 30, 2005. These asset-based fees accounted for 45% of the revenues from our ten largest clients in the fiscal year ended November 30, 2006. Economic uncertainty and volatile capital markets, as well as changing investment styles, may influence an investor’s decision to invest in and maintain an investment in an index-linked investment product. In particular, because our international equity indices are constructed from the perspective of an international investor, our asset-based fees may decrease if investments are directed away from foreign markets and become focused on domestic markets. Additionally, if the performance of a market and the MSCI index that tracks that market decline, the assets of an investment product based on that index may decline as well. Each of these factors could result in the fluctuation in or decline in our asset-based fees, which could have a material adverse effect on our business, financial condition or results of operations.

 

Our clients that pay us a fee based on the assets of an investment product may seek to negotiate a lower asset-based fee percentage or may cease using our indices, which could limit the growth of or decrease our revenues from asset-based fees.

 

A portion of our revenues are from asset-based fees and these revenues are concentrated in some of our largest clients. Our clients may seek to negotiate a lower asset-based fee percentage for a variety of reasons. As the assets of index-linked investment products managed by our clients change, they may request to pay us lower asset-based fee percentages. Additionally, as competition among our clients increases, they may have to lower the fees they charge to their clients, which could cause them to try to decrease our fees accordingly. For example, competition is intense and increasing among our clients that provide exchange traded funds. The fees they charge their clients are one of the competitive differentiators for these exchange traded fund managers. Additionally, clients that have licensed our indices to serve as the basis of index-linked investment products are generally not required to continue to use our indices and could elect to cease offering the product or could change the index to a non-MSCI index, in which case our asset-based fees could dramatically decrease, which could have a material adverse effect on our business, financial condition or results of operations.

 

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Our business is dependent on our clients continuing to invest in equity securities. If our clients significantly reduce their investments in equity securities, our business, financial condition or results of operations may be materially adversely affected.

 

The majority of our revenues comes from our products that are focused on various aspects of managing or monitoring equity portfolios. To the extent our clients’ investment emphasis significantly changes from equity to fixed income securities or multi-asset class or derivative strategies, the demand for our equity products would likely decrease, which could have a material adverse effect on our business, financial condition or results of operations.

 

Our business is dependent on our clients continuing to measure the performance of their equity investments against equity benchmarks. If our clients discontinue use of equity benchmarks to measure performance, our business, financial condition or results of operations could be materially adversely affected.

 

Our equity index products serve as equity benchmarks against which our clients can measure the performance of their investments. If clients decide to measure performance on an absolute return basis instead of against an equity benchmark, the demand for our indices could decrease. Any such decrease in demand for our equity index products could have a material adverse effect on our business, financial condition or results of operations.

 

We must continue to introduce new products and product enhancements to address our clients’ changing needs, market changes and technological developments.

 

The market for our products is characterized by shifting client demands, evolving market practices and, for some of our products, rapid technological change. Changed client demands, new market practices or new technologies can render existing products obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop new products and product enhancements that address the future needs of our target markets and respond to technological and market changes. We may not be successful in developing, introducing, marketing and licensing our new products or product enhancements on a timely and cost effective basis, or at all, and our new products and product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. In addition, clients may delay purchases in anticipation of new products or product enhancements.

 

A limited number of clients account for a material portion of our revenue. Cancellation of subscriptions or investment product licenses by any of these clients could have a material adverse effect on our business, financial condition or results of operations.

 

For both the six month period ended May 31, 2007 and the fiscal year ended November 30, 2006, revenues from our ten largest clients accounted for 31% of our total revenues. If we fail to obtain a significant number of new clients or if one of our largest clients cancels its subscriptions or investment product licenses and we are unsuccessful in replacing those subscriptions or licenses, our business, financial condition or results of operation could be materially adversely affected. In the six month period ended May 31, 2007 and the fiscal year ended November 30, 2006, our largest client organization by revenue, Barclays PLC and affiliates, accounted for 12% and 11% of our total revenues, respectively. Approximately 90% of the revenue from Barclays came from fees based on the assets in Barclays’ exchange traded funds based on MSCI indices, including the iShares MSCI EAFE Index Fund.

 

Cancellation of subscriptions or investment product licenses or renegotiation of terms by a significant number of clients could have a material adverse effect on our business, financial condition or results of operations.

 

Our primary commercial model is to license annual, recurring subscriptions to our products for use at a specified location and by a given number of users. For most of our products, our clients may cancel their

 

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subscriptions or investment product licenses at the end of the current term. While we believe this practice supports our marketing efforts by allowing clients to subscribe without the requirement of a long-term commitment, the cancellation of subscriptions or investment product licenses by a significant number of clients at any given time may have a material adverse effect on our business, financial condition or results of operations.

 

Our clients may become more self-sufficient, which may reduce demand for our products and materially adversely affect our business, financial condition or results of operations.

 

Our clients may develop independently certain functionality contained in the products they currently license from us. For example, some of our clients who currently license our risk data to analyze their portfolio risk may develop their own tools to collect data and assess risk, making our products unnecessary for them. To the extent that our clients become more self-sufficient, demand for our products may be reduced, which could have a material adverse effect on our business, financial condition or results of operations.

 

Increased competition in our industry may cause price reductions or loss of market share, which may materially adversely affect our business, financial condition or results of operations.

 

We face competition across all markets for our products. Our competitors range in size from large companies with substantial resources to small, single-product businesses that are highly specialized. Our larger competitors may have access to more resources and may be able to achieve greater economies of scale, and our competitors that are focused on a narrower product line may be more effective in devoting technical, marketing and financial resources to compete with us. In addition, barriers to entry to create a single-purpose product may be low in many cases. The Internet as a distribution channel has allowed free or relatively inexpensive access to information sources, which has reduced barriers to entry even further. Low barriers to entry could lead to the emergence of new competitors; for example, broker-dealers and data suppliers could begin developing their own proprietary risk analytics or equity indices. These competitive pressures may also result in fewer clients, fewer subscriptions or investment product licenses, price reductions, and increased operating costs, such as for marketing, resulting in lower revenue, gross margins and operating income.

 

Consolidation within our target markets may affect our business.

 

Consolidation in the investment management industry could reduce our existing client base and the number of potential clients. This may negatively impact our ability to generate future growth and may reduce demand for our products, which could have a material adverse effect on our business, financial condition or results of operations.

 

Increased accessibility to free or relatively inexpensive information sources may reduce demand for our products and materially adversely affect our business, financial condition or results of operations.

 

In recent years, more free or relatively inexpensive information has become available, particularly through the Internet, and we expect this trend to continue. The availability of free or relatively inexpensive information may reduce demand for our products. Weak economic conditions also can result in clients seeking to utilize lower-cost information that is available from alternative sources. To the extent that our clients choose to use these sources for their information needs, our business, financial condition or results of operations may be materially adversely affected.

 

Our growth and profitability may not continue at the same rate as we have experienced in the past, which could have a material adverse effect on our business, financial condition or results of operations.

 

We have experienced significant growth during our operating history. There can be no assurance that we will be able to maintain the levels of growth and profitability that we have experienced in the past. Among other things, there can be no assurance that we will be as successful in our marketing efforts as we have been in the

 

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past, or that such efforts will result in growth or profit margins comparable to those we have experienced in the past. For example, our attempt to expand our index products to include fixed income indices was not as successful as we anticipated, so we have decided to terminate our efforts to develop proprietary fixed income indices at this time. See “—We must continue to introduce new products and product enhancements to address our clients’ changing needs, market changes and technological developments,” “—We are dependent on key personnel in our professional staff for their expertise,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Any failure to continue to grow our business and maintain profitability could have a material adverse effect on our business, financial condition or results of operations.

 

Our growth may place significant strain on our management and other resources.

 

We must plan and manage our growth effectively to increase revenue and maintain profitability. Our growth has placed, and is expected to continue to place, significant demands on our personnel, management and other resources. We must continue to improve our operational, financial, management, legal and compliance processes and information systems to keep pace with the growth of our business. There can also be no assurance that, if we continue to grow internally or by way of acquisitions, management will be effective in attracting and retaining additional qualified personnel, expanding our physical facilities and information technology infrastructure, integrating acquired businesses or otherwise managing growth. Any failure to effectively manage growth or to effectively manage the business could have a material adverse effect on our business, financial condition or results of operations. See “—We must continue to introduce new products and product enhancements to address our clients’ changing needs, market changes and technological developments,” “—We are dependent on key personnel in our professional staff for their expertise,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

 

There is considerable risk embedded in growth through acquisitions, which may materially adversely affect our business, financial condition or results of operations.

 

A principal element of our growth strategy is growth through acquisitions. Any future acquisitions could present a number of risks, including:

 

   

incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;

 

   

failure to integrate the operations or management of any acquired operations or assets successfully and on a timely and cost effective basis;

 

   

failure to achieve assumed synergies;

 

   

insufficient knowledge of the operations and markets of acquired businesses;

 

   

increased debt;

 

   

dilution of your common stock;

 

   

loss of key personnel;

 

   

diversion of management’s attention from existing operations or other priorities; and

 

   

inability to secure, on terms we find acceptable, sufficient financing that may be required for any such acquisition or investment.

 

In addition, if we are unsuccessful in completing acquisitions of other businesses, operations or assets or if such opportunities for expansion do not arise, our future growth, business, financial condition or results of operations could be materially adversely affected.

 

Our revenues are subject to currency exchange fluctuation risk.

 

We have two separate exposures to currency exchange fluctuation risk—revenues from index-linked investment products, such as exchange traded funds, and non-U.S. dollar invoiced revenues.

 

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Revenues from index-linked investment products represented approximately 18% of our operating revenues for the six months ended May 31, 2007. While our fees for index-linked investment products are generally invoiced in U.S. dollars, the fees are based on the investment product’s assets, substantially all of which are invested in securities denominated in currencies other than the U.S. dollar. Accordingly, declines in such other currencies against the U.S. dollar will decrease the fees payable to us under such licenses. In addition, declines in such currencies against the U.S. dollar could impact the attractiveness of such investment products resulting in net fund outflows, which would further reduce the fees payable under such licenses.

 

We generally invoice our clients in U.S. dollars; however, we invoice a portion of our clients in Euro, Pounds Sterling, Japanese Yen and a limited number of other non-U.S. dollar currencies. For the fiscal years ended November 30, 2004, 2005 and 2006 and for the six months ended May 31, 2007, approximately 17%, 21%, 17%, and 16%, respectively, of our operating revenues were invoiced in currencies other than U.S. dollars. Approximately half of our foreign currency revenues were in Euro and a quarter in Pounds Sterling and Japanese Yen, respectively, over those periods.

 

To the extent that such foreign currency revenues increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase. We do not hedge our foreign currency-linked revenue stream. To the extent we or Morgan Stanley attempt to hedge this risk in the future, there is no guarantee that any hedging will be fully effective.

 

Changes in government regulations could materially adversely affect our business, financial condition or results of operations.

 

The financial services industry is subject to extensive regulation at the federal and state levels, as well as by foreign governments. It is very difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting our business and our clients’ businesses. If we fail to comply with any applicable laws, rules or regulations, we could be subject to fines or other penalties. There can be no assurance that changes in laws, rules or regulations will not have a material adverse effect on our business, financial condition or results of operations.

 

   

Investment Advisers Act—We believe that our products do not provide investment advice for purposes of the Investment Advisers Act of 1940. Future developments in our product line or changes to the current laws, rules or regulations could cause this status to change. It is possible we may become registered as an investment adviser under the Investment Advisers Act or similar laws in states or foreign jurisdictions. As a registered investment adviser, we would be subject to the requirements and regulations of the Investment Advisers Act, which relate to, among other things, fiduciary duties, recordkeeping and reporting requirements, disclosure requirements, limitations on agency and principal transactions between an adviser and advisory clients, as well as general anti-fraud prohibitions. We may also be adversely affected as a result of new or revised legislation or regulations imposed by the Securities and Exchange Commission (the “SEC”), other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets around the world. In addition, we may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

 

   

Data Privacy Legislation—Changes in laws, rules or regulations, or consumer environments relating to consumer privacy or information collection and use may affect our ability to collect and use data. There could be a material adverse impact on our direct marketing, data sales and business due to the enactment of legislation or industry regulations, or simply a change in customs, arising from public concern over consumer privacy issues. Restrictions could be placed upon the collection, management, aggregation and use of information that is currently legally available, in which case our cost of

 

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collecting some kinds of data could materially increase. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our clients’ needs.

 

   

Soft Dollars—Approximately 13% and 12% of our revenues were paid through soft dollar arrangements for the fiscal years ended November 30, 2005 and 2006, respectively. U.S. clients accounted for 80% and 76% of total soft dollar revenues for the fiscal years ended November 30, 2005 and 2006, respectively. No other country represented more than 5% of total soft dollar revenues in either fiscal year. On July 18, 2006, the SEC issued Interpretive Release No. 34-54165, which became effective on July 24, 2006. The release provides guidance on asset managers’ use of client commissions to pay for brokerage and research services within the scope of Section 28(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). The Interpretive Release outlines a framework for determining what types of research services fall within the safe harbor provisions of that section. Market participants had a six-month grace period that ended on January 24, 2007 to bring their soft dollar practices into compliance with the new guidance. We rely on our clients to determine whether our products fall within the description of eligible research services, whether our products provide lawful and appropriate assistance to the money manager in undertaking investment decisions, and whether the commissions are reasonable in relation to the value of the products provided for their particular business in the U.S. and abroad. If clients decide they cannot or will not pay for our products through soft dollar arrangements, or if additional rules are issued or certain interpretations are followed that narrow the definition of research or brokerage services that can be paid for on behalf of a money manager through use of soft dollars in the U.S. or abroad or the safe harbor provisions of Section 28(e) of the Exchange Act are eliminated, our revenues could decrease.

 

We may become subject to liability based on the use of our products by our clients.

 

Our products support the investment processes of our clients, which, in the aggregate, manage trillions of dollars of assets. Our client agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or third parties based on the use of our products. However, these provisions have certain exceptions and could be invalidated by unfavorable judicial decisions or by federal, state, foreign or local laws. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. In addition, such claims and lawsuits could have a material adverse effect on our business, financial condition or results of operations.

 

Our indebtedness could materially adversely affect our business, financial condition or results of operations.

 

As of May 31, 2007 we had no indebtedness and a cash balance of $397.0 million. On July 19, 2007, we paid a dividend of $973.0 million, consisting of $325.0 million in cash and $648.0 million of demand notes, $22.1 million of which have already been repaid. Prior to the completion of this offering, we intend to obtain a new credit facility, the net proceeds of which will be used to pay in full the $625.9 million demand note held by Morgan Stanley. In addition, we may need to incur additional indebtedness in the future in the ordinary course of business. Our level of indebtedness could increase our vulnerability to general economic consequences; require us to dedicate a substantial portion of our cash flow and proceeds of any additional equity issuances to payments of our indebtedness; make it difficult for us to optimally capitalize and manage the cash flow for our business; limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate; place us at a competitive disadvantage to our competitors that have less debt; limit our ability to borrow money or sell stock to fund our working capital and capital expenditures; limit our ability to consummate acquisitions; and increase our interest expense.

 

 

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We are dependent on key personnel in our professional staff for their expertise. If we fail to attract and retain the necessary qualified personnel, our business, financial condition or results of operations could be materially adversely affected.

 

The development, maintenance and support of our products is dependent upon the knowledge, experience and ability of our highly skilled, educated and trained employees. Accordingly, the success of our business depends to a significant extent upon the continued service of our executive officers and other key management, research, sales and marketing, information technology and other technical personnel. Although we do not believe that we are dependent upon any individual employee, the loss of a group of our key professional employees could have a material adverse effect on our business, financial condition or results of operations. We believe our future success will also depend in large part upon our ability to attract and retain highly skilled managerial, research, sales and marketing, information technology, software engineering and other technical personnel. Competition for such personnel worldwide is intense, and there can be no assurance that we will be successful in attracting or retaining such personnel. If we fail to attract and retain the necessary qualified personnel our products may suffer, which could have a material adverse effect on our business, financial condition or results of operations. See “Business—Employees” and “Management—Executive Officers and Directors.”

 

Our business relies heavily on electronic delivery systems and the Internet, and any failures or disruptions may materially adversely affect our ability to serve our clients.

 

We depend heavily on the capacity, reliability and security of our electronic delivery systems and the Internet. Heavy use of our electronic delivery systems and other factors such as loss of service from third parties, operational failures, sabotage, break-ins and similar disruptions from unauthorized tampering or hacking, human error, national disasters, power loss or computer viruses could cause our systems to operate slowly or interrupt their availability for periods of time. Our ability to effectively use the Internet may be impaired due to infrastructure failures, service outages at third-party Internet providers or increased government regulation. If disruptions, failures or slowdowns of our electronic delivery systems or the Internet occur, our ability to distribute our products effectively and to serve our clients may be materially and adversely affected.

 

Catastrophic events could lead to interruptions in our operations, which may materially adversely affect our business, financial condition or results of operations.

 

Our operations depend on our ability to protect our equipment and the information stored in our databases against fires, earthquakes and other natural disasters, as well as power losses, computer and telecommunications failures, technological breakdowns, unauthorized intrusions, terrorist attacks on sites where we or our clients are located, and other catastrophic events. We also depend on accessible office facilities for our employees in order for our operations to function appropriately. There is no assurance that the business continuity measures we have taken to reduce the risk of interruption in our operations caused by these events will be sufficient.

 

Such events could have a material adverse effect on our business, financial condition or results of operations. For example, immediately after the terrorist attacks on September 11, 2001, our clients who were located in the World Trade Center area were concentrating on disaster recovery rather than licensing additional products. In addition, delivery of some of the data we receive from New York-based suppliers was delayed. The grounding of air transportation impaired our ability to conduct sales visits and other meetings at client sites. During the resulting temporary closure of the U.S. stock markets, some of the data updates supporting our products were interrupted. These types of interruptions could affect our ability to sell and deliver products and could have a material adverse effect on our business, financial condition or results of operations.

 

Although we currently estimate that the total cost of developing and implementing our business continuity measures will not have a material impact on our business, financial condition or results of operations, we cannot provide any assurance that our estimates regarding the timing and cost of implementing these measures will be accurate.

 

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Risks Related to This Offering and Our Relationship with Morgan Stanley

 

Morgan Stanley owns a controlling interest in our company and the interests of Morgan Stanley may conflict with ours and with those of our other shareholders.

 

After this offering, Morgan Stanley will own approximately     % of the outstanding shares of our class B common stock, which represents approximately     % of the combined voting power of all classes of voting stock (    % if the underwriters exercise their over-allotment option in full). Our class A common stock will have one vote per share, and our class B common stock will have five votes per share. Following this offering, holders of shares of class B common stock will collectively control     % of the combined voting power of all classes of voting stock, except when amending or altering any provision of our Amended and Restated Certificate of Incorporation or By-laws so as to adversely affect the rights of the other class. For example, the holders of shares of class B common stock, substantially all of which will be held by Morgan Stanley, will be able to direct the election of all of the members of our Board of Directors, who will determine our strategic plans, approve major financing decisions and appoint top management. In addition, as a holder of substantially all of our class B common stock, Morgan Stanley may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to holders of our class A common stock or adversely affect us or other investors, including you. See “Description of Capital Stock.” Because Morgan Stanley’s interests as our controlling shareholder may differ from your interests, actions taken by Morgan Stanley with respect to us may not be favorable to you.

 

Prior to the completion of this offering, we also will enter into a services agreement and a number of other agreements with Morgan Stanley setting forth various matters governing our relationship with Morgan Stanley while it remains a significant shareholder in us. For a description of these agreements, see “Arrangements Between Morgan Stanley and Us.” These agreements will govern our relationship with Morgan Stanley after this offering and the provision of corporate services to us and are likely to affect our ability to make certain acquisitions or to merge or consolidate or to sell all or substantially all our assets. The rights of Morgan Stanley under these agreements may allow Morgan Stanley to delay or prevent an acquisition of us that our other shareholders, including you, may consider favorable. We will not be able to terminate these agreements or amend them in a manner we deem more favorable, except in accordance with their terms. See “Description of Capital Stock” and “Arrangements Between Morgan Stanley and Us.”

 

Conflicts of interest may arise between Morgan Stanley and us that could be resolved in a manner unfavorable to us.

 

Questions relating to conflicts of interest may arise between Morgan Stanley and us in a number of areas relating to our past and ongoing relationships. Areas in which conflicts of interest between Morgan Stanley and us could arise include, but are not limited to, the following:

 

   

Cross officerships, directorships and stock ownership. The ownership interests of our directors or executive officers in the common stock of Morgan Stanley or service as a director or officer of both Morgan Stanley and us could create, or appear to create, conflicts of interest when directors and executive officers are faced with decisions that could have different implications for the two companies. For example, these decisions could relate to (i) the nature, quality and cost of services rendered to us by Morgan Stanley, (ii) disagreement over the desirability of a potential business or acquisition opportunity or business plans, (iii) employee retention or recruiting or (iv) our dividend policy.

 

   

Intercompany transactions. From time to time, Morgan Stanley or its affiliates may enter into transactions with us or our subsidiaries or other affiliates. For example, we may provide Morgan Stanley with licenses to certain of our products. Although the terms of any such transactions will be established based upon negotiations between Morgan Stanley and us and, when appropriate, subject to the approval of the independent directors on our Board of Directors or a committee of disinterested

 

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directors, the terms of any such transactions may not be as favorable to us or our subsidiaries or affiliates as may otherwise be obtained in arm’s length negotiations.

 

   

Intercompany agreements. We will enter into certain agreements with Morgan Stanley pursuant to which Morgan Stanley will provide us with certain human resources, information technology, accounting, legal and compliance, tax, office space leasing, corporate services, treasury and other services for so long as Morgan Stanley owns more than 50% of our outstanding common stock and for periods, varying for different services, of up to 12 months thereafter. It is expected that payments for these services will be determined, consistent with past practices, using an internal cost allocation methodology based on fully loaded cost (i.e., allocated direct costs of providing the services, plus all out-of-pocket costs, expenses and corporate overhead). In addition, we will enter into a number of intercompany agreements covering matters such as tax sharing. We are negotiating the terms of these agreements with Morgan Stanley in the context of a parent-subsidiary relationship. The terms will not be the result of, and may not be as favorable as terms obtained in, arm’s length negotiations. In addition, conflicts could arise in the interpretations of any extension or renegotiation of these agreements after this offering. See “Arrangements Between Morgan Stanley and Us.”

 

   

Business opportunities. Several of our directors, Morgan Stanley and affiliates of Morgan Stanley may have or make investments in other companies that may compete with us. Our Amended and Restated Certificate of Incorporation will provide that we have renounced any interest in related business opportunities and that our directors who are employees of Morgan Stanley or its affiliates (other than us) have no obligation to offer us those opportunities. As a result of these charter provisions, our future competitive position and growth potential could be adversely affected. See “Description of Capital Stock.”

 

Future sales or distributions of our shares by Morgan Stanley could depress the market price for shares of our class A common stock.

 

After this offering, Morgan Stanley may sell all or part of the shares of our class B common stock that it owns (which shares, unless sold to a subsidiary of Morgan Stanley, would be converted automatically into class A common stock in connection with any sale prior to a Tax-Free Spin-Off), including pursuant to certain demand registration rights described herein, or distribute those shares to its shareholders. See “Shares Eligible for Future Sale—Registration Rights.” Morgan Stanley is not subject to any contractual obligation that would prohibit it from selling, spinning off, splitting off or otherwise disposing of any shares of our common stock, except that Morgan Stanley has agreed not to sell, spin off, split off or otherwise dispose of any of our shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated, subject to certain limited exceptions. Consequently, Morgan Stanley may not maintain its ownership of our class B common stock after the 180-day period following this offering. Sales or distributions by Morgan Stanley of substantial amounts of our common stock in the public market, to its shareholders or in a private transaction could adversely affect prevailing market prices for our class A common stock.

 

Our cost of funding will increase and our liquidity will decrease.

 

We are expected to have lower credit ratings and more constrained liquidity than our current principal shareholder, Morgan Stanley. We may also face additional challenges in the future, including more limited capital resources to invest in or expand our business. See “Arrangements Between Morgan Stanley and Us.”

 

Our historical financial results are derived from our results as a subsidiary of Morgan Stanley and include allocated costs for functions historically provided by Morgan Stanley and therefore may not be representative of our results as a stand-alone company and may not be a reliable indicator of our future results.

 

Our historical financial information included in this prospectus does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company during the

 

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periods presented and may not be indicative of the results we will achieve in the future as a stand-alone public company. The historical costs and expenses reflected in our consolidated financial statements include an allocation for certain corporate functions historically provided by Morgan Stanley, including portions of human resources, information technology, accounting, legal and compliance, tax, office space leasing, corporate services and treasury. These allocations were based on what we and Morgan Stanley considered to be reasonable reflections of the historical utilization levels of these services required in support of our business. The historical information does not necessarily indicate what our results of operations, financial condition, cash flows or costs and expenses will be in the future, or that our costs as a stand-alone company will be similar. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated Financial Data” and the notes to our consolidated financial statements included elsewhere in this prospectus.

 

Our ability to operate our business effectively may suffer if we do not, quickly and cost effectively, establish our own financial, administrative and other support functions to operate as a stand-alone company or if we are unable to replace the corporate services Morgan Stanley provides us in a timely manner or on comparable terms.

 

Historically, we have relied on certain financial, administrative and other resources of Morgan Stanley to operate our business. As a result of this offering, we will need to enhance certain financial, legal and compliance, administrative, information technology and other support systems and processes or contract with third parties to replace Morgan Stanley’s systems. We will also need to establish our own accounting and auditing policies and systems on a stand-alone basis.

 

Morgan Stanley has performed many important corporate functions for our operations, including certain human resources, information technology, accounting, legal and compliance, office space leasing, corporate services and treasury functions. For the fiscal years ended November 30, 2004, 2005 and 2006, cost allocations related to these services were $29.2 million, $20.0 million and $23.1 million, respectively. Prior to this offering, we will enter into a services agreement with Morgan Stanley pursuant which Morgan Stanley will continue to provide some of these services to us for so long as Morgan Stanley owns more than 50% of our outstanding common stock and for periods, varying for different services, of up to 12 months thereafter.

 

It is expected that compensation for services under the services agreement with Morgan Stanley will be determined, consistent with past practices, using an internal cost allocation methodology based on fully loaded cost (i.e., allocated direct costs of providing the services, plus all out-of-pocket costs, expenses and corporate overhead). See “Arrangements Between Morgan Stanley and Us” for a description of these arrangements. These services may not be sufficient to meet our needs and, after these agreements with Morgan Stanley terminate, we may not be able to replace these services at all or obtain these services at acceptable prices and terms. Any failure or significant downturn in our own financial or administrative policies and systems or in Morgan Stanley’s financial or administrative policies and systems during the term of the services agreement could have a material adverse effect on our business, financial condition and results of operations.

 

We are negotiating these arrangements with Morgan Stanley in the context of a parent-subsidiary relationship. Although Morgan Stanley will be contractually obligated to provide us with services during the term of the services agreement, we may not be able to obtain services of similar scope and quality after the expiration or termination of that agreement. In addition, our costs of procuring those services from third parties may increase. See “Arrangements Between Morgan Stanley and Us—Relationship with Morgan Stanley.”

 

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In connection with this offering, we will enter into agreements with Morgan Stanley relating to the ongoing provision of services and other matters that may be on terms less favorable to us than if they had been negotiated with another party, and we will agree to indemnify Morgan Stanley for, among other things, certain past, present and future liabilities related to our business.

 

We will enter into agreements with Morgan Stanley relating to the ongoing provision of services and other matters while still a majority-owned subsidiary of Morgan Stanley. Accordingly, the terms of these agreements may not reflect those that would have been reached with another party on an arm’s-length basis. If these agreements were to be entered into with another party, we may have obtained more favorable terms.

 

Pursuant to certain of these agreements, we will agree to indemnify Morgan Stanley for, among other matters, certain past, present and future liabilities related to our business. Such liabilities will include certain unknown liabilities, which could be significant.

 

We may experience increased costs resulting from a decrease in the purchasing power and other operational efficiencies we currently have due to our association with Morgan Stanley.

 

We have been able to take advantage of Morgan Stanley’s purchasing power in the U.S. and internationally in procuring goods, technology and services, including insurance, employee benefit support and audit services. As a stand-alone company, we may be unable to obtain goods, technology and services at prices and on terms as favorable as those available to us prior to this offering, which could have a material adverse effect on our business, financial condition or results of operations.

 

Additionally, if we are unable to continue to file combined returns with Morgan Stanley after this offering, our tax liability may also increase due to increased income taxes in the jurisdictions where combined filings were previously made with Morgan Stanley.

 

Further, Morgan Stanley has been influential in our ability to attract and retain research, sales and marketing, information technology, software engineering and other personnel. After this offering, it may be more difficult and costly for us to attract and retain such personnel. The development, maintenance, support and use of our products is dependent upon the knowledge, experience and ability of our highly skilled, educated and trained employees. There can be no assurance that we will be successful in attracting or retaining such personnel, which could have a material adverse effect on our business, financial condition or results of operations. See “Business—Employees,” “Management—Executive Officers and Directors” and “—Risks Related to Our Business—We are dependent on key personnel in our professional staff for their expertise. If we fail to attract and retain the necessary qualified personnel, our business, financial condition or results of operations could be materially adversely affected.”

 

After this offering, we may experience a loss in the marketing and reputational value we currently have due to our association with the Morgan Stanley name.

 

We believe we receive marketing and reputational benefits from our association with the Morgan Stanley brand name. After this offering that may no longer be the case. Consequently, our ability to retain existing clients and attract new clients and our reputation may be adversely affected.

 

The obligations associated with being a public company will require significant resources and management attention.

 

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. All of the procedures and practices required as a majority-owned subsidiary of Morgan

 

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Stanley were previously established, but we will have additional procedures and practices to establish as a stand-alone public company. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements.

 

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the SEC, and will likely require in the same report, a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. We will be unable to issue securities in the public markets through the use of a shelf registration statement if we are not in compliance with Section 404. In addition, failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price.

 

We are a “controlled company” within the meaning of                      rules and, as a result, are exempt from certain corporate governance requirements.

 

Upon completion of this offering, Morgan Stanley will continue to control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the                      corporate governance standards. Under the                      rules, a company of which more than 50% of the voting power is held by another company is a “controlled company” and need not comply with certain requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the nominating/corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, (3) the requirement that the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (4) the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees. Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our Nominating and Corporate Governance and Compensation Committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the                      corporate governance requirements.

 

Risks Related to This Offering and Ownership of Our Class A Common Stock

 

An active trading market for our class A common stock may not develop, and you may not be able to sell your class A common stock at or above the initial public offering price.

 

Prior to this offering, there has been no public market for our class A common stock. An active trading market for shares of our class A common stock may never develop or be sustained following this offering. As a result, you may not be able to sell your class A common stock at or above the initial public offering price or at any other price or at the time that you would like to sell.

 

Because holders of the shares of class B common stock will control the majority of the voting power of all classes of voting stock, you will not be able to determine the outcome of shareholder votes.

 

Our class A common stock will have one vote per share, and our class B common stock will have five votes per share. Following this offering, holders of shares of class B common stock will collectively control     % of the

 

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combined voting power of all classes of voting stock. For example, the holders of shares of class B common stock will be able to direct the election of all of the members of our Board of Directors, who will determine our strategic plans (including certain acquisitions), approve major financing decisions and appoint top management. In addition, the holders of the class B common stock may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to holders of our class A common stock or adversely affect us or other investors, including you. Substantially all of the class B common stock will be beneficially owned by Morgan Stanley following the offering and class B shares will only be transferable to Morgan Stanley, Capital Group International or one of their subsidiaries. Any such shares of class B common stock transferred to a person other than Morgan Stanley, Capital Group International or one of their subsidiaries will automatically convert into one share of class A common stock upon such disposition, except for a disposition effected in connection with a distribution of class B common stock in a Tax-Free Spin-Off. Morgan Stanley may in the future decide to distribute all or a portion of its interest in the class B common stock to its shareholders through a Tax-Free Spin-Off. Following any such disposition, shares of class B common stock will no longer be convertible into shares of class A common stock, and will be transferable as class B common stock, retaining their rights to multiple votes per share.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our class A common stock, the price of our class A common stock could decline.

 

The trading market for our class A common stock will rely in part on the research and reports that equity research analysts publish about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

The market price of our class A common stock may be volatile, which could result in substantial losses for you.

 

The initial public offering price for our class A common stock will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our class A common stock after the offering. Some of the factors that may cause the market price of our class A common stock to fluctuate include:

 

   

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

   

changes in estimates of our financial results or recommendations by securities analysts;

 

   

failure of any of our products to achieve or maintain market acceptance;

 

   

failure to produce or distribute our products;

 

   

changes in market valuations of similar companies;

 

   

success of competitive products;

 

   

changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;

 

   

announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;

 

   

regulatory developments in the U.S., foreign countries or both;

 

   

litigation involving our company, our general industry or both;

 

   

additions or departures of key personnel;

 

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investors’ general perception of us, including any perception of misuse of sensitive information;

 

   

changes in general economic, industry and market conditions; and

 

   

changes in regulatory and other dynamics.

 

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our class A common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

 

You will incur immediate and substantial dilution as a result of this offering.

 

If you purchase class A common stock in this offering, you will pay more for your shares than the amounts paid by existing shareholders for their shares. As a result, you will incur immediate and substantial dilution of $             per share, representing the difference between the initial public offering price of $             per share and our pro forma net tangible book value per share after giving effect to this offering.

 

Future sales of our common stock, or the perception that such sales may occur, could depress our class A common stock price.

 

Sales of a substantial number of shares of our common stock, or the perception that such sales may occur, following this offering could depress the market price of our class A common stock. This would include sales by Morgan Stanley, as detailed above under “—Risks Related to This Offering and Our Relationship with Morgan Stanley—Future sales or distributions of our shares by Morgan Stanley could depress the market price for shares of our class A common stock,” and restricted shares of class A common stock and options to purchase shares of class A common stock granted in connection with this offering and pursuant to our equity incentive compensation plan. We, our directors, executive officers and certain other employees and Morgan Stanley and Capital Group International have agreed with the underwriters not to offer, sell, dispose of or hedge any shares of our class A common stock or securities convertible into or exchangeable for shares of our common stock (including shares of our class B common stock), subject to specified limited exceptions and extensions described elsewhere in this prospectus, during the period ending 180 days (subject to extension) after the date of this prospectus, except with the prior written consent of Morgan Stanley & Co. Incorporated. Our Amended and Restated Certificate of Incorporation will authorize us to issue up to              shares of class A common stock, of which              shares will be outstanding and              shares will be issuable upon the exercise of outstanding stock options, and up to              shares of class B common stock, of which              shares will be outstanding, upon completion of this offering. Of the outstanding shares,              shares of class A common stock and              shares of class B common stock will be freely tradable after the expiration date of the lock-up agreements, excluding any shares acquired by persons who may be deemed to be our affiliates. All of the outstanding shares of our class B common stock will be eligible for conversion and resale after the expiration of the lock-up period. Shares of our common stock held by our affiliates will continue to be subject to the volume and other restrictions of Rule 144 under the U.S. Securities Act of 1933, as amended, or the Securities Act. Morgan Stanley & Co. Incorporated may, in its sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up.

 

In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of common stock reserved for issuance in respect of incentive awards to our officers and certain of our employees. See the information under the heading “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sales upon completion of this offering.

 

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Provisions in our Amended and Restated Certificate of Incorporation and By-laws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our class A common stock.

 

Provisions of our Amended and Restated Certificate of Incorporation and By-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our class A common stock. These provisions may also prevent or frustrate attempts by our shareholders to replace or remove our management. These provisions include:

 

   

limitations on the removal of directors;

 

   

advance notice requirements for shareholder proposals and director nominations;

 

   

the inability of shareholders, after a change in control, to act by written consent or to call special meetings;

 

   

the ability of our Board of Directors to make, alter or repeal our By-laws; and

 

   

the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without shareholder approval.

 

Generally, the amendment of our Amended and Restated Certificate of Incorporation requires approval by our Board of Directors and a majority vote of shareholders. Any amendment to our By-laws requires the approval of either a majority of our Board of Directors or holders of at least 80% of the votes entitled to be cast by the outstanding capital stock in the election of our Board of Directors.

 

Moreover, while we have opted out of the “business combination” provisions of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”) until such time as Morgan Stanley ceases to own more than 50% of our outstanding common stock, after which we will be governed by these provisions. Section 203 prohibits a person who acquires more than 15% but less than 85% of all classes of our outstanding voting stock without the approval of our Board of Directors from merging or combining with us for a period of three years, unless the merger or combination is approved by a two-thirds vote of the shares not owned by such person. These provisions would apply even if the proposed merger or acquisition could be considered beneficial by some shareholders.

 

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our class A common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your class A common stock in an acquisition.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our class A common stock.

 

Other than dividends that we declared and paid prior to the effectiveness of this offering, we do not intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, including growth through acquisitions. The payment of any future dividends will be determined by the Board of Directors in light of conditions then existing, including our earnings, financial condition and capital requirements, business conditions, corporate law requirement and other factors.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.”

 

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We do not plan to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds of the sale of the class A common stock we are offering will be approximately $             million, based on an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses of $             million payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

On July 19, 2007, we paid a dividend of $973.0 million, consisting of $325.0 million in cash and $648.0 million of demand notes. On July 19, 2007, we paid in full in cash the $22.1 million demand note held by Capital Group International. Prior to the completion of this offering, we intend to obtain a new credit facility, the net proceeds of which we will use to pay in full the $625.9 million demand note held by Morgan Stanley. We intend to use all of the net proceeds from this offering to pay a portion of our new credit facility. The credit facility will bear interest at a rate of              payable              and matures on                 .

 

DIVIDEND POLICY

 

Other than the dividends that we declared and paid prior to the effectiveness of this offering, we do not intend to pay any dividends in the foreseeable future and intend to retain all available funds for use in the operation and expansion of our business, including growth through acquisitions. In addition, we expect that our new credit facility will contain restrictions on the payment of dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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CAPITALIZATION

 

The following table sets forth our capitalization, cash and cash equivalents, and cash deposited with related parties as of May 31, 2007:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (i) the $973.0 million dividend paid on July 19, 2007, consisting of $325.0 million in cash and $648.0 million in demand notes payable to Morgan Stanley and Capital Group International, (ii) payment in full in cash of the $22.1 million demand note held by Capital Group International on July 19, 2007, (iii) the payment in full of the $625.9 million demand note held by Morgan Stanley with the net proceeds of a new credit facility we intend to enter into prior to the completion of this offering and (iv) the reclassification of all 29,323 shares of our common stock, par value $1.00 per share into              shares of class B common stock; and

 

   

on a pro forma as adjusted basis to reflect (i) the pro forma adjustments described above, (ii) the sale by us of              shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, and (iii) the application of all of the estimated net proceeds from this offering to pay a portion of the credit facility.

 

This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto appearing elsewhere in this prospectus.

 

     As of May 31, 2007
     Actual     Pro
Forma
   Pro Forma as
Adjusted(1)
     (in thousands)

Cash and cash equivalents

   $ 29,951       

Cash deposited with related parties

     367,010       
                 
   $ 396,961       
                 

Demand note

     —         

Credit facility

     —         

Shareholders’ equity:

       

Common stock, par value $1.00 per share, 40,000 shares authorized, 29,323 shares issued and outstanding, actual

   $ 29       

Class A common stock, par value $0.01 per share,              shares authorized,              shares issued and outstanding, pro forma as adjusted

     —         

Class B common stock, par value $0.01 per share,              shares authorized,              shares issued and outstanding, pro forma and pro forma as adjusted

     —         

Additional paid-in capital

     649,884       

Retained earnings

     217,589       

Accumulated other comprehensive loss

     (2,736 )     
                 

Total shareholders’ equity

     864,766       
                 

Total capitalization

   $ 864,766       
                 

  (1)   A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

 

Our net tangible book value as of May 31, 2007 was $             or $             per share of common stock on a pro forma basis to reflect (i) the $973.0 million dividend paid on July 19, 2007, consisting of $325.0 million in cash and $648.0 million in demand notes payable to Morgan Stanley and Capital Group International, (ii) payment in full in cash of the $22.1 million demand note held by Capital Group International on July 19, 2007, (iii) the payment in full of the $625.9 million demand note held by Morgan Stanley with the net proceeds of a new credit facility we intend to enter into prior to the completion of this offering and (iv) the reclassification of all 29,323 shares of our common stock, par value $1.00 per share, into              shares of class B common stock. Pro forma net tangible book value per share is determined by dividing tangible net worth, total tangible assets less total liabilities, by the aggregate number of shares of common stock outstanding, in each case on a pro forma basis.

 

The price per share to the public of the shares of class A common stock in this offering exceeds the pro forma net tangible book value per share of common stock prior to the offering. Therefore, purchasers of shares of class A common stock in the offering will realize immediate and substantial dilution in the net tangible book value of $             per share.

 

The following table illustrates this per share dilution:

 

Assumed initial public offering price (the midpoint of the range listed on the cover page of this prospectus)

      $             

Pro forma net tangible book value per share as of May 31, 2007

   $                

Increase per share attributable to new investors

     

Adjusted pro forma net tangible book value per share after this offering

      $  
         

Dilution per share to new class A common stock investors

      $  
         

 

Dilution is determined by subtracting pro forma net tangible book value per share after the offering from the initial public offering price per share of class A common stock.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value after this offering by $            , the dilution per share to new investors by $            , the pro forma net tangible book value after this offering by $             and the dilution per share to new investors by $            , in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table sets forth as of May 31, 2007, after giving retroactive effect to the pro forma adjustments and this offering as described above, the number of shares of common stock purchased from us, the total consideration paid by existing shareholders and to be paid by new investors purchasing shares of class A common stock in this offering, at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us:

 

     Shares Purchased    

Total Consideration

    Average
Price
Per Share
      Number    Percent     Amount    Percent    

Existing shareholders

           %   $                      %  

New investors

            

Total

      100 %   $      100 %  

 

If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing shareholders will be reduced to              , or     % of the aggregate number of shares of common stock outstanding after this offering, and the number of shares of common stock held by new investors will be increased to             , or     % of the aggregate number of shares of common stock outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table presents our selected historical consolidated financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statement of income data for the fiscal years ended November 30, 2004, 2005 and 2006 and the consolidated financial condition data as of November 30, 2005 and 2006 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of income data for the fiscal years ended November 30, 2002 and 2003 and the consolidated statement of financial condition data as of November 30, 2002, 2003 and 2004 are derived from our audited historical consolidated financial statements not included in this prospectus. The consolidated statement of income data for the six month periods ended May 31, 2006 and 2007 and the consolidated financial condition data as of May 31, 2006 and 2007 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus which, in our opinion, have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position.

 

The historical financial information presented below may not be indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we operated as a stand-alone company during the periods presented. Results for the six months ended May 31, 2007 are not necessarily indicative of results that may be expected for the entire year.

 

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Consolidated Statements of Income Data

 

    For the Year Ended November 30,     For the Six Months
Ended May 31,
 
    2002(1)   2003(1)   2004(1)     2005   2006     2006     2007  
    (in thousands, except share and per share data)  

Operating revenues

  $ 83,776   $ 91,277   $ 178,446     $ 278,474   $ 310,698     $ 149,557     $ 175,821  

Cost of services

    44,808     44,670     86,432       106,598     115,426       51,593       62,607  

Selling, general and administrative

    24,560     30,411     51,304       74,678     76,130       35,268       44,453  

Amortization of intangible assets

            14,910       28,031     26,156       13,078       12,531  
                                                 

Total operating expenses

    69,368     75,081     152,646       209,307     217,712       99,939       119,591  
                                                 

Operating income

    14,408     16,196     25,800       69,167     92,986       49,618       56,230  

Interest income

    878     924     1,250       8,738     15,482       6,308       10,586  

Interest expense

    35     131     624       1,864     352       250       597  

Other income (loss)

            (13 )     398     1,043       (26 )     53  
                                                 

Interest and other income, net

    843     793     613       7,272     16,173 (2)     6,032       10,042 (2)
                                                 

Income before provision for income taxes, discontinued operations and cumulative effect of change in accounting principle

    15,251     16,989     26,413       76,439     109,159       55,650       66,272  

Provision for income taxes

    4,757     5,804     8,519       28,603     39,535       20,702       24,779  
                                                 

Income before discontinued operations and cumulative effect of change in accounting principle

    10,494     11,185     17,894       47,836     69,624       34,948       41,493  

Discontinued operations(3)

             

Income (loss) from discontinued operations

            (84 )     5,847     12,699       664        

Provision (benefit) for income taxes on discontinued operations

            (30 )     2,054     4,626       189        
                                                 

Income (loss) from discontinued operations

            (54 )     3,793     8,073       475        
                                                 

Income before cumulative effect of change in accounting principle

    10,494     11,185     17,840       51,629     77,697       35,423       41,493  

Cumulative effect of change in accounting principle

                  313                  
                                                 

Net income

  $ 10,494   $ 11,185   $ 17,840     $ 51,942   $ 77,697 (2)   $ 35,423     $ 41,493 (2)
                                                 

Earnings (loss) per basic share:

             

Continuing operations

  $ 1,049   $ 1,119   $ 910     $ 1,631   $ 2,375     $ 1,192     $ 1,415  

Discontinued operations

            (3 )     129     275       16        

Cumulative effect of change in accounting principle

                  11                  
                                                 

Earnings per basic share

  $ 1,049   $ 1,119   $ 907     $ 1,771   $ 2,650     $ 1,208     $ 1,415  
                                                 

Earnings (loss) per diluted share:

             

Continuing operations

  $ 1,049   $ 1,119   $ 910     $ 1,631   $ 2,375     $ 1,192     $ 1,415  

Discontinued operations

            (3 )     129     275       16        

Cumulative effect of change in accounting principle

                  11              
                                                 

Earnings per diluted share

  $ 1,049   $ 1,119   $ 907     $ 1,771   $ 2,650     $ 1,208     $ 1,415  
                                                 

Weighted average shares outstanding used in computing earnings per share

             

Basic

    10,000     10,000     19,662       29,323     29,323       29,323       29,323  
                                                 

Diluted

    10,000     10,000     19,662       29,323     29,323       29,323       29,323  
                                                 

 

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Consolidated Statements of Financial Condition Data

 

    As of November 30,   As of May 31,
    2002   2003   2004   2005   2006   2006   2007
    (in thousands)

Cash and cash equivalents

  $ 20,535   $ 5,735   $ 33,076   $ 23,411   $ 24,362   $ 23,882   $ 29,951

Cash deposited with related parties(4)

  $ 40,058   $ 67,492   $ 98,873   $ 252,882   $ 330,231   $ 238,467   $ 367,010

Goodwill and intangible assets

          $ 781,238   $ 668,539   $ 642,383   $ 655,461   $ 629,852

Total assets

  $ 84,123   $ 122,072   $ 991,213   $ 1,039,106   $ 1,113,747   $ 1,026,949   $ 1,139,559

Deferred revenue

  $ 29,553   $ 53,007   $ 88,689   $ 87,952   $ 102,368   $ 121,937   $ 139,497

Shareholders’ equity

  $ 25,175   $ 35,972   $ 704,836   $ 750,940   $ 825,687   $ 779,656   $ 864,766

 

Other Data

 

     For the Year Ended November 30,     For the Six Months
Ended May 31,
 
     2002(1)     2003(1)     2004(1)     2005     2006     2006     2007  
     (dollar amounts in thousands)  

EBITDA(5)

   $ 15,451     $ 17,369     $ 48,544     $ 107,802     $ 136,383     $ 65,015     $ 69,903  
                                                        

Operating margin(6)

     17.2 %     17.7 %     14.5 %     24.8 %     29.9 %     33.2 %     32.0 %
                                                        

Capital expenditures

   $ 567     $ 1,231     $ 2,058     $ 346     $ 2,435     $ 692     $ 357  
                                                        

  (1)   On June 3, 2004, Morgan Stanley completed the acquisition of Barra. The operations of Barra have been included with our results of operations since that date. All information prior to June 3, 2004 does not include the operations of Barra.
  (2)   On July 19, 2007, we paid a dividend of $973.0 million, consisting of $325.0 million in cash and $648.0 million of demand notes. On July 19, 2007 we paid in full in cash the $22.1 million demand note held by Capital Group International. Prior to the completion of this offering, we intend to obtain a new credit facility, the net proceeds of which we will use to pay in full the $625.9 million demand note held by Morgan Stanley. As a result of the dividend and the payment of the demand notes, we expect interest income to be substantially lower and interest expense to be substantially higher in future periods. On a pro forma basis, assuming a dividend of $973 million paid on December 1, 2005 and a constant interest rate of         %, net income would have been $             million and $             million and earnings per share would have been $             and $             for the fiscal year ended November 30, 2006 and the six months ended May 31, 2007, respectively.
  (3)   Income (loss) from discontinued operations relates to our interest in POSIT JV, a joint venture that was acquired with the purchase of Barra in 2004. On February 1, 2005, we sold our interest in POSIT JV to our joint venture partner, ITG, for $90 million. We recorded a pre-tax gain of $6.8 million at the time of sale. As part of the sale agreement, we were entitled to additional royalties for a period of 10 years subsequent to the sale pursuant to an earn-out arrangement, based on fees earned by ITG related to the POSIT system. In September 2006, ITG exercised its option to accelerate the earn-out period by making a lump sum payment to us of $11.7 million. We will receive no further payments pursuant to the earn-out arrangement.
  (4)   Historically, we have deposited most of our excess funds with our principal shareholder, Morgan Stanley, and have received interest at Morgan Stanley’s internal prevailing rates. The funds are payable on demand.

 

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  (5)   EBITDA is defined as income before interest income, interest expense, provision for income taxes, depreciation and amortization. EBITDA is not presented as an alternative measure of operating results, as determined in accordance with accounting principles generally accepted in the U.S. We believe that EBITDA is one measure that investors use to evaluate companies that have substantial amortization of intangible assets included in their statement of income. We use EBITDA to compare ourselves to other companies in the industry. However, EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies. EBITDA is a non-GAAP measure that should not be considered as an alternative to net income, as an indication of financial performance or as an alternative to cash flow from operations as a measure of liquidity.

 

Reconciliation of EBITDA to net income is presented below:

 

    For the Year Ended November 30,     For the Six Months
Ended May 31,
 
    2002     2003     2004     2005     2006     2006     2007  
    (in thousands)  

Net income

  $ 10,494     $ 11,185     $ 17,840     $ 51,942     $ 77,697     $ 35,423     $ 41,493  

Interest income

    (878 )     (924 )     (1,250 )     (8,738 )     (15,482 )     (6,308 )     (10,586 )

Interest expense

    35       131       624       1,864       352       250       597  

Provision for income taxes (including tax on discontinued operations)

    4,757       5,804       8,489       30,657       44,161       20,891       24,779  

Depreciation and amortization of property, equipment and leasehold improvements

    1,043       1,173       2,597       2,546       3,499       1,681       1,089  

Amortization of intangible assets

                20,244       29,531       26,156       13,078       12,531  
                                                       

EBITDA

  $ 15,451     $ 17,369     $ 48,544     $ 107,802     $ 136,383     $ 65,015     $ 69,903  
                                                       

 

  (6)   Operating margin is defined as operating income divided by operating revenues.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors.”

 

Overview

 

We are a leading provider of investment decision support tools to investment institutions worldwide. We produce indices and risk and return portfolio analytics for use in managing investment portfolios. Our products are used by institutions investing in or trading equity, fixed income and multi-asset class instruments and portfolios around the world. Our flagship products are our international equity indices marketed under the MSCI brand and our equity portfolio analytics marketed under the Barra brand. Our products are used in many areas of the investment process, including for portfolio construction and optimization, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, investment manager selection and investment research.

 

Our clients include asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, ETFs, hedge funds and private wealth; and financial intermediaries such as broker-dealers, exchanges, custodians and investment consultants. We have a client base of over 2,800 clients across 63 countries. Our clients include 24 of the 25 largest firms managing assets globally, measured by assets under management as published in July 2007 by Nelson MarketPlace, a leading provider of information to the global investment community. We have 18 offices in 14 countries to help serve our diverse client base, with approximately 51% of our clients in the Americas, 34% in EMEA, 9% in Japan and 6% in Asia (not including Japan), based on fiscal year 2006 revenues.

 

We sell our products through a common sales force, produce them on common data and systems platforms and develop them in our global research and product management organizations. In evaluating our results, we focus on revenues and revenue growth by product category and operating margins encompassing the entire cost structure supporting all our operations. Our current financial focus is on accelerating our revenue growth to generate cash flow to expand our market position and capitalize on the many growth opportunities before us. Our revenue growth strategy includes: (a) expanding and deepening our relationships with the large and increasing number of investment institutions worldwide; (b) enhancing existing and developing new equity product offerings, as well as further developing and growing our investment tools for multi-asset class and fixed income investment institutions; and (c) actively seeking to acquire products, technologies and companies that will enhance, complement or expand our client base and our product offerings. See “Business—Growth Strategy.”

 

To maintain and accelerate our revenue growth, we will continue to invest in and expand our operating functions and infrastructure, including new sales and client support staff and facilities in locations around the world; additional staff and supporting technology for our research, data management and production functions; and additional personnel and supporting technology in our general and administrative functions, particularly finance and human resources personnel required to operate as a stand-alone public company. At the same time, managing and controlling our operating expenses is very important to us and a distinct part of our culture. In general, our goal is to keep the rate of growth of our operating expenses below the rate of growth of our revenues allowing us to expand our operating margins. However, at times because of significant market opportunities, it may be more important to us to invest in our business in order to support increased efforts to attract new clients and to develop new product offerings, rather than emphasize short-term operating margin expansion.

 

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We experienced growth in both revenues and expenses during fiscal 2006 and the six-month period ended May 31, 2007. Strong revenue growth continued in equity index products during both periods. Acceleration of revenue growth in equity portfolio analytics products during the six-month period ended May 31, 2007 resulted in part from investments made during 2006 to enhance and add features to our Barra Aegis and Equity Models Direct product offerings. Our operating expense growth rate increased at a higher rate than in prior periods, and exceeded our revenue growth rate, during the six-month period ended May 31, 2007. This reflects large staff additions made during the third and fourth quarters of fiscal 2006, including the hiring of a Chief Operating Officer and a Chief Financial Officer. Product enhancements continued throughout 2007 and included the releases of Aegis 4.1 and BarraOne 1.9 and the introduction of the MSCI Global Investable Market Indices (“GIMI”) methodology.

 

Key Financial Metrics and Drivers

 

Revenues

 

Our principal sales model is to license annual, recurring subscriptions to our products for use at specified locations by a given number of client users for an annual fee paid upfront. The substantial majority of our revenues come from these annual, recurring subscriptions. These fees are recorded as deferred revenues on our consolidated statement of financial condition and are recognized each month on our income statement as the service is rendered. Over time, as their needs evolve, our clients often add product modules, users and locations to their subscriptions, which results in an increase in our revenues per client. Additionally, a rapidly growing source of our revenues comes from clients who use our indices as the basis for certain index-linked investment products such as ETFs, passive mutual funds and structured products. These clients commonly pay us a license fee based on the investment product’s assets.

 

We group our revenues into the following four product categories:

 

Equity Indices

 

This category includes fees from MSCI equity index data subscriptions, fees based on assets in investment products linked to our equity indices, fees from one-time licenses of our equity index historical data and fees from custom MSCI indices. We also generate a limited amount of revenues based on the trading volume of futures and options contracts linked to our indices.

 

Clients typically subscribe to equity index data modules for use by a specified number of users at a particular location. Clients may select delivery from us or delivery via a third-party vendor. We are able to grow our revenues for data subscriptions by expanding the number of client users and their locations and the number of third-party vendors the client uses for delivery of our data modules. The increasing scope and complexity of a client’s data requirements beyond standard data modules, such as requests for historical data or customized indices, also provide opportunities for further revenue growth from an existing client.

 

Our goal is to increase revenues from MSCI International and Domestic Equity Indices by licensing additional data subscriptions to existing and new clients, licensing subscriptions of index data to additional client types in which we are underrepresented, such as hedge funds, and licensing new indices, such as the Emerging Markets Small Cap Indices created from the recent enhancements we made to our international equity index series through the introduction of the GIMI methodology.

 

Revenues from our index-linked investment product licenses, such as ETFs, increase or decrease as a result of changes in value of the assets in the investment products. These changes in assets can result from equity market price changes and investment inflows and outflows. In most cases, fees for these licenses are paid quarterly in arrears and are calculated by multiplying a negotiated basis point fee times the average assets in the investment product for the most recent period.

 

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We strive to grow revenues from our ETF clients by licensing to existing clients the right to use additional MSCI equity indices to launch new ETFs and by licensing our equity indices to new ETF managers, particularly in EMEA and Asia.

 

Equity Portfolio Analytics

 

This category includes revenues from annual, recurring subscriptions to Barra Aegis and our proprietary risk data in it; Equity Models Direct products; and our proprietary equity risk data incorporated in third-party software application offerings (e.g., Barra on FactSet).

 

Barra Aegis has many uses, including portfolio risk analysis and forecasting, optimization and portfolio performance attribution. A base subscription for use in portfolio analysis typically involves a subscription to Barra Aegis and various risk data modules. A client may add portfolio performance attribution, optimization tools or other features to its Barra Aegis subscription. By licensing the client to receive additional software modules and risk data, or increasing the number of permitted client users or client locations, we can increase our revenues per client further.

 

We seek to increase revenues in the future from new subscriptions to Barra Aegis driven by the increased need for quantitative tools by investment firms, and by increasing renewals of existing clients driven by recent and planned enhancements to the user interface and data loading features.

 

Our Equity Models Direct risk data is distributed directly to clients who then combine it with their own software applications or upload the risk data onto third-party applications. A base subscription to our Equity Models Direct product provides equity risk data for a single country for a set fee that authorizes two users. By licensing the client to receive equity risk model data for additional countries, or increasing the number of permitted client users or client locations, we can further increase our revenues per client.

 

We seek to increase the number of Equity Models Direct product subscriptions sold to equity hedge funds, asset managers and broker-dealer proprietary trading units and to increase subscriptions by licensing our proprietary equity risk data through a larger number of third-party software applications.

 

Multi-Asset Class Portfolio Analytics

 

This category includes revenues from annual, recurring subscriptions to BarraOne and Barra TotalRisk together with risk data for multiple asset classes. Currently, we are actively selling subscriptions only to BarraOne and related risk data. Once most of the features and functionality of Barra TotalRisk have been added to BarraOne, we plan to decommission TotalRisk. As this happens, we will offer our TotalRisk clients the opportunity to transition to BarraOne. Therefore, as this transition takes place, revenues from this product group will increasingly come from BarraOne, partially offset by declines in revenues from TotalRisk.

 

We intend to grow revenues by increasing BarraOne subscriptions, driven in part by client interest in recent and planned product enhancements. These include expanding the breadth of asset and asset class coverage and adding features such as stress testing, historical and Monte Carlo value-at-risk simulations and multi-asset class performance attribution. Our goal is to implement functionality in BarraOne that caters to investment institutions’ need for risk reporting and management and performance attribution, spanning various client types such as asset managers, asset owners and hedge funds.

 

Other Products

 

This category includes revenues from a number of products, including Barra Cosmos for fixed income analytics, MSCI hedge fund indices, Barra hedge fund risk model, and FEA energy and commodity asset valuation analytics products.

 

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Run Rate

 

At the end of any period, we generally have subscription and investment product license agreements in place for a large portion of our total revenues for the following 12 months. We measure the fees related to these agreements and refer to this as our “Run Rate.” The Run Rate at a particular point in time represents the forward-looking fees for the next 12 months from all subscriptions and investment product licenses we currently provide to our clients under renewable contracts assuming all contracts that come up for renewal are renewed and assuming then-current exchange rates. For any license whose fees are linked to an investment product’s assets or trading volume, the Run Rate calculation reflects an annualization of the most recent periodic fee earned under such license. The Run Rate does not include fees associated with “one-time” and other non-recurring transactions. In addition, we remove from the Run Rate the fees associated with any subscription or investment product license agreement with respect to which we have received a notice of termination or non-renewal at the time we receive such notice, even if the notice is not effective until a later date.

 

Because the Run Rate represents potential future fees, there is typically a delayed impact on our operating revenues from changes in our Run Rate. In addition, the actual amount of revenues we will realize over the following 12 months will differ from the Run Rate because of:

 

   

revenues associated with new subscriptions and one-time sales;

 

   

modifications, cancellations and non-renewals of existing agreements, subject to specified notice requirements;

 

   

fluctuations in asset-based fees, which may result from market movements or from investment inflows into and outflows from investment products linked to our indices;

 

   

fluctuations in fees based on trading volumes of futures and options contracts linked to our indices;

 

   

price changes;

 

   

timing differences under GAAP between when we receive fees and the realization of the related revenues; and

 

   

fluctuations in foreign exchange rates.

 

The following table sets forth our Run Rate as of the dates indicated and the percentage growth over the prior period:

 

   

As of
November 30,

2004

 

Percentage
change

November
2004/2005

   

As of
November 30,

2005

 

Percentage
change

November
2005/2006

   

As of
November 30,

2006

 

As of

May 31,

2006

 

Percentage
change

May
2006/2007

   

As of

May 31,

2007

    (dollars in thousands)

Run Rate

  $ 245,961   9 %   $ 268,743   17 %   $ 314,996   $ 303,033   17 %   $ 354,298

 

Changes in Run Rate between periods reflect increases from new subscriptions, decreases from cancellations and increases or decreases, as the case may be, from the change in the value of assets of investment products linked to MSCI indices, the change in trading volumes of futures and options contracts linked to MSCI indices, price changes and fluctuations in foreign exchange rates.

 

Retention Rate

 

Because subscription cancellations decrease our Run Rate and ultimately our operating revenues, another key metric is our “Retention Rate.” Our Retention Rate for any period represents the percentage of the Run Rate as of the beginning of the period that is not cancelled during the period. The Retention Rate is computed on a product-by-product basis. Therefore, if a client reduces the number of products to which it subscribes or switches between our products, we treat it as a cancellation. In addition, we treat any reduction in fees resulting from

 

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renegotiated contracts as a cancellation in the calculation to the extent of the reduction. We do not calculate Retention Rates for that portion of our Run Rate attributable to assets in investment products linked to our indices or to trading volumes of futures and options contracts linked to our indices. Retention Rates for a non-annual period are annualized.

 

The following table sets forth our aggregate Retention Rate as of the dates indicated:

 

     Year Ended
November 30,
    Six Months
Ended
May 31,
 
     2005     2006     2006     2007  

Aggregate Retention Rate

   89 %   91 %   94 %   93 %

 

In recent years on average, 40% to 50% of our subscription cancellations have occurred in the fourth fiscal quarter. As a result, Retention Rates are generally higher during the first three fiscal quarters and lower in the fourth fiscal quarter.

 

Expenses

 

Compensation and benefits expenses represent the majority of our expenses across all of our operating functions. These expenses generally contribute to the majority of our expense increases from period to period, reflecting current staff compensation and benefit increases and increased staffing levels. Continued growth of our staff in lower cost locations around the world is an important factor in our ability to manage and control the growth of our compensation and benefit expenses. An important location for us is Mumbai, India, where we have increased our staff levels significantly since commencing our operations there in early 2004 with a small staff in data management and production. Subsequently, we expanded the scale of our operations there by adding teams in research and administration, as well as by continuing to expand the data management and production team. Our office in Mumbai has grown from 12 employees as of November 30, 2004 to 49 employees as of May 31, 2007.

 

Another significant expense for us is services provided by our principal shareholder, Morgan Stanley. As a majority-owned subsidiary of Morgan Stanley, we have relied on Morgan Stanley to provide a number of administrative support services and facilities. Although we will continue to operate under a services agreement with Morgan Stanley, the amount and composition of our expenses may vary from historical levels as we replace these services with ones supplied by us or by third parties. We are investing in expanding our own administrative functions, including finance, legal and compliance and human resources, as well as information technology infrastructure, to replace services currently provided by Morgan Stanley. Because of initial set-up costs and overlaps with services currently provided by Morgan Stanley, our expenses may increase in the near-term. We will incur additional costs as a public company, including audit, investor relations, stock administration and regulatory compliance costs.

 

Information technology costs, which include market data, amortization of hardware and software products, and telecommunications services, are also an important part of our expense base.

 

We group our expenses into three categories:

 

   

Cost of services,

 

   

Selling, general and administrative (“SG&A”), and

 

   

Amortization of intangible assets.

 

In both the cost of services and SG&A expense categories, compensation and benefits represent the majority of our expenses. Other costs associated with the number of employees such as occupancy and equipment and professional services are included in both the cost of services and SG&A expense categories consistent with the allocation of employees to those respective areas.

 

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Cost of Services

 

This category includes costs related to our research, data management and production, software engineering and product management functions. Costs in these areas include staff compensation and benefits, allocated office space, market data fees and certain information technology services provided by Morgan Stanley. The largest expense in this category is compensation and benefits. As such, they generally contribute to a majority of our expense increases from period to period, reflecting compensation increases for current staff and increased staffing levels.

 

Selling, General and Administrative

 

This category includes compensation expense for our sales, client support and marketing staff, and our finance, human resources, legal and compliance, information technology infrastructure and corporate administration personnel. As with cost of services, the largest expense in this category is compensation and benefits. As such, they generally contribute to a majority of our expense increases from period to period, reflecting compensation increases for current staff and increased staffing levels. Other significant expenses are for services provided by Morgan Stanley and office space.

 

Amortization of Intangible Assets

 

This category consists of expenses related to amortizing intangible assets arising from the acquisition of Barra in June 2004. At the time of acquisition, the intangible assets had weighted average useful lives ranging from 1.5 to 21.5 years. Our intangible assets consist primarily of technology and software, trademarks and client relationships. At May 31, 2007, our intangible assets totaled $188.2 million, net of accumulated amortization.

 

Interest and Other Income, net

 

This category consists primarily of interest we collect on cash balances, including cash deposited with Morgan Stanley. Average cash balances and the weighted average yield received are the two largest factors causing changes from period to period. As a result of the payment in cash and the demand notes associated with the $973.0 million dividend paid on July 19, 2007, described below under “—Factors Impacting Comparability of Our Financial Results—July 2007 Dividend,” we expect interest income to be substantially lower and interest expense to be substantially higher in future periods.

 

Factors Impacting Comparability of Our Financial Results

 

Our historical results of operations for the periods presented may not be comparable with prior periods or with our results of operations in the future for the reasons discussed below.

 

Barra Acquisition and Divestiture of POSIT JV

 

On June 3, 2004, Morgan Stanley completed the acquisition of Barra. On December 1, 2004, Morgan Stanley contributed Barra to us. The contribution of Barra was accounted for as a transfer of net assets between entities under common control and therefore, we have presented our financial position and results of operations as if Barra had been combined with us from the date of the acquisition. Founded in 1975, Barra became a public company in 1991, trading on the NASDAQ under the ticker symbol BARZ.

 

On February 1, 2005, we sold for $90.0 million our 50% interest in POSIT JV, a joint venture that owned the intellectual property for and certain licenses underlying the POSIT equity crossing system that matches institutional buyers and sellers, to our joint venture partner, ITG. We recorded a pre-tax gain of $6.8 million at the time of sale. We acquired the POSIT JV interest as part of our acquisition of Barra. As part of the sale agreement, we were entitled to additional royalties for a period of 10 years subsequent to the sale pursuant to an earn-out arrangement based on fees earned by ITG related to the POSIT system. In September 2006, ITG

 

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exercised its option to accelerate the earn-out period by making a lump sum payment to us of $11.7 million. In addition, we received royalty payments of $3.2 million and $1.0 million in fiscal 2005 and 2006, respectively, prior to the lump sum earn-out payment. With the issuance of FASB Interpretation 46R Consolidation of Variable Interest Entities (FIN 46R), Barra determined that POSIT JV qualified as a variable interest entity. Barra was entitled to 95% of the gains and losses of the joint venture and thus consolidated POSIT JV. We accounted for the results of operations of POSIT JV, the gain on sale of POSIT JV, and the lump sum payment from ITG as discontinued operations in our financial statements.

 

Our Relationship with Morgan Stanley

 

Our consolidated financial statements have been derived from the financial statements and accounting records of Morgan Stanley using the historical results of operations and historical bases of assets and liabilities of our business. The historical costs and expenses reflected in our audited consolidated financial statements include an allocation for certain corporate functions historically provided by Morgan Stanley, including human resources, information technology, accounting, legal and compliance, tax, office space leasing, corporate services, treasury and other services. We will enter into a services agreement with Morgan Stanley prior to the completion of this offering pursuant to which Morgan Stanley and its affiliates will agree to continue to provide us with certain of these services for so long as Morgan Stanley owns more than 50% of our outstanding common stock and for periods, varying for different services, of up to 12 months thereafter. For the fiscal years ended November 30, 2004, 2005 and 2006 and the six months ended May 31, 2007, direct cost allocations related to these services were $29.2 million, $20.0 million, $23.1 million and $12.8 million, respectively. Cost allocations for the fiscal year ended November 30, 2004 were higher as they incorporated certain costs of integrating Barra. These allocations were based on what we and Morgan Stanley considered to be reasonable reflections of the utilization levels of these services required in support of our business and are based on methods that include direct time tracking, headcount, inventory metrics and corporate overhead. The historical information does not necessarily indicate what our results of operations, financial condition or cash flows will be in the future.

 

As a stand-alone company, and as we replace services currently provided by Morgan Stanley, our expenses may be higher or lower than the amounts reflected in the consolidated statements of income. We will enter into a services agreement with Morgan Stanley prior to the completion of this offering. Pursuant to the services agreement, Morgan Stanley and its affiliates will agree to provide us with services after this offering, including certain human resources, information technology, accounting, legal and compliance, tax, office space leasing, corporate services, treasury and other services. It is expected that payment for these services will be determined, consistent with past practices, using an internal cost allocation methodology based on fully loaded cost (i.e., allocated direct costs of providing the services, plus all out-of-pocket costs, expenses and corporate overhead). As a result of this offering, we will need to enhance our own financial, administrative and other support systems or contract with third parties to replace Morgan Stanley’s systems. We will also need to establish our own accounting and internal auditing functions separate from those provided to us by Morgan Stanley.

 

Public Company Expenses

 

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. All of the procedures and practices required as a majority-owned subsidiary of Morgan Stanley were previously established, but we will have additional procedures and practices to establish as a stand-alone public company. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur.

 

July 2007 Dividend

 

On July 19, 2007, we paid a dividend of $973.0 million, consisting of $325.0 million in cash and $648.0 million of demand notes. Morgan Stanley was issued a demand note in the amount of $625.9 million and Capital Group International was issued a demand note in the amount of $22.1 million. On July 19, 2007, we paid in full in cash the $22.1 million demand note held by Capital Group International. Prior to the completion of this

 

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offering, we intend to obtain a new credit facility, the net proceeds of which we will use to pay in full the $625.9 million demand note held by Morgan Stanley. As a result of the dividend and the payment of the demand notes, we expect interest income to be substantially lower and interest expense to be substantially higher in future periods.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. We believe the estimates and judgments upon which we rely are reasonable based upon information available to us at the time these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. The accounting policies that reflect our more significant estimates and judgments and that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include revenue recognition, research and development and software capitalization, allowance for doubtful accounts, tax contingencies, impairment of long-lived assets and accrued compensation. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.

 

Revenue Recognition

 

For non-software-related recurring revenue arrangements, we recognize revenues ratably over the service period.

 

Our software-related recurring revenue arrangements do not require significant modification or customization of any underlying software applications being licensed. Accordingly, we recognize software revenues excluding the energy and commodity asset valuation analytics products, pursuant to the requirements of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” In accordance with SOP 97-2, we begin to recognize revenues from subscriptions, maintenance and client technical support, and professional services when all of the following criteria are met: (1) we have persuasive evidence of a legally binding arrangement with a client, (2) delivery has occurred, (3) client payment is deemed fixed or determinable and free of contingencies or significant uncertainties, and (4) collection is probable.

 

Our subscription agreements for software products include provisions that, among other things, would allow clients to receive unspecified future software upgrades for no additional fee as well as the right to use the software products with maintenance for the term of the agreement, typically one year. Under these agreements, once all four of the above noted revenue recognition criteria are met, we recognize revenues ratably over the term of the license agreement.

 

Our software license arrangements generally do not include acceptance provisions. Such provisions generally allow a client to test the software for a defined period of time before committing to license the software. If a license agreement includes an acceptance provision, we do not record subscription revenues until the earlier of the receipt of a written client acceptance or, if not notified by the client that it is cancelling the license agreement, the expiration of the acceptance period.

 

License fees on energy and commodity asset valuation analytics products are recorded as revenues upon delivery of the product.

 

Clients that use our indices as the basis for certain index-linked investment products such as ETFs or futures contracts commonly pay us a fee based on the investment product’s assets or contract volumes. These fees are recognized as they are earned, based upon estimated amounts of assets or contract volumes obtained either through independent third party sources or the most recent reported information of the client.

 

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Research and Development and Software Capitalization

 

We account for research and development costs in accordance with several accounting pronouncements, including SFAS No. 2, Accounting for Research and Development Costs (SFAS 2), and SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS 86). SFAS 2 requires that research and development costs generally be expensed as incurred. SFAS No. 86 specifies that costs incurred in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to clients. Judgment is required in determining when technological feasibility of a product is established. Costs incurred after technological feasibility is established have not been material, and accordingly, we have expensed all research and development costs when incurred. Research and development costs for the fiscal year ended November 30, 2004, 2005 and 2006 and the six months ended May 31, 2007 were approximately $39.7 million, $48.3 million, $55.4 million and $29.6 million, respectively.

 

Allowance for Doubtful Accounts and Change in Estimates

 

The allowance for doubtful accounts is based on the age of uncollected invoices. The allowance for doubtful accounts was approximately $10.8 million and $1.6 million at November 30, 2005 and 2006, respectively. Changes in the allowance for doubtful accounts from November 30, 2004 to November 30, 2006 were as follows (amounts in thousands):

 

     Amount  

Balance as of November 30, 2004

   $ 5,557  

Addition to provision

     5,210  
        

Balance as of November 30, 2005

     10,767  

Reduction to provision

     (9,035 )

Amounts written off

     (144 )
        

Balance as of November 30, 2006

   $ 1,588  
        

 

During the third quarter of fiscal 2006, we integrated our accounting systems and changed our processes for managing our client accounts receivable. This change in systems and processes resulted in improved collections. Therefore, we reviewed our methodology for estimating the allowance for doubtful accounts and revised our estimate. This change in estimate resulted in a reduction of the allowance of $10.7 million ($6.9 million after tax) in fiscal 2006 and an increase in earnings per share in fiscal 2006 of $235.

 

Tax Contingencies

 

Our taxable income historically has been included in the consolidated U.S. federal income tax return of Morgan Stanley and in returns filed by Morgan Stanley with certain state and foreign taxing jurisdictions. Our federal and foreign income tax liability has been computed and presented in the consolidated financial statements as if we were a separate taxpaying entity in the periods presented. The state and local tax liability presented in these statements reflects the fact that we are included in state unitary filings of Morgan Stanley, and that our tax liability is affected by the attributions of the unitary group. We will continue to file federal income tax returns with Morgan Stanley on such basis for so long as Morgan Stanley owns at least 80% of the total voting power of our stock and 80% of the total value of our stock, and will generally continue to file certain state income tax returns with Morgan Stanley on a consolidated, combined or unitary basis under applicable state law until we are no longer permitted to do so. If Morgan Stanley’s ownership of our common stock falls below the relevant threshold, which may occur as a result of a subsequent sale or Tax-Free Spin-Off by Morgan Stanley of our common stock, we will file the relevant federal or state income tax return as a separate taxable group. As a stand-alone taxpayer, our state and local tax filings will reflect our separate filing attributes.

 

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Although management believes that the judgments and estimates discussed in this prospectus are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement could require use of our cash and result in an increase in our effective income tax rate in the period of resolution.

 

Impairment of Long-Lived Assets

 

We review long-lived assets and identifiable definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, a loss is recorded for the excess of the asset’s carrying value over the fair value. To date we have not recognized any impairment loss for long-lived assets. Changes to the expected period in which the intangible asset will be utilized, changes in forecasted cash flow, changes in technology or client demand could materially impact the value of these assets in the future.

 

As part of a product review on July 15, 2007, we decided to transition certain clients over the next two to three years from Barra TotalRisk to other products. At the end of the transition, this product will no longer be offered. We have performed an impairment test in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). We have determined there is no impairment of this asset. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), the remaining useful life of the asset will be shortened from four-and-a-half years to two-and-a-half years. The revised useful life will result in higher amortization expenses related to this asset of $1.2 million, $3.5 million and $3.5 million for the fiscal years ended November 30, 2007, 2008 and 2009, respectively.

 

Accrued Compensation

 

We make significant estimates in determining our quarterly accrued non-stock based compensation. A significant portion of our employee incentive compensation programs are discretionary. Each year-end we determine the amount of discretionary cash bonus pools. We also review compensation throughout the year to determine how overall performance compares to management’s expectations. We take these and other factors, including historical performance, into account in reviewing accrued discretionary cash compensation estimates quarterly and adjusting accrual rates as appropriate. Changes to these factors could cause a material increase or decrease in the amount of expense that we report in a particular period. Accrued non stock-based compensation as of May 31, 2007 was $20.0 million.

 

Results of Operations

 

Six Months Ended May 31, 2007 Compared to Six Months Ended May 31, 2006

 

Revenues

 

     For the Six Months Ended May 31,       
             2006                    2007            Increase/(Decrease)  
     (in thousands)         

Equity indices

   $ 73,229    $ 94,034    $ 20,805      28 %

Equity portfolio analytics

     54,535      59,571      5,036      9 %

Multi-asset class portfolio analytics

     8,241      8,701      460      6 %

Other products

     13,552      13,515      (37 )    0 %
                         

Total operating revenues

   $ 149,557    $ 175,821    $ 26,264      18 %
                         

 

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Revenues increased $26.3 million, or 18%, to $175.8 million for the six months ended May 31, 2007, compared to the same period in 2006. New client additions for equity and multi-asset class products, increased fees attributable to higher assets of investment products linked to MSCI equity indices, further penetration into the European market and the licensing of additional index and analytics products by existing and new clients drove revenue growth. The increase primarily reflects increased revenues from equity indices and equity portfolio analytics.

 

Revenues from equity indices increased $20.8 million, or 28%, to $94.0 million for the six months ended May 31, 2007 compared to the same period in 2006. The increase is largely attributable to increases in fees based on assets of investment products linked to MSCI equity indices, including a number of new ETFs launched in EMEA, as well as additional index subscriptions from existing and new clients.

 

Revenues from equity portfolio analytics increased $5.0 million, or 9%, to $59.6 million for the six months ended May 31, 2007 compared to the same period in 2006. The increase reflects additional subscriptions for Equity Models Direct risk data from existing and new clients accessed directly and through third parties who began distributing our products in the second half of fiscal 2006 as well as from higher Retention Rates for Barra Aegis.

 

Revenues from multi-asset class portfolio analytics products increased $0.5 million, or 6%, to $8.7 million for the six months ended May 31, 2007 compared to the same period in 2006. The increase primarily reflects additional subscriptions to BarraOne by asset owners and balanced fund managers. The increase in BarraOne revenues was offset in part by a decline in revenues from TotalRisk due to lower Retention Rates as well as our decision to stop licensing subscriptions to TotalRisk and gradually transition clients from TotalRisk to BarraOne.

 

A decrease in revenues from other products resulted from the cancellation by Morgan Stanley of a $2.5 million per annum fixed income index subscription at the end of the first quarter of 2007, and from decreased fees based on lower assets of investment products linked to MSCI hedge fund indices. These decreases were partially offset by an increase in revenues from subscriptions to our energy and commodity analytics products.

 

Expenses

 

     For the Six Months Ended May 31,       
             2006                    2007            Increase/(Decrease)  
     (in thousands)         

Cost of services

   $ 51,593    $ 62,607    $ 11,014      21 %

Selling, general and administrative

     35,268      44,453      9,185      26 %

Amortization of intangible assets

     13,078      12,531      (547 )    (4 )%
                         

Total operating expenses

   $ 99,939    $ 119,591    $ 19,652      20 %
                         

 

Total operating expenses of $119.6 million for the six months ended May 31, 2007 were $19.7 million or 20% higher compared to the same period in 2006. The largest contributor to the expense increase was growth in compensation and benefits of approximately $16.6 million reflecting large staff additions made during the fiscal third and fourth quarters of 2006, including the hiring of a Chief Operating Officer and a Chief Financial Officer.

 

Cost of services

 

Cost of services increased $11.0 million, or 21%, to $62.6 million for the six months ended May 31, 2007 compared to the same period in 2006. The majority of the increase, $8.2 million, was driven by increased personnel costs that reflected hires made in the second half of 2006 in the information technology group as well as the hiring of a Chief Operating Officer. As a percentage of revenues, cost of services increased to 36% from 34%.

 

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Selling, general and administrative

 

Selling, general and administrative expenses increased $9.2 million, or 26%, to $44.5 million for the six months ended May 31, 2007 compared to the same period in 2006. The rise largely reflects increases in personnel expenses of $8.5 million due to additional employees being hired in the second half of fiscal 2006. Expanding the sales organization and hiring a Chief Financial Officer were the main drivers of our increased personnel expenditures. In addition, allocations of general and administrative expenses from Morgan Stanley increased by $1.1 million in the six months ended May 31, 2007. As a percentage of revenues, selling, general, and administrative expenses increased to 25% from 24%.

 

Amortization of intangible assets

 

Amortization expense decreased $0.5 million, or 4%, to $12.5 million for the six months ended May 31, 2007 compared to the same period in 2006. The decrease was principally due to a portion of one component of our identified intangibles, client relationships, being fully amortized by the end of fiscal 2006. As a percentage of revenues, amortization expense decreased to 7% from 9%.

 

Interest and other income, net

 

Interest and other income, net increased $4.0 million, or 66%, to $10.0 million for the six- month period ended May 31, 2007 compared to the same period in 2006. This increase reflects both increased average cash balances, including cash deposited with Morgan Stanley, and higher average yields on the deposited funds. As a percentage of revenues, interest and other income increased to 6% from 4%.

 

Provision for income taxes

 

Our provision for income taxes increased $4.1 million, or 20%, to $24.8 million for the six-month period ended May 31, 2007 compared to the same period in 2006. The effective tax rate remained at 37% for the six-month periods ended May 31, 2007 and May 31, 2006. Effective tax rates are subject to change based on the taxable income in all the jurisdictions in which we do business.

 

Discontinued operations

 

Income from discontinued operations decreased to zero in the six-month period ended May 31, 2007 from $0.5 million in the same period in 2006, reflecting the termination in September 2006 of the earn-out arrangement related to our disposition of our POSIT JV interest on February 1, 2005.

 

Fiscal Year Ended November 30, 2006 Compared to Fiscal Year Ended November 30, 2005

 

Revenues

 

     For the Fiscal Year Ended November 30,       
             2005                    2006            Increase/(Decrease)  
     (in thousands)           

Equity indices

   $ 126,533    $ 156,772    $ 30,239        24 %

Equity portfolio analytics

     106,594      110,007      3,413        3 %

Multi-asset class portfolio analytics

     17,260      16,873      (387 )      (2 )%

Other products

     28,087      27,046      (1,041 )      (4 )%
                           

Total operating revenues

   $ 278,474    $ 310,698    $ 32,224        12 %
                           

 

Revenues increased $32.2 million, or 12%, to $310.7 million for fiscal 2006 compared to fiscal 2005. Increased asset-based fees attributable to higher assets of investment products linked to MSCI equity indices

 

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drove revenue growth. The increase also reflects increased revenues from equity indices and equity portfolio analytics partially offset by a decrease in revenues from our multi-asset class portfolio analytics products and other products including hedge fund indices.

 

Revenues from equity indices increased $30.2 million, or 24%, to $156.8 million in fiscal 2006 compared to fiscal 2005. The increase was largely attributable to increases in fees based on higher assets of investment products linked to MSCI equity indices along with additional subscriptions to existing and new clients.

 

Revenues from equity portfolio analytics increased $3.4 million, or 3%, to $110.0 million in fiscal 2006 compared to fiscal 2005. The increase reflects additional subscriptions to Equity Models Direct by existing and new clients as well as higher Retention Rates for Barra Aegis.

 

Revenues from multi-asset class portfolio analytics decreased $0.4 million, or 2%, to $16.9 million in fiscal 2006 compared to fiscal 2005. The decrease stems from a decline in TotalRisk revenues of $1.8 million, attributable to lower Retention Rate as well as our decision to stop licensing subscriptions to TotalRisk and gradually transition clients from TotalRisk to BarraOne. The decline in TotalRisk revenues was offset in part by a $1.4 million increase from BarraOne revenues attributable to new subscriptions from asset owners and balanced fund managers.

 

Revenues from other products decreased $1.0 million, or 4%, due to lower fees attributable to reduced assets of investment products linked to our hedge fund indices.

 

Expenses

 

     For the Fiscal Year Ended November 30,       
             2005                    2006            Increase/(Decrease)  
     (in thousands)           

Cost of services

   $ 106,598    $ 115,426    $ 8,828        8 %

Selling, general and administrative

     74,678      76,130      1,452        2 %

Amortization of intangible assets

     28,031      26,156      (1,875 )      (7 )%
                           

Total operating expenses

   $ 209,307    $ 217,712    $ 8,405        4 %
                           

 

Total expenses of $217.7 million for the fiscal year ended November 30, 2006 were $8.4 million, or 4%, higher compared to fiscal 2005. The increase in total operating expenses would have been greater except that in 2006 we recognized a benefit of $9.0 million as opposed to an expense of $5.2 million in 2005 in respect of the allowance for doubtful accounts. During 2006 we reviewed our methodology for estimating the allowance for doubtful accounts, which resulted in a reduction of the allowance of $10.7 million. See “—Critical Accounting Policies and Estimates—Allowance for Doubtful Accounts and Change in Estimates.” Compensation and benefits continue to account for our largest expense increase, accounting for $12.9 million in growth from the prior year. This increase stems from hiring personnel to support business growth mainly in the U.S. and Europe and the hiring of a Chief Operating Officer and a Chief Financial Officer. Additional increases were principally due to rises in general and administrative expenses from Morgan Stanley, information technology and software engineering costs.

 

Cost of services

 

Cost of services increased $8.8 million, or 8%, to $115.4 million in fiscal 2006 versus 2005. The rise mainly stems from higher research, information technology and software engineering costs incurred in order to add new product features and to expand the breadth of our equity securities universe. The increase is also attributable to

 

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the hiring of a Chief Operating Officer. In addition, allocations from Morgan Stanley increased by $2.4 million to reflect our expanded use of services after we migrated Barra onto Morgan Stanley platforms. As a percentage of revenues, cost of services declined to 37% in fiscal 2006 from 38% in 2005.

 

Selling, general and administrative

 

Selling, general and administrative expenses increased $1.5 million, or 2%, to $76.1 million in fiscal 2006 compared to fiscal 2005. The primary drivers of the increase in fiscal 2006 were an increase in personnel and occupancy costs, offset by a decrease in our bad debt expense. The increase in personnel costs was a result of expanding staffing in the sales organization and information technology infrastructure areas, as well as the hiring of a Chief Financial Officer. Higher occupancy costs were attributable to the expansion of office space and the establishment of business continuity sites in Hong Kong and London. During 2006 we reviewed our methodology for estimating the allowance for doubtful accounts, which resulted in a reduction of the allowance for doubtful accounts of $10.7 million. See “—Critical Accounting Policies and Estimates—Allowance for Doubtful Accounts and Change in Estimates.” As a percentage of revenues, selling, general and administrative expenses decreased to 25% from 27%.

 

Amortization of intangible assets

 

Amortization expense decreased $1.9 million, or 7%, to $26.2 million in fiscal 2006 compared to fiscal 2005. The decrease principally reflects the full amortization of some components of our identified intangibles, primarily related to developed technology for our energy and commodity products, by the end of fiscal 2005. As a percentage of revenues, amortization expense decreased to 8% from 10%.

 

Interest and other income, net

 

Interest and other income, net increased $8.9 million, or 122%, to $16.2 million in fiscal 2006 compared to fiscal 2005. The increase reflects higher average cash balances, including cash deposited with Morgan Stanley, and higher average interest rates earned on these balances, as well as a $1.0 million gain associated with the sale of our interest in two unconsolidated companies, LoanPerformance and ValuBond, in the fourth quarter of fiscal 2006. As a percentage of revenues, interest and other income, net increased to 5% from 3%.

 

Provision for income taxes

 

Our provision for income taxes increased $10.9 million, or 38%, to $39.5 million in fiscal 2006 compared to fiscal 2005. The effective tax rate decreased to 36% from 37% in fiscal 2006 compared to fiscal 2005. This decrease primarily reflects lower tax rates applicable to non-U.S. earnings during fiscal 2006. Effective tax rates are subject to change based on the taxable income in all the jurisdictions in which we do business.

 

Discontinued operations

 

Income from discontinued operations, net of tax, increased $4.3 million, or 113%, to $8.1 million in fiscal 2006 compared to fiscal 2005. Pre-tax income from discontinued operations increased $6.9 million, or 117%, to $12.7 million in fiscal 2006 compared to fiscal 2005. On February 1, 2005, we sold our interest in POSIT JV to our joint venture partner, ITG, for $90.0 million. We recorded a pre-tax gain of $6.8 million at the time of sale. As part of the sale agreement, we were entitled to additional royalties for a period of 10 years subsequent to the sale through an earn-out arrangement, based on fees earned by ITG related to the POSIT system. In September 2006, ITG exercised its option to accelerate the earn-out period by making a lump sum payment to us of $11.7 million. In addition, we received royalty payments of $3.2 million and $1.0 million in fiscal 2005 and 2006, respectively, prior to the lump sum earn-out payment.

 

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Fiscal Year Ended November 30, 2005 Compared to Fiscal Year Ended November 30, 2004

 

Revenues

 

     For the Fiscal Year Ended November 30,       
             2004                    2005            Increase/(Decrease)  
     (in thousands)         

Equity indices

   $ 103,844    $ 126,533    $ 22,689      22 %

Equity portfolio analytics

     51,686      106,594      54,908      106 %

Multi-asset class portfolio analytics

     9,028      17,260      8,232      91 %

Other products

     13,888      28,087      14,199      102 %
                         

Total operating revenues

   $ 178,446    $ 278,474    $ 100,028      56 %
                         

 

Revenues increased $100.0 million, or 56%, to $278.5 million for fiscal 2005 compared to fiscal 2004. The increase reflects increased revenues from equity indices, equity portfolio analytics, multi-asset class portfolio analytics and other products.

 

Revenues from equity indices increased $22.7 million, or 22%, to $126.5 million in fiscal 2005 compared to fiscal 2004. The increase is largely attributable to increases in fees based on higher assets of investment products linked to MSCI equity indices along with additional subscriptions by existing and new clients.

 

Revenues from equity portfolio analytics increased $54.9 million, or 106%, to $106.6 million in fiscal 2005 compared to fiscal 2004. The increase is the result of having a full year of Barra operations in fiscal 2005 compared to only six months of Barra operations in fiscal 2004 since Barra was acquired on June 3, 2004.

 

Revenues from multi-asset class portfolio analytics increased $8.2 million, or 91%, to $17.3 million in fiscal 2005 compared to fiscal 2004. The increase is principally the result of having a full year of Barra operations in fiscal 2005 compared to only six months of Barra operations in fiscal 2004.

 

Revenues from other products increased $14.2 million, or 102%, to $28.1 million in fiscal 2005 compared to fiscal 2004. The increase is principally the result of having a full year of Barra operations in fiscal 2005 compared to only six months of Barra operations in fiscal 2004. In addition, fees based on the assets of investment products linked to MSCI hedge fund indices increased $5.0 million in fiscal 2005 compared to fiscal 2004.

 

Expenses

 

     For the Fiscal Year Ended November 30,       
             2004                    2005            Increase/(Decrease)  
     (in thousands)         

Cost of services

   $ 86,432    $ 106,598    $ 20,166      23 %

Selling, general and administrative

     51,304      74,678      23,374      46 %

Amortization of intangible assets

     14,910      28,031      13,121      88 %
                         

Total operating expenses

   $ 152,646    $ 209,307    $ 56,661      37 %
                         

 

Total expenses of $209.3 million for the fiscal year ended November 30, 2005 were $56.7 million or 37% higher compared to fiscal 2005. The increase is principally the result of having a full year of Barra operations in fiscal 2005 compared to only six months of Barra in fiscal 2004.

 

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Cost of services

 

Cost of services increased $20.2 million, or 23%, to $106.6 million in fiscal 2005 compared to fiscal 2004. The increase is principally the result of having a full year of Barra operations in fiscal 2005 compared to only six months of Barra operations in fiscal 2004. As a percentage of revenues, cost of services declined to 38% from 48%.

 

Selling, general and administrative

 

Selling, general and administrative expenses increased $23.4 million, or 46%, to $74.7 million in fiscal 2005 compared to fiscal 2004. The increase is principally the result of having a full year of Barra operations in fiscal 2005 compared to only six months of Barra operations in fiscal 2004. As a percentage of revenues, selling, general and administrative expenses declined to 27% from 29%.

 

Amortization of intangible assets

 

Amortization expense increased $13.1 million, or 88%, to $28.0 million in fiscal 2005 compared to fiscal 2004. The increase is the result of having a full year of intangibles linked to the Barra acquisition in fiscal 2005 compared to only six months in fiscal 2004. As a percentage of revenues, amortization expense increased to 10% from 8%.

 

Interest and other income, net

 

Interest and other income, net increased more than ten times, from $0.6 million in fiscal 2004 to $7.3 million in fiscal 2005. The increase reflects higher average cash balances, including cash deposited with Morgan Stanley, as well as higher average yields on those funds. As a percentage of revenues, interest and other income, net increased to 3% from less than 1%.

 

Provision for income taxes

 

Our provision for income taxes increased $20.1 million, or 236%, to $28.6 million in fiscal 2005 compared to fiscal 2004. The increase primarily resulted from substantially higher pre-tax income during fiscal 2005 as compared to fiscal 2004. The effective tax rate increased from 32% to 37% for fiscal 2005 compared to fiscal 2004. The increase primarily reflects a higher benefit from domestic tax credits due to lower pre-tax income in 2004. Effective tax rates are subject to change based on the taxable income in all the jurisdictions in which we do business.

 

Cumulative effect of change in accounting principle

 

The cumulative effect of change in accounting principle in fiscal 2005 reflects a $0.5 million gain ($0.3 million after tax) we recognized upon adoption of SFAS 123R resulting from the requirement to estimate forfeitures at the date of grant instead of recognizing them as incurred.

 

Discontinued operations

 

Income from discontinued operations, net of tax, increased from a loss of $0.1 million in fiscal 2004 to a gain of $3.8 million in fiscal 2005. Pre-tax income from discontinued operations increased from a loss of $0.1 million in fiscal 2004 to a gain of $5.8 million in fiscal 2005. On February 1, 2005 we sold our interest in POSIT JV to our joint venture partner, ITG, for $90.0 million. Net of the unamortized balance of identifiable intangibles related to POSIT JV, the gain on sale before tax was $6.8 million. The pre-tax income from discontinued operations of $5.8 million in fiscal 2005 is composed of the gain on sale of $6.8 million plus royalty payments received in fiscal 2005 amounting to $3.2 million, less amortization of intangible assets related to POSIT JV amounting to $1.5 million and less other operating expenses of $2.7 million.

 

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Quarterly Results of Operations

 

The following table sets forth our quarterly consolidated statement of operations data for each of the eight quarters in the period ended May 31, 2007. In management’s opinion, the data has been prepared on the same basis as the audited consolidated financial statements included in this prospectus, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    2005   2006   2007
   

August

31,

 

November

30,

 

February

28,

 

May

31,

 

August

31,

 

November

30,

 

February

28,

 

May

31,

    (in thousands)

Operating revenues

  $ 66,096   $ 74,830   $ 71,273   $ 78,284   $ 79,555   $ 81,586   $ 87,069   $ 88,752

Cost of services

    23,418     30,760     27,030     24,563     25,519     38,314     32,266     30,341

Selling, general and administrative

    15,641     20,379     12,530     22,738     12,087     28,775     18,964     25,489

Amortization of intangible assets

    7,005     7,006     6,539     6,539     6,539     6,539     6,266     6,265
                                               

Total operating expenses

    46,064     58,145     46,099     53,840     44,145     73,628     57,496     62,095
                                               

Operating income

    20,032     16,685     25,174     24,444     35,410     7,958     29,573     26,657

Interest and other income, net

    1,093     4,541     2,794     3,238     4,281     5,860     4,994     5,048
                                               

Income before provision for income taxes, discontinued operations and cumulative effect of change in accounting principle

    21,125     21,226     27,968     27,682     39,691     13,818     34,567     31,705

Provision for income taxes

    7,905     7,943     10,404     10,298     13,970     4,863     12,925     11,854
                                               

Income from discontinued operations, net

    213     238     44     431     427     7,171        

Cumulative effect of change in accounting principle, net

        313                        
                                               

Net income

  $ 13,433   $ 13,834   $ 17,608   $ 17,815   $ 26,148   $ 16,126   $ 21,642   $ 19,851
                                               

 

Liquidity and Capital Resources

 

We require capital to fund ongoing operations, internal growth initiatives and acquisitions. Our working capital requirements and funding for capital expenditures, strategic investments and acquisitions have historically been part of the corporate-wide cash management program of Morgan Stanley. Subsequent to this offering, we will be solely responsible for the provision of funds to finance our working capital and other cash requirements.

 

Our primary sources of liquidity are cash flows generated from our operations, existing cash and cash equivalents and funds available under a revolving credit facility we intend to obtain prior to completion of this offering. We intend to use these sources of liquidity to service our debt and fund our working capital requirements, capital expenditures, investments and acquisitions. In connection with our business strategy, we regularly evaluate acquisition opportunities. We believe our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth.

 

As described above in “—Factors Impacting Comparability of Our Financial Results—July 2007 Dividend,” we paid a dividend of $973.0 million, consisting of $325.0 million in cash and $648.0 million of demand notes, on July 19, 2007. Morgan Stanley was issued a demand note in the amount of $625.9 million and Capital Group International was issued a demand note in the amount of $22.1 million. The demand notes bear interest at Morgan Stanley’s prevailing internal rate. On July 19, 2007, we paid in full in cash the $22.1 million demand note held by Capital Group International. Prior to the completion of this offering, we intend to obtain a new credit facility, the net proceeds of which we will use to pay in full the $625.9 million demand note held by Morgan Stanley.

 

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Cash flows

 

    As of and for the Fiscal Year Ended November 30,     As of and for the
Six Months Ended
May 31,
    As of and for the
Six Months Ended
May 31,
 
            2004                     2005                     2006             2006     2007  
    (in thousands)  

Cash and cash equivalents

  $ 33,076     $ 23,411     $ 24,362     $ 23,882     $ 29,951  

Cash deposited with related parties

  $ 98,873     $ 252,882     $ 330,231     $ 238,467     $ 367,010  

Cash provided (used) by operating activities

  $ 22,082     $ 59,881     $ 83,665     $ (6,564 )   $ 45,139  

Cash provided (used) by investing activities

  $ 135,126     $ (63,708 )   $ (79,764 )   $ 13,743     $ (37,136 )

Cash provided (used) by financing activities

  $ (131,478 )   $     $ (5,000 )   $ (5,000 )   $  

 

Cash and cash equivalents and cash deposited with related parties

 

Cash and cash equivalents were $23.4 million, $24.4 million and $30.0 million as of November 30, 2005 and 2006 and May 31, 2007, respectively. This constituted approximately 2% of total assets as of November 30, 2005 and 2006 and 3% of total assets as of May 31, 2007. Excess cash is deposited with Morgan Stanley and is shown separately on the balance sheet under Cash deposited with related parties. Cash deposited with related parties was $252.9 million, $330.2 million and $367.0 million as of November 30, 2005 and 2006 and as of May 31, 2007, respectively, representing approximately 24%, 30% and 32% of total assets, respectively. Our cash, including cash equivalents and cash deposited with related parties, generally has increased as a result of cash provided by operating activities during the periods included herein. We believe that our cash flow from operations (including prepaid subscription fees), together with existing cash balances, will be sufficient to meet our cash requirements for capital expenditures and other cash needs for ongoing business operations for at least the next 12 months.

 

Cash flows from operating activities

 

In the six months ended May 31, 2007, our operating cash flow reflected net income generated during the period of $41.5 million, adjusted for non-cash items such as amortization of intangible assets of $12.5 million and depreciation of $1.1 million. During the six months ended May 31, 2007, we generated operating cash flows through cash collections from our clients and the receipt of cash in settlement of related party balances. Our collections were offset partly by a cash outflow of $30.0 million in settlement of payables to related parties.

 

Our primary uses of cash from operating activities are for payment of cash compensation expenses, office rent, technology costs and services provided by Morgan Stanley. The payment of cash compensation expenses is historically at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year.

 

Timing differences relating to the payment of amounts due to related parties between fiscal 2005 and the six-month period ended May 31, 2006 caused us to use $6.6 million of cash during the six-month period ended May 31, 2006.

 

Cash flows from investing activities

 

Cash flows from investing activities include cash used for capital expenditures, cash deposited with Morgan Stanley and cash received from the sale of discontinued operations. In the six months ended May 31, 2007, the amount of cash deposited with Morgan Stanley increased by $36.8 million. Capital expenditures totaled $0.4 million, relating primarily to the purchase of computer equipment and build-out costs of office space that we lease. We anticipate funding any future capital expenditures out of our operating cash flows.

 

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In fiscal year 2005, we sold our interest in POSIT JV to our joint venture partner, ITG, for $90.0 million. We deposited the cash proceeds from this sale with Morgan Stanley, contributing in part to the increase of $154.0 million in cash deposited with related parties during fiscal year 2005.

 

Cash flows from financing activities

 

Cash flows from financing activities largely represent payments for cash dividends. Cash dividends paid in fiscal years 2004, 2005 and 2006 amounted to $177.5 million, $0 and $5.0 million, respectively. Cash dividends paid in the six month periods ended May 31, 2006 and 2007 amounted to $5.0 million and $0, respectively. In 2004, cash flows from financing activities include $46.0 million in cash as part of the acquisition of Barra.

 

Contractual Obligations

 

Our contractual obligations consist primarily of leases for office space, capital leases for equipment and other operating leases as well as obligations to vendors arising out of market data contracts. The following summarizes our long-term contractual obligations in thousands:

 

As of May 31, 2007

   Total    Fiscal Year
      2007    2008    2009    2010    2011    Thereafter

Operating leases

   $ 31,324    $ 2,782    $ 4,952    $ 4,739    $ 3,686    $ 3,743    $ 11,422

Vendor obligations

     3,343      2,191      931      221         
                                                

Total contractual obligations

   $ 34,667    $ 4,973    $ 5,883    $ 4,960    $ 3,686    $ 3,743    $ 11,422
                                                

 

Off-Balance Sheet Arrangements

 

At May 31, 2007, November 30, 2006 and 2005, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Recent Accounting Pronouncements

 

In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48). This interpretation clarified the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109). Specifically, FIN 48 clarifies the application of SFAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods of income taxes, as well as the required disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the requirements of FIN 48 and have not yet determined if the adoption of FIN 48 will have a significant impact on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“Statement No. 157”). Statement No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Statement No. 157 is effective beginning an entity’s first fiscal year that begins after November 15, 2007, or upon early adoption of FASB Statement No. 159. We early adopted FASB Statement No. 159 as of December 1, 2006, and in effect adopted Statement No. 157 at the same time. Accordingly, we adopted Statement No. 157 on December 1, 2006. The adoption of Statement No. 157 did not have a material impact on our combined financial condition, results of operations or cash flows.

 

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In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“Statement No. 158”). Statement No. 158 requires an employer to recognize the funded status of defined benefit pension and other post-retirement benefit plans as an asset or liability. Statement No. 158 is effective for us as of December 1, 2007. Our employees currently participate in Morgan Stanley’s pension and other post-retirement plans. We are still in the process of evaluating the impact of Statement No. 158 on our consolidated financial statements.

 

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The guidance is applicable for fiscal years ending after November 15, 2006. Effective August 31, 2006, we early adopted SAB 108. The adoption did not have a material impact to our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“Statement No. 159”). Statement No. 159 permits entities to elect to measure certain assets and liabilities at fair value with changes in the fair values of those items (unrealized gains and losses) recognized in the statement of income for each reporting period. Under this Statement, fair value elections can be made on an instrument-by-instrument basis, are irrevocable, and can only be made upon specified election date events. In addition, new disclosure requirements apply with respect to instruments for which fair value measurement is elected. We elected to early adopt Statement No. 159 as of December 1, 2006. We chose not to make any fair value elections with respect to any of its eligible assets or liabilities as permitted under the provisions of Statement No. 159.

 

In June 2007, the EITF reached consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF Issue No. 06-11 requires that the tax benefit related to dividend equivalents paid on restricted stock units that are expected to vest be recorded as an increase to additional paid-in capital. We currently account for this tax benefit as a reduction to our income tax provision. EITF Issue No. 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007. We currently are evaluating the potential impact of adopting EITF Issue No. 06-11.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Currency Risk

 

We have two separate exposures to currency exchange fluctuation risk—revenues from index-linked investment products, such as exchange traded funds, and non-U.S. dollar invoiced revenues.

 

Revenues from index-linked investment products represented approximately 18% of our operating revenues for the six months ended May 31, 2007. While our fees for index-linked investment products are generally invoiced in U.S. dollars, the fees are based on the investment product’s assets, substantially all of which are invested in securities denominated in currencies other than the U.S. dollar. Accordingly, declines in such other currencies against the U.S. dollar will decrease the fees payable to us under such licenses. In addition, declines in such currencies against the U.S. dollar could impact the attractiveness of such investment products resulting in net fund outflows, which would further reduce the fees payable under such licenses.

 

We generally invoice our clients in U.S. dollars; however, we invoice a portion of clients in Euro, Pounds Sterling, Japanese Yen and a limited number of other non-U.S. dollar currencies. Approximately 16% of our revenues for the six months ended May 31, 2007 are denominated in foreign currencies, of which the majority are in Euro, Japanese Yen and Pounds Sterling.

 

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To the extent that our international activities recorded in local currencies increase in the future, our exposure to fluctuations in currency exchange rates will correspondingly increase. We have not engaged in derivative financial instruments as a means of hedging this risk. Foreign currency cash balances held overseas are generally kept at levels necessary to meet current operating and capitalization needs.

 

Interest Rate Sensitivity

 

We had unrestricted cash and cash equivalents totaling $23.4 million, $24.4 million and $30.0 million at November 30, 2005, November 30, 2006 and May 31, 2007, respectively. These amounts were held primarily in checking money market accounts in the countries where we maintain banking relationships. The majority of excess cash is deposited with our parent company. At November 30, 2005, November 30, 2006 and May 31, 2007, amounts held with our parent company were $252.9 million, $330.2 million and $367.0 million, respectively. On our statements of financial condition these amounts are shown as “Cash deposited with related parties.” We receive interest at Morgan Stanley’s internal prevailing rates on these funds. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe we do not have any material exposure to changes in fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.

 

As described above in “—Factors Impacting Comparability of Our Financial Results—July 2007 Dividend,” we paid a dividend of $973.0 million, consisting of $325.0 million in cash and $648.0 million of demand notes, on July 19, 2007. Morgan Stanley was issued a demand note in the amount of $625.9 million and Capital Group International was issued a demand note in the amount of $22.1 million. On July 19, 2007, we paid in full in cash the $22.1 million demand note held by Capital Group International. Prior to the completion of this offering, we intend to obtain a new credit facility, the net proceeds of which we will use to pay in full the $625.9 million demand note held by Morgan Stanley. As a result of the dividend and related financings, we expect interest income to be substantially lower and interest expense to be substantially higher in future periods. We expect to pay down our new credit facility with cash generated from our ongoing operations.

 

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INDUSTRY

 

Industry Overview

 

We provide a variety of investment decision support tools to the investment industry worldwide. There are many different types of investment decision support tools, including fundamental and market data, investment research, indices, asset and portfolio analytics, software applications, credit ratings and a variety of other products and services that aid in the investment process. These tools serve a variety of client types, including asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, ETFs, hedge funds and private wealth; and financial intermediaries, such as broker-dealers, exchanges, custodians and investment consultants. Among the types of products offered by us and our competitors are tools to aid in allocating assets, benchmarking performance, constructing and optimizing portfolios, forecasting and decomposing risk and measuring and attributing performance. Tools such as these are used to support the decision making process with respect to investment management in a variety of asset classes, including equities, fixed income, alternatives (e.g., hedge funds, private equities, real estate, commodities) and combinations of asset classes. Our current focus is on the creation and provision of indices and risk and return portfolio analytics to support the investment process, primarily with regard to equity securities, in a variety of financial institutions worldwide.

 

Investment Management Trends Driving Demand

 

The global market for investment decision support tools is driven by several factors. A key factor is the large and increasing number and variety of asset owners and managers around the world and the growth of invested assets. For example, the assets managed worldwide by institutional asset managers have increased from approximately $10 trillion in 1998 to approximately $25 trillion in 2006, according to Pension & Investments. According to Investment Company Institute (“ICI”) data, the total number of mutual funds in the U.S. has increased from 2,312 in 1987 to 8,021 as of May 2007. Hedge Fund Research, Inc. has estimated that within the U.S. alone, as of December 31, 2006, 9,575 hedge funds managed approximately $1.6 trillion of assets, up from 6,297 funds managing approximately $820 billion of assets as of December 31, 2003. To aid themselves in dealing with the complexity and variety of investment opportunities worldwide, asset managers are increasing the number of employees who review investment opportunities, make investment decisions and manage market and portfolio risk.

 

Assets are becoming increasingly concentrated among the largest asset owners and managers even as their number and variety continue to grow. Consolidation among investment institutions seeking to broaden their product offerings and gain economies of scale has resulted in increasingly large firms with large and diverse portfolios. Because of the size of investment institutions and the complexity of investment opportunities available today, many institutions are focusing on standardizing their investment process, and putting in place appropriate processes and monitoring tools. The increased needs of both asset owners and managers require improved and standardized methods and tools for asset-liability management, asset allocation, asset class performance benchmarking, enterprise-wide risk management, portfolio construction and optimization, and risk and return measurement, attribution and reporting.

 

As the investment industry grows and the competition to gather assets increases, asset managers seek ways to obtain market returns (beta) and above-market returns (alpha) with more consistency and predictability and less volatility and expense than their competitors. This has led some asset managers to adopt tools to aid them in more sophisticated portfolio construction, tighter risk management and frequent and thorough reporting of performance and risk to their investors. It has also led to significant increases in the use of both (a) hedge fund-like strategies to capture alpha, which often require rigorous portfolio construction and risk management tools, and (b) passive strategies to capture beta, which require sophisticated and accurate market indices. The latter has led to offerings of index-linked investment products, such as exchange traded funds, by asset managers attempting to offer exposure to market, sector or style returns in a relatively cost-effective way. Over the past

 

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decade, particularly in the past two years, ETFs have become an increasingly popular method of investing, as reflected by both the growth in the number of ETFs and the assets invested in ETFs. According to ICI, there were a total of 507 ETFs within the U.S. as of May 31, 2007, which represents cumulative growth of nearly 235% since the end of 2004. Coupled with this fund count growth, ICI reports that ETF assets in the U.S. have grown to $485.5 billion as of May 2007. This represents a cumulative increase of 114% from year-end 2005 when ETF assets in the U.S. totaled about $226.2 billion.

 

Many asset managers are also using more sophisticated investment strategies, including short-selling, leverage and derivative instruments, in their quest to achieve higher returns. To add to the complexity, many investment institutions are broadening their offerings to include diverse investments within and across asset classes. For example, a single institution may invest in both U.S. equities and European equities, both large capitalization and small capitalization stocks, and both developed and emerging markets stocks. Similarly, a single institution may invest in sovereign, investment grade and high-yield bonds, as well as fixed income derivatives and structured products. And the same institution may invest in both equities and fixed income securities and in both single asset class and balanced portfolios. Tools that help with asset allocation, performance measurement and attribution and risk analysis within and across asset classes can aid investment institutions in making, analyzing and monitoring their investment decisions.

 

At the same time that the number of investment choices is increasing, asset managers are experiencing a higher degree of investment consultant and institutional investor scrutiny. The activities of pension funds, particularly public pension funds in the U.S., are also closely scrutinized by politicians and the public at large. It appears that regulation and industry best practices, as well as client demand for standards that can be used to compare asset managers and asset owners to one another, are leading to a higher degree of formalization and standardization of the investment process, and consequently a greater emphasis on ways to measure and monitor adherence to regulatory, industry and client standards.

 

In sum, the number, size, diversity and sophistication of investment institutions have grown rapidly. Competition for higher returns has led many to employ more complex strategies and to seek higher returns and diversification around the world and within and across asset classes. At the same time, asset owners and managers are subjected to increased scrutiny, which, along with the other factors we have described, is leading to increased standardization and a demand for ways to measure and monitor adherence to the relevant standards. As a result, we believe the market for tools such as ours that support investment processes within investment institutions is large, and we expect that it will continue to grow.

 

Our Competition

 

Many industry participants compete directly with us offering one or more similar products.

 

Our principal competitors on a global basis for our international equity index products are Dow Jones & Company, Inc. (“Dow Jones”), FTSE International, Ltd (a joint venture between The Financial Times and The London Stock Exchange), and Standard & Poor’s (a division of The McGraw-Hill Companies, Inc.).

 

Additionally, we compete with equity index providers whose primary strength is in a local market or region. These include Russell Investment Group (a unit of Northwestern Mutual Life Insurance Group) and Standard & Poor’s in the U.S.; STOXX Ltd. (a joint venture of Dow Jones, Deutsche Börse AG and the SWX Group) in Europe; and Nikkei Inc., Russell Investment Group and Nomura Securities, Ltd., and Tokyo Stock Exchange, Inc. in Japan. There are also many smaller companies that create custom indices primarily for use as the basis of ETFs.

 

The principal competitors for our equity portfolio analytics products are Applied Portfolio Technologies, FactSet Research Systems, Inc., Northfield Information Services, Inc., and Wilshire Analytics. The primary competitors for our multi-asset class portfolio analytics products are Algorithmics (a member of Fimilac) and RiskMetrics Group, Inc.

 

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Additionally, many of the larger broker-dealers have developed proprietary analytics tools for their clients. Similarly, many investment institutions, particularly the larger global organizations, have developed their own internal analytics tools.

 

For our other products where our revenues are less significant, we also have a variety of other competitors.

 

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BUSINESS

 

Overview

 

We are a leading provider of investment decision support tools to investment institutions worldwide. We produce indices and risk and return portfolio analytics for use in managing investment portfolios. Our products are used by institutions investing in or trading equity, fixed income and multi-asset class instruments and portfolios around the world. Our flagship products are our international equity indices marketed under the MSCI brand and our equity portfolio analytics marketed under the Barra brand. Our products are used in many areas of the investment process, including portfolio construction and optimization, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, investment manager selection and investment research.

 

Our clients include asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, ETFs, hedge funds and private wealth; and financial intermediaries such as broker-dealers, exchanges, custodians and investment consultants. We have a client base of over 2,800 clients across 63 countries. Our clients include 24 of the 25 largest firms managing assets globally, measured by assets under management as published in July 2007 by Nelson MarketPlace, a leading provider of information to the global investment community. We have 18 offices in 14 countries to help serve our diverse client base, with approximately 51% of our clients in the Americas, 34% in EMEA, 9% in Japan and 6% in Asia (not including Japan), based on fiscal year 2006 revenues.

 

Our principal sales model is to license annual, recurring subscriptions to our products for use at specified locations by a given number of users for an annual fee paid upfront. The substantial majority of our revenues comes from these annual, recurring subscriptions. Over time, as their needs evolve, our clients often add product modules, users and locations to their subscriptions, which results in an increase in our revenues per client. Additionally, a rapidly growing source of our revenues comes from clients who use our indices as the basis for index-linked investment products such as ETFs. These clients commonly pay us a license fee based on the investment product’s assets. We also generate a limited amount of our revenues from certain exchanges that use our indices as the basis for futures and options contracts and pay us a license fee based on their volume of trades.

 

We were a pioneer in developing the market for international equity index products and equity portfolio risk analytics tools. We introduced our first equity index products in 1969, and Barra, acquired by us in 2004, launched its first equity risk analytics products in 1975. Over the course of more than 30 years, our research organization has accumulated an in-depth understanding of the investment process worldwide. Based on this wealth of knowledge, we have created and continue to develop, enhance and refine sophisticated index construction methodologies and risk models to meet the growing, complex and diverse needs of our clients’ investment processes. Our models and methodologies are the intellectual foundation of our business and include the innovative algorithms, formulas and analytical and quantitative techniques that we use, together with market data, to produce our products. Our long history has allowed us to build extensive databases of proprietary index and risk data, as well as to accumulate valuable historical market data, which we believe would be difficult to replicate and which provide us with a substantial competitive advantage.

 

Today, our primary products consist of equity indices, equity portfolio analytics and multi-asset class portfolio analytics. We also have product offerings in the areas of fixed income portfolio analytics, hedge fund indices and risk models, and energy and commodity asset valuation analytics. Our products are generally comprised of proprietary index data, risk data and sophisticated software applications. Our index and risk data are created by applying our models and methodologies to market data. For example, we input closing stock prices and other market data into our index methodologies to calculate our index data, and we input fundamental data and other market data into our risk models to produce our risk forecasts for individual securities and portfolios of securities. Our clients can use our data together with our proprietary software applications, third-party applications or their own applications in their investment processes. Our software applications offer our clients

 

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sophisticated portfolio analytics to perform in-depth analysis of their portfolios, using our risk data, the client’s portfolio data and fundamental and market data. Our products are marketed under three leading brands. Our index products are typically branded “MSCI.” Our portfolio analytics products are typically branded “Barra.” Our energy and commodity analytics products are typically branded “FEA.”

 

Our MSCI-branded equity index products are designed to measure returns available to investors across a wide variety of markets (e.g., Europe, Japan or emerging markets), size segments (e.g., small capitalization or large capitalization), style segments (e.g., growth or value) and industries (e.g., banks or media). We currently calculate over 90,000 equity indices daily. Our most widely used equity indices are the MSCI International Equity Indices, in particular the well-known MSCI EAFE (Europe, Australasia and Far East), MSCI World and MSCI Emerging Markets Indices. The MSCI EAFE Index is licensed as the basis of the iShares MSCI EAFE Index Fund, the second largest exchange traded fund in the world with over $46 billion of assets as of June 30, 2007. Approximately 2,100 clients worldwide subscribe to our equity index products for use in their investment portfolios and for market performance measurement and analysis. In addition to delivering our products directly to our clients, we also have over 50 third-party financial information and analytics software providers who distribute our various equity index products worldwide. The performance of our equity indices is also frequently referenced when selecting investment managers, assigning return benchmarks in mandates, comparing performance and providing market and academic commentary. The performance of certain of our indices is reported on a daily basis in the financial media.

 

Our Barra-branded equity portfolio analytics products assist investment professionals in analyzing and managing risks and returns for equities at both the asset and portfolio level in major equity markets worldwide. Barra equity risk models identify and analyze the factors that influence equity asset returns and risk. Our most widely used Barra equity products utilize our fundamental multi-factor equity risk model data to help our clients construct, analyze, optimize and manage equity portfolios. Approximately 750 clients worldwide subscribe to our equity portfolio analytics products. Asset owners often request Barra risk model measurements for portfolio risk and tracking error when selecting investment managers, prescribing investment restrictions and assigning investment mandates. Our clients can use our equity portfolio analytics by installing our proprietary software applications and equity risk data in their technology platforms, by accessing our software applications and risk data via the Internet, by integrating our equity risk data into their own applications or by subscribing to third-party applications, like FactSet, that have incorporated our equity risk data and analytics into their offerings.

 

Our Barra-branded multi-asset class portfolio analytics products are also based on our proprietary fundamental multi-factor risk models, value-at-risk methodologies and asset valuation models. These products offer a consistent risk assessment framework for managing and monitoring investments in multiple asset classes across an organization. They enable clients to analyze portfolios and identify and manage potential risks from equities, fixed income, derivatives contracts such as futures and swaps, and alternative investments such as commodities and hedge funds. The products allow clients to identify the drivers of risk and return across their investments, run optimization programs, produce daily risk reports, perform pre-trade analysis, evaluate and monitor managers and investment teams across asset classes, and analyze correlations across a group of selected portfolios. These products are available by accessing our software applications via the Internet or for installation on the client’s information technology infrastructure.

 

We also offer fixed income portfolio analytics, hedge fund indices and risk models, and energy and commodity asset valuation analytics.

 

Growth Strategy

 

We have experienced growth in recent years with operating revenues and operating income increasing by 18% and 13%, respectively, in the six months ended May 31, 2007 compared to the six months ended May 31, 2006, and by 12% and 34%, respectively, in the fiscal year ended November 30, 2006 compared to the fiscal year ended November 30, 2005.

 

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We believe we are well-positioned for significant growth worldwide and have a multi-faceted growth strategy that builds on our strong client relationships, products, brands and integral role in the investment process. The number, diversity, size, sophistication and amount of assets held in investment institutions that own, manage and direct financial assets have grown significantly in recent years. These investment institutions increasingly require sophisticated investment management tools such as ours to support their complex and global investment processes. Set forth below are the principal elements of our strategy to grow our company and meet the increasing needs of these institutions for investment decision support tools:

 

   

Client Growth. We believe there are significant opportunities to increase the number of users and locations and the number of products we license to existing client organizations, and to obtain new clients in both existing and new geographic markets and client types worldwide. We intend to:

 

   

Increase product subscriptions and users within our current client base. Many of our clients worldwide use only one or a limited number of our products, and we believe there are substantial opportunities to cross sell our other investment decision support tools. This is particularly the case with respect to our various offerings for the equity investment process. In addition, we will continue to focus on adding new users and new locations for current products at existing clients.

 

   

Expand client base in current client types. We plan to add new clients by leveraging our brand strength, our products, our broad access to the global investment community and our strong knowledge of the investment process. This includes client types in which we already have a strong penetration for our flagship international equity index and equity portfolio analytics products. For example, of the equity asset management organizations in the world with over $2 billion of assets, we are only serving two-thirds with our equity index offerings, and one-third with our equity analytics products, based on an analysis of July 2007 data from Bigdough, a leading provider of capital markets ownership data. We believe this presents a significant opportunity for growth.

 

We also plan to increase licensing of our indices for index-linked investment products to capitalize on their growth in number, variety and assets. The following table demonstrates the success we have experienced to date in licensing our equity indices as the basis of ETFs, and we believe there is potential for substantial continued growth and expansion in this market in the future.

 

Number of Exchange Listings of ETFs Linked to MSCI Equity Indices

 

     As of December 31,   

As of
June 30,

    2007    

          2004            2005            2006       

Regions

    

Americas

   44    58    61    89

EMEA

   19    30    39    45

Asia

   4    4    7    18
                   

Total

   67    92    107    152
                   

 

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The table below demonstrates the growth of assets in ETFs linked to our equity indices:

 

Assets in ETFs Linked to MSCI Indices

 

     As of December 31,   

As of
June 30,

2007

         2004            2005            2006       

MSCI Equity Index

   (in billions)

EAFE

   $ 13.7    $ 23.5    $ 37.2    $ 46.3

Emerging Markets

     3.9      10.4      18.3      23.5

Japan

     7.3      14.0      15.8      16.1

US Broad Market

     0.0      5.6      6.9      8.6

Europe

     0.9      1.0      3.2      4.8

Brazil

     0.4      1.1      3.1      4.5

Subtotal

     26.2      55.6      84.5      103.8

Other Indices

     9.1      17.3      38.0      52.3
                           

Total

   $ 35.3    $ 72.9    $ 122.5    $ 156.1
                           
 

Source: Bloomberg & MSCI.

 

   

Expand into client types in which we are underrepresented. We plan to expand into client types in which we do not currently have a leading presence. In particular, we intend to continue to focus on increasing the number of hedge fund managers using our products. Even though still relatively small, our revenues from hedge fund managers have been growing rapidly, and we believe we have significant growth potential. We currently serve approximately one-third of hedge fund managers with over $500 million of assets in the U.S. and Europe based on an analysis of July 2007 Bigdough data. We believe that our equity risk data is particularly valuable to the investment processes of hedge fund managers. Recent enhancements to our equity portfolio analytics products have been focused on the needs of long/short equity hedge fund managers in particular.

 

   

Expand global presence. We currently have a strong presence in the U.S., Western Europe and certain parts of Asia. While we have established a presence in selected markets within the Middle East, Asia, Eastern Europe and Latin America, there is potential for further penetration and growth in these markets. We intend to leverage our strong brands, reputation, products and existing presence to continue to expand in these markets and gain more clients. For example, we have recently opened sales offices in Dubai and Mumbai.

 

   

Product Growth. We plan to develop new product offerings and continue to enhance our existing products through internal product development.

 

   

Create innovative new equity product offerings and enhancements. In order to maintain and enhance our leadership position, we plan to introduce innovative new products and enhancements to existing products. We maintain an active dialogue with our clients in order to understand their needs and anticipate market developments. For example, in June 2007, after client consultations that began in March 2006, we enhanced our international equity index offering with the introduction of the MSCI Global Investable Market Indices. Additionally, after extensive client consultations, we are in the process of enhancing our Global Equity Model for our portfolio analytics products. Other recent product launches in our index products include the creation of absolute value and growth indices for the China market, indices for the Gulf Cooperation Council countries in the Middle East, a BRIC index covering Brazil, Russia, India and China and a global series of Islamic indices.

 

   

Expand our presence across all asset classes. We believe our well-established reputation and client base in the equity area as well as our experienced research staff provide us with a strong

 

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foundation to become a leading provider of tools for investors in multi-asset class portfolios and other asset classes such as fixed income. We are investing in these products, particularly our web-based multi-asset class software application, BarraOne, as well as our hedge fund risk model.

 

   

Expand our capacity to design and produce new products. We intend to increase our investments in new model research, data production systems and software application design to enable us to design and produce new products more quickly and cost-effectively. Increasing our ability to process additional models and data, and design and code software applications more effectively, will allow us to respond faster to client needs and bring new products and product enhancements to market more quickly.

 

   

Growth Through Acquisitions. We intend to actively seek to acquire products, technologies and companies that will enhance, complement or expand our product offerings and client base, as well as increase our ability to provide investment decision support tools to equity, fixed income and multi-asset class investment institutions.

 

Competitive Advantages

 

We believe our competitive advantages include the following:

 

   

Strong brand recognition. Our indices, portfolio analytics and energy and commodity asset valuation analytics, marketed under the MSCI, Barra and FEA brands, respectively, are well-established and recognized throughout the investment community worldwide. We are an industry leader in international equity indices and equity portfolio analytics tools worldwide. Our brand strength reflects the longstanding quality and widespread use of our products. We believe our products are well-positioned to be the tools of choice for investment institutions increasingly looking to third parties for benchmarking, index-linked product creation, portfolio risk management and related tools.

 

   

Strong client relationships and deep understanding of their needs. Our approach to product development, dedication to client support and range of products have helped us build strong relationships with investment institutions around the world. We believe the skills, knowledge and experience of our research, software engineering, data management and production and product management teams enable us to develop and enhance our models, methodologies, data and software applications in accordance with client demands and needs. We consult with our clients and other market participants during the product development and construction process to take into account their actual investment process requirements.

 

   

Client reliance on our products. Many of our clients have come to rely on our products in their investment management processes, integrating our products into their performance measurement and risk management processes, where they become an integral part of their daily portfolio management functions. In certain cases, our clients are requested by their customers to report using our tools or data. Consequently, we believe that certain of our clients may experience business disruption and additional costs if they chose to cease using or replace our products.

 

   

Sophisticated models with practical application. We have invested significant time and resources for more than three decades in developing highly sophisticated and practical index methodologies and risk models that combine financial theory and investment practice. We review our models and methodologies regularly and enhance them when appropriate to reflect meaningful changes in theory and practice.

 

   

Open architecture and transparency. We have an open architecture philosophy. Clients can access our data through our software applications, third-party applications or their own applications. We also recognize that the marketplace is complex and that a competitor in one context may be a supplier or distributor in another context. For example, Standard & Poor’s competes with us in index products but also supplies index data available in our portfolio analytics software products. In order to provide

 

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transparency, we document and disclose many details of our models and methodologies to our clients so that they can better understand and utilize the tools we offer. We strongly believe this open architecture approach benefits us and our clients.

 

   

Global products and operations. Our products cover most major investment markets throughout the world. For example, our international equity indices cover 56 countries, spanning both developed and emerging market countries. In addition, we produce equity risk data for 42 countries and an integrated multi-asset class risk model that covers 56 equity markets and 46 fixed income markets. Our clients are located in 63 countries and many of them have a presence in multiple locations around the world. Our employees are located in 14 countries in order to maintain close contact with our clients and the international markets we follow. We believe our global presence and focus allow us to serve our clients well and capitalize on a great number of business opportunities in many countries and regions of the world.

 

   

Highly skilled employees. Our workforce is highly skilled, highly technical and, in some instances, highly specialized. In particular, our research and software application development departments include experts in advanced mathematics, statistics, finance, portfolio investment and software engineering, who combine strong academic credentials with market experience. Over 45 of our employees have doctorate degrees. Employees in our diverse global client coverage group collectively hold more than 70 MBAs or other Masters degrees. Our employees’ experience and knowledge gives us access to, and allows us to add value at, the highest levels of our clients’ organizations.

 

   

Extensive historical databases. We have accumulated comprehensive databases of historical global market data and proprietary index and risk data. We believe our substantial and valuable databases of proprietary index and risk data, including over 35 years of certain index data history and over 30 years of certain risk data history, would be difficult and costly for another party to replicate. The information is not available from any single source and would require intensive data checking and quality assurance testing that we have performed over our many years of accumulating this data. Historical data is a critical component of our clients’ investment processes, allowing them to research and back-test investment strategies and analyze portfolios over many investment and business cycles and under a variety of historical situations and market environments.

 

Clients

 

We currently serve over 2,800 clients across 63 countries worldwide with 51% of our client base in the Americas, 34% in EMEA, 9% in Japan, and 6% in Asia (not including Japan), based on fiscal year 2006 revenues. Our clients include asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, ETFs, hedge funds and private wealth; and financial intermediaries such as broker-dealers, exchanges, custodians and investment consultants. To calculate the number of our clients, we have counted affiliates, cities and certain business units within a single organization (e.g., buy-side and sell-side business units) as separate clients when they separately subscribe to our products. For example, the asset management and broker-dealer arms of a diversified financial services firm are treated as separate clients. We have enjoyed very high product subscription Retention Rates. Our Retention Rates were 91% and 93% in the fiscal year ended November 30, 2006 and the six months ended May 31, 2007, respectively. For a description of the calculation of our Retention Rates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial Metrics and Drivers—Retention Rate.”

 

Our index products are used by 2,100 clients, including the ten largest asset managers in the world measured by assets under management as published in Nelson MarketPlace in July 2007. Our portfolio analytics products are used by over 900 clients worldwide, including nine out of the ten largest asset managers, measured by assets under management, as published by Nelson MarketPlace in July 2007.

 

Revenues from our ten largest clients contributed a total of 28%, 28%, 31% and 31% of revenues for the fiscal years ended November 30, 2004, 2005 and 2006 and the six months ended May 31, 2007, respectively. In

 

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the fiscal year ended November 30, 2006, and in the six months ended May 31, 2007 our largest client organization by revenue, Barclays, accounted for 11% and 12% of our total revenues, respectively. For the fiscal year ended November 30, 2006, approximately 90% of our revenues from Barclays came from fees based on the assets of ETFs linked to MSCI equity indices, including the iShares MSCI EAFE Index Fund. In addition, 4% of our revenues in the six-month period ended May 31, 2007 consisted of revenues from Morgan Stanley, our principal shareholder. No client represented more than 10% of our operating revenues in the fiscal years ended November 30, 2004 or 2005.

 

Marketing

 

We market our products to investment institutions and service providers worldwide. See “—Clients.” Our research and product management teams seek to understand our clients’ investment process and their needs and design tools that help clients address them. Because of the sophisticated nature of our products, our main means of marketing is through face-to-face meetings and 24-hour client support, as described in “—Sales and Client Support” below. These marketing and support efforts are supplemented by our website, our client seminars, our participation in industry conferences, our ongoing product consultations and research papers, and our public relations efforts.

 

Our research and other employees regularly speak at industry conferences, as well as at our own seminars. We host over 100 seminars and workshops per year in locations across the globe. These seminars and workshops bring our staff and our clients’ investment professionals together, expose those professionals to our latest research and product enhancements and give our staff an opportunity to gain insight into our clients’ needs. Our marketing communications professionals also arrange interviews for our professionals in prominent industry journals and issue press releases on product developments and releases. Our strategic marketing professionals collaborate with our product specialists to analyze our clients’ use of our products and to analyze the competitive landscape for our products.

 

Sales and Client Support

 

As of May 31, 2007, we employed over 90 sales people and over 50 client support people worldwide. Of these, over 40 are located in our New York headquarters and over 30 are located in our London office. In the last few years we have expanded our sales effort in two ways. We have opened sales offices in Shanghai, Dubai, Mumbai and Chicago. We have also created more teams dedicated solely to the needs of certain client types such as hedge funds, asset owners and broker dealers. In total, our sales and client support staff are based in 16 offices around the world to enable us to provide face-to-face client service.

 

Our sales people service established clients and develop new ones. Our client support team provides 24-hour support five days a week to our clients as needed. Within a given office, client support teams focus on different types of clients. We believe that the size, quality, knowledge and experience of our sales and client support staff, as well as their proximity to clients, differentiates us from our competitors. Because of the sophisticated nature of our products and their uses, our sales and client support staff have strong academic and financial backgrounds. Our sales people are compensated under a salary and bonus system and do not receive commissions.

 

The sales cycle for new clients varies based on the product. Because of the sophisticated nature of our products, most new sales require one or more face-to-face meetings with the prospective client. Once the sales group has obtained a new client, the client is introduced to our client support team. For Barra-branded products, sales and client support personnel are available to provide intensive on-site training in the use of the models, data and software application underlying each product. They also provide continuing support, which may include on-site visits, telephone support and routine client support needed in connection with the use of the product, all of which are included in the recurring subscription fee.

 

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Product Development and Production

 

We take a coordinated team approach to product development and production. Our product management, research, data management and production, and software engineering departments are at the center of this process.

 

Based on a comprehensive understanding of the investment process worldwide, our research department is responsible for developing, reviewing and enhancing our various methodologies and models. Our global data management and production team designs and manages our processes and systems for market data procurement, proprietary data production and quality control. Our software engineering team builds our sophisticated software applications. As part of our product development process, we also commonly undertake extensive consultations with our clients and other market participants to understand their specific needs and investment process requirements. Our product management team facilitates this collaborative product development and production approach.

 

   

Research. Our models are developed by a cross-functional research team of mathematicians, statisticians, financial engineers and investment industry experts. Our research department consists of over 75 employees, including more than 25 who have Ph.Ds. Our research department combines extensive academic credentials with broad financial and investment industry experience. We monitor investment trends and their drivers globally, as well as analyze product-specific needs in areas such as indexing, risk forecasting, portfolio optimization and value-at-risk simulation. An important way we monitor global investment trends and their implications for our business is through the forum provided by our Editorial Advisory Board (“EAB”). Our EAB, which was established in 1999, meets twice a year and is comprised of senior investment professionals from around the world and senior members of our research team. Our researchers commonly speak at industry events and conferences, and their papers have been frequently published in leading academic and industry journals. We sponsor an annual research conference for our clients where our researchers discuss their current work, research papers and projects. Our researchers work on both developing new models and methodologies and enhancing existing ones. For example, in our equity index business we announced the MSCI Global Investable Markets Index Series methodology this year, which is an enhancement to our current International Index Series methodology. This methodology is based on changes we have observed in global equity markets and investing. We also announced other new equity index methodologies, such as the MSCI Global Islamic Indices. In our equity analytics business we have announced that we are currently recalibrating our Global Equity Model to use weekly data and additional risk factors. We have research offices in the U.S., Europe and Asia.

 

   

Data Management and Production. Our data management and production team consists of more than 200 people in five countries, and involves a combination of information technology and operations specialists. We license a large volume and variety of market data for every major market in the world, including fundamental and return data, from more than 160 third party sources. We apply this market data to our models and methodologies to produce our proprietary index and risk data. Our data management and production team oversees this complex process. Our experienced information technology staff builds internal systems and proprietary software and databases that house all of the data we license in order for our data management and production teams to perform data quality checks and run our data production systems. This data factory produces our proprietary index data such as end of day and real time equity indices, and our proprietary risk data such as daily and monthly equity risk forecasts. We have data management and production offices in the U.S., Europe and Asia.

 

   

Software Engineering. Certain of our proprietary risk data are made available to clients through our proprietary software applications, such as Barra Aegis, BarraOne and Barra Cosmos. Our software engineering team consists of over 75 individuals, including 14 who have Ph.Ds, with significant experience in both the finance and software industries. Our staff has an extensive skill set, including expertise in both the Java-based technologies used in our web-based, on-demand software application tool for multi-asset class risk analysis and reporting and the Microsoft-based technologies used in our

 

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desktop equity and fixed income analytics software products. We also have extensive experience with database technologies, computational programming techniques, scalability and performance analysis and tuning and quality assurance. We use a customized software development methodology that leverages best practices from the software industry, including agile programming, test-driven development, parallel tracking, iterative cycles, prototyping and beta releases. We build our software applications by compiling multiple components, which enables us to reuse designs and codes in multiple products. Our software development projects involve extensive collaboration with our product management team and directly with clients. Our software engineering team is primarily located in California in the San Francisco Bay Area.

 

Products

 

Our primary products consist of equity indices, equity portfolio analytics and multi-asset class portfolio analytics. We also have product offerings in the areas of fixed income portfolio analytics, hedge fund indices and risk models, and energy and commodity asset valuation analytics. Our products are marketed under three leading brands. Our index products are typically branded “MSCI.” Our portfolio analytics products are typically branded “Barra.” Our energy and commodities asset valuation analytics products are typically branded “FEA.”

 

Equity Index Products

 

Our international equity indices were first introduced in 1969. Today we calculate and license over 90,000 equity indices for use in asset allocation, investment manager selection, performance benchmarking and attribution, investment research and portfolio construction, and as the basis for index-linked investment products such as exchange traded funds, mutual funds, structured products and exchange listed and traded futures and options contracts. We also calculate and license certain customized versions of our indices upon client request. Our equity index products are typically branded “MSCI.”

 

Our primary equity index products are:

 

   

MSCI International Equity Indices

 

The MSCI International Equity Indices are our flagship index products. They are designed to measure returns available to international investors across a variety of public equity markets. The indices include 56 country indices across developed and emerging markets, as well as various regional composite indices built from the component country indices, including the well-known MSCI EAFE (Europe, Australasia, and Far East), MSCI World and MSCI Emerging Markets Indices. In addition, the International Equity Indices include industry indices, value and growth style indices and large-, mid-, and small-capitalization size segment indices.

 

The MSCI International Equity Indices are the most widely used international equity indices in the industry. They are used by over 2,100 clients worldwide and as the performance benchmark for over 90% of all international equity assets under management in the U.S. as of December 2005 according to InterSec Research. We continue to enhance and expand this successful product offering. Recent examples include the introduction of the MSCI Global Investable Market Indices methodology, the MSCI Global Islamic Indices and the MSCI GCC Countries Indices.

 

   

MSCI Domestic Equity Indices

 

The MSCI Domestic Equity Indices are designed to measure the returns available to domestic investors in the U.S., Japan and China public equity markets. In addition to offering a total market index, each of these domestic country index series includes value and growth style indices, and in the case of the U.S. and Japan, large-, mid-, small- and micro-capitalization size segment indices.

 

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Global Industry Classification Standard (GICS)

 

The Global Industry Classification Standard was developed and is maintained jointly by us and Standard & Poor’s. We designed this classification system to respond to our clients’ needs for a consistent, accurate and complete framework for classifying companies into industries. The GICS has been widely accepted as an industry analysis framework for investment research, portfolio management and asset allocation. Our equity index products classify constituent securities according to the GICS.

 

We also offer GICS Direct, a product developed jointly with Standard & Poor’s. GICS Direct is a database of more than 34,000 companies classified by sector, industry group, industry and sub-industry in accordance with the proprietary GICS methodology.

 

Equity Portfolio Analytics Products

 

Barra entered the equity portfolio analytics business in 1975 when Barra introduced its first multi-factor model for forecasting the risk of U.S. equity portfolios. Since then, Barra has developed multi-factor equity risk models for 42 countries, including the world’s major public equity markets. Our equity portfolio analytics products are typically branded “Barra.”

 

Our equity portfolio analytics products help our clients manage equity risk and return at both the asset and portfolio level. These products apply modern portfolio theory to practical equity investment problems. Our multi-factor risk models identify common factors that influence stock price movements, such as industry group and style characteristics, based on market and fundamental data. The proprietary risk data available in our products identifies an asset’s or a portfolio’s sensitivities to these common factors. Risk not attributable to the common factors is risk unique to the asset or portfolio.

 

We have also developed sophisticated software applications that provide advanced quantitative analytics for portfolio analysis. Clients can utilize the proprietary risk data generated by our models in combination with our sophisticated software applications, in their own software applications or in third-party applications.

 

Our primary equity portfolio analytics products are:

 

   

The Barra Aegis System

 

Barra Aegis is our flagship equity risk management and analytics system. It is a sophisticated software application for equity risk management and portfolio analysis that is powered by our proprietary equity risk data. It is deployed by the client as a desktop application. Barra Aegis is an integrated suite of equity investment analytics modules, specifically designed to help clients actively manage their equity risk against their expected returns. It also enables clients to construct optimized portfolios based on client-specified expectations and constraints.

 

Barra Aegis also provides a factor-based performance attribution module which allows clients to analyze realized returns relative to risk factors by sectors, styles, currencies and regions. Barra Aegis tools also help clients identify returns attributable to stock selection skills. Additionally, using Barra Aegis’ advanced automation tools, clients can back-test their portfolio construction strategies over time.

 

   

Equity Models Direct

 

Our Equity Models Direct product delivers our proprietary risk data to clients for integration into their own software applications. This product is also available via third-party providers that we have licensed to integrate our risk data into their client applications. Based on their investment processes, clients select the risk data that best suits their needs. We offer proprietary risk data from the following Barra risk models:

 

Single Country Equity Risk Models. Our single country equity risk models identify the unique set of factors most able to explain the risk of portfolios in that market. Examples include our USE3

 

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model (i.e., U.S. equity model, version 3) which models risk for U.S. equity assets and portfolios, and our UKE7 model which models risk for United Kingdom equity assets and portfolios. Data from the USE3 equity risk model is our most commonly licensed Barra risk data.

 

Global Equity Model (“GEM”). Our global equity model isolates the factors that explain the risks associated with global equity portfolios and identifies the sources of risk unique to multiple-country equity investing.

 

Barra Integrated Model (“BIM”). Our integrated model provides a detailed view of risk across markets, asset classes and currencies. It begins by identifying the factors that affect the returns of equity and fixed income securities and currencies in many countries around the world. These factors are then combined into a single global model that can forecast the risk of a multi-asset class, international portfolio.

 

Short-Horizon Equity Models. Our short horizon equity models, designed to forecast risk over a period of one to six months, provide portfolio managers and analysts with more responsive risk forecasts. By using daily data and placing greater emphasis on recent events, the short-horizon models adapt more quickly to changing market conditions and emerging trends.

 

Multi-Asset Class Portfolio Analytics Products

 

Our multi-asset class portfolio analytics products offer a consistent framework for monitoring investments in a variety of asset classes across an organization. The products are based on proprietary multi-factor risk models, value-at-risk methodologies and asset valuation models. They enable clients to identify, monitor, report and manage potential market risks from equities, fixed income, derivatives and alternative investments, and to analyze portfolios and systematically analyze risk and return across multiple asset classes. Using these tools, clients can identify the drivers of market risk across their investments, produce daily risk reports, run pre-trade analysis and optimization, evaluate and monitor multiple asset managers and investment teams and access correlations across a group of selected portfolios.

 

We have two major products in this area, which differ mainly in how they are delivered to clients and in certain functionality:

 

   

The BarraOne System. Clients access BarraOne via the Internet, using their desktop browsers. This product includes modules for risk allocation and risk budgeting, and historical “as-of” analysis of portfolios.

 

   

The Barra TotalRisk System. Clients install TotalRisk on their own information technology infrastructure. This product includes simulation modules that enable clients to perform historical and Monte Carlo value-at-risk calculations.

 

Currently, we are actively seeking to license subscriptions only to BarraOne and related risk data for multiple asset classes. Once most of the features and functionality of Barra TotalRisk have been added to BarraOne, we plan to decommission TotalRisk. As this happens we will offer our TotalRisk clients the opportunity to transition to BarraOne.

 

Other Products

 

Our other products consist of fixed income portfolio analytics products to facilitate the investment processes of fixed income investors; hedge fund indices and risk models for use by investors in hedge funds; and energy and commodity valuation asset analytics for investors, traders and hedgers in these asset classes.

 

   

The Barra Cosmos System for fixed income portfolio analytics

 

Barra Cosmos enables global fixed income portfolio managers to manage risk and optimize return in a multi-currency, global bond portfolio. This adaptable product integrates specific bond, derivative

 

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and currency strategies to reflect each user’s investment style, while monitoring the overall risk exposure of the portfolio. Barra Cosmos is deployed by the client as a desktop application.

 

   

Hedge Fund Indices

 

Our hedge fund indices are designed to provide a broad representation of the hedge fund universe, and offer a consistent and granular classification of hedge funds into strategies. These indices contain thousands of funds and we regularly seek to include additional funds. We also calculate investable hedge fund indices that aim to reflect the overall structure of the hedge fund universe or relevant segments of that universe, but which consist solely of funds available on an identified third-party hedge fund platform. These hedge funds have agreed with the platform provider to accept investments from, and to provide liquidity to, investment vehicles such as tracker funds that are linked to the performance of our investable hedge fund indices. In total we calculate over 200 hedge fund indices.

 

   

Hedge Fund Risk Model

 

Our hedge fund risk model identifies the major factors driving the returns and risks of investments in hedge funds. It provides investors in hedge funds, such as managers of funds of hedge funds, with risk forecasts and profiles of their exposures to the major sources of risk. Given the lack of transparency among hedge funds, the model utilizes historical returns rather than position level information. This model is available in our BarraOne and Barra TotalRisk software applications.

 

   

Energy and Commodity Asset Valuation Analytics Products

 

Our energy and commodity valuation products are software applications that offer a variety of quantitative analytics tools for valuing, modeling and hedging physical assets and derivatives across a number of market segments including energy and commodity assets. These software applications are not provided with any market data or proprietary index or risk data. These products are typically branded “FEA” and include products such as @Energy, @Interest, VaRworks and ProStorage.

 

Employees

 

As of May 31, 2007, we employed 647 full-time employees and 58 temporary employees worldwide. This number of full-time employees includes certain employees that are solely dedicated to us but are employed by a Morgan Stanley affiliate. Of our 58 temporary employees, 39 were consultants who were contracted to work on various projects. Historically, certain services have been provided to us by other Morgan Stanley employees, not included in the numbers above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Impacting Comparability of Our Financial Results—Our Relationship with Morgan Stanley.”

 

Properties

 

Our corporate headquarters are located in New York, New York. This is also our largest sales office and one of our main research centers. Employees in the following offices are engaged in a variety of functions:

 

Location

   Square Feet   

Expiration Date

Berkeley, California

   59,000    June 30, 2014

New York, New York

   39,000    December 31, 2014

Geneva, Switzerland

   19,900    March 31, 2009

London, England

   15,830    September 5, 2014

Mumbai, India (two locations)

   9,000    January 13, 2016 and September 30, 2009

Tokyo, Japan

   6,820    November 30, 2008

Hong Kong, China

   5,845    December 31, 2008

 

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We also lease sales and client support offices in the following locations: Cape Town, South Africa; Chicago, Illinois; Dubai, United Arab Emirates; Frankfurt, Germany; Milan, Italy; Paris, France; San Francisco, California; Sao Paolo, Brazil; Shanghai, China; and Sydney, Australia. Of these office locations, we currently share leased space with Morgan Stanley, our principal shareholder, in the following locations: Chicago, Illinois; Dubai, United Arab Emirates; Milan, Italy; Mumbai, India (two locations); Paris, France; San Francisco, California; Sao Paulo, Brazil; and Sydney, Australia.

 

We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.

 

Intellectual Property

 

We rely on a combination of trade secret, patent, copyright, trademark and other intellectual property rights, as well as contractual protections and technical measures, to protect our rights in our products. We currently hold eight U.S. and foreign utility patents and one design patent. We currently have 13 U.S. and foreign utility applications pending. We also seek to protect our proprietary assets through non-disclosure undertakings with our employees, clients and others.

 

Seasonality

 

Revenues from subscription agreements are recognized ratably over the service period. We have not observed seasonality in our asset-based fee revenues. As a result, we currently experience and historically have experienced no significant seasonality in our operating revenues.

 

Legal Proceedings

 

From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, operating results, financial condition or cash flows.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table sets forth information regarding our executive officers and directors, as of                     , 2007:

 

Name

   Age   

Position

Henry A. Fernandez

   49    Chief Executive Officer, President and Director

David C. Brierwood

   46   

Chief Operating Officer

Michael K. Neborak

   50    Chief Financial Officer

C.D. Baer Pettit

   42    Head of Client Coverage

Gary Retelny

   49    Head of Strategy and Business Development

Jerker M. Johansson

   51    Director

Linda H. Riefler

   46    Director

 

Henry A. Fernandez has served as Chief Executive Officer, President and Director since 1998. Prior to joining us, Mr. Fernandez worked at Morgan Stanley from 1983 to 1991 and since 1994, most recently as a Managing Director in the Institutional Equity Division. Mr. Fernandez holds a Bachelor of Arts in economics from Georgetown University and an M.B.A. from the Stanford University Graduate School of Business.

 

David C. Brierwood has served as Chief Operating Officer since 2006. Prior to joining us, Mr. Brierwood worked at Morgan Stanley from 1986 to 2006, most recently as Chief Operating Officer of the Institutional and Retail Securities Groups. Mr. Brierwood holds a Bachelor of Science in material science from the Royal School of Mines, Imperial College at the University of London and an M.B.A. from the Manchester Business School.

 

Michael K. Neborak has served as Chief Financial Officer since 2006. Prior to joining us, Mr. Neborak worked for Citigroup and its predecessors from 1982 to 2006, most recently as Chief Financial Officer for Operations and Technology and Chief Financial Officer for Alternative Investments. Mr. Neborak holds a Bachelor of Arts in economics from Lafayette College and an M.B.A. from the Stern School of Business at New York University. Mr. Neborak is a former licensed Certified Public Accountant.

 

C.D. Baer Pettit has served as Head of Client Coverage since 2001. Prior to joining us, Mr. Pettit worked for Bloomberg L.P. from 1992 to 1999, most recently as Deputy Head of European Sales. Mr. Pettit holds a Master of Arts in history from Trinity College, Cambridge and a Master of Science from the School of Foreign Service at Georgetown University.

 

Gary Retelny has served as Head of Strategy and Business Development since 2003. Prior to joining us, Mr. Retelny worked for Cori Capital Partners, L.P. and Cori-related entities from 2000 to 2003 as a Managing Director. Mr. Retelny holds a Bachelor of Science and a Master of Science in Civil Engineering from Stanford University and an M.B.A. from the Stanford University Graduate School of Business.

 

Jerker M. Johansson has served as Director since 1998 at the request of Morgan Stanley. Mr. Johansson is Co-Head of Institutional Sales and Trading and Head of Clients and Services at Morgan Stanley. He joined Morgan Stanley in 1985 and was elected a Managing Director in 1995. Mr. Johansson holds a Masters Degree in economics from Stockholm School of Economics in 1979 and an M.B.A. from the Stanford University Graduate School of Business.

 

Linda H. Riefler has served as Director since 2005 at the request of Morgan Stanley. Ms. Riefler has been the Chief Talent Officer of Morgan Stanley since 2006 and is a member of Morgan Stanley’s Management Committee. In addition, Ms. Riefler is responsible for the Client Services Division at Morgan Stanley.

 

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Ms. Riefler joined Morgan Stanley in 1987 and was elected a Managing Director of Morgan Stanley in 1998. Ms. Riefler holds a Bachelor of Arts in economics from Princeton University and an M.B.A. from the Stanford University Graduate School of Business.

 

Each of our executive officers is a Managing Director of both us and Morgan Stanley. There are no additional responsibilities or duties, however, associated with their title of Managing Director of Morgan Stanley.

 

There are no family relationships among any of our directors or executive officers.

 

Composition of our Board of Directors After this Offering

 

Prior to the completion of this offering, we intend to restructure our Board of Directors. Our Board of Directors currently consists of three directors. We intend to appoint             additional directors prior to the completion of this offering and an additional          directors within 12 months of the completion of this offering increasing the total size of our Board of Directors to                   . For so long as Morgan Stanley directly owns shares representing more than 50% of the total voting power of all classes of voting stock, it will have the ability to direct the election of all the members of our Board of Directors, the composition of our board committees and the size of the board. See “Description of Capital Stock.”

 

We intend to avail ourselves of the “controlled company” exception under the                  rules, which eliminates the requirements that a company has a majority of independent directors on its Board of Directors and that its Compensation and Nominating and Corporate Governance Committees be composed entirely of independent directors.

 

Committees of the Board of Directors After this Offering

 

The standing committees of our Board of Directors will be an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, each of which is described below.

 

Audit Committee. The Audit Committee of our Board of Directors consists of                     .              serves as the Chairman of the Audit Committee. The Audit Committee operates pursuant to a charter that was approved by our Board of Directors. Within one year after consummation of this offering, the Audit Committee will be comprised entirely of independent directors. The Audit Committee reviews and, as it deems appropriate, recommends to the Board of Directors our internal accounting and financial controls and the accounting principles and auditing practices and procedures employed in preparation and review of our financial statements. The Audit Committee also makes recommendations to the Board concerning the engagement of independent public auditors and the scope of the audit to be undertaken by such auditors.

 

Compensation Committee. The Compensation Committee of our Board of Directors consists of                     .              serves as the Chairman of the Compensation Committee. The Compensation Committee operates pursuant to a charter that was approved by our Board of Directors. The Compensation Committee reviews and, as it deems appropriate, recommends to the Board of Directors policies, practices and procedures relating to the compensation of the officers and other managerial employees and the establishment and administration of employee benefit plans. The Committee also exercises all authority under our employee equity incentive plans and advises and consults with our officers as may be requested regarding managerial personnel policies.

 

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee of our Board of Directors consists of                                 .                              serves as the Chairman of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee operates pursuant to a charter that was approved by our Board of Directors. The Nominating and Corporate Governance Committee reviews and, as it deems appropriate, recommends to the Board of Directors policies and procedures relating to director and board committee nominations and corporate governance policies.

 

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Executive Compensation

 

The following table sets forth compensation information for our chief executive officer and the four other executive officers who, based on salary and bonus compensation, were our most highly compensated executive officers during the fiscal year ended November 30, 2006. We refer to these individuals as our “named executive officers.” The information included in this table reflects compensation earned by our named executive officers for services rendered to us.

 

SUMMARY COMPENSATION TABLE

 

        Annual Compensation   Long-Term Compensation

Name And
Principal Position

  Year   Salary ($)   Bonus ($)  

Other

Annual

Compen-
sation ($)

  Awards   Payouts   All other
Compensation ($)
         

Restricted

Stock

Award(s)(1)

 

Securities
Under-
lying

Options/
SARs (#)

  LTIP
Payouts ($)
 

Henry A. Fernandez

Chief Executive Officer and President

  2006              

David C. Brierwood

Chief Operating Officer

  2006              

Michael K. Neborak

Chief Financial Officer

  2006              

C.D. Baer Pettit

Head of Client Coverage

  2006              

Gary Retelny

Head of Strategy and Business Development

  2006              

  (1)   The market value of the common stock underlying restricted stock units (RSUs) of Morgan Stanley stock was calculated using the closing price per share of common stock on the applicable grant date, as reported on the New York Stock Exchange Composite Transaction Tape.

 

Option Grants with respect to Morgan Stanley Common Stock in Last Fiscal Year

 

The following table sets forth information concerning grants of options to acquire shares of Morgan Stanley common stock granted to the executive officers named in the Summary Compensation Table above for the year ended November 30, 2006. No grants of options to acquire shares of our stock were granted to the named executive officers for the year ended November 30, 2006, but we anticipate granting such awards going forward as described in “Equity Grants” below.

 

OPTION/SAR GRANTS IN LAST FISCAL YEAR

 

Name

   Number of
Securities
Underlying
Options/SARS
Granted (#)
  

Percent of

Total

Options/SARs
Granted to
Employees in
fiscal year

  

Exercise or
Base Price

($/Share)

  

Expiration

Date

   Grant Date Present
Value ($)(1)

Henry A. Fernandez

              

David C. Brierwood

              

Michael K. Neborak

              

C.D. Baer Pettit

              

Gary Retelny

              

  (1)   The present value of stock options granted was determined using the Black-Scholes model as of the grant date, consistent with Statement of Financial Accounting Standards No. 123R, Share-Based Payment (Statement No. 123R).

 

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Aggregate Exercises of Morgan Stanley Stock Options in Last Fiscal Year and Year-End Option Values

 

The following table sets forth information regarding the exercise of options to purchase Morgan Stanley common stock by our named executive officers in the year ended November 30, 2006, as well as the number and value of their unexercised options to purchase Morgan Stanley common stock as of November 30, 2006.

 

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR

AND FY-END OPTION/SAR VALUES

 

Name

   Shares Acquired on
Exercise (#)
   Value Realized ($)    Number of Securities
Underlying Unexercised
Options/SARs at Fiscal
year-end (#)
Exercisable/Unexercisable
  

Value of Unexercised In-

The-Money Options/
SARs at FY-end ($)
Exercisable/
Unexercisable

Henry A. Fernandez

           

David C. Brierwood

           

Michael K. Neborak

           

C.D. Baer Pettit

           

Gary Retelny

           

 

Pension Plans

 

The following table sets forth information with respect to the estimated amounts that we will pay to                  in annual benefits upon retirement.

 

Final Average Salary

                   Credited Years of Service as of November 30, 2006                 
     10    15    20    25    30    35 (Max)

 

Employment Agreements

 

We have no employment agreements in place with any of our named executive officers.

 

Employee Benefit Plans

 

Our employees currently participate in various incentive, retirement savings, group welfare and employee benefit plans sponsored by Morgan Stanley. It is anticipated that they will continue participating in such plans after this offering is completed.

 

Participation by our employees in stock plans is described below under “Current Employee Stock Plans.”

 

We intend to adopt a new omnibus equity plan for our eligible employees, described below under “—New MSCI Omnibus Incentive Plan.”

 

Current Employee Stock Plans

 

Before this offering, some of our employees received stock options and/or restricted stock units relating to Morgan Stanley common stock under the Morgan Stanley 1994 Omnibus Equity Plan, the Morgan Stanley 1995 Equity Incentive Plan, the Morgan Stanley Employees’ Equity Accumulation Plan and the Morgan Stanley Tax Deferred Equity Participation Plan (“TDEPP”).

 

After the offering, all outstanding Morgan Stanley stock options and RSUs held by our employees will remain outstanding in accordance with the original terms and conditions, including but not limited to forfeiture conditions and transfer restrictions, of the applicable Morgan Stanley stock plan and award. All of our employees

 

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will continue to be treated as Morgan Stanley employees for purposes of any vesting and forfeiture provisions, and all non-vested stock options and RSUs will continue to vest in accordance with their original provisions, based upon continuing service with us or Morgan Stanley.

 

New MSCI Omnibus Incentive Plan

 

We intend to adopt, subject to the approval of our shareholders, the MSCI Omnibus Incentive Plan (the “Incentive Plan”). The purposes of the Incentive Plan will be: (i) to advance our interests by attracting and retaining high caliber employees and other key individuals, (ii) to more closely align the interests of recipients of Incentive Plan awards with the interest of our shareholders by increasing the proprietary interest of such recipients in our growth and success as measured by the value of our stock and (iii) to motivate award recipients to act in the long-term best interests of our shareholders.

 

Shares Available. The Incentive Plan permits us to make awards of              shares of our common stock (the “Plan Share Limit”), subject to adjustment in the event of a stock split, reverse stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, split-up, extraordinary dividend or distribution, spin-off, warrants or rights offering to purchase common stock at a price substantially below fair market value, or other similar event. If any award issued under the Incentive Plan is cancelled, forfeited, or terminates or expires unexercised, or if shares are tendered or withheld from an award to pay the option price or satisfy a tax withholding obligation, such shares may again be issued under the Incentive Plan.

 

Eligibility. Generally, all of our employees and all employees of our subsidiaries and their respective affiliates, and certain other individuals who perform services for us, any of our subsidiaries, or any of their respective affiliates will be eligible to receive awards. Our Compensation Committee will have discretion to select participants and determine the form, amount and timing of each award to such persons, the exercise price or base price associated with the award, the time and conditions of exercise or settlement of the award and all other terms and conditions of an award.

 

Forms of Awards. Awards under the Incentive Plan may include one or more of the following types: (i) stock options (both nonqualified and incentive stock options), (ii) stock appreciation rights (“SARs”), (iii) restricted stock awards, (iv) restricted stock unit awards, (v) performance grants and (vi) cash awards. Such awards may be for partial-year, annual or multi-year periods.

 

Options are rights to purchase a specified number of shares of our common stock at a price fixed by our Compensation Committee, but not less than fair market value on the date of grant. Options generally expire no later than ten years after the date of grant. Options will become exercisable at such time and in such installments as our Compensation Committee will determine. Payment of the option price (sometimes called the exercise price or strike price) must be made in full at the time of exercise in such form as our Compensation Committee shall determine. Payment methods will include cash, the exchange of shares already owned, a combination of cash and exchange of shares or by such other means as we may authorize. Options intended to be incentive stock options under section 422 of the Code may not be granted to any person who is not an employee of us or any parent or subsidiary, as defined in section 424 of the Code. All incentive stock options must be granted within ten years of the date the Incentive Plan is approved by our Compensation Committee.

 

A SAR entitles the holder to receive, upon exercise, an amount equal to any positive difference between the fair market value of one share of our common stock on the date the SAR is exercised and the exercise price, multiplied by the number of shares of common stock with respect to which the SAR is exercised. Our Compensation Committee will have the authority to determine whether the amount to be paid upon exercise of a SAR will be paid in cash, common stock (including restricted stock) or a combination of cash and common stock.

 

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Restricted stock awards provide for a specified number of shares of our common stock subject to a restriction against transfer during a period of time or until performance measures are satisfied, as established by our Compensation Committee. Unless otherwise set forth in the agreement relating to a restricted stock award, the holder has all rights as a shareholder, including voting rights, the right to receive dividends and the right to participate in any capital adjustment applicable to all holders of common stock; provided, however, that our Compensation Committee may determine that distributions with respect to shares of common stock will be deposited with us and will be subject to the same restrictions as the shares of common stock with respect to which such distribution was made.

 

A restricted stock unit award is a right to receive a specified number of shares of our common stock (or the fair market value thereof in cash, or any combination of our common stock and cash, as determined by our Compensation Committee), subject to the expiration of a specified restriction period and/or the achievement of any performance measures selected by the Compensation Committee, consistent with the terms of the Incentive Plan. The restricted stock unit award agreement will specify whether the award recipient is entitled to receive dividend equivalents with respect to the number of shares of our common stock subject to the award. Prior to the settlement of a restricted stock unit award in our common stock, the award recipient will have no rights as a shareholder of our company with respect to our common stock subject to the award.

 

Performance grants are awards whose final value or amount, if any, is determined by the degree to which specified performance measures have been achieved during a performance period set by our Compensation Committee. Performance periods can be partial-year, annual or multi-year periods, as determined by our Compensation Committee. Performance measures that may be used include one or more of the following: the attainment by a share of common stock of a specified value within or for a specified period of time, earnings per share, earnings before interest expense and taxes, return to shareholders (including dividends), return on equity, earnings, revenues, cash flow or cost reduction goals, operating profit, pretax return on total capital, economic value added or any combination of the foregoing. Such criteria and objectives may relate to results obtained by the individual, us, a subsidiary, or an affiliate, or any business unit or division thereof, or may relate to results obtained relative to a specific industry or a specific index. Payment may be made in the form of cash, common stock, restricted stock, restricted stock units or a combination thereof, as specified by our Compensation Committee.

 

Annual incentive awards are generally cash awards based on the degree to which certain of any or all of a combination of individual, team, department, division, subsidiary, group or corporate performance objectives are met or not met. Our Compensation Committee may establish the terms and provisions, including performance objectives, for any annual incentive award.

 

An award agreement may contain additional terms and restrictions, including vesting conditions, not inconsistent with the terms of the Incentive Plan, as the Committee may determine.

 

Maximum Award. To the extent necessary for an award to be qualified performance-based compensation under section 162(m) of the Code, the maximum number of options and SARs which may be granted to any individual during a calendar year is             . The maximum number of shares that may be subject to restricted stock or stock units granted to or elected by a participant in any fiscal year shall be                  shares. The maximum cash bonus payable to any individual in any fiscal year will be $            .

 

Federal Income Tax Consequences. A participant to whom a nonqualified stock option is granted will recognize no income at the time of the grant and we will not be entitled to a deduction. When the participant exercises a nonqualified stock option, he or she will generally recognize ordinary income equal to the excess, if any, of the fair market value (determined as of the date of exercise) of the common stock received over the option exercise price. The tax basis of such shares to the participant will be equal to the exercise price paid plus the amount includable in his or her gross income as compensation. The holding period for purposes of

 

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determining whether a subsequent sale of such share by the participant results in the recognition of short-term or long-term capital gain or loss will commence on the day after the date the share is transferred to the participant. A participant to whom a stock option is granted will recognize no income at the time of grant. When the participant exercises a stock option, he or she will generally recognize ordinary compensation income equal to the difference, if any, between the fair market value of the common stock he or she receives at such time and the sum of the exercise price for such shares.

 

A participant to whom an incentive stock option which qualifies under section 422 of the Internal Revenue Code is granted will generally recognize no income at the time of grant or at the time of exercise, and we will not be entitled to a deduction. However, upon the exercise of an incentive stock option, the excess of the fair market value of the common stock over the exercise price thereof may result in the participant being subject to an alternative minimum tax under applicable provisions of the Code. In order to obtain incentive stock option treatment for federal income tax purposes, the participant (i) must be our employee or an employee of any parent or subsidiary, or any of their respective affiliates continuously from the date of grant until any termination of employment and (ii) in the event of such a termination, must generally exercise an incentive stock option within three months after such termination. When a participant sells the common stock received upon exercise of an incentive stock option more than one year after exercise and more than two years after the date of grant of such incentive stock option, he or she will normally recognize long-term capital gain or loss equal to the difference, if any, between the sale price of such shares at such time and the exercise price. If the participant disposes of such shares before such period’s end the participant will recognize ordinary compensation income equal to the lesser of (i) the difference, if any, between the fair market value of such shares on the date of exercise and the exercise price, and (ii) the difference, if any, between the sale price and the exercise price. Any other gain or loss on such sale (in addition to the ordinary income mentioned above), will normally be capital gain or loss. The tax basis of such shares to the participant, for purposes of computing such other gain or loss, should be equal to the exercise price paid (plus the amount includable in his gross income as compensation, if any).

 

The inclusion of SARs with a nonqualified stock option or an incentive stock option will normally not result in taxable income to the participant, and we will not be entitled to a deduction at that time. At the time of exercise, the participant will normally recognize ordinary compensation income in an amount equal to the cash and the fair market value of the common stock he or she receives to satisfy his or her SAR. The tax basis of any such shares received by the participant pursuant to a SAR should be equal to the amount includable in his gross income as compensation in respect of such shares, and the participant’s holding period therefor should normally commence on the day after the day on which he or she recognizes taxable income in respect of such shares.

 

A participant granted shares of restricted stock will not recognize taxable income at the time of grant and we will not be allowed a deduction for federal income tax purposes at that time. However, a participant granted such shares may elect to recognize taxable compensation in the year of the grant in an amount equal to the fair market value of the shares at the time of grant by filing a “Section 83(b) election” to such effect with us and the Internal Revenue Service within 30 days after the date of grant. If shares with respect to which a participant has made the above-described Section 83(b) election are forfeited, no deduction will be allowed to the participant with respect to such forfeiture or any income tax previously paid but a participant may be entitled to report a capital loss. If a Section 83(b) election is not made, a participant granted shares of restricted stock will recognize taxable compensation in an amount equal to the fair market value of the shares at the time the shares first become transferable. Any dividends paid on shares of restricted stock prior to the date on which the participant recognizes taxable compensation with respect to the shares will be taxable to the participant as additional compensation rather than as ordinary dividends. Subject to the $1 million limit on the amount of compensation that can be deducted for payments to our senior officers, we will be allowed a deduction for federal income tax purposes at the time the holder of restricted stock recognizes taxable compensation equal to the amount of compensation recognized by such participant. A participant’s basis for shares of restricted stock will be the amount recognized as taxable compensation. A participant’s holding period for such shares will begin on the day after the date the participant recognizes taxable compensation with respect to the shares.

 

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A person who has been granted a restricted stock unit award will not recognize taxable income on the date of grant and we will not be entitled to a deduction at that time. When the restricted stock unit award vests and shares are transferred to the holder, the holder will recognize ordinary income in an amount equal to the fair market value of the transferred shares at such time less any cash consideration which the holder paid for the shares, and we will be entitled to a corresponding deduction. Any gain or loss realized upon the holder’s sale or exchange of the shares will be treated as long-term or short-term capital gain or loss. The holder’s basis for the shares will be the amount recognized as taxable compensation plus any cash consideration which the holder paid for the shares. The holder’s holding period for the shares will begin on the day after the date the shares are transferred to the holder.

 

A participant to whom a performance grant award is made will not recognize taxable income at the time such award is made. The participant will recognize taxable income, however, at the time cash, common stock or other of our securities or property is paid to the participant pursuant to such award, and the amount of such income will be the amount of such cash and the fair market value at such time of such shares or securities, or property. The tax basis of any such shares, securities or property received by the participant pursuant to a performance grant award should be equal to the amount includable in the participant’s gross income as compensation in respect of such shares, securities or property, and the holding period therefore should normally commence on the day following the date on which the participant recognizes taxable income in respect of such shares, securities or property. Any income equivalents paid to a recipient with respect to his or her performance grant award should generally be regarded for federal income tax purposes as compensation. A participant who receives a bonus stock award will recognize taxable income at the time the bonus stock is awarded.

 

Any compensation includable in the gross income of a recipient will be subject to appropriate federal income tax withholding. The company for which a participant is performing services will generally be allowed to deduct amounts that are includable in the income of the participant as ordinary compensation income at the time such amounts are so includable, provided that the amounts qualify as reasonable compensation for personal services actually rendered.

 

The discussion set forth above is a brief overview of certain U.S. federal income tax consequences of awards made under the Incentive Plan and is limited to the federal tax issues herein. This overview should not be relied upon as being a complete description of the applicable U.S. federal income tax consequences. Additional issues may exist that are not addressed in this discussion and that could affect a participant’s federal income tax treatment. This disclosure was written to support the marketing of our shares of common stock and was not intended or written to be used, and cannot be used, to avoid penalties that may be asserted against such participant under the Code. In addition, this overview does not address the state, local, foreign or other tax aspects of awards made under the Incentive Plan or the effect on such awards of guidance that may be issued by the U.S. Treasury under section 409A of the Code.

 

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Equity Grants

 

In connection with the offering, and subject to the approval of our Compensation Committee, we expect to grant approximately                          of our stock options and              shares of our restricted stock units to                      following the completion of the offering. The expected value of our stock option and restricted stock units awards is approximately $            , which is the sum of the face value of the restricted stock units and the binomial value of the stock options.

 

The following table contains information on the proposed equity grants for our named executive officers.

 

Named Executive Officer

   Proposed
Founder’s
Restricted
Stock Unit
Grant ($)
   Proposed
Founder’s
Option Grant
($)(1)

Henry A. Fernandez

   $            $        

David C. Brierwood

   $            $        

Michael K. Neborak

   $            $        

C.D. Baer Pettit

   $            $        

Gary Retelny

   $            $        

 

(1)

 

Calculated using the binomial valuation method.

 

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ARRANGEMENTS BETWEEN MORGAN STANLEY AND US

 

Relationship with Morgan Stanley

 

Currently, Morgan Stanley owns 96.6% of our common stock and Capital Group International owns 3.4% of our common stock. Upon completion of this offering, Morgan Stanley will own             shares of our class B common stock, which will represent approximately     % of the combined voting power of all classes of voting stock (or approximately     % if the underwriters exercise their over-allotment option in full) and Capital Group International will own             shares of our class B common stock, representing approximately     % of the combined voting power of all classes of voting stock (or approximately     % if the underwriters exercise their over-allotment option in full).

 

For as long as Morgan Stanley continues to beneficially own more than 50% of the combined voting power of all classes of our voting stock, Morgan Stanley will be able to direct the election of all of the members of our Board of Directors and exercise a controlling influence over our business and affairs, including any decisions with respect to mergers or other business combinations involving us, the acquisition or disposition of assets by us, our approval or disapproval of amendments to our Amended and Restated Certificate of Incorporation and By-laws, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock or preferred stock and the payment of dividends. Similarly, Morgan Stanley will have the power to determine or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to prevent an acquisition or any other change in control of us and could take other actions that might be favorable to Morgan Stanley and potentially unfavorable to you. See “Description of Capital Stock.”

 

Set forth below are descriptions of certain agreements, relationships and transactions we will have with Morgan Stanley.

 

Services Agreement

 

We will enter into a services agreement with Morgan Stanley pursuant to which Morgan Stanley will continue to provide us with a variety of services following the consummation of this offering. Services to be provided by Morgan Stanley, directly or indirectly through its subsidiaries or subcontractors, will include services in the areas of human resources, information technology, accounting, legal and compliance, tax, office space leasing, corporate services, treasury and other services for so long as Morgan Stanley owns more than 50% of our outstanding common stock and for periods, varying for different services, of up to 12 months thereafter. It is expected that payment for these services will be determined, consistent with past practices, using an internal cost allocation methodology based on fully loaded cost (i.e., allocated direct costs of providing the services, plus all out-of-pocket costs, expenses and corporate overhead). Upon the sale or other disposition of any portion of our business, assets or properties, Morgan Stanley’s obligation to provide any service in respect of such disposed business, assets or properties will terminate. Similarly, if we acquire any business, assets or properties, Morgan Stanley may not have to provide any services in respect of such acquired business, assets or properties.

 

The services agreement will provide that any obligation of Morgan Stanley to provide a service may be terminated (i) by us upon advance notice to Morgan Stanley or (ii) by either party if the other party has breached its obligations under the agreement relating to the service and has not cured the breach within an agreed upon period of time. In addition, at any time following the announcement of a transaction involving a change of control of us, Morgan Stanley may elect to terminate any and all services it provides, provided that no service will be terminated prior to the closing of the change of control transaction unless agreed to by us.

 

In general, Morgan Stanley will not be liable to us in connection with any service provided under the services agreement except in the case of gross negligence or willful misconduct.

 

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Tax Sharing Agreement

 

Prior to the completion of this offering, we have filed federal income tax returns and certain state and local income tax returns with Morgan Stanley on a consolidated, combined or unitary basis. We will continue to file federal income tax returns with Morgan Stanley on such basis for so long as Morgan Stanley owns at least 80% of the total voting power of our stock and 80% of the total value of our stock, and will generally continue to file other income tax returns with Morgan Stanley on a consolidated, combined or unitary basis under applicable law so long as we are permitted to do so. If Morgan Stanley’s ownership of our common stock falls below the relevant threshold, which may occur as a result of a subsequent sale or Tax-Free Spin-Off by Morgan Stanley of our common stock, we will file the relevant federal or other income tax return as a separate taxable group.

 

Prior to completion of this offering, we will enter into a tax sharing agreement with Morgan Stanley setting forth the rights and obligations of Morgan Stanley and us with respect to federal and other income taxes for periods, including periods after the completion of this offering, if any, in which we file returns on a consolidated, combined or unitary basis with Morgan Stanley. Under the terms of the tax sharing agreement, we will be liable for a portion of the consolidated, combined or unitary tax liability, including any liability resulting from adjustments on audit, based on what our liability would have been had we and our subsidiaries been a taxable group separate from the Morgan Stanley consolidated group. In addition, we will provide Morgan Stanley with a covenant in the tax sharing agreement that if Morgan Stanley distributes our common stock to its shareholders in a transaction intended to qualify as a Tax-Free Spin-Off, we will provide customary representations, covenants and indemnities to Morgan Stanley (to the extent not otherwise already provided in the tax sharing agreement), including indemnifying Morgan Stanley for any taxes resulting from such transaction failing to qualify as a Tax-Free Spin-Off (or as a similar transaction under state law) as a result of any action taken by any member of our separate taxable group.

 

Furthermore, under the tax sharing agreement, Morgan Stanley will prepare and file the consolidated federal and applicable consolidated, combined or unitary income tax returns that include taxable periods in which we or a member of our taxable group, on the one hand, and Morgan Stanley or a member of its taxable group, on the other hand, are included. Tax audits and controversies relating to Morgan Stanley or a member of its taxable group, regardless of whether such tax audit or controversy relates to us or a member of our taxable group, will be controlled by Morgan Stanley. However, we may participate at our own expense in any such tax audit or controversy that also relates to us or a member of our taxable group, and in certain circumstances may be entitled to control certain audits or controversies relating to taxes that solely relate to us or a member of our taxable group.

 

License Agreement

 

We currently have a trademark license agreement with Morgan Stanley which grants us an exclusive royalty-free license to use the Morgan Stanley trademark “Morgan Stanley Capital International” for so long as Morgan Stanley owns 50% or more of us. Pursuant to the agreement, we must cease using the trademark “Morgan Stanley Capital International” within 90 days after Morgan Stanley ceases to own 50% or more of us.

 

Ongoing Leasehold Arrangements

 

We currently lease an aggregate of approximately 16,000 square feet of office space from Morgan Stanley in nine locations. The rent and other terms of all such leases and/or subleases, as the case may be, are (or will be) consistent with arm’s-length commercially reasonable terms for leasehold agreements of these types.

 

Our leases in Geneva, Switzerland and Frankfurt, Germany are guaranteed by subsidiaries of Morgan Stanley.

 

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Morgan Stanley Agreements with Third Parties

 

Historically, we have received services provided by third parties pursuant to various agreements that Morgan Stanley has entered into for the benefit of its affiliates. We pay the third parties directly for the services they provide to us or reimburse Morgan Stanley for our share of the actual costs incurred under the agreements. After this offering, we intend to continue to procure some of these third-party services through Morgan Stanley to the extent we are permitted (and elect to) or are required to do so.

 

Shareholder Agreement

 

We will enter into a shareholder agreement with Morgan Stanley under which we will grant to Morgan Stanley a continuing option, transferable to any of its wholly-owned subsidiaries, to purchase, under certain circumstances, additional shares of class B common stock or shares of any of our nonvoting capital stock (the “Options”). The Options may be exercised by Morgan Stanley simultaneously with the issuance of any equity securities by us (other than in this offering or upon the exercise of the underwriters’ over-allotment option), with respect to class B common stock, only to the extent necessary to maintain Morgan Stanley’s ability to effect a Tax-Free Spin-Off, which is generally 80% of the total voting power of our stock and 50% of the total value of our stock and, with respect to shares of any nonvoting capital stock, to the extent necessary to own 80% of each outstanding class of such stock. We will also agree to indemnify Morgan Stanley with respect to liabilities (including tax liabilities) resulting from our breach of the shareholder agreement, which could include damages to Morgan Stanley resulting from the loss of its ability to effect a Tax-Free Spin-Off. The purchase price of the shares of class B common stock purchased upon any exercise of the Options, subject to certain exceptions, will be based on the market price at which such stock may be purchased by third parties. The Options terminate in the event that Morgan Stanley reduces its ownership percentage in us to less than 50% of the number of outstanding shares of common stock. We do not intend to issue additional shares of class B common stock except pursuant to the exercise of the Options.

 

Subject to certain limitations, Morgan Stanley may assign certain of its rights under the shareholder agreement to any person that agrees to be bound by certain terms of the shareholder agreement. The shareholder agreement will further provide Morgan Stanley with certain registration rights relating to shares of our outstanding common stock held by Morgan Stanley after this offering. Subject to certain limitations, Morgan Stanley and its transferees may require us to register, under the Securities Act, all or any portion of the common stock, a so-called “demand registration.” We are not obligated to effect a demand registration within the six-month period after the effective date of a previous demand registration.

 

Additionally, Morgan Stanley and its transferees have so-called “piggyback” registration rights, which means that Morgan Stanley and its transferees may include their respective shares in any future registrations of our equity securities, whether or not that registration relates to a primary offering by us or a secondary offering by or on behalf of any of our shareholders. The demand registration rights and piggyback registrations are each subject to customary market cutback exceptions.

 

We will pay certain registration expenses in connection with certain “demand” or “piggyback” registrations, except underwriting discounts, commissions and transfer taxes, if any. The shareholder agreement will set forth customary registration procedures, including an agreement by us to make our management available for road show presentations in connection with any underwritten offerings. We will also agree to indemnify Morgan Stanley and its transferees with respect to liabilities resulting from untrue statements or omissions in any registration statement used in any such registration, other than untrue statements or omissions resulting from information furnished to us for use in the registration statement by Morgan Stanley or any transferee.

 

Certain rights of Morgan Stanley and its transferees under the shareholder agreement will remain in effect with respect to the shares of class B common stock covered by the agreement until the earlier of ten years or until those shares have been transferred to persons other than those holding more than 3% of our outstanding common stock.

 

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RELATIONSHIPS AND RELATED TRANSACTIONS

 

Product Sales

 

Morgan Stanley or its affiliates and Capital Group International or its affiliates subscribe to, in the normal course of business, certain of our products. Historically, Morgan Stanley and Capital Group International received a 15% discount on certain of our products and Capital Group International was entitled to most favored nation treatment in certain circumstances. Revenues we recognized from subscription to our products by related parties for the fiscal years ended November 30, 2004, 2005 and 2006 and the six months ended May 31, 2007 are set forth below (amounts in thousands):

 

     For the Fiscal Year Ended
November 30,
  

For the
Six Months Ended

May 31,

     2004    2005    2006    2007

Morgan Stanley and its affiliates

   $ 12,690    $ 12,783    $ 13,971    $ 6,155

Capital Group International and its affiliates

     1,050      1,092      1,617      864