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As filed with the Securities and Exchange Commission on October 26, 2007

Registration No. 333-144975

 

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 5 to

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) 804-3900

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

 

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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)

 

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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.  ¨             

 

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CALCULATION OF REGISTRATION FEE

 

Title Of Each Class Of Securities To Be Registered		Amount to be Registered (1)		Proposed Maximum Aggregate Offering Price Per Share (2)			Proposed Maximum Aggregate Offering Price (2)			Amount Of Registration Fee (3)
Class A Common Stock, par value $0.01 per share		16,100,000		$	16.00		$	257,600,000		$	7,908.32

(1)	Includes 2,100,000 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(a) under the Securities Act of 1933.

(3)	Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price, $6,140 of which has been paid previously in connection with this Registration Statement based on an estimate of the aggregate offering price.

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 October 26, 2007

 

14,000,000 SHARES

MSCI Inc.

CLASS A COMMON STOCK

 

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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 $14.00 and $16.00 per share.

 

We are currently majority-owned by Morgan Stanley and, upon completion of the offering, Morgan Stanley will beneficially own 96.6% of our outstanding class B common stock, which will represent approximately 82.78% of the economic interest (or rights of holders of common equity to participate in distributions in respect of the common equity) in us (81.04% if the underwriters’ over-allotment option is exercised in full). See “Risk Factors—Risks Related to This Offering and Our Relationship with Morgan Stanley.”

 

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Holders of class A common stock generally 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 generally 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 93.47% of the combined voting power of all classes of voting stock (93.02% 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.”

 

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We intend to apply to list the class A common stock on the New York Stock Exchange under the symbol “MXB.”

 

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Investing in the class A common stock involves risks. See “ Risk Factors” beginning on page 14.

 

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PRICE $              A SHARE

 

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		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 2,100,000 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.

 

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MORGAN STANLEY

 

BANC OF AMERICA SECURITIES LLC

 

CREDIT SUISSE

 

MERRILL LYNCH & CO.

 

UBS INVESTMENT BANK

                    , 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.

 

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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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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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% of revenues in the nine-month period ended August 31, 2007, 15% in the nine-month period ended August 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 nine-month period ended August 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 nine-month period ended August 31, 2007 and the fiscal year ended November 30, 2006, our largest client organization by revenue, Barclays PLC and affiliates, accounted for 13% and 11% of our total revenues, respectively. Approximately 92% 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.

 

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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;

 

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

 

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failure to achieve assumed synergies;

 

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insufficient knowledge of the operations and markets of acquired businesses;

 

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increased debt;

 

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dilution of your common stock;

 

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loss of key personnel;

 

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

 

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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 and expenses 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 and expenses.

 

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Revenues from index-linked investment products represented approximately 18% of our operating revenues for the nine months ended August 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 euros, 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 nine months ended August 31, 2007, approximately 17%, 21%, 17%, and 15%, respectively, of our operating revenues were invoiced in currencies other than U.S. dollars. Approximately half of our foreign currency revenues were in euros and a quarter in pounds sterling and Japanese yen, respectively, over those periods.

 

We are exposed to additional foreign currency risk in certain of our operating costs. Although our expenses are generally in U.S. dollars, some of our expenses are incurred in non-U.S. dollar denominated currencies. Approximately $36.2 million or 20% of our expenses for the nine months ended August 31, 2007 were denominated in foreign currencies, the significant majority of which were denominated in Swiss francs, pounds sterling, Hong Kong dollars and Japanese yen. Expenses incurred in foreign currency may increase as we expand our business outside the U.S. and replace services provided by Morgan Stanley internationally for which we currently pay Morgan Stanley in U.S. dollars.

 

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 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.

 

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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.

 

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•

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 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.

 

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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 August 31, 2007 we had $625.9 million of indebtedness and a cash balance of $73.4 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. On the date of this prospectus, we intend to enter into a new $500.0 million credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Simultaneously with the completion of this offering, we intend to borrow $425.0 million under the new credit facility and use the net proceeds from the borrowing to pay a portion of the $625.9 million demand note held by Morgan Stanley. The balance of the demand note will be paid with the net proceeds from this offering and, to the extent necessary, our available cash. Any proceeds remaining from this offering after paying the balance of the demand note will be used for general corporate purposes.

 

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The new credit facility is guaranteed on a senior secured basis by each of our direct and indirect wholly-owned domestic subsidiaries and secured by a valid and perfected first priority lien and security interest in substantially all of the shares of capital stock of our present and future domestic subsidiaries and up to 65% of the shares of capital stock of our foreign subsidiaries, substantially all of our and our domestic subsidiaries’ present and future property and assets and the proceeds thereof. In addition, the credit facility contains restrictive covenants that limit our ability and our existing or future subsidiaries’ abilities, among other things, to: incur liens; incur additional indebtedness; make or hold investments; merge, dissolve, liquidate, consolidate with or into another person; sell, transfer or dispose of assets; pay dividends or other distributions in respect of our capital stock; change the nature of our business; enter into any transactions with affiliates other than on an arm’s length basis (except as described in “Arrangements Between Morgan Stanley and Us” and “Relationships and Related Transactions”); and prepay, redeem or repurchase debt.

 

The credit facility also requires us and our subsidiaries to achieve specified financial and operating results and maintain compliance with the following financial ratios on a consolidated basis: (1) the maximum total leverage ratio (as defined in the credit facility) measured quarterly on a rolling four-quarter basis shall not exceed (a) 3.75:1.0 through November 30, 2009, (b) 3.50:1.0 from December 1, 2009 through November 30, 2010 and (c) 3.25:1.0 thereafter; and (2) the minimum interest coverage ratio (as defined in the credit facility) measured quarterly on a rolling four-quarter basis shall be (a) 3.00:1.0 through November 30, 2009, (b) 3.50:1.0 from December 1, 2009 through November 30, 2010 and (c) 4.00:1.0 thereafter.

 

In addition, our credit facility contains the following affirmative covenants, among others: periodic delivery of financial statements, budgets and officer’s certificates; payment of other obligations; compliance with laws and regulations; payment of taxes and other material obligations; maintenance of property and insurance; performance of material leases; right of the lenders to inspect property, books and records; notices of defaults and other material events; maintenance of books and records; and compliance with laws.

 

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.

 

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.”

 

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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.

 

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 96.6% of the outstanding shares of our class B common stock, which represents approximately 93.47% of the combined voting power of all classes of voting stock (93.02% 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 generally have five votes per share other than with respect to a limited number of matters specified in our Amended and Restated Certificate of Incorporation (such as approval of transactions by which a third-party might acquire control of us). Following this offering, holders of shares of class B common stock will collectively control 96.77% 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

 

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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 or prevent a redemption or repurchase of our common stock 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 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.

 

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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. The services Morgan Stanley will continue to provide upon owning 50% or less of our outstanding common stock are subject to renegotiation in good faith, and will be provided for a period not to exceed 12 months. It is expected, for so long as Morgan Stanley owns more than 50% of our outstanding common stock, that payments for these services will be based on an internal cost allocation methodology based on fully loaded cost (i.e., allocated direct costs of providing the services, plus all

 

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related overhead and out-of-pocket costs and expenses) and an allocation to us of a portion of compensation-related expenses for Morgan Stanley senior executives, in each case, consistent with past practices. 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.”

 

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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 or affiliate 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 or securityholders. 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 securityholders 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 have lower credit ratings and are expected to have more constrained liquidity than our current principal shareholder, Morgan Stanley. Morgan Stanley’s credit is currently rated AA- and Aa3 by Standard & Poor’s and Moody’s, respectively, and our credit rating is currently rated below investment grade by each of Standard & Poor’s and Moody’s. Currently, Morgan Stanley maintains a contingency funding plan to manage a potential prolonged liquidity contraction over a one-year time period and to provide the ability to conduct business in an orderly manner. As part of Morgan Stanley, our liquidity needs are included in this plan. As a stand-alone company, we will need to manage our liquidity needs independent of Morgan Stanley. We may face challenges in maintaining equivalent liquidity reserves and securing access to contingent funding. 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 periods presented and may not be indicative of the results we will achieve in the future as a stand-alone public

 

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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. The services Morgan Stanley will continue to provide upon owning 50% or less of our outstanding common stock are subject to renegotiation in good faith, and will be provided for a period not to exceed 12 months.

 

It is expected, for so long as Morgan Stanley owns more than 50% of our common stock, 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 related overhead and out-of-pocket costs and expenses), as well as the portion of compensation related expenses for Morgan Stanley senior executives as allocated to us. See “Arrangements Between Morgan Stanley and Us” for a description of these arrangements. 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 our business increases significantly or we acquire any business, assets or properties, Morgan Stanley will not have to provide any services in respect of such increase or acquired business, assets or properties. 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 or 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 will be a “controlled company” within the meaning of the New York Stock Exchange 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 will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under the New York Stock Exchange 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 New York Stock Exchange 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 generally have five votes per share, other than with respect to a limited number of matters specified in our Amended and

 

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Restated Certificate of Incorporation (such as approval of transactions by which a third-party might acquire control of us). 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 other than with respect to those matters. 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 or affiliates. Any such shares of class B common stock transferred to a person other than Morgan Stanley, Capital Group International or one of their subsidiaries or affiliates 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 or securityholders 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;

 

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•

litigation involving our company, our general industry or both;

 

•

additions or departures of key personnel;

 

•

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 $20.30 per share, representing the difference between the assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, 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 executive officers, certain of our directors 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 500,000,000 shares of class A common stock, of which 14,000,000 shares will be outstanding (assuming that the underwriters do not exercise their over-allotment option), and up to 250,000,000 shares of class B common stock, of which 83,900,000 shares will be outstanding, upon completion of this offering. Of the outstanding shares, all of the shares of class A common stock and all of the 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, 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 $190.3 million, based on an assumed initial public offering price of $15.00 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 $4.98 million payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $13.02 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. We intend to use the net proceeds from this offering to pay a portion of the $625.9 million demand note held by Morgan Stanley, which bears interest at a rate equal to the open federal funds rate plus 35 basis points per annum (which was 5.725% on August 31, 2007) and matures on November 30, 2007. On the date of this prospectus, we intend to enter into a new $500.0 million credit facility (the “credit facility”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” The credit facility is expected to be comprised of a $200.0 million term loan A facility (the “term loan A facility”), a $225.0 million term loan B facility (the “term loan B facility,” together with the term loan A facility, the “term loans”) and a $75.0 million revolving credit facility (the “revolving facility”), with maturities of                             , 2012,                     , 2014 and                     , 2012, respectively. Simultaneously with the completion of this offering, we intend to borrow $425.0 million (the full amount of the term loans) under the credit facility and use the net proceeds from the borrowing to pay a portion of the $625.9 million demand note held by Morgan Stanley. If the net proceeds from this offering, together with the net proceeds from the borrowing under the new credit facility, are insufficient to pay in full the $625.9 million demand note held by Morgan Stanley, we will use our available cash to pay the balance. If the net proceeds from this offering, together with the net proceeds from the borrowing under the new credit facility, exceed the amount payable to Morgan Stanley under the $625.9 million demand note, the proceeds remaining from this offering after paying the balance of the demand note will be used for general corporate purposes.

 

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, our new credit facility contains restrictions on the payment of dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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CAPITALIZATION

 

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

 

•

on an actual basis;

 

•

on a pro forma basis to reflect (i) the payment in part of the $625.9 million demand note held by Morgan Stanley with the net proceeds from the $425.0 million borrowing under the new credit facility we intend to enter into on the date of this prospectus, (ii) the reclassification of all 29,323 shares of our common stock, par value $1.00 per share, into 83,900,000 shares of class B common stock, par value $0.01 per share; (iii) the sale by us of 14,000,000 shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, (iv) the application of all of the estimated net proceeds from this offering to pay a portion of the demand note held by Morgan Stanley, (v) the application of cash deposited with related parties to pay the remaining balance of the demand note held by Morgan Stanley and (vi) the payment of estimated offering expenses.

 

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 August 31, 2007
		Actual				Pro Forma(1)
		(in thousands)
Cash and cash equivalents		$	21,599			$	21,599
Cash deposited with related parties			51,799				41,520
		$	73,398			$	63,119
Note payable to related party		$	625,901				—
Credit facility			—			$	425,000
Shareholders’ equity/accumulated deficit:
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, 500,000,000 shares authorized, 14,000,000 shares issued and outstanding, pro forma			—				140
Class B common stock, par value $0.01 per share, 250,000,000 shares authorized, 83,900,000 shares issued and outstanding, pro forma			—				839
Additional paid-in capital			—				189,673
Accumulated deficit			(84,123	)			(84,123	)
Accumulated other comprehensive loss			(1,828	)			(1,828	)
Total shareholders’ equity (accumulated deficit)			(85,922	)			104,701
Total capitalization		$	539,979			$	529,701

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(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of total shareholders’ equity and total capitalization by $13.02 million, 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 August 31, 2007 was $(709,077,000) or $(8.45) per share of common stock, which reflects the reclassification of all 29,323 shares of our common stock, par value $1.00 per share, into 83,900,000 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 $20.30 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)						$	15.00
Pro forma net tangible book value per share as of August 31, 2007		$	(8.45	)
Increase per share attributable to new investors			3.15
Adjusted pro forma net tangible book value per share after this offering						$	(5.30	)
Dilution per share to new class A common stock investors						$	20.30

 

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 $15.00 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 $13.02 million and the dilution per share to new investors by $0.87, 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 August 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 $15.00 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		83,900,000		85.7	%		$	29,323		0.01	%		$	0.00035
New investors		14,000,000		14.3				210,000,000		99.99				15.00
Total		97,900,000		100	%		$	210,029,323		100	%

 

If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing shareholders will be 83,900,000, or 83.9% 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 16,100,000, or 16.1% 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 nine- month periods ended August 31, 2006 and 2007 and the consolidated financial condition data as of August 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 nine months ended August 31, 2007 are not necessarily indicative of results that may be expected for the entire year.

 

The pro forma tables present our pro forma unaudited consolidated statements of income data for the fiscal year ended November 30, 2006 and the nine months ended August 31, 2007. The pro forma consolidated statement of income data for the fiscal year ended November 30, 2006 is presented showing adjustments for (1) the $973.0 million dividend as if it had been paid on December 1, 2005, (2) the sale by us of 14,000,000 shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, and the application of the estimated net proceeds from this offering to pay a portion of the $625.9 million demand note held by Morgan Stanley as if the initial public offering and the payment of the demand note had occurred on December 1, 2005, (3) the payment of a portion of the $625.9 million demand note held by Morgan Stanley with the net proceeds from the borrowing under a new credit facility we intend to enter into on the date of this prospectus as if the borrowing under the new credit facility and the payment of the demand note had occurred on December 1, 2005 and (4) the application of our available cash to pay the remaining balance of the demand note held by Morgan Stanley as if it had occurred on December 1, 2005. The pro forma consolidated statement of income data for the nine months ended August 31, 2007 is presented showing adjustments for (1) the $973.0 million dividend as if it had been paid on December 1, 2005, (2) the sale by us of 14,000,000 shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus and the application of the estimated net proceeds from this offering to pay a portion of the $625.9 million demand note held by Morgan Stanley as if the initial public offering and the payment of the demand note had occurred on December 1, 2005, (3) the payment of a portion of the $625.9 million demand note held by Morgan Stanley with the net proceeds from the borrowing under a new credit facility we intend to enter into on the date of this prospectus as if the borrowing under the new credit facility and the payment of the demand note had occurred on December 1, 2005 and (4) the application of our available cash to pay the remaining balance of the demand note held by Morgan Stanley as if it had occurred on December 1, 2005.

 

The pro forma statement of financial condition data as of August 31, 2007 gives effect to this offering based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, and the application of the estimated net proceeds from this offering, together with the net proceeds from the borrowing under our new credit facility referred to in the preceding paragraph and our available cash, to pay the $625.9 million demand note held by Morgan Stanley.

 

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Consolidated Statements of Income Data

 

		For the Fiscal Year Ended November 30,																	For the Nine Months Ended August 31,
		2002(2) (as restated)(1)			2003(2) (as restated)(1)			2004(2) (as restated)(1)				2005 (as restated)(1)			2006 (as restated)(1)				2006			2007
		(in thousands, except per share data)
Operating revenues		$	83,776		$	91,277		$	178,446			$	278,474		$	310,698			$	229,112		$	268,228
Cost of services			44,809			44,670			86,432				106,598			115,426				77,112			92,033
SGA			23,861			30,082			47,099				70,220			85,820				57,044			67,884
Amortization of intangible assets			—			—			14,910				28,031			26,156				19,617			19,228
Total operating expenses			68,670			74,752			148,441				204,849			227,402				153,773			179,145
Operating income			15,106			16,525			30,005				73,625			83,296				75,339			89,083
Interest income			878			924			1,250				8,738			15,482				10,412			11,711
Interest expense			35			131			624				1,864			352				284			1,856
Other income (loss)			—			—			(13	)			398			1,043				186			253
Interest and other income, net			843			793			613				7,272			16,173	(3)			10,314			10,108	(3)
Income before provision for income taxes, discontinued operations and cumulative effect of change in accounting principle			15,949			17,318			30,618				80,897			99,469				85,653			99,191
Provision for income taxes			5,015			5,921			9,711				30,449			36,097				30,769			36,319
Income before discontinued operations and cumulative effect of change in accounting principle			10,934			11,397			20,907				50,448			63,372				54,884			62,872
Discontinued operations(4)
Income (loss) from discontinued operations			—			—			(84	)			5,847			12,699				1,304			—
Provision (benefit) for income taxes on discontinued operations			—			—			(30	)			2,054			4,626				419			—
Income (loss) from discontinued operations			—			—			(54	)			3,793			8,073				885			—
Income before cumulative effect of change in accounting principle			10,934			11,397			20,853				54,241			71,445				55,769			62,872
Cumulative effect of change in accounting principle			—			—			—				313			—				—			—
Net income		$	10,934		$	11,397		$	20,853			$	54,554		$	71,445	(3)		$	55,769		$	62,872	(3)
Earnings (loss) per basic common share(8):
Continuing operations		$	0.38		$	0.40		$	0.37			$	0.60		$	0.76			$	0.65		$	0.75
Discontinued operations			—			—			0.00				0.05			0.10				0.01			—
Cumulative effect of change in accounting principle			—			—			—				0.00			—				—			—
Earnings (loss) per basic common share		$	0.38		$	0.40		$	0.37			$	0.65		$	0.86	(3)		$	0.66		$	0.75	(3)
Earnings (loss) per diluted common share(8):
Continuing operations		$	0.38		$	0.40		$	0.37			$	0.60		$	0.76			$	0.65		$	0.75
Discontinued operations			—			—			0.00				0.05			0.10				0.01			—
Cumulative effect of change in accounting principle			—			—			—				0.00			—				—			—
Earnings (loss) per diluted common share		$	0.38		$	0.40		$	0.37			$	0.65		$	0.86			$	0.66		$	0.75
Weighted average shares outstanding used in computing earnings (loss) per common share(8):
Basic			28,612			28,612			56,256				83,900			83,900				83,900			83,900
Diluted			28,612			28,612			56,256				83,900			83,900				83,900			83,900
PRO FORMA(5)
Pro forma earnings (loss) per basic share(5)															$	0.40						$	0.41
Pro forma earnings (loss) per diluted share(5)															$	0.40						$	0.41
Pro forma weighted average shares outstanding used in computing basic earnings (loss) per share(5)																97,900							97,900

 

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Consolidated Statements of Financial Condition Data

 

		As of November 30,															As of August 31,							Pro Forma as of August 31, 2007(3)
		2002 (as restated)(1)			2003 (as restated)(1)			2004 (as restated)(1)			2005 (as restated)(1)			2006 (as restated)(1)			2006			2007
		(in thousands)
Cash and cash equivalents		$	20,535		$	5,735		$	36,741		$	23,411		$	24,362		$	21,576		$	21,599			$	21,599
Cash deposited with related parties(6)		$	40,058		$	67,492		$	98,873		$	252,882		$	330,231		$	290,185		$	51,799			$	41,520
Goodwill and intangible assets			—			—		$	781,238		$	668,539		$	642,383		$	648,922		$	623,155			$	623,155
Total assets		$	84,822		$	123,100		$	996,444		$	1,047,519		$	1,112,775		$	1,038,407		$	794,842			$	784,563
Deferred revenue		$	29,553		$	53,007		$	88,689		$	87,952		$	102,368		$	105,090		$	131,416			$	131,416
Shareholders’ equity (accumulated deficit)		$	25,616		$	36,624		$	708,501		$	757,217		$	825,712		$	806,530		$	(85,922	)		$	104,701

 

Other Data

 

		For the Fiscal Year Ended November 30,																				For the Nine Months Ended August 31,
		2002(2)				2003(2)				2004(2)				2005				2006				2006				2007
		(dollar amounts in thousands)
Operating margin(7)			18.0	%			18.1	%			16.8	%			26.4	%			26.8	%			32.9	%			33.2	%
Capital expenditures		$	567			$	1,231			$	2,058			$	346			$	2,435			$	938			$	946

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(1)

The consolidated financial statements for the years ended November 30, 2002, 2003, 2004, 2005 and 2006 have been restated (see note 20 to our audited consolidated financial statements for the years ended November 30, 2004, 2005 and 2006 included in this prospectus for a discussion of the restatement).

(2)

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.

(3)

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. On the date of this prospectus, we intend to enter into a new $500.0 million credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Simultaneously with the completion of this offering, we intend to borrow $425.0 million (the full amount of the term loans) under the new credit facility and use the net proceeds from the borrowing to pay a portion of the $625.9 million demand note held by Morgan Stanley, the balance of which will be paid with the net proceeds of this offering and, to the extent necessary, our available cash, Any proceeds remaining from this offering after paying the balance of the demand note will be used for general corporate purposes. 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.

(4)

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.

(5)

We made pro forma adjustments to the historical results of operations for the fiscal year ended November 30, 2006 and for the nine months ended August 31, 2007 to show the pro forma effect for the following as if they had occurred on December 1, 2005:

(i)

The reclassification of each share of our outstanding common stock into 2,861.235208 shares of class B common stock.

(ii)

The issuance and sale by us of 14,000,000 shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus.

(iii)

The receipt of proceeds from the $425.0 million borrowing under a new $500.0 million credit facility we intend to enter into on the date of this prospectus.

(iv)

The payment of the $973.0 million dividend (see footnote 3) with the proceeds from (ii) and (iii) above and our available cash.

The pro forma basic and diluted earnings (loss) per share were calculated using 97,900,000 shares, which represent the number of shares expected to be outstanding for the year (after giving effect to the Reclassification) plus the number of shares expected to be issued in this offering. The interest expense related to the new credit facility is based on an assumed interest rate of 8.0%. A tax rate of 36.3% was used in calculating the related income tax effect. A 0.125% increase (decrease) in the assumed interest rate would increase (decrease) the interest expense related to the new credit facility by approximately $508,000 for the fiscal year ended November 30, 2006 and by approximately $381,000 for the nine months ended August 31, 2007. See note 21 to our audited consolidated financial statements as of November 30, 2005 and 2006 and for the years ended November 30, 2004, 2005 and 2006 and note 16 to our unaudited condensed consolidated financial statements as of August 31, 2007 and for the nine months ended August 31, 2006 and 2007 included in this prospectus for further information regarding this pro forma calculation.

 

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As described in note 3 above, the dividend consisted of $325.0 million in cash and $648.0 million of demand notes, $22.1 million of which have already been paid and the remaining $625.9 million are expected to be paid with the net proceeds from the shares to be issued in this offering plus the borrowing under our new credit facility and our available cash.

(6)

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.

(7)

Operating margin is defined as operating income divided by operating revenues.

(8)

On October 24, 2007, subject to completion of this offering, our Board of Directors approved the Amended and Restated Certificate of Incorporation, which included: (i) authority to issue 850,000,000 shares of stock, consisting of 500,000,000 shares of class A common stock, par value $0.01 per share, 250,000,000 shares of class B common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share; and (ii) a reclassification of each share of our outstanding common stock into 2,861.235208 shares of class B common stock. All per share computations included in the accompanying consolidated financial statements have been restated to reflect the reclassification.

 

Pro Forma Consolidated Statements of Income Data

 

		For the Fiscal Year Ended November 30, 2006 (as restated)(1)															For the Fiscal Year Ended November 30, 2006
		Historical			Adjustments(2)				Adjustments(3)				Adjustments(4)				Pro Forma
		(in thousands, except per share data)
Operating revenues		$	310,698														$	310,698
Cost of services			115,426															115,426
Selling, general and administrative			85,820															85,820
Amortization of intangible assets			26,156															26,156
Total operating expenses			227,402															227,402
Operating income			83,296															83,296
Interest income			15,482		$	(13,505	)											1,977
Interest expense			352			37,935			$	(11,181	)		$	9,796				36,902
Other income (loss)			1,043															1,043
Interest and other income, net			16,173			(51,440	)			11,181				(9,796	)			(33,882	)
Income before provision for income taxes, discontinued operations and cumulative effect of change in accounting principle			99,469			(51,440	)			11,181				(9,796	)			49,414
Provision for income taxes			36,097			(18,673	)			4,059				(3,556	)			17,927
Income before discontinued operations and cumulative effect of change in accounting principle			63,372			(32,767	)			7,122				(6,240	)			31,487
Discontinued operations(5)
Income (loss) from discontinued operations			12,699															12,699
Provision (benefit) for income taxes on discontinued operations			4,626															4,626
Income (loss) from discontinued operations			8,073															8,073
Income before cumulative effect of change in accounting principle			71,445			(32,767	)			7,122				(6,240	)			39,560
Cumulative effect of change in accounting principle
Net income		$	71,445		$	(32,767	)		$	7,122			$	(6,240	)		$	39,560
Earnings (loss) per basic common share(6):
Continuing operations		$	0.76		$	(0.39	)		$	0.01			$	(0.06	)		$	0.32
Discontinued operations			0.10							(0.02	)			—				0.08
Earnings (loss) per basic common share		$	0.86		$	(0.39	)		$	(0.01	)		$	(0.06	)		$	0.40

 

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		For the Fiscal Year Ended November 30, 2006 (as restated)(1)															For the Fiscal Year Ended November 30, 2006
		Historical			Adjustments(2)				Adjustments(3)				Adjustments(4)				Pro Forma
		(in thousands, except per share data)
Earnings (loss) per diluted share(6):
Continuing operations		$	0.76		$	(0.39	)		$	0.01			$	(0.06	)		$	0.32
Discontinued operations			0.10							(0.02	)							0.08
Cumulative effect of change in accounting principle			—
Earnings (loss) per diluted share		$	0.86		$	(0.39	)		$	(0.01	)		$	(0.06	)		$	0.40
Weighted average shares outstanding used in computing earnings (loss) per share(6):
Basic			83,900			83,900				97,900				97,900				97,900
Diluted			83,900			83,900				97,900				97,900				97,900

---

(1)

The consolidated financial statements for the year ended November 30, 2006 have been restated. See note 20 to our audited consolidated financial statements for the years ended November 30, 2004, 2005 and 2006.

(2)

Adjustments for the $973.0 million dividend, consisting of $325.0 million in cash, $22.1 million in a demand note payable to Capital Group International (which was paid in full in cash on July 19, 2007) and $625.9 million in a demand note held by Morgan Stanley, as if it had been paid on December 1, 2005.

(3)

Adjustments for the sale by us of shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, and the application of the estimated net proceeds from this offering to pay a portion of the demand note as if the initial public offering had occurred on December 1, 2005.

(4)

Adjustments for the payment of the balance of the $625.9 million demand note held by Morgan Stanley with the net proceeds from the $425.0 million borrowing under a new credit facility we intend to enter into on the date of this prospectus together with our available cash as if the borrowing under the new credit facility and payment of the demand note had occurred on December 1, 2005. The interest expense related to the new credit facility is based on an assumed interest rate of 8.0%. A 0.125% increase (decrease) in the assumed interest rate would increase (decrease) the interest expense related to the new credit facility by approximately $508,000.

(5)

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.

(6)

On October 24, 2007, subject to completion of this offering, our Board of Directors approved the Amended and Restated Certificate of Incorporation, which included: (i) authority to issue 850,000,000 shares of stock, consisting of 500,000,000 shares of class A common stock, par value $0.01 per share, 250,000,000 shares of class B common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share; and (ii) a reclassification of each share of our outstanding common stock into 2,861.235208 shares of class B common stock. All per-share computations included in the accompanying financial statements have been restated to reflect the reclassification.

 

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		For the Nine Months Ended August 31, 2007															For the Nine Months Ended August 31, 2007
		Historical			Adjustments(1)				Adjustments(2)				Adjustments(3)				Pro Forma
		(in thousands, except per share data)
Operating revenues		$	268,228			—				—				—			$	268,228
Cost of services			92,033			—				—				—				92,033
Selling, general and administrative			67,884			—				—				—				67,884
Amortization of intangible assets			19,228			—				—				—				19,228
Total operating expenses			179,145			—				—				—				179,145
Operating income			89,083															89,083
Interest income			11,711			(11,414	)											297
Interest expense			1,856			25,286			$	(8,386	)		$	7,347				26,103
Other income (loss)			253															253
Interest and other income, net			10,108			(36,700	)		$	8,386			$	(7,347	)			(25,553	)
Income before provision for income taxes			99,191			(36,700	)			8,386				(7,347	)			63,530
Provision for income taxes			36,319			(13,322	)			3,044				(2,667	)			23,374
Net income		$	62,872		$	(23,378	)		$	5,342			$	(4,680	)		$	40,156
Earnings (loss) per basic common share(4):
Earnings (loss) per basic common share		$	0.75		$	(0.28	)		$	(0.01	)		$	(0.05	)		$	0.41
Earnings (loss) per diluted common share(4):
Earnings (loss) per diluted common share		$	0.75		$	(0.28	)		$	(0.01	)		$	(0.05	)		$	0.41
Weighted average shares outstanding used in computing earnings per common share(4):
Basic			83,900			83,900				97,900				97,900				97,900
Diluted			83,900			83,900				97,900				97,900				97,900

---

(1)

Adjustments for the $973.0 million dividend, consisting of $325.0 million in cash, $22.1 million in a demand note payable to Capital Group International (which was paid in full in cash on July 19, 2007) and $625.9 million in a demand note held by Morgan Stanley as if it had been paid on December 1, 2005.

(2)

Adjustments for the sale by us of shares of class A common stock pursuant to this offering based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, and the application of the estimated net proceeds from this offering to pay a portion of the demand note and any proceeds remaining from this offering after paying a portion of the demand note to cash and cash equivalents as if the initial public offering had occurred on December 1, 2005. In addition, the impact of the increased weighted average shares outstanding to the earnings per basic and diluted common share has been reflected.

(3)

Adjustments for the payment of the balance of the $625.9 million demand note held by Morgan Stanley with the net proceeds from the borrowing under a new credit facility we intend to enter into on the date of this prospectus together with our available cash as if the borrowing under the new credit facility and payment of the demand note had occurred on December 1, 2005. The interest expense related to the new credit facility is based on an assumed interest rate of 8.0%. A 0.125% increase (decrease) in the assumed interest rate would increase (decrease) the interest expense related to the new credit facility by approximately $381,000.

(4)

On October 24, 2007, subject to completion of this offering, our Board of Directors approved the Amended and Restated Certificate of Incorporation, which included: (i) authority to issue 850,000,000 shares of stock, consisting of 500,000,000 shares of class A common stock, par value $0.01 per share, 250,000,000 shares of class B common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share; and (ii) a reclassification of each share of our outstanding common stock into 2,861.235208 shares of class B common stock. All per-share computations included in the accompanying financial statements have been restated to reflect the reclassification.

 

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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.”

 

The consolidated financial statements for the years ended November 30, 2002, 2003, 2004, 2005 and 2006 have been restated. See note 20 to our audited consolidated financial statements for the years ended November 30, 2004, 2005 and 2006 included in this prospectus for information regarding the restatement. Accordingly, certain amounts and explanations included in our discussion and analysis of financial condition and results of operations have been amended.

 

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 2,900 clients across 63 countries. Our clients include the 25 largest firms managing assets globally, measured by assets under management as published in October 2007 by Nelson MarketPlace, a leading provider of information to the global investment community. We have 19 offices in 15 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 and our 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

 

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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.

 

We experienced growth in both revenues and expenses during fiscal 2006 and the nine-month period ended August 31, 2007. Strong revenue growth continued in equity index products during both periods. Acceleration of revenue growth in equity portfolio analytics products during the nine-month period ended August 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. Investments made in BarraOne in 2006 contributed to growth in revenues in our multi-asset class portfolio analytics products from additional subscriptions during the nine-month period ended August 31, 2007. 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.

 

Our operating expenses increased at a higher rate than in prior periods during the nine-month period ended August 31, 2007. This is the result of numerous staff additions that were made during the third and fourth quarters of fiscal 2006, including the hiring of a Chief Operating Officer and a Chief Financial Officer.

 

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

 

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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 daily assets in the investment product for the most recent period.

 

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

 

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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.

 

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 August 31, 2006			Percentage change August 2006/2007			As of August 31, 2007
		(dollars in thousands)
Run Rate		$	245,961		9	%		$	268,743		17	%		$	314,996		$	313,114		19	%		$	371,931

 

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

 

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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 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:

 

		Fiscal Year Ended November 30,						Nine Months Ended August 31,
		2005			2006			2006			2007
Aggregate Retention Rate		89	%		91	%		93	%		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, and typically represent 50% to 60% of our total operating expenses. 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 56 employees as of August 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.

 

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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 office space 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.

 

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 August 31, 2007, our intangible assets totaled $181.5 million, net of accumulated amortization. For the nine months ended August 31, 2007, amortization expense related to intangibles amounted to $19.2 million and represented more than 10% of our total operating expenses of $179.1 million. We believe that this is a substantially higher percentage than for other companies in our industry. This difference is directly linked to the substantial intangible amortization expense arising from our acquisition of Barra.

 

Interest and Other Income, net

 

This category consists primarily of interest we collect on cash balances, including cash deposited with Morgan Stanley, less interest we pay on payables to related parties and on the demand note payable to Morgan Stanley. Average cash balances and the weighted average yield received are the two largest factors causing changes in interest income 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.

 

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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 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 nine months ended August 31, 2007, direct cost allocations related to these services were $29.2 million, $20.0 million, $23.1 million and $19.8 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,

 

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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 related overhead and out-of-pocket costs and expenses). 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. On the date of this prospectus, we intend to enter into a new $500.0 million credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Simultaneously with the completion of this offering, we intend to borrow $425.0 million (the full amount of the term loans) under the new credit facility and use the net proceeds from the borrowing to pay a portion of the $625.9 million demand note held by Morgan Stanley. The balance of the demand note will be paid with net proceeds from this offering and, to the extent necessary, our available cash. 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.

 

Founders Grants

 

On October 24, 2007, our Board of Directors approved a founders grant, subject to completion of this offering, to our employees and service providers in the form of restricted stock units and/or options. The expected aggregate value of this founders grant is approximately $68 million of restricted stock units and options, subject to a vesting period. The restricted stock units and options vest over a four-year period, with 50% vesting on the second anniversary of the grant date and 25% vesting on each of the third and fourth anniversary of the grant date. The options have an exercise price per share equal to the final offering price per share set forth on the cover page of this prospectus and have a term of ten years subject to earlier cancellation in certain circumstances. The aggregate value of the options will be calculated using the Black-Scholes valuation method, consistent with Statement of Financial Accounting Standards No. 123R. See “Management—Equity Grants.”

 

The anticipated pre-tax expense of such founders grant is approximately $1 million, $27 million, $26 million, $10 million and $4 million for the fiscal years ended November 30, 2007, 2008, 2009, 2010 and 2011, respectively.

 

Share Reclassification

 

On October 24, 2007, subject to completion of this offering, our Board of Directors approved the Amended and Restated Certificate of Incorporation, which included: (i) authority to issue 850,000,000 shares of stock, consisting of 500,000,000 shares of class A common stock, par value $0.01 per share, 250,000,000 shares of class B common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share; and (ii) a reclassification of each share of our outstanding common stock into 2,861.235208 shares of class B common stock. All per share computations included in the accompanying consolidated financial statements have been restated to reflect the reclassification.

 

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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

 

Revenue related to our non-software-related recurring arrangements is recognized pursuant to the requirements of Emerging Issues Task Force 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” Under EITF 00-21, transactions with multiple elements should be considered separate units of accounting if all of the following criteria are met:

 

•

The delivered item has stand-alone value to the client,

 

•

There is objective and reliable evidence of the fair value of the undelivered item(s), and

 

•

If the arrangement includes a general right of return, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor.

 

We have signed subscription agreements with all of our clients that set forth the fees paid to us by the clients. Further, we regularly assess the receivable balances for each client. Our subscription agreements for these products include provisions that, among other things, allow clients, for no additional fee, to receive updates and modifications that may be made from time to time, for the term of the agreement, typically one year. As we currently do not have objective and reliable evidence of the fair value of this element of the transaction, we do not account for the delivered item as a separate element. Accordingly, we recognize revenue ratably over the term of the license agreement.

 

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, (2) delivery has occurred, (3) client fee is deemed fixed or determinable, and (4) collection is probable.

 

We have signed subscription agreements with all of our clients that set forth the fees paid to us by the clients. Further, we regularly assess the receivable balances for each client. 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. As we do not have vendor specific objective evidence (“VSOE”) for these elements (except for the support related to energy and commodity asset valuation products), we do not account for these elements separately. Accordingly, except for revenues related to energy and commodity asset valuation products, we recognize revenue ratably over the term of the license agreement.

 

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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.

 

For our energy and commodity asset valuation analytics products, we use the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and VSOE of the fair value of all undelivered elements exists. In virtually all of our contracts, the only element that remains undelivered at the time of delivery of the product is support. The fair value of support is determined based upon what the fees for the support are for clients who purchase support separately. Under the residual method, the fair value of the undelivered element is deferred and the remaining portion of the contract fee is recognized as product revenue. Support fees for these products are recognized ratably over the support period.

 

We apply Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, in determining revenue recognition related to clients that use our indices as the basis for certain index-linked investment products such as exchange traded funds or futures contracts. These clients commonly pay us a fee based on the investment product’s assets under management or contract volumes. These fees are calculated based upon estimated assets in the investment product or contract volumes obtained either through independent third-party sources or the most recently reported information of the client.

 

We recognize revenue when all the following criteria are met:

 

•

The client has signed a contract with us,

 

•

The service has been rendered,

 

•

The amount of the fee is fixed and determinable based on the terms of the contract, and

 

•

Collectability is reasonably assured.

 

We have signed contracts with all clients that use our indices as the basis for certain index-linked investment products, such as exchange traded funds or futures contracts. The contracts state the terms under which these fees are to be calculated. These fees are billed in arrears, after the fees have been earned. The fees are earned as we supply the indices to the client. We assess the creditworthiness of these clients prior to entering into a contract and regularly review the receivable balances related to them.

 

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 nine months ended August 31, 2007 were approximately $39.7 million, $48.3 million, $55.4 million and $42.5 million, respectively.

 

Allowance for Doubtful Accounts

 

The allowance for doubtful accounts is recorded when it is probable and estimable that a receivable will not be collected. We identified an error in the estimates used in determining the allowance for doubtful accounts in our financial reporting that caused us to restate our financial statements for the fiscal years ended November 30,

 

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2002, 2003, 2004, 2005 and 2006. See note 20 to our audited consolidated financial statements for the years ended November 30, 2004, 2005 and 2006 included in this prospectus for information regarding the restatement. As evidenced by the error that led to the previously mentioned restatement, the estimates used in determining the allowance for doubtful accounts are extremely subjective. The allowance for doubtful accounts was approximately $1.1 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 (as restated)
Balance as of November 30, 2004		$	325
Addition to provision			753
Balance as of November 30, 2005			1,078
Addition to provision			654
Amounts written off			(144	)
Balance as of November 30, 2006		$	1,588

 

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 taxing jurisdictions. Our foreign income tax returns have been filed on a separate company basis. Our federal 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.

 

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 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

 

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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 August 31, 2007 was $27.5 million.

 

Results of Operations

 

Nine Months Ended August 31, 2007 Compared to Nine Months Ended August 31, 2006

 

Revenues

 

		For the Nine Months Ended August 31,
		2006			2007			Increase/(Decrease)
		(in thousands)
Equity indices		$	114,500		$	143,970		$	29,470		26	%
Equity portfolio analytics			82,384			89,023			6,639		8	%
Multi-asset class portfolio analytics			12,417			15,370			2,953		24	%
Other products			19,811			19,865			54		0	%
Total operating revenues		$	229,112		$	268,228		$	39,116		17	%

 

Revenues increased $39.1 million, or 17%, to $268.2 million for the nine months ended August 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. Price increases contributed very little to our revenue growth.

 

Revenues from equity indices increased $29.5 million, or 26%, to $144.0 million for the nine months ended August 31, 2007 compared to the same period in 2006. Approximately 56% of the increase was 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, and the balance to additional index subscriptions from existing and new clients. Growth of assets in ETFs linked to our equity indices drove the higher fees we received from assets of investment products. The majority of growth in assets under management was the result of increased investment flows into the ETFs.

 

Revenues from equity portfolio analytics increased $6.6 million, or 8%, to $89.0 million for the nine months ended August 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 (partly a result of licensing our proprietary equity risk data through a larger number of third-party software applications) as well as from higher Retention Rates for Barra Aegis (93% for the nine months ended August 31, 2007 compared to 92% for the nine months ended August 31, 2006).

 

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Revenues from multi-asset class portfolio analytics products increased $3.0 million, or 24%, to $15.4 million for the nine months ended August 31, 2007 compared to the same period in 2006. The increase primarily reflects additional subscriptions to BarraOne by asset owners and fund managers. The increase in BarraOne revenues was offset in part by a decline in revenues from TotalRisk due to our decision to stop licensing subscriptions to TotalRisk and gradually transition clients from TotalRisk to BarraOne.

 

Revenues from other products increased $0.1 million to $19.9 million for the nine months ended August 31, 2007 compared to the nine months ended August 31, 2006. The increase reflects additional subscriptions for our energy and commodity analytics products, offset partially by 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.

 

Expenses

 

		For the Nine Months Ended August 31,
		2006			2007			Increase/(Decrease)
		(in thousands)
Cost of services		$	77,112		$	92,033		$	14,921			19	%
Selling, general and administrative			57,044			67,884			10,840			19	%
Amortization of intangible assets			19,617			19,228			(389	)		(2	)%
Total operating expenses		$	153,773		$	179,145		$	25,372			16	%

 

Total operating expenses of $179.1 million for the nine months ended August 31, 2007 were $25.4 million, or 16%, higher compared to the same period in 2006. The largest contributor to the expense increase was growth in compensation and benefits of $17.1 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. Compensation and benefits expense represented 56% of total operating expenses for the nine months ended August 31, 2007 compared to 54% in the same period in 2006. Allocations of expenses from Morgan Stanley grew by $3.4 million during the nine months ended August 31, 2007, largely as a result of the increased headcount of our employees. Other contributors to the expense increase were information technology expenses, which grew by $1.7 million, and office space costs, which grew by $1.0 million, during the nine months ended August 31, 2007.

 

Cost of services

 

Cost of services increased $14.9 million, or 19%, to $92.0 million for the nine months ended August 31, 2007 compared to the same period in 2006. The majority of the increase, $10.4 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. Additional market data costs, including costs associated with introducing the GIMI methodology, rent increases from adding business continuity space in Hong Kong and London, as well as higher allocations of information technology and administrative expenses from Morgan Stanley, were the largest contributors to non-compensation expense growth. As a percentage of revenues, cost of services remained at 34%.

 

Selling, general and administrative

 

Selling, general and administrative expenses increased $10.8 million, or 19%, to $67.9 million for the nine-month period ended August 31, 2007 compared to the nine-month period ended August 31, 2006. Compensation and benefits expense was the significant contributor to the increase, rising $6.7 million, due to the hiring of additional employees in the second half of fiscal 2006. Expanding the sales organization and the hiring of a Chief Financial Officer were the main drivers of our increased personnel expenditures. In addition, the allocation of

 

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general and administrative expenses from Morgan Stanley increased by $1.2 million in the nine months ended August 31, 2007, and this increase was principally attributable to the increased headcount of our employees. Travel expenses increased with the growth of our sales organization. As a percentage of revenues, selling, general and administrative expenses remained at 25%.

 

Amortization of intangible assets

 

Amortization expense decreased $0.4 million, or 2%, to $19.2 million for the nine-month period ended August 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 decreased $0.2 million, or 2%, to $10.1 million for the nine-month period ended August 31, 2007 compared to the nine-month period ended August 31, 2006. The net decrease was a result of gross interest expense growing at a higher rate than gross interest income.

 

Gross interest expense increased by $1.6 million, or 553%, to $1.9 million for the nine-month period ended August 31, 2007. During this period we incurred interest expense on the demand note issued to Morgan Stanley as part of the $973.0 million dividend we paid to Morgan Stanley and Capital Group International on July 19, 2007. The dividend consisted 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. The demand note we issued to Morgan Stanley remained outstanding at August 31, 2007, with interest expense accruing at a rate equal to the open federal funds rate plus 35 basis points per annum. This rate was 5.725% on August 31, 2007.

 

Gross interest income increased by $1.3 million, or 12%, to $11.7 million for the nine-month period ended August 31, 2007. The growth in gross interest income reflected increased average cash balances, including cash deposited with Morgan Stanley, during the period prior to the payment of the $973.0 million dividend on July 19, 2007, and higher average yields on the deposited funds, compared to the yields earned on deposited funds during the first nine months of 2006.

 

As a percentage of revenues, interest and other income, net decreased from 5% to 4% for the nine-month periods ended August 31, 2006 and August 31, 2007, respectively.

 

Provision for income taxes

 

Our provision for income taxes increased $5.6 million, or 18%, to $36.3 million for the nine-month period ended August 31, 2007 compared to the same period in 2006. During the nine-month period ended August 31, 2007 the effective tax rate increased to 37% from 36% for the nine-month period ended August 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 nine-month period ended August 31, 2007 from $0.9 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.

 

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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 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. Price increases contributed very little to our revenue growth.

 

Revenues from equity indices increased $30.2 million, or 24%, to $156.8 million in fiscal 2006 compared to fiscal 2005. Approximately $21 million, or 70%, of the revenue increase was attributable to index subscriptions and the remainder to fees based on assets of investment products linked to MSCI indices. Growth of assets in ETFs linked to our equity indices drove the higher fees we received from assets of investment products. A majority of the growth in assets under management was the result of increased investment flows into the ETFs.

 

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			70,220			85,820			15,600			22	%
Amortization of intangible assets			28,031			26,156			(1,875	)		(7	)%
Total operating expenses		$	204,849		$	227,402		$	22,553			11	%

 

Total expenses of $227.4 million for the fiscal year ended November 30, 2006 were $22.6 million, or 11%, higher compared to fiscal 2005. Compensation and benefits continue to account for our largest expense increase,

 

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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 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 $15.6 million, or 22%, to $85.8 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. 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. The hiring also caused recruiting expenses to increase substantially compared to 2005. Higher occupancy costs were attributable to the expansion of office space and the establishment of business continuity sites in Hong Kong and London. As a percentage of revenues, selling, general and administrative expenses increased to 28% from 25%.

 

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 $1.1 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 $5.6 million, or 19%, to $36.1 million in fiscal 2006 compared to fiscal 2005. The effective tax rate decreased to 36% from 38% 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

 

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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.

 

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. Approximately $12.7 million, or 56%, of the revenue increase was attributable to increases in fees based on assets of investment products linked to MSCI indices, and the balance to additional index subscriptions from existing and new clients. Growth of assets in ETFs linked to our equity indices drove the higher fees we received from assets in investment products. The majority of growth in assets under management was the result of increased investment flows into the ETFs.

 

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			47,099			70,220			23,121		49	%
Amortization of intangible assets			14,910			28,031			13,121		88	%
Total operating expenses		$	148,441		$	204,849		$	56,408		38	%

 

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Total expenses of $204.8 million for the fiscal year ended November 30, 2005 were $56.4 million or 38% 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.

 

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 $23.1 million, or 49%, to $70.2 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 25% from 26%.

 

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 $20.7 million, or 214%, to $30.4 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 38% 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 August 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
		November 30,(1)			February 28,(1)			May 31,(1)			August 31,(1)			November 30,(1)			February 28,(1)			May 31,(1)			August 31,
								(as restated)			(in thousands)
Operating revenues		$	74,830		$	71,273		$	78,284		$	79,555		$	81,586		$	87,069		$	88,752		$	92,407
Cost of services			30,760			27,030			24,563			25,519			38,314			32,266			30,341			29,426
Selling, general and administrative			19,906			13,793			19,679			23,572			28,776			18,964			25,489			23,431
Amortization of intangible assets			7,006			6,539			6,539			6,539			6,539			6,266			6,265			6,697
Total operating expenses			57,672			47,362			50,781			55,630			73,629			57,496			62,095			59,554
Operating income			17,158			23,911			27,503			23,925			7,957			29,573			26,657			32,853
Interest and other income, net			4,541			2,794			3,238			4,282			5,859			4,994			5,048			66
Income before provision for income taxes, discontinued operations and cumulative effect of change in accounting principle			21,699			26,705			30,741			28,207			13,816			34,567			31,705			32,919
Provision for income taxes			8,455			9,594			11,043			10,132			5,328			12,925			11,854			11,540
Income from discontinued operations, net			238			44			431			410			7,188			—			—			—
Cumulative effect of change in accounting principle, net			313			—			—			—			—			—			—			—
Net income		$	13,795		$	17,155		$	20,129		$	18,485		$	15,676		$	21,642		$	19,851		$	21,379

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(1)

As restated. See discussion in note 20 to our audited consolidated financial statements for the years ended November 30, 2004, 2005 and 2006 and note 18 to our audited consolidated financial statements for the six month period ended May 31, 2007.

 

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.

 

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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. The demand note held by Morgan Stanley bears interest at a rate equal to the open federal funds rate plus 35 basis points, which was 5.725% on August 31, 2007, and matures on November 30, 2007.

 

On the date of this prospectus, we intend to enter into a new $500.0 million credit facility with Morgan Stanley Senior Funding, Inc. and Bank of America, N.A. as agents for a syndicate of lenders, which is contingent on the consummation of this offering and is expected to be comprised of a $200.0 million term loan A facility, a $225.0 million term loan B facility, which will be issued at a discount of 0.5% of the principal amount resulting in proceeds of approximately $223.88 million, and a $75.0 million revolving credit facility (under which there will be no drawings on the date of the closing of this offering). Outstanding borrowings under the credit facility will accrue interest at (i) the base rate plus a fixed margin of 1.50% in the case of the term loan A facility and the revolving facility and 2.00% in the case of the term loan B facility or (ii) LIBOR plus a fixed margin of 2.50% in the case of the term loan A facility and the revolving facility and 3.00% in the case of the term loan B facility, in each case subject to interest rate step downs based on the achievement of consolidated leverage ratio (as defined in the credit facility) conditions. The term loan A facility and the term loan B facility will mature on             , 2012 and             , 2014, respectively. Simultaneously with the completion of this offering, we intend to borrow $425.0 million (the full amount of the term loans) under the credit facility and use the proceeds to pay a portion of the $625.9 million demand note held by Morgan Stanley. The balance of the demand note will be paid with the net proceeds from this offering and, to the extent necessary, our available cash. Any proceeds remaining from this offering after paying the balance of the demand note will be used for general corporate purposes. The revolving credit facility is available for working capital requirements and other general corporate purposes (including the financing of permitted acquisitions), subject to certain conditions, and matures on             , 2012. We have engaged an affiliate of Morgan Stanley and Banc of America Securities LLC as joint lead arrangers for the credit facility.

 

The credit facility is guaranteed on a senior secured basis by each of our direct and indirect wholly-owned domestic subsidiaries and secured by a valid and perfected first priority lien and security interest in substantially all of the shares of capital stock of our present and future domestic subsidiaries and up to 65% of the shares of capital stock of our foreign subsidiaries, substantially all of our and our domestic subsidiaries’ present and future property and assets and the proceeds thereof. In addition, the credit facility contains restrictive covenants that limit our ability and our existing or future subsidiaries’ abilities, among other things, to:

 

•

incur liens;

 

•

incur additional indebtedness;

 

•

make or hold investments;

 

•

merge, dissolve, liquidate, consolidate with or into another person;

 

•

sell, transfer or dispose of assets;

 

•

pay dividends or other distributions in respect of our capital stock;

 

•

change the nature of our business;

 

•

enter into any transactions with affiliates other than on an arm’s length basis (except as described in “Arrangements Between Morgan Stanley and Us” and “Relationships and Related Transactions”); and

 

•

prepay, redeem or repurchase debt.

 

The credit facility also requires us and our subsidiaries to achieve specified financial and operating results and maintain compliance with the following financial ratios on a consolidated basis: (1) the maximum total

 

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leverage ratio (as defined in the credit facility) measured quarterly on a rolling four-quarter basis shall not exceed (a) 3.75:1.0 through November 30, 2009, (b) 3.50:1.0 from December 1, 2009 through November 30, 2010 and (c) 3.25:1.0 thereafter; and (2) the minimum interest coverage ratio (as defined in the credit facility) measured quarterly on a rolling four-quarter basis shall be (a) 3.00:1.0 through November 30, 2009, (b) 3.50:1.0 from December 1, 2009 through November 30, 2010 and (c) 4.00:1.0 thereafter.

 

In addition, our credit facility contains the following affirmative covenants, among others: periodic delivery of financial statements, budgets and officer’s certificates; payment of other obligations; compliance with laws and regulations; payment of taxes and other material obligations; maintenance of property and insurance; performance of material leases; right of the lenders to inspect property, books and records; notices of defaults and other material events; maintenance of books and records; and compliance with laws.

 

Cash flows

 

		As of and for the Fiscal Year Ended November 30,												As of and for the Nine Months Ended August 31,				As of and for the Nine Months Ended August 31,
		2004         (as restated)				2005         (as restated)				2006         (as restated)				2006				2007
		(in thousands)
Cash and cash equivalents		$	33,076			$	23,411			$	24,362			$	21,576			$	21,599
Cash deposited with related parties		$	98,873			$	252,882			$	330,231			$	290,185			$	51,799
Cash provided by operating activities		$	22,082			$	59,881			$	83,665			$	42,842			$	68,356
Cash provided by (used in) investing activities		$	135,126			$	(63,708	)		$	(79,764	)		$	(38,221	)		$	277,486
Cash used in financing activities		$	(131,478	)		$	—			$	(5,000	)		$	(5,000	)		$	(347,099	)

 

Cash and cash equivalents and cash deposited with related parties

 

Cash and cash equivalents were $23.4 million, $24.4 million and $21.6 million as of November 30, 2005 and 2006 and August 31, 2007, respectively. This constituted approximately 2% of total assets as of November 30, 2005 and 2006 and 3% of total assets as of August 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 $51.8 million as of November 30, 2005 and 2006 and August 31, 2007, respectively, representing approximately 24%, 30% and 7% of total assets, respectively. Our cash, including cash equivalents and cash deposited with related parties, decreased in the nine months ended August 31, 2007. This was primarily a result of cash used in financing activities, representing the payment of a cash dividend of $325.0 million and the payment in cash of the $22.1 million demand note held by Capital Group International on July 19, 2007. 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 nine months ended August 31, 2007, our operating cash flow reflected net income generated during the period of $62.9 million, adjusted for non-cash items such as amortization of intangible assets of $19.2 million and depreciation of $1.5 million. During the nine months ended August 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 $52.3 million in settlement of payables to related parties.

 

 

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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 nine-month period ended August 31, 2006 caused us to use $58.2 million of cash during the nine-month period ended August 31, 2006 in settlement of related party balances.

 

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 nine months ended August 31, 2007, the amount of cash deposited with Morgan Stanley decreased by $278.4 million as a result of the payment of the $325.0 million cash dividend and $22.1 million demand note held by Capital Group International from cash deposits, partially offset by $68.7 million of cash flows from operations deposited with related parties. Capital expenditures totaled $0.9 million in the nine months ended August 31, 2007, 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.

 

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 nine months ended August 31, 2006 amounted to $5.0 million. During the nine months ended August 31, 2007, the net cash used in financing activities was $347.1 million, representing the payment of a dividend of 973.0 million, less the demand note payable to Morgan Stanley of $625.9 million. 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 August 31, 2007		Total			Fiscal Year
					2007			2008			2009			2010			2011			Thereafter
Operating leases		$	29,968		$	1,394		$	4,978		$	4,745		$	3,686		$	3,743		$	11,422
Vendor obligations			3,213			1,565			1,427			221			—			—			—
Total contractual obligations		$	33,181		$	2,959		$	6,405		$	4,966		$	3,686		$	3,743		$	11,422

 

Off-Balance Sheet Arrangements

 

At August 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.

 

 

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Recent Accounting Pronouncements

 

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for us as of December 1, 2007. We are currently evaluating the potential impact of adopting FIN 48.

 

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.

 

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) (“SFAS No. 158”). SFAS 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. SFAS No. 158 also requires the measurement of defined benefit and post-retirement plan assets and obligations at the end of the fiscal year. Our employees currently participate in Morgan Stanley’s pension and other post-retirement plans and SFAS No. 158 is effective for Morgan Stanley as of November 30, 2007. Based on information currently available, Morgan Stanley expects to record an after-tax charge of approximately $200 million to shareholders’ equity as of November 30, 2007 upon the adoption of SFAS No. 158. Morgan Stanley expects to adopt a fiscal year-end measurement date for its fiscal year ending November 30, 2008. However, as these plans are not separately identifiable for us, the adoption of SFAS No. 158 by Morgan Stanley would not impact our 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 an 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”). 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.

 

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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 nine months ended August 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 euros, pounds sterling, Japanese yen and a limited number of other non-U.S. dollar currencies. Approximately 15% of our revenues for the nine months ended August 31, 2007 are denominated in foreign currencies, of which the majority are in euros, pounds sterling and Japanese yen.

 

We are exposed to additional foreign currency risk in certain of our operating costs. Although our expenses are generally in U.S. dollars, some of our expenses are incurred in non-U.S. dollar denominated currencies. Approximately $36.2 million, or 20%, of our expenses for the nine months ended August 31, 2007 were denominated in foreign currencies, the significant majority of which were denominated in Swiss francs, pounds sterling, Hong Kong dollars and Japanese yen. Expenses paid in foreign currency may increase as we expand our business outside the U.S. and replace services provided by Morgan Stanley internationally for which we currently pay Morgan Stanley in U.S. dollars.

 

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 $21.6 million at November 30, 2005, November 30, 2006 and August 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 August 31, 2007, amounts held with our parent company were $252.9 million, $330.2 million and $51.8 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. On the date of this prospectus, we intend to enter into a new $500.0 million credit facility. See “Management’s Discussion and Analysis of Financial

 

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Condition and Results of Operations—Liquidity and Capital Resources.” Simultaneously with the completion of this offering, we intend to borrow $425.0 million (the full amount of the term loans) under the new credit facility and use the net proceeds from the borrowing to pay a portion of 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. Any borrowings under our credit facility will accrue interest at a variable rate equal to (i) the base rate plus a fixed margin of 1.50% in the case of the term loan A facility and the revolving facility and 2.00% in the case of the term loan B facility or (ii) LIBOR plus a fixed margin of 2.50% in the case of the term loan A facility and the revolving facility and 3.00% in the case of the term loan B facility, in each case subject to interest rate step downs based on the achievement of consolidated leverage ratio (as defined in the credit facility) conditions. 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, analyzing and forecasting 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 8,033 as of August 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 decade, particularly in the past two years, ETFs have become an increasingly popular method of investing, as

 

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reflected by both the growth in the number of ETFs and the assets invested in ETFs. According to ICI, there were a total of 546 ETFs within the U.S. as of August 2007, which represents cumulative growth of 261% since the end of 2004. Coupled with this fund count growth, ICI reports that ETF assets in the U.S. have grown to $507.1 billion as of August 2007. This represents a cumulative increase of 124% from year-end 2004 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 Fimalac S.A.) 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 2,900 clients across 63 countries. Our clients include the 25 largest firms managing assets globally, measured by assets under management as published in October 2007 by Nelson MarketPlace, a leading provider of information to the global investment community. We have 19 offices in 15 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 100,000 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 August 31, 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 800 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 17% and 18%, respectively, in the nine months ended August 31, 2007 compared to the nine months ended August 31, 2006, and by 12% and 13%, 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 $15 billion of assets, we are serving less than 60% with our equity index offerings, and less than 40% with our equity analytics products, based on an analysis of October 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 August 31,     2007
		2004		2005		2006
Regions
Americas		44		58		61		90
EMEA		19		30		39		52
Asia		4		4		7		19
Total		67		92		107		161

 

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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