Why did Morgan Stanley restate its fiscal 2003 interim financial statements?

Morgan Stanley restated its fiscal 2003 interim financial statements due to a change in the timing of recognition of expense related to equity-based compensation awards. This adjustment was made in connection with the company's adoption of SFAS No. 123, 'Accounting for Stock-Based Compensation,' and followed discussions with the SEC staff.

What was the financial impact of the restatement on the first half of fiscal 2003?

The restatement resulted in a reduction of compensation and benefits expense by $162 million for the three months ended May 31, 2003, and by $347 million for the six months ended May 31, 2003. This led to an increase in net income of $109 million (or $0.10 per diluted share) for the quarter and $234 million (or $0.21 per diluted share) for the six-month period.

How did Morgan Stanley perform in the quarter ended May 31, 2004, compared to the same period last year?

The company reported a significant improvement, with net income increasing by 73% to $1,223 million and diluted earnings per share rising by 69% to $1.10. This growth was driven by strong performance across its business segments, particularly Institutional Securities, and a 32% increase in consolidated net revenues.

What is the significance of the $109 million impairment charge?

The $109 million pre-tax asset impairment charge was related to the company's aircraft financing business. While it reduced net income and diluted EPS, it was lower than the $287 million charge taken in the prior year's comparable quarter.

What are the key risks Morgan Stanley foresees for the remainder of fiscal 2004?

The company anticipates mixed business and market trends, citing concerns about the pace of global economic growth, increasing inflationary pressures, high oil prices, and geopolitical risks. These factors could negatively impact its Institutional Securities, Individual Investor Group, and Investment Management segments. Additionally, the Credit Services business will focus on loan balance growth and credit quality, with typically higher marketing expenses in the latter half of the year.

MORGAN STANLEY 10-Q Quarterly Report Q2 FY2004

Summary

Morgan Stanley's (MS) amended Q1 2004 10-Q filing reveals a restatement of its first three quarters of fiscal 2003 financial statements due to changes in accounting for equity-based compensation expenses. The restatement, driven by discussions with the SEC staff regarding the adoption of SFAS No. 123, resulted in a reduction of compensation and benefits expense and an increase in net income for the periods affected in fiscal 2003. For the current quarter (ended May 31, 2004), Morgan Stanley reported a significant year-over-year increase in net income and diluted EPS, driven by strong performance across its business segments, particularly Institutional Securities. The company also noted a $109 million pre-tax asset impairment charge related to its aircraft financing business. Looking ahead, Morgan Stanley anticipates mixed business and market trends, with potential impacts from global economic growth concerns, inflation, and geopolitical risks.

Key Highlights

1Restatement of Fiscal 2003 Interim Financial Statements: The company restated its financial statements for the first three quarters of fiscal 2003 to adjust the timing of recognition for equity-based compensation expense, following discussions with the SEC staff regarding the adoption of SFAS No. 123.
2Improved Profitability in Q1 2004: Morgan Stanley reported a 73% increase in net income and a 69% increase in diluted EPS for the quarter ended May 31, 2004, compared to the prior year period.
3Strong Performance in Institutional Securities: The Institutional Securities segment saw a significant 116% increase in income before taxes, driven by strong revenues in investment banking and sales and trading, particularly in fixed income.
4Asset Impairment Charge: The company recorded a $109 million pre-tax asset impairment charge related to its aircraft financing business during the quarter.
5Increased Total Revenues: Consolidated net revenues rose 32% year-over-year to $6.7 billion for the quarter, supported by growth across most business segments.
6Acquisition of Barra, Inc.: Morgan Stanley completed the acquisition of Barra, Inc. for approximately $800 million on June 3, 2004, to enhance its risk management systems and services.
7Deterioration in Credit Services Net Revenue: Despite a lower provision for loan losses, net revenues in the Credit Services segment saw a 1% decrease year-over-year due to lower net interest income and non-interest revenues.

MORGAN STANLEY Quarterly Report (Amendment) for Q2 Ended May 31, 2004

Summary

Key Highlights

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