Morgan Stanley 2009 Annual Report Download - page 197

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock Purchase Contracts.
Each stock purchase contract requires the holder to purchase, and the Company to sell, on the stock purchase date
a number of newly issued or treasury shares of the Company’s common stock, par value $0.01 per share, equal to
the settlement rate.
On October 13, 2008, the Company sold to MUFG certain preferred stock for an aggregate purchase price of $9
billion (see below for further discussion). As a result of this transaction, and as contractually required by the
terms of the securities purchase agreement for the sale of Equity Units to CIC, the threshold appreciation price of
$57.6840 was reduced to the reference price of $48.07. As a result, the Company will issue 116,062,911 shares
of common stock (subject to adjustment for certain anti-dilution provisions and participation in certain dividends
as described below) upon settlement of the stock purchase contracts on August 17, 2010.
The initial quarterly distributions on the Series A, Series B and Series C trust preferred securities of 6%, combined with
the contract adjustment payments on the stock purchase contracts of 3%, result in a 9% yield on the Equity Units. If the
Company defers any of the contract adjustment payments on the stock purchase contracts, then it will accrue additional
amounts on the deferred amounts at the annual rate of 9% until paid, to the extent permitted by law.
The present value of the future contract adjustment payments due under the stock purchase contracts was
approximately $400 million and was recorded in Other liabilities and accrued expenses with a corresponding
decrease recorded in Paid-in capital, a component of Morgan Stanley shareholders’ equity in the Company’s
consolidated statement of financial condition in the first quarter of fiscal 2008. The other liability balance related
to the stock purchase contracts accretes over the term of the stock purchase contract using the effective yield
method with a corresponding charge to Interest expense. When the contract adjustment payments are made under
the stock purchase contracts, they will reduce the other liability balance.
Earnings per Share.
Prior to October 13, 2008, the impact of the Equity Units was reflected in the Company’s earnings per diluted
common share using the treasury stock method. Under the treasury stock method, the number of shares of
common stock included in the calculation of earnings per diluted common share was calculated as the excess, if
any, of the number of shares expected to be issued upon settlement of the stock purchase contract based on the
average market price for the last 20 days of the reporting period, less the number of shares that could be
purchased by the Company with the proceeds to be received upon settlement of the contract at the average
closing price for the reporting period.
Dilution of net income per share occurred (i) in reporting periods when the average closing price of common
shares was over $57.6840 per share or (ii) in reporting periods when the average closing price of common shares
for a reporting period was between $48.0700 and $57.6840 and was greater than the average market price for the
last 20 days ending three days prior to the end of such reporting period.
Effective October 13, 2008, as a result of the adjustment to the Equity Units as described above, the Equity Units
are deemed to be “participating securities” in that the Equity Units have the ability to participate in any dividends
the Company declares on common shares above $0.27 per share during any quarterly reporting period via an
increase in the number of common shares to be delivered upon settlement of the stock purchase contracts. The
Equity Units are reflected, prospectively from October 13, 2008, in the Company’s earnings per share calculation
using the two-class method. During 2009, the one month ended December 31, 2008 and fiscal 2008, no dividends
above $0.27 per share were declared during any quarterly reporting period.
The Equity Units do not share in any losses of the Company for purposes of calculating EPS. Therefore, if the
Company incurs a loss in any reporting period, losses will not be allocated to the Equity Units in the EPS
calculation.
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