Morgan Stanley 2010 Annual Report Download - page 218

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The trust common securities, which were held by the Company, represented an interest in the Trusts and were
recorded as an equity method investment in the Company’s consolidated statement of financial condition. The
Trusts were VIEs in accordance with current accounting guidance, and the Company did not consolidate its
interests in the Trusts as it was not the primary beneficiary of any of the Trusts.
As a result of the transaction with Mitsubishi UFJ Financial Group, Inc. (“MUFG”) described under “Preferred
Stock—Series B and Series C Preferred Stock” below, upon settlement of the Equity Units, CIC would be
entitled to receive 116,062,911 shares of the Company’s common stock, subject to anti-dilution adjustments. In
June 2009, to maintain its pro rata share in the Company’s share capital, CIC participated in the Company’s
registered public offering of 85,890,277 shares by purchasing 45,290,576 shares of the Company’s common
stock.
Redemption of CIC Equity Units and Issuance of Common Stock. On July 1, 2010, Moody’s announced that
it was lowering the equity credit assigned to such Equity Units. The terms of the Equity Units permitted
the Company to redeem the junior subordinated debentures underlying the Equity Units upon the occurrence and
continuation of a Rating Agency Event. In response to this Rating Agency Event, the Company redeemed the
junior subordinated debentures in August 2010, and the redemption proceeds were subsequently used by the CIC
Entity to settle its obligation under the stock purchase contracts. The settlement of the stock purchase contracts
and delivery of 116,062,911 shares of Company common stock to the CIC Entity occurred in August 2010.
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) and prior to the
quarter ended June 30, 2010, the Company included the Equity Units in the diluted EPS calculation using the
more dilutive of the two-class method or the treasury stock method. The Equity Units participated in
substantially all of the earnings of the Company (i.e., any earnings above $0.27 per quarter) in basic EPS
(assuming a full distribution of earnings of the Company), and therefore, the Equity Units generally would not
have been included as incremental shares in the diluted calculation under the treasury stock method. During
2010, 2009, fiscal 2008, and the one month ended December 31, 2008, no dividends above $0.27 per share were
declared during any quarterly reporting period.
Beginning in the quarter ended June 30, 2010, and prior to the redemption of the junior subordinated debentures
underlying the Equity Units and issuance of common stock, the Company included the Equity Units in the
diluted EPS calculation using the more dilutive of the two-class method or the if-converted method. See Note 2
for further discussion of the two-class method and Note 16 for the dilutive impact for 2010, 2009, fiscal 2008 and
the one month ended December 31, 2008.
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