Prudential 2002 Annual Report Download - page 129
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Please find page 129 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
16. STOCK-BASED COMPENSATION (continued)
Employee Stock Option Grants
During 2002 and 2001, the Company accounted for employee stock options using the intrinsic value method
of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. Under this method, the Company did not recognize any stock-based compensation expense for
employee stock options as all options granted had an exercise price equal to the market value of the underlying
Common Stock on the date of grant. Effective January 1, 2003, the Company changed its accounting for
employee stock options to adopt the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-
Based Compensation,” as amended, prospectively for all new awards granted to employees on or after January 1,
2003. Generally, awards under the Plan vest over three years. The expense related to employee stock options to be
included in the determination of net income for 2003 will be less than that which would have been recognized if
the fair value method had been applied to all awards since the inception of the Plan. If the Company had
accounted for all employee stock options under the fair value based accounting method of SFAS No. 123 for the
year ended December 31, 2002 and the period December 18, 2001 through December 31, 2001, net income and
earnings per share would have been as follows:
Year ended
December 31, 2002
December 18, 2001
through
December 31, 2001
Financial
Services
Businesses
Closed
Block
Business
Financial
Services
Businesses
Closed
Block
Business
(in millions, except per share amounts)
Net income (loss)
As reported ................................................ $679 $ (485) $ 38 $ 3
Pro forma compensation expense determined under fair value method,
netoftax ................................................ 30 — 1 —
Proforma.................................................. $649 $ (485) $ 37 $ 3
Basic and diluted net income (loss) per share
As reported ................................................ $1.25 $(264.00) $0.07 $1.50
Pro forma compensation expense determined under fair value method,
netoftax ................................................ 0.05 — 0.01 —
Proforma.................................................. $1.20 $(264.00) $0.06 $1.50
Grants of stock options since the demutualization include the one-time Associates Grant in December 2001
and the Executive Grants during 2002. The Executive Grants replace a portion of long-term cash compensation,
which cash compensation would have been expensed. The above table reflects the pro forma effect of the fair
value based accounting method considering both the Associates Grant and the Executive Grants. The pro forma
effect of the Executive Grants, without considering the Associates Grant, would have been to reduce net income
by $12 million for the year ended December 31, 2002, with a corresponding reduction of $0.02 to basic and
diluted net income per share of Common Stock for the year ended December 31, 2002.
The fair value of each option was estimated on the date of grant using a Black-Scholes option-pricing model
with the following weighted average assumptions:
2002 2001
Dividend yield ........................................................................... 1.05% 1%
Expected volatility ........................................................................ 33.33% 37%
Risk-free interest rate ...................................................................... 3.98% 4.05%
Expected life of stock option ................................................................ 6years 4 years
The dividend yield reflects the assumption that the current dividend payout will continue with no anticipated
increases.
Growing and Protecting Your Wealth128