Prudential 2003 Annual Report Download - page 145

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
14. 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
APB No. 25, 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, as amended,
prospectively for all new awards granted to employees on or after January 1, 2003. Generally, awards previously issued
under the Option Plan vest over three years. If the Company had accounted for all 2001 and 2002 employee stock
option grants under the fair value based accounting method of SFAS No. 123 for the years ended December 31, 2003
and 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, 2003
Year ended
December 31, 2002
December 18, 2001 through
December 31, 2001
Financial
Services
Businesses
Closed
Block
Business
Financial
Services
Businesses
Closed
Block
Business
Financial
Services
Businesses
Closed
Block
Business
(in millions, except per share amounts)
Net income (loss), as reported ........... $1,025 $ 239 $ 679 $ (485) $ 38 $ 3
Add: Total employee stock option
compensation expense included in
reported net income, net of tax ........ 10 — — — — —
Deduct: Total employee stock option
compensation expense determined under
the fair value based method for all
awards, net of tax .................. 45 1 30 — 1 —
Pro forma net income (loss) ............ $ 990 $ 238 $649 $ (485) $ 37 $ 3
Earnings per share:
Basic—as reported ............... 1.99 89.50 1.25 (264.00) .07 1.50
Basic—pro forma ................ 1.93 89.50 1.20 (264.00) .06 1.50
Diluted—as reported .............. 1.98 89.50 1.25 (264.00) .07 1.50
Diluted—pro forma ............... 1.91 89.50 1.20 (264.00) .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 and 2003. The Executive Grants replace a portion of long-term cash compensation,
which would have been expensed. The table above reflects the pro forma effect of the fair value based accounting
method considering both the 2001 Associates Grant and the 2002 Executive Grants. The pro forma effect of the 2002
Executive Grants, without considering the Associates Grant, would have been to reduce net income by $24 million and
$12 million for the years ended December 31, 2003 and 2002, respectively, with a corresponding reduction of $0.04
and $0.02 to basic and diluted net income per share of Common Stock for the years ended December 31, 2003 and
2002, respectively.
Prudential Financial 2003 Annual Report 143