Prudential 2006 Annual Report Download - page 149

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
14. EARNINGS PER SHARE (continued)
The Company’s convertible senior notes provide for the Company to issue shares of its Common Stock as a component of the
conversion of the notes. The notes will be dilutive to earnings per share if the average market price of the Common Stock for a
particular period is above $90.00 for the November 2005 issuance or above $104.21 for the December 2006 issuance. See Note 12
for additional information regarding the convertible senior notes.
For the years ended December 31, 2006, 2005 and 2004, 2.1 million, 1.8 million and 4.5 million options, respectively,
weighted for the portion of the period they were outstanding, with a weighted average exercise price of $76.11, $56.02 and $44.94
per share, respectively, were excluded from the computation of diluted earnings per share because the options, based on application
of the treasury stock method, were antidilutive.
Class B Stock
Net income per share of Class B Stock was $108.00, $119.50 and $249.00 for the years ended December 31, 2006, 2005 and
2004, respectively.
The net income attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment
for the years ended December 31, 2006, 2005 and 2004 amounted to $216 million, $239 million, and $498 million, respectively.
The direct equity adjustment resulted in a decrease in the net income attributable to the Closed Block Business applicable to holders
of Class B Stock for earnings per share purposes of $68 million, $82 million and $84 million for the years ended December 31,
2006, 2005 and 2004, respectively. For the years ended December 31, 2006, 2005 and 2004, the weighted average number of shares
of Class B Stock used in the calculation of basic earnings per share amounted to two million. There are no potentially dilutive
shares associated with the Class B Stock.
15. SHARE-BASED PAYMENTS
In March 2003, the Company’s Board of Directors adopted the Prudential Financial, Inc. Omnibus Incentive Plan (as amended
and restated effective October 10, 2006, the “Omnibus Plan”). Upon adoption of the Omnibus Plan, the Prudential Financial, Inc.
Stock Option Plan previously adopted by the Company on January 9, 2001 (the “Option Plan”) was merged into the Omnibus Plan.
The Omnibus Plan was amended and restated effective October 10, 2006. The nature of stock based awards provided under the
Omnibus Plan are stock options, stock appreciation rights, restricted stock shares, restricted stock units, and equity-based
performance awards (“performance shares”). Dividend equivalents are provided on restricted stock shares, restricted stock units and
performance shares. Generally, the requisite service period is the vesting period.
As of December 31, 2006, 46,671,299 authorized shares remain available for grant under the Omnibus Plan including
previously authorized but unissued shares under the Option Plan.
Compensation Costs
Compensation cost for employee stock options is based on the fair values estimated on the grant date, while compensation cost
for non-employee stock options is re-estimated at each period-end through the vesting date, using the approach and assumptions
described below. Compensation cost for restricted stock shares, restricted stock units and performance shares granted to employees
is measured by the share price of the underlying Common Stock at the date of grant. Compensation cost for restricted stock shares
and restricted stock units granted to non-employees is measured by the share price as of the balance sheet date for unvested shares
and the share price at the vesting date for vested shares.
The fair value of each stock option award is estimated on the date of grant for stock options issued to employees and the
balance sheet date or vesting date for stock options issued to non-employees. The weighted average assumptions used in a binomial
option valuation model are as follows:
2006 2005 2004
Expected volatility ................................................................. 20.65% 23.77% 25.84%
Expected dividend yield ............................................................. 1.20% 1.20% 1.20%
Expected term ..................................................................... 5.14 years 5.19 years 5.5 years
Risk-free interest rate ............................................................... 4.58 % 3.74% 3.42%
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
147