Prudential 2007 Annual Report Download - page 37

for which $92 million of the fees are offset in incentive compensation expense in accordance with the terms of the contractual agreements.
Certain of these incentive fees are subject to positive or negative future adjustment based on cumulative fund performance in relation to
specified benchmarks. The increase also reflects $68 million greater revenues from proprietary investing mainly due to appreciation and
gains on sale of real estate related investments, including income of $12 million relating to a single investment in the current period and
$58 million relating to two sale transactions in the prior year. Asset management fees increased $88 million mainly from institutional and
retail customer assets as a result of increased asset values due to market appreciation and net asset flows.
Expenses
2007 to 2006 Annual Comparison. Expenses, as shown in the table above under “—Operating Results,” increased $170 million,
from $1.457 billion in 2006 to $1.627 billion in 2007. The increase is primarily driven by higher expenses associated with certain real
estate funds, as discussed above.
2006 to 2005 Annual Comparison. Expenses increased $225 million, from $1.232 billion in 2005 to $1.457 billion in 2006. The
increase in expenses was primarily due to higher performance-based compensation costs resulting from favorable performance in 2006,
higher expenses related to proprietary investing activities and incentive compensation related to performance based incentive fees, as
discussed above.
Financial Advisory
Operating Results
The following table sets forth the Financial Advisory segment’s operating results for the periods indicated.
Year ended December 31,
2007 2006 2005
(in millions)
Operating results:
Revenues ........................................................................................ $373 $314 $199
Expenses ........................................................................................ 76 287 454
Adjusted operating income .......................................................................... 297 27 (255)
Equity in earnings of operating joint ventures(1) ..................................................... (370) (294) (192)
Income (loss) from continuing operations before income taxes and equity in earnings of operating joint ventures ...... $ (73) $(267) $(447)
(1) Equity in earnings of operating joint ventures are included in adjusted operating income but excluded from income from continuing operations before
income taxes and equity in earnings of operating joint ventures, as they are reflected on a U.S. GAAP basis on an after-tax basis as a separate line on
our Consolidated Statements of Operations.
On July 1, 2003, we combined our retail securities brokerage and clearing operations with those of Wachovia Corporation, or
Wachovia, and formed Wachovia Securities Financial Holdings, LLC, or Wachovia Securities, a joint venture now headquartered in St.
Louis, Missouri. As of December 31, 2007, we had a 38% ownership interest in the joint venture, with Wachovia owning the remaining
62%. As part of the transaction, we retained certain assets and liabilities related to the contributed businesses, including liabilities for
certain litigation and regulatory matters. We account for our ownership of the joint venture under the equity method of accounting.
On October 1, 2007, Wachovia completed the acquisition of A.G. Edwards, Inc., or A.G. Edwards, for $6.8 billion and on January 1,
2008 combined the retail securities brokerage business of A.G. Edwards with Wachovia Securities. As discussed in Note 6 to the
Consolidated Financial Statements, we have elected the “lookback” option under the terms of the agreements relating to the joint venture in
connection with the combination of the A.G. Edwards business with Wachovia Securities. The “lookback” option permits us to delay for
approximately two years following the combination of the A.G. Edwards business with Wachovia Securities our decision to make or not to
make payments to avoid or limit dilution of our ownership interest in the joint venture. During this “lookback” period, our share in the
earnings of the joint venture, as well as our share of the one-time costs associated with the combination, will be based on our diluted
ownership level, which is in the process of being determined. Any payment at the end of the “lookback” period to restore all or part of our
ownership interest in the joint venture would be based on the appraised or agreed value of the existing joint venture and the A.G. Edwards
business. In such event, we would also need to make a true-up payment of one-time costs associated with the combination to reflect the
incremental increase in our ownership interest in the joint venture. Alternatively, we may at the end of the “lookback” period “put” our
joint venture interests to Wachovia based on the appraised value of the joint venture, excluding the A.G. Edwards business, as of the date
of the combination of the A.G. Edwards business with Wachovia Securities.
We also retain our separate right to “put” our joint venture interests to Wachovia at any time after July 1, 2008 based on the appraised
value of the joint venture, including the A.G. Edwards business, determined as if it were a public company and including a control
premium such as would apply in the case of a sale of 100% of its common equity. However, if in connection with the “lookback” option we
elect at the end of the “lookback” period to make payments to avoid or limit dilution, we may not exercise this “put” option prior to the first
anniversary of the end of the “lookback” period.
Prudential Financial 2007 Annual Report 35