Eli Lilly 2008 Annual Report Download - page 53

Download and view the complete annual report

Please find page 53 of the 2008 Eli Lilly 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.

Page out of 132

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132

FINANCIALS
51
year period. The number of shares actually issued varies depending on our stock price at the end of the three-year
vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the
grant date using a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input vari-
ables that determine the probability of satisfying the market condition stipulated in the award grant and calculates
the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded
options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based
on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the
U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted
during 2008 and 2007 were $43.46 and $49.85, respectively, determined using the following assumptions:
2008 2007
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00% 2.75%
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05%–2.29% 4.81%–5.16%
Range of volatilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.48%–21.48% 22.54%–23.90%
A summary of the SVA activity is presented below:
Units Attributable to SVAs
(in thousands)
Outstanding at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Forfeited or expired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47)
Outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 922
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,282
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Forfeited or expired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (301)
Outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,903
The maximum number of shares that could ultimately be issued upon vesting of the SVA units outstanding at
December 31, 2008, is 2.7 million. As of December 31, 2008, the total remaining unrecognized compensation cost
related to nonvested SVAs amounted to $46.7 million, which will be amortized over the weighted-average remain-
ing requisite service period of 21.6 months.
Stock Option Program
Stock options were granted in 2006 to offi cers and management at exercise prices equal to the fair market value of
our stock price at the date of grant. No stock options were granted in 2008 or 2007. Options fully vest three years
from the grant date and have a term of 10 years. We utilized a lattice-based option valuation model for estimating
the fair value of the stock options. The lattice model allows the use of a range of assumptions related to volatility,
risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the lattice model are based
on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors.
Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-
free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The model incorpo
rates
exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The expected life of the
2006 grants is derived from the output of the lattice model. The weighted-average fair values of the individual
options granted during 2006 were $15.61, determined using the following assumptions:
2006
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
Weighted-average volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.0%
Range of volatilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.8%–27.0%
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6%–4.8%
Weighted-average expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 years