Kraft 2009 Annual Report Download - page 84

93,740,465 shares available to be granted under the 2005 Plan and 372,097 shares available to be granted under the 2006 Directors Plan.
Restricted or deferred shares available for grant under the 2005 Plan at December 31, 2009, were 27,984,072.
In 2008, we changed our annual and long-term incentive compensation programs to further align them with shareholder returns. Under the annual
equity program, we now grant equity in the form of both restricted or deferred stock and stock options. The restricted or deferred stock continues
to vest 100% after three years, and the stock options vest in three annual installments beginning on the first anniversary of the grant date.
Additionally, we changed our long-term incentive plan from a cash-based program to a share-based program. These shares vest based on varying
performance, market and service conditions.
All stock awards are issued to employees from treasury stock. We have no specific policy to repurchase Common Stock to mitigate the dilutive
impact of options; however, we have historically made adequate discretionary purchases, based on cash availability, market trends and other
factors, to satisfy stock option exercise activity.
Stock Options:
Stock options are granted at an exercise price equal to the market value of the underlying stock on the grant date, generally become exercisable
in three annual installments beginning on the first anniversary of the grant date and have a maximum term of ten years. Prior to 2008, we had not
granted stock options through a broad-based program since 2002.
We account for our employee stock options under the fair value method of accounting using a modified Black-Scholes methodology to measure
stock option expense at the date of grant. The fair value of the stock options at the date of grant is amortized to expense over the vesting period.
We recorded compensation expense related to stock options of $31 million in 2009 and $18 million in 2008. The deferred tax benefit recorded
related to this compensation expense was $11 million in 2009 and $6 million in 2008. The unamortized compensation expense related to our stock
options was $48 million at December 31, 2009 and is expected to be recognized over a weighted-average period of two years. Our
weighted-average Black-Scholes fair value assumptions were as follows:
Risk-Free
Interest Rate Expected Life
Expected
Volatility
Expected
Dividend Yield
Fair Value
at Grant Date
2009
2.46% 6 years 21.36% 4.90% $ 2.68
2008 3.08% 6 years 21.04% 3.66% $ 4.49
The risk-free interest rate represents the rate on zero-coupon U.S. government issues with a remaining term equal to the expected life of the
options. The expected life is the period over which our employees are expected to hold their options. It is based on the simplified method from the
SEC’s safe harbor guidelines. Volatility reflects historical movements in our stock price for a period commensurate with the expected life of the
options. Dividend yield is estimated over the expected life of the options based on our stated dividend policy.
Stock option activity for the year ended December 31, 2009 was:
Shares Subject
to Option
Weighted-
Average
Exercise Price
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Balance at January 1, 2009 38,485,559 $ 24.74
Options granted 16,310,380 23.64
Options exercised (5,891,471) 14.08
Options cancelled (2,176,771) 27.76
Balance at December 31, 2009 46,727,697 25.56 6 years $ 149 million
Exercisable at December 31, 2009 22,848,549 25.41 2 years $ 91 million
In February 2009, as part of our annual equity program, we granted 16.3 million stock options to eligible employees at an exercise price of $23.64.
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Source: KRAFT FOODS INC, 10-K, February 25, 2010 Powered by Morningstar® Document Research℠