UPS 2009 Annual Report Download - page 104

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Nonqualified Stock Options
We maintain fixed stock option plans, under which options are granted to purchase shares of UPS class A
common stock. Stock options granted in connection with the Incentive Compensation Plan must have an exercise
price at least equal to the NYSE closing price of UPS class B common stock on the date the option is granted.
Persons earning the right to receive stock options are determined each year by the Compensation
Committee. Except in the case of death, disability, or retirement, options granted under the Incentive
Compensation Plan prior to 2008 are generally exercisable three to five years from the date of grant and before
the expiration of the option 10 years after the date of grant. Beginning in 2008, option awards have been made to
a more limited group of employees, and options granted will generally vest over a five year period with
approximately 20% of the award vesting at each anniversary date of the grant. All options granted are subject to
earlier cancellation or exercise under certain conditions. Option holders may exercise their options via the tender
of cash or class A common stock, and new class A shares are issued upon exercise. Options granted to eligible
employees will generally be granted annually during the second quarter of each year at the discretion of the
Compensation Committee.
The following is an analysis of options to purchase shares of class A common stock issued and outstanding:
Shares
(in thousands)
Weighted
Average
Exercise
Price
Weighted Average Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value (in millions)
Outstanding at January 1, 2009 ........ 18,297 $66.65
Exercised ......................... (918) 50.08
Granted .......................... 265 55.83
Forfeited / Expired ................. (446) 60.73
Outstanding at December 31, 2009 ..... 17,198 $67.52 4.47 $ 2
Options Vested and Expected to Vest . . . 17,018 $67.46 4.44 $ 2
Exercisable at December 31, 2009 ..... 10,829 $64.00 3.23 $ 1
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The weighted
average assumptions used, by year, and the calculated weighted average fair values of options are as follows:
2009 2008 2007
Expected dividend yield ............................................... 3.25% 2.39% 2.28%
Risk-free interest rate ................................................. 3.22% 3.79% 4.65%
Expected life in years ................................................. 7.5 7.5 7.5
Expected volatility ................................................... 23.16% 22.24% 19.15%
Weighted average fair value of options granted ............................ $10.86 $16.77 $16.85
Expected volatilities are based on the historical returns on our stock and the implied volatility of our
publicly-traded options. The expected dividend yield is based on the recent historical dividend yields for our
stock, taking into account changes in dividend policy. The risk-free interest rate is based on the term structure of
interest rates at the time of the option grant. The expected life represents an estimate of the period of time options
are expected to remain outstanding, and we have relied upon a combination of the observed exercise behavior of
our prior grants with similar characteristics, the vesting schedule of the grants, and an index of peer companies
with similar grant characteristics.
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