Eli Lilly 2003 Annual Report Download - page 36

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FINANCIALS
34
2004, and anytime thereafter for a defi ned redemption price.
The 6.55 percent Employee Stock Ownership Plan (ESOP) debentures are obligations of the ESOP but are
shown on the consolidated balance sheet because we guarantee them. The principal and interest on the debt are
funded by contributions from us and by dividends received on certain shares held by the ESOP. Because of the am-
ortizing feature of the ESOP debt, bondholders will receive both interest and principal payments each quarter.
In 2001, we repurchased $188.6 million of 8.38 percent notes due in 2006, $14.0 million of 6.77 percent notes
due in 2036, and $198.6 million of 7.13 percent notes due in 2025. As a result of this early extinguishment of debt,
we recognized a charge of $45.2 million. As a result of our adoption of SFAS 145 in 2003 (see Note 2), this charge
was reclassifi ed from an extraordinary charge to interest expense. In 2003, we repurchased $257.1 million of fl oat-
ing rate debt securities due in 2008.
The aggregate amounts of maturities on long-term debt for the next fi ve years are as follows: 2004, $179.7 mil-
lion;
2005, $360.3 million; 2006, $719.4 million; 2007, $207.4 million; and 2008, $389.6 million.
At December 31, 2003 and 2002, short-term borrowings included $16.8 million and $260.0 million, respec-
tively, of notes payable to banks. Included in short-term borrowings in 2002 are $250.0 million of 4.23 percent
one-year resettable notes issued in March 2001. These notes were repaid in 2003. At December 31, 2003, unused
committed lines of credit totaled approximately $1.24 billion. Compensating balances and commitment fees are not
material, and there are no conditions that are probable of occurring under which the lines may be withdrawn.
We have converted substantially all fi xed rate debt to fl oating rates through the use of interest rate swaps.
The weighted-average effective borrowing rate based on debt obligations and interest rates at December 31, 2003
and 2002, including the effects of interest rate swaps for hedged debt obligations, was 2.7 percent and 3.5 percent,
respectively.
Cash payments of interest on borrowings totaled $44.7 million, $54.6 million, and $171.6 million in 2003, 2002,
and 2001, respectively.
In accordance with the requirements of SFAS 133, the portion of our fi xed-rate debt obligations that is hedged
is refl ected in the consolidated balance sheet as an amount equal to the sum of the debt’s carrying value plus the
fair value adjustment representing changes in fair value of the hedged debt attributable to movements in market
interest rates subsequent to the inception of the hedge.
Note 7: Stock Plans
Stock options are granted to employees at exercise prices equal to the fair market value of the company’s stock
at the dates of grant. Generally, options vest 100 percent 3 years from the grant date and have a term of 10 years.
Performance awards are granted to offi cers and key employees and are payable in shares of our common stock.
The number of performance award shares actually issued, if any, varies depending upon the achievement of cer-
tain earnings-per-share targets. In general, performance awards vest 100 percent at the end of the second fi scal
year following the grant date. No performance awards were granted in 2002.
We issued a grant under the GlobalShares program in 2001. Essentially all employees were given an option to
buy 125 shares of our stock at a price equal to the fair market value of our stock on the date of the grant. Options to
purchase approximately 4.3 million shares were granted as part of the program in 2001. Individual grants gener-
ally become exercisable on or after the third anniversary of the grant date and have a term of 10 years.
We also issued a special stock option grant in 2001 to global management and all employees in the U.S. and
Puerto Rico. This option grant was designed to retain and motivate employees affected by the compensation
changes due to the Prozac patent expiration. Options to purchase approximately 10.0 million shares were granted
as part of this program at a price equal to the fair market value on the date of the grant. Approximately 7.3 million
of these options vested in 2002 with the remainder vesting in 2003.
We have elected to follow APB Opinion 25 and related interpretations in accounting for our stock options and
performance awards. See Note 1 for a calculation of our net income and earnings per share under the fair value
method pursuant to SFAS 123.
The weighted-average per-share fair values of the individual options and performance awards granted during
2003, 2002, and 2001 were as follows on the date of grant:
2003 2002 2001
Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.59 $25.98 $26.59
Performance awards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.51 N/A 78.86