Eli Lilly 2004 Annual Report Download - page 41

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FINANCIALS
39
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 three 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
certain earnings-per-share targets. In general, performance awards vest 100 percent at the end of the fi scal year
following the grant date. No performance awards were granted in 2002.
We have elected to follow APB Opinion 25 and related interpretations in accounting for our stock options and per-
formance awards. See Note 1 for a calculation of our net income and earnings per share under the fair value method
pursuant to SFAS 123. As discussed more fully in Note 2, we plan to adopt SFAS 123 (R) effective January 1, 2005.
The weighted-average per-share fair values of the individual options and performance awards granted during
2004, 2003, and 2002 were as follows on the date of grant:
2004 2003 2002
Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.19 $20.59 $25.98
Performance awards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.33 63.51 N/A
The fair values of the options calculated in accordance with SFAS 123 were determined using a Black-Scholes
option-pricing model with the following assumptions:
2004 2003 2002
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.57% 1.50% 1.54%
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.20% 35.10% 35.00%
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.43% 3.32% 3.14%
Forfeiture rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0
Expected life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 years 7 years 7 years
Stock option activity during 2002-2004 is summarized below:
Shares of Common Stock Weighted-Average
Attributable to Options Exercise
(in thousands) Price of Options
Unexercised at January 1, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,098 $60.60
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,133 74.33
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,357) 21.18
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,819) 70.95
Unexercised at December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,055 64.65
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,361 57.36
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,379) 22.65
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,047) 70.03
Unexercised at December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,990 65.36
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,578 71.26
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,145) 28.45
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,765) 70.46
Unexercised at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,658 68.02
The following table summarizes information concerning outstanding and exercisable options at December 31,
2004 (shares in millions, contractual life in years):
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$1–$25 4.2 1.1 $22.53 4.2 $22.53
$25–$55 2.9 2.9 38.29 2.6 36.31
$55–$65 17.0 6.6 59.33 5.2 62.39
$65–$75 47.3 6.4 72.36 29.4 71.97
$75–$95 22.3 6.5 77.96 12.7 79.38