Union Pacific 2001 Annual Report Download - page 76

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Assumed health care cost trend rates have a significant effect on the amount reported for health care plans. A one-
percentage point change in the assumed health care cost trend rates would have the following effects on other
postretirement benefits:
Millions of Dollars
One % pt.
Increase
One % pt.
Decrease
Effect on total service and interest cost components..................................................... $ 5 $ (4)
Effect on postretirement benefit obligation................................................................... 50 (34)
10. Stock Options and Other Stock Plans
Options – The Corporation applies Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock plans. Pursuant to the Corporation’s stock incentive plans for officers, key employees and non-
employee directors, 12,461,025; 6,089,561; and 4,809,408 common shares were available for grant at December 31, 2001,
2000 and 1999, respectively. Options are granted at fair value on the grant date and are outstanding for a period of 10
years from the grant date. Options generally become exercisable no earlier than one year after grant.
Determination of Fair Value of Options – The fair value of each stock option granted is estimated for the determination
of pro forma expense using a Black-Scholes option-pricing model. The following table details the number of options
granted, weighted-average exercise price of the options granted, weighted-average assumptions utilized in determining
the pro forma expense and the weighted-average fair value of options for the years ended December 31, 2001, 2000 and
1999:
2001 2000 1999
Number of options granted ................................................................... 1,798,150 253,250 44,250
Weighted-average exercise price............................................................ $49.91 $41.96 $54.25
Weighted-average assumptions:
Dividend yield.................................................................................... 1.4% 1.6% 1.8%
Risk-free interest rate......................................................................... 4.3% 5.1% 6.4%
Volatility............................................................................................. 29.5% 31.4% 28.3%
Expected option life (years) .............................................................. 4 4 4
Weighted-average fair value of options................................................ $13.09 $11.84 $14.94
The expense impact of the option grant is determined as of the date of the grant and is reflected in pro forma results
over the options’ vesting period.
Pro forma net income and earnings per share (EPS) for 2001, 2000 and 1999, including compensation expense for
options that vested in each year, were as follows:
Millions of Dollars, Except Per Share Amounts 2001 2000 1999
Net income................................................................................................. $ 944 $ 813 $ 755
EPS - basic.................................................................................................. $3.81 $3.30 $3.06
EPS - diluted.............................................................................................. $3.69 $3.23 $3.01
During 1998, the Corporation implemented a broad-based option program that granted each active employee the
option to purchase 200 shares of UPC common stock at $55.00 per share. This program resulted in 11,236,400 new
options in 1998 and generated an after-tax pro forma compensation expense of $7 million in 2001 and $28 million in both
2000 and 1999. The conversion of these options will be effected with treasury shares as the options were not issued under
the stock option plan for officers and key employees.