 |
notes to consolidated financial statements
note 6. incentive compensation plans
We adopted the UPS Incentive Compensation Plan in October 1999. The Incentive Compensation Plan permits the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units, and management incentive awards to eligible employees. The number of shares reserved for issuance under the plan is 112 million, with the number of shares reserved for issuance as restricted stock limited to 34 million shares. As of December 31, 2000, only management incentive awards and stock option grants had been made under the Incentive Compensation Plan.
Management Incentive Awards
Persons earning the right to receive Management Incentive Awards are determined annually by the Compensation Committee of the UPS Board of Directors. This Committee in its sole discretion determines the total award, which consists of UPS Class A-1 common stock, given in any year. The total of all such awards historically has been 15% of consolidated income before income taxes for the 12-month period ending each September 30, exclusive of gains and losses from the sale of real estate and stock of subsidiaries and the effect of certain other nonrecurring transactions or accounting changes. Amounts charged to operations for Management Incentive Awards were $735, $588, and $448 million during 2000, 1999, and 1998, respectively.
Nonqualified and Incentive Stock Options
We maintain fixed stock option plans under which options are granted to purchase shares of UPS Class A common stock. Prior to adoption of the Incentive Compensation Plan, these options were granted at the current price of UPS shares as determined by the Board of Directors on the date of option grant. 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 was granted. We apply the measurement provisions of APB Opinion 25 and related Interpretations in accounting for these plans. Accordingly, no compensation expense has been recorded for the grant of stock options during 2000, 1999, or 1998. Pro forma information regarding net income and earnings per share has been determined as if we accounted for our employee stock options under the fair value method of FAS 123. For purposes of pro forma disclosures, the estimated fair value of the options granted in 2000, 1999, and 1998 is amortized to expense over the vesting period of the options.
The pro forma information is as follows :
| (In millions except per share amounts) |
|
|
2000 |
|
1999 |
|
1998 |
|
|
| Net income |
As reported |
$ |
2,934 |
$ |
883 |
$ |
1,741 |
|
|
Pro forma |
$ |
2,907 |
$ |
870 |
$ |
1,734 |
|
| Basic earnings per share |
As reported |
$ |
2.54 |
$ |
0.79 |
$ |
1.59 |
|
|
Pro forma |
$ |
2.52 |
$ |
0.78 |
$ |
1.59 |
|
| Diluted earnings per share |
As reported |
$ |
2.50 |
$ |
0.77 |
$ |
1.57 |
|
|
Pro forma |
$ |
2.47 |
$ |
0.76 |
$ |
1.56 |
|
The assumptions used, by year, and the calculated weighted average fair value of options granted, are as follows:
|
|
2000(1) |
|
1999(1) |
|
1999 |
|
1998 |
|
|
| Semi-annual dividend per share |
|
n/a |
|
n/a |
$ |
0.30 |
$ |
0.23 |
|
| Expected yield |
|
1.00% |
|
1.00% |
|
n/a |
|
n/a |
|
| Risk-free interest rate |
|
6.26% |
|
5.88% |
|
5.14% |
|
5.56% |
|
| Expected life in years |
|
5 |
|
5 |
|
5 |
|
5 |
|
| Expected volatility |
|
40.0% |
|
40.0% |
|
n/a |
|
n/a |
|
| Weighted average fair value of options granted |
$ |
32.67 |
$ |
20.29 |
$ |
2.08 |
$ |
1.80 |
|
|
|
|
|
|
|
|
|
|
|
(1) Pro forma information for options granted in 2000 and November 1999 was calculated using the Black-Scholes option pricing model as these options were granted in connection with, or subsequent to, the IPO. Pro forma information for all options granted prior to the IPO was calculated using the minimum value method for nonpublic entities.
Persons earning the right to receive stock options are determined each year by the Compensation Committee of the UPS Board of Directors. Except in the case of death, disability, or retirement, options granted prior to the adoption of our Incentive Compensation Plan are exercisable only during a limited period after the expiration of five years from the date of grant, while options granted under the Incentive Compensation Plan are generally exercisable after three years from the date of grant and before the expiration of the option ten years after the date of grant. All options granted are subject to earlier cancellation or exercise under certain conditions.
The following is an analysis of options for shares of Class A-1 common stock issued and outstanding:
|
|
Weighted Average Exercise Price |
Number of Shares (In thousands) |
|
|
|
|
|
|
|
| Outstanding at January 1, 1998 |
$ |
11.88 |
|
35,898 |
|
| Exercised |
|
9.38 |
|
(7,787) |
|
| Granted |
|
16.00 |
|
8,300 |
|
| Canceled |
|
12.38 |
|
(440) |
|
|
|
|
| Outstanding at December 31, 1998 |
|
13.37 |
|
35,971 |
|
| Exercised |
|
10.63 |
|
(7,571) |
|
| Granted |
|
30.37 |
|
11,139 |
|
| Canceled |
|
14.61 |
|
(1,059) |
|
|
|
|
| Outstanding at December 31, 1999 |
|
18.76 |
|
38,480 |
|
| Exercised |
|
11.88 |
|
(7,277) |
|
| Granted |
|
59.38 |
|
194 |
|
| Canceled |
|
18.77 |
|
(2,085) |
|
|
|
|
| Outstanding at December 31, 2000 |
$ |
20.57 |
|
29,312 |
|
|
Options were granted to eligible employees under the 1996 Stock Option Plan in March 1999 and under the Incentive Compensation Plan in November 1999. Options will no longer be granted under the 1996 Stock Option Plan, and a limited option grant to certain employees under the Incentive Compensation Plan occurred in 2000. Beginning in 2001, options to eligible employees will generally be granted only in the first quarter of each year at the discretion of the Board of Directors.
No options were exercisable at December 31, 2000, 1999, or 1998. The following table summarizes information about stock options outstanding at December 31, 2000:
|
Number of Shares
(In thousands) |
Weighted Average
Remaining Life (In years) |
Weighted Average
Exercise Price |
|
|
|
5,785 |
|
0.3 |
$ |
13.50 |
|
5,818 |
|
1.3 |
$ |
14.88 |
|
7,347 |
|
2.3 |
$ |
16.00 |
|
6,967 |
|
3.3 |
$ |
21.50 |
|
3,261 |
|
8.9 |
$ |
50.00 |
|
134 |
|
9.3 |
$ |
59.38 |
|
|
|
|
29,312 |
|
2.7 |
$ |
20.57 |
|
|
|
|
