Pfizer 2005 Annual Report Download - page 61

60 2005 Financial Report
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
rate of 7.00% per annum, of which $22 million was utilized prior
to our acquisition of Pharmacia and remains outstanding as of
December 31, 2005.
Allocated shares held by the Common ESOP are considered
outstanding for the earnings per share (EPS) calculations and
the eventual conversion of allocated preferred shares held by the
Preferred ESOP is assumed in the diluted EPS calculation. At
December 31, 2005, the Preferred ESOP held preferred shares
convertible into approximately 11 million shares of our common
stock and the Common ESOP held approximately 26 thousand
shares. The value of the shares held in the Preferred ESOP at
December 31, 2005 was approximately $169 million.
D. Employee Benefit Trust
The Pfizer Inc Employee Benefit Trust (EBT) was established in 1999
to fund our employee benefit plans through the use of its holdings
of Pfizer Inc stock. The consolidated balance sheets reflect the fair
value of the shares owned by the EBT as a reduction of
Shareholders’ equity.
E. Share-Based Payments
The Company’s shareholders approved the Pfizer Inc. 2004 Stock
Plan (the 2004 Plan) at the Annual Meeting of Shareholders held
on April 22, 2004 and, effective upon that approval, new stock
option and other share-based awards may be granted only under
the 2004 Plan. The 2004 Plan allows a maximum of 3 million shares
to be awarded to any employee per year and 475 million shares in
total. Whole share awards count as three shares and stock options
count as one share under the 2004 Plan toward the maximums.
In the past, we had various employee stock and incentive plans
under which stock options and other share-based awards were
granted. Stock options and other share-based awards that were
granted under the prior plans and were outstanding on April 22,
2004 continue in accordance with the terms of the respective
plans.
The following shares (in thousands) were available for award as
of:
•December 31, 2005 402,540*
•December 31, 2004 487,993*
•December 31, 2003 152,173*
*Includes 16,610 shares in 2005, 13,139 shares in 2004 and 20,827 shares
in 2003 available for award under the legacy Pharmacia Long-Term
Incentive Plan, which reflects award cancellations returned to the pool
of available shares for legacy Pharmacia commitments.
We may grant stock options to employees, including officers.
Options are exercisable after five years or less, subject to
continuous employment and certain other conditions, and
generally expire 10 years after the grant date. Once options are
exercisable, the employee can purchase shares of our common
stock at the market price on the date we granted the option.
Former Pharmacia and Warner-Lambert plans provided that, in the
event of a change in control, stock options already granted
became immediately exercisable.
The table below summarizes information concerning options
outstanding under the plans as of December 31, 2005:
____________________________________________________________________________________________________________________
(THOUSANDS OF SHARES)
___________________________________________________________________________ ___________________________________
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
___________________________________________________________________________ ___________________________________
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
RANGE OF NUMBER REMAINING PRICE NUMBER PRICE
EXERCISE OUTSTANDING CONTRACTUAL (TOTAL EXERCISABLE (EXERCISABLE
PRICES AT 12/31/05 TERM (YEARS) OPTIONS) AT 12/31/05 OPTIONS)
$0 – $19.99 51,339 1.2 $15.38 51,339 $15.38
20 – 29.99 171,953 6.8 27.47 63,372 26.70
30 – 34.99 101,788 4.6 32.67 85,656 32.96
35 – 39.99 126,401 6.3 36.59 44,615 35.57
40 – 41.99 59,897 6.2 41.30 56,069 41.30
42 – 44.99 53,475 3.3 42.07 53,460 42.07
over 45 62,551 5.1 45.40 60,539 45.40
Total 627,404 415,050
The following table summarizes the activity for the plans:
UNDER OPTIONS
WEIGHTED AVERAGE
EXERCISE PRICE
(THOUSANDS OF SHARES) SHARES PER SHARE
Balance, January 1, 2003 431,981 $31.45
Pharmacia option exchange 180,068 28.84
Granted 102,027 29.78
Exercised (57,237) 18.24
Cancelled (38,243) 35.89
Balance, December 31, 2003 618,596 31.36
Granted 91,697 37.10
Exercised (55,932) 18.29
Cancelled (19,222) 39.24
Balance, December 31, 2004 635,139 33.10
Granted 52,082 26.22
Exercised (31,373) 12.17
Cancelled (28,444) 34.47
Balance, December 31, 2005 627,404 $33.51
The decline in the number of options granted in 2005 reflects a
change in the compensation strategy of the Company.
The tax benefits related to certain stock option transactions were
$137 million in 2005, $261 million in 2004, and $238 million in 2003.
The weighted average fair value per stock option granted was $5.15
for 2005, $6.88 for 2004 and $7.35 for 2003. We estimated the fair
values using the Black-Scholes-Merton option pricing model and
using the assumptions below. In the first quarter of 2005, we
changed our method of estimating expected dividend yield from
historical patterns of dividend payments to a method that reflects
a constant dividend yield during the expected term of the option.
In the first quarter of 2004, we changed our method of estimating
expected stock price volatility to reflect market-based inputs under
emerging stock option valuation considerations.
2005 2004 2003
Expected dividend yield 2.90% 2.90% 3.15%
Risk-free interest rate 3.96% 3.32% 2.75%
Expected stock price volatility 21.93% 22.15% 33.05%
Expected term until exercise (years) 5.75 5.75 5.58