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NOTE
8
INCENTIVE PLANS AND STOCK OPTIONS
The 1992 Praxair
Long-Term Incentive Plan (the "1992 Plan") provides for granting nonqualified
or incentive stock options, stock grants, performance awards, and other
stock-related incentives for key employees. Awards may be made under
the 1992 Plan through the year 2001.
Under the 1992 Plan,
the total number of shares available for options or stock grants shall
not exceed one percent of the number of shares outstanding on the first
day of each year, plus any shares that were available but not used in
a prior year up to two percent of the total number of shares outstanding
on the first day of the year of the grant. Option prices for Incentive
Stock Options must be equal to the closing price of Praxair's common
stock on the date of the grant. The options issued under the 1992 Plan
become exercisable only after one or more years, and the option term
can be no more than ten years.
In 1996, the Board
of Directors approved the 1996 Praxair, Inc. Performance Incentive Plan
(the "1996 Plan") that provides for granting nonqualified or incentive
stock options, stock grants, performance awards and other stock-related
incentives for Praxair employees other than officers and directors,
employees subject to Section 16 of the Securities Exchange Act of 1934
and employees subject to Section 162(m) of the Internal Revenue Code.
Under the 1996 Plan, the number of shares of stock available for options
or grants in each calendar year is limited to two percent of the total
number of shares of common stock outstanding as of the first day of
the year plus any carryover shares from prior years that were not granted
up to a maximum of four percent of the shares of common stock that were
outstanding on the first day of the year. Options granted under the
1996 Plan have terms and conditions identical to those that may be granted
under the 1992 Plan.
Effective January
1, 1997, Praxair initiated a three-year long-term incentive program
by granting performance share equivalents and stock options to corporate
officers and other key employees under the applicable Incentive Plan.
Because Praxair's average annual earnings per share growth for the three
year performance period was 10.7% versus the 15% target established
for this program, 71.1% of the performance share equivalents or 652,421
share equivalents vested on January 1, 2000, according to a pre-determined
formula. Vested performance share equivalents are payable primarily
in shares of Praxair, Inc. common stock. Settlement is scheduled for
March 2000. Pre-tax compensation expense related to this plan was $10
million in 1999, $8 million in 1998 and $15 million in 1997.
The following table
summarizes the changes in outstanding shares under option and performance
share equivalents for 1999, 1998, and 1997 (options in thousands):
|
|
|
|
|
|
|
|
|
Stock
Options  |
|
|
|
|
|
Average
Exercise Price |
|
|
|
Options |
|
|
Performance
Stock &
Equivalents(a) |
| Activity |
|
|
|
|
| Outstanding
at December
31, 1996 |
|
11,477 |
|
|
$21.03 |
639 |
| Granted |
|
1,232 |
|
|
$50.63 |
992 |
| Exercised |
|
(1,737) |
|
|
$15.11 |
— |
| Vested |
|
— |
|
|
— |
(639) |
| Cancelled
or expired |
|
(73) |
|
|
$40.19 |
(24) |
|
| Outstanding
at December
31, 1997 |
|
10,899 |
|
|
$25.20 |
968 |
| Granted |
|
2,022 |
|
|
$40.98 |
14 |
| Exercised |
|
(889) |
|
|
$19.63 |
— |
| Cancelled
or expired |
|
(60) |
|
|
$46.00 |
(31) |
|
| Outstanding
at December
31, 1998 |
|
11,972 |
|
|
$28.17 |
951 |
| Granted
|
|
2,946 |
|
|
$40.98 |
— |
| Exercised |
|
(2,138) |
|
|
$19.48 |
— |
| Cancelled
or expired |
|
(104) |
|
|
$44.78 |
(299) |
|
| Outstanding
at December 31, 1999(b) |
|
12,676 |
|
|
$32.47 |
652 |
|
| Options
exercisable at: |
|
|
|
|
|
|
| December
31, 1997 |
|
7,167 |
|
|
$15.51 |
|
| December
31, 1998 |
|
7,728 |
|
|
$18.95 |
|
| December 31, 1999(b) |
|
6,650 |
|
|
$23.86 |
|
|
|
(a) The weighted-average
price per share on the date performance share equivalents were granted
was $50.26 in 1998 and $46.25 in 1997.
(b) The following
table summarizes information about options outstanding and exercisable
at December 31, 1999 (options in thousands, life in years):
|
|
Outstanding
|
|
Exercisable |
| Range
of Exercise Prices |
Average
Remaining Life |
Number
of Options |
|
Average
Exercise Price |
|
Number
of Options |
|
Average
Exercise Price |
|
| $ 9.80-$13.95 |
1.4 |
1,914 |
|
$11.96 |
|
1,914 |
|
$11.96 |
| $15.50-$24.38 |
3.9 |
2,788 |
|
$18.08 |
|
2,788 |
|
$18.08 |
| $26.25-$36.00 |
8.4 |
2,192 |
|
$33.92 |
|
485 |
|
$33.57 |
| $36.06-$45.00 |
8.7 |
2,278 |
|
$42.15 |
|
473 |
|
$38.91 |
| $45.06-$56.13 |
7.9 |
3,504 |
|
$47.93 |
|
990 |
|
$51.21 |
| $ 9.80-$56.13 |
6.3 |
12,676
|
|
$32.47 |
|
6,650 |
|
$23.86 |
|
|
Pro
forma information
SFAS No. 123 requires
Praxair to disclose pro forma net income and pro forma earnings per
share amounts as if compensation expense was recognized for options
granted after 1994. Using this approach, pro forma net income and the
related basic and diluted earnings per share amounts would be as follows:
| Year
Ended December 31, |
|
1999 |
1998 |
1997 |
|
| Net
Income: |
|
|
|
|
| As
reported |
|
$431 |
$425 |
$405 |
| Pro
forma |
|
$411 |
$409 |
$391 |
|
|
|
|
|
| Basic
Earnings per Share: |
|
|
|
|
| As
reported |
|
$2.71 |
$2.68 |
$2.56 |
| Pro
forma |
|
$2.58 |
$2.58 |
$2.47 |
|
|
|
|
|
| Diluted
Earnings per Share: |
|
|
|
|
| As
reported |
|
$2.66 |
$2.60 |
$2.46 |
| Pro
forma |
|
$2.53 |
$2.50 |
$2.37 |
|
The weighted average
fair value of options granted during 1999 was $13.80 ($12.57 in 1998
and $16.54 in 1997). These values, which were used as a basis for the
pro forma disclosures, were estimated using the Black-Scholes Options-Pricing
Model with the following weighted average assumptions used for grants
in 1999, 1998, and 1997:
| Year
Ended December 31, |
1999 |
1998 |
1997 |
|
| Dividend
yield |
1.0% |
1.0% |
1.0% |
| Volatility |
31.0% |
28.0% |
27.0% |
| Risk-free
interest rate |
5.5% |
5.2% |
6.1% |
| Expected
term - years |
5.0 |
5.0 |
5.0 |
These pro forma disclosures may not be representative of the effects
for future years since options vest over several years, and additional
awards generally are made each year. |
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