NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (thousands of dollars unless otherwise indicated) The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions for all options granted: Product warranties.  The Company offers product warranties for certain products. The specific terms and conditions of such warranties vary depending on the product or customer contract requirements. Manage- ment estimated and accrued the costs of unsettled product warranty claims based on historical results  and experience. Management periodically assesses the adequacy of the accrual for product warranty claims and adjusts the accrual as necessary. Changes in the Company’s accrual for product warranty claims during 2004, 2003 and 2002, including customer satisfaction settlements during the year, were as follows: The Black-Scholes option-pricing model was devel- oped for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the sub- jective input assumptions can materially affect the fair value estimate, it is management’s opinion that the exist- ing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Earnings per share.  Shares of preferred stock held in an unallocated account of the ESOP (see Note 11) and common stock held in a revocable trust (see Note 10) were not considered outstanding shares for basic or diluted income per share calculations. All references  to “shares or per share information” throughout this report relate to common shares, unless otherwise indi- cated. Basic income per common share amounts were computed based on the weighted-average number of common shares outstanding during the year. Diluted income per common share amounts were computed based on the weighted-average number of common In May 2004, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) No. 106-2 Impact of recently issued accounting standards.  In April 2004, the Emerging Issues Task Force (EITF) issued EITF No. 03-6, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF No. 03-6 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The pronouncement also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of com- puting earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF No. 03-6 is effective for fiscal periods beginning after March 31, 2004. Adoption of this pronouncement had no signifi- cant effect on the Company’s reported earnings  per share. shares outstanding plus all dilutive securities potentially outstanding during the year. See Note 15. All references to income or losses per common share throughout this report are stated on a diluted per common share basis, unless otherwise indicated. 2004 2003 2002 Net income, as reported .. $393,254 $332,058 $127,565 Add: Total stock-based compensation expense included in the determination of net income as reported, net of related tax effects..... 7,778  3,667  2,013  Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects......... (14,576) (12,138) (11,455) Pro-forma net income....... $386,456  $323,587  $118,123  Income per share: Basic - as reported........ $ 2.79  $ 2.29  $ .85  Basic - pro-forma ......... $ 2.74  $ 2.23  $ .79  Diluted - as reported .... $ 2.72  $ 2.26  $ .84  Diluted - pro-forma...... $ 2.67  $ 2.20  $ .78  2004 2003 2002 Risk-free interest rate................. 2.87% 2.24% 2.15% Expected life of option............... 3 years 3 years 3 years Expected dividend yield of stock 2.28% 2.28% 2.18% Expected volatility of stock........ .225 .290 .333 2004 2003 2002 Balance at January 1 .......... $ 16,555  $ 15,510  $ 14,074  Charges to expense ............ 32,541  28,745  25,023  Settlements.......................... (30,998) (27,700) (23,587) Balance at December 31 .... $ 18,098  $ 16,555  $ 15,510  49