IBM 1997 Annual Report Download - page 72

70
notes to consolidated financial statements
International Business Machines Corporation
and Subsidiary Companies
Pro Forma Disclosure
In applying APB Opinion 25, no expense was recognized for stock options granted under the Plan and for employee stock
purchases under the ESPP. SFAS 123 requires that a fair market value of all awards of stock-based compensation be
determined using standard techniques and that pro forma net earnings and earnings per share be disclosed as if the
resulting stock-based compensation amounts were recorded in the Consolidated Statement of Earnings as follows:
(Dollars in millions except per share amounts)
1997 1996 1995
As reported Pro forma As reported Pro forma As reported Pro forma
Net earnings applicable to
common shareholders $6,073 $5,866 $5,409 $5,267 $4,116 $4,020
Net earnings per share
of common stock $6.18 $5.97 $5.12 $4.98 $3.61 $3.53
Net earnings per share of
common stock - assuming dilution $6.01 $5.82 $5.01 $4.89 $3.53 $3.45
The above pro forma amounts, for purposes of SFAS 123,
reflect the portion of the estimated fair value of awards
earned in 1997, 1996 and 1995. The aggregate fair value
of awards granted is earned ratably over the vesting or
service period and is greater than that included in the
pro forma amounts.
The company used the Black-Scholes model to value
the stock options granted in 1997, 1996 and 1995. The
weighted average assumptions used to estimate the
value of the options included in the pro forma amounts,
and the weighted average estimated fair value of an
option granted are as follows:
1997 1996 1995
Term (years)*5/6 5/6 5/6
Volatility** 23.0% 22.0% 21.0%
Risk-free interest rate
(zero coupon
U.S. Treasury note) 6.2% 6.0% 7.0%
Dividend yield 1.0% 1.2% 2.0%
Weighted average
fair value $25 $20 $12
**Option term is based on tax incentive options (5 years) and non-tax
incentive options (6 years).
** To determine volatility, the company measured the daily price changes of
the stock over the most recent 5 and 6 year periods.
U Stock Repurchases
The Board of Directors has authorized the company
to repurchase IBM common stock. The company
repurchased 81,505,200 common shares at a cost of
$7,128 million and 98,930,400 common shares at a cost
of $5,810 million in 1997 and 1996, respectively. The
repurchases resulted in a reduction of $34,338,668 and
$61,831,500 in the stated capital (par value) associated
with common stock in 1997 and 1996, respectively. In
1997, 10 million repurchased shares were used to establish
the Employee Benefits Trust, while 2,727,864 and 979,000
in 1997 and 1996, respectively, were used to fund new
acquisitions. The rest of the repurchased shares were
retired and restored to the status of authorized but
unissued shares. At December 31, 1997, approximately
$2.7 billion of Board authorized repurchases remained. The
company plans to purchase shares on the open market
from time to time, depending on market conditions.
During 1995, the IBM Board of Directors authorized
the company to purchase all its outstanding Series A
71⁄2percent preferred stock. The company repurchased
13,450 shares at a cost of $1.4 million during 1997, which
resulted in a $134.50 ($.01 par value per share) reduction
in the stated capital associated with preferred stock. The
repurchased shares were retired and restored to the
status of authorized but unissued shares. No shares were
repurchased in 1996. The company plans to purchase
remaining shares on the open market and in private
transactions from time to time, depending on market
conditions.