IBM 2004 Annual Report Download - page 80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International Business Machines Corporation and Subsidiary Companies
78
ibm annual report 2004
There were 76.2 million option awards outstanding under previous plans included in the
total number of shares under option at December 31, 2004. There were 126.3 million and
148.1 million unused shares available to be granted under the Plans as of December 31,
2004 and 2003, respectively. Awards under the Plans resulted in pre-tax compensation
expense of $219 million, $117 million and $183 million in 2004, 2003 and 2002, respectively.
Stock Option Grants
Stock options are granted to employees and directors at an exercise price equal to or
greater than the fair market value of the company’s stock at the date of grant. Generally,
options vest 25 percent per year, are fully vested four years from the grant date and have
a term of ten years. The following tables summarize option activity under the Plans during
2004, 2003 and 2002.
2004 2003 2002
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise No. of Shares Exercise No. of Shares Exercise No. of Shares
Price Under Option Price Under Option Price Under Option
Balance at Jan. 1 $««86 244,966,052 $««84 222,936,700 $««85 177,956,490
Options granted 97 26,537,055 83 41,275,832 77 59,966,106
Options exercised 47 (14,035,038) 40 (11,205,228) 33 (7,490,424)
Options canceled/
expired 93 (8,120,163) 100 (8,041,252) 103 (7,495,472)
Balance at Dec. 31 $««89 249,347,906 $««86 244,966,052 $««84 222,936,700
Exercisable at
Dec. 31 $««89 159,607,886 $««85 134,735,326 $««75 108,347,895
During the year ended December 31, 2004, the company granted approximately 5 mil-
lion stock options with an exercise price greater than the stock price at the date of grant.
These stock options had a weighted-average exercise price of $105.85 and are included
in the table above.
The shares under option at December 31, 2004, were in the following exercise
price ranges:
Options Outstanding Options Currently Exercisable
Wtd. Avg.
Wtd. Avg. Number Remaining Wtd. Avg. Number
Exercise of Shares Contractual Exercise of Shares
Exercise Price Range Price Under Option Life (in years) Price Under Option
$18–$60 $««46 45,610,909 4 $««44 39,083,439
$61–$85 77 55,717,463 8 75 19,450,291
$86–$105 98 80,640,962 7 98 39,507,144
$106 and over 117 67,378,572 6 117 61,567,012
$««89 249,347,906 6 $««89 159,607,886
In connection with various acquisition transactions, there are an additional 2.9 million
options outstanding at December 31, 2004, as a result of the company’s assumption of
options granted by the acquired entities. The weighted-average exercise price of these
options is $89.
ibm employees stock purchase plan
In July 2003, the IBM 2003 ESPP became effective and 50 million additional shares of
authorized common stock were reserved and approved for issuance. The ESPP enables
substantially all regular employees to purchase full or fractional shares of IBM common
stock through payroll deductions of up to 10 percent of eligible compensation. The 2003
ESPP provides for semiannual offerings commencing July 1, 2003, and continuing as long
as shares remain available under the ESPP, unless terminated earlier at the discretion of the
Board of Directors. The share price paid by an employee equals the lesser of 85 percent
of the average market price on the first business day of each offering period or 85 percent
of the average market price on the last business day of each pay period. Individual ESPP
participants are restricted from purchasing more than $25,000 of common stock in one
calendar year or 1,000 shares in an offering period. Approximately 32.8 million, 44.2 mil-
lion and 4.6 million reserved unissued shares were available for purchase under the 2003
ESPP (or a predecessor plan) at December 31, 2004, 2003 and 2002, respectively.
pro forma disclosure
See “Stock-Based Compensation” on page 52, in note a, “Significant Accounting Policies,”
for the pro forma disclosures of net income and earnings per share required under
SFAS No. 123.
w. Retirement-Related Benefits
IBM offers defined benefit pension plans, defined contribution pension plans, as well as
nonpension postretirement plans primarily consisting of retiree medical benefits. These
benefits form an important part of the company’s total compensation and benefits pro-
gram that is designed to attract and retain highly skilled and talented employees. The
table on page 79 provides the total retirement-related benefit plans’ impact on income
before income taxes.