IBM 2005 Annual Report Download - page 84
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_83
T.RentalExpenseandLeaseCommitments
Rentalexpensefromcontinuingoperations,includingamountschargedtoinventoriesandfixedassets,andexcludingamountspre-
viouslyreserved,was$1,345 millionin2005,$1,442millionin2004and$1,419millionin2003.Rentalexpenseinagreementswithrent
holidaysandscheduledrentincreasesisrecordedonastraight-linebasisovertheleaseterm.Contingentrentalsareincludedinthe
determinationof rentalexpense asaccruable.Thetablebelowdepictsgrossminimumrentalcommitmentsfromcontinuingopera-
tions under noncancelable leases, amounts related to vacant space associated with infrastructure reductions and restructuring
actionstaken through1993,andin1999, 2002 and2005 (previouslyreserved), subleaseincomecommitments and capital lease
commitments.Theseamountsreflectactivitiesprimarilyrelatedtoofficespace,aswellasmanufacturingequipment.
(Dollarsinmillions)
2006 2007 2008 2009 2010 BEYOND2010
Operating lease commitments:
Grossminimumrentalcommitments
(includingVacantspacebelow) $«1,331 $«1,116 $«950 $«781 $«588 $«1,014
Vacantspace $««««««79 $««««««86 $«««43 $«««20 $«««14 $««««««22
Subleaseincomecommitments $«««««(94) $«««««(65) $««(50) $««(35) $««(27) $«««««(28))
Capitalleasecommitments $««««104 $««««««81 $«««74 $«««71 $«««70 $««««««52
U.Stock-BasedCompensation
As discussed in note A, “Significant Accounting Policies” on
pages 58 and 59, effective January 1, 2005, the company
adopted the fair value recognition provisions for stock-based
awardsgrantedtoemployeesusingthemodifiedretrospective
application method provided by SFAS 123(R). Stock-based
compensationcostismeasuredatgrantdate,basedonthefair
value of the award, and is recognized as expense over the
employeerequisiteserviceperiod.
Thefollowingtableshowstotalstock-basedcompensation
expenseincludedintheConsolidatedStatementofEarnings:
(Dollarsinmillions)
FORTHEYEARENDEDDECEMBER31: 2005 2004 2003
Cost $««««330 $««««463 $«««««471
Selling,generaland
administrative* 606 914 865
Research,developmentand
engineering 107 201 237
Other(income)andexpense** (8) ——
Pre-tax stock-based
compensationexpense 1,035 1,578 1,573
Incometaxbenefits (349) (498) (472)
Totalstock-based
compensationexpense $««««686 $«1,080 $««1,101
* Includes$7millionofcreditsrecordedduringtheyearendedDecember31,2005,
asaresultofawardsforfeitedinconnectionwiththecompany’ssecond-quarter
2005workforceresourceactions.
** Reflectstheone-timeeffectsonstock-basedcompensationexpense asaresult
ofthe divestiture ofthePersonalComputingbusiness.
Total unrecognized compensation costs related to non-vested
awardsatDecember31,2005is$1,512millionandisexpectedto
berecognizedoveraweighted-averageperiodofapproximately
3years.
Therewerenosignificantcapitalizedstock-basedcompen-
sationcostsatDecember31,2005,2004and2003.
Incentive Awards
Stock-basedincentiveawardsareprovidedtoemployeesunder
the terms of the company’s plans (the “Plans”). The Plans are
administeredbytheExecutiveCompensationandManagement
Resources Committee of the Board of Directors (the
“Committee”). Awards under the Plans principally include at-
the-money stock options, premium-priced stock options,
restrictedstock(units),performanceshareunits,stockappreci-
ationrights,oranycombinationthereof. Thenon-management
members of the IBM Board of Directors also receive stock
optionsunderadirectorstockoptionplan.
The amount of shares originally authorized to be issued
underthecompany’sexistingPlansis274.1 millionatDecember
31, 2005. In addition, certain incentive awards granted under
previousplans,ifandwhenthoseawardsarecanceled,canbe
reissuedunderthecompany’sexistingPlans.Assuch,44.7mil-
lion additional awards are considered authorized to be issued
under the company’s existing Plans as of December 31, 2005.
There are 66.2 million option awards outstanding (which are
includedinthetotaloptionsoutstandingatDecember31,2005)
underpreviousplansthat,ifandwhencancelled,wouldincrease
the number of authorized shares. There were127.4 million and
126.3 million unused shares available to be granted under the
PlansasofDecember31,2005and2004,respectively.
RestrictedStockUnits(“RSUs”)arestockawardsthat are
grantedtoemployees and entitletheholderto sharesofcom-
monstockastheawardvests,typicallyoveratwo- tofive-year
period.Thefairvalueoftheawardsisdeterminedandfixedon
thegrantdatebasedonthecompany’sstockprice.
Performance Share Units (“PSUs”) are stock awards where
the number of shares ultimately received by the employee
dependsoncompanyperformanceagainstspecifiedtargetsand
typicallyvestoverathree-yearperiod.ThefairvalueofeachPSU
isdeterminedonthedateofgrant,basedonthefairvalueofthe
company’sstock,andassumesthatperformancetargetswillbe
achieved.Overtheperformanceperiod,thenumberofsharesof
stockthatwillbeissuedisadjustedupwardordownwardbased