IBM 2005 Annual Report Download - page 86
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NotestoConsolidatedFinancialStatements
INTERNATIONALBUSINESSMACHINESCORPORATION ANDSUBSIDIARYCOMPANIES
_85
Inconnectionwithvariousacquisitiontransactions,therearean
additional2.0millionoptionsoutstandingatDecember31,2005,
asaresultofthecompany’sassumptionofoptionsgrantedby
the acquired entities. The weighted-average exercise price of
theseoptionsis$89.
Thecompanyestimatesthefairvalueofstockoptionsusing
aBlack-Scholesvaluationmodel,consistentwiththeprovisions
ofSFAS123(R)andSECStaffAccountingBulletinNo.107(SAB
107).Keyinputsandassumptionsusedtoestimatethefairvalue
of stock options include the grant price of the award, the
expectedoptionterm,volatilityofthecompany’sstock,therisk-
free rate and the company’s dividend yield. Estimates of fair
valuearenotintendedtopredictactualfutureeventsorthevalue
ultimatelyrealizedbyemployeeswhoreceiveequityawards,and
subsequent events are not indicative of the reasonableness of
theoriginalestimatesoffairvaluemadebythecompany.
Thefairvalueof each stockoptiongrant wasestimatedat
the date of grant using a Black-Scholes option pricing model.
Thefollowingtablepresentstheweighted-averageassumptions
usedforoptionsgranted:
FORTHEYEARENDEDDECEMBER31: 2005 2004 2003
Optionterm(years)* ««««5 ««««5 ««««5
Volatility** 34.7% 37.8% 39.9%
Risk-freeinterestrate(zero
couponU.S.treasurynote) 4.0% 3.5% 2.9%
Dividendyield 0.9% 0.8% 0.7%
Weighted-averagefairvalue
peroptiongranted $««29 $««34 $««30
* TheOptiontermisthenumberofyearsthatthecompanyestimates,basedupon
history,thatoptionswillbeoutstandingpriortoexerciseorforfeiture.
** Thecompany’sestimatesofexpectedvolatilityareprincipallybasedondaily
pricechangesofthecompanystockovertheexpectedoptionterm,aswellas
theadditionalrequirementsincludedintheprovisionsofSFAS123(R)andthe
guidanceprovidedbySAB107.
ExercisesofEmployeeStockOptions
The total intrinsic value of options exercised during the years
ended December 31, 2005, 2004 and 2003 was $470 million,
$651 million and $565 million, respectively. The total cash
receivedfromemployeesasaresultofemployeestock option
exercises for the years ended December 31, 2005, 2004 and
2003wasapproximately$550million,$661 millionand$445mil-
lion, respectively. In connection with these exercises, the tax
benefits realized by the company for the years ended
December31,2005,2004and2003were$148 million,$225mil-
lionand$184million,respectively.
Thecompanysettlesemployeestockoptionexercisespri-
marilywithnewlyissuedcommonsharesand,occasionally,with
treasury shares. Total treasury shares held at December 31,
2005wereapproximately407millionshares.
IBM EmployeesStockPurchasePlan
The company maintains an Employees Stock Purchase Plan
(ESPP).TheESPPenableseligibleparticipantstopurchasefull
or fractional shares of IBM common stock through payroll
deductions of up to10 percent of eligible compensation. The
ESPPprovidesforofferingperiodsduringwhichsharesmaybe
purchased and continues as long as shares remain available
undertheESPP,unlessterminatedearlieratthediscretionofthe
Board of Directors. Individual ESPP participants are restricted
frompurchasingmorethan$25,000ofcommonstockinonecal-
endaryearor1,000sharesinanofferingperiod.
PriortoApril1,2005,theESPPwas considered compensa-
tory undertheprovisionsofSFAS123(R).Thesharepricepaid
byanemployeepriortoApril1,2005wasthelesserof85per-
cent of the average market price on the first business day of
eachofferingperiodor85percentoftheaveragemarketprice
onthe last business day ofeach pay period. EffectiveApril1,
2005,thecompanymodifiedthetermsoftheplansuchthateli-
gibleparticipantsmaypurchasefullorfractionalsharesofIBM
commonstockundertheESPPatafivepercentdiscountoffthe
average market price on the day of purchase. In accordance
with the provisions of SFAS 123(R), effective April1, 2005, the
ESPPisnotconsideredcompensatory.
Approximately 26.2 million, 32.8 million and 44.2 million
shareswereavailableforpurchaseundertheESPP(oraprede-
cessorplan)atDecember31,2005,2004and2003,respectively.
V.Retirement-RelatedBenefits
DescriptionofPlans
IBMoffersdefined benefit pensionplans, definedcontribution
plans, as well as nonpension postretirement plans primarily
consistingof retireemedical benefits.These benefits form an
importantpartofthecompany’stotalcompensationandbene-
fitsprogramthatisdesignedtoattractandretainhighlyskilled
and talented employees. The company and its subsidiaries
have defined benefit and/or defined contribution plans that
cover substantially all regular employees, and supplemental
retirementplans that covercertain executives. In addition,the
companyhascertainU.S.andnon-U.S.nonpensionpostretire-
mentbenefitplansthatprovidemedicalanddentalbenefitsto
certainretireesandtheireligibledependents.
U.S.PLANS
DEFINED BENEFIT PENSION PLANS
IBMPersonalPensionPlan
IBMprovidesU.S.regular,full-timeandpart-timeemployees hired
priortoJanuary1,2005 withnoncontributorydefinedbenefitpen-
sionbenefitsviatheIBMPersonalPensionPlan(PPP).ThePPP
consistsofataxqualifiedplanandanon-taxqualified(non-qual-
ified)plan.Thequalifiedplanisfundedbycompanycontributions
toanirrevocabletrust fund, which is held for the sole benefit of
participants andbeneficiaries.Thenon-qualifiedplan,whichpro-
videsbenefitsinexcessof InternalRevenueService limitationsfor
qualifiedplans,isunfunded.Thenumberofindividualsreceiving
benefitpayments fromthePPPatDecember31,2005and2004
was137,106and139,804,respectively.
Benefitsprovidedtoemployeesunderthisplanarecalcu-
latedusingbenefitformulasthatvarybasedontheparticipant.
Pension benefits are calculated using one of two methods