IBM 2006 Annual Report Download - page 101

Black
MAC
390 CG10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
99
In connection with various acquisition transactions, there were an
additional 3.2 million options outstanding at December 31, 2006, as a
result of the company’s assumption of options granted by the acquired
entities. The weighted-average exercise price of these options was
$77 per share.
Exercises of Employee Stock Options
The total intrinsic value of options exercised during the years ended
December 31, 2006, 2005 and 2004 was $727 million, $470 million
and $651 million, respectively. The total cash received from employ-
ees as a result of employee stock option exercises for the years ended
December 31, 2006, 2005 and 2004 was approximately $1,149 mil-
lion, $550 million and $661 million, respectively. In connection with
these exercises, the tax benefits realized by the company for the years
ended December 31, 2006, 2005 and 2004 were $242 million, $148
million and $225 million, respectively.
The company settles employee stock option exercises primarily
with newly issued common shares and, occasionally, with treasury
shares. Total treasury shares held at December 31, 2006 and 2005
were approximately 502 million and 407 million shares, respectively.
Stock Awards
In addition to stock options, the company grants its employees stock
awards. These awards are made in the form of Restricted Stock
Units ( RSUs) or Performance Stock Units (PSUs). RSUs are stock
awards granted to employees that entitle the holder to shares of
common stock as the award vests, typically over a two- to five-year
period. The fair value of the awards is determined and fixed on the
grant date based on the company’s stock price. During the year
ended December 31, 2006, the company modified its equity com-
pensation plans to increase awards of RSUs compared to stock
options. RSUs awarded during the years ended December 31, 2005
and 2004 were not material when compared to the value of stock
options awarded during the respective years.
The following table summarizes RSU activity under the Plans
during the year ended December 31, 2006:
WTD. AVG. NUMBER
GRANT PRICE OF UNITS
Balance at January 1 $ ,,
RSUs granted  ,,
RSUs released  (,,)
RSUs canceled/forfeited  (,)
Balance at December 31 $ ,,
The remaining weighted-average contractual term of RSUs at
December 31, 2006 is the same as the period over which the remaining
cost of the awards will be recognized, which is approximately three
years. The fair value of RSUs granted during the year ended
December 31, 2006 was $410 million. The total fair value of RSUs
vested and released during the year ended December 31, 2006 was
$79 million. As of December 31, 2006, there was $501 million of
unrecognized compensation cost related to nonvested RSUs. The
company received no cash from employees as a result of employee
vesting and release of RSUs for the year ended December 31, 2006.
In connection with employee vesting and release of RSUs, the tax
benefit realized by the company for the year ended December 31,
2006 was $59 million.
PSUs are stock awards where the number of shares ultimately
received by the employee depends on the company’s performance
against specified targets and typically vest over a three-year period.
The fair value of each PSU is determined on the date of grant, based
on the company’s stock price, and assumes that performance targets
will be achieved. Over the performance period, the number of shares
of stock that will be issued is adjusted upward or downward based
upon the probability of achievement of performance targets. The
ultimate number of shares issued and the related compensation cost
recognized as expense will be based on a comparison of the final per-
formance metrics to the specified targets. The fair value of PSUs
granted during the year ended December 31, 2006 was $104 million.
Total fair value of PSUs vested and released during the year ended
December 31, 2006 was $67 million.
IBM EMPLOYEES STOCK PURCHASE PLAN
The company maintains an Employees Stock Purchase Plan (ESPP).
The ESPP enables eligible participants to purchase full or fractional
shares of IBM common stock through payroll deductions of up to 10
percent of eligible compensation. Eligible compensation includes any
compensation received by the employee during the year. The ESPP
provides for offering periods during which shares may be purchased
and continues as long as shares remain available under the ESPP,
unless terminated earlier at the discretion of the Board of Directors.
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.
Prior to April 1, 2005, the ESPP was considered compensatory
under the provisions of SFAS No. 123(R). The share price paid by an
employee prior to April 1, 2005 was 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. Effective April 1, 2005, the company modified the
terms of the plan whereas eligible participants may purchase full or
fractional shares of IBM common stock under the ESPP at a five
percent discount off the average market price on the day of the pur-
chase. In accordance with the provisions of SFAS No. 123(R), effective
April 1, 2005, the ESPP is not considered compensatory.