IBM 2010 Annual Report Download - page 112

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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies110
Stock Options
Stock options are awards which allow the employee to purchase
shares of the company’s stock at a fixed price. Stock options are
granted at an exercise price equal to the company stock price on
the date of grant. These awards, which generally vest 25 percent
per year, are fully vested four years from the date of grant and have
a contractual term of 10 years. The company also had a stock-
based program (“the Buy-First Program”) under the Plans for its
senior executives, designed to drive improved performance and
increase the ownership executives have in the company. These
executives had the opportunity to receive at-the-money stock
options by agreeing to defer a certain percentage of their annual
incentive compensation into IBM equity, where it was held for
three years or until retirement. In 2005, this program was expanded
to cover all executives of the company. Options under this program
became fully vested three years from the date of grant and
had a contractual term of 10 years. The Buy-First Program was
discontinued on December 31, 2006.
The company estimates the fair value of stock options at the
date of grant using the Black-Scholes valuation model. Key inputs
and assumptions used to estimate the fair value of stock options
include the grant price of the award, the expected option term,
volatility of the company’s stock, the risk-free rate and the com-
pany’s dividend yield. Estimates of fair value are not intended to
predict actual future events or the value ultimately realized by
employees who receive equity awards, and subsequent events
are not indicative of the reasonableness of the original estimates
of fair value made by the company.
During the years ended December 31, 2010, 2009 and 2008,
the company did not grant stock options.
The following table summarizes option activity under the Plans during the years ended December 31, 2010, 2009 and 2008.
2010 2009 2008
Wtd. Avg. No. of Shares Wtd. Avg. No. of Shares Wtd. Avg. No. of Shares
Exercise Price Under Option Exercise Price Under Option Exercise Price Under Option
Balance at January 1 $ 98 73,210,457 $102 119,307,170 $100 157,661,257
Options exercised 134 (33,078,316) 120 (28,100,192) 91 (36,282,000)
Options canceled/expired 108 (934,413) 127 (17,996,521) 109 (2,072,087)
Balance at December 31 $ 94 39,197,728 $ 98 73,210,457 $102 119,307,170
Exercisable at December 31 $ 94 39,197,728 $ 98 72,217,126 $102 114,445,381
The shares under option at December 31, 2010 were in the following exercise price ranges:
Options Outstanding and Exercisable
Wtd. Avg.
Number Remaining
Wtd. Avg. of Shares Aggregate Contractual
Exercise Price Range Exercise Price Under Option Intrinsic Value Life (in Years)
$61– $85 $ 77 12,169,508 $ 846,212,907 2.3
$86 – $105 98 18,978,978 932,730,564 3.0
$106 and over 112 8,049,242 279,500,723 1.3
$ 94 39,197,728 $2,058,444,194 2.4
In connection with various acquisition transactions, there was an
additional 1.1 million stock-based awards, consisting of stock
options and restricted stock units, outstanding at December 31,
2010, as a result of the company’s assumption of stock-based
awards previously granted by the acquired entities. The weighted-
average exercise price of these awards was $58 per share.
Exercises of Employee Stock Options
The total intrinsic value of options exercised during the years ended
December 31, 2010, 2009 and 2008 was $1,072 million, $639 million
and $1,073 million, respectively. The total cash received from
employees as a result of employee stock option exercises for the
years ended December 31, 2010, 2009 and 2008 was approximately
$3,347 million, $2,744 million and $3,320 million, respectively. In
connection with these exercises, the tax benefits realized by the
company for the years ended December 31, 2010, 2009 and 2008
were $351 million, $243 million and $356 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, 2010
and 2009 were approximately 934 million and 822 million shares,
respectively.