AIG 2005 Annual Report Download - page 166

Notes to Consolidated Financial Statements Continued
The fair value calculated was derived by using the Black-Scholes
14. Stock Compensation Plans
model. The pro forma recognition of such fair value had an
Continued
insignificant effect on the pro forma amounts disclosed above.
With respect to net income for December 31, 2005, 2004, The fair values of purchase privileges granted during the
and 2003, the following table provides a pro forma reconcilia- years ended December 31, 2005, 2004 and 2003 were
tion as if AIG had adopted the recognition provisions of $13 million, $12 million and $12 million, respectively. The
FAS 123 at the awards inception: weighted average fair values per share of those purchase rights
granted in 2005, 2004, and 2003 were $12.24, $14.82, and
(in millions, except per share data) 2005 2004 2003 $11.64, respectively. The fair value of each purchase right was
Net income, as reported $10,477 $9,839 $8,108 derived at the date of the subscription using the AIG model.
Add back interest on contingently The following weighted average assumptions were used for
convertible bonds, net of tax 11 11 11 purchase privileges granted in 2005, 2004 and 2003, respec-
10,488 9,850 8,119 tively: dividend yields of 0.71 percent, 0.36 percent and
0.32 percent; expected volatilities of 27.3 percent, 34.4 percent
Actual stock-based compensation
and 34.0 percent; risk-free interest rates of 3.37 percent,
recognized, net of tax 53 40 16
1.60 percent and 1.10 percent; and terms of one year.
10,541 9,890 8,135
Fair Value for Grants (a) Stock Option Plan: The AIG 1999 Stock Option Plan, as
Issued prior to January 1, amended (the 1999 Plan), provides that options to purchase a
2003, net of tax 39 49 56 maximum of 45,000,000 shares of common stock can be
Actual stock-based compensation granted to certain key employees and members of the Board of
recognized, net of tax 53 40 16 Directors at prices not less than fair market value at the date
of grant. The 1999 Plan limits the maximum number of shares
Net income, pro forma $10,449 $9,801 $8,063
as to which stock options may be granted to any employee in
Earnings per common share: any one year to 900,000 shares. Options granted under this
Basic: Plan expire not more than ten years from the date of the
Net income, as reported $ 4.03 $ 3.77 $ 3.10 grant. Options with respect to 32,500 shares, 25,000 shares,
Stock-based compensation,
25,000 shares, and 25,000 shares were granted to nonemployee
net of tax (0.01) (0.02) (0.02)
members of the Board of Directors on August 11, 2005,
Net income, pro forma $ 4.02 $ 3.75 $ 3.08 May 19, 2004, May 14, 2003 and February 10, 2003,
Diluted: respectively. These options become exercisable on the first
Net income, as reported $ 3.99 $ 3.73 $ 3.07 anniversary of the date of grant, expire ten years from the date
Stock-based compensation, of grant, and do not qualify for Incentive Stock Option
net of tax (0.01) (0.02) (0.02) Treatment under the Section 422 of the Internal Revenue
Net income, pro forma $ 3.98 $ 3.71 $ 3.05 Code (ISO Treatment). The 1999 Plan, and the options
Average shares outstanding: previously granted thereunder, were approved by the sharehold-
Basic 2,597 2,606 2,610 ers at the 2000 Annual Meeting of Shareholders, and certain
Diluted 2,627 2,637 2,637 amendments were approved at the 2003 Annual Meeting of
Shareholders. At December 31, 2005, 20,130,562 shares were
AIG uses a binomial model to calculate the fair value of reserved for future grants under the 1999 Plan. The 1999 Plan
stock option grants. The model uses ten years of historical superseded the 1991 employee stock option plan (the 1991
exercise behavior to account for the early exercise of employee Plan) and the previously superseded 1987 employee stock
options and five years of historical stock price data to infer the option plan, although outstanding options granted under the
implied volatility. The fair-value model has been refined from 1991 Plan continue in force until exercise or expiration. At
time to time since AIG adopted FAS 123 on January 1, 2003, December 31, 2005, there were 29,524,565 shares reserved for
but valuation results have been consistent from one reporting issuance under the 1999 Plan and the 1991 Plan.
period to the next. During 2003, AIG granted options with respect to
The fair values of stock options granted during the three 137,300 shares which become exercisable on the fifth anniver-
years ended December 31, 2005, 2004, and 2003 were sary of the date of grant and expire ten years from the date of
approximately $100 million, $80 million and $180 million, grant. These options do not qualify for ISO Treatment. The
respectively. agreements with respect to all other options granted to
The following weighted average assumptions were used for employees under these plans in 2004 and 2003 provide that 25
stock options granted in 2005, 2004 and 2003, respectively: percent of the options granted become exercisable on the
dividend yields of 0.71 percent, 0.36 percent and 0.32 percent; anniversary of the date of grant in each of the four years
expected volatility of 27.3 percent, 34.4 percent and 34.0 per- following that grant and expire 10 years from the date of the
cent; risk-free interest rates of 4.17 percent, 3.87 percent and grant. As of December 31, 2005, outstanding options granted
3.57 percent; and expected terms of seven years in each year. with respect to 12,009,898 shares qualified for ISO Treatment.
Also included in the above table is the compensation
expense with respect to AIG’s employee stock purchase plan.
114 AIG m Form 10-K