Boeing 2005 Annual Report Download - page 74

Notes to Consolidated Financial Statements
The following tables summarize information about Performance
Shares activity:
December 31, 2005
(Shares in thousands) Shares
Number of Performance Shares:
Outstanding at beginning of year 28,623
Granted 8,134
Transferred 2,266
Dividend 439
Converted or deferred (10,543)
Forfeited (1,148)
Canceled or expired (2,912)
Outstanding at end of year 24,859
Outstanding at end of year not contingent
on future employment 11,392
The above table does not include the maximum number of
shares contingently issuable under the Plans. Additional shares
of 7,335,493 could be transferred in and converted or deferred
if Plan vestings exceed 100%. Additionally, future deferred vest-
ings that are eligible for the 25% matching contribution could
result in the issuance of an additional 1,837,712 shares.
The following table provides additional information regarding
convertible and converted or deferred Performance Shares.
(Shares in thousands)
Shares Total Market
Weighted Shares Converted Value of
Average Convertible at or Deferred Converted
Grant Expiration Grant Date December 31, during or Deferred
Date Date Fair Value 2005 2005 Shares
2/26/2001 2/26/2006 $62.76
2/25/2002 2/25/2007 44.94
2/24/2003 2/24/2008 30.27
2/23/2004 2/23/2009 43.53
2/28/2005 2/28/2010 33.05
5,896
5,625
5,688 $351
5,991 4,855 322
7,347
For years ended December 31, 2005 and 2004, we recorded
an additional $124 and $57 of compensation expense due to
accelerating amortization of compensation cost for those
Performance Shares converted to common stock or deferred
as stock or cash at the employees’ election.
As discussed above, Performance Shares granted in 2005
were measured on the date of grant using a Monte Carlo
model. Additionally, certain Performance Shares that have a
cash settlement feature are remeasured quarterly beginning
September 30, 2005. The key assumptions used for valuing
Performance Shares in 2005 follow:
Weighted
Average Expected
Measurement Expected Dividend Risk Free Stock
Grant Year Date Volatility Yield Interest Rate Beta
2001-2005 12/31/2005 23.0% 1.6% 4.38-4.43% 0.98
2001-2005 9/30/2005 27.6% 1.7% 3.93-4.18% 0.92
2005 2/28/2005 27.8% 1.9% 4.00% 1.03
Weighted average expected volatility is based on recent volatil-
ity levels implied by actively traded option contracts on our
common stock and the historical volatility levels on our com-
mon stock. Expected dividend yield is based on historical divi-
dend payments. Risk free interest rate reflects the yield on the
zero coupon U.S. Treasury based on the Performance Shares’
remaining contractual term. Stock beta is a measure of how
our stock price moves relative to the market as a whole. The
fair value of the 2005 Performance Shares is amortized over
the expected term of each award. The expected term of 1 to 4
years for each award granted is derived from the output of the
valuation model and represents the median time required to
satisfy the conditions of the award, adjusted for the effect of
retiree eligible participants. Each price growth target has a dif-
ferent expected term, resulting in the range of values provided.
At December 31, 2005, there was $515 of unrecognized com-
pensation cost related to the Performance Share plan which is
expected to be recognized over a weighted average period of
2.1 years. In connection with Performance Shares that have
not met the market conditions, we reclassified $288 from
Additional paid-in capital to Other liabilities and recognized a
cumulative adjustment to General and administrative expense
of $88 during 2005. Additionally, effective December 31, 2005,
we modified our deferred stock compensation plan to require
all Performance Shares that were unvested and deferred as
stock units to be settled in stock. We also gave participants in
our deferred stock compensation plan a one-time opportunity
to cancel their deferral election for unvested Performance
Shares or to change their deferral election for unvested
Performance Shares to a deferred interest account. As a result,
we reclassified $213 from Other liabilities to Additional paid-in
capital at December 31, 2005, for unvested Performance
Shares deferred as stock units and for unvested Performance
Shares no longer being deferred. These modifications resulted
in no incremental compensation cost. For participants who had
deferred unvested Performance Shares in stock units and can-
celled or changed their deferral election effective December 31,
2005, we reversed $13 of previously recorded compensation
expense related to the 25% matching contribution which was
forfeited. 268 employees were affected by the modification.
Stock options
Options have been granted with an exercise price equal to the
fair market value of our stock on the date of grant and expire
ten years after the date of grant. Vesting is generally over a
five-year service period with portions of a grant becoming exer-
cisable at one year, three years and five years after the date of
grant. In the event an employee has a termination of employ-
ment due to retirement, layoff, disability or death, the employee
(or beneficiary) immediately vests in grants that have been out-
standing for at least one year.
72 The Boeing Company and Subsidiaries