Chevron 2005 Annual Report Download - page 81

CHEVRON CORPORATION 2005 ANNUAL REPORT 79
Cash paid to settle performance units and stock appre-
ciation rights was $110, $23 and $11 for 2005, 2004 and
2003, respectively. Cash paid in 2005 included $73 million for
Unocal awards paid under change-in-control plan provisions.
At adoption of FAS 123R, the impact of measuring
stock appreciation rights at fair value instead of intrinsic
value resulted in an insignifi cant charge against income in
the third quarter 2005. For restricted stock units, FAS 123R
required that unrecognized compensation amounts presented
in “Deferred compensation and benefi t plan trust” on the
Consolidated Balance Sheet be reclassifi ed against the appropri-
ate equity accounts. This resulted in a reclassifi cation of $7 to
“Capital in excess of par value.”
Prior to the adoption of FAS 123R, the company pre-
sented all tax benefi ts of deductions resulting from the exercise
of stock options as operating cash fl ows in the Consolidated
Statement of Cash Flows. FAS 123R requires the cash fl ow
resulting from the tax deductions in excess of the compensa-
tion cost recognized for those options (excess tax benefi ts) to be
classifi ed as fi nancing cash fl ows. Refer to Note 3, beginning on
page 61, for information on excess tax benefi ts.
In November 2005, the FASB issued a Staff Position FAS
123R-3 (FSP FAS 123R-3), “Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards,”
which provides a one-time transition election for companies
to follow in calculating the beginning balance of the pool of
excess tax benefi ts related to employee compensation and a
simplifi ed method to determine the subsequent impact on the
pool of employee awards that are fully vested and outstanding
upon the adoption of FAS 123R. Under the FSP, the com-
pany must decide by November 2006 whether to make this
one-time transition election, which may provide some adminis-
trative relief in calculating the future tax effects of stock option
issuances. Whether or not the one-time election is made, the
company anticipates no signifi cant difference in the amount of
tax expense recorded in future periods.
In the discussion below, the references to share price
and number of shares have been adjusted for the two-for-one
stock split in September 2004.
Chevron Long-Term Incentive Plan (LTIP) Awards under
the LTIP may take the form of, but are not limited to, stock
options, restricted stock, restricted stock units, stock appre-
ciation rights, performance units and non-stock grants. For
a 10-year period after April 2004, no more than 160 mil-
lion shares may be issued under the LTIP, and no more than
64 million of those shares may be in a form other than a stock
option, stock appreciation right or award requiring full payment
for shares by the award recipient.
Stock options and stock appreciation rights granted
under the LTIP extend for 10 years from grant date. Effective
with options granted in June 2002, one-third of each award
vests on the fi rst, second and third anniversaries of the date
of grant. Prior to this change, options granted by Chevron
vested one year after the date of grant. Performance units
granted under the LTIP extend for 3 years from grant date
and are settled in cash at the end of the period. Settlement
amounts are based on achievement of performance targets
relative to major competitors over the period, and payments are
indexed to the company’s stock price.
Texaco Stock Incentive Plan (Texaco SIP) On the closing
of the acquisition of Texaco in October 2001, outstand-
ing options granted under the Texaco SIP were converted
to Chevron options. These options retained a provision for
being restored, which enables a participant who exercises
a stock option to receive new options equal to the number
of shares exchanged or who has shares withheld to satisfy
tax withholding obligations to receive new options equal to
the number of shares exchanged or withheld. The restored
options are fully exercisable six months after the date of
grant, and the exercise price is the market value of the com-
mon stock on the day the restored option is granted. Apart
from the restored options, no further awards may be granted
under the former Texaco plans.
Unocal Share-Based Plans (Unocal Plans) On the closing of
the acquisition of Unocal in August 2005, outstanding stock
options and stock appreciation rights granted under vari-
ous Unocal Plans were exchanged for fully vested Chevron
options at a conversion ratio of 1.07 Chevron shares for each
Unocal share. These awards retained the same provisions
as the original Unocal Plans. Awards issued prior to 2004
generally may be exercised for up to 3 years after termination
of employment (depending upon the terms of the individual
award agreements), or the original expiration date, whichever
is earlier. Awards issued since 2004 generally remain exercis-
able until the end of the normal option term if termination
of employment occurs prior to August 10, 2007. Other
awards issued under the Unocal Plans, including restricted
stock, stock units, restricted stock units and performance
shares, became vested at the acquisition date, and shares or
cash were issued to recipients in accordance with change-in-
control provisions of the plans.
NOTE 22. STOCK OPTIONS AND OTHER SHARE-BASED
COMPENSATION – Continued