American Airlines 1998 Annual Report Download - page 53

equal to the market price of the Company’s stock at the date
of grant. The shares vest over a three-year performance
period based upon AMR’s ratio of cash flow to adjusted
gross assets. Performance share activity was:
Year Ended December 31,
1998 1997 1996
Outstanding at January 1 1,737,274 1,679,460 1,648,822
Granted 644,680 808,736 764,614
Issued (205,458) (190,766) (137,008)
Awards settled in cash (522,234) (513,064) (356,176)
Canceled1(88,646) (47,092) (240,792)
Outstanding at December 31 1,565,616 1,737,274 1,679,460
1Includes 181,102 shares canceled upon conversion to The Sabre Group stock awards for 1996.
The weighted-average grant date fair value of perfor-
mance share awards granted during 1998, 1997 and 1996
was $62.06, $52.28 and $39.41, respectively.
There were approximately 21 million shares of AMR’s
common stock at December 31, 1998 reserved for the
issuance of stock upon the exercise of options and the
issuance of stock awards.
The Sabre Group has established the 1996 Long
Term Incentive Plan (1996 Plan), whereby its officers and
other key employees may be granted stock options and
other stock-based awards. Initially, 13 million shares of
The Sabre Group’s Class A Common Stock (Sabre
Common Stock) were authorized to be issued under the
1996 Plan. At December 31, 1998, approximately five mil-
lion options for Sabre Common Stock were outstanding
under the 1996 Plan.
In January 1998, in connection with the information
technology services agreement executed between The Sabre
Group and US Airways, The Sabre Group granted two
tranches of stock options to US Airways, each to acquire
three million shares of Sabre Common Stock. During cer-
tain periods, US Airways may select an alternative vehicle of
substantially equivalent value in place of receiving stock.
The first tranche of options is exercisable during the six
month period ending two years after the transfer of US
Airways’ information technology assets, which occurred in
January 1998, has an exercise price of $27 per share and
is subject to a cap on share price of $90. The second
tranche of options is exercisable during the 10-year period
51
AMR CORPORATION
beginning on the fifth anniversary of the asset transfer
date, has an exercise price of $27 per share and is subject
to a cap on share price of $127. During 1998, a long-term
liability and a related deferred asset equal to the number
of options outstanding multiplied by the difference
between the exercise price of the options and the market
price of Sabre Common Stock were recorded. The asset
and liability are adjusted based on changes in the market
price of Sabre Common Stock. As of December 31, 1998,
the liability relating to these options was $105 million.
The deferred asset is being amortized over the 11-year
non-cancelable portion of the agreement.
The Company has adopted the pro forma disclosure
features of Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation”
(SFAS 123). As required by SFAS 123, pro forma informa-
tion regarding net earnings and earnings per share has been
determined as if the Company and The Sabre Group had
accounted for its employee stock options and awards
granted subsequent to December 31, 1994 using the fair
value method prescribed by SFAS 123. The fair value for
the stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for 1998, 1997 and 1996:
risk-free interest rates ranging from 5.01% to 6.70%; divi-
dend yields of 0%; expected stock volatility ranging from
25.4% to 32.0%; and expected life of the options of 4.5
years for all Plans, with the exception of The Pilot Plan
which was 1.5 years.
The Black-Scholes option valuation model was devel-
oped for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of
highly subjective assumptions including the expected stock
price volatility. Because the Company’s employee stock
options have characteristics significantly different from those
of traded options, and because changes in the subjective
input assumptions can materially affect the fair value esti-
mate, in management’s opinion the existing models do
not necessarily provide a reliable single measure of the fair
value of its employee stock options. In addition, because