Capital One 1998 Annual Report Download - page 50

48Capital One Financial Corporation
Notes to Consolidated Financial Statements (continued)
(Currencies in Thousands, Except Per Share Data)
In April 1998, upon stockholder approval, a 1997 stock option
grant to senior management became effective at the December 18,
1997, market price of $48.75 per share. This grant included
1,143,221 performance-based options granted to certain key man-
agers (including 685,755 options to the Company’s CEO and COO),
which vested in April 1998 when the market price of the Company’s
stock remained at or above $84.00 for at least ten trading days in a
thirty consecutive calendar day period. The grant also included
223,900 options which vest in full, regardless of the stock price, on
December 18, 2000, or immediately upon a change in control of the
Company.
In April 1998, the Company granted 445,084 options to all
associates not granted options in the above mentioned grants. Cer-
tain associates were granted options in exchange for giving up
future compensation. Other associates were granted a set number
of options. These options were granted at the then market price of
$95.13 per share and vest, in full, on April 30, 2001, or immedi-
ately upon a change in control of the Company.
In April 1996, upon stockholder approval, a 1995 stock option
grant to the Company’s CEO and its COO became effective. This
grant was for performance-based options to purchase 2,500,000
common shares at the September 15, 1995, market price of
$29.19 per share. Vesting of the options was dependent on the fair
market value of the common stock remaining at or above specified
levels for at least ten trading days in any thirty consecutive calen-
dar day period. Fifty percent of the options vested in January 1997
when the Company’s stock reached $37.50 per share; 25% vested
in October 1997 when the stock reached $43.75 per share; and
the remaining 25% vested in January 1998 when the stock
reached $50.00 per share.
The Company recognized $70,038, $24,772 and $7,728 of
compensation cost relating to its associate stock plans for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company maintains a non-associate directors stock incen-
tive plan. This plan authorizes a maximum of 500,000 shares of
the Company’s common stock for the automatic grant of restricted
stock and stock options to eligible members of the Company’s
Board of Directors. As of December 31, 1998, 1997 and 1996,
347,500; 382,500 and 417,500 shares were available for grant
under this plan, respectively. The options vest after one year and
their maximum term is ten years. The exercise price of each option
equals the market price of the Company’s stock on the date of
grant. As of December 31, 1998, there was no outstanding
restricted stock under this plan.
SFAS No. 123, “Accounting for Stock-Based Compensation”
(“SFAS 123”) requires, for companies electing to continue to fol-
low the recognition provisions of APB 25, pro forma information
regarding net income and earnings per share, as if the recognition
provisions of SFAS 123 were adopted for stock options granted
subsequent to December 31, 1994. For purposes of pro forma dis-
closure, the fair value of the options was estimated at the date of
grant using a Black-Scholes option-pricing model with the following
weighted average assumptions and is amortized to expense over the
options’ vesting period.
Year Ended December 31
Assumptions 1998 1997 1996
Dividend yield .32% .82% .90%
Volatility factors of expected
market price of stock 40% 40% 32%
Risk-free interest rate 5.44% 6.27% 5.90%
Expected option lives (in years) 5.2 4.5 6.0
Pro Forma Information
Net income $287,637 $186,003 $151,853
Basic earnings per share $ 4.39 $ 2.82 $ 2.29
Diluted earnings per share $ 4.13 $ 2.74 $ 2.27
Under the 1994 Stock Incentive Plan, the Company has
reserved 10,620,880 common shares as of December 31, 1998,
for issuance in the form of incentive stock options, nonstatutory
stock options, stock appreciation rights, restricted stock and incen-
tive stock. The exercise price of each stock option issued to date
equals the market price of the Company’s stock on the date of
grant. Each option’s maximum term is ten years. The number of
shares available for future grants was 726,223; 97,814 and
1,508,352 as of December 31, 1998, 1997 and 1996, respec-
tively. Other than the performance-based options discussed below,
options generally vest annually over three to five years and expire
beginning November 2004. All options vest immediately upon a
change in control of the Company.
In June 1998, the Company’s Board of Directors approved a
grant to senior management (“EntrepreneurGrant III”). Included in
this grant as of December 31, 1998, were 870,632 performance-
based options granted to certain key managers (including 666,680
options to the Company’s Chief Executive Officer (“CEO”) and Chief
Operating Officer (“COO”)) at the then market price of $101.31 per
share. The Company’s CEO and COO gave up 100,000 and 66,670
vested options (valued at $8,760 in total), respectively, in exchange
for their EntrepreneurGrant III options. Other members of senior
management gave up future cash compensation for each of the
next three years in exchange for the options. All options made
under this grant will vest if the Company’s stock reaches $175 per
share for at least ten trading days in a thirty consecutive calendar
day period by June 11, 2001, or immediately upon a change in
control of the Company.