SkyWest Airlines 2006 Annual Report Download - page 71

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65
Effective January 1, 2006, the Company adopted thefair value recognition provisions of SFAS
No. 123(R), using the modified-prospective transition method. Under the modified-prospective transition
method, compensation cost recognized during theyear ended December 31,2006 includes compensation
cost for all share-based payments granted to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with theoriginal provisionsof SFAS No. 123. Results for prior
periods have not been restated.
Thefair value of stock optionshas been estimated as of thegrant date usingtheBlack-Scholes option
pricing model. TheCompany uses historical data to estimate option exercises and employeetermination in
the option pricing model.Theexpected term of options granted is derived from the output of the option
pricing model and represents theperiod of time that options granted are expected to be outstanding. The
expected volatilities are based on thehistoricalvolatility of the Company’s traded stockand other factors.
During the year ended December 31, 2006,the Company granted 376,890 stock options to employees
under the 2006 Incentive Plan. The following table shows the assumptions usedand weighted average fair
valuefor grants in the years ended December 31, 2006, 2005 and 2004.
2006 2005 2004
Expected annual dividend rate ..............................0.70% 0.70%0.63%
Risk-freeinterestrate ......................................4.31% 3.87%2.75%
Average expected life (years). ...............................4.1 6.04.0
Expected volatility of common stock.........................0.294 0.3910.422
Forfeiture rate ............................................6.0%6.7%6.6%
Weighted averagefair value of optiongrants ..................$6.80 $7.04$ 6.66
As required by SFAS No.123(R), the Company recorded share-based compensationexpense only for
thoseoptions that areexpected to vest. The estimated fair value of the stock optionsis amortized over the
vesting period of the respectivestock option grants.
During the year ended December 31, 2006, the Company granted 317,823shares of restricted stockto
theCompany’s employeesunder the 2006 Incentive Plan. The restricted stock has a three-year vesting
period, during which the recipient must remain employed with the Company or its subsidiaries.
Additionally, the Company granted 12,600 fully vested shares of restricted stocktothe Company’s
directors. Thefair value of the stock on the date of grants made during the year ended December 31, 2006
was$23.80 per share. Thefollowing table summarizes therestricted stock activity as of December 31,2006:
2006
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
Non-vested shares outstanding at beginning of year ................. —$—
Granted....................................................... 330,42323.80
Vested ........................................................ (12,600) 23.80
Cancelled...................................................... (5,072) 23.80
Non-vested shares outstanding at endofyear ...................... 312,751$23.80
During the year ended December 31, 2006, the Company recorded equity-based compensation
expense of $10.8 million relatedto the adoption of SFAS No. 123(R) andtheissuance of restricted stock
under the 2006 Incentive Plan. As a result of adopting SFAS No. 123(R) on January 1, 2006, the
Company’s net incomefor the year ended December 31, 2006was$7.6 million lower than if the Company
hadcontinuedto account for share-based compensation under Opinion No. 25. Basic and diluted earnings
per shareforthe yearended December 31,2006 was $0.13 and$0.11,respectively, lower than if the
Company hadcontinued to account for share-based compensation under Opinion No. 25.The impact of