Southwest Airlines 2008 Annual Report Download - page 88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Employee Plans
Options
(000)
Wtd. average
exercise price
Wtd. average
remaining
contractual
term
Aggregate intrinsic
value (millions)
Outstanding December 31, 2005 ................... 35,820 $ 13.96
Granted .................................... 2,831 17.52
Exercised ................................... (5,015) 9.57
Surrendered ................................. (1,442) 15.93
Outstanding December 31, 2006 ................... 32,194 $ 14.87
Granted .................................... 293 16.35
Exercised ................................... (2,506) 8.45
Surrendered ................................. (1,454) 16.49
Outstanding December 31, 2007 ................... 28,527 $ 15.37
Granted .................................... 1,642 12.13
Exercised ................................... (2,447) 10.64
Surrendered ................................. (1,233) 16.05
Outstanding December 31, 2008 ................... 26,489 $ 15.57 4.5 $—
Vested or expected to vest at December 31, 2008 ...... 25,003 $ 15.57 4.5 $—
Exercisable at December 31, 2008 ................. 19,760 $ 15.82 4.0 $—
The total aggregate intrinsic value of options
exercised during the years ended December 31, 2008,
2007, and 2006, was $24 million, $137 million, and
$262 million, respectively. The total fair value of shares
vesting during the years ended December 31, 2008,
2007, and 2006, was $12 million, $64 million, and $112
million, respectively. As of December 31, 2008, there
was $28 million of total unrecognized compensation
cost related to share-based compensation arrangements,
which is expected to be recognized over a weighted-
average period of 2.1 years. The total recognition period
for the remaining unrecognized compensation cost is
approximately seven years; however, the majority of
this cost will be recognized over the next two years, in
accordance with vesting provisions.
Employee Stock Purchase Plan
Under the amended 1991 Employee Stock
Purchase Plan (ESPP), which has been approved by
shareholders, the Company is authorized to issue up to
a remaining balance of 5.2 million shares of Common
Stock to Employees of the Company. These shares
may be issued at a price equal to 90 percent of the
market value at the end of each monthly purchase
period. Common Stock purchases are paid for through
periodic payroll deductions. For the years ended
December 31, 2008, 2007, and 2006, participants
under the plan purchased 1.3 million shares,
1.3 million shares, and 1.2 million shares at average
prices of $11.29, $13.30, and $14.86, respectively. The
weighted-average fair value of each purchase right
under the ESPP granted for the years ended
December 31, 2008, 2007, and 2006, which is equal to
the ten percent discount from the market value of the
Common Stock at the end of each monthly purchase
period, was $1.25, $1.48, and $1.65, respectively.
Taxes
A portion of the Company’s granted options
qualify as incentive stock options (ISO) for income
tax purposes. As such, a tax benefit is not recorded at
the time the compensation cost related to the options
is recorded for book purposes due to the fact that an
ISO does not ordinarily result in a tax benefit unless
there is a disqualifying disposition. Grants of
non-qualified stock options result in the creation of a
deferred tax asset, which is a temporary difference,
until the time that the option is exercised. Due to the
treatment of incentive stock options for tax purposes,
the Company’s effective tax rate from year to year is
subject to variability.
15. Employee Retirement Plans
Defined contribution plans
The Company has defined contribution plans
covering substantially all its Employees. The Southwest
Airlines Co. Profit Sharing Plan (Profit Sharing Plan) is
a defined contribution plan to which the Company
contributes 15 percent of its eligible pre-tax profits, as
defined, on an annual basis. No Employee contributions
to the Profit Sharing Plan are allowed.
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