United Airlines 2011 Annual Report Download - page 108

Table of Contents
termination of employment under certain circumstances following the Merger, the participant is entitled to a cash settlement. In the fourth quarter of 2010,
UAL paid $19 million in cash for settlement of these awards in connection with Merger-related terminations.
Stock Options. The Company did not grant any stock options during 2011. Historically, stock options were awarded with exercise prices equal to the fair
market value of UAL’s common stock on the date of grant. UAL stock options generally vest over a period of either three or four years and have a contractual
life of 10 years. The Continental Predecessor stock options generally have an original contractual life of five years (management level employee options) or 10
years (outside directors). Expense related to each portion of an option grant is recognized on a straight-line basis over the specific vesting period for those
options.
The table below summarizes UAL stock option activity (shares in thousands):
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

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Outstanding at beginning of year 11,052 $21.70
Exercised (a) (2,449) 10.77
Canceled (30) 16.66
Expired (1,627) 29.30
Outstanding at end of year 6,946 23.80 3.2
Exercisable at end of period 6,372 24.68 3.0 $19
(a) The aggregate intrinsic value of shares exercised in 2011, 2010 and 2009 was $33 million, $42 million and less than $1 million, respectively.
The following table provides additional information for options granted in 2009 and Continental Predecessor options granted in 2010 which were valued at the
Merger date:
  
Risk-free interest rate 0.1 – 1.8% 1.9 – 3.1%
Dividend yield — % — %
Expected market price volatility of UAL common stock 75% 93%
Expected life of options (years) 0.1 – 6.3 6.0
Weighted-average fair value $11.52 $3.72
The fair value of options is determined at the grant date, and at the Merger date in the case of Continental Predecessor options, using a Black Scholes option
pricing model, which requires UAL to make several assumptions. The risk-free interest rate is based on the U.S. treasury yield curve in effect for the expected
term of the option at the time of grant. The dividend yield on UAL’s common stock was assumed to be zero since UAL did not have any plans to pay
dividends at the time of the option grants.
The volatility assumptions were based upon historical volatilities of UAL and other comparable airlines whose shares are traded using daily stock price
returns equivalent to the contractual term of the option. In addition, implied volatility data for both UAL and other comparable airlines, using current
exchange-traded options, was utilized.
The expected lives of the options were determined based upon either a simplified assumption that the option will be exercised evenly from vesting to expiration
or estimated using historical experience for the assumed options. The terms of certain UAL awards do not provide for the acceleration of vesting upon
retirement. In addition,
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