Southwest Airlines 1996 Annual Report Download - page 45

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45
Participants under the plan received 309,446 shares in 1996, 388,339 shares in 1995, and
290,054 shares in 1994 at average prices of $23.05, $19.18, and $24.98, respectively.
Pro forma information regarding net income and net income per share is required by
SFAS 123, and has been determined as if the Company had accounted for its employee stock-
based compensation plans and other stock options under the fair value method of that SFAS. The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants under the fixed
option plans in 1996 and 1995, respectively: dividend yield of .16% and .21%; expected volatility
of 35.4% and 36.9%; risk-free interest rate of 5.9% and 7.8%; and expected lives of 5.0 years for
both periods. Assumptions for the stock options granted in 1996 to the Company’s president and
chief executive officer were the same as for the fixed option plans except for the weighted
average expected lives of 8.0 years.
The Black-Scholes option valuation model was developed 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 estimate, in management’s opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its Employee
stock options.
For purposes of pro forma disclosures the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the vesting period.
The Company’s pro forma net income and net income per share is as follows (in thousands
except per share amounts):
1996 1995
Net income:
As reported $ 207,337 $ 182,626
Pro forma $ 196,478 $ 167,907
Net income per share:
As reported $ 1.37 $ 1.23
Pro forma $ 1.33 $ 1.14