Southwest Airlines 1997 Annual Report Download - page 47

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SOUTHWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM
exercise price of $15.67 per share related to the 1996 employment agreement. At
December 31, 1997, 1996, and 1995, total options of 2,611,000, 2,847,000, and
2,133,000 were outstanding, respectively. At December 31, 1997, total options of
2,031,000 were exercisable at exercise prices ranging from $1.00 to $15.67 per share.
Options for 236,000, 253,000, and 101,000 shares were exercised in 1997, 1996, and
1995, respectively.
Under the 1991 Employee Stock Purchase Plan (ESPP), at December 31, 1997, the
Company is authorized to issue up to a balance of 871,000 shares of common stock to
Employees of the Company at a price equal to 90 percent of the market value at the
end of each purchase period. Common stock purchases are paid for through periodic
payroll deductions. Participants under the plan received 440,000 shares in 1997,
464,000 shares in 1996, and 583,000 shares in 1995 at average prices of $16.00,
$15.37, and $12.79, 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
SFAS 123. 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 1997, 1996, and 1995,
respectively: dividend yield of .22 percent, .16 percent, and .21 percent; expected
volatility of 38.23 percent, 35.37 percent, and 36.85 percent; risk-free interest rate of
5.80 percent, 5.89 percent, and 7.79 percent; and expected lives of 5.0 years for all
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 weighted-average fair value of options granted under the five fixed option plans
during 1997, 1996, and 1995 was $6.12, $6.78, and $5.61, respectively, for the
incentive plans; $7.67, $6.16, and $5.31, respectively, for the SWAPA Plan; and $6.12,
$6.78, and $5.61, respectively, for other non-qualified plans. The weighted-average fair
value of options granted in 1996 to the Company’s president and chief executive officer
relative to an employment contract was $9.32. No such options were granted in 1997 or
1995. The weighted-average fair value of each purchase right under the ESPP granted
in 1997, 1996, and 1995, which is equal to the ten percent discount from the market
value of the common stock at the end of each purchase period, was $1.78, $1.71, and
$1.43, respectively.
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 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.