Southwest Airlines 1998 Annual Report Download - page 57

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57
SOUTHWEST AIRLINES CO. ¤ SIX STORIES OF FREEDOM
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 1998, 1997, and 1996,
respectively: dividend yield of .16 percent, .22 percent, and .16 percent; expected
volatility of 38.20 percent, 38.23 percent, and 35.37 percent; risk-free interest rate of
4.66 percent, 5.80 percent, and 5.89 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 fixed option plans,
except the SAEA Plan, during 1998, 1997, and 1996 was $7.17, $4.08, and $4.52,
respectively, for the incentive plans; $7.14, $5.11, and $4.11, respectively, for the
SWAPA Plan; and $7.15, $4.08, and $4.52, respectively, for other non-qualified plans.
The weighted-average fair value of options granted in 1998 under the SAEA Plan was
$7.25. 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 $6.21. No
such options were granted in 1998 or 1997. The weighted-average fair value of each
purchase right under the ESPP granted in 1998, 1997, and 1996, which is equal to the
ten percent discount from the market value of the common stock at the end of each
purchase period, was $1.94, $1.19, and $1.14, 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.