Southwest Airlines 2003 Annual Report Download - page 64

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which is equal to the ten percent discount from the market value of the common stock at the end of each
purchase period, was $1.56, $1.63, and $1.82, respectively.
Pro forma information regarding net income and net income per share, as disclosed in Note 1, 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 a modified Black-Scholes option pricing model with the following weighted-average
assumptions used for grants under the fixed option plans:
2003 2002 2001
Wtd-average risk-free interest rate 2.6% 3.4% 4.5%
Expected life of option (years) 4.2 5.0 5.9
Expected stock volatility 34.0% 34.0% 34.8%
Expected dividend yield 0.13% 0.13% 0.07%
The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term
traded options that 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.
The fair value of options granted under the fixed option plans during 2003 ranged from $3.33 to $8.17. The
fair value of options granted under the fixed option plans during 2002 ranged from $3.54 to $8.52. The fair
value of options granted under the fixed option plans during 2001 ranged from $5.69 to $9.11.
14. EMPLOYEE RETIREMENT PLANS
The Company has defined contribution plans covering substantially all of Southwest's Employees. The
Southwest Airlines Co. Profitsharing Plan is a money purchase defined contribution plan and Employee stock
purchase plan. The Company also sponsors Employee savings plans under section 401(k) of the Internal
Revenue Code, which include Company matching contributions. The 401(k) plans cover substantially all
Employees. Contributions under all defined contribution plans are based primarily on Employee compensation
and performance of the Company.
Company contributions to all retirement plans expensed in 2003, 2002, and 2001 were $219 million, $156
million, and $215 million, respectively.
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components
of deferred tax assets and liabilities at December 31, 2003 and 2002, are as follows: