American Airlines 2007 Annual Report Download - page 70

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67
9. Share Based Compensation (Continued)
The following table illustrates the effect on net earnings (loss) and earnings (loss) per share amounts if the
Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation
for periods prior to the adoption of SFAS 123(R) (in millions, except per share amounts):
2005
Net earnings (loss), as reported $ (857)
Add: Stock-based employee compensation
expense included in reported net
earnings (loss)
132
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for all
awards
(174)
Pro forma net earnings (loss) $ (899)
Loss per share:
Basic and diluted – as reported $ (5.18)
Basic and diluted – pro forma $ (5.44)
Stock Options/SSARs During 2006, the AMR Board of Directors approved an amendment covering all of the
outstanding stock options previously granted under the LTIP Plans. The Amendment added to each of the
outstanding options an additional stock settled stock appreciation right (SSAR) in tandem with each of the then
outstanding stock options. The addition of the SSAR did not impact the fair value of the stock options, but simply
allowed the Company to settle the exercise of the option by issuing the net number of shares equal to the in-the-
money value of the option. This amendment is estimated to make available enough shares to permit the
Company to settle all outstanding performance and deferred share awards in stock rather than cash.
Options/SSARs granted under the LTIP Plans and the 2003 Plan are awarded with an exercise price equal to the
fair market value of the stock on date of grant, become exercisable in equal annual installments over periods
ranging from two to five years and expire no later than ten years from the date of grant. Expense for the options
is recognized on a straight-line basis. The fair value of each award is estimated on the date of grant using the
modified Black-Scholes option valuation model and the assumptions noted in the following table. Expected
volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the
Company’s stock, and other factors. The Company uses historical employee exercise data to estimate the
expected term of awards granted used in the valuation model. The risk-free rate is based on the U.S. Treasury
yield curve in effect at the time of grant. The dividend yield is assumed to be zero based on the Company’s
history and expectation of not paying dividends.
2007 2006 2005
Expected volatility 49.7% to 51.6% 52.5% to 55.0% 55.0%
Expected term (in years) 4.0 4.0 4.0
Risk-free rate 4.43% to 5.03% 4.35% to 5.07% 3.71% to 3.98%
Annual forfeiture rate 10.0% 10.0% 0.0%