(9) Capital Transactions

Preferred Stock

The Company is authorized to issue 5,000,000 shares of preferred stock in one or more series without shareholder approval. No shares of preferred stock are presently outstanding. The Company’s Board of Directors is authorized, without any further action by the shareholders of the Company, to (i) divide the preferred stock into series; (ii) designate each such series; (iii) fix and determine dividend rights; (iv) determine the price, terms and conditions on which shares of preferred stock may be redeemed; (v) determine the amount payable to holders of preferred stock in the event of voluntary or involuntary liquidation; (vi) determine any sinking fund provisions; and (vii) establish any conversion privileges.

Stock Compensation

On May 4, 2010, the Company’s shareholders approved the adoption of the SkyWest Inc. 2010 Long‑Term Incentive Plan, which provides for the issuance of up to 5,150,000 shares of common stock to the Company’s directors, employees, consultants and advisors (the “2010 Incentive Plan”). The 2010 Incentive Plan provides for awards in the form of options to acquire shares of common stock, stock appreciation rights, restricted stock grants, restricted stock units and performance awards. The 2010 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”), which is authorized to designate option grants as either incentive stock options for income tax purposes (“ISO”) or non-statutory stock options ISOs are granted at not less than 100% of the market value of the underlying common stock on the date of grant. Non‑statutory stock options are granted at a price as determined by the Compensation Committee.

In prior years, the Company adopted three stock option plans: the Executive Stock Incentive Plan (the “Executive Plan”), the 2001 Allshare Stock Option Plan (the “Allshare Plan”) and SkyWest Inc. Long‑Term Incentive Plan (the “2006 Incentive Plan”). As of December 31, 2015, options to purchase an aggregate 76,923 shares of the Company’s common stock remained outstanding under the Executive Plan, the Allshare Plan and the 2006 Incentive Plan. There are no additional shares of common stock available for issuance under these plans.

The fair value of stock options awarded under the Company’s stock option plans has been estimated as of the grant date using the Black‑Scholes option pricing model. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company’s traded stock and other factors. The Company granted 267,433, 255,503 and 173,560 stock options to employees under the 2010 Incentive Plan during the years ended December 31, 2015, 2014 and 2013, respectively. Stock options granted in 2015 vest in three equal installments over a three-year period. Stock options granted in 2014 and 2013 have three-year vesting periods. The following table shows the assumptions used and weighted average fair value for grants in the years ended December 31, 2015, 2014 and 2013.


	2015			2014			2013
Expected annual dividend rate		1.18	%		1.32	%		1.21	%
Risk-free interest rate		1.62	%		1.50	%		0.92	%
Average expected life (years)		5.7			5.8			6.0
Expected volatility of common stock		0.401			0.431			0.446
Forfeiture rate		0.0	%		0.0	%		0.0	%
Weighted average fair value of option grants	$	4.75		$	4.47		$	5.04

The Company recorded share‑based compensation expense only for those options that are expected to vest. The estimated fair value of the stock options is amortized over the vesting period of the respective stock option grants.

During the year ended December 31, 2015, the Company granted 408,163 shares of restricted stock units to certain Company’s employees under the 2010 Incentive Plan. The restricted stock units granted during the year ended December 31, 2015 have a three‑year vesting period, during which the recipient must remain employed with the Company or its subsidiaries. The weighted average fair value of the restricted stock units the date of grants made during the year ended December 31, 2015 was $13.57 per share.

The following table summarizes the activity of restricted stock units granted to certain Company employees as of December 31, 2015, 2014 and 2013:


			Weighted-Average
			Grant-Date Fair
	Number of Shares		Value
Non-vested shares outstanding at December 31, 2012	698,885	$	14.21
Granted	282,651		13.43
Vested	(202,012)		14.51
Cancelled	(45,933)		13.69
Non-vested shares outstanding at December 31, 2013	733,591		13.79
Granted	312,749		12.00
Vested	(284,891)		14.74
Cancelled	(38,273)		12.83
Non-vested shares outstanding at December 31, 2014	723,176		12.70
Granted	408,163		13.57
Vested	(215,856)		13.06
Cancelled	(106,184)		13.52
Non-vested shares outstanding at December 31, 2015	809,299		13.13

During the year ended December 31, 2015, the Compensation Committee granted performance share units, which are performance based restricted stock units, to certain Company employees with three-year performance based financial metrics that the Company must meet before those awards may be earned and the performance period for those grants ends December 31, 2017. The Compensation Committee will determine the achievement of performance results and corresponding vesting of performance shares for each performance period. At the end of each performance period, the number of shares awarded can range from 0% to 150% of the original granted amount, depending on the performance against the pre-established targets.

The following table summarizes the activity of performance share units granted at target as of December 31, 2015.


			Weighted-Average
			Grant-Date Fair
	Number of Shares		Value
Non-vested shares outstanding at December 31, 2014	—	$	—
Granted	222,583		13.61
Vested	—		—
Cancelled	(19,754)		13.51
Non-vested shares outstanding at December 31, 2015	202,829	$	13.62

During the years ended December 31, 2015, 2014 and 2013 the Company granted fully‑vested shares of common stock to the Company’s directors in the amounts of 36,950, 44,631 and 29,453 shares, respectively, with a weighted average grant‑date fair value of $14.05, $12.10, and $13.24, respectively.

During the year ended December 31, 2015, 2014 and 2013, the Company recorded equity‑based compensation expense of $5.4 million, $5.3 million and $4.4 million, respectively.

As of December 31, 2015, the Company had $8.7 million of total unrecognized compensation cost related to non‑vested stock options and non‑vested restricted stock grants. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize this cost over a weighted average period of 2.0 years.

Options are exercisable for a period as defined by the Compensation Committee on the date granted; however, no stock option will be exercisable before six months have elapsed from the date it is granted and no stock option shall be exercisable after seven years from the date of grant. The following table summarizes the stock option activity for all of the Company’s plans for the years ended December 31, 2015, 2014 and 2013:


	2015							2014			2013
				Weighted
		Weighted		Average			Aggregate		Weighted			Weighted
		Average		Remaining			Intrinsic		Average			Average
	Number of	Exercise		Contractual			Value	Number of	Exercise		Number of	Exercise
	Options	Price		Term			($000)	Options	Price		Options	Price
Outstanding at beginning of year	2,888,074	$	16.46	1.7	years	$	—	3,407,575	$	17.99	3,653,859	$	18.44
Granted	267,433		13.63					255,503		11.96	173,560		13.24
Exercised	(544,917)		14.68					(6,701)		12.10	(75,080)		10.91
Cancelled	(1,546,161)		18.53					(768,303)		6.81	(344,764)		20.67
Outstanding at end of year	1,064,429		13.64	3.7	years	$	5,726.7	2,888,074		16.46	3,407,575		17.99
Exercisable at December 31, 2015	484,747		14.46	1.7	years	$	2,212.5
Exercisable at December 31, 2014	2,324,336		17.39	0.8	years		—

The total intrinsic value of options to acquire shares of the Company’s common stock that were exercised during the years ended December 31, 2015, 2014 and 2013 was $1,800,000, $30,000 and $172,000, respectively.

The following table summarizes the status of the Company’s non‑vested stock options as of December 31, 2015:


		Weighted-Average
	Number of	Grant-Date
	Shares	Fair Value
Non-vested shares at beginning of year	563,738	$	4.56
Granted	267,433		4.92
Vested	(187,403)		4.43
Cancelled	(64,086)		4.65
Non-vested shares at end of year	579,682	$	4.75

The following table summarizes information about the Company’s stock options outstanding at December 31, 2015:


			Options Outstanding					Options Exercisable
				Weighted Average
			Number	Remaining		Weighted Average		Number	Weighted Average
Range of Exercise Prices			Outstanding	Contractual Life		Exercise Price		Exercisable	Exercise Price
$8	to	$11	19,458	5.4	years	$	11.10	—	$	—
$12	to	$14	859,595	4.1	years		13.31	305,331		13.90
$15	to	$18	185,376	1.4	years		15.43	179,416		15.64
$8	to	$18	1,064,429	3.7	years	$	13.64	484,747	$	14.46

Taxes

The Company’s treatment of stock option grants of non‑ qualified options, restricted stock units and performance shares results in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised or the restrictions lapse.