<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-14719
SKYWEST, INC.
Incorporated under the Laws of Utah 87-0292166
(IRS Employer ID No.)
444 South River Road
St. George, Utah 84790
(435) 634-3000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or such shorter
period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- -----
The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price of the Common Stock on the NASDAQ National Market
System) on June 16, 1998, was approximately $431,886,095.
As of June 16, 1998, there were 24,141,320 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended March 31, 1998, are incorporated by reference in Part II as
specified.
Portions of the Registrant's Proxy Statement to be used in connection
with the solicitation of proxies to be voted at the Registrant's 1998 Annual
Meeting of Shareholders, to be filed with the Commission, are incorporated by
reference in Part III as specified.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
<PAGE> 2
SKYWEST, INC.
FISCAL 1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
Item 1. Business.....................................................................1
Item 2. Properties...................................................................6
Item 3. Legal Proceedings............................................................7
Item 4. Submission of Matters to a Vote of Security Holders..........................7
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters................................................7
Item 6. Selected Financial Data......................................................8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................8
Item 8. Financial Statements and Supplementary Data..................................8
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure..........8
PART III
Item 10. Directors and Executive Officers of the Registrant...........................8
Item 11. Executive Compensation.......................................................8
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................................8
Item 13. Certain Relationships and Related Transactions...............................8
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................................9
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
SkyWest, Inc. (the "Company"), through its wholly-owned subsidiary, SkyWest
Airlines, Inc. ("SkyWest"), operates one of the larger regional airlines in the
United States. SkyWest provides passenger and air freight service and completes
over 880 daily flights. Pursuant to a joint marketing and code sharing agreement
with Delta Airlines, Inc. ("Delta"), SkyWest operates as a Delta Connection in
certain SkyWest markets. In October 1995, SkyWest entered into a marketing and
code sharing agreement with Continental Airlines, Inc. ("Continental") which
allows SkyWest to operate as a Continental Connection in certain markets in and
out of Los Angeles. Effective October 1, 1997, SkyWest entered into a new
code-sharing agreement ("United Express Agreement") with United Airlines, Inc.
("United") and began operating as United Express in Los Angeles, California. On
January 19, 1998, SkyWest executed an addendum to the United Express Agreement
to provide service as United Express in San Francisco, California, which began
June 1, 1998. On February 9, 1998, SkyWest executed an addendum to the United
Express Agreement to provide service as United Express in United's Portland and
Seattle/Tacoma markets and in additional Los Angeles markets, which began April
23, 1998. Prior to October 1, 1998, 97 percent of SkyWest's traffic was carried
under the DL code and 3 percent was carried under the CO code. In addition, all
of SkyWest's flights operated under the DL code and certain flights operating in
and out of Los Angeles operated under both DL and CO codes. As of May 31, 1998,
42 percent of SkyWest's traffic was carried under the DL code, 57 percent was
carried under the UA code and 1 percent was carried under the CO code.
Additionally, 42 percent of SkyWest's flights operated under the DL and CO codes
and 58 percent operated under the UA code. SkyWest will no longer provide
service as a Continental Connection effective July 15, 1998. With principal hubs
located at Los Angeles, Salt Lake City, San Francisco, Portland and
Seattle/Tacoma, SkyWest offers a convenient and frequent flight schedule
designed to maximize connecting and origin-destination traffic for its major
code-sharing partners. SkyWest currently operates a fleet of 69 turboprop
aircraft and 10 regional jet aircraft.
Founded in 1972, the Company has experienced significant growth. During the past
five fiscal years, consolidated operating revenues have increased at a
compounded annual growth rate of 13 percent, from $182.9 million in fiscal 1994
to $297.1 million in fiscal 1998. Total passengers carried by SkyWest have
increased from approximately 1,731,000 to approximately 2,989,000 over the same
period. In fiscal 1998, the Company achieved record levels of passengers
carried, record consolidated operating revenues of $297.1 million, and net
income increased 117 percent to $21.9 million or $1.04 per diluted share. All
references in this Form 10-K give affect to a stock dividend of one share for
each share outstanding declared May 20, 1998.
The Company, through two wholly-owned subsidiaries, is also engaged in various
other transportation related businesses. Scenic Airlines, Inc. ("Scenic")
provides air tours and general aviation services to the scenic regions of
Northern Arizona and Southern Utah and operates 36 aircraft. National Parks
Transportation, Inc. ("NPT") provides car rental services through a fleet of
Avis vehicles located at six airports. In fiscal 1998, Scenic and NPT together
accounted for approximately 11.0 percent of the Company's consolidated operating
revenues.
JOINT MARKETING AND CODE SHARING AGREEMENTS
SkyWest's Code-Sharing Agreements with Delta, United and Continental authorize
SkyWest to use two-letter flight designator codes ("DL," "UA" and "CO,"
respectively) to identify its flights and fares in major central reservation
systems, to paint its aircraft with the colors and/or logos of its code-sharing
partners and to market and advertise its status as the Delta Connection, United
Express or Continental Connection carrier. The Code-Sharing Agreements either
allocate to SkyWest a portion of the total passenger fare on a formula or other
basis, subject to periodic adjustments, or provide for payments for contracted
flying on a per departure basis with incentives related to number of passengers
carried and customer service. SkyWest's passengers participate in the frequent
flyer
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programs of its code-sharing partners. Under the Code-Sharing Agreements, Delta,
United and Continental provide additional services to SkyWest, including
providing reservation services and ticket stock, issuing tickets, providing
ground support services and gate access and coordinating cooperative marketing,
advertising and other promotional efforts. SkyWest pays negotiated fees to its
code-sharing partners for services provided.
The significant terms of each of the Code-Sharing Agreements are as follows:
Delta. SkyWest has operated as the Delta Connection at Delta's Salt Lake City
and Los Angeles hubs since 1987. The Delta Agreement was revised in 1990 and
modified effective April 1, 1997, to facilitate interline connections in Salt
Lake City and Los Angeles, to adjust proration formulas (the portion of the
passenger fare allocated to SkyWest) and to permit SkyWest to seek other
code-sharing relationships in Los Angeles. The Delta Agreement continues until
April 2002, but is subject to earlier termination under various circumstances,
including upon 180 days' advance notice by either party for any or no reason.
The Delta Agreement was modified in April 1997, to be noncancellable (except for
cause) for a two-year period. Delta currently owns approximately 13.0 percent of
the outstanding Common Stock, which was acquired under the Delta Option
Agreement entered into in 1987, concurrently with the Delta Agreement.
United. On October 1, 1998, SkyWest and United entered into a United Express
Agreement pursuant to which SkyWest became a United Express carrier at United's
Los Angeles hub. In January 1998, SkyWest and United also entered into an
addendum to the United Express Agreement, pursuant to which SkyWest would become
the United Express carrier at United's San Francisco hub, which began June 1,
1998. In February 1998, SkyWest and United entered into an amendment to the
United Express Agreement, pursuant to which SkyWest would become the United
Express carrier in United's Portland and Seattle/Tacoma markets and in
additional Los Angeles markets, which began April 23, 1998.
Under the United Express Agreement, SkyWest currently operates flights in Los
Angeles city pairs on a contract basis; i.e., United pays SkyWest a flat rate
per flight departure, an additional amount per passenger and per passenger
incentives based upon on-time performance, flight completion rates and number of
passengers carried measured against agreed upon objectives. United controls
scheduling, ticketing, pricing and seat inventories in these city pairs. SkyWest
also operates as a United Express carrier in certain city pairs where SkyWest
receives no contract payments and United controls scheduling, inventory and
pricing. United must also concur in any marketing or code-sharing relationships
with any other carrier with respect to operations covered by the United Express
Agreement. United has consented to SkyWest's Code-Sharing Agreement with Delta
in designated city pairs in Los Angeles.
The term of the United Express Agreement is for five years ending in September
2002, with respect to operations in Los Angeles and for ten years, ending in May
2008, with respect to operations in San Francisco and the Pacific Northwest,
subject to termination by United upon 180 days' prior notice. United may,
however, terminate the United Express Agreement for cause upon 30 days' written
notice.
Continental. SkyWest entered into a Code-Sharing Agreement with Continental in
October 1996, which provided for service to selected California markets. The
Continental agreement expired in October 1997. SkyWest has continued to operate
as the Continental Connection without an agreement, but on the same terms as
provided in the expired agreement. SkyWest will no longer provide service as a
Continental Connection effective July 15, 1998.
ROUTES
Operating from its hubs in Los Angeles, Salt Lake City, San Francisco, Portland
and Seattle/Tacoma, SkyWest serves approximately 64 cities in 13 states and
Canada with approximately 880 scheduled daily flights.
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The following table identifies the cities served by SkyWest as of June 16, 1998:
<TABLE>
<S> <C> <C>
ARIZONA: Santa Rosa Portland
Tucson Visalia Redmond
Yuma COLORADO: SOUTH DAKOTA:
CALIFORNIA: Colorado Springs Rapid City
Bakersfield Grand Junction UTAH:
Burbank IDAHO: Cedar City
Carlsbad Boise Salt Lake City
Chico Idaho Falls St. George
Cresent City Pocatello Vernal
Eureka/Arcata Sun Valley WASHINGTON:
Fresno Twin Falls Bellingham
Imperial/El Centro MONTANA: Pasco
Inyokern Billings Seattle
Los Angeles Bozeman Yakima
Merced Butte WYOMING:
Modesto Helena Casper
Monterey Missoula Cody
Ontario West Yellowstone Jackson Hole
Orange County NEBRASKA: CANADA:
Oxnard Omaha Vancouver B.C.
Palm Springs NEW MEXICO:
Redding Albuquerque
Sacramento NEVADA:
San Diego Elko
San Francisco Las Vegas
San Jose Reno
San Luis Obispo OREGON:
Santa Barbara Eugene
Santa Maria Medford
</TABLE>
GOVERNMENT REGULATION
All interstate air carriers, including SkyWest and Scenic, are subject to
regulation by the DOT, the FAA and certain other governmental agencies.
Regulations promulgated by the DOT primarily relate to economic aspects of air
service. The FAA requires operating, air worthiness and other certificates,
approval of personnel who may engage in flight, maintenance or operations
activities, record keeping procedures in accordance with FAA requirements, and
FAA approval of flight training and retraining programs. The DOT and the FAA, as
well as other governmental agencies regulating SkyWest and Scenic, enforce their
regulations through, among other mechanisms, (i) certifications, which are
necessary for SkyWest's and Scenic's continued operations, and (ii) proceedings,
which can result in civil or criminal penalties or revocation of operating
authority. The FAA can also issue maintenance directives and other mandatory
orders relating to, among other things, inspection of aircraft, installation of
new safety-related items and the mandatory removal and replacement of aircraft
parts that the FAA believes might present a safety hazard.
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SkyWest and Scenic management believe they are operating in compliance with FAA
regulations and holds all necessary operating and air worthiness certificates
and licenses. SkyWest and Scenic incur substantial costs in maintaining its
current certifications and otherwise complying with laws, rules and regulations
to which they are subject. SkyWest and Scenic flight operations, maintenance
programs, record keeping and training programs are conducted under FAA approved
procedures. SkyWest and Scenic do not operate at any airports where landing
slots are restricted.
All air carriers are required to comply with federal law and regulations
pertaining to noise abatement and engine emissions. All air carriers are also
subject to certain provisions of the Federal Communications Act of 1934, as
amended, because of their extensive use of radio and other communication
facilities. SkyWest and Scenic are also subject to certain other federal and
state laws relating to protection of the environment, labor relations and equal
employment opportunity. Management believes that SkyWest and Scenic are in
compliance in all material respects with these laws and regulations.
COMPETITION AND ECONOMIC CONDITIONS
The airline industry is highly competitive. SkyWest not only competes with other
regional airlines, some of which are owned by or are operated as code-sharing
partners of major airlines, but also faces competition from major airlines on
certain routes. SkyWest is the dominant regional airline operating out of the
Salt Lake City International Airport; however, Southwest Airlines Co., a
national low fare airline, also operates out of the Salt Lake City International
Airport, which results in significant price competition at the Salt Lake City
hub. Competition in the Southern California markets, which are serviced by
SkyWest from its hub in Los Angeles, is particularly intense, with a large
number of carriers in these markets. In its markets serviced from LAX, SkyWest's
principle competitors include Wings West, Inc. (operating as "American Eagle"),
Trans States Airlines, Inc. (operating as "US Air Express" and "Trans World
Express"). SkyWest believes its principle competitor in San Francisco will be
Trans States Airlines, Inc. (operating as "US Air Express"). In its Pacific
Northwest markets, SkyWest's principal competitor is Horizon Air Industries,
Inc. (operating as "Horizon Airlines").
Certain of SkyWest's competitors are larger and have significantly greater
financial and other resources than SkyWest. Moreover, federal deregulation of
the industry allows competitors to rapidly enter SkyWest's markets and to
quickly discount and restructure fares. The airline industry is particularly
susceptible to price discounting because airlines incur only nominal costs to
provide service to passengers occupying otherwise unsold seats.
Generally, the airline industry is highly sensitive to general economic
conditions, in large part due to the discretionary nature of a substantial
percentage of both business and leisure travel. In the past, many airlines have
reported decreased earnings or substantial losses resulting from periods of
economic recession, heavy fare discounting and other factors. Economic downturns
combined with competitive pressures have contributed to a number of bankruptcies
and liquidations among major and regional carriers. Negative economic conditions
may have a material adverse affect on regional airlines, including SkyWest.
EMPLOYEES
As of June 16, 1998, the Company employed 2,966 full-time equivalent employees
consisting of 1,063 pilots and flight attendants, 360 maintenance personnel,
1,234 customer service personnel, 74 reservation and marketing personnel, and
235 employees engaged in accounting, administration and other functions. The
Company's employees are not represented by any union. The Company is aware,
however, that collective bargaining group organization efforts among its
employees occur from time to time and are expected to continue in the future.
The Company has never experienced any work stoppages and considers its
relationship with its employees to be very good.
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YEAR 2000 COMPLIANCE
The Company is currently modifying computer systems and application programs for
year 2000 compliance, with project completion scheduled for March 31, 1999. The
Company believes that the cost to modify its systems or applications will not
have a material effect on its financial position or results of operations. Any
expenditures will be funded through operating cash flows while any costs for new
software will be capitalized and amortized over the software's useful life.
Although the Company is working cooperatively with third parties with systems
upon which the Company must rely, the Company can not give any assurances that
the systems of other parties will be year 2000 compliant on a timely basis.
Systems operated by others which the Company would use and/or rely on would
include: Federal Aviation Administration Air Traffic Control, computer
reservation systems for travel agent sales as well as Delta and United
reservation, passenger check-in and ticketing systems. The Company's business,
financial condition and/or results of operations could be materially adversely
affected by the failure of its system and applications or those operated by
others.
SEASONALITY
As is common in the airline industry, SkyWest's operations are favorably
affected by increased travel, historically occurring in the summer months and
are unfavorably affected by decreased business travel during the months from
November through January and by inclement weather which occasionally results in
cancelled flights, principally during the winter months. However, SkyWest does
expect some mitigation of the historical seasonal trends due to an increase in
the portion of its operations in contract flying with United. Scenic's business
is also seasonal in nature. A large percentage of Scenic's passengers are
tourists visiting the Las Vegas and Grand Canyon areas during the summer months.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains various forward-looking statements and information that
are based on management's belief, as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "estimate," "project," "expect," and similar expressions are
intended to identify forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, projected or expected. Among the
key factors that may have a direct bearing on the Company's operating results
include, among other things, changes in SkyWest's code-sharing relationships,
fluctuations in the economy and the demand for air travel, the degree and nature
of competition and SkyWest's ability to expand services in new and existing
markets and to maintain profit margins in the face of pricing pressures.
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ITEM 2. PROPERTIES
FLIGHT EQUIPMENT
As of June 16, 1998, SkyWest owned or leased the following types of aircraft:
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED AVERAGE
AIRCRAFT FLIGHT CRUISING AVERAGE
---------------- PASSENGER RANGE SPEED AGE
TYPE OF AIRCRAFT OWNED LEASED CAPACITY (MILES) (MPH) (YEARS)
- - ---------------- ----- ------ --------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Brasilia................... 16 53 30 300 300 5.1
Canadair Regional Jet...... - 10 50 850 530 3.6
</TABLE>
SkyWest's aircraft are turboprop and jet pressurized aircraft designed to
operate more economically over short-haul routes with lower passenger load
factors than larger jet aircraft. These factors make it economically feasible
for SkyWest to provide high frequency service in markets with relatively low
volumes of passenger traffic. Passenger comfort features of these aircraft
include stand-up headroom, a lavatory, overhead baggage compartments and flight
attendant service. Fiscal year 1995 marked the introduction of the Canadair
Regional Jet. SkyWest operates ten of these aircraft on stage lengths up to 850
miles.
During fiscal 1998 SkyWest entered into an agreement to purchase 20 new Brasilia
aircraft, related spare parts inventory and support equipment. Two of these
aircraft were delivered prior to March 31, 1998. At March 31, 1998, SkyWest had
agreed to purchase 18 Brasilia aircraft, related spare parts and support
equipment at an aggregate cost of approximately $144.0 million, including
estimated cost escalations. SkyWest also has options to acquire 40 additional
Brasilia aircraft at fixed prices (subject to cost escalation and delivery
schedules) exercisable through fiscal 2000 and options to acquire an additional
ten CRJs, exercisable at any time. In connection with SkyWest's expansion in Los
Angeles, San Francisco and the Pacific Northwest, SkyWest expects to acquire an
additional 14 used Brasilias for a total of 34 new and used aircraft. SkyWest
also anticipates that it will incur costs of approximately $24.0 million
associated with the acquisition of additional ground and maintenance facilities,
support equipment and spare parts inventory related to its expansion.
GROUND FACILITIES
Employees of SkyWest perform substantially all routine airframe and engine
maintenance and periodic inspection of equipment. Maintenance is performed
primarily at facilities in Palm Springs, California, Salt Lake City, Utah, and
Fresno, California. SkyWest owns a 56,600 square foot maintenance facility in
Palm Springs, California and leases a 90,000 square foot aircraft maintenance
and training facility at the Salt Lake International Airport. The facility
consists of a 40,000 square foot maintenance hangar and 50,000 square feet of
training and other facilities to support SkyWest's growing hub operations. The
facility was constructed and is owned by the Salt Lake City Airport Authority.
SkyWest is leasing the facility under an operating lease arrangement over a
36-year term. SkyWest also leases, under an operating lease arrangement over a
five year term, a 90,000 square foot maintenance hanger and 15,000 square foot
office facility in Fresno, California. SkyWest leases ticket counters, check-in,
and boarding and other facilities in the passenger terminal areas in the
majority of the airports it serves and staffs these facilities with SkyWest
personnel. Delta and United provide ticket handling and/or ground support
services for SkyWest in 27 of the 64 airports it serves.
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Scenic owns a new terminal and hangar facility in Page, Arizona consisting of
11,500 square feet of office and terminal space and 22,000 square feet of
maintenance hangar space. Scenic also leases, under an operating lease
arrangement over a five year term, a new terminal and hanger facility in Las
Vegas, Nevada consisting of 39,500 square feet of office and terminal space and
28,500 square feet of maintenance hanger space.
The Company's corporate headquarters are located in a 63,000 square foot
building in St. George, Utah. Management deems the Company's facilities as being
suitable and necessary to support existing operations and facilities are
adequate for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine legal proceedings incident to its business. In
the opinion of management, none of such proceedings are expected to have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter and quoted in the NASDAQ
National Market System under the symbol "SKYW." At June 16, 1997, there were
approximately 1,051 stockholders of record. Securities held of record do not
include shares held in securities position listings. The following table sets
forth the range of high and low closing sales prices for the Company's Common
Stock.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
----------- -----------
Quarter High Low High Low
------- ------ ------ ----- -----
<S> <C> <C> <C> <C>
First $ 8.50 $ 6.00 $9.88 $6.63
Second 10.32 7.69 9.13 7.06
Third 14.81 10.13 7.82 6.32
Fourth 21.06 14.75 7.19 6.00
</TABLE>
The transfer agent for the Company's Common Stock is Zions First National Bank,
Salt Lake City, Utah. On May 5, 1998, the Company's Board of Directors declared
a 100 percent stock dividend (one share for each share outstanding) payable to
stockholders of record on May 20, 1998. The dividend was distributed on June 8,
1998. The Company paid cash in lieu of issuing fractional shares. All common
shares and per share information included and incorporated by reference in this
Form 10-K have been retroactively adjusted to reflect this stock dividend.
On May 5, 1998, the Company's Board of Directors declared a regular quarterly
cash dividend of $.03 per share payable to stockholders of record on June 30,
1998, distributable July 15, 1998.
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During fiscal 1997, the Board of Directors declared a special dividend of $.04
per share. Thereafter the Board of Directors declared three regular quarterly
dividends of $.025 each quarter.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
page one of the Company's Annual Report to Shareholders for the fiscal year
ended March 31, 1998, furnished herewith to the Commission as Exhibit 13.1 to
this report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference to
pages 12 through 16 of the Company's Annual Report to Shareholders for the
fiscal year ended March 31, 1998, furnished herewith to the Commission as
Exhibit 13.1 to this report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company included on pages 17
through 30 of the Company's Annual Report to Shareholders for the fiscal year
ended March 31, 1998, furnished herewith to the Commission as Exhibit 13.1 to
this report on Form 10-K, are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
All items in Part III are incorporated by reference to the Company's Proxy
Statement for its 1998 annual stockholders meeting to be held August 11, 1998,
to be filed with the Commission.
<TABLE>
<CAPTION>
Headings in
Proxy Statement
---------------
<S> <C>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS "Election of Directors" and
OF THE REGISTRANT. "Executive Officers"
ITEM 11. EXECUTIVE COMPENSATION. "Executive Officers" and
"Executive Compensation" and
"Report of the Compensation
Committee"
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL "Election of Directors" and
OWNERS AND MANAGEMENT. "Security Ownership of Certain
Beneficial Owners and
Management"
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. "Certain Relationships and
Related Transactions"
</TABLE>
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed:
1. Financial Statements. The following consolidated financial
statements of SkyWest, Inc., included in the Annual Report to
Shareholders for the year ended March 31, 1998, are incorporated
herein by reference in Item 8 of the Form 10-K.
- Report of independent public accountants
- Consolidated balance sheets as of March 31, 1998 and 1997
- Consolidated statements of income for the years ended March 31,
1998, 1997 and 1996
- Consolidated statements of stockholders' equity for the years
ended March 31, 1998, 1997 and 1996
- Consolidated statements of cash flows for the years ended March
31, 1998, 1997 and 1996
- Notes to consolidated financial statements
2. Financial Statement Schedules. The following consolidated
financial statement schedule of SkyWest, Inc. is included in Item
14(d) hereof.
- Report of independent public accountants on financial statement
schedule
- Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are not
applicable, and therefore have been omitted.
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the quarter ended
March 31, 1998, dated January 21, 1998 and February 11, 1998.
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(c) Exhibits.
<TABLE>
<CAPTION>
Incorporated by Filed
Number Exhibit Reference Herewith
- - ------ ------- --------- --------
<S> <C> <C> <C>
3.1 Restated Articles of Incorporation..............................(1)
3.2 Amended By-Laws.................................................(3)
4.1 Articles IV and VI of Restated Articles of
Incorporation describing the Common Shares
and shareholders rights (included in
Exhibit 3.1)....................................................(1)
4.2 Article II of the Amended By-Laws defining the
rights of Common Shareholders (included in
Exhibit 3.2)....................................................(3)
10.1 SkyWest, Inc. Amended and Combined Incentive and
Non-Statutory Stock Option Plan.................................(3)
10.2 Delta Connection agreement dated January 13, 1987
between Delta Air Lines, Inc. and SkyWest
Airlines, Inc...................................................(2)
10.3 Stock Option agreement dated January 28,
1987 between Delta Air Lines, Inc. and
SkyWest, Inc....................................................(2)
10.4 Lease Agreement dated December 1,1989 between
Salt Lake City Corporation and SkyWest Airlines,
Inc.............................................................(4)
10.5 Purchase Agreement dated July 23,1993 between
Bombardier Regional Aircraft Division and
SkyWest Airlines, Inc...........................................(5)
10.6 SkyWest, Inc. 1995 Employee
Stock Purchase Plan.............................................(6)
10.7 United Express Agreement dated October 1, 1997 and
subsequent amendments dated January 15, 1998 and
February 9, 1998................................................(7)
10.8 Purchase Agreement No. GCT-008/98 dated
March 26, 1998 between Embraer-Empresa
Brasileira de Aeronautica S.A. and SkyWest Airlines, Inc
(portions of this Exhibit 10.8 have been omitted pursuant
to a request for confidential treatment)........................................X
</TABLE>
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<TABLE>
<CAPTION>
Incorporated by Filed
Number Exhibit Reference Herewith
- - ------ ------- --------- --------
<S> <C> <C> <C>
13.1 Certain portions of the Annual Report to Shareholders
for the year ended March 31, 1998, are incorporated
by reference into this report on Form 10-K......................................X
22.1 Subsidiaries of the Registrant..................................(1)
24.1 Consent of independent public accountants.......................................X
27 Financial Data Schedule.........................................................X
</TABLE>
- - ----------------
(1) Incorporated by reference to Registration Statement on Form S-1, File
No. 33-5823.
(2) Incorporated by reference to Registrant's 10-Q filed for the quarter ended
December 31, 1986.
(3) Incorporated by reference to Registration Statement on Form S-8, File
No. 33-41285.
(4) Incorporated by reference to Registrant's Form 10-K filed for the year
ended March 31, 1992.
(5) Incorporated by reference to Registrant's Form 10-K filed for the year
ended March 31, 1994.
(6) Incorporated by reference to Registrant's Form 10-K filed for the year
ended March 31, 1995.
(7) Incorporated by reference to Registrant's Forms 8-K filed on January 21,
1998 and February 11, 1998.
11
<PAGE> 14
(d) Financial Statement Schedule.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To SkyWest, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in SkyWest, Inc.'s Annual Report to
Shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated May 20, 1998. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
listed in Item 14 (a)(2) is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Salt Lake City, Utah
May 20, 1998
12
<PAGE> 15
SKYWEST, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Additions
Balance at Charged To Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended March 31, 1998:
Allowance for obsolescence $ 280,000 $ -- $ 100,000 $ 180,000
Allowance for doubtful
accounts receivable 103,978 77,728 57,943 123,763
--------- --------- --------- ---------
$ 383,978 $ 77,728 $ 157,943 $ 303,763
========= ========= ========= =========
Year Ended March 31, 1997:
Allowance for obsolescence $ 180,000 $ 100,000 $ -- $ 280,000
Allowance for doubtful
accounts receivable 221,345 44,686 (162,053) 103,978
--------- --------- --------- ---------
$ 401,345 $ 144,686 $(162,053) $ 383,978
========= ========= ========= =========
Year Ended March 31, 1996:
Allowance for obsolescence $ 180,000 $ -- $ -- $ 180,000
Allowance for doubtful
accounts receivable 215,262 150,150 (144,067) 221,345
--------- --------- --------- ---------
$ 395,262 $ 150,150 $(144,067) $ 401,345
========= ========= ========= =========
</TABLE>
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SKYWEST, INC.
/s/ JERRY C. ATKIN
By_____________________________
Jerry C. Atkin
Chairman, President and Chief
Executive Officer
Pursuant to the requirement of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Names Capacities Date
----- ---------- ----
<S> <C> <C>
/s/ JERRY C. ATKIN Chairman of the Board, President and June 16, 1998
- - ------------------------ Chief Executive Officer
Jerry C. Atkin
/s/ SIDNEY J. ATKIN Vice Chairman of the Board June 16, 1998
- - ------------------------ and Director
Sidney J. Atkin
/s/ BRADFORD R. RICH Executive Vice President, June 16, 1998
- - ------------------------ Chief Financial Officer and Treasurer
Bradford R. Rich (principal financial and
accounting officer)
/s/ J. RALPH ATKIN
- - ------------------------ Director June 16, 1998
J. Ralph Atkin
/s/ MERVYN K. COX
- - ------------------------ Director June 16, 1998
Mervyn K. Cox
/s/ IAN M. CUMMING
- - ------------------------ Director June 16, 1998
Ian M. Cumming
/s/ STEVEN F. UDVAR-HAZY
- - ------------------------ Director June 16, 1998
Steven F. Udvar-Hazy
/s/ HENRY J. EYRING
- - ------------------------ Director June 16, 1998
Henry J. Eyring
/s/ HYRUM W. SMITH
- - ------------------------ Director June 16, 1998
Hyrum W. Smith
</TABLE>
14
<PAGE> 1
EXHIBIT 10.8
Disclosure Regarding Confidential Information:
Portions of pages 2-4, 11, 15 and 16 and of Attachment D to this
Exhibit 10.8 to the Annual Report on Form 10-K (consisting of portions of
9 multiple pages) have been omitted from this exhibit filed with the Securities
and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted
portions, which are the subject of an application for confidential treatment
and have been filed separately with the Commission, are identified in this
exhibit by the placement of the following symbols: *****.
PURCHASE AGREEMENT NO. GCT-008/98
EMBRAER - EMPRESA BRASILEIRA
DE AERONAUTICA S.A.
AND
SKYWEST AIRLINES, INC.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
ARTICLE PAGE
----
<S> <C>
1. DEFINITIONS 1
2. SUBJECT 2
3. PRICE 2
4. PAYMENT 3
5. DELIVERY 4
6. CERTIFICATION 5
7. ACCEPTANCE AND TRANSFER OF OWNERSHIP 5
8. STORAGE CHARGE 6
9. DELAYS IN DELIVERY 7
10. INSPECTION AND QUALITY CONTROL 8
11. CHANGES 9
12. WARRANTY 11
13. TECHNICAL ASSISTANCE SERVICES 11
14. SPARE PARTS POLICY 12
15. PUBLICATIONS 12
16. ASSIGNMENT 12
17. RESTRICTIONS AND PATENT INDEMNITY 13
18. MARKETING PROMOTIONAL RIGHTS 13
19. TAXES 13
20. APPLICABLE LAW 13
21. JURISDICTION 14
22. TERMINATION 14
23. OPTIONS 16
24. INDEMNITY 18
25. NOTICES 18
26. CONFIDENTIALITY 19
27. INTEGRATED AGREEMENT 19
28. NEGOTIATED AGREEMENT 19
29. COUNTERPARTS 19
30. ENTIRE AGREEMENT 19
</TABLE>
ATTACHMENTS:
"A" - AIRCRAFT TECHNICAL DESCRIPTION AND AIRCRAFT SPECIFIC CONFIGURATION
"B" - AIRCRAFT FINISHING, REGISTRATION MARKS, FERRY EQUIPMENT, SPARE PARTS
POLICY, AND LIST OF PUBLICATIONS
"C" - WARRANTY CERTIFICATE - MATERIAL AND WORKMANSHIP
"D" - EMB-120 BRASILIA PRICE ESCALATION FORMULA
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
<PAGE> 3
PURCHASE AGREEMENT NO. GCT-008/98
THIS AGREEMENT IS ENTERED INTO THIS 26th DAY OF MARCH 1998, BY AND BETWEEN
EMBRAER - EMPRESA BRASILEIRA DE AERONAUTICA S.A. AND SKYWEST AIRLINES, INC., FOR
THE PURCHASE AND SALE OF EMBRAER AIRCRAFT.
THE SALE COVERED BY THIS AGREEMENT SHALL BE GOVERNED SOLELY BY THE TERMS AND
CONDITIONS HEREIN SET FORTH, AS WELL AS BY THE PROVISIONS SET FORTH IN THE
ATTACHMENTS HERETO.
THIS AGREEMENT SHALL NOT BE EFFECTIVE UNLESS AND UNTIL IT IS SIGNED BY AN
AUTHORIZED OFFICER OF SKYWEST AIRLINES, INC. AND EXECUTED BY TWO AUTHORIZED
OFFICERS OF EMBRAER - EMPRESA BRASILEIRA DE AERONAUTICA S.A.
1. DEFINITIONS:
For the purpose of this Agreement, the following definitions are hereby
adopted by the parties:
a. EMBRAER - shall mean EMBRAER - EMPRESA BRASILEIRA DE AERONAUTICA
S.A., a Brazilian corporation with its principal place of
business at Sao Jose dos Campos, Sao Paulo, Brazil.
b. BUYER - shall mean SkyWest Airlines, Inc., a company with its
principal place of business at 444 South River Road, St. George,
Utah 84790.
C. PARTIES - shall mean EMBRAER and BUYER.
d. AIRCRAFT - shall mean the EMB-120ER "BRASILIA" aircraft or,
where there is more than one such aircraft, each of the
EMB-120ER "BRASILIA" aircraft manufactured by EMBRAER, for sale
to BUYER pursuant to this Agreement, according to the Technical
Description number TD-120/9801 dated February 1998, and the
AIRCRAFT Specific Configuration constituting the Attachment "B"
to this Agreement, and equipped with Pratt & Whitney Canada Inc.
PW-118B engines, according to PW-118A Turboprop Engine
Specification no.1083, dated February 6, 1996.
e. SERVICES - shall mean technical assistance services as specified
in Article 13 herein.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 1 of 20
<PAGE> 4
f. CONTRACTUAL DELIVERY DATE - shall mean the delivery date
referred to in Article 5 of this Agreement.
g. ACTUAL DELIVERY DATE - shall mean, in respect of each AIRCRAFT,
the date on which BUYER obtains title to that AIRCRAFT in
accordance with Article 7 hereof.
h. CTA - shall mean the Aerospace Technical Center of the Brazilian
Ministry of Aeronautics.
i. FAA - shall mean the Federal Aviation Administration.
j. BASIC PRICE - shall mean the AIRCRAFT total price, effective
on the date of execution of this Purchase Agreement, as referred
to in its Article 3.
k. PURCHASE PRICE - shall mean the AIRCRAFT total price, effective
on the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE, *****.
2. SUBJECT:
This Agreement covers:
a. Twenty (20) firm order AIRCRAFT (the "FIRM AIRCRAFT"), and
options for BUYER to purchase up to forty (40) additional
AIRCRAFT (the "OPTION AIRCRAFT") on the terms and conditions of
this Agreement.
b. SERVICES as specified in Article 14 herein.
These AIRCRAFT include the exercise by BUYER of its option to
purchase EMB-120 Brasilia AIRCRAFT according to the provisions
of Purchase Agreement No. DSP/AJV-30B/93, Article 26 - Groups
III and IV
3. PRICE:
a.****
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 2 of 20
<PAGE> 5
*****
b. The BASIC PRICE as indicated in item "a.1" herinabove shall be
escalated according to the formula established in Attachment "D"
hereto. Such price as escalated shall be the AIRCRAFT PURCHASE
PRICE and will be provided to BUYER two (2) months prior to each
AIRCRAFT CONTRACTUAL DELIVERY DATE. Except for the first three
aircraft, for which the AIRCRAFT PURCHASE PRICE shall be
provided one week after execution of this Purchase Agreement.
4. PAYMENT:*****
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 3 of 20
<PAGE> 6
*****
b. Interest will accrue at the rate of one percent (1%) per month
or any part thereof on any amount not paid to EMBRAER as set
forth in paragraph 4.a of this Article from the date on which
such payments should have been made as therein set forth, until
the actual receipt by EMBRAER of such amounts.
C. Without prejudice to the above, should BUYER fall to make any
payment on the due date, EMBRAER shall have the right, at its
sole discretion, to (i) terminate this Agreement and in this
case BUYER shall release on behalf of EMBRAER all amounts
previously paid by BUYER towards this Agreement without
prejudice to EMBRAER's rights to indemnity as set forth in this
Agreement or by law or (ii) postpone, at its sole discretion,
the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE.
5. DELIVERY:
Subject to payment in accordance with Article 4 hereof and the
provisions of Articles 7 and 9 hereof, the AIRCRAFT shall be offered by
EMBRAER to BUYER, by means of a written notice, for inspection,
acceptance and subsequent delivery, in Fly Away Factory ("F.A.F.")
conditions, at Sao Jose dos Campos, State of Sao Paulo, Brazil,
according to the following schedule:
<TABLE>
<S> <C>
FIRST AND SECOND AIRCRAFT on or before March 27, 31, 1998
THIRD AIRCRAFT on or before April 30, 1998
FOURTH AND FIFTH AIRCRAFT on or before May 22, 29, 1998
SIXTH AND SEVENTH AIRCRAFT on or before June 23, 30, 1998
EIGHT AIRCRAFT on or before July 31, 1998
NINTH AIRCRAFT on or before August 31, 1998
TENTH AIRCRAFT on or before September 30, 1998
ELEVENTH AIRCRAFT on or before November 23, 1998
TWELFTH AIRCRAFT on or before March 23, 1999
THIRTEENTH AIRCRAFT on or before April 20, 1999
FOURTEENTH AIRCRAFT on or before May 21, 1999
FIFTEENTH AIRCRAFT on or before August 20, 1999
SIXTEENTH AIRCRAFT on or before September 22, 1999
SEVENTEENTH AIRCRAFT on or before October 20, 1999
EIGHTEENTH AIRCRAFT on or before November 22, 1999
NINETEENTH AIRCRAFT on or before December 20, 1999
TWENTIETH AIRCRAFT on or before December 28, 1999
</TABLE>
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 4 of 20
<PAGE> 7
6. CERTIFICATION:
The AIRCRAFT shall be delivered to BUYER with an export certificate of
airworthiness issued by CTA complying with the requirements of FAR-25
and the requirements of the FAA. The condition of the AIRCRAFT on
delivery and the documentation delivered with the AIRCRAFT, including
the above-mentioned export certificate of airworthiness, shall be
sufficient to enable BUYER to obtain a standard certificate of
airworthiness for the AIRCRAFT. Subject to the above, it shall be
BUYER's responsibility to obtain such standard certificate of
airworthiness for the AIRCRAFT, at BUYER'S sole expense.
7. ACCEPTANCE AND TRANSFER OF OWNERSHIP:
a. Unless BUYER is notified otherwise, the AIRCRAFT shall be
delivered in accordance with the provisions and schedules
specified in Article 5 herein. EMBRAER shall give BUYER fifteen
(15) calendar days advance notice of the date on which EMBRAER
considers that each AIRCRAFT will be ready for delivery. Upon
successful completion of ground and flight tests performed by
EMBRAER, BUYER will receive a written confirmation that the
AIRCRAFT concerned is ready for delivery, on which date BUYER
shall promptly inspect such AIRCRAFT.
b. BUYER shall be allowed a reasonable period of time to inspect
and conduct an acceptance flight of each AIRCRAFT prior to its
delivery. The fuel for the AIRCRAFT's acceptance flight will be
provided by EMBRAER. After such acceptance flight, each AIRCRAFT
will be delivered by EMBRAER to BUYER in accordance with Article
5 hereof with its wing tanks full.
c. If BUYER finds an AIRCRAFT acceptable, BUYER shall promptly make
the due payments, if any, according to Article 4 hereof and
accept delivery of such AIRCRAFT, whereupon the necessary title
and risk transfer documents shall be executed in order to effect
title transfer.
d. If BUYER declines to accept an AIRCRAFT, BUYER shall immediately
give EMBRAER written notice of all specific reasons for such
refusal and EMBRAER shall have five (5) business days,
commencing on the first business day after receipt of such
notice, to take all necessary actions in order to resubmit the
AIRCRAFT to BUYER for reinspection.
e. BUYER shall reinspect the AIRCRAFT within five (5) calendar days
after receipt of notice from EMBRAER that all necessary actions
were taken. This period, as well as the one mentioned in item
"d" above, shall not be considered as part of the thirty (30)
calendar days grace period provided for in Article 9.b.1 hereof.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 5 of 20
<PAGE> 8
f. Should BUYER fail to comply with the procedures specified in any
of the preceding items, EMBRAER shall not be held liable for any
delays in delivery.
g. Should BUYER fail to perform the acceptance and receipt of title
of the AIRCRAFT within ninety (90) calendar days to be computed
from the notification specified in item "a" above, EMBRAER shall
be entitled to either terminate this Agreement pursuant to
Article 22.f hereinbelow or, at its sole discretion, renegotiate
the terms of this Agreement with BUYER.
8. STORAGE CHARGE:
a. A storage charge equal to zero point zero three percent (0.03%)
of the relevant AIRCRAFT BASIC PRICE per calendar day shall be
charged by EMBRAER to BUYER commencing on the fifteenth (15th)
calendar day after:
1. BUYER's failure to perform inspection or reinspection of
an AIRCRAFT, per the date or time period specified in
writing by EMBRAER, according to Articles 5 and/or 7
hereof, as applicable.
2. BUYER's acceptance of an AIRCRAFT when BUYER defaults in
the fulfillment of any payment due in taking title to
such AIRCRAFT immediately thereafter.
b. A storage charge equal to zero point zero three percent (0.03%)
of the relevant AIRCRAFT BASIC PRICE per calendar day shall be
charged by EMBRAER to BUYER commencing on the thirtieth (30th)
calendar day after BUYER's failure after title transfer to
remove an AIRCRAFT from EMBRAER's facilities.
c. The fifteen (15) and thirty (30) calendar days "GRACE PERIOD" is
conditioned to receipt by EMBRAER of a written notification, ten
(10) days in advance of the expected delay in the performance of
BUYER'S obligations set forth in items "a.1", "a.2" and "b"
above.
d. In the event an AIRCRAFT CONTRACTUAL DELIVERY DATE must be
extended by EMBRAER from that which is designated in Article 5
hereof due to BUYER's failure to perform any action or provide
any information contemplated by this Agreement, other than the
ones specified in the preceding item", the storage charge shall
commence on the fifteenth (15th) calendar day after the
CONTRACTUAL DELIVERY DATE relative to such AIRCRAFT.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 6 of 20
<PAGE> 9
e. BUYER undertakes to pay the storage charge, as set forth in
items "a', "b" or "c" hereinabove, as applicable, in U.S.
dollars per each month of delay or part thereof, upon
presentation of an invoice by EMBRAER.
9. DELAYS IN DELIVERY:
a. EXCUSABLE DELAYS:
1. EMBRAER shall not be held liable or be found in default
for any delays in the delivery of an AIRCRAFT or in the
performance of any act to be performed by EMBRAER under
this Agreement, resulting from, but not restricted to,
the following events or occurrences hereinafter referred
to as "excusable delays" (a) force majeure (including,
but not limited to, war or state of war, civil war,
insurrection, fire, accident, explosion, flood, act of
government, governmental priorities, requisition,
strike, labor troubles); (b) inability despite due and
timely diligence to procure any materials, equipment,
accessories, parts or means of transport; or (c) any
delay resulting from any failure by BUYER to perform any
action or provide any information contemplated by this
Agreement or delays resulting from any other cause to
the extent it is beyond EMBRAER's control or does not
result from EMBRAER's fault or negligence.
2. Within sixty (60) calendar days after the occurrence of
any of the above-mentioned events which constitute
causes of excusable delays in delivery of an AIRCRAFT or
in the performance of any act to be performed by EMBRAER
under this Agreement, EMBRAER undertakes to send a
written notice to BUYER, with requested acknowledgment
of receipt, including a description of details involved
and an estimate of the effects expected upon the timing
of the performance of its contractual obligations.
3. Any such delays shall extend the time for delivery of an
AIRCRAFT by the same number of calendar days required
for the cause of delay to be remedied. EMBRAER
undertakes to use its best efforts whenever applicable
to avoid or remove any such causes of delay and to
minimize their effect on the CONTRACTUAL DELIVERY DATE
of an AIRCRAFT-
4. If the cause of such excusable delays is such as to last
longer than three hundred (300) calendar days or to
render the performance of this Agreement impossible,
then this Agreement shall be considered terminated
without liability to either party, except as provided
for in Article 22-b hereof.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 7 of 20
<PAGE> 10
b. NON-EXCUSABLE DELAYS:
1. if the delivery of an AIRCRAFT is delayed, without any
excusable reason, by more than ten (10) calendar days
after the CONTRACTUAL DELIVERY DATE for such AIRCRAFT,
BUYER will be entitled to claim from EMBRAER liquidated
damages equal to US$ 5,000.00 (five thousand US Dollars)
per day, for each calendar day of delay in excess of the
above-mentioned ten (10) calendar days, up to the date
EMBRAER notices BUYER such AIRCRAFT will be ready for
delivery via written notice per Article 7.a hereof, it
being understood that such liquidated damages will not,
in any event, exceed three percent (3%) of the BASIC
PRICE of the delayed item.
2. The grace period of ten (10) calendar days granted by
BUYER to EMBRAER as mentioned herein shall only prevail
should BUYER receive a written notification from EMBRAER
advising the expected delay and provided such written
notification is presented to BUYER forty (40) calendar
days prior to the relevant AIRCRAFT CONTRACTUAL DELIVERY
DATE.
3. It is agreed between the PARTIES that if, with respect
to a delayed AIRCRAFT, EMBRAER does not receive a claim
for liquidated damages as mentioned in item "b.1" above
from BUYER within ninety (90) calendar days after the
CONTRACTUAL DELIVERY DATE of such AIRCRAFT, BUYER shall
be deemed to have fully waived its rights to such
liquidated damages.
C. DELAY DUE TO LOSS OR STRUCTURAL DAMAGE OF THE AIRCRAFT:
Should any AIRCRAFT be destroyed or damaged before its
acceptance to the extent that it becomes commercially useless,
BUYER may, at its sole discretion, either take a replacement
AIRCRAFT at a later delivery date to be agreed by the PARTIES or
terminate this Agreement with respect to such AIRCRAFT by notice
to EMBRAER given in accordance with Article 24 hereof, without
any liability to either party.
10. INSPECTION AND QUALITY CONTROL:
a. BUYER is hereby allowed to have one or more authorized
representatives at EMBRAER's facilities in order to assure that
the AIRCRAFT and SERVICES were developed in accordance with this
Agreement and according to all applicable quality control
standards.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 8 of 20
<PAGE> 11
b. BUYER shall present and communicate to EMBRAER the names of its
authorized representatives, by means of a written notice, at
least thirty (30) calendar days prior to the earliest delivery
date specified in Article 5 hereof.
C. Such representatives shall also be authorized to sign the
acceptance and transfer of title and risk documents and accept
delivery of the AIRCRAFT pursuant to Article 7 hereof.
d. For the purposes subject hereof, EMBRAER shall provide
reasonable communication facilities for BUYER's authorized
representatives, as well as the necessary tools, measuring
devices, test equipment and technical assistance as may be
necessary to perform acceptance tests.
e. It is agreed by the PARTIES that BUYER's authorized
representatives shall observe EMBRAER's administrative rules and
instructions while at EMBRAER's facilities.
f. The BUYER's authorized representatives shall be allowed
exclusively in those areas related to the subject matter hereof
and BUYER agrees to hold harmless EMBRAER from and against all
and any kind of liabilities in respect to such representatives,
for whom BUYER is solely and fully responsible under all
circumstances and in any instance.
11. CHANGES:
a. Each AIRCRAFT will comply with the standards defined in the
Attachment "A" hereto and shall incorporate all modifications
which are classified as Airworthiness Directives (AD's)
mandatory by CTA or FAA-or those agreed upon by BUYER and
EMBRAER in accordance with this Article 11.
b. All the specified tray-mounted avionic equipment installed in
the AIRCRAFT shall be of the latest modification standard made
available to EMBRAER by the relevant vendor at such time as not
to violate the delivery schedule of the AIRCRAFT. All other
parts will be of the latest modification standard available at
the moment of scheduled installation in the AIRCRAFT.
C. The PARTIES hereby agree that changes can be made by EMBRAER in
the design of the AIRCRAFT; the definition of which and its
respective classification shall be in compliance to the AIRCRAFT
Type Specification as follows:
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 9 of 20
<PAGE> 12
1. Minor changes - defined as those modifications which
shall not adversely affect the AIRCRAFT in any of the
following:
- Performance, weight or balance;
- Structural strength, flight qualities; operation
and/or characteristics;
- Interchangeability of parts; defined by EMBRAER as
interchangeable
- AIRCRAFT delivery and prices;
- Operational safety;
- Ease of maintenance;
- Noise and environmental control.
2. Major changes - defined as those modifications which
affect at least one of the topics mentioned in item "c.
1" hereinabove.
d. EMBRAER shall have the right, without the prior consent of
BUYER, to make minor changes, as referred to in item "c.1"
hereinabove, in the design of AIRCRAFT. The costs of any such
changes shall be borne by EMBRAER.
e. Major changes as referred to in item "c.2" hereinabove which are
classified as Airworthiness Directives (AD's) mandatory by CTA
and/or FAA shall be conveyed to BUYER by means of Service
Bulletins, approved by said authorities and incorporated by
EMBRAER in all AIRCRAFT delivered or to be delivered to BUYER at
EMBRAER's own costs during the term of the AIRCRAFT's Warranty
Certificate validity, in a reasonable period of time. When
flight safety is affected, such changes will be immediately
incorporated.
EMBRAER shall not be liable for any delays, in the AIRCRAFT
CONTRACTUAL DELIVERY DATE resulting from the execution of any
change classified as mandatory by CTA or FAA when the AIRCRAFT
shall have already surpassed the specific production stage
affected by the incorporation of said change.
f. Major changes (any other than those which are Airworthiness
Directives mandatory as per item "e" above), any change
developed by EMBRAER as product improvement and any change
required by BUYER, including those changes required by BUYER's
country authorities as a consequence of alterations, amendments
and/or innovations of its present airworthiness regulations,
shall be considered as optional and, as such, the corresponding
cost proposals shall be submitted by EMBRAER to BUYER for
consideration and approval. Should BUYER not approve any such
change, it shall not be incorporated in the AIRCRAFT.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Page 10 of 20
<PAGE> 13
g. Any change made by EMBRAER in accordance with the preceding
items which affect the provisions of Attachment "A" hereto shall
be incorporated in said Attachment by means of an amendment. The
amendments shall be submitted to BUYER for signature thirty (30)
calendar days prior to the relevant AIRCRAFT CONTRACTUAL
DELIVERY DATE, a copy of which shall be received by EMBRAER,
duly signed, prior to the relevant AIRCRAFT ACTUAL DELIVERY
DATE.
12. WARRANTY:
The materials and workmanship relative to the AIRCRAFT subject of this
Agreement will be warranted in accordance with the terms and conditions
specified in Attachment "C" hereto. If BUYER intends to place the
AIRCRAFT on lease to another party or to assign the rights and
obligations as specified in Article 16 hereof, it is BUYER's
responsibility to obtain EMBRAER's prior consent as well as to provide
EMBRAER written notice within five (5) business days of any changes as
to BUYER's designated lessee or assignee complying with Article 6 of the
Attachment "C" hereof.
13. TECHNICAL ASSISTANCE SERVICES:
*****
Notwithstanding the eventual use of the term "training" in this Article
13 or in the Agreement, the intent of the SERVICES provided hereunder is
to familiarize BUYER's pilots with the operation of the AIRCRAFT. It is
not the intent of EMBRAER to provide basic training to any
representatives of BUYER.
Simulator Training - Provided that BUYER's pilots are duly qualified as
regards AIRCRAFT systems, weight and balance, performance and
normal/emergency procedures, simulator training of no more than twelve
(12) hours per pilot, for six (6) pilots per aircraft, shall be
provided at EMBRAER's facilities in Ft. Lauderdale, Florida, United
States of America or at such other location as EMBRAER shall reasonably
designate, or, at BUYER's option, at any FlightSafety facility that
offers such training, to the extent time is available. BUYER must give
written notification to EMBRAER thirty (30) calendar days in advance of
BUYER's expected training schedules.
*****
Any other additional SERVICES shall depend on mutual agreement between
the PARTIES and shall be charged by EMBRAER accordingly.
120ER Purchase Agreement
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Page 11 of 20
<PAGE> 14
The presence of BUYER's authorized trainees and representatives at
EMBRAER's facilities shall be allowed exclusively in those areas related
to the subject matter hereof and BUYER agrees to hold harmless EMBRAER
from and against all and any kind of liabilities in respect to such
trainees and representatives for whom BUYER is solely and fully
responsible under all aspects and in any instance.
14. SPARE PARTS POLICY:
EMBRAER guarantees the supply of spare parts and Aircraft Ground
Equipment for the AIRCRAFT, in accordance with Article 4 of Attachment
"B" hereto, for a period of ten (10) years after production of the last
aircraft of the same type. Such spare parts and Aircraft Ground
Equipment shall be supplied according to the prevailing availability,
sale conditions, delivery schedule and effective price on the date of
acceptance by EMBRAER of the purchase order. The spare parts and
Aircraft Ground Equipment may be supplied either by EMBRAER or through
its subsidiaries or branch offices located abroad.
15. PUBLICATION:
a. Aircraft Publications - EMBRAER shall supply for each AIRCRAFT,
at no cost to BUYER, copies of operational and maintenance
publications applicable thereof in the English language and in
the quantities as specified in Article 5 of Attachment "B"
hereof. Such publications are issued under A.T.A. 100
Specification (as applicable) and are available in hard copies.
The revision service for these publications is provided
free-of-charge, including mailing services (except for air cargo
shipping), for the first two (2) years and subsequently at a
nominal fee. Such publications, except for one set of
operational publications supplied with each AIRCRAFT to
accomplish airworthiness requirements, will be delivered to
BUYER no later than one (1) month after the execution of this
Purchase Agreement.
b. Vendor Items Publications - With respect to vendor items
installed in the AIRCRAFT which have their own publications, the
BUYER will receive them in the quantity specified in Article 5
of Attachment "B" hereto, in their original content and printed
form, directly from the suppliers, who are also in charge of
keeping them continuously updated through a direct communication
system with the BUYER.
16. ASSIGNMENT:
BUYER's rights and obligations hereunder may not be assigned without
EMBRAER's previous written consent.
120ER Purchase Agreement
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Page 12 of 20
<PAGE> 15
17. RESTRICTIONS AND PATENT INDEMNITY:
This sale does not include the transfer of designs, copyrights, patents
and other similar rights to BUYER. Subject to BUYER's duty to
immediately advise EMBRAER of any alleged copyright or patent
infringement, EMBRAER shall indemnify and save BUYER harmless with
respect to any claims made against BUYER if the AIRCRAFT infringes
copyright patents or the proprietary rights of others.
18. MARKETING PROMOTIONAL RIGHTS:
EMBRAER shall have the right to show free of any charge, for marketing
purposes, the image of BUYER's AIRCRAFT, painted with BUYER's colors and
emblems, affixed in photographs, drawings, films, slides, audiovisual
works, models or any other medium of expression (pictorial, graphic, and
sculptural works), through all mass communications media such as
billboards, magazines, newspapers, television, movies, theaters, as well
as in posters, catalogs, models and all other kinds of promotional
material. In the event such AIRCRAFT is sold to or operated by or for
another company or person, EMBRAER shall be entitled to disclose such
fact, as well as to continue to show the image of the AIRCRAFT, free of
any charge, for marketing purposes, either with the original or the new
colors and emblems, unless otherwise notified, provided that such
notification shall be subject to the reasonable satisfaction and
agreement of EMBRAER. If accepted, said prohibition, however, shall in
no way apply to the promotional materials or pictorial, graphic or
sculptural works already existing or to any contract for the display of
such materials or works already binding EMBRAER at the time of receipt
of the notification.
The provisions of this Article shall be included in all future sales or
lease agreements concerning the AIRCRAFT.
19. TAXES:
EMBRAER shall pay all taxes arising from the sale subject of this
Agreement as may be imposed on it under the Brazilian laws. All other
taxes, imposts, fees, withholding taxes, stamp taxes and any other
similar or dissimilar taxes, as well as any duties as may be imposed on
the sale subject of this Agreement, shall be borne by BUYER.
20. APPLICABLE LAW:
This Agreement shall be construed in accordance with and its performance
shall be governed by the laws of the Federative Republic of Brazil.
120ER Purchase Agreement
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Page 13 of 20
<PAGE> 16
21. JURISDICTION:
All disputes arising in connection with this Agreement shall be finally
settled in the courts of the city of Sao JOSE dos Campos, Sao Paulo,
Brazil. The PARTIES hereby waive any other court of Jurisdiction that
may be competent for settlement of disputes arising from this Agreement.
22. TERMINATION:
a. Should either party fail to comply partially or completely with
its obligations hereunder, the other party shall be entitled to
give notice of such failure and to require that such failure be
remedied within the period specified in that notice, which
period shall not be less than five (5) calendar days. Should
such failure not be remedied within the period so specified,
then the party who gave notice of such failure shall be entitled
to terminate this Agreement provided always that the foregoing
shall not apply in any circumstances where a specific right of
termination is available or will be available upon the expiry of
a specific period of time. Should termination occur in
accordance with the foregoing, the defaulting party shall pay to
the non-defaulting party, as liquidated damages, an amount
determined by mutual agreement or by law.
b. BUYER shall have the right to terminate this Agreement, in
respect to the relevant AIRCRAFT, upon the occurrence of any
excusable delay of three hundred (300) calendar days or longer
and any non-excusable delay of ninety (90) calendar days or
longer after such AIRCRAFT CONTRACTUAL DELIVERY DATE. Such right
to be exercisable by giving EMBRAER a written notice to such
effect no earlier than the three hundredth (300th) or ninetieth
(90th) calendar day as applicable. Upon receipt of such notice
of termination, EMBRAER shall return to BUYER an amount equal to
the amounts previously paid by BUYER relative to the relevant
AIRCRAFT less the value of equipment or services previously
delivered or performed by EMBRAER, it being hereby agreed by the
PARTIES that, in this case, no kind of other indemnity shall be
due by EMBRAER to BUYER.
C. In the event of a force majeure occurring prior to the ACTUAL
DELIVERY DATE of any AIRCRAFT which causes BUYER to determine
not to purchase such AIRCRAFT, BUYER may by written notice to
EMBRAER, terminate the Purchase Agreement with respect to such
AIRCRAFT, and BUYER shall only be liable to EMBRAER for the
following amounts on account of such AIRCRAFT:
120ER Purchase Agreement
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Page 14 of 20
<PAGE> 17
*****
d. EMBRAER agrees that BUYER has the option to terminate the
Purchase Agreement with no penalty assessed against BUYER by
EMBRAER, in the event EMBRAER fails to deliver any six (6)
consecutive AIRCRAFT due to force majeure reasons (and in case
of this item "d", excluding acts of government, governmental
priorities, requisition, strike and labor troubles from the
concept of force majeure) and/or if such delay is due to reasons
detailed in Article 1O.a.1 (b) (except to the extent that the
delay is as a consequence of a general work force strike of
EMBRAER or of a supplier of EMBRAER, if the supplier provides to
EMBRAER a major component of the AIRCRAFT) and for which Article
22.c has not been invoked, within sixty (60) days of each
relevant AIRCRAFT CONTRACTUAL DELIVERY DATE as specified in
Article 6 herein. If EMBRAER fails to deliver any six (6)
consecutive AIRCRAFT within such sixty (60) day period as above
mentioned, BUYER's right to terminate the Purchase Agreement may
be exercised by written notice to EMBRAER as provided in Article
25 herein, within five (5) days after the expiration of the
sixty (60) day period following the CONTRACTUAL DELIVERY DATE of
the third consecutive AIRCRAFT delayed more than sixty (60)
days. In this case, all amounts paid by BUYER to EMBRAER under
the Purchase Agreement, and specifically with regard to the
non-delivered AIRCRAFT, shall be returned to BUYER, less the
value of equipment or services previously delivered or performed
by EMBRAER, it being hereby agreed by the PARTIES that, in this
case, no other kind of indemnity shall be due by EMBRAER to
BUYER.
e. If EMBRAER terminates this Agreement pursuant to Article 7.g
hereof, EMBRAER may, at its sole option, retain all amounts
previously paid by BUYER as liquidated damages resulting from
such default on the part of BUYER.
120ER Purchase Agreement
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Page 15 of 20
<PAGE> 18
23. OPTIONS:
a. In addition to the FIRM AIRCRAFT, and subject to the conditions
set forth hereinbelow, BUYER shall have the option to purchase
another forty (40) AIRCRAFT (the "OPTION AIRCRAFT") at the unit
BASIC PRICE per OPTION AIRCRAFT, with adjustments for any
additions and/or deletions of equipment and/or provisioning
agreed to by BUYER and EMBRAER.
This basic price shall be escalated in accordance with the
escalation formula provided in Attachment "D" to this
Agreement.
b. For option exercise purposes, the OPTION AIRCRAFT are divided
into four (4) groups of ten (10) OPTION AIRCRAFT each as
defined in item "c" hereinbelow.
c. *****
<TABLE>
<CAPTION>
GROUP OPTION EXERCISE DATE
----- --------------------
<S> <C> <C>
I OPTION Aircraft 21 - 30 March 31, 1998
II OPTION Aircraft 31 - 40 December 31, 1998
III OPTION Aircraft 41 - 50 May 31, 1999
IV OPTION Aircraft 51 - 60 November 30, 1999
</TABLE>
d. Delivery for OPTION Aircraft in Groups I -through IV shall occur
in accordance with option delivery dates below specified,
subject to availability of delivery positions at the time Buyer
elects to exercise its option:
<TABLE>
<CAPTION>
GROUP 1 OPTION AIRCRAFT DELIVERY DATE:
----------------------- --------------
<S> <C>
21st A/C December 29, 1998
22nd A/C January 20, 1999
23rd & 24th A/C February 19, 1999
25th A/C April 25, 1999
26th & 27th A/C June 22, 1999
28th A/C July 30, 1999
29th A/C August 31, 1999
30th A/C October 29, 1999
</TABLE>
120ER Purchase Agreement
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Page 16 of 20
<PAGE> 19
<TABLE>
<CAPTION>
GROUP 2 OPTION AIRCRAFT DELIVERY DATE:
- - ----------------------- --------------
<S> <C>
31st & 32nd A/C January 2000
33rd & 34th A/C February 2000
35th & 36th A/C March 2000
37th & 38th A/C April 2000
39th & 40th A/C May 2000
</TABLE>
<TABLE>
<CAPTION>
GROUP 3 OPTION AIRCRAFT DELIVERY DATE:
- - ----------------------- --------------
<S> <C>
41st & 42nd A/C June 2000
43rd & 44th A/C July 2000
45th & 46th A/C August 2000
47th & 48th A/C September 2000
49th A/C October 2000
50th A/C November 2000
</TABLE>
<TABLE>
<CAPTION>
GROUP 4 OPTION AIRCRAFT DELIVERY DATE:
- - ----------------------- --------------
<S> <C>
51st A/C December 2000
52nd A/C January 2001
53rd A/C February 2001
54th A/C March 2001
55th A/C April 2001
56th A/C May 2001
57th A/C June 2001
58th A/C July 2001
59th A/C August 2001 -
60th A/C September 2001
</TABLE>
Upon exercise of each Group of OPTION AIRCRAFT and confirmation that
delivery positions are available, BUYER shall purchase and EMBRAER shall
sell such AIRCRAFT pursuant to the terms of this Purchase Agreement.
e. Buyer many not purchase any OPTION AIRCRAFT unless BUYER has purchased
all twenty (20) FIRM AIRCRAFT, and receipt by EMBRAER of any and all
payments due, pursuant thereto. Should BUYER fail to purchase and
receive any of the FIRM AIRCRAFT, or fail to cause EMBRAER to receive
full payment therefore in accordance with this Purchase Agreement, then
any right for BUYER to purchase the OPTION AIRCRAFT shall be considered
null and void.
f. Should BUYER fail to exercise a Group of OPTIONS on the OPTION exercise
dates determined in item "c" of this Article 23, or on any other dates
in lieu thereof that may be agreed by EMBRAER and BUYER in writing,
EMBRAER shall be entitled to consider the OPTION contemplated in this
Article 23 terminated for that Group.
120ER Purchase Agreement
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Page 17 of 20
<PAGE> 20
g. OPTION Aircraft pricing is offered to BUYER provided that
delivery of all forty (40) OPTION AIRCRAFT shall occur on or
before September 30, 2001 . Any OPTION AIRCRAFT contracted for
delivery after such date shall be subject to a price adjustment
according to the EMBRAER pricing criteria then prevailing.
24. INDEMNITY:
BUYER agrees to indemnify and hold harmless EMBRAER and EMBRAER's
officers, agents and employees from and against all liabilities,
damages, losses, judgments, claims and suits, including costs and
expenses incident thereto, which may be suffered by, accrued against, be
charged to or recoverable from EMBRAER and/or EMBRAER's officers, agents
and employees by reason of loss or damage to property or by reason of
injury or death of any person resulting from or in any way connected
with the performance of services by employees, representatives or agents
of EMBRAER for or on behalf of BUYER related to AIRCRAFT delivered by
EMBRAER to BUYER, including, but not limited to, technical operations,
maintenance and training services and assistance performed while on the
premises of EMBRAER or BUYER, while in flight on BUYER owned AIRCRAFT or
while performing any other services, at any place, in conjunction with
the AIRCRAFT operations of BUYER.
25. NOTICES:
All notices permitted or required hereunder shall be in writing in the
English language and sent, by registered mail or facsimile, to the
attention of the Senior Manager - Contracts as to EMBRAER and of the
Vice President -- Planning as to the BUYER, to the addresses indicated
below or to such other address as either party may, by written notice,
designate to the other.
a. EMBRAER:
EMBRAER - Empresa Brasileira de Aeronautica S.A. Av. Brigadeiro
Faria Lima, 2170 12225 Sao Jose dos Campos - SP BRAZIL
Telephone: (011)(55)(12)345-1410
Facsimile: (011)(55)(12)345-1257
b. BUYER:
SkyWest Airlines, Inc.
444 South River Road
St. George, Utah 84790
Telephone: (435) 634-3000
Facsimile: (435) 634-3305
120ER Purchase Agreement
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Page 18 of 20
<PAGE> 21
26. CONFIDENTIALITY:
BUYER does not have the right to disclose the terms of this Agreement
except as required by law or in order to obtain AIRCRAFT financing.
BUYER agrees not to disclose any portion of this Agreement or its
Attachments, amendments or any other supplement to any third party
without EMBRAER's written consent, except as necessary to obtain
AIRCRAFT financing. Without limiting the foregoing, in the event BUYER
is legally required to disclose the terms of this Agreement, BUYER
agrees to exert its best efforts to request confidential treatment of
the clauses and conditions of this Agreement relevantly designated by
EMBRAER as confidential.
27. INTEGRATED AGREEMENT:
All attachments referred to in this Agreement and attached hereto are,
by such reference and attachment, incorporated in this Agreement. This
Purchase Agreement, including all Attachments and all amendments,
modifications and supplements, is herein and hereinafter called the
"Agreement" or the "Purchase Agreement".
28. NEGOTIATED AGREEMENT:
BUYER and EMBRAER agree that this Agreement, including all of its
Attachments, has been the subject of discussion and negotiation and is
fully understood by the PARTIES, and that the rights, obligations and
other mutual agreements of the PARTIES contained in this Agreement were
arrived at in consideration of such complete discussion and negotiation
between the PARTIES.
29. COUNTERPARTS:
This Agreement may be signed by the PARTIES hereto in any number of
separate counterparts with the same effect as if the signatures thereto
and hereto whereupon the same instrument and all of which when taken
together shall constitute but one and the same instrument.
30. ENTIRE AGREEMENT:
This Agreement constitutes the entire agreement of the PARTIES hereto
with respect to the sale described as its subject and supersedes all
previous and connected negotiations, representations and agreements
between the PARTIES. This Agreement may not be altered, amended or
supplemented except by a written instrument executed by the PARTIES.
120ER Purchase Agreement
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Page 19 of 20
<PAGE> 22
IN WITNESS WHEREOF, the PARTIES have caused this Agreement to be duly executed
and delivered by their proper and duly authorized officers and to be effective
as of the day and year first above written.
EMBRAER BUYER
By: [SIG] By: /s/BRADFORD R. RICH
-------------------------------- --------------------------------
Name: [ILLEGIBLE] Name: Bradford R. Rich
------------------------------ ------------------------------
Title: [ILLEGIBLE] Title: Exec. VP, CFO & Treasurer
----------------------------- -----------------------------
By: [SIG] By: /s/ ERIC CHRISTENSEN
-------------------------------- --------------------------------
Name: Name: Eric Christensen
------------------------------ ------------------------------
Title: Title: VP Planning and Corporate
----------------------------- Secretary
Date: March 5, 1998 Date: March 29, 1998
------------------------------ ------------------------------
Place: San Jose dos Campos - SP Brazil Place: St. George, UT
------------------------------ -----------------------------
Witness: [SIG] Witness:/s/AIMEE WORAM
--------------------------- ---------------------------
Name: [ILLEGIBLE] Name: Aimee Woram
------------------------------ ------------------------------
120ER Purchase Agreement
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PAGE 20 OF 20
<PAGE> 23
PURCHASE AGREEMENT NO. GCT-008198
ATTACHMENT "A"
In addition to the standard equipment detailed in Technical Description number
TD-120/9801, dated February 1998, as referred to in the Purchase Agreement, the
equipped AIRCRAFT configuration as selected by BUYER will include some
non-standard items. The complete list of equipment is detailed hereinbelow. In
case of any conflict between this Attachment and TD-120/9801, this Attachment
shall control.
DESCRIPTION
A) STANDARD EMB-120ER BRASILIA AIRCRAFT:
Basic commuter configuration, incorporating the following equipment and
features:
- Four-blade, constant speed, full feathering and unfeathering,
beta mode, overspeed protection and synchrophasing, Hamilton
Standard propellers, model 14 RF-9
- Pressurization system, with nominal differential pressure of 7.0
psi
- Air conditioning supplied by two air cycle machines and intake
for external supply
- Oxygen system: demand masks for crew and drop-out masks for pax
- Fuel system with two gravity refueling points and one pressure
refueling point
- Four electric fuel booster pumps
- Complete anti-ice/de-ice system
- Complete Bruce Lighting system interior lighting with cabin
light control at attendant post station
- Logotype lights
- Two Rotating Beacons
120ER Purchase Agreement
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Attachment A Page 1 of 6
<PAGE> 24
- Dual flight controls and instruments
- Adjustable SICMA seats for pilot and copilot
- Rear plug-in baggage cargo/baggage door (1.30m x 1.36m)
- Front pax airstairs door (0.77m x 1.70m)
- Complete carpeting, sidewall and headliner with finishing
B) BASIC AVIONICS PANEL:
1 (one) SMITHS Counter Pointer Encoding Altimeter
2 (two) SMITHS Vertical Speed Indicators
2 (two) SMITHS Airspeed Indicators
1 (one) JET Stand-by Gyro Horizon
I (one) AMETEK Outside Air Temperature Indicator
2 (two) Digital Clocks
1 (one) AMETEK Stand-by Compass
1 (one) DORNE & MARGOLIN DMELT-8 Emergency Locator Transmitter
1 (one) AVTECH Remote Audio Unit for ground crew
2 (two) AVTECH Audio Control Units
1 (one) AVTECH Public Address/Cabin Interphone Unit
2 (two) COLLINS VHF-22A VHF/COMM
2 (two) COLLINS VIR-32 VHF/NAV Receivers
1 (one) COLLINS ADF-60A ADF System
2 (two) COLLINS RMI-36 Radio Magnetic Indicators
2 (two) COLLINS AHRS-85 Attitude and Heading Ref Systems
120ER Purchase Agree
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Attachment A Page 2 of 6
<PAGE> 25
2 (two) COLLINS EADI-86 Electronic Attitude Director Indicators (5"x6")
2 (two) COLLINS EHSI-86 Electronic Horizontal Situation Indicators
(5"x6"), including DPU-86.
1 (one) COLLINS Automatic Pilot System (APS-65), composed of:
- Autopilot/Flight Director Computers
- Air Data Sensors
- 2 Flight Control Panels
- Autopilot Panel
1 (one) COLLINS DME42 DME System
2 (two) COLLINS TDR-94 Transponder System
1 (one) COLLINS WXR-350 Color Weather Radar
1 (one) COLLINS ALT-55 Radio Altimeter
C) OPTIONAL AVIONICS:
1. Third Collins VHF-22A VHF/COMM with CTL-22
2. Second Collins DME-42 System
3. CVR - Solid State
4. FDR - Solid State
5. IDC Altitude Preselect System with Servo Encoding Altimeter
6. GPWS - Sundstrand Mark VI Ground Proximity Warning System
7. Complete Installation of TCAS-1 - B. F. Goodrich
120ER Purchase Agreement
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Attachment A Page 3 of 6
<PAGE> 26
D) OPTIONAL SYSTEMS/OTHER EQUIPMENT:
1. P&W 118B Engines
2. Complete APU System with Garrett unit FTCP36-150 (AA)
3. High Altitude Oxygen System (Gaseous type)
4. Polyurethane painting
5. Cargo Door Anti-blockage Barrier
6. Reinforced 700 kg cargo compartment bulkhead
7. Advanced Version (EMB-120ER)
8. Engine Oil Aero Exxon Turbo Oil 2380
E) INTERIOR:
The first four (4) AIRCRAFT shall have the following interior
configuration:
1. External flushing dry toilet (FDT1), including toilet seat,
paper towel dispenser, miscellaneous items, toilet paper and
waste container,
2. Afterward left-hand side galley (FGL2), including miscellaneous
items, two (2) hot jugs (1 gal.) - 28VDC (Manufacturer: Midland
Ross - model 306-140 or equivalent), two (2) ice box, two (2)
miscellaneous, one (1) provisions of half size trolley, one (1)
paper napkins, one (1) folding work table,
3. 30 Pax Carbon fiber Seats 9G certified, according to FAR 25.561
and 25.785 - Amendment 25-63
4. Observer Station - includes folding seat; oxygen mask connected
to the crew system; seat belts; audio unit
5. Flight Attendant Station - includes: folding seat; oxygen mask:
cabin interphone handset; seat belts; flashlight; fire
extinguisher; control panel for: air conditioning, cabin light,
main door; life vest behind headset
6. Overhead baggage bins - 6 units
120ER Purchase Agreement
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Attachment A Page 4 of 6
<PAGE> 27
The fifth AIRCRAFT and all subsequent AIRCRAFT shall have the
following interior configuration:
1. External flushing dry toilet (ADT1), including toilet seat,
paper towel dispenser, miscellaneous items, toilet paper and
waste container.
2. Afterward left-hand side galley (AGL1), including miscellaneous
items, two (2) hot jugs (1 gal.) - 28VDC (Manufacturer: Midland
Ross - model 306-140 or equivalent), two (2) standard' units
provisions and waste container.
3. Afterward right-hand side galley (AGR3), including miscellaneous
items, icebox, three (3) standard units provisions, galley
service door and folding table.
Note Neither galley includes standard unit equipment and
optional interphone.
4. 30 Pax Carbon fiber Seats 9G certified, according to FAR 25.561
and 25.785 - Amendment 25-63.
5. Observer Station - includes folding seat; oxygen mask connected
to the crew system; seat belts; audio unit
6. Flight Attendant Station - includes: folding seat; oxygen mask;
cabin interphone handset; seat belts; flashlight; fire
extinguisher; control panel for: air conditioning, cabin light,
main door, life vest behind headset
7. Overhead baggage bins - 6 units
F) WEIGHT
For the first four (4) AIRCRAFT,
EMBRAER hereby represents that (i) the Basic Empty Weight (BEW) of the
first four (4) AIRCRAFT, in the specific configuration described in this
Attachment "A", shall not be greater than 16,387 Lbs, with a tolerance
of plus or minus one percent (+/- 1%), and (ii) the Maximum Baggage
Allowed (with 30 pax) shall be 1,477 Lbs.
For the fifth AIRCRAFT and all subsequent AIRCRAFT, EMBRAER hereby
represents as follows:
120ER Purchase Agreement
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Attachment A Page 5 of 6
<PAGE> 28
EMBRAER hereby represents that (i) the Basic Empty Weight (BEW) of the
AIRCRAFT, in the specific configuration described in this Attachment
"A", shall not be greater than 16,405 Lbs, with a tolerance of plus or
minus one percent (+/- 1%), and (ii) the Maximum Baggage Allowed (with
30 pax) shall be 1,543 Lbs.
120ER Purchase Agreement
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Attachment A Page 6 OF 6
<PAGE> 29
ATTACHMENT "B"
AIRCRAFT FINISHING, REGISTRATION MARKS,_FERRY EQUIPMENT,
SPARE PARTS POLICY AND LIST OF PUBLICATIONS
1. FINISHING
a. Exterior Finishing: The AIRCRAFT shall be painted according to
BUYER's color and paint scheme which shall be supplied to
EMBRAER by BUYER on or before six (6) months prior to the
relevant AIRCRAFT CONTRACTUAL DELIVERY DATE, except in the case
of the FIRST AND SECOND AIRCRAFT which will be delivered in the
current EMBRAER paint scheme. For the third through twentieth
AIRCRAFT the paint scheme shall be agreed by the PARTIES within
one week after signature of the Purchase Agreement.
b. Interior Finishing: BUYER shall inform EMBRAER on or before
seven (7) months prior to the relevant AIRCRAFT CONTRACTUAL
DELIVERY DATE of its choice of materials and colors of all and
any item of interior finishing, such as seat covers, carpet,
floor lining on galley areas, side walls and overhead lining,
galley lining and curtain, except in the case of the FIRST AND
SECOND AIRCRAFT, which will be delivered as is. For the third
through twentieth AIRCRAFT, the choice of materials and colors
shall be agreed by the PARTIES within one week after signature
of the Purchase Agreement.
c. The above-mentioned schedule for definition of interior
finishing shall only be applicable if BUYER selects its
materials from the choices offered and available by EMBRAER. In
case BUYER opts to use different materials and/or patterns, such
schedule shall be mutually agreed between the PARTIES at the
time of signature of this Purchase Agreement.
2. REGISTRATION MARKS
Each AIRCRAFT shall be delivered to BUYER with the registration marks
painted on it, which shall be supplied to EMBRAER by BUYER no later than
ninety (90) days before the relevant AIRCRAFT CONTRACTUAL DELIVERY DATE,
except in the case of the first three AIRCRAFT, which shall be supplied
to EMBRAER by BUYER no later than the date of signature of the Purchase
Agreement.
120ER Purchase Agreement
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Attachment B Page 1 of 4
<PAGE> 30
3. FERRY EQUIPMENT
If it is necessary for any ferry equipment to be installed by EMBRAER
for the ferry flight between Brazil and Fort Lauderdale, Florida, United
States of America. EMBRAER may provide such equipment to BUYER, for a
price to be previously agreed between the PARTIES. In this case, BUYER
shall remove such ferry equipment from the AIRCRAFT at EMBRAER AIRCRAFT
CORPORATION's facilities at Fort Lauderdale, Florida, United States of
America. Such equipment shall be turned over to a representative of
EMBRAER AIRCRAFT CORPORATION for the purpose of it being returned to
EMBRAER in Brazil at BUYER's own expense.
If such equipment is utilized for any reason, or if such equipment is
not returned by BUYER, in EMBRAER's sole judgment in complete and
perfect condition, BUYER shall fully indemnify EMBRAER for the value of
such equipment, provided that in case of partial utilization of or
damage to any such equipment, the value to be charged shall be the price
of a new complete set of equipment.
In such case the original equipment shall become property of BUYER. The
above-mentioned payment shall be made to EMBRAER by BUYER upon
presentation of a sight draft by EMBRAER.
The presence of an EMBRAER qualified crew member during the ferry flight
on the way to BUYER's facilities, to act as second in command and to
assist in handling communication with Air Traffic Control (ATC) while
overflying Brazilian airspace, shall depend on a previous agreement
between the PARTIES provided that a written advance notice shall be
given from BUYER to EMBRAER at least thirty (30) days prior to the date
of such ferry flight.
4. SPARE PARTS
4.1. Policy:
EMBRAER's spare parts policy is to provide the following
categories of spares as specified in the respective EMBRAER
publications and available to be purchased through EMBRAER:
- Line Replaceable Units (LRU's);
- Parts to repair and overhaul components manufactured
under EMBRAER specification to be used only on the EMB-
120 BRASILIA;
- Parts to line maintenance;
- Parts to fulfill all maintenance tasks per maintenance
manual and/or maintenance plan issued by EMBRAER;
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment B Page 2 of 4
<PAGE> 31
- EMBRAER-made parts;
- Aircraft Ground Equipment (AGE);
- Aircraft Ground Equipment spare parts manufactured under
- EMBRAER specifications;
- Special tools;
- Bulk material.
4.2. Emergency Spare Parts Service:
EMBRAER will maintain emergency spare parts service twenty-four (24)
hours a day, seven (7) days a week. EMBRAER will deliver in F.C.A.
condition at Sao Jose dos Campos, State of Sao Paulo, Brazil, or at any
other port of clearance that may be chosen by EMBRAER and informed to
BUYER, spare parts in inventory needed for aircraft-on-ground (AOG)
orders within twenty-four (24) hours after receipt. EMBRAER will notify
BUYER of the action taken to satisfy each emergency in accordance with
the following schedule:
-AOG (Aircraft-On-Ground).................................within 4 hours
-Critical (Imminent AOG or Work Stoppage)................within 24 hours
-Expedite (Less than published or quoted lead time)........within 7 days
4.3 Parts Exchange Program:
According to its prevailing availability, EMBRAER may offer an "exchange
program" for repairable parts whenever the vendor does not have its own
exchange program.
4.4. Parts Repair Program:
For any repair required by BUYER on any EMBRAER or vendor repairable
item, EMBRAER may assist BUYER to perform such repair in order to ensure
the shortest turn around time (TAT).
4,5. Pricing:
EMBRAER will maintain a spare parts price list updated periodically.
Items not shown on the list will be quoted on request.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment B Page 3 of 4
<PAGE> 32
5. LIST OF PUBLICATIONS
As provided for in Article 16 of this Agreement, the technical
publications covering operation and maintenance shall be delivered to
BUYER in accordance with the following list:
<TABLE>
<CAPTION>
QTY
TITLE (Copies)
----- --------
<S> <C>
01. AIRPLANE FLIGHT MANUAL (1) 6
02. SUPPLEMENTARY PERFORMANCE MANUAL (1) 6
03. OPERATION MANUAL (1) 6
04. WEIGHT & BALANCE (1) 6
05. QUICK REFERENCE HANDBOOK (1) 6
06. WIRING MANUAL 6
07. MAINTENANCE MANUAL 6
08. MAINTENANCE REVIEW BOARD (FAA) 6
09. AIRPORT PLANNING GUIDE 6
10. ILLUSTRATED PARTS CATALOG 6
11. MAINTENANCE PLANNING GUIDE 6
12. STRUCTURAL REPAIR 6
13. ILLUSTRATED TOOL EQUIPMENT LIST 6
14. POWERPLANT BUILD-UP 6
15. AUXILIARY POWER UNIT BUILD UP 6
16. INSTRUCTIONS FOR GROUND FIRE
EXTINGUISHING AND RESCUE 6
17. DISPATCH DEVIATION PROCEDURES MANUAL (1) 6
18. FAULT ISOLATION MANUAL 6
19. RAMP ISOLATION MANUAL 6
20. SERVICE & INFORMATION BULLETIN SET 6
21. VENDOR SERVICE PUBLICATIONS (2) 6
22. OPERATIONS BULLETIN 6
</TABLE>
(1) Extra copy with each AIRCRAFT
(2) To be delivered by the supplier.
In the event BUYER elects not to take all or any portion of the publications
referred to hereinabove, no refund or other financial adjustment of the contract
price or additional concession/credit will be made since the publications are
offered to BUYER by EMBRAER free of charge.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment B Page 4 of 4
<PAGE> 33
ATTACHMENT "C"
WARRANTY CERTIFICATE - MATERIAL AND WORKMANSHIP
EMB-120 BRASILIA
1. EMBRAER subject to the conditions and limitations hereby expressed,
warrants all EMB-120 BRASILIA AIRCRAFT as follows:
a. For a period of twenty-four (24) months from the date of
delivery to the first BUYER, the AIRCRAFT will be free from:
- Defects in materials, workmanship and manufacturing
processes in relation to parts manufactured by
EMBRAER or by its subcontractors holding an EMBRAER part
number;
- Defects inherent to the design of the AIRCRAFT and its
parts designed and manufactured by EMBRAER or by its
subcontractors holding an EMBRAER part number.
b. For a period of twelve (12) months from the date of delivery to
the first BUYER, the AIRCRAFT will be free from:
- Defects in operation of vendor (EMBRAER's supplier)
manufactured parts, not including the engines and their
accessories and the landing gear system parts, as well
as failures of mentioned parts due to incorrect
installation or installation not complying with the
instructions issued or approved by their respective
manufacturers;
- Defects due to non-conformity to the technical
specification referred to in the purchase agreement of
the AIRCRAFT.
c. For a period of twelve (12) months or six thousand (6,000)
landings, whichever occurs first, from the date of delivery to
the first BUYER, the AIRCRAFT will be free from:
- Defects in operation of the landing gear system parts
supplied by ERAM, as well as failures of mentioned parts
due to incorrect installation or installation not
complying with the instructions issued or approved by
the manufacturer.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment C Page 1 of 4
<PAGE> 34
Once the above-mentioned periods have expired, EMBRAER will
transfer to BUYER the original Warranty issued by the vendors,
if it still exists.
2. EMBRAER, subject to the conditions and limitations hereby expressed,
warrants that:
a. All spare parts or Aerospace Ground Equipment, which have been
manufactured by EMBRAER or by its subcontractors holding an
EMBRAER part number which will permit their particular
identification and which have been sold by EMBRAER or its
representatives, will, for a period of twelve (12) months from
the date of the invoice, be free from defects of material,
workmanship, manufacturing processes and defects inherent to the
design of the above mentioned parts or Aerospace Ground
Equipment.
b. All spare parts or Aerospace Ground Equipment which have been
designed and manufactured by vendors, not including engines and
their accessories, and stamped with a serial number which will
permit their particular identification and which have been sold
by EMERAER or its representatives, will, for a period of six (6)
months from the date of the invoice, be free from malfunction,
defect of material and manufacture.
3. The obligations of EMBRAER as expressed in this Warranty are limited to
replace or repair, depending solely upon its own judgment, the parts
that are returned to EMBRAER or its representatives, at BUYER's own
expenses, adequately packed, within a period of sixty (60) days after
the occurrence of the defect, provided that EMBRAER agrees that such
components are indeed defective and that the defect has occurred within
the periods stipulated in this certificate.
NOTE: Notification of any defect claimed under Article 3 above must be
given to EMBRAER within thirty (30) days after such defect is
found.
Parts supplied to BUYER as replacement for defective parts are
warranted for the balance of the warranty period still available from
the original Warranty of the exchanged parts. However, freight,
insurance, taxes and other costs eventually incurred during the shipment
to EMBRAER or its representatives, reinstallation and adjustments are
BUYER's responsibility.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment C Page 2 of 4
<PAGE> 35
4. EMBRAER will accept no warranty claims under any of the circumstances
listed below:
a. When the AIRCRAFT has been used in an attempt to break records,
or subjected to experimental flights, or any other way not in
conformity with the flight manual or the airworthiness
certificate, or subjected to any manner of use in contravention
of the applicable aerial navigation or other regulations and
rules issued or recommended by government authorities of
whatever country in which the AIRCRAFT is operated, when
accepted and recommended by I.C.A.O.;
b. When the AIRCRAFT or any of its parts have been altered or
modified by BUYER, without prior approval from EMBRAER or from
the manufacturer of the parts through a Service Bulletin;
c. Whenever the AIRCRAFT or any of its parts have been involved in
an accident, or when parts either defective or not complying to
manufacturer's design or specification have been used;
d. Whenever parts have had their identification marks, designation,
seal or serial number altered or removed;
e. In the event of negligence, misuse or maintenance services done
on the AIRCRAFT or any of its parts not in accordance with the
respective maintenance manual;
f. In cases of deterioration, wear, breakage, damage or any other
defect resulting from the use of inadequate packing methods when
returning items to EMBRAER or its representatives.
5. This Warranty does not apply to defects presented by expendable items,
whose service life or maintenance cycle is lower than the warranty
period, and to materials or parts subjected to deterioration.
6. The Warranty hereby expressed is established between EMBRAER and the
first BUYER, and it cannot be transferred or assigned to others, unless
by written consent of EMBRAER, according to Article 16 of the Purchase
Agreement of which this is an Attachment.
7. THE WARRANTIES, OBLIGATIONS AND LIABILITIES OF EMBRAER AND REMEDIES OF
BUYER SET FORTH IN THIS WARRANTY CERTIFICATE ARE EXCLUSIVE AND IN
SUBSTITUTION FOR, AND BUYER HEREBY WAIVES, RELEASES AND RENOUNCES, ALL
OTHER
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment C Page 3 of 4
<PAGE> 36
WARRANTIES, OBLIGATIONS AND LIABILITIES OF EMBRAER AND ANY ASSIGNEE OF
EMBRAER AND ALL OTHER RIGHTS, CLAIMS AND REMEDIES OF BUYER AGAINST
EMBRAER OR ANY ASSIGNEE OF EMBRAER, EXPRESSED OR IMPLIED, ARISING BY LAW
OR OTHERWISE, WITH RESPECT TO ANY NON-CONFORMANCE OR DEFECT OR FAILURE
FOR ANY OTHER REASON, IN ANY AIRCRAFT OR OTHER THING DELIVERED UNDER THE
PURCHASE AGREEMENT OF WHICH THIS IS AN ATTACHMENT INCLUDING DATA,
DOCUMENT, INFORMATION OR SERVICE, INCLUDING BUT NOT LIMITED TO:
a. ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS;
b. ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE
OF DEALING OR USAGE OF TRADE;
c. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT,
WHETHER OR NOT ARISING FROM THE NEGLIGENCE OR OTHER RELATED
CAUSES OF EMBRAER OR ANY ASSIGNEE OF EMBRAER, WHETHER ACTIVE,
PASSIVE OR IMPUTED; AND
d. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR
DAMAGE TO ANY AIRCRAFT, FOR LOSS OF USE, REVENUE OR PROFIT WITH
RESPECT TO ANY AIRCRAFT OR FOR ANY OTHER DIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES.
8. No representative or employee of EMBRAER is authorized to establish any
other warranty than the one hereby expressed, nor to assume any
additional obligation relative to the matter, in the name of EMBRAER and
therefore any such statements eventually made by or in the name of
EMBRAER shall be void and without effect.
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment C Page 4 of 4
<PAGE> 37
ATTACHMENT "D"
EMB - 120
---------
ESCALATION FORMULA
------------------
*****
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment D Page 1 of 3
<PAGE> 38
*****
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment D Page 2 of 3
<PAGE> 39
*****
120ER Purchase Agreement
- - --------------------------------------------------------------------------------
Attachment D Page 3 of 3
<PAGE> 1
EXHIBIT 13.1
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Year Ended March 31,1998
- - --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues (000) $ 297,098 $ 278,110 $ 245,520 $ 218,075 $ 182,908
Operating income (000) $ 33,958 $ 15,417 $ 5,710 $ 20,341 $ 24,680
Net income (000) $ 21,944 $ 10,111 $ 4,366 $ 13,701 $ 14,396
Net income per common share(1):
Basic $ 1.06 $ .50 $ .21 $ .62 $ .73
Diluted $ 1.04 $ .50 $ .21 $ .61 $ .72
Weighted average shares (000)(1):
Basic 20,799 20,170 20,568 22,224 19,766
Diluted 21,168 20,248 20,736 22,428 20,126
Total assets (000) $ 330,406 $ 232,898 $ 227,550 $ 188,182 $ 184,017
Current assets (000) $ 192,801 $ 90,295 $ 76,462 $ 71,642 $ 87,088
Current liabilities (000) $ 49,692 $ 45,022 $ 43,644 $ 25,603 $ 20,473
Long-term debt (000) $ 49,571 $ 47,337 $ 53,736 $ 29,553 $ 26,647
Stockholders' equity (000) $ 211,133 $ 124,552 $ 115,800 $ 117,684 $ 122,788
Return on average equity 14.8% 8.3% 3.7% 11.1% 17.4%
SKYWEST AIRLINES, INC. OPERATING DATA
Passengers carried 2,989,062 2,656,602 2,340,366 2,073,885 1,730,993
Revenue passenger miles (000) 745,386 717,322 617,136 488,901 345,414
Available seat miles (000) 1,463,975 1,413,170 1,254,334 976,095 727,059
Load factor 50.9% 50.8% 49.2% 50.1% 47.5%
Break-even load factor 45.0% 47.9% 48.4% 45.5% 41.2%
Yield per revenue passenger mile 34.8c 33.3c 33.2c 36.3c 43.9c
Revenue per available seat mile 18.1c 17.3c 16.9c 18.8c 21.6c
Cost per available seat mile 16.0c 16.3c 16.6c 17.1c 18.8c
Average passenger trip length 249 270 264 236 200
Number of aircraft at end of year 60 60 63 60 55
</TABLE>
<PAGE> 2
QUARTERLY FINANCIAL AND STOCK PRICE DATA
<TABLE>
<CAPTION>
Fiscal Year 1998
----------------------------------------------------
First Second Third Fourth Year
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues (000) $72,115 $80,302 $73,266 $71,415 $297,098
Operating income (000) $ 6,703 $12,248 $ 7,752 $ 7,255 $ 33,958
Net income (000) $ 4,345 $ 7,510 $ 5,422 $ 4,667 $ 21,944
Net income per common share (1):
Basic $ .22 $ .37 $ .27 $ .21 $ 1.06
Diluted $ .22 $ .37 $ .26 $ .21 $ 1.04
Stock price data (1):
High $ 8.50 $ 10.32 $ 14.81 $ 21.06 $ 21.06
Low $ 6.00 $ 7.69 $ 10.13 $ 14.75 $ 6.00
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1997
----------------------------------------------------
First Second Third Fourth Year
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues (000) $70,569 $75,819 $63,651 $68,071 $278,110
Operating income (loss) (000) $ 7,678 $ 7,999 $(1,736) $ 1,476 $ 15,417
Net income(loss) (000) $ 4,834 $ 4,990 $ (821) $ 1,108 $ 10,111
Net income (loss) per common share (1):
Basic $ .24 $ .25 $ (.04) $ .06 $ .50
Diluted $ .24 $ .25 $ (.04) $ .06 $ .50
Stock price data (1):
High $ 9.88 $ 9.13 $ 7.82 $ 7.19 $ 9.88
Low $ 6.63 $ 7.06 $ 6.32 $ 6.00 $ 6.00
</TABLE>
(1) On May 5, 1998, the Company's Board of Directors declared a 100 percent
stock dividend (one share for each share outstanding) payable to stockholders of
record on May 20, 1998. The dividend was distributed on June 8, 1998. The
Company paid cash in lieu of issuing fractional shares. All common shares and
per share information in the accompanying consolidated financial statements have
been retro-actively adjusted to reflect this stock dividend.
As of April 30, 1998, there were 1,041 holders of common stock. Cash dividends
of $.10 and $.12 per share of outstanding common stock were paid in fiscal years
1998 and 1997, respectively.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through SkyWest Airlines Inc., operates a regional airline offering
scheduled passenger service with approximately 580 daily departures to 46 cities
in 12 western states and Canada. Total operating revenues and passengers carried
have grown consistently from fiscal 1994 through fiscal 1998, at compound annual
growth rates of approximately 13.0 percent and 15.0 percent, respectively. In
fiscal 1994, SkyWest generated approximately 727 million available seat miles
("ASMs") with its fleet of twenty-eight 19-seat Metroliners, twenty-three
30-seat Brasilias and four Canadair Regional Jets ("CRJs") at fiscal year end.
As a result of the introduction of the 50-seat CRJs beginning in fiscal 1994,
the expansion of the Brasilia fleet and the strategic transition out of the
Metroliner aircraft as of December 1996, SkyWest generated approximately 1.5
billion ASMs in fiscal 1998 with a fleet of 50 Brasilias and 10 CRJs at fiscal
year end. The transition out of the Metroliner aircraft enabled SkyWest to
upgrade its aircraft to an all cabin-class fleet of Brasilias and CRJs, which
offer increased passenger acceptance and capacity and higher operating
efficiencies. The transition resulted in one-time pre-tax fleet restructuring
and transition expenses of $6.2 million, or $.19 per share, in fiscal 1996.
In fiscal 1998, the Company generated net income of $21.9 million, compared to
$10.1 million in fiscal 1997 and $4.4 million in fiscal 1996. The improvement
since fiscal 1996 reflects, among other factors, the addition of United
Airlines, Inc. ("United") as a code-sharing partner and the completion of
SkyWest's transition to an all cabin-class fleet.
SkyWest has been a code-sharing partner with Delta Air Lines, Inc. ("Delta") and
Continental Airlines, Inc. ("Continental") since 1987 and 1995, respectively.
SkyWest recently expanded its code-sharing relationships to include United
effective October 1, 1997. SkyWest operates as the Delta Connection in Salt Lake
City and Los Angeles, as United Express in Los Angeles and as the Continental
Connection in selected California markets. On January 19, 1998, SkyWest executed
an addendum to the United Express Agreement, expanding SkyWest's operations to
serve as the United Express carrier in San Francisco which began June 1, 1998.
On February 9, 1998, SkyWest executed an amendment to the United Express
Agreement to provide service as United Express in United's Portland and
Seattle/Tacoma markets and in additional Los Angeles markets which began April
23, 1998. SkyWest believes that its success in attracting multiple code-sharing
relationships is attributable to its delivery of high quality customer service
with an all cabin-class fleet.
Multiple code-sharing relationships have enabled SkyWest to reduce reliance on
any single major airline code and to enhance and stabilize operating results
through a mix of SkyWest-controlled flying and United Express contract flying.
On flights operated by SkyWest, SkyWest controls scheduling, ticketing, pricing
and seat inventories and receives a prorated portion of passenger fares. On
United Express contract routes, United controls scheduling, ticketing, pricing
and seat inventories with SkyWest receiving from United negotiated minimum
payments per flight departure and incentives related to passenger volumes and
levels of customer service. As of March 31, 1998, 68 percent of the Company's
capacity was generated in the Delta and Continental codes and 32 percent in the
United code. As a result of SkyWest's Los Angeles, San Francisco and Pacific
Northwest expansion, management expects that the percentages of SkyWest capacity
in the United Express contract flying will increase.
The Company has continued to emphasize cost management and better utilization of
existing resources. During the period from fiscal 1994 through fiscal 1998, cost
per ASM decreased from 18.8 cents to 16.0 cents. This reduction was due
primarily to the introduction of the CRJs, which offer lower unit operating
costs on longer stage lengths. In addition, the transition to an all-Brasilia
turboprop fleet has resulted in fewer flight interruptions and lower maintenance
costs. Furthermore, increased employee productivity has enabled the Company to
grow with few additional employees, except for flight crews to operate the
larger Brasilia and CRJ aircraft.
<PAGE> 4
RESULTS OF OPERATIONS
The following table sets forth information regarding the Company's operating
expense components. Airline operating expenses are expressed as a percentage of
total airline operating revenues. Nonairline expenses are expressed as a
percentage of total nonairline revenues. Total operating expenses and interest
are expressed as a percentage of total consolidated revenues.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------
Percent Cents Percent Cents Percent Cents
of per of per of per
Amount Revenue ASM Amount Revenue ASM Amount Revenue ASM
-------- ------- ---- -------- ------- ---- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries, wages and employee
benefits . . . . . . . . . . . . . . . . . $ 67,591 25.5% 4.6c $ 60,759 24.8% 4.3c $ 56,005 26.5% 4.5c
Aircraft costs . . . . . . . . . . . . . . . 52,357 19.8 3.6 49,822 20.4 3.5 43,009 20.3 3.5
Maintenance . . . . . . . . . . . . . . . . 20,535 7.8 1.4 20,929 8.6 1.4 20,779 9.8 1.6
Fuel . . . . . . . . . . . . . . . . . . . . 28,510 10.8 2.0 30,713 12.6 2.2 23,084 10.9 1.8
Other . . . . . . . . . . . . . . . . . . . 62,701 23.7 4.3 66,323 27.0 4.7 56,794 26.9 4.5
Interest . . . . . . . . . . . . . . . . . . 2,066 .8 .1 2,431 1.0 .2 2,160 1.0 .2
Fleet restructuring and transition
expenses . . . . . . . . . . . . . . . . . -- -- -- -- -- -- 6,247 3.0 .5
-------- ---- ---- -------- ----- ---- -------- ---- ----
Total airline expenses . . . . . . . . . . . 233,760 88.4 16.0c 230,977 94.4 16.3c 208,078 98.4 16.6c
-------- ---- ==== -------- ----- ==== -------- ---- ====
Nonairline expenses . . . . . . . . . . . . 32,319 98.8 34,147 102.0 33,895 99.6
-------- ---- -------- ----- -------- ----
Total operating expenses and
interest . . . . . . . . . . . . . . . . . $266,079 89.6% $265,124 95.3% $241,973 98.6%
======== ==== ======== ===== ======== ====
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
During fiscal 1998, the Company enplaned a record number of passengers, reported
record consolidated net income and experienced continued growth in revenue
passenger miles ("RPMs") and ASMs. In fiscal 1998, consolidated net income
increased 117.0 percent to $21.9 million, or $1.04 per diluted share, after
retroactively giving effect to a 100 percent stock dividend (one share for each
share outstanding) declared May 5, 1998, compared to $10.1 million, or $.50 per
diluted share in fiscal 1997. Consolidated operating revenues increased to a
record $297.1 million in fiscal 1998 compared to $278.1 in fiscal 1997.
Passenger revenues, which represented 87.3 percent of total operating revenues,
increased 8.4 percent to $259.3 million in fiscal 1998 compared to $239.2
million or 86.0 percent of total operating revenues in fiscal 1997. The increase
is due to a 4.5 percent increase in yield per RPM and a 3.9 percent increase in
RPMs. SkyWest entered into a new code-sharing relationship with United and began
operating as United Express in Los Angeles beginning October 1, 1997. This
operation has resulted in both increased RPMs and increased yield per RPM. The
4.5 percent increase in yield per RPM also resulted from an increase in the
Company's portion of prorated fares with Delta in certain markets. SkyWest has
also acquired a new state-of-the-art revenue management and control system which
utilizes historical booking data and trends to optimize revenue. The combination
of these factors resulted in an increase in revenue per ASM to 18.1 cents in
fiscal 1998 compared to 17.3 cents in fiscal 1997.
Management has continued its efforts to reduce airline operating costs per ASM
and as a percentage of airline operating revenues. Total airline operating
expenses and interest were 88.4 percent of total airline operating revenues in
fiscal 1998 compared to 94.4 percent in fiscal 1997. This percentage decrease is
due to an 8.1 percent increase in total airline operating revenues and only a
1.2 percent increase in total airline operating expenses. This improvement is
primarily the result of the increase in revenues from the new United contract
flying as well as the Company not incurring expenses such as traffic commissions
and certain traffic handling expenses related to contract flying. Airline
operating costs per ASM decreased to 16.0 cents in fiscal 1998 from 16.3 cents
in fiscal 1997.
<PAGE> 5
Salaries, wages and employee benefits increased as a percentage of airline
operating revenues to 25.5 percent in fiscal 1998 from 24.8 percent in fiscal
1997. The increase is primarily the result of incentive payments to employees,
which are based on the Company's profitability. The average number of employees
was 1,915 for fiscal 1998 compared to 1,852 for fiscal 1997. The increase is due
to the addition of crewmembers required for the Company's expansion. Salaries,
wages and employee benefits per ASM increased to 4.6 cents in fiscal 1998 from
4.3 cents in fiscal 1997.
Aircraft costs, including aircraft rent and depreciation, decreased slightly as
a percentage of airline operating revenues to 19.8 percent in fiscal 1998 from
20.4 percent in fiscal 1997. The decrease is due to airline operating revenues
increasing at a faster rate than aircraft costs. Aircraft costs per ASM were
3.6 cents in fiscal 1998 compared to 3.5 cents in fiscal 1997.
Maintenance expense decreased slightly as a percentage of airline operating
revenues to 7.8 percent in fiscal 1998 from 8.6 percent in fiscal 1997. The
decrease is due to airline operating revenues increasing while maintenance
expenses decreased, in fiscal 1998, due to the utilization of newer Brasilia
aircraft. Maintenance cost per ASM was 1.4 cents in fiscal 1998 and 1997.
Fuel costs decreased as a percentage of airline operating revenues to 10.8
percent in fiscal 1998 from 12.6 percent in fiscal 1997. The decrease is due to
airline operating revenues increasing 8.1 percent while fuel costs decreased 7.2
percent in fiscal 1998 compared to fiscal 1997. The decrease in fuel costs was
due to a reduction in the average fuel price per gallon from 95 cents in fiscal
1997 to 81 cents in fiscal 1998. As a result, fuel costs per ASM decreased to
2.0 cents in fiscal 1998 from 2.2 cents in fiscal 1997.
Other expenses, which consist primarily of commissions, landing fees, station
rents, computer reservation systems and hull and liability insurance, decreased
as a percentage of airline operating revenues to 23.7 percent in fiscal 1998
compared to 27.0 percent in fiscal 1997. The decrease is primarily the result of
the Company not incurring commissions on United contract related passenger
revenues. Due to the decrease in other expenses, cost per ASM decreased to 4.3
cents in fiscal 1998 from 4.7 cents in fiscal 1997.
Nonairline revenues decreased 2.3 percent to $32.7 million in fiscal 1998
compared to $33.5 million in fiscal 1997. Nonairline revenues decreased due to
weather related flight cancellations and as a result of lowering average fares
in order to increase market share in the Scenic Airlines operations. Nonairline
expenses decreased 7.9 percent to $31.4 million in fiscal 1998 compared to $34.1
million in fiscal 1997. The decrease was primarily due to the implementation of
cost control measures and the restructuring of the financing of flight equipment
and facilities.
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated operating revenues increased 13.3 percent to $278.1 million in
fiscal 1997 compared to $245.5 million in fiscal 1996. The Company also
experienced continued growth in passenger enplanements, RPMs and ASMs during
fiscal 1997 compared to fiscal 1996. Consolidated net income increased to $10.1
million, or $.50 per diluted share in fiscal 1997 compared to $4.4 million, or
$.21 per diluted share, in fiscal 1996. The fiscal 1996 results included a
pretax fleet restructuring expense of $6.2 million, or $.19 per diluted share,
resulting from a fleet rationalization plan that required a restructuring of the
Company's turboprop fleet.
Passenger revenues, which represented 86.0 percent of total operating revenues,
increased 16.7 percent to $239.2 million in fiscal 1997 from $205.0 million in
fiscal 1996. The increase was primarily due to a 16.2 percent increase in RPMs,
while yield per RPM remained relatively constant at 33.3 cents in fiscal 1997
compared to 33.2 cents in fiscal 1996. The increase in RPMs was due to a 20.3
percent increase in ASMs generated by Canadair Regional Jets, which were used to
provide service to destinations such as San Francisco, California, Pasco,
Washington and Colorado Springs, Colorado. Additionally, the Company acquired 15
new Brasilia aircraft to replace the 18 remaining Metroliner aircraft as their
leases expired or were terminated as part of the fleet rationalization program.
These aircraft fleet additions and changes resulted in a 12.7 percent increase
in ASMs. The growth in RPMs exceeded the growth in ASMs and resulted in a
passenger load factor of 50.8 percent in fiscal 1997 compared to 49.2 percent in
fiscal 1996.
As a result of the increased passenger load factor and a .3 percent increase in
yield per RPM, revenue per ASM increased 2.4 percent to 17.3 cents in fiscal
1997 from 16.9 cents in fiscal 1996.
<PAGE> 6
Total airline operating expenses and interest were 94.4 percent of total airline
operating revenues in fiscal 1997 compared to 98.4 percent in fiscal 1996.
Exclusive of the one-time charge related to the fleet restructuring and
transition from Metro to Brasilia aircraft recorded in fiscal 1996, total
operating expenses and interest, as a percentage of total airline operating
revenues, decreased to 94.4 percent from 95.4 percent in fiscal 1996. This
percentage decrease was due to a 16.7 percent growth rate in passenger revenues
compared to a 14.4 percent increase in operating expenses and interest. The 14.4
percent increase in operating expenses and interest was exclusive of the
one-time fleet restructuring and transition expense recorded in fiscal 1996.
Airline operating costs per ASM decreased to 16.3 cents in fiscal 1997 from 16.6
cents in fiscal 1996. Exclusive of the one-time fleet restructuring and
transition expense, airline operating costs per ASM would have been 16.1 cents
for fiscal 1996. The slight increase in cost per ASM in fiscal 1997 was
primarily due to increased fuel costs.
Salaries, wages and employee benefits decreased as a percentage of airline
operating revenues to 24.8 percent in fiscal 1997 from 26.5 percent in fiscal
1996. The decrease was primarily due to airline operating revenues increasing at
a faster rate than employee related expenses. The average number of employees
was 1,852 for 1997 compared to 1,753 for fiscal 1996. The increase was primarily
due to the addition of flight attendants to crew new Brasilia aircraft.
Salaries, wages and employee benefits per ASM decreased to 4.3 cents in fiscal
1997 from 4.5 cents in fiscal 1996.
Aircraft costs, including aircraft rent and depreciation, increased slightly as
a percentage of airline operating revenues to 20.4 percent in fiscal 1997 from
20.3 percent in fiscal 1996, as a result of the fleet transition to Brasilia
aircraft. Aircraft costs per ASM were 3.5 cents in fiscal 1997 and 1996.
Maintenance expense decreased slightly as a percentage of airline operating
revenues to 8.6 percent in fiscal 1997 from 9.8 percent in fiscal 1996.
Maintenance cost per ASM decreased to 1.4 cents in fiscal 1997 from 1.6 cents in
fiscal 1996 due to the efficiency of additional new Brasilia aircraft.
Fuel costs increased as a percentage of airline operating revenues to 12.6
percent in fiscal 1997 compared to 10.9 percent in fiscal 1996. The increase was
primarily due to an 18.8 percent increase in the average fuel price per gallon
to $.95 in fiscal 1997 from $.80 in fiscal 1996. As a result, fuel costs per ASM
increased to 2.2 cents in fiscal 1997 from 1.8 cents in fiscal 1996.
Other expenses, which consist primarily of commissions, landing fees, station
rents, computer reservation systems and hull and liability insurance, increased
as a percentage of airline operating revenues to 27.0 percent in fiscal 1997
compared to 26.9 percent in fiscal 1996. The increase was due primarily to rate
increases in customer reservation systems booking fees. In addition, the Company
has experienced rate increases in landing fees and general passenger handling
charges. Interest expense as a percentage of airline operating revenues was 1.0
percent in fiscal 1997 and 1996. This percentage was the same since no new debt
financings were entered into during fiscal 1997.
Nonairline revenues decreased 1.7 percent to $33.5 million in fiscal 1997
compared to $34.0 million in fiscal 1996. The decrease is due to decreased
passenger enplanements in fiscal 1997. Nonairline expenses increased 0.8 percent
to $34.1 million for fiscal 1997 compared to $33.9 million for fiscal 1996. The
slight increase was primarily due to increased fuel costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $143.1 million and a current ratio of 3.9:1
at March 31, 1998 compared to working capital of $45.3 million and a current
ratio of 2.0:1 at March 31, 1997. The principal sources of funds during fiscal
1998 were $48.4 million generated from operations, $65.7 million from the sale
of common stock, $11.5 million from the issuance of long-term debt, $11.2
million of proceeds from the sale of property and equipment, $3.3 million of
proceeds from the sale of available-for-sale securities and $1.1 million of tax
benefit from exercise of common stock options. During fiscal 1998 the Company
invested $22.8 million in flight equipment and $7.0 million in buildings, ground
equipment and other assets. The Company also reduced long-term debt by $7.4
million and paid $2.0 million in cash dividends. These factors resulted in a
$102.0 million increase in cash and cash equivalents during fiscal 1998.
The Company's position in available-for-sale securities, consisting primarily of
bonds and commercial paper, decreased to $14.6 million at March 31, 1998
compared to $18.0 million at March 31, 1997.
<PAGE> 7
During fiscal 1998, the Company entered into an agreement to purchase 20 new
Brasilia aircraft related spare parts inventory and support equipment. Two of
these aircraft were delivered prior to March 31, 1998. At March 31, 1998 the
Company had agreed to purchase 18 Brasilia aircraft and related spare parts and
support equipment at an aggregate cost of approximately $144.0 million,
including estimated cost escalations. The Company also has options to acquire 40
additional Brasilia aircraft at fixed prices (subject to cost escalation and
delivery schedules) exercisable through fiscal 2000 and options to acquire an
additional ten CRJs, exercisable at any time. In connection with SkyWest's
expansion in Los Angeles, San Francisco and the Pacific Northwest, SkyWest
expects to acquire an additional 14 used Brasilias for a total of 34 new and
used aircraft. The Company also anticipates that SkyWest will incur costs of
approximately $24.0 million associated with the acquisition of additional ground
and maintenance facilities, support equipment and spare parts inventory related
to its expansion.
The Company has significant long-term lease obligations primarily relating to
its aircraft fleet. These leases are classified as operating leases and
therefore are not reflected as liabilities in the Company's consolidated balance
sheets. At March 31, 1998, the Company leased 44 SkyWest aircraft and 8 Scenic
Airlines aircraft under leases with remaining terms of up to 14.0 years. Future
minimum lease payments due under all long-term operating leases were
approximately $441.5 million at March 31, 1998.
At March 31, 1998, the Company had outstanding long-term debt, including current
maturities, of approximately $57.8 million. The interest rates on $7.1 million
of the $57.8 million of long-term debt are floating based on one month and three
month LIBOR. Long-term debt of $47.4 million was incurred in connection with the
acquisition of Brasilia aircraft and is subject to subsidy payments through the
export support program of the Federative Republic of Brazil. The subsidy
payments reduced the stated interest rates on the $47.4 million of long-term
debt to an average effective rate of approximately 4.0 percent as of March 31,
1998. The debt is payable in either monthly, quarterly or semi-annual
installments through January 2, 2006. These subsidy payments are at risk to the
Company if the Federative Republic of Brazil does not meet its obligations under
the export support program. While the Company has no reason to believe, based on
information currently available, that the Company will not continue to receive
these subsidy payments from the Federative Republic of Brazil in the future,
there can be no assurance that such a default will not occur.
The Company expended approximately $11.3 million for non-aircraft capital
expenditures during the year ended March 31, 1998, consisting primarily of
aircraft engine overhauls, aircraft modifications to be made pursuant to
industry-wide FAA directives, buildings and ground equipment, and rental
vehicles.
The Company has available $5.0 million in an unsecured bank line of credit with
interest payable at the bank's base rate less one-quarter percent, which was
8.25 percent at March 31, 1998. The Company believes that in the absence of
unusual circumstances the working capital available to the Company will be
sufficient to meet its present requirements, including expansion, capital
expenditure, lease payment and debt service requirements for at least the next
12 months.
YEAR 2000 COMPLIANCE
The Company is currently modifying computer systems and application programs for
year 2000 compliance, with project completion scheduled for March 31, 1999. The
Company believes that the cost to modify its systems or applications will not
have a material effect on its financial position or results of operations. Any
expenditures will be funded through operating cash flows while any costs for new
software will be capitalized and amortized over the software's useful life.
Although the Company is working cooperatively with third parties with systems
upon which the Company must rely, the Company can not give any assurances that
the systems of other parties will be year 2000 compliant on a timely basis.
Systems operated by others which the Company would use and/or rely on would
include: Federal Aviation Administration Air Traffic Control, computer
reservation systems for travel agent sales as well as Delta and United
reservation, passenger check-in and ticketing systems. The Company's business,
financial condition and/or results of operations could be materially adversely
affected by the failure of its system and applications or those operated by
others.
SEASONALITY
As is common in the airline industry, the Company's operations are favorably
affected by increased travel, historically occurring in the summer months and
are unfavorably affected by decreased business travel during the months from
November through January and by inclement weather which occasionally results in
cancelled flights, principally during the winter months. However, the Company
does expect some mitigation of the historical seasonal trends due to an increase
in the portion of its operations in contract flying with United. Scenic's
business is also seasonal in nature. A large percentage of Scenic's passengers
are tourists visiting the Las Vegas and Grand Canyon areas during the summer
months.
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 139,772 $ 37,786
Available-for-sale securities 14,627 17,970
Receivables, less allowance for doubtful accounts
of $124 in 1998 and $104 in 1997 10,699 10,851
Inventories 11,200 9,987
Prepaid aircraft rents 12,145 8,612
Other current assets 4,358 5,089
--------- ---------
Total current assets 192,801 90,295
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Aircraft and rotable spares 185,712 171,239
Buildings and ground equipment 42,663 43,508
Rental vehicles 3,148 3,291
--------- ---------
231,523 218,038
Less - accumulated depreciation and amortization (98,053) (80,295)
--------- ---------
133,470 137,743
OTHER ASSETS 4,135 4,860
--------- ---------
$ 330,406 $ 232,898
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE> 9
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,238 $ 6,399
Trade accounts payable 31,202 29,213
Accrued salaries, wages and benefits 7,317 6,095
Taxes other than income taxes 1,698 1,537
Air traffic liability 1,237 1,488
Fleet restructuring accrual -- 290
--------- ---------
Total current liabilities 49,692 45,022
--------- ---------
LONG-TERM DEBT, less current maturities 49,571 47,337
--------- ---------
DEFERRED INCOME TAXES PAYABLE 20,010 15,987
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, no par value; 40,000,000 shares authorized;
26,959,110 and 23,249,622 shares issued, respectively 155,917 89,146
Retained earnings 75,501 55,691
Treasury stock, at cost, 2,949,200 shares (20,285) (20,285)
--------- ---------
Total stockholders' equity 211,133 124,552
--------- ---------
$ 330,406 $ 232,898
========= =========
</TABLE>
<PAGE> 10
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the year ended March 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Passenger $ 259,314 $ 239,222 $ 205,034
Freight 3,810 4,174 4,291
Public service and other 1,278 1,243 2,159
Nonairline 32,696 33,471 34,036
------------ ------------ ------------
Total operating revenues 297,098 278,110 245,520
------------ ------------ ------------
Operating expenses:
Flying operations 103,636 101,689 85,117
Aircraft, traffic and passenger service 38,957 37,044 32,522
Maintenance 29,299 29,149 28,713
Promotion and sales 25,505 29,606 25,965
Depreciation and amortization 19,305 18,481 15,392
General and administrative 14,992 12,577 11,962
Fleet restructuring and transition -- -- 6,247
Nonairline 31,446 34,147 33,892
------------ ------------ ------------
Total operating expenses 263,140 262,693 239,810
------------ ------------ ------------
Operating income 33,958 15,417 5,710
------------ ------------ ------------
Other income (expense):
Interest expense (2,939) (2,431) (2,163)
Interest income 4,283 2,481 2,707
Gain on sales of property and equipment 374 1,113 556
------------ ------------ ------------
Total other income 1,718 1,163 1,100
------------ ------------ ------------
Income before provision for income taxes 35,676 16,580 6,810
Provision for income taxes 13,732 6,469 2,444
------------ ------------ ------------
Net income $ 21,944 $ 10,111 $ 4,366
============ ============ ============
Net income per common share:
Basic $ 1.06 $ .50 $ .21
Diluted $ 1.04 $ .50 $ .21
============ ============ ============
Weighted average number of common shares outstanding:
Basic 20,799,000 20,170,000 20,568,000
Diluted 21,168,000 20,248,000 20,736,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Retained
Shares Amount Shares Amount Earnings
---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 22,936,112 $ 87,658 (2,300,000) $(16,091) $ 46,117
Net income -- -- -- -- 4,366
Exercise of common stock options
(at prices ranging from $1.92 to
$2.75 per share) 55,000 114 -- -- --
Sale of common stock under
employee stock purchase plan 52,504 287 -- -- --
Tax benefit from exercise of common
stock options -- 41 -- -- --
Compensation expense related to grant
of stock options -- 83 -- -- --
Purchase of treasury stock -- -- (649,200) (4,194) --
Cash dividends ($.13 per share) -- -- -- -- (2,581)
---------- -------- ---------- -------- --------
Balance at March 31, 1996 23,043,616 88,183 (2,949,200) (20,285) 47,902
Net income -- -- -- -- 10,111
Exercise of common stock options
(at a price of $2.75 per share) 102,500 282 -- -- --
Sale of common stock under
employee stock purchase plan 103,506 588 -- -- --
Tax benefit from exercise of common
stock options -- 93 -- -- --
Cash dividends ($.12 per share) -- -- -- -- (2,322)
---------- -------- ---------- -------- --------
Balance at March 31, 1997 23,249,622 89,146 (2,949,200) (20,285) 55,691
Net income -- -- -- -- 21,944
Exercise of common stock options
(at prices ranging from $6.32 to
$16.63 per share) 383,420 3,465 -- -- --
Sale of common stock under
employee stock purchase plan 106,068 663 -- -- --
Sale of common stock, net of offering
Costs of $3,648 3,220,000 61,557 -- -- --
Tax benefit from exercise of common
stock options -- 1,086 -- -- --
Cash dividends ($.10 per share) -- -- -- -- (2,134)
---------- -------- ---------- -------- --------
Balance at March 31, 1998 26,959,110 $155,917 (2,949,200) $(20,285) $ 75,501
========== ======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the year ended March 31,
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,944 $ 10,111 $ 4,366
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,305 18,481 15,392
Nonairline depreciation and amortization 4,848 3,585 2,742
Maintenance expense related to disposition of rotable spares 322 286 173
Gain on sales of property and equipment (374) (1,113) (556)
Increase (decrease) in allowance for doubtful accounts 20 (117) 6
Increase in deferred income taxes 4,023 1,617 1,336
Amortization of deferred credits -- (1,614) (1,497)
Compensation expense related to grant of stock options -- -- 83
Changes in operating assets and liabilities:
Decrease (increase) in receivables 132 2,159 (5,895)
Increase in inventories, net of dispositions (1,749) (1,064) (1,744)
Increase in other current assets (2,802) (2,681) (2,286)
Increase in trade accounts payable 1,896 4,965 9,951
(Decrease) increase in fleet restructuring accrual (290) (3,498) 3,788
Increase in other current liabilities 1,132 854 1,005
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,407 31,971 26,864
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities 3,343 1,127 2,212
Acquisition of property and equipment:
Aircraft and rotable spares (22,812) (11,979) (48,508)
Deposits on aircraft and rotable spares -- -- (3,053)
Buildings and ground equipment (4,572) (4,886) (10,281)
Rental vehicles (2,392) (2,850) (2,842)
Proceeds from sales of property and equipment 11,238 2,945 4,114
Decrease in deposits on aircraft and rotable spares -- 3,603 8,715
(Increase) decrease in other assets (29) 413 (447)
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (15,224) (11,627) (50,090)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 65,685 870 401
Purchase of treasury stock -- -- (4,194)
Tax benefit from exercise of common stock options 1,086 93 41
Payment of cash dividends (2,041) (1,814) (2,581)
Reduction of long-term debt (7,427) (6,236) (4,329)
Proceeds from issuance of long-term debt 11,500 -- 31,001
--------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 68,803 (7,087) 20,339
--------- -------- --------
Increase (decrease) in cash and cash equivalents 101,986 13,257 (2,887)
Cash and cash equivalents at beginning of year 37,786 24,529 27,416
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 139,772 $ 37,786 $ 24,529
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,012 $ 2,399 $ 2,060
Income taxes 8,221 3,950 3,090
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -
The accompanying consolidated financial statements include the accounts of
SkyWest, Inc. (a Utah corporation) and its wholly owned subsidiaries, SkyWest
Airlines, Inc. ("SkyWest"), Scenic Airlines, Inc. ("Scenic") and National Parks
Transportation, Inc. ("NPT"), collectively (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
AVAILABLE-FOR-SALE SECURITIES -
The Company's investments in debt and equity securities have been classified as
available-for-sale securities and are recorded at fair market value. Significant
unrealized holding gains and losses will be recorded as a separate component of
stockholders' equity.
INVENTORIES -
Inventories include expendable parts, fuel and supplies and are valued at
weighted average cost less an allowance for obsolescence. Expendable parts are
charged to expense as used.
PROPERTY AND EQUIPMENT -
Property and equipment are stated at cost and depreciated over their useful
lives to their estimated residual values using the straight-line method as
follows:
Aircraft and rotable spares 3 - 14 years
Buildings and ground equipment 3 - 39.5 years
Rental vehicles 4 years
MAINTENANCE -
The Company operates under an FAA approved continuous inspection and maintenance
program. The cost of maintenance is charged to expense when incurred. The
Company uses the deferred method of accounting for EMB-120 engine overhauls and
uses the accrual method of accounting for regional jet engine overhauls.
<PAGE> 14
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PASSENGER AND FREIGHT REVENUES -
Passenger and freight revenues are recognized when service is provided.
Passenger tickets sold but not used and the liability to other airlines are
recorded as air traffic liability.
INCOME TAXES -
The Company recognizes a liability or asset for the deferred tax consequences of
all temporary differences between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years when the reported amounts of
the assets and liabilities are recovered or settled. As of March 31, 1998 and
1997, the Company had recorded current deferred tax assets of $2,065,000 and
$2,046,000, respectively (which are included in other current assets), and
deferred tax liabilities of $20,010,000 and $15,987,000, respectively.
DEFERRED CREDITS -
In order to assist the Company in integrating new aircraft into its fleet,
certain manufacturers provided the Company with cash or credits for spare parts.
With respect to purchased aircraft, these amounts reduced the capitalized cost
of the aircraft. With respect to leased aircraft (operating leases), the Company
had deferred these amounts and amortized them over the terms of the related
aircraft leases as a reduction of rent expense. Amounts amortized during the
years ended March 31, 1997 and 1996 were $1,614,000 and $1,497,000,
respectively. As of March 31, 1997, the Company had no remaining deferred
credits to amortize.
NET INCOME PER COMMON SHARE -
Basic net income per common share ("Basic EPS") excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding during the fiscal year. Diluted net income per common share
("Diluted EPS") reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised or converted
into common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net income
per common share. Net income per common share amounts and share data have been
restated for all periods presented to reflect Basic and Diluted EPS and the
subsequent stock dividend described in Note 5.
Following is a reconciliation of the numerator and denominator of Basic EPS to
the numerator and denominator of Diluted EPS for all periods presented (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended March 31, 1998 1997 1996
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net Income $21,944 $10,111 $ 4,366
======= ======= =======
Denominator:
Weighted Average Common Shares Outstanding 20,799 20,170 20,568
Effect of Options 369 78 168
------- ------- -------
21,168 20,148 20,736
======= ======= =======
Basic EPS $ 1.06 $ .50 $ .21
Diluted EPS $ 1.04 $ .50 $ .21
======= ======= =======
</TABLE>
<PAGE> 15
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, available-for-sale securities, receivables and accounts
payable approximate fair values because of the immediate or short-term maturity
of these financial instruments. The fair value of the Company's long-term debt
is estimated based on current rates offered to the Company for similar debt and
approximates $56,262,000 as of March 31, 1998, as compared to the carrying
amount of $57,809,000.
RECENT ACCOUNTING PRONOUNCEMENTS -
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") and No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components and SFAS 131 establishes new
standards for public companies to report information about their operating
segments, products and services, geographic areas and major customers. Both
statements are effective for financial statements issued for periods beginning
after December 15, 1997. Accordingly, the Company will adopt SFAS 130 and SFAS
131 in its fiscal 1999 consolidated financial statements. Management believes
the adoption of SFAS 130 and 131 will not have a material impact on the
consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1997 and 1996
consolidated financial statements in order to conform to the current fiscal year
presentations.
(2) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
As of March 31,
-------------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Note payable to bank, due in monthly installments
of $223,094 including interest at 7.4% through
September 2002, secured by aircraft $10,400 $ --
Note payable to bank, due in monthly installments
of $90,394 including interest at 6.95% through
December 2005, secured by aircraft 6,485 7,096
Note payable to bank, due in monthly installments
of $88,737 including interest at 6.7% through
January 2006, secured by aircraft 6,476 7,085
Note payable to bank, due in monthly installments
of $91,290 including interest at 7.37% through
October 2005, secured by aircraft 6,350 6,953
Note payable to bank, due in monthly installments
of $64,319 plus interest at 6.36% through
November 2000. Balloon payment of $3,937,000
due December 2000, secured by aircraft 6,046 6,818
Note payable to bank, due in quarterly installments of
$177,906 plus interest at 8.58% through March 2005,
secured by aircraft 4,981 5,693
</TABLE>
<PAGE> 16
(2) LONG-TERM DEBT (continued)
<TABLE>
<S> <C> <C>
Note payable to bank, due in monthly installments of
$77,265 including interest at 7.33% through June 2003,
secured by aircraft 4,031 4,638
Note payable to bank, due in quarterly installments of
$167,246 plus interest based on three month LIBOR
(7.39% at March 31, 1998) through September 2003,
secured by aircraft 3,679 4,348
Note payable to bank, due in monthly installments of
$54,702 plus interest based on one month LIBOR
(7.44% at March 31, 1998) through June 2003,
secured by aircraft 3,446 4,103
Note payable to financing company, due in quarterly
installments of $155,000 plus interest at
7.64% through July 2003, secured by aircraft 3,483 4,030
Note payable to bank, due in semi-annual installments
of $270,186 plus interest at 8.5% through May 2002,
secured by aircraft 2,432 2,972
57,809 53,736
Less - current maturities (8,238) (6,399)
------- -------
$49,571 $47,337
======= =======
</TABLE>
The aggregate amounts of principal maturities of long-term debt as of March 31,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C>
1999 $ 8,238
2000 8,627
2001 9,048
2002 9,502
2003 8,562
Thereafter 13,832
-------
$57,809
</TABLE>
The Company's long-term debt, excluding $10,400,000, was incurred in connection
with the acquisition of Brasilia aircraft and is supported by subsidy payments
through the export support program of the Federative Republic of Brazil. The
subsidy payments reduce the stated interest rates to an average effective rate
of approximately 4.0 percent at March 31, 1998. These subsidy payments are at
risk to the Company if the Federative Republic of Brazil does not meet its
obligations under the export support program. While the Company has no reason to
believe, based on information currently available, that the Company will not
continue to receive these subsidy payments from the Federative Republic of
Brazil in the future, there can be no assurance that such a default will not
occur.
As of March 31, 1998, the Company had available $5,000,000 in an unsecured bank
line of credit with interest payable at the bank's base rate less one-quarter
percent, which was 8.25 percent at March 31, 1998.
Certain of the Company's long-term debt arrangements contain limitations on,
among other things, sale or lease of assets and ratio of long-term debt to
tangible net worth. As of March 31, 1998, the Company was in compliance with all
the debt covenants.
<PAGE> 17
(3) INCOME TAXES
The provision for income taxes includes the following components (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current tax provision:
Federal $ 7,587 $ 3,315 $ 2,656
State 2,141 355 204
9,728 3,670 2,860
Deferred tax provision (benefit):
Federal 3,363 2,344 (348)
State 641 455 (68)
4,004 2,799 (416)
------- ------- -------
Provision for income taxes $13,732 $ 6,469 $ 2,444
======= ======= =======
</TABLE>
The following is a reconciliation between the statutory Federal income tax rates
(at a blended rate of 34 percent on taxable income up to $10,000,000 and 35
percent for taxable income in excess of $10,000,000) and the effective rate
which is derived by dividing the provision for income taxes by income before
provision for income taxes (in thousands).
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Computed "expected" provision
for income taxes at the statutory rates $12,387 $5,703 $2,315
Increase (decrease) in income taxes resulting from:
State income taxes, net of Federal income tax benefit 1,391 711 292
Other, net (46) 55 (163)
------- ------ ------
Provision for income taxes $13,732 $6,469 $2,444
======= ====== ======
</TABLE>
The significant components of the net deferred tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
As of March 31,
------------------------
Deferred tax assets: 1998 1997
-------- --------
<S> <C> <C>
Accrued benefits $ 1,038 $ 979
Engine overhaul accrual 2,216 1,909
AMT credit carryforward 216 3,939
Accrued expense reserves and other 1,465 1,256
-------- --------
Total deferred tax assets 4,935 8,083
-------- --------
Deferred tax liabilities:
Accelerated depreciation (22,285) (21,047)
Other (595) (977)
-------- --------
Total deferred tax liabilities (22,880) (22,024)
-------- --------
Net deferred tax liability $(17,945) $(13,941)
======== ========
</TABLE>
<PAGE> 18
(4) COMMITMENTS AND CONTINGENT LIABILITIES
Lease Obligations
The Company leases 44 SkyWest aircraft and 8 Scenic aircraft, as well as airport
facilities, office space, and various other property and equipment under
noncancelable operating leases which are generally on a long-term net rent basis
where the Company pays taxes, maintenance, insurance and certain other operating
expenses applicable to the leased property. Management expects that, in the
normal course of business, leases that expire will be renewed or replaced by
other leases. The following summarizes future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C>
1999 $ 40,939
2000 39,658
2001 38,938
2002 38,279
2003 36,426
Thereafter 247,220
--------
$441,460
========
</TABLE>
Total rental expense for noncancelable operating leases was approximately
$35,188,000, $35,058,000, and $31,369,000 for the years ended March 31, 1998,
1997 and 1996, respectively.
The above minimum rental payments do not include landing fees, which amounted to
approximately $6,505,000, $6,259,000, and $4,460,000 for the years ended March
31, 1998, 1997 and 1996, respectively.
PURCHASE COMMITMENTS AND OPTIONS
During fiscal 1998, the Company entered into an agreement to purchase 20 new
Brasilia aircraft, related spare parts inventory and support equipment. Two of
these aircraft were delivered prior to March 31, 1998. At March 31, 1998, the
Company had agreed to purchase 18 Brasilia aircraft and related spare parts and
support equipment at an aggregate cost of approximately $144.0 million,
including estimated cost escalations. The Company also has options to acquire 40
additional Brasilia aircraft at fixed prices (subject to cost escalation and
delivery schedules) exercisable through fiscal 2000 and options to acquire an
additional ten Canadair Regional Jets, exercisable at any time.
LEGAL MATTERS
The Company is the subject of certain legal actions, which it considers routine
to its business activities. As of March 31, 1998, management believes that any
potential liability to the Company under such actions will not materially effect
the accompanying consolidated financial statements.
STANDBY LETTERS OF CREDIT
As of March 31, 1998, the Company has outstanding letters of credit totaling
approximately $2,265,000 related to requirements of certain airports, port
authorities and workers compensation agreements.
CASH AND CASH EQUIVALENTS
As of March 31, 1998, the Company has demand deposits and money market accounts
totaling $360,000 with Wells Fargo Bank, $432,000 with Bank of America, $631,000
with Edward D. Jones, $2,357,000 with Citibank and $53,151,000 with Zions First
National Bank. These balances exceed the $100,000 limit for insurance by the
Federal Deposit Insurance Corporation.
<PAGE> 19
(5) CAPITAL TRANSACTIONS
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock from time
to time in one or more series without stockholder approval. No shares of
preferred stock are presently outstanding. The Board of Directors is authorized,
without any further action by the stockholders 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 OFFERING
On February 20, 1998, the Company completed a public offering of 1,610,000
shares of common stock which generated net proceeds of $61,557,000 after
deducting underwriting commissions and other expenses.
SUBSEQUENT STOCK DIVIDEND
On May 5, 1998, the Company's Board of Directors declared a 100 percent stock
dividend (one share for each share outstanding) payable to stockholders of
record on May 20, 1998. The dividend was distributed on June 8, 1998. The
Company paid cash in lieu of issuing fractional shares. All common shares and
per share information in the accompanying consolidated financial statements have
been retroactively adjusted to reflect this stock dividend.
SUBSEQUENT CASH DIVIDEND
On May 5, 1998, the Company's Board of Directors declared a regular quarterly
cash dividend of $.03 per share payable to stockholders of record on June 30,
1998, distributable July 15, 1998.
STOCK OPTIONS
The Company's Board of Directors and Stockholders have approved the SkyWest,
Inc. Amended and Combined Incentive and Non-statutory Stock Option Plan ("the
Option Plan"). The Option Plan provides for the issuance of a maximum of
3,000,000 shares of common stock to officers, directors and other key employees.
The Option Plan is administered by the Board of Directors who designate option
grants as either incentive or non-statutory. Incentive stock options are granted
at not less than 100 percent 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 Board of Directors.
Both types of options are exercisable for the period as defined by the Board of
Directors at the date granted; however, no stock option will be exercisable
before six months have elapsed from the date it is granted and no incentive
stock option shall be exercisable after ten years from the date of grant. The
following table summarizes the stock option activity for fiscal years 1996, 1997
and 1998.
<TABLE>
<CAPTION>
Average
Number of Weighted
Options Price
--------- --------
<S> <C> <C>
Outstanding at March 31, 1995 907,498 $8.56
Granted 210,000 8.11
Exercised (55,000) 2.07
--------- ----
Outstanding at March 31, 1996 1,062,498 8.81
Granted 238,000 7.48
Exercised (102,500) 2.75
Canceled (65,648) 6.90
--------- -----
Outstanding at March 31, 1997 1,132,350 9.19
</TABLE>
<PAGE> 20
(5) CAPITAL TRANSACTIONS (continued)
<TABLE>
<S> <C> <C>
Granted 346,000 6.65
Exercised (383,420) 9.04
Canceled (104,214) 9.33
--------- -----
Outstanding at March 31, 1998 990,716 $8.34
========= =====
</TABLE>
As of March 31, 1998, there were 596,590 shares available for future grant of
stock options under the Option Plan.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans, which
include the Option Plan and the Stock Purchase Plan (see Note 6). SFAS No. 123,
"Accounting for Stock-Based Compensation," requires pro forma information
regarding net income and net income per share as if the Company had accounted
for its stock options and employee stock purchases granted or sold subsequent to
April 1, 1996, under the fair value method of the statement. The fair value of
these stock options and employee stock purchases was estimated at the grant date
using the Black-Scholes option pring model with the following assumptions used
for grants in fiscal 1998, 1997 and 1996: a risk-free interest rate of 5.6
percent for fiscal 1998 and 6.5 percent for fiscal 1997 and 1996, a dividend
yield of .5 percent for fiscal 1998 and 1.5 percent for fiscal 1997 and 1996, a
volatility factor of the expected common stock price of .390 for fiscal 1998 and
.508 for fiscal 1997 and 1996 and a weighted average expected life of four years
for the stock options and six months for employee stock purchases for all the
years presented. For purposes of the pro forma disclosures, the estimated fair
value of the stock options and employee stock purchases is amortized over the
estimated life of the respective stock options and employee stock purchases.
Following are the pro forma disclosures and the related impact on net income and
net income per share (in thousands, except per share information):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Net Income:
As Reported $21,944 $10,111 $4,366
Pro Forma 21,213 9,838 4,232
Net Income Per Common Share:
Diluted as reported $ 1.04 $ .50 $ .21
Diluted pro forma $ 1.00 $ .49 $ .20
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to April 1, 1996, and due to the nature and timing of option
grants, the resulting pro forma compensation cost may not be indicative of
future years.
(6) RETIREMENT PLAN AND EMPLOYEE STOCK PURCHASE PLAN
RETIREMENT PLAN
The Company sponsors the SkyWest Airlines Employee's Retirement Plan (the
"Plan"). Employees who have completed one year of service and are 21 years of
age are eligible for participation in the Plan. Employees may elect to make
contributions to the Plan. The Company matches 100 percent of such contributions
up to 2 percent, 4 percent or 6 percent of the individual participant's
compensation, based upon length of service. Additionally, a discretionary
contribution may be made by the Company. The Company's combined contribution was
$2,729,000, $1,960,000 and $1,728,000 to the Plan for the years ended March 31,
1998, 1997 and 1996, respectively.
EMPLOYEE STOCK PURCHASE PLAN
On February 7, 1996, the Company's Board of Directors approved the SkyWest, Inc.
1996 Employee Stock Purchase Plan ("the Stock Purchase Plan"). All employees who
have completed 90 days of employment are eligible to participate, except
officers who are highly compensated employees under section 414 (q) of the
Internal Revenue Code. The Stock Purchase Plan enables employees to purchase
shares of the Company's common stock
<PAGE> 21
(6) RETIREMENT PLAN AND EMPLOYEE STOCK PURCHASE PLAN (continued)
at a 15 percent discount, through payroll deductions. Employees can contribute
two to 15 percent of their base pay, not to exceed $21,250 each calendar year,
for the purchase of shares. For the fiscal year ended March 31, 1998, 106,068
shares had been purchased by employees at prices of $5.90 and $6.64. For the
fiscal year ended March 31, 1997, 103,506 shares had been purchased by employees
at prices of $5.47 and $5.90. For the fiscal year ended March 31, 1996, 52,504
shares had been purchased by employees at a price of $5.47 per share. In
addition, as of March 31, 1998, $244,000 had been withheld for the future
purchase of shares. Shares are purchased semi-annually at the lower of the
beginning or the end of the period price. Employees can terminate from the Stock
Purchase Plan at anytime upon written notice.
(7) SEGMENT INFORMATION
Nonairline operating revenues and expenses primarily represent the operations of
Scenic and NPT, both wholly-owned subsidiaries of SkyWest, Inc. Scenic provides
air tours and general aviation services to the scenic regions of Northern
Arizona, Southern Utah and Southern Nevada, commonly referred to as the "Grand
Circle". The primary aircraft used to accomplish scenic tours are 19 passenger
deHavilland Twin Otter VistaLiners. NPT provides car rental services through a
fleet of Avis vehicles located at six airports.
Information related to this segment of the Company's business is as follows (in
thousands):
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Operating revenues $32,696 $33,471 $34,036
Operating (loss) income 1,250 (676) 144
Depreciation and amortization 4,848 3,585 2,742
Capital expenditures 15,499 5,476 14,209
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Identifiable assets $28,635 $28,338
</TABLE>
(8) RELATED-PARTY TRANSACTIONS
The Company and Delta Air Lines, Inc. ("Delta") operate under a joint marketing
and code-sharing agreement under which the Company uses the Delta two letter
designator code (DL) in displaying its schedules on certain flights in the
automated airline reservation systems used throughout the industry. During
fiscal 1997, the Company entered into a code-sharing agreement with Continental
Airlines, Inc. ("Continental"). The Company uses the Continental two letter
designator code (CO) in displaying schedules on certain flights in the automated
airline reservation systems used throughout the industry. During fiscal 1998,
the Company entered into a code-sharing agreement with United Airlines, Inc.
("United"). The Company uses the United two letter designator code (UA) in
displaying schedules on certain flights in the automated airline reservation
systems used throughout the industry.
As of March 31, 1998, Delta owned 3,107,798 shares of common stock which
represents approximately 13 percent of the outstanding common stock of the
Company. The Company leases various terminal facilities from Delta and Delta
provides certain services to the Company, including advertising, reservation and
ground handling services. Expenses paid to Delta under these agreements were
approximately $8,893,000, $11,218,000 and $9,181,000 during the years ended
March 31, 1998, 1997 and 1996, respectively. United provides services to the
Company consisting of passenger and ground handling-services. The Company paid
$742,000 to United for their services for the year ended March 31, 1998.
The Company had a net payable to Delta of $65,000 as of March 31, 1998 and a net
receivable from Delta of $780,000 as of March 31, 1997. The Company had net
receivables from Continental of $182,000 and $284,000 as of March 31, 1998 and
1997, respectively and a net receivable from United of $1,687,000 as of March
31, 1998.
<PAGE> 1
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated May 20,1998 included in SkyWest,
Inc.'s Annual Report to Shareholders for the fiscal year ended March 31, 1998.
We further consent to the incorporation of our report dated May 20, 1998,
incorporated by reference in this Form 10-K, into the Company's previously filed
Registration Statement No. 33-41285 and No. 33-60173.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Salt Lake City, Utah
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 139,772
<SECURITIES> 14,627
<RECEIVABLES> 10,823
<ALLOWANCES> 124
<INVENTORY> 11,200
<CURRENT-ASSETS> 192,801
<PP&E> 231,523
<DEPRECIATION> 98,053
<TOTAL-ASSETS> 330,406
<CURRENT-LIABILITIES> 49,692
<BONDS> 49,571
0
0
<COMMON> 135,632
<OTHER-SE> 75,501
<TOTAL-LIABILITY-AND-EQUITY> 330,406
<SALES> 297,098
<TOTAL-REVENUES> 297,098
<CGS> 0
<TOTAL-COSTS> 263,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,939
<INCOME-PRETAX> 35,676
<INCOME-TAX> 13,732
<INCOME-CONTINUING> 21,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,944
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.04
</TABLE>
