<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
-----------
Date of Report (Date of earliest event reported): February 24, 1997
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 1-7259 74-1563240
(State or other jurisdiction (Commission (I.R.S. employee
of incorporation) file number) identification no.)
P.O. Box 36611
Love Field, Dallas, Texas 75235
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, include area code: (214) 792-4000
================================================================================
<PAGE> 2
Item 5. Other Events
The purpose of this report is to permit the registrant to file herewith
those exhibits listed in Item 7 (c) below.
Item 7. Financial Statements and Exhibits.
(c). Exhibits
Exhibit 5.2 - Opinion of Deborah Ackerman, Associate General
Counsel of Southwest Airlines Co., re legality
of Debt Securities being offered.
Exhibit 12 - Calculation of Ratio of Earnings to Fixed Charges.
Exhibit 23 - Consent of Independent Auditors.
Exhibit 25.1 - Form T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of U.S. Trust
Company of Texas, N.A., as Trustee, under the
Indenture between Southwest Airlines Co. and U.S.
Trust Company of Texas, N.A. (which Indenture is
incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (File No.
33-59113)).
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Consolidated Financial Statements and Notes to
Consolidated Financial Statements.
Exhibit 99.2 - Report of Independent Auditors
Exhibit 99.3 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
February 24, 1997 By: /s/ Gary C. Kelly
------------------------
Gary C. Kelly
Vice President - Finance
and Chief Financial Officer
-2-
<PAGE> 3
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C> <C>
Exhibit 5.2 - Opinion of Deborah Ackerman, Associate General Counsel
of Southwest Airlines Co., re legality of Debt
Securities being offered.
Exhibit 12 - Calculation of Ratio of Earnings to Fixed Charges.
Exhibit 23 - Consent of Independent Auditors.
Exhibit 25.1 - Form T-1 Statement of Eligibility and Qualification under the Trust Indenture
Act of 1939 of U.S. Trust Company of Texas, N.A., as Trustee, under the Indenture
between Southwest Airlines Co. and U.S. Trust Company of Texas, N.A. (which
Indenture is incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (File No. 33-59113)).
Exhibit 27 - Financial Data Schedule
Exhibit 99.1 - Consolidated Financial Statements and Notes to Consolidated Financial Statements.
Exhibit 99.2 - Report of Independent Auditors
Exhibit 99.3 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
</TABLE>
<PAGE> 1
EXHIBIT 5.2
February 24, 1997
Southwest Airlines Co.
P.O. Box 36611
Dallas, TX 75235
Dear Sirs:
I have represented Southwest Airlines Co., a Texas corporation (the
"Company") in connection with the proposed offering, issuance and sale of
$100,000,000 principal amount of Debt Securities (the "Securities") to be
issued from time to time under a Trust Indenture (the "Indenture") between the
Company and U.S. Trust Company of Texas, N.A., as Trustee (the "Trustee"), such
Securities to bear interest at such rates and to be payable at such times,
to mature at such times and otherwise to have such terms as contemplated by the
Prospectus included as part of the Registration Statement on Form S-3 (the
"Registration Statement") with respect to the Securities which has been filed
with the Securities and Exchange Commission under the Securities Act of 1993
and Rule 415 thereunder (File No. 33-59113) and which became effective on
May 9, 1995.
For the purposes of this opinion, I have examined such corporate records
and other documents and have reviewed such questions of law as I considered
necessary or appropriate for the purposes of this opinion.
Based on such examination and review, I hereby advise you that, in my
opinion, the execution and delivery by the Company of the Indenture has been
duly authorized by the Company. Further, when all necessary proceedings have
been taken by the Board of Directors or the Executive Committee of such Board
of Directors of the Company in connection with the authorization, issuance and
sale of the Securities of a particular series and related matters, the
Securities of such series, when duly executed on behalf of the Company and
authenticated by the Trustee and issued and delivered pursuant to the Indenture
against payment to the Company of the authorized consideration therefor, will
be duly authorized and validly issued and will be binding obligations of the
Company.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me under the caption "Legal
Opinions" in the Prospectus relating to the Securities forming a part of the
Registration Statement. In giving this consent, I do not thereby admit that
I am within the category of persons whose consent is required under Section 7 of
the
<PAGE> 2
Southwest Airlines Co.
February 24, 1997
Page 2
Securities Act of 1933 and the rules and regulations of the Securities and
Exchange Commission thereunder.
Sincerely,
/s/ DEBORAH ACKERMAN
Deborah Ackerman
DA:pjw
<PAGE> 1
Exhibit 12
SOUTHWEST AIRLINES CO.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings
Income before income taxes and
cumulative effect of accounting
changes $341.4 $305.1 $299.5 $259.6 $157.4
Add: Fixed charges 184.1 169.1 141.6 132.1 113.8
Less: Interest capitalized 22.3 31.4 26.3 17.8 15.4
------ ------ ------ ------ ------
Total $503.2 $442.8 $414.8 $373.9 $255.8
====== ====== ====== ====== ======
Fixed charges
Interest expense $37.0 $27.4 $27.1 $40.7 $ 43.7
Add: Interest capitalized 22.3 31.4 26.3 17.8 15.4
------ ------ ------ ------ ------
Gross interest expense 59.3 58.8 53.4 58.5 59.1
Add: Interest factor of operating
lease expense 124.8 110.3 88.2 73.6 54.7
------ ------ ------ ------ ------
Total $184.1 $169.1 $141.6 $132.1 $113.8
====== ====== ====== ======= ======
Ratio of earnings to fixed charges 2.73 2.62 2.93 2.83 2.25
====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-20275, 33-48178, 33-57327, 33-40652 and 33-40653 and Form
S-3 Nos. 33-52115 and 33-59113) and in the related Prospectuses of our report
dated January 23, 1997 with respect to the consolidated financial statements of
Southwest Airlines Co. for the year ended December 31, 1996 included in its
Current Report on Form 8-K dated February 24,1997, filed with the Securities
and Exchange Commission.
ERNST & YOUNG LLP
Dallas, TX /s/ ERNST & YOUNG LLP
February 20, 1997
<PAGE> 1
EXHIBIT 25.1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2) X
------
--------------------
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
2001 Ross Avenue, Suite 2700 75201-2936
Dallas, Texas (Zip Code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201-2936
(214) 754-1200
(Name, address and telephone number of agent for service)
--------------------
Southwest Airlines Co.
(Exact name of obligor as specified in its charter)
Texas 74-1563240
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
2702 Love Field Drive
Dallas, TX 75235
(Address of principal executive offices) (Zip Code)
--------------------
Debt Securities
(Title of the indenture securities)
================================================================================
<PAGE> 2
GENERAL
1. General Information.
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Reserve Bank of Dallas (11th District),
Dallas, Texas (Board of Governors of the Federal
Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency,
Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust
powers.
2. Affiliations with Obligor and Underwriters.
If the obligor or any underwriter for the obligor is an affiliate of
the Trustee, describe each such affiliation.
None.
3. Voting Securities of the Trustee.
Furnish the following information as to each class of voting
securities of the Trustee:
As of January 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Col A. Col B.
- --------------------------------------------------------------------------------
<S> <C>
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Capital Stock - par value $100 per share 5,000 shares
- --------------------------------------------------------------------------------
</TABLE>
4. Trusteeships under Other Indentures.
Not Applicable
5. Interlocking Directorates and Similar Relationships with the Obligor
or Underwriters.
Not Applicable
<PAGE> 3
6. Voting Securities of the Trustee Owned by the Obligor or its
Officials.
Not Applicable
7. Voting Securities of the Trustee Owned by Underwriters or their
Officials.
Not Applicable
8. Securities of the Obligor Owned or Held by the Trustee.
Not Applicable
9. Securities of Underwriters Owned or Held by the Trustee.
Not Applicable
10. Ownership or Holdings by the Trustee of Voting Securities of Certain
Affiliates or Security Holders of the Obligor.
Not Applicable
11. Ownership or Holdings by the Trustee of any Securities of a Person
Owning 50 Percent or More of the Voting Securities of the Obligor.
Not Applicable
12. Indebtedness of the Obligor to the Trustee.
Not Applicable
13. Defaults by the Obligor.
Not Applicable
14. Affiliations with the Underwriters.
Not Applicable
15. Foreign Trustee.
Not Applicable
16. List of Exhibits.
T-1.1 - A copy of the Articles of Association of U.S. Trust Company
of Texas, N.A.; incorporated herein by reference to Exhibit
T-1.1 filed with Form T-1 Statement, Registration No.
22-21897.
<PAGE> 4
16. (con't.)
T-1.2 - A copy of the certificate of authority of the Trustee to
commence business; incorporated herein by reference to
Exhibit T-1.2 filed with Form T-1 Statement, Registration
No. 22-21897.
T-1.3 - A copy of the authorization of the Trustee to exercise
corporate trust powers; incorporated herein by reference to
Exhibit T-1.3 filed with Form T-1 Statement, Registration
No. 22-21897.
T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas,
N.A., as amended to date; incorporated herein by reference
to Exhibit T-1.4 filed with Form T-1 Statement,
Registration No. 22-21897.
T-1.5 - The consent of the Trustee required by Section 321(b) of
the Trust Indenture Act of 1939.
T-1.6 - A copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its
supervising or examining authority.
NOTE
As of January 31, 1997 the Trustee had 5,000 shares of Capital Stock
outstanding, all of which are owned by U.S. T.L.P.O. Corp. As of January 31,
1997 U.S. T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of
which are owned by U.S. Trust Corporation. U.S. Trust Corporation had
outstanding 9,863,036 shares of $5 par value Common Stock as of January 31,
1997.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the Trustee of
all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the
Trustee disclaims responsibility for the accuracy or completeness of such
information.
--------------------
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
U.S Trust Company of Texas, N.A., a national banking association organized
under the laws of the United States of America, has duly caused this statement
of eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
20th day of February, 1997.
U.S. Trust Company of Texas, N.A.,
Trustee
By: /s/ JOHN C. STOHLMANN
-------------------------------
John C. Stohlmann
Vice President
<PAGE> 6
Exhibit T-1.5
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Southwest Airlines Co.
Debt Securities, we hereby consent that reports of examination by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
U.S. Trust Company of Texas, N.A.
By: /s/ JOHN C. STOHLMANN
------------------------------
John C. Stohlmann
Vice President
<PAGE> 7
<TABLE>
<S> <C>
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Federal Financial Institutions Examination Council Expires March 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
[1]
[LOGO] Please Refer to Page i,
Table of Contents, for
the required disclosure
of estimated burden
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR
A BANK WITH DOMESTIC OFFICES ONLY AND
TOTAL ASSETS OF LESS THAN $100 MILLION - FFIEC 034
REPORT AT THE CLOSE OF BUSINESS DECEMBER 31, 1996 (961231)
-----------
(RCRI 9999)
This report is required by law: 12 U.S.C. Section 324 (State This report form is to be filed by banks with
member banks); 12 U.S.C. Section 1817 (State nonmember domestic offices only. Banks with branches and
banks); and 12 U.S.C. Section 161 (National banks). consolidated subsidiaries in U.S. territories and
possessions, Edge or Agreement subsidiaries, foreign
branches, consolidated foreign subsidiaries, or
International Banking Facilities must file FFIEC 031.
- -------------------------------------------------------------------------------------------------------------------------
NOTE: The Reports of Condition and Income must be signed by The Reports of Condition and Income are to be
an authorized officer and the Report of Condition must be prepared in accordance with Federal Regulatory
attested to by not less than two directors (trustees) for authority instructions. NOTE: These instructions may
State nonmember banks and three directors for State member in some cases differ from generally accepted
and National banks. accounting principles.
I, Alfred B. Childs, SVP & Cashier We, the undersigned directors (trustees), attest to
-------------------------------------------------------- the correctness of this Report of Condition
Name and Title of Officer Authorized to Sign Report (including the supporting schedules) and declare that
it has been examined by us and to the best of our
of the named bank do hereby declare that these Reports of knowledge and belief has been prepared in conformance
Condition and Income (including the supporting schedules) with the instructions issued by the appropriate
have been prepared in conformance with the instructions Federal regulatory authority and is true and correct.
issued by the appropriate Federal regulatory authority and
are true to the best of my knowledge and belief. /s/ STUART M. PEARMAN
-----------------------------------------------------
Director (Trustee)
/s/ ALFRED B. CHILDS
- ------------------------------------------------------------- /s/ J. T. MOORE, JR.
Signature of Officer Authorized to Sign Report -----------------------------------------------------
Director (Trustee)
January 15, 1997 /s/ PETER J. DENKER
- ------------------------------------------------------------- -----------------------------------------------------
Date of Signature Director (Trustee)
- -------------------------------------------------------------------------------------------------------------------------
FOR BANKS SUBMITTING HARD COPY REPORT FORMS:
STATE MEMBER BANKS: Return the original and one copy to the NATIONAL BANKS: Return the original only in the
appropriate Federal Reserve District Bank. special return address envelope provided. If express
mail is used in lieu of the special return address
STATE NONMEMBER BANKS: Return the original only in the envelope, return the original only to the FDIC, c/o
special return address envelope provided. If express mail is Quality Data Systems, 2127 Espey Court, Suite 204,
used in lieu of the special return address envelope, return Crofton, MD 21114.
the original only to the FDIC, c/o Quality Data Systems,
2127 Espey Court, Suite 204, Crofton, MD 21114.
- -------------------------------------------------------------------------------------------------------------------------
FDIC Certificate Number 12-31-96
----------- Banks should affix the address label in this space.
(RCRI 9050)
U.S. TRUST COMPANY OF TEXAS, NATIONAL
-----------------------------------------------------
Legal Title of Bank (TEXT 9010)
2001 ROSS AVENUE, SUITE 2700
-----------------------------------------------------
City (TEXT 9130)
DALLAS, TX 75201
-----------------------------------------------------
State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220)
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 12/31/96 STATE # 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 Vendor ID: D CERT: 33217 Page RC-1
DALLAS, TX 75201 Transit Number: 11101765
9
</TABLE>
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 31, 1996
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
<TABLE>
<CAPTION>
C100 <-
Dollar Amounts in Thousands
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS RCON
----
1. Cash and balances due from depository institutions:
a. Noninterest-bearing balances and currency and coin(1,2)............................... 0081 325 1.a
b. Interest bearing balances(3).......................................................... 0071 173 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)............................ 1754 0 2.a
b. Available-for-sale securities (from Schedule RC-B, column D).......................... 1773 101,385 2.b
3. Federal funds sold and securities purchased under agreements to resell:
a. Federal funds sold (4) ............................................................... 0276 0 3.a
b. Securities purchased under agreements to resell (5) .................................. 0277 0 3.b
4. Loans and lease financing receivables: RCON
-----
a. Loans and leases, net of unearned income (from Schedule RC-C)... 2122 42,103 4.a
b. LESS: Allowance for loan and lease losses....................... 3123 481 4.b
c. LESS: Allocated transfer risk reserve........................... 3128 0 4.c
d. Loans and leases, net of unearned income, allowance, and reserve (item 4.a minus 4.b RCON
---
and 4.c).............................................................................. 2125 41,622 4.d
5. Trading assets ............................................................................ 3545 0 5.
6. Premises and fixed assets (including capitalized leases)................................... 2145 753 6.
7. Other real estate owned (from Schedule RC-M)............................................... 2150 0 7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule
RC-M)...................................................................................... 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding............................... 2155 0 9.
10. Intangible assets (from Schedule RC-M)..................................................... 2143 0 10.
11. Other assets (from Schedule RC-F).......................................................... 2160 1,511 11.
12. a. Total assets (sum of items 1 through 11)................................................ 2170 145,769 12.a
b. Losses deferred pursuant to 12 U.S.C. 1823(j)........................................... 0306 0 12.b
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823 (j) (sum of items 12.a
and 12.b)............................................................................... 0307 145,769 12.c
</TABLE>
- ---------------
(1) Includes cash items in process of collection and unposted debits.
(2) The amount reported in this item must be greater than or equal to the sum
of Schedule RC-M, items 3.a and 3.b
(3) Includes time certificates of deposit not held for trading.
(4) Report 'term federal funds sold' in Schedule RC, item 4.a, 'Loans and
leases, net of unearned income', and in Schedule RC-C, part 1.
(5) Report securities purchased under agreements to resell that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 3.a, 'Federal
funds sold.'
<PAGE> 9
<TABLE>
<S> <C> <C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 12/31/96 State: 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 Vendor ID: D CERT: 33217 Page RC-2
DALLAS, TX 75201 Transit Number: 11101765
10
</TABLE>
SCHEDULE RC -- CONTINUED
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ---------------------------------------------------------------------------------------------------------------------
RCON
----
<S> <C> <C> <C>
LIABILITIES
Deposits:
13. a. In domestic offices (sum of 2200 118,129 13.a
totals of columns A and C from Schedule RC-E..... RCON
----
(1) Noninterest-bearing(1)..................................6631 12,689 13.a.1
(2) Interest-bearing........................................6636 105,440 13.a.2
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest-bearing.......................................................
(2) Interest-bearing..........................................................
14. Federal funds purchased and securities sold under agreements to repurchase:
a. Federal funds purchased(2)................................................... 0278 0 14.a
b. Securities sold under agreements to repurchase(3)............................ 0279 0 14.b
15. a. Demand notes issued to the U.S. Treasury..................................... 2840 0 15.a
b. Trading liabilities.......................................................... 3548 0 15.b
16. Other borrowed money:
a. With a remaining maturity of one year or less............................... 2332 0 16.a
b. With a remaining maturity of more than one year.............................. 2333 6,000 16.b
17. Mortgage indebtedness and obligations under capitalized leases................. 2910 0 17.
18. Bank's liability on acceptances executed and outstanding....................... 2920 0 18.
19. Subordinated notes and debentures.............................................. 3200 0 19.
20. Other liabilities (from Schedule RC-G)......................................... 2930 1,575 20.
21. Total liabilities (sum of items 13 through 20)................................. 2948 125,704 21.
22. Limited-life preferred stock and related surplus............................... 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus.................................. 3838 7,000 23.
24. Common stock................................................................... 3230 500 24.
25. Surplus (exclude all surplus related to preferred stock)....................... 3839 8,384 25.
26. a. Undivided profits and capital reserves...................................... 3632 4,045 26.a
b. Net unrealized holding gains (losses) on available-for-sale securities...... 8434 136 26.b
27. Cumulative foreign currency translation adjustments............................ 3210
28. a. Total equity capital (sum of items 23 through 27)........................... 3210 20,065 28.a
b. Losses deferred pursuant to 12 U.S.C. 1823 (j).............................. 0306 0 28.b
c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823 (j)
(sum of items 28.a and 28.b)................................................ 3559 20,065 28.c
29. Total liabilities, limited-life preferred stock, equity capital, and losses
deferred pursuant to U.S.C. 1823(j) (sum of items 21, 22 and 28.c)............. 2257 145,769 29.
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION.
1. Indicate in the box at the right the number of the statement below that best RCON NUMBER
describes the most comprehensive level of auditing work performed for the bank ----
by independent external auditors as of any date during 1995.................... 6724 N/A M.1
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified
public accounting firm which submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing
standards by a certified public accounting firm which submits a report on the consolidated holding company (but
not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a
certified public accounting firm (may be required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors (may be required by state chartering
authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
</TABLE>
- ---------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Report 'term federal funds purchased' in Schedule RC, item 16, 'Other
borrowed money.'
(3) Report securities sold under agreements to repurchase that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 14.a, 'Federal
funds purchased.'
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 581,841
<SECURITIES> 0
<RECEIVABLES> 73,440
<ALLOWANCES> 0
<INVENTORY> 51,094
<CURRENT-ASSETS> 750,990
<PP&E> 4,157,628
<DEPRECIATION> 1,188,405
<TOTAL-ASSETS> 3,723,479
<CURRENT-LIABILITIES> 765,404
<BONDS> 0
0
0
<COMMON> 145,112
<OTHER-SE> 1,503,200
<TOTAL-LIABILITY-AND-EQUITY> 3,723,479
<SALES> 0
<TOTAL-REVENUES> 3,406,170
<CGS> 0
<TOTAL-COSTS> 3,055,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,269
<INCOME-PRETAX> 341,362
<INCOME-TAX> 134,025
<INCOME-CONTINUING> 207,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207,337
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................... $ 581,841 $ 317,363
Accounts receivable .......................... 73,440 79,781
Inventories of parts and supplies,
at cost .................................... 51,094 41,032
Deferred income taxes (Note 9) ............... 11,560 10,476
Prepaid expenses and other current
assets ..................................... 33,055 24,484
---------- ----------
Total current assets ..................... 750,990 473,136
Property and equipment, at cost (Notes 2 and 5):
Flight equipment ............................. 3,435,304 3,024,702
Ground property and equipment ................ 523,958 435,822
Deposits on flight equipment
purchase contracts ......................... 198,366 323,864
---------- ----------
4,157,628 3,784,388
Less allowance for depreciation .............. 1,188,405 1,005,081
---------- ----------
2,969,223 2,779,307
Other assets ................................... 3,266 3,679
---------- ----------
$3,723,479 $3,256,122
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 214,232 $ 116,530
Accrued liabilities (Note 3) ................. 380,747 349,419
Air traffic liability ........................ 158,098 131,156
Current maturities of long-term
debt ....................................... 12,327 13,516
---------- ----------
Total current liabilities ................ 765,404 610,621
Long-term debt less current
maturities (Note 4) .......................... 650,226 661,010
Deferred income taxes (Note 9) ................. 349,987 281,650
Deferred gains from sale and
leaseback of aircraft ........................ 274,891 245,154
Other deferred liabilities ..................... 34,659 30,369
Commitments and contingencies
(Notes 2, 5, and 9)
Stockholders' equity (Notes 6 and 7):
Common stock, $1.00 par value:
680,000,000 shares authorized;
145,112,090 and 144,033,273
shares issued and
outstanding in 1996 and
1995, respectively ......................... 145,112 144,033
Capital in excess of par value ............... 181,650 162,704
Retained earnings ............................ 1,321,550 1,120,581
---------- ----------
Total stockholders' equity ................ 1,648,312 1,427,318
---------- ----------
$3,723,479 $3,256,122
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 2
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION> Years ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger .................. $ 3,269,238 $ 2,760,756 $ 2,497,765
Freight .................... 80,005 65,825 54,419
Other ...................... 56,927 46,170 39,749
----------- ----------- -----------
Total operating revenues 3,406,170 2,872,751 2,591,933
OPERATING EXPENSES:
Salaries, wages, and
benefits (Note 8) ........ 999,719 867,984 756,023
Fuel and oil ............... 484,673 365,670 319,552
Maintenance materials and
repairs .................. 253,521 217,259 190,308
Agency commissions ......... 140,940 123,380 133,081
Aircraft rentals ........... 190,663 169,461 132,992
Landing fees and other
rentals .................. 187,600 160,322 148,107
Depreciation ............... 183,470 156,771 139,045
Other operating expenses ... 614,749 498,373 456,116
----------- ----------- -----------
Total operating expenses 3,055,335 2,559,220 2,275,224
----------- ----------- -----------
OPERATING INCOME ............. 350,835 313,531 316,709
OTHER EXPENSES (INCOME):
Interest expense ........... 59,269 58,810 53,368
Capitalized interest ....... (22,267) (31,371) (26,323)
Interest income ............ (25,797) (20,095) (9,166)
Nonoperating (gains) losses,
net ....................... (1,732) 1,047 (693)
----------- ----------- -----------
Total other expenses .... 9,473 8,391 17,186
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ... 341,362 305,140 299,523
PROVISION FOR INCOME TAXES
(NOTE 9) ................... 134,025 122,514 120,192
----------- ----------- -----------
NET INCOME ................... $ 207,337 $ 182,626 $ 179,331
=========== =========== ===========
NET INCOME PER SHARE
(NOTES 6, 7, AND 10) ....... $ 1.37 $ 1.23 $ 1.22
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 3
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Capital
in excess
Common of Retained
stock par value earnings Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 .......................................... $ 142,756 $ 141,168 $ 770,095 $ 1,054,019
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
(Note 7) .......................................................... 500 8,243 -- 8,743
Tax benefit of options exercised .................................... -- 2,335 -- 2,335
Cash dividends, $.04 per share ...................................... -- -- (5,722) (5,722)
Net income - 1994 ................................................... -- -- 179,331 179,331
----------- ----------- ----------- -----------
Balance at December 31, 1994 .......................................... 143,256 151,746 943,704 1,238,706
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
(Note 7) .......................................................... 777 9,907 -- 10,684
Tax benefit of options exercised .................................... -- 1,051 -- 1,051
Cash dividends, $.04 per share ...................................... -- -- (5,749) (5,749)
Net income - 1995 ................................................... -- -- 182,626 182,626
----------- ----------- ----------- -----------
Balance at December 31, 1995 .......................................... $ 144,033 $ 162,704 $ 1,120,581 $ 1,427,318
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
(Note 7) .......................................................... 1,079 14,513 -- 15,592
Tax benefit of options exercised .................................... -- 4,433 -- 4,433
Cash dividends, $.044 per share ..................................... -- -- (6,368) (6,368)
Net income - 1996 ................................................... -- -- 207,337 207,337
----------- ----------- ----------- -----------
Balance at December 31, 1996 .......................................... $ 145,112 $ 181,650 $ 1,321,550 $ 1,648,312
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 4
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................ $ 207,337 $ 182,626 $ 179,331
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation ...................... 183,470 156,771 139,045
Deferred income taxes ............. 67,253 48,147 49,887
Amortization of deferred gains
on sale and leaseback of
aircraft ..................... (18,263) (24,286) (30,341)
Amortization of scheduled
airframe overhauls ............... 20,539 17,337 14,216
Changes in certain assets and
liabilities:
Accounts receivable .......... 6,341 (4,089) (5,208)
Other current assets ......... (19,534) (11,857) 648
Accounts payable and
accrued liabilities....... 132,096 61,937 52,679
Air traffic liability ........ 26,942 25,017 9,993
Other current liabilities .... 5,334 1,050 (4,690)
Other ............................. 3,713 3,789 7,106
--------- --------- ---------
Net cash provided by
operating activities .... 615,228 456,442 412,666
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ... (677,431) (728,643) (788,649)
--------- --------- ---------
Net cash used in investing
activities .............. (677,431) (728,643) (788,649)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt ............ -- 98,811 --
Proceeds from aircraft sale and
leaseback transactions ............ 330,000 321,650 315,000
Payment of long-term debt and capital
lease obligations ................. (12,695) (10,379) (63,071)
Payment of cash dividends ............. (6,216) (5,749) (5,722)
Proceeds from Employee stock plans .... 15,592 10,693 8,743
--------- --------- ---------
Net cash provided by
financing activities ... 326,681 415,026 254,950
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................... 264,478 142,825 (121,033)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................. 317,363 174,538 295,571
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD ................................ $ 581,841 $ 317,363 $ 174,538
========= ========= =========
CASH PAYMENTS FOR:
Interest, net of amount capitalized ........ $ 36,640 $ 25,277 $ 26,598
Income taxes ............................... 66,447 73,928 80,461
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides shorthaul, high frequency, point-to-point, low-fare
service. The consolidated financial statements include the accounts of
Southwest and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from these estimates. Certain prior year amounts have been
reclassified for comparison purposes.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and
financial institutions that are highly liquid and have original maturity dates
of three months or less. Cash and cash equivalents are carried at cost, which
approximates market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and
supplies are carried at average cost. These items are charged to expense when
issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to
residual values over periods ranging from 12 to 20 years for flight equipment
and 3 to 30 years for ground property and equipment. Property under capital
leases and related obligations are recorded at an amount equal to the present
value of future minimum lease payments computed on the basis of the Company's
incremental borrowing rate or, when known, the interest rate implicit in the
lease. Amortization of property under capital leases is on a straight-line
basis over the lease term and is included in depreciation expense. In
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows to be generated by those assets are
less than the carrying amounts of those assets.
AIRCRAFT AND ENGINE MAINTENANCE The cost of engine overhauls and routine
maintenance costs for aircraft and engine maintenance
<PAGE> 6
are charged to maintenance expense as incurred. Scheduled airframe overhaul
costs are capitalized and amortized over the estimated period benefited,
presently 8 years. Modifications that significantly enhance the operating
performance or extend the useful lives of aircraft or engines are capitalized
and amortized over the remaining life of the asset.
REVENUE RECOGNITION Passenger revenue is recognized when transportation is
provided. Tickets sold but not yet used are included in "Air traffic
liability", which includes estimates that are evaluated and adjusted
periodically. Any adjustments resulting therefrom are included in results of
operations for the periods in which the evaluations are completed.
FREQUENT FLYER AWARDS The Company accrues the estimated incremental cost of
providing free travel awards earned under its Rapid Rewards frequent flyer
program.
ADVERTISING The Company expenses the production costs of advertising as
incurred. Advertising expense for the years ended December 31, 1996, 1995, and
1994 was $109,136,000, $92,087,000, and $79,475,000, respectively.
STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation", the
Company accounts for stock-based compensation plans utilizing the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees" and related Interpretations because, as discussed in Note
7, the alternative fair value accounting provided for under SFAS 123 requires
use of option valuation models that were not developed for use in valuing
employee stock options.
2. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Timing of payments pursuant to contractual commitments
was affected favorably by third quarter 1995 amendments to certain aircraft
purchase contracts, which modified future progress payment schedules. Fifteen
737-300 and four 737-700 aircraft are scheduled for delivery in 1997. Sixteen
- -700s are scheduled for delivery in 1998, 16 in 1999, 15 in 2000, and 12 in
2001. In addition, the Company has options to purchase up to sixty-seven -700s
during 1998-2004. The Company has the option, which must be exercised two years
prior to the contractual delivery date, to substitute 737-600s or 737-800s for
the -700s delivered subsequent to 1999. Aggregate funding needed for these
commitments is approximately $1,960.1 million, subject to adjustments for
inflation, due as follows: $515.1 million in 1997,
<PAGE> 7
$420.0 million in 1998, $502.2 million in 1999, $318.3 million in 2000, and
$204.5 million in 2001.
The Company has historically used jet fuel and heating oil fixed price swap
arrangements to hedge its exposure to price fluctuations on an insignificant
percent of its annual fuel requirements. As of December 31, 1996, the Company
had no open swap agreements, although the hedging program has not been
discontinued. As of December 31, 1995, the Company had a heating oil swap
agreement with a broker-dealer to exchange monthly payments on a notional
quantity of 1,050,000 gallons during May 1996. Under the swap agreement, the
Company paid or received the difference between the daily average heating oil
price and a fixed price of $.46 per gallon.
The Company's principal hedging program utilizes the purchase of crude oil call
options at a nominal premium and at volumes of up to 30 percent of its annual
fuel requirements.
Gains and losses on hedging transactions are recorded as adjustments to fuel
expense and have been insignificant. Any such future agreements expose the
Company to credit loss in the event of nonperformance by the other parties to
the agreements. The Company does not anticipate such nonperformance.
3. ACCRUED LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Aircraft rentals ___________________ $121,384 $105,534
Employee profitsharing and
savings plans (Note8)________ 61,286 55,253
Vacation pay _______________________ 44,763 38,777
Aircraft maintenance costs__________ 25,942 31,463
Taxes, other than income ___________ 25,574 22,478
Interest ___________________________ 21,853 22,326
Other ______________________________ 79,945 73,588
----------------------------
$380,747 $349,419
============================
</TABLE>
<PAGE> 8
4. LONG-TERM DEBT
(in thousands)
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
9 1/4% Notes due 1998 ____________________ $100,000 $100,000
9.4% Notes due 2001 ______________________ 100,000 100,000
8 3/4% Notes due 2003 ____________________ 100,000 100,000
7 7/8% Notes due 2007 ____________________ 100,000 100,000
8% Notes due 2005 ________________________ 100,000 100,000
Capital leases (Note 5) 165,610 177,696
Other ____________________________________ 10 430
---------------------------
665,620 678,126
Less current maturities _________________ 12,327 13,516
Less debt discount _______________________ 3,067 3,600
---------------------------
$650,226 $661,010
===========================
</TABLE>
On March 7, 1995, the Company issued $100 million of senior unsecured 8% Notes
due March 1, 2005. Interest is payable semi-annually on March 1 and September
1. The Notes are not redeemable prior to maturity.
On September 9, 1992, the Company issued $100 million of senior unsecured
7 7/8% Notes due September 1, 2007. Interest is payable semi-annually on March 1
and September 1. The Notes are not redeemable prior to maturity.
During 1991, the Company issued $100 million of senior unsecured 9 1/4% Notes,
$100 million of senior unsecured 9.4% Notes, and $100 million of senior
unsecured 8 3/4% Notes due February 15, 1998, July 1, 2001, and October 15,
2003, respectively. Interest on the Notes is payable semi-annually. The Notes
are not redeemable prior to maturity.
The fair values, based on quoted market prices, of these Notes at December 31,
1996, were as follows (in thousands):
<TABLE>
<S> <C>
9 1/4% Notes due 1998 _____________________ $103,520
9.4% Notes due 2001 ______________________ 110,670
8 3/4% Notes due 2003 _____________________ 109,820
7 7/8% Notes due 2007 _____________________ 104,800
8% Notes due 2005 _________________________ 106,190
</TABLE>
<PAGE> 9
In addition to the credit facilities described above, Southwest has an
unsecured Bank Credit Agreement with a group of banks that permits Southwest to
borrow through December 14, 1999 on a revolving credit basis up to $460
million. Interest rates on borrowings under the Credit Agreement can be, at the
option of Southwest, the agent bank's prime rate, 0.275% over LIBOR, or 0.50%
over domestic certificate of deposit rates. The commitment fee is 0.125% per
annum. There were no outstanding borrowings under this agreement at December
31, 1996 or 1995.
<PAGE> 10
5. LEASES
Total rental expense for operating leases charged to operations in 1996, 1995,
and 1994 was $280,389,000, $247,033,000, and $198,987,000, respectively. The
majority of the Company's terminal operations space, as well as 106 aircraft,
were under operating leases at December 31, 1996. The amounts applicable to
capital leases included in property and equipment were (in thousands):
1996 1995
- -------------------------------------------------------------------------------
[S]
Flight equipment __________________ $226,677 $223,844
Less accumulated amortization _____ 111,815 101,641
---------------------------
$114,862 $122,203
===========================
Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
1996 were (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
- ---------------------------------------------------------------------------------
<S> <C> <C>
1997 _______________________ $ 25,858 $ 243,253
1998 _______________________ 32,026 223,479
1999 _______________________ 20,245 215,553
2000 _______________________ 16,871 213,798
2001 _______________________ 17,391 208,460
After 2001 _______________________ 155,360 2,342,794
-----------------------------
Total minimum lease payments _____ 267,751 $3,447,337
==========
Less amount representing
interest ______________________ 102,141
----------
Present value of minimum
lease payment _________________ 165,610
Less current portion _____________ 12,317
----------
Long-term portion ________________ $ 153,293
==========
</TABLE>
The aircraft leases can generally be renewed, at rates based on fair market
value at the end of the lease term, for one to five years. Most aircraft leases
have purchase options at or near the end of the lease term at fair market
value, but generally not to exceed a stated percentage of the lessor's defined
cost of the aircraft.
<PAGE> 11
6. COMMON STOCK
At December 31, 1996, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (35,257,962 shares) and upon exercise
of rights (180,370,052 shares) pursuant to the Common Stock Rights Agreement ,
as amended (Agreement).
Effective July 18, 1996, the Company amended and restated the Agreement. The
principal purpose of the amendment and restatement was to extend the Agreement
by 10 years. Pursuant to the Agreement, each outstanding share of the Company's
common stock is accompanied by one common share purchase right (Right). Each
Right entitles its holder to purchase one share of common stock at an exercise
price of $16.67 and is exercisable only in the event of a proposed takeover, as
defined by the Agreement. The Company may redeem the Rights at $.0111 per Right
prior to the time that 15 percent of the common stock has been acquired by a
person or group. If the Company is acquired, each Right will entitle its
holder to purchase for $16.67 that number of the acquiring company's or the
Company's common shares, as provided in the Agreement, having a market value of
two times the exercise price of the Right. The Rights will expire no later than
July 30, 2006.
7. STOCK PLANS
At December 31, 1996, the Company had six stock-based compensation plans and
other stock options outstanding, which are described below. The Company applies
APB 25 and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation cost is recognized for its fixed
option plans and its stock purchase plan because the exercise price of the
Company's Employee stock options equals the market price of the underlying
stock on the date of the grant. Compensation cost charged against income for
other options outstanding was $649,778, $564,251, and $451,400 for 1996, 1995,
and 1994, respectively.
The Company has five fixed option plans. Under the 1991 Incentive Stock Option
Plan, the Company may grant options to key Employees for up to 9,000,000 shares
of common stock. Under the 1991 Non-Qualified Stock Option Plan, the Company
may grant options to key Employees and non-employee directors for up to 750,000
shares of common stock. All options granted under these plans have ten-year
maximum terms and vest and become fully exercisable at the end of three, five,
or ten years of continued employment, depending upon the grant type.
Under the 1995 Southwest Airlines Pilots' Association Non-Qualified Stock
Option Plan (SWAPA Plan), the Company may grant
<PAGE> 12
options to Pilots for up to 18,000,000 shares of common stock. An initial grant
of approximately 14,500,000 shares was made on January 12, 1995 at an option
price of $20.00 per share. Options granted under the initial grant vest in ten
annual increments of ten percent. On September 1 of each year of the agreement,
beginning September 1, 1996, additional options will be granted to Pilots that
become eligible during that year. Additional options granted on September 1,
1996 vest in eight annual increments of 12.5 percent. Options under both grants
must be exercised prior to January 31, 2007, or within a specified time upon
retirement or termination. In the event that the Southwest Airlines Pilots'
Association exercises its option to make the collective bargaining agreement
amendable on September 1, 1999, any unexercised options will be canceled on
December 1, 1999.
Under the 1996 Incentive Stock Option Plan, the Company may grant options to
key Employees for up to 6,000,000 shares of common stock. Under the 1996
Non-Qualified Stock Option Plan, the Company may grant options to key Employees
and non-employee directors for up to 575,000 shares of common stock. All
options granted under these plans have ten-year terms and vest and become fully
exercisable at the end of three, five, or ten years of continued employment,
depending upon the grant type.
Under all fixed option plans, the exercise price of each option equals the
market price of the Company's stock on the date of grant, except that under the
SWAPA Plan, for additional options granted each September 1, eligible Pilots
will be required to pay a purchase price equal to 105 percent of the fair value
of such stock on the date of the grant.
<PAGE> 13
A summary of the status of the Company's five fixed option plans as of December
31, 1996, 1995, and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
INCENTIVE PLANS NON-QUALIFIED PLANS
--------------- -------------------
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS * PRICE OPTIONS ** PRICE
--------- ----- ---------- -----
<S> <C> <C> <C> <C>
Outstanding December 31, 1993 .. 4,312,287 $ 8.83 301,277 $ 8.92
Granted - Incentive Plans ... 794,714 29.02 -- --
Granted - SWAPA Plan ........ -- -- -- --
Granted - Other Non-Qualified
Plans ................... -- -- 63,918 34.85
Exercised ................... (190,159) 8.23 (9,940) 7.85
Surrendered ................. (104,880) 14.22 -- --
--------- ----------
Outstanding December 31, 1994 .. 4,811,962 12.07 355,255 13.61
Granted - Incentive Plans .... 983,214 18.80 -- --
Granted - SWAPA Plan ......... -- -- 14,527,050 20.00
Granted - Other Non-Qualified
Plans .................... -- -- 93,315 18.77
Exercised ................... (275,058) 8.50 (60,510) 15.12
Surrendered ................. (308,239) 12.71 (61,041) 19.61
--------- ----------
Outstanding December 31, 1995 .. 5,211,879 13.47 14,854,069 19.86
Granted - Incentive Plans ... 1,670,344 25.18 -- --
Granted - SWAPA Plan ......... -- -- 466,200 23.82
Granted - Other Non-Qualified
Plans .................... -- -- 69,122 25.17
Exercised ................... (395,848) 10.27 (290,385) 17.89
Surrendered ................. (250,446) 20.16 (94,985) 20.00
--------- ----------
Outstanding December 31, 1996 .. 6,235,929 $ 16.54 15,004,021 $ 20.04
========= ==========
Exercisable December 31, 1996 .. 1,237,517 4,250,643
Available for granting in
future periods ............. 7,352,821 3,854,504
</TABLE>
<PAGE> 14
*Includes 1991 Incentive Stock Option Plan. No options have been
granted under the 1996 Incentive Stock Option Plan.
**Includes 1991 Non-Qualified Stock Option Plan and SWAPA Plan. No
options have been granted under the 1996 Non-Qualified Stock Option
Plan.
The following table summarizes information about fixed stock options
outstanding under the fixed option plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/31/96 Life Price 12/31/96 Price
- ---------------- ------------------ ---- ----- ------------------ -----
<S> <C> <C> <C> <C> <C>
$6.02 to $7.81 2,487,991 4.05 yrs. $ 6.12 682,231 $ 6.39
$11.33 to $16.87 326,591 5.09 12.02 71,291 12.07
$18.81 to $27.19 18,248,078 8.09 20.71 4,572,348 20.33
$35.69 to $37.44 177,290 7.02 37.29 162,290 37.40
------------------ ------------------
$6.02 to $37.44 21,239,950 7.56 yrs. $19.01 5,488,160 $18.99
================== ==================
</TABLE>
The Company has granted options to purchase the Company's common stock related
to employment contracts with the Company's president and chief executive
officer. These options have terms of ten years from the date of grant or ten
years from the date exercisable, depending upon the grant. The options vest and
become fully exercisable over three or four years. In 1996, the Company granted
144,395 options with an exercise price of $1.00 per share and 500,000 options
with an exercise price of $23.50 per share related to the 1996 employment
agreement. None of the 1996 options granted were exercised in 1996, however,
128,879 were exercisable as of December 31, 1996. At December 31, 1996, 1995,
and 1994, 1,897,898, 1,422,253, and 1,489,753 total options were outstanding.
Exercise prices range from $1.00 to $23.50 per share. Options for 168,750,
67,500, and 15,000 shares were exercised in 1996, 1995, and 1994, respectively.
Under the 1991 Employee Stock Purchase Plan (ESPP), the Company is authorized
to issue up to a balance of 1,183,236 shares of common stock to Employees of
the Company at a price equal to 90 percent of the market value at the end of
each purchase period. Common stock purchases are paid for through periodic
payroll deductions. Participants under the plan received 309,446 shares in
1996, 388,339 shares in 1995, and 290,054 shares in 1994 at average prices of
$23.05, $19.18, and $24.98, respectively.
<PAGE> 15
Pro forma information regarding net income and net income per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock-based compensation plans and other stock options under the fair
value method of that SFAS. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants under the fixed option
plans in 1996 and 1995, respectively: dividend yield of .16% and .21%; expected
volatility of 35.4% and 36.9%; risk-free interest rate of 5.9% and 7.8%; and
expected lives of 5.0 years for both periods. Assumptions for the stock options
granted in 1996 to the Company's president and chief executive officer were the
same as for the fixed option plans except for the weighted average expected
lives of 8.0 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's Employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its Employee stock options.
For purposes of pro forma disclosures the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the
vesting period. The Company's pro forma net income and net income per share is
as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income As reported $207,337 $182,626
Pro forma $196,478 $167,907
Net income per share As reported $1.37 $1.23
Pro forma $1.33 $1.14
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures during the
initial phase-in period may not be representative of the effects on reported
net income for future years.
The weighted-average fair value of options granted under the five fixed option
plans during 1996 and 1995 was $10.17 and $8.42, respectively, for the
incentive plans, $9.24 and $7.97, respectively, for the SWAPA Plan, and $10.17
and $8.42,
<PAGE> 16
respectively, for other non-qualified plans. The weighted average fair value of
options granted in 1996 to the Company's president and chief executive officer
(no options were granted in 1995) was $13.98. The weighted-average fair value
of each purchase right under the ESPP granted in 1996 and 1995, which is equal
to the ten percent discount from the market value of the common stock at the
end of each purchase period, was $2.56 and $2.15, respectively.
<PAGE> 17
8. EMPLOYEE PROFITSHARING AND SAVINGS PLANS
Substantially all of Southwest's Employees are members of the Southwest
Airlines Co. Profitsharing Plan (the Plan). Total profitsharing expense charged
to operations in 1996, 1995, and 1994, was $59,927,000, $54,033,000, and
$52,782,000, respectively.
The Company sponsors Employee savings plans under Section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time Employees.
The amount of matching contributions varies by Employee group. Company
contributions generally vest over five years with credit for prior years'
service granted. Company matching contributions expensed in 1996, 1995 and
1994 were $35,125,000, $28,954,000, and $19,817,000, respectively.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation _____________ $467,372 $400,321
Scheduled airframe overhauls _________ 30,984 27,129
Other ________________________________ 78,195 68,458
---------------------------
Total deferred tax liabilities 576,551 495,908
Deferred tax assets:
Deferred gains from sale and
leaseback of aircraft ___________ 114,514 106,119
Capital and operating leases _______ 58,252 54,472
Alternative minimum tax credit
carryforward ___________________ 6,019 11,333
Other ______________________________ 59,339 52,810
---------------------------
Total deferred tax assets _______ 238,124 224,734
---------------------------
Net deferred tax liability ______ $338,427 $271,174
===========================
</TABLE>
<PAGE> 18
The provision for income taxes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ___________ $ 59,101 $ 64,420 $ 59,603
State _____________ 7,671 9,947 10,702
-------- -------- --------
Total Current 66,772 74,367 70,305
Deferred:
Federal ___________ 60,967 44,580 46,470
State _____________ 6,286 3,567 3,417
-------- -------- --------
Total deferred 67,253 48,147 49,887
-------- -------- --------
$134,025 $122,514 $120,192
======== ======== ========
</TABLE>
Southwest has received examination reports from the Internal Revenue Service
proposing certain adjustments to Southwest's income tax returns for 1987
through 1991. The adjustments relate to certain types of aircraft financings
consummated by Southwest, as well as other members of the aviation industry
during that time period. Southwest intends to vigorously protest the
adjustments proposed with which it does not agree. The industry's difference
with the IRS involves complex issues of law and fact that are likely to take a
substantial period of time to resolve. Management believes that final
resolution of such protest will not have a materially adverse effect upon the
results of operations of Southwest.
The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons (in thousands):
1996 1995 1994
- -------------------------------------------------------------------------------
Tax at statutory
U.S. tax rates ___ $119,477 $106,799 $104,833
Nondeductible items 5,168 4,488 3,689
State income taxes,
net of federal
benefit __________ 9,072 8,784 9,177
Other, net _________ 308 2,443 2,493
________ ________ ________
Total income tax $134,025 $122,514 $120,192
provision __________ ======== ======== ========
<PAGE> 19
10. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed based on the
weighted average number of common and common equivalent shares outstanding
(151,840,187 in 1996, 148,850,512 in 1995 and 147,305,374 in 1994). Fully
diluted earnings per share have not been presented as the fully dilutive effect
of shares issuable upon the exercise of options under the Company's Stock
Option Plans is not material.
<PAGE> 1
EXHIBIT 99.2
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Southwest Airlines Co.
We have audited the accompanying consolidated balance sheets of Southwest
Airlines Co. as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest
Airlines Co. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 23, 1997
<PAGE> 1
EXHIBIT 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR IN REVIEW
Southwest and the airline industry continued to post record profits in 1996.
Southwest's net income for the first half of 1996 benefitted from the lapse in
the ten percent federal ticket tax on December 31, 1995. Net income for the
second half of 1996 fell below year ago levels primarily due to significant
increases in jet fuel prices.
Southwest continued to maintain our advantage as the low cost leader in the
industry. Despite this advantage, we continue pursuing numerous cost reduction
efforts, which have proven to be beneficial.
We added 22 new Boeing 737-300 aircraft to our fleet in 1996 and retired three
- -200s. Our fleet remains one of the youngest fleets in the industry with an
average age of 7.9 years. In October 1997, we will be the launch customer for
the new Boeing 737-700 aircraft. In total for 1997, we will accept delivery of
15 -300s and four -700s. We currently plan to retire four -200s in fourth
quarter 1997.
Our expansion into Florida in 1996 has been successful with strong load
factors. We added Jacksonville, Florida service beginning January 15, 1997.
Service to Providence, Rhode Island, which began October 27, 1996, also looks
promising. Our current plans for capacity growth in 1997 will be primarily
directed to cities we presently serve, either with increased frequencies or new
routes. We may begin service to one more new city later in 1997.
Proposed FAA "funding reform" continues to present uncertainty as to how or if
any changes would impact Southwest. While Congress reinstated the ten percent
ticket tax in August 1996, the tax lapsed again as of December 31, 1996. At the
current time, Southwest is unable to predict how this FAA funding issue will be
resolved and what impact, if any, resolution of this uncertainty will have on
future operating results.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995 The Company's consolidated net income for 1996 was
$207.3 million ($1.37 per share), as compared to the corresponding 1995 amount
of $182.6 million ($1.23 per share), an increase of 13.5 percent.
OPERATING REVENUES Consolidated operating revenues increased by 18.6 percent in
1996 to $3,406.2 million, compared to $2,872.8
<PAGE> 2
million for 1995. This increase in 1996 operating revenues was derived
primarily from an 18.4 percent increase in passenger revenues. Revenue
passenger miles (RPMs) increased 16.1 percent in 1996, compared to a 12.6
percent increase in available seat miles (ASMs), resulting in an increase in
load factor from 64.5 percent in 1995 to 66.5 percent in 1996. The 1996 ASM
growth resulted from the net addition of 19 aircraft during the year: 22
additions and three retirements.
In December 1995, because of the impasse in the federal budget, Congress
allowed the ten percent federal ticket tax to lapse. This benefitted
Southwest's revenues until late August when Congress reimposed the tax through
December 31, 1996. The reimposition of the ticket tax negatively impacted
revenues in third and fourth quarters 1996 as compared to revenue trends in the
first half of 1996.
In celebration of the Company's 25th Anniversary, Southwest launched a fare
sale in July for travel between August 19 and October 31, 1996. The sale was
extremely popular and resulted in record advance bookings, with more than four
and a half million seats sold. Although July and early August load factors and
revenues were negatively impacted by the telephone line congestion experienced
during the sale, revenues for September and October 1996 were positively
impacted with very heavy passenger volumes.
Freight revenues in 1996 were $80.0 million, compared to $65.8 million in 1995.
The 21.5 percent increase in freight revenues exceeded the 12.6 percent
increase in ASMs for the same period primarily due to increased air freight
volumes and United States mail services primarily resulting from the
development of new markets added in 1995 and early 1996.
Other revenues increased by 23.3 percent in 1996 to $56.9 million, compared to
$46.2 million in 1995. This increase is primarily due to increased charter
revenue.
OPERATING EXPENSES Consolidated operating expenses for 1996 were $3,055.3
million, compared to $2,559.2 million in 1995, an increase of 19.4 percent,
compared to the 12.6 percent increase in capacity. Operating expenses per ASM
increased 6.1 percent in 1996 compared to 1995, primarily due to significantly
higher jet fuel prices along with the 4.3 cent per gallon federal jet fuel tax
implemented October 1, 1995. Excluding jet fuel costs and related taxes,
operating expenses per ASM were up 3.1 percent in 1996 compared to 1995.
Unit costs are expected to increase in first quarter 1997 versus first quarter
1996, due to higher jet fuel prices. (The
<PAGE> 3
immediately preceding sentence is a forward-looking statement which involves
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to, the
largely unpredictable levels of fuel prices.)
Operating expenses per ASM for 1996 and 1995 were as follows:
OPERATING EXPENSES PER ASM
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERCENT
1996 1995 INCREASE CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries, wages,
and benefits ... 2.22(cents) 2.17(cents) .05(cents) 2.3%
Employee profitsharing
and savings plans .. .23 .23 -- --
Fuel and oil ............ 1.19 1.01 .18 17.8
Maintenance materials and
repairs ........ .62 .60 .02 3.3
Agency commissions ...... .35 .34 .01 2.9
Aircraft rentals ........ .47 .47 -- --
Landing fees and
other rentals .. .46 .44 .02 4.5
Depreciation ............ .45 .43 .02 4.7
Other ................... 1.51 1.38 .13 9.4
- --------------------------------------------------------------------------------
TOTAL ................... 7.50(cents) 7.07(cents) .43(cents) 6.1%
- --------------------------------------------------------------------------------
</TABLE>
Salaries, wages, and benefits per ASM increased 2.3 percent in 1996. This
increase resulted primarily from a 16.2 percent increase in 1996 average
headcount, which outpaced the 1996 capacity (ASM) increase of 12.6 percent, and
offset a 0.8 percent decrease in average salary and benefits cost per Employee.
The 16.2 percent increase in average headcount was primarily the result of a
24.3 percent increase in Reservations Sales Agents in 1996. Excluding
Reservations Sales Agents, total average headcount increased 13.1 percent, in
line with capacity.
Southwest's mechanics are subject to an agreement with the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (the
Teamsters), which became amendable August 16, 1995. The Company reached an
agreement with the Teamsters which was ratified by its membership in March
1996. The Company's flight attendants are subject to an agreement with the
Transport Workers Union of America, AFL-CIO (TWU), which became amendable May
31, 1996. Southwest is currently in negotiations with TWU to amend the
contract.
<PAGE> 4
Fuel and oil expenses per ASM increased 17.8 percent in 1996, primarily due to
an 18.6 percent increase in the average jet fuel cost per gallon from 1995. The
average price paid for jet fuel in 1996 was $.6547 compared to $.5522 in 1995.
During fourth quarter 1996, the average cost per gallon increased 25.0 percent
to $.7323 compared to $.5859 in fourth quarter 1995. In January 1997, fuel
prices have averaged approximately $.76 per gallon.
Maintenance materials and repairs per ASM increased 3.3 percent in 1996
compared to 1995 primarily as a result of increased scheduled airframe
inspections during 1996.
Agency commissions per ASM increased 2.9 percent in 1996 compared to 1995,
which was slightly slower than the 5.2 percent increase in passenger revenues
per ASM.
Landing fees and other rentals per ASM increased 4.5 percent in 1996 compared
to 1995, which included an airport credit of $4.9 million.
Depreciation expense per ASM increased 4.7 percent in 1996 compared to 1995 due
to an increase in the percentage of owned aircraft.
Other operating expenses per ASM increased 9.4 percent in 1996 compared to
1995. This increase was primarily due to increased advertising costs resulting
from the expansion into Florida and Providence, Rhode Island, as well as a new
advertising campaign; the 4.3 cents per gallon tax on commercial aviation jet
fuel purchased for use in domestic operations, which became effective October
1, 1995; and increased airport security costs. The additional fuel tax
increased 1996 and 1995 "other operating expenses" by $32.7 million and $7.4
million, respectively.
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and nonoperating gains and losses. Capitalized
interest decreased $9.1 million in 1996 as a result of certain amendments to
aircraft purchase contracts during third quarter 1995 that affected the timing
of payments. Interest income for 1996 increased $5.7 million primarily due to
higher invested cash balances.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes decreased in 1996 to 39.3 percent from 40.2 percent in 1995. The decrease
was primarily the result of lower effective state tax rates.
1995 COMPARED WITH 1994 The Company's consolidated net income for 1995 was
$182.6 million ($1.23 per share), as compared to the
<PAGE> 5
corresponding 1994 amount of $179.3 million ($1.22 per share), an increase of
1.8 percent.
Operating Revenues Consolidated operating revenues increased by 10.8 percent in
1995 to $2,872.8 million, compared to $2,591.9 million for 1994. This increase
in 1995 operating revenues was derived from a 10.5 percent increase in
passenger revenues. RPMs increased 7.9 percent in 1995, compared to a 12.6
percent increase in ASMs, resulting in a decrease in load factor from 67.3
percent in 1994 to 64.5 percent in 1995. The 1995 ASM growth resulted from the
addition of 25 aircraft during the year.
Freight revenues in 1995 were $65.8 million, compared to $54.4 million in 1994.
The 21.0 percent increase in freight revenues exceeded the 12.6 percent
increase in ASMs for the same period primarily due to increased air freight
volumes and United States mail services primarily resulting from the
development of new markets added throughout 1994 and 1995.
Operating Expenses Consolidated operating expenses for 1995 were $2,559.2
million, compared to $2,275.2 million in 1994, an increase of 12.5 percent,
compared to the 12.6 percent increase in ASMs. For the second consecutive year,
operating expenses on a per-ASM basis decreased year-over-year, down .1 percent
in 1995.
Salaries, wages, and benefits per ASM increased 1.9 percent in 1995. This
increase resulted primarily from a 17.8 percent increase in 1995 average
headcount, which outpaced the 1995 capacity (ASM) increase of 12.6 percent, and
offset a 2.6 percent decrease in average salary and benefits cost per Employee.
The 17.8 percent increase in average headcount was primarily the result of a
44.6 percent increase in Reservations Sales Agents in 1995. Excluding
Reservations Sales Agents, total average headcount increased only 11.4 percent.
The Reservations Sales Agent increase coincided with increased demand for
reservations capacity following 1994 enhancements to Southwest's ticket
delivery systems for direct Customers.
Employee profitsharing and savings plans expense per ASM increased 4.5 percent
in 1995. The increase is primarily the result of increased matching
contributions to Employee savings plans resulting from increased Employee
participation and higher matching rates in 1995 for non-contract Employees and
certain Employee groups covered by collective bargaining agreements.
Fuel and oil expenses per ASM increased 1.0 percent in 1995, primarily due to a
2.4 percent increase in the average jet fuel cost per gallon from 1994. Jet
fuel prices remained relatively stable throughout most of 1995, with quarterly
averages through
<PAGE> 6
the first three quarters ranging from $.53 to $.55 per gallon. During fourth
quarter 1995, the average cost per gallon increased to $.59 and, in January
1996, averaged approximately $.62 per gallon.
Maintenance materials and repairs per ASM increased 1.7 percent in 1995
compared to 1994 primarily as a result of performing more engine overhauls
during 1995.
Agency commissions per ASM decreased 17.1 percent in 1995 compared to 1994, due
to a lower mix of travel agency sales in 1995. The lower travel agency sales
mix resulted from 1994 enhancements to Southwest's ticket delivery systems for
direct Customers, as described below.
In response to actions taken by our competitor-owned reservations systems in
1994, we reduced our operating costs and enhanced our ticket delivery systems
by developing our own Southwest Airlines Air Travel ("SWAT") system allowing
high-volume travel agents direct access to reservations; introduced overnight
ticket delivery for travel agents; reduced to three the number of advance days
reservations required for overnight delivery of tickets to consumers (Ticket By
Mail); developed our own Ticketless system, which was rolled out system-wide on
January 31, 1995; and effective March 30, 1995 subscribed to a new level of
service with SABRE that automates the booking process for SABRE travel
agencies.
Aircraft rentals per ASM increased 11.9 percent in 1995. The increase primarily
resulted from second and third quarter 1995 sale/leaseback transactions
involving ten new 737-300 aircraft and a higher percentage of the fleet
consisting of leased aircraft.
Other operating expenses per ASM decreased 2.8 percent in 1995 compared to
1994. This decrease was primarily due to operating efficiencies resulting from
the transition of Morris operating functions to Southwest commencing first
quarter 1994, and lower communications costs. Communications costs decreased
approximately 15 percent per ASM primarily due to lower negotiated rates,
increased reservations operations efficiencies, and enhancements to the
Company's ticket delivery system.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted, which,
among other things, included an assessment of a 4.3 cents per gallon tax on
commercial aviation jet fuel purchased for use in domestic operations, which
became effective September 30, 1995. This additional fuel tax increased 1995
"other operating expenses" by $7.4 million.
<PAGE> 7
Other "Other expenses (income)" included interest expense, capitalized
interest, interest income, and nonoperating gains and losses. Interest expense
increased $5.4 million in 1995 due to the March 1995 issuance of $100 million
senior unsecured 8% Notes due 2005. Capitalized interest increased $5.0 million
in 1995 as a result of higher levels of progress payments on aircraft compared
to 1994. Interest income for 1995 increased $10.9 million primarily due to
higher invested cash balances and higher short-term interest rates.
Income Taxes The provision for income taxes as a percentage of income before
taxes was relatively unchanged year over year.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations was $615.2 million in 1996, compared to $456.4
million in 1995. During 1996, additional funds of $330.0 million were generated
from the sale and leaseback of ten new 737-300 aircraft subject to long-term
operating leases (increasing total commitments for operating leases by $588.8
million).
During 1996, capital expenditures of $677.4 million primarily were for the
purchase of 22 new 737-300 aircraft, one used 737-200 aircraft previously
leased by the Company, and progress payments for future aircraft deliveries. At
December 31, 1996, capital commitments of the Company consisted primarily of
scheduled aircraft acquisitions.
The Company recently announced its intention to order 20 hushkits for our
737-200 fleet, with an option for 14 more, for delivery in 1997-1999. These
hushkits, with an approximate cost of $1.0 million per aircraft, will make the
Stage 2 -200 aircraft compliant with Stage 3 noise requirements.
As of January 1997, Southwest had 78 new 737s on firm order, including 19 to be
delivered in 1997, with options to purchase another 67. Aggregate funding
required for firm commitments approximated $1,960.1 million through the year
2001 of which $515.1 million related to 1997. See Note 2 to the Consolidated
Financial Statements for further information.
In September 1996, the Company's Board of Directors reaffirmed a 1990
authorization for the Company to purchase shares of its common stock from
time-to-time on the open market. The authorization reaffirmed the purchase of
up to 2,500,000 shares. As of February 21, 1997, no shares have been purchased
pursuant to this authority since 1990.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1996
<PAGE> 8
of $581.8 million, internally generated funds, and a revolving credit line with
a group of banks of up to $460 million (none of which had been drawn at
December 31, 1996). In addition, the Company will also consider various
borrowing or leasing options to maximize earnings and supplement cash
requirements.
The Company currently has outstanding shelf registrations for the issuance of
$114.4 million of public debt securities which it currently intends to utilize
for aircraft financings in 1997.
Cash provided from operations was $456.4 million in 1995 as compared to $412.7
million in 1994. During 1995, additional funds of $321.7 million were generated
from the sale and leaseback of ten new 737-300 aircraft subject to long-term
operating leases (increasing total commitments for operating leases by $607.9
million). In addition, $98.8 million was generated from the March 1995 issuance
of $100 million in senior unsecured 8% Notes due 2005. These proceeds were
primarily used to finance aircraft-related capital expenditures and to provide
working capital.
