<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT
OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.1a-11(c) or Section 240.1a-
12
SOUTHWEST AIRLINES CO.
(Name of Registrant as Specified in its Charter
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computer
pursuant to Exchange Act Rule 0-11: (Set forth the amount on
which the filing fee is calculated and state how it was
determined.)
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, MAY 15, 1997
To the Shareholders:
The Annual Meeting of Shareholders of Southwest Airlines Co. (the
"Company" or "Southwest") will be held at its corporate headquarters, 2702 Love
Field Drive, Dallas, Texas, on Thursday, May 15, 1997, at 10:00 A.M., local
time, for the following purposes:
(1) the election of three directors;
(2) to take action on two shareholder proposals; and
(3) transacting such other business as may properly come before such
meeting.
March 20, 1997 has been fixed as the date of record for determining
shareholders entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Colleen C. Barrett
Secretary
April 5, 1997
YOUR VOTE IS IMPORTANT, PLEASE DATE, VOTE, SIGN AND MAIL BACK THE
ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE. THE ENCLOSED RETURN ENVELOPE MAY
BE USED FOR THAT PURPOSE.
<PAGE> 3
SOUTHWEST AIRLINES CO.
P. O. BOX 36611
DALLAS, TEXAS 75235-1611
(214/792-4000)
PROXY STATEMENT
SOLICITATION AND REVOCABILITY OF PROXIES; VOTING
The enclosed proxy is solicited by and on behalf of the Board of
Directors of the Company for use at the Annual Meeting of Shareholders to be
held on May 15, 1997, at the Company's corporate headquarters, 2702 Love Field
Drive, Dallas, Texas, or any adjournment thereof. The cost of solicitation
will be paid by the Company. In addition to solicitation by mail, solicitation
of proxies may be made personally or by telephone by the Company's regular
employees, and arrangements will be made with brokerage houses or other
custodians, nominees and fiduciaries to send proxies and proxy material to
their principals. The proxy statement and form of proxy were first mailed to
shareholders of the Company on or about April 5, 1997.
The enclosed proxy, even though executed and returned, may be revoked at
any time prior to the voting of the proxy by the subsequent execution and
submission of a revised proxy, by written notice to the Secretary of the
Company, or by voting in person at the meeting. Shares represented by proxy
will be voted at the meeting. Cumulative voting is not permitted. An
automated system administered by the Company's transfer agent tabulates the
votes. Abstentions and broker non-votes are each included in the determination
of the number of shares present and voting, for purposes of determining the
presence or absence of a quorum for the transaction of business. Neither
abstentions nor broker non-votes are counted as voted either for or against a
proposal. Except as otherwise stated herein, provided a quorum is present, the
affirmative vote of the holders of a majority of the shares entitled to vote
on, and voted for or against, the matter is required to approve any matter.
ELECTION OF DIRECTORS
(ITEM 1)
At the Annual Meeting of Shareholders, three directors are to be elected
for a three-year term expiring in 2000 or until their respective successors are
duly elected and qualified, to serve with the six directors whose terms do not
expire until later years. Provided a quorum is present at the Annual Meeting,
a plurality of the votes cast in person or by proxy by the holders of shares
entitled to vote is required to elect directors.
The persons named in the enclosed proxy have been selected as a proxy
committee by the directors of the Company, and it is the intention of the proxy
committee that, unless otherwise directed therein, proxies will be voted for
the election of the nominees listed below. Although the directors of the
Company do not contemplate that any of the nominees will be unable to serve, if
such a situation arises prior to the meeting, the proxy committee will act in
accordance with its best judgment.
The following table sets forth certain information for each nominee and
present director of the Company. Each of the nominees for director named in
the following table is now serving as a director of the Company. There is no
family relationship between any of the directors or between any director and
any executive officer of the Company.
<PAGE> 4
<TABLE>
<CAPTION>
DIRECTOR
NAME SINCE AGE
- ---- -------------- ---
<S> <C> <C>
Samuel E. Barshop.......... 1975 67
Gene H. Bishop............. 1977 66
C. Webb Crockett........... 1994 63
William P. Hobby, Jr....... 1990 64
Travis C. Johnson.......... 1978 60
Herbert D. Kelleher(1)..... 1967 (2) 65
Rollin W. King............. 1967 65
Walter M. Mischer, Sr(1)... 1983 74
June M. Morris(1).......... 1994 66
</TABLE>
- ---------------------
(1) Current Nominee.
(2) Mr. Kelleher resigned as a director effective August 5, 1975, and he was
reelected to the Board on April 27, 1976.
CURRENT NOMINEES
Current nominees are to be reelected for a term expiring in 2000.
Herbert D. Kelleher has been Chairman of the Board of the Company since
March 29, 1978. Mr. Kelleher became interim President and Chief Executive
Officer of the Company in September 1981, and assumed those offices on a
permanent basis in February 1982.
Walter M. Mischer, Sr. has been Chairman of the Board and Chief
Executive Officer of Southern Investors Service Company, Inc. (formerly The
Mischer Corporation), a real estate and financial investment company, and
Hallmark Residential Group, Inc. (real estate development and homebuilding),
for more than the past five years. Mr. Mischer is also a director of Howell
Corporation.
June M. Morris was a founder of Morris Air Corporation ("Morris"). Mrs.
Morris was Chief Executive Officer of Morris until its operations were absorbed
by Southwest in October 1994, and subsequently she has been principally engaged
in private investments. Morris was a domestic airline operating 21 Boeing 737
aircraft until its acquisition by Southwest in December 1993.
DIRECTORS WHOSE TERM EXPIRES IN 1998
C. Webb Crockett has been a shareholder in the Phoenix, Arizona, law
firm of Fennemore Craig for more than the past five years. Fennemore Craig has
performed services for the Company in the past and may do so in 1997.
William P. Hobby, Jr. was lieutenant governor of the State of Texas for
18 years until January 1991. He has been Chancellor of the University of
Houston System since September 1995 and Chairman of H&C Communications, Inc.,
Houston, Texas, a privately owned broadcasting company, for more than the past
five years. He also served as Executive Editor of the Houston Post for more
than 20 years.
Travis C. Johnson has been a partner in the El Paso, Texas law firm of
Johnson & Bowen for more than the past five years. Mr. Johnson is a director
of Texas Commerce Bank - El Paso. Johnson & Bowen has performed services for
the Company during the past and may do so in 1997.
2
<PAGE> 5
DIRECTORS WHOSE TERM EXPIRES IN 1999
Samuel E. Barshop was Chairman of the Board of Directors, President and
Chief Executive Officer of La Quinta Inns, Inc., for more than five years prior
to 1992. During 1992, Mr. Barshop resigned his positions as President and
Chief Executive Officer, maintaining the position of Chairman of La Quinta
Inns, Inc. until March 1994. La Quinta Inns, Inc. develops, owns, operates and
licenses motor inns. Since March 1994, Mr. Barshop has been managing partner
of Barshop & Oles, Co., Inc., a real estate company located in San Antonio,
Texas.
Gene H. Bishop was Chairman and Chief Executive Officer of Life Partners
Group, Inc., a closely held life insurance holding company, from November 1991
until October 1994, when he retired. Prior to that time he was Vice Chairman
and Chief Financial Officer of Lomas Financial Corporation and Chief Operating
Officer of Lomas Mortgage USA since October 1990, becoming President and Chief
Operating Officer of Lomas Mortgage USA in January 1991. Mr. Bishop is also a
director of Southwestern Public Service Company, First USA, Inc. (a credit card
company), First USA Paymentech, Inc. (a processor of credit card transactions),
Liberte` Investors (a real estate investment trust), Life Partners Group, Inc.,
Republic Financial Services, Inc., and Drew Industries, Inc.
Rollin W. King engaged in executive education and consulting as the
principal of Rollin King Associates from January 1, 1989 until his retirement
on December 31, 1995.
BOARD COMMITTEES
The Board of Directors has appointed an Audit Committee consisting of
Messrs. Barshop, Bishop, Crockett, Hobby, Johnson (Chairman), King, and Mischer
and Mrs. Morris. The Audit Committee held four meetings during 1996. Its
principal functions are to give additional assurance that financial information
is accurate and timely and that it includes all appropriate disclosures; to
ascertain the existence of an effective accounting and internal control system;
and to oversee the entire audit function, both independent and internal. The
Board of Directors has appointed a Compensation Committee consisting of Messrs.
Barshop (Chairman), Bishop, Hobby and Mischer. The Compensation Committee held
two meetings during 1996. The Compensation Committee studies, advises and
consults with management respecting the compensation of officers of the
Company, and administers the Company's stock-based compensation plans. It
recommends for the Board's consideration any plan for additional compensation
that it deems appropriate. The Board of Directors has appointed an Executive
Committee consisting of Messrs. Bishop, Kelleher and King to assist the Board
in carrying out its duties. The Executive Committee has authority to act for
the Board on most matters during the intervals between Board meetings. The
Executive Committee held five telephone meetings during 1996, and otherwise
acted by unanimous consent. The Company has no standing nominating committee
of its Board nor any committee performing similar functions. During 1996, each
director attended at least 75% of the total of the Board and committee meetings
which he or she was obligated to attend, with the exception of Governor Hobby.
DIRECTORS' FEES
Directors' fees are paid on an annual basis from May to May in each
year. Each director of the Company who is not an officer of the Company was
paid $9,500 for the year ending May 1996 and $10,000 for the year ending May
1997, for services as a director. During 1996, the Board of Directors held six
meetings and otherwise acted by unanimous consent. In addition, $2,000
(increasing to $2,200 for the year ending May 1997) was paid for attendance at
each meeting of the Board of Directors, and $850 (increasing to $900 for the
year ending May 1997) for attendance at each meeting of a committee held on the
same date as the Board meetings. Members of the Executive Committee receive an
additional $4,500 (increasing to $4,725 for the
3
<PAGE> 6
year ending May 1997) per year for their services on such committee. The
Chairmen of the Audit and Compensation Committees received annual fees of
$3,500 and $2,000, respectively (increasing to $3,800 and $2,100, respectively
for the year ending May 1997). Officers of the Company receive no additional
remuneration for serving as directors or on committees of the Board.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
At the close of business on March 20, 1997, the record date of those
entitled to notice of and to vote at the meeting, there were outstanding
145,398,847 shares of Common Stock, $1.00 par value, each share of which is
entitled to one vote.
MANAGEMENT
The following table sets forth as of February 28, 1997, certain
information regarding the beneficial ownership of Common Stock by the
directors, each of the executive officers of the Company named in the Summary
Compensation Table and by all executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
NAME OF DIRECTOR, OFFICER OR BENEFICIALLY OF
IDENTITY OF GROUP OWNED (1)(2) CLASS (2)
--------------------------------- ------------ ---------
<S> <C> <C>
Samuel E. Barshop . . . . . . . . . . . . . . . . . . 50,832 *
Gene H. Bishop . . . . . . . . . . . . . . . . . . . 46,800 *
C. Webb Crockett . . . . . . . . . . . . . . . . . . 5,500 *
William P. Hobby, Jr (3) . . . . . . . . . . . . . . 41,520 *
Travis C. Johnson . . . . . . . . . . . . . . . . . . 90,600 *
Herbert D. Kelleher (4) . . . . . . . . . . . . . . . 2,706,944 2.0%
Rollin W. King (5) . . . . . . . . . . . . . . . . . 151,888 *
Walter M. Mischer, Sr . . . . . . . . . . . . . . . . 44,025 *
June M. Morris (6) . . . . . . . . . . . . . . . . . 1,114,047 *
Gary A. Barron (7) . . . . . . . . . . . . . . . . . 80,677 *
John G. Denison (8) . . . . . . . . . . . . . . . . . 93,755 *
Colleen C. Barrett (9) . . . . . . . . . . . . . . . 71,870 *
James F. Parker (10) . . . . . . . . . . . . . . . . 79,283 *
Executive Officers and Directors as a Group
(17 persons) (11) . . . . . . . . . . . . . . . . . . 4,740,870 3.2%
</TABLE>
- ----------------------------
* Less than 1%
(1) Unless otherwise indicated, beneficial owners have sole rather than
shared voting and investment power respecting their shares, other than
shared rights created under joint tenancy or marital property laws as
between the Company's directors and officers and their respective
spouses, if any. Such persons also beneficially owned an equal number
and percentage of nonexercisable Common Share Purchase Rights of the
Company that trade in tandem with its Common Stock.
(2) The number of shares beneficially owned includes shares which each
beneficial owner and the group had the right to acquire within 60 days
pursuant to stock options. The percentage for each beneficial owner and
for the group is calculated based on the sum of the 145,335,143 shares
of Common Stock outstanding on February 28, 1997 and any shares shown
for such beneficial owner or group as subject to stock options and
currently exercisable, as if any such stock options had been exercised.
(footnotes continue on next page)
4
<PAGE> 7
(3) Includes 3,525 shares held by a testamentary trust of which Governor
Hobby is a co-trustee.
(4) Includes 1,366,601 shares which Mr. Kelleher had the right to acquire
within 60 days pursuant to stock options; and 88,912 shares held in
trust for unrelated individuals.
(5) Includes 12,000 shares held by a charitable remainder trust in which Mr.
King has a beneficial interest. Mr. King disclaims any beneficial
interest in these shares.
(6) Held by a family trust of which Mrs. Morris is co-trustee.
(7) Includes 178 shares held for his account under the Profit Sharing Plan
with respect to which he has the right to direct the voting and 79,656
shares which Mr. Barron had the right to acquire within 60 days pursuant
to stock options.
(8) Includes 4,264 shares held for his account under the Profit Sharing Plan
with respect to which he has the right to direct the voting and 81,141
shares which Mr. Denison had the right to acquire within 60 days
pursuant to stock options.
(9) Includes 178 shares held for her account under the Profit Sharing Plan
with respect to which she has the right to direct the voting and 66,506
shares which Ms. Barrett had the right to acquire within 60 days
pursuant to stock options.
(10) Includes 5,976 shares held for his account under the Profit Sharing Plan
with respect to which he has the right to direct the voting and 67,392
shares which Mr. Parker had the right to acquire within 60 days pursuant
to stock options.
(11) Includes 21,131 shares held for the accounts of certain officers under
the Profit Sharing Plan with respect to which such persons have the
right to direct voting.
5
<PAGE> 8
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation for services rendered by the
Company's Chief Executive Officer and the four remaining most highly paid
executive officers during the three fiscal years ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------------------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS(#) ($) (1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Herbert D. Kelleher, Chairman 1996 $395,000 $172,000 644,395 $ 52,625
of the Board, President and 1995 395,000 172,000 --- 56,779
Chief Executive Officer 1994 395,000 172,000 --- 68,458
Gary A. Barron, 1996 $213,879 $160,000 12,075 $ 5,000
Executive Vice 1995 205,653 125,000 10,500 20,760
President - Operations 1994 197,209 125,000 7,500 25,927
John G. Denison, 1996 $201,456 $100,000 12,660 $ 5,000
Executive Vice President - 1995 193,707 100,000 11,085 20,760
Corporate Services 1994 185,754 115,000 8,085 25,927
Colleen C. Barrett, Executive 1996 $197,628 $100,000 12,075 $ 5,000
Vice President - Customers; 1995 188,084 100,000 10,500 20,760
Corporate Secretary 1994 180,361 125,000 7,500 25,927
James F. Parker, 1996 $174,262 $110,000 8,100 $ 5,000
Vice President - 1995 167,560 85,000 7,050 20,760
General Counsel 1994 160,680 80,000 5,000 23,825
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of amounts contributed by the Company pursuant to the Southwest
Airlines Co. Profit Sharing Plan and 401(k) Plan in which all employees
of the Company are eligible to participate, except that the figures for
1996 do not include the profit sharing information as such information
is not yet available. In addition to those amounts, "All Other
Compensation" for Mr. Kelleher includes deferred compensation, bearing
interest at an annual rate of 10%, in an amount equal to Company
contributions which would otherwise have been made on behalf of Mr.
Kelleher to the Profit Sharing Plan but which exceed the contributions
permitted by Federal tax laws, totalling $47,625, $36,019, and $42,531
for 1996, 1995 and 1994, respectively. See "Employment and Other
Contracts."
6
<PAGE> 9
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants in
1996 to the named executive officers:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herbert D. Kelleher(2) 144,395 5.14% $ 1.00 01/01/06 $5,382,905 $ 8,656,906
500,000 17.82% $23.50 01/01/06 7,389,512 18,726,474
Gary A. Barron (3) 12,075 .43% $25.1875 01/26/06 191,271 484,719
John G. Denison (3) 12,075 .43% $25.1875 01/26/06 191,271 484,719
585 .02% $23.0625 01/01/06 8,485 21,502
Colleen C. Barrett(3) 12,075 .43% $25.1875 01/26/06 191,271 484,719
James F. Parker (3) 8,050 .28% $25.1875 01/26/06 127,514 323,146
50 - $23.0625 01/01/06 725 1,838
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These amounts represent assumed rates of appreciation in market value
from the date of grant until the end of the option term, at the rates
set by the Securities and Exchange Commission, and therefore are not
intended to forecast possible future appreciation, if any, in
Southwest's stock price. Southwest did not use an alternative formula
for a grant date valuation, as it is not aware of any formula which will
determine with reasonable accuracy a present value based on future
unknown or volatile factors.
(2) Options were granted to Mr. Kelleher pursuant to his Employment Contract
dated as of January 1, 1996. Twenty percent of the options were
immediately vested and the balance vests ratably over the next four
years.
(3) Options to the named individuals were granted under the Company's 1991
Non-Qualified Stock Option Plan and 1991 Incentive Stock Option Plan at
fair market value on the date of the grant. Such options are
exercisable as follows: One-third on the grant date, one-third on the
first anniversary of the grant date, and one-third on the second
anniversary of the grant date, subject to continued employment; except
that options to purchase 585 shares granted to Mr. Denison and 50 shares
granted to Mr. Parker vest immediately.
At January 26, 2006, the expiration date of the $25.1875 options
described above, the stock price for Southwest Common Stock would be $41.0278
or $65.3299 per share, assuming annual appreciation rates from January 26, 1996
at 5% or 10%, respectively. However, if the price of the Common Stock does not
appreciate, the value of these options to the named executives, and the
corresponding benefit to all shareholders of the Company, would be zero. All
of the preceding appreciation calculations are compounded annually.
7
<PAGE> 10
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAREND OPTION VALUES
The following table shows stock option exercises by the named executive
officers during 1996. In addition, this table includes the number of shares
covered by both exercisable and non-exercisable stock options as of December
31, 1996. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the yearend price of the Common Stock.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY
AT FISCAL YEAREND (#) OPTIONS AT FISCAL YEAREND($)(2)
-----------------------------------------------------------------
SHARES ACQUIRED VALUE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME ON EXERCISE(#) REALIZED ($)(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herbert D. 198,750 $ 4,054,919 1,384,122 561,116 $24,263,633 $3,154,482
Kelleher
Gary A. Barron - 0 - N/A 58,365 57,150 $ 543,777 $ 739,803
John G. Denison - 0 - N/A 59,265 57,150 $ 525,105 $ 739,803
Colleen C. Barrett 5,000 $ 86,146 49,965 57,150 $ 409,552 $ 739,803
James F. Parker 1,000 $ 24,167 51,099 47,601 $ 555,959 $ 645,005
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Aggregate market value of the shares covered by the option less the
aggregate price paid by the executive.
(2) The closing price of the Common Stock on December 31, 1996, the last
trading day of Southwest's fiscal year, was $22 per share.
EMPLOYMENT AND OTHER CONTRACTS
The Company re-employed Herbert D. Kelleher, effective as of January 1,
1996, as President and Chief Executive Officer under a five-year Employment
Contract. The contract provides for an annual base salary of $395,000, in the
first four years, increasing to $450,000 in the year 2000. The Employment
Contract also provides for additional benefits including: (i) a discretionary
annual cash bonus, not exceeding $172,000 in the first four years and $196,000
in the year 2000; (ii) long-term disability insurance providing for disability
payments of $6,000 per month to age 70; (iii) reimbursement for medical and
dental expenses incurred by Mr. Kelleher and his spouse, and for such expenses
for other members of his family to the extent Mr. Kelleher pays in excess of
$10,000 per year in such expenses; and (iv) deferred compensation bearing
interest at 10% in an amount equal to any Company contributions which would
otherwise have been made on behalf of Mr. Kelleher to the Company Profit
Sharing Plan but which exceed maximum annual additions under the Plan on his
behalf under federal tax laws. The Employment Contract is terminable by Mr.
Kelleher within 60 days after the occurrence of a change of control of the
Company in which a third party acquires 20% or more of the Company's voting
securities or a majority of the directors of the Company are replaced as a
result of a tender offer or merger, sale of assets or contested election. In
the event Mr. Kelleher so terminates his employment, the Employment Contract
provides for a lump sum severance payment equal to Mr. Kelleher's unpaid base
salary for the remaining term of his Employment Contract plus $750,000 subject
to reduction to avoid any "excess parachute payment" for federal income tax
purposes.
The Board of Directors of the Company established in 1987 an Executive
Service Recognition Plan to permit the Company to continue to attract and
retain well-qualified executive personnel and to assure both the Company of
continuity of management and its executives of continued employment in the
event of any actual or threatened change of control of the Company (defined
substantially as described in the following paragraph).
8
<PAGE> 11
As contemplated by the Executive Service Recognition Plan, the Company has
entered into employment agreements with each of its current executive officers
named in the Summary Compensation Table and certain other executive personnel.
The terms of these employment agreements would be invoked only in the event of
a change of control. The executives must remain in the employment of the
Company for one year after a change of control has occurred. If the
executive's employment is terminated other than for cause (as defined), or if
the executive terminates employment for good reason (as defined), during the
one-year term of employment, then the executive would receive a severance
payment equal to a full year's base salary and annual bonus plus a prorated
annual bonus for the year of termination. In addition, the executive's welfare
benefits would continue for the unexpired portion of his one-year term of
employment.
The Board of Directors of the Company established in 1988 a Change in
Control Severance Pay Plan (the "Severance Pay Plan") to provide for severance
payments to qualified employees whose employment with the Company terminates
due to certain conditions created by a change in control of the Company (as
defined in the plan). All employees of the Company are participants in the
Severance Pay Plan except the President, any Vice President participating in
the Executive Service Recognition Plan and all other employees who are
beneficiaries of an enforceable contract with the Company providing for
severance payments in the event of a reduction in force or furlough (collective
bargaining agreements). Generally, the Severance Pay Plan provides for
severance payments, based upon the employee's salary and years of service with
the Company, in the event the employee is terminated, other than for cause (as
defined in the Plan), death, voluntary retirement or total and permanent
disability, within one year of a "change in control". The employee would also
remain eligible for a 12 month extension of coverage under each "welfare
benefit" plan of the Company, including medical, dental, etc., as in effect
immediately prior to any change in control. For purposes of the Severance Pay
Plan, a "change in control" shall be deemed to have occurred if 20% or more of
the combined voting power of the Company's outstanding voting securities
ordinarily having the right to vote for directors shall have been acquired by a
third person or a change in the makeup of the Board of Directors shall have
occurred under certain circumstances described in the plan.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Salary Administration Program for Southwest's noncontract people
will be administered in a manner that promotes the attainment by Southwest of
reasonable profits on a consistent basis in order to preserve job protection
and security for such noncontract people; that promotes and rewards
productivity and dedication to the success of Southwest as the collective
embodiment of all of its people; that accomplishes internal equity among its
people; and that responds pragmatically to the actual influence of external
market forces.
Southwest Airlines Co.
Salary Administration Manual
January 1991
The above principles are applied to all Southwest noncontract employees,
including executive officers. The compensation of Southwest's executive
officers is reviewed by the Compensation Committee of the Board of Directors on
an annual basis. The Committee considers the total compensation (both salary
and incentives), as well as the recommendation of the Company's President, in
establishing each element of compensation.
At current cash compensation levels, the Committee does not expect
Internal Revenue Service regulations regarding maximum deductibility of
executive compensation to have any application to the Company, except with
respect to Mr. Kelleher's 1996 Employment Contract, addressed below.
The principal elements of compensation for Southwest's executive
officers are the following:
Base salary. As a general rule, base salary for the executive officers
of Southwest falls below the salaries for comparable positions in comparably
sized companies. The Committee bases this determination on comparative
compensation studies for similarly situated businesses; its impression of the
prevailing business climate; and the advice of the Company's President.
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<PAGE> 12
Annual salary increases, if any, for executive officers as a group are
not more, on a percentage basis, than those received by other noncontract
employees.
Annual incentive bonus. Only officers of the Company are eligible for
annual incentive bonuses. The amount of each bonus is determined by the
Compensation Committee at the end of each year, including Mr. Kelleher's
discretionary bonus under his Employment Contract.
In fixing the salary and bonus amounts for 1996, the Committee
considered the performance of each individual, his or her level of
responsibility within the Company, the Company's profitability, the longevity
in office of each officer, and each officer's performance as a team member.
However, no mathematical weighing formulae were applied with respect to any of
these factors. In evaluating an individual's performance, the Committee relied
on the recommendation of the President, whose recommendation is based on his
own perception of such officer's performance.
The Company does not utilize defined performance targets in establishing
compensation, nor does it employ minimum, targeted or maximum amounts of
bonuses or total compensation levels for the executive officers and the final
determination of compensation is subjective.
Stock Options. In an effort to bridge the perceived gap between the
lower level of cash compensation for Company officers as compared to their
peers and to provide a long-term incentive for future performance that aligns
officers' interests with shareholders in general, the Company adopted its 1991
and 1996 Incentive Stock Option Plans and 1991 and 1996 Non-Qualified Stock
Option Plans. The number of options initially granted to an individual, as
compared to other Southwest employees, is dependent on the length of service
with the Company and individual levels of performance and responsibility.
Subsequent grants, including those made in 1996, have been based on levels of
individual performance. With respect to all options granted, the precise
number of shares is determined on a subjective basis. All grants under the
Stock Option Plans are at current market value and vest over a number of years,
dependent on continued employment. Each grant is made based upon the
individual's compensation package for that year, without reference to previous
grants. There is no limit on the number of options that may be granted to any
one individual under the 1991 Plans. Each of the 1996 Plans limits the number
of options that may be granted to any one individual in any calendar year to
50,000 shares.
Although it is not contractually obligated to do so, it has been the
practice of the Committee to grant additional options to employees (including
the named executive officers) who exercise options under the above Stock Option
Plans and hold the acquired stock. Such grants have been made on January 1 of
each year in an amount equal to five percent of the number of shares held by
the employee on the previous December 31 as a result of option exercises. On
January 1, 1997, the total such options granted was 9,782, of which 2,135 were
to named executive officers.
Kelleher 1996 Employment Contract. Effective as of January 1, 1996,
Southwest entered into a new five-year employment agreement with its President
and Chief Executive Officer, Herbert D. Kelleher. See "Compensation of
Executive Officers - Employment and Other Contracts". Pursuant to his 1996
Employment Contract, Mr. Kelleher is to receive a base salary of $395,000 for
the first four years, increasing to $450,000 in year five, with maximum annual
bonuses capped at $172,000 for the first four years and $196,000 in year five.
In addition, Mr. Kelleher was granted fair market value options to purchase
500,000 shares of Southwest Common Stock and $1.00 options to purchase 144,395
shares of Southwest Common Stock, with 20% of each grant vested immediately and
the balance vesting ratably over the next four years.
Mr. Kelleher's cash compensation for the first four years under the 1996
Employment Contract was unchanged from his 1992 Employment Contract pursuant to
a voluntary commitment made by Mr. Kelleher to the Southwest Airlines Pilots'
Association (SWAPA) at the time members of SWAPA agreed to a five year base pay
freeze, receiving in lieu thereof, options to purchase Southwest Common Stock,
all pursuant to a collective bargaining agreement entered into as of 1994. The
Committee relied on a study performed by an independent consultant in
determining that Mr. Kelleher's cash compensation for the five-year period
covered by his 1996 Employment Contract was significantly below the midpoint
for comparable positions. The options
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<PAGE> 13
granted to Mr. Kelleher, in accordance with past practice, were designed to
make up the difference between his cash compensation and that received by
others in comparable positions, dependent on successful performance by the
Company as reflected in the price of its stock.
The number of options granted to Mr. Kelleher was based on the
Committee's review of compensation for similarly situated individuals in the
transportation industry, and the Committee's perception of his past and
expected future contributions to Southwest's performance over the five-year
term of the new contract. At Mr. Kelleher's recommendation, the number of
options granted to Mr. Kelleher was significantly below the number recommended
by the consultant as necessary to make Mr. Kelleher's contract competitive.
The Committee did not consider the amount and value of other options held by
Mr. Kelleher, as those options were granted in connection with employment
agreements going back 15 years, and were part of earlier compensation packages.
The Company has no target ownership levels for Company equity holdings by
executives. Although as a result of the $1 stock options, some portion of Mr.
Kelleher's compensation may not be deductible pursuant to current Internal
Revenue Service regulations, the Committee believed that it is in the best
interests of all shareholders to structure Mr. Kelleher's compensation in a
manner consistent with past practices, in a way designed to ensure his
continuing service to Southwest Airlines Co.
Executive officers, including the President, participate in the
Southwest Airlines Profit Sharing Plan and 401(k) Plan, which are available to
all Southwest employees on the same basis. See "Compensation of Executive
Officers - Summary Compensation Table." Southwest makes little use of
perquisites for executive officers.
COMPENSATION COMMITTEE
Samuel E. Barshop, Chair
Gene H. Bishop
William P. Hobby, Jr.
Walter M. Mischer, Sr.
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<PAGE> 14
PERFORMANCE GRAPH
The following table compares total shareholder returns for the Company
over the last five years to the Standard & Poor's 500 Stock Index and the
Standard & Poor's Transportation Index assuming a $100 investment made on
December 31, 1991. Each of the three measures of cumulative total return
assumes reinvestment of dividends. The stock performance shown on the graph
below is not necessarily indicative of future price performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
SOUTHWEST AIRLINES CO., S&P 500 INDEX
AND S&P TRANSPORTATION INDEX
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
=======================================================================================================
1991 1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Southwest Airlines 100.00 173.29 329.74 148.03 203.64 195.12
- -------------------------------------------------------------------------------------------------------
S&P 500 100.00 104.47 111.85 110.14 147.72 177.67
- -------------------------------------------------------------------------------------------------------
S&P Transportation 100.00 106.54 124.67 102.56 140.34 158.00
=======================================================================================================
</TABLE>
12
<PAGE> 15
SHAREHOLDER PROPOSAL
(ITEM 2)
United States Trust Company Boston, 40 Court Street, Boston,
Massachusetts 02108, owner of the requisite shares of Common Stock, has given
notice that it intends to present for action at the Annual Meeting the
following resolution:
"RESOLVED: The shareholders request the Board to prepare a report at
reasonable cost, available to shareholders and employees reporting on the
following issues. This report, which may omit confidential information, shall
be available by September 30, 1997. Also, the Company will place a notice of
availability of the equal opportunity report in its 1997, 1998, and 1999 annual
reports.
1. A chart identifying employees according to their gender and race
in each of the nine major Equal Employment Opportunity Commission defined job
categories for the previous three years (1994, 1995 and 1996) listing either
numbers or percentages in each category.
2. A summary description of policies and programs to improve equal
opportunity performance, including job categories where women and minorities
are underutilized.
3. A description of policies and programs oriented specifically
toward increasing the number of managers who are female and/or minority."
The following statement was submitted in support of such resolution:
"GIVEN that Southwest Airlines was recently sued for sex discrimination
and the suit was featured in the national business journal, Business Week;
GIVEN that Southwest Airlines' route structure serves areas with
significant minority populations -- the overall average is approximately 25%;
GIVEN that issues related to Equal Employment Opportunity can have an
economic impact on corporations we believe it is important for shareholder's to
access to EEO-1 information;
GIVEN that a clear policy opposing all forms of discrimination is a sign
of a responsible corporation and that a substandard Equal Employment
Opportunity record leaves a company open to expensive legal action, poor
employee morale and even the loss of certain business, it is in the company's
and shareholder's interests to have information on our company's equal
opportunity record publicly available;
GIVEN that the company's equal employment opportunity (EEO)-1 report can
be requested by the public under the Freedom of Information Act, and that a
lack of supplementary information could result in misinterpretations of
Southwest Airlines' EEO conduct; and,
GIVEN that the report requested asks for information already gathered
for the purpose of complying with government regulations, it is not an undue
burden or cost."
Please mark your proxy "FOR", if you do not, the company will vote your
proxy "AGAINST".
BOARD OF DIRECTORS POSITION
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ADOPTION OF THIS PROPOSAL,
FOR THE FOLLOWING REASONS:
Your Company is committed to complying with all applicable equal
employment opportunity laws and affirmative action regulations. It is
Southwest's policy not to discriminate against any employee or applicant
because of race, color, religion, sex, national origin, age, or disability.
Southwest is proud of its widely-
13
<PAGE> 16
recognized excellence in employee relations. For instance, Southwest was
recognized in The 100 Best Companies to Work for in America (Levering and
Moskowitz, 1993) as one of the ten best companies to work for in America. The
Company already complies with numerous federal, state and local governmental
reporting requirements regarding compliance with equal employment opportunity
laws and its affirmative action plans. The preparation and distribution of an
additional report will not enhance Southwest's commitment to the worthy goal of
equal employment opportunity and affirmative action; to the contrary, in the
view of the Board of Directors, the publication of such reports leads to
divisiveness as opposed to the inclusive culture which Southwest strives to
achieve. Moreover, the Board of Directors believes that requiring preparation
and distribution of another report would be a poor use of Company resources,
and should not be approved by the Company's shareholders.
THEREFORE, THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS
SHAREHOLDER PROPOSAL. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO
VOTED UNLESS SHAREHOLDERS SPECIFY A DIFFERENT CHOICE.
SHAREHOLDER PROPOSAL
(ITEM 3)
Michael Schaefer, P.O. Box 14398, Las Vegas, Nevada 89114, owner of 500
shares of Common Stock, has given notice that he intends to present for action
at the Annual Meeting the following resolution:
"RESOLVED: That Shareholders assembled in annual meeting in person and
by proxy recommend that the Board of Directors take such action as may be
necessary to provide for rotation of annual meeting location to various cities
served by Southwest Airlines Co, and that meetings be held at the corporation's
headquarters only in alternate years after a meeting held in one of our many
cities served."
The following statement was submitted in support of such resolution:
"Our company has always had its annual meeting at corporate headquarters
at Love Field, Dallas, Texas. We used to serve only a few cities and they were
in Texas. Today we serve almost 50 cities across America. Having an annual
meeting in a destination city provides public relations benefits, press access,
community recognition, and makes it convenient for shareholders in the area to
meet corporate management. Major corporations more and more are rotating their
annual shareholders meeting, and Southwest Airlines Co. has reached the point
where it has outgrown Dallas Love Field as the only situs for our annual
shareholder-management meeting.
Please mark your proxy "FOR", if you do not, the company will vote your
proxy "AGAINST".
BOARD OF DIRECTORS POSITION
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ADOPTION OF THIS PROPOSAL,
FOR THE FOLLOWING REASONS:
Southwest has always welcomed its shareholders to its annual meeting,
held in its "hometown". The Company has chosen its corporate headquarters as
the site of its annual meeting in the belief that Dallas, Texas is readily
accessible to all of its shareholders, a large concentration of employee
shareholders are based in or near Dallas and the site is relatively
inexpensive. Further the choice permits attending shareholders to interact
with the maximum number of corporate representatives, who might otherwise be
unable to attend. The subject proposal reflects a personal interest of the
proponent and is not in the best interests of all shareholders.
THEREFORE, THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS
SHAREHOLDER PROPOSAL. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO
VOTED UNLESS SHAREHOLDERS SPECIFY A DIFFERENT CHOICE.
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<PAGE> 17
RELATIONSHIP WITH INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, independent auditors, has been selected
by the Board of Directors to serve as the Company's auditors for the fiscal
year ending December 31, 1997. Ernst & Young LLP has served as the Company's
auditors since the inception of the Company. A representative of Ernst & Young
LLP is expected to be present at the Annual Meeting in order to make a
statement if he so desires and to respond to appropriate questions.
OTHER MATTERS
NOTICE REQUIREMENTS
To permit the Company and its shareholders to deal with shareholder
proposals in an informed and orderly manner, the Bylaws establish an advance
notice procedure with regard to the nomination (other than by or at the
direction of the Board of Directors) of candidates for election to the Board of
Directors and with regard to certain matters to be brought before an Annual
Meeting of Shareholders. In general, written notice must be received by the
Secretary of the Company not less than 20 days nor more than 60 days prior to
the meeting and must contain certain specified information concerning the
person to be nominated or the matters to be brought before the meeting as well
as the shareholder submitting the proposal. A copy of the applicable Bylaw
provisions may be obtained, without charge, upon written request to the
Secretary of the Company at the address set forth on page 1 of this Proxy
Statement.
In addition, any shareholder who wishes to submit a proposal for
inclusion in the proxy material and presentation at the 1998 Annual Meeting of
Shareholders must forward such proposal to the Secretary of the Company, at the
address indicated on page 1 of this Proxy Statement, so that the Secretary
receives it no later than December 10, 1997.
DISCRETIONARY AUTHORITY
In the event a quorum is present at the meeting but sufficient votes to
approve any of the items proposed by the Board of Directors have not been
received, the persons named as proxies may propose one or more adjournments of
the meeting to permit further solicitation of proxies. A shareholder vote may
be taken on one or more of the proposals in this Proxy Statement prior to such
adjournment if sufficient proxies have been received and it is otherwise
appropriate. Any adjournment will require the affirmative vote of the holders
of a majority of those shares of Common Stock represented at the meeting in
person or by proxy. If a quorum is present, the persons named as proxies will
vote those proxies which they have been authorized to vote on any other
business properly before the meeting in favor of such an adjournment.
The Board of Directors does not know of any other matters which are to
be presented for action at the meeting. However, if other matters properly
come before the meeting, it is intended that the enclosed proxy will be voted
in accordance with the judgment of the persons voting the proxy.
By Order of the Board of Directors,
Herbert D. Kelleher
Chairman of the Board, President and
Chief Executive Officer
April 5, 1997
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<PAGE> 18
PROXY
SOLICITED BY THE BOARD OF DIRECTORS OF SOUTHWEST AIRLINES CO.
The undersigned hereby appoints Colleen C. Barrett, Herbert D. Kelleher and
Gary C. Kelly proxies (to act by majority decision if more than one shall act),
and each of them with full power of substitution, to vote all shares of Common
Stock of Southwest Airlines Co., that the undersigned is entitled to vote at
the annual meeting of shareholders thereof to be held on May 15, 1997, or at
any adjournments thereof, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR ALL NOMINEES."
1. Election of Directors [ ] FOR all nominees listed
below (except those indicated
to the contrary below, see
instructions)
[ ] WITHHOLD AUTHORITY to vote
for all nominees listed below
Herbert D. Kelleher, Walter M. Mischer, St. and June M. Morris.
INSTRUCTION: to withold authority to vote for any individual nominee, write
that nominee's name in the space provided here.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "DISAPPROVE" THE FOLLOWING
SHAREHOLDER PROPOSALS.
2. Shareholder proposal related to employment practices described in proxy
statement related to the meeting.
[ ] APPROVE or [ ] DISAPPROVE or [ ] ABSTAIN
3. Shareholder proposal related to the situs of the annual shareholders'
meeting described in proxy statement related to the meeting.
[ ] APPROVE or [ ] DISAPPROVE or [ ] ABSTAIN
4. Authority to vote on any business that may properly come before the
meeting.
[ ] WITH or [ ] WITHOUT
(Please Date and Sign on Reverse Side)
<PAGE> 19
Please complete, sign and promptly mail this proxy in the enclosed envelope.
ALL SHARES WILL BE VOTED AS DIRECTED HEREIN AND, UNLESS OTHERWISE
DIRECTED, WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1, "DISAPPROVE" ITEMS 2 AND
3, AND IN ACCORDANCE WITH THE DISCRETION OF THE PERSON VOTING THE PROXY WITH
RESPECT TO ANY OTHER BUSINESS PROPERLY BEFORE THE MEETING.
YOU MAY REVOKE THIS PROXY AT ANY TIME PRIOR TO A VOTE THEREON.
Dated: _____________________________, 1997
__________________________________________
__________________________________________
Please sign exactly as name appears on
this card. Joint owners should each sign.
Executors, administrators, trustees, etc.,
should give their full titles.
