<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
[COMPANY LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, MAY 21, 1998
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 21, 1998, at 10:00 A.M., local
time, for the following purposes:
(1) the election of three directors;
(2) amending the Company's Articles of Incorporation to increase
the authorized number of shares of Common Stock;
(3) to take action on one shareholder proposal, if the proposal is
presented at the meeting; and
(4) transacting such other business as may properly come before
such meeting.
March 26, 1998 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 6, 1998
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 21, 1998, 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 6, 1998.
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 2001 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 68
Gene H. Bishop.................................. 1977 67
C. Webb Crockett (1)............................ 1994 64
William P. Hobby(1)............................. 1990 65
Travis C. Johnson(1)............................ 1978 61
Herbert D. Kelleher............................. 1967 (2) 66
Rollin W. King.................................. 1967 66
Walter M. Mischer, Sr. ......................... 1983 75
June M. Morris.................................. 1994 67
</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 2001.
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 1998.
William P. Hobby 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 Hobby Communications, L.L.C.,
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 1998.
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 Chairman of the Board 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
2
<PAGE> 5
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 Paymentech, Inc. (a processor of credit card
transactions), Liberte` Investors (a real estate investment trust), 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. He owns and operates King Sporting Agency, Inc.
DIRECTORS WHOSE TERM EXPIRES 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.
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 three meetings during 1997. 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
one meeting during 1997. 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 six telephone meetings during 1997, and otherwise acted by
unanimous consent. The Company has no standing nominating committee of its Board
nor any committee performing similar functions. During 1997, each director
attended at least 75% of the total of the Board and committee meetings which he
or she was obligated to attend.
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
$10,000 for the year ending May 1997 and
3
<PAGE> 6
$10,200 for the year ending May 1998, for services as a director. During 1997,
the Board of Directors held six meetings and otherwise acted by unanimous
consent. In addition, $2,200 (increasing to $2,400 for the year ending May 1998)
was paid for attendance at each meeting of the Board of Directors, and $900
(increasing to $950 for the year ending May 1998) 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 $4,725 (increasing to $4,925 for the
year ending May 1998) per year for their services on such committee. The
Chairmen of the Audit and Compensation Committees received annual fees of $3,800
and $2,100, respectively (increasing to $4,000 and $2,300, respectively for the
year ending May 1998). 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 26, 1998, the record date of those
entitled to notice of and to vote at the meeting, there were outstanding
222,939,506 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 March 2, 1998, 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................................................... 76,248 *
Gene H. Bishop...................................................... 60,200 *
C. Webb Crockett.................................................... 12,000 *
William P. Hobby (3)................................................ 62,280 *
Travis C. Johnson................................................... 135,900 *
Herbert D. Kelleher (4)............................................. 3,936,246 1.7%
Rollin W. King (5).................................................. 211,832 *
Walter M. Mischer, Sr............................................... 82,912 *
June M. Morris (6).................................................. 1,173,727 *
Gary A. Barron (7).................................................. 46,274 *
John G. Denison (8)................................................. 122,643 *
Colleen C. Barrett (9).............................................. 135,103 *
James F. Parker (10)................................................ 138,680 *
Executive Officers and Directors as a Group
(17 persons) (11)................................................... 6,442,947 2.8%
</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.
(footnotes continue on next page)
4
<PAGE> 7
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.
All share information in this proxy statement has been adjusted for the
3-for-2 stock split paid in November 1997.
(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 222,627,708 shares
of Common Stock outstanding on March 2, 1998 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.
(3) Includes 1,980 shares held by a testamentary trust of which Governor
Hobby is a co-trustee.
(4) Includes 2,089,795 shares which Mr. Kelleher had the right to acquire
within 60 days pursuant to stock options; and 133,368 shares held in
trust for unrelated individuals.
(5) Includes 1,500 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 271 shares held for his account under the Profit Sharing Plan
with respect to which he has the right to direct the voting and 44,739
shares which Mr. Barron had the right to acquire within 60 days
pursuant to stock options.
(8) Includes 6,705 shares held for his account under the Profit Sharing
Plan with respect to which he has the right to direct the voting and
115,788 shares which Mr. Denison had the right to acquire within 60
days pursuant to stock options.
(9) Includes 451 shares held for her account under the Profit Sharing Plan
with respect to which she has the right to direct the voting and
107,175 shares which Ms. Barrett had the right to acquire within 60
days pursuant to stock options.
(10) Includes 9,621 shares held for his account under the Profit Sharing
Plan with respect to which he has the right to direct the voting and
105,187 shares which Mr. Parker had the right to acquire within 60 days
pursuant to stock options.
(11) Includes 28,182 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, 1997:
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 1997 $395,000 $172,000 2,250(2) $ 71,014
of the Board, President and 1996 395,000 172,000 644,395 53,893
Chief Executive Officer 1995 395,000 172,000 -- 56,253
Gary A. Barron, 1997 $222,434 $115,000 18,751 $ 20,500
Executive Vice 1996 213,879 160,000 12,075 20,052
President - Operations 1995 205,653 125,000 10,500 20,760
John G. Denison, 1997 $209,514 $115,000 19,629 $ 20,500
Executive Vice President - 1996 201,456 100,000 12,660 20,052
Corporate Services 1995 193,707 100,000 11,085 20,760
Colleen C. Barrett, Executive 1997 $207,787 $150,000 19,126 $ 20,500
Vice President - Customers; 1996 197,628 100,000 12,075 20,052
Corporate Secretary 1995 188,084 100,000 10,500 20,760
James F. Parker, 1997 $181,233 $ 75,000 12,646 $ 20,500
Vice President - 1996 174,262 110,000 8,100 20,052
General Counsel 1995 167,560 85,000 7,050 20,760
</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. 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
$50,514, $33,393, and $35,753 for 1997, 1996 and 1995, respectively.
See "Employment and Other Contracts".
(2) Granted to Mr. Kelleher in respect of options exercised and held by
him. See "Board Compensation Committee Report on Executive
Compensation".
6
<PAGE> 9
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants in 1997 to
the named executive officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
------------------------------ ----------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- -------------------------------- ----------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Herbert D. Kelleher 2,250 .06% $ 14.8333 01/01/07 $ 20,989 $ 53,191
Gary A. Barron (2) 18,751 .53% $ 14.50 01/24/07 $ 170,990 $ 433,322
John G. Denison (2) 878 .02% $ 14.8333 01/01/07 $ 8,190 $ 20,756
18,751 .53% 14.50 01/24/07 $ 170,990 $ 433,322
Colleen C. Barrett (2) 375 .01% $ 14.8333 01/01/07 $ 3,498 $ 8,865
18,751 .53% 14.50 01/24/07 $ 170,990 $ 433,322
James F. Parker (2) 150 -- $ 14.8333 01/01/07 $ 1,399 $ 3,546
12,496 .35% 14.50 01/24/07 $ 113,951 $ 288,773
</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 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 2,250 shares granted to Mr. Kelleher, 878
shares granted to Mr. Denison, 375 shares granted to Ms. Barrett, and
150 shares granted to Mr. Parker vest immediately. The exercise price
per share has been adjusted to give effect to the 3-for-2 stock split
distributed on November 26, 1997.
At January 24, 2007, the expiration date of the $14.50 options
described above, the stock price for Southwest Common Stock would be $23.619 or
$37.6093 per share, assuming annual appreciation rates from January 24, 1997 at
5% or 10%, respectively. However, if the price of the Common Stock does not
appreciate, the value of these options to the named executives, and the
corresponding benefit to all shareholders of the Company, would be zero. All of
the preceding appreciation calculations are compounded annually.
7
<PAGE> 10
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAREND OPTION VALUES
The following table shows stock option exercises by the named executive
officers during 1997. In addition, this table includes the number of shares
covered by both exercisable and non-exercisable stock options as of December 31,
1997. Also reported are the values for "in-the-money" options which represent
the positive spread between the exercise price of any such existing stock
options and the yearend price of the Common Stock.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money
at Fiscal Yearend (#) Options at Fiscal Yearend ($)(2)
------------------------------ ---------------------------------
Shares Acquired Value Realized Exercisable Unexercisable Exercisable Unexercisable
Name on Exercise(#) ($)(1) (#) (#) ($) ($)
- ---------------------- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Herbert D. Kelleher 236,250 $ 3,195,929 2,049,902 633,956 $41,575,879 $ 8,214,444
Gary A. Barron 108,234 $ 1,416,550 11,251 72,540 -- $ 1,286,879
John G. Denison -0- -0- 121,714 72,541 $ 1,755,564 $ 1,286,887
Colleen C. Barrett 15,000 $ 217,916 92,259 72,541 $ 1,196,343 $ 1,286,887
James F. Parker 22,500 $ 419,688 78,588 59,609 $ 1,149,359 $ 1,089,780
</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, 1997, the last
trading day of Southwest's fiscal year, was $24.625 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.
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<PAGE> 11
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). 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
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.
9
<PAGE> 12
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.
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 (which is capped pursuant to his Employment Contract).
In fixing the salary and bonus amounts for 1997, 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 are 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 75,000 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, 1998, the total such options granted was 18,328, of which 4,860 were to named
executive officers.
Kelleher 1996 Employment Contract. Mr. Kelleher's 1997 compensation was
determined by his existing employment agreement, entered into on January 1,
1996. See "Compensation of Executive Officers - Employment and Other Contracts".
As a result of the $1 stock options granted to Mr. Kelleher in his 1996
Employment Contract, some portion of Mr. Kelleher's compensation may not be
deductible pursuant to current Internal Revenue Service regulations. At the time
the Company entered into such agreement, the Committee believed that it was 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
continued service to Southwest.
10
<PAGE> 13
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
Walter M. Mischer, Sr.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Due to a clerical error, Colleen C. Barrett, Executive Vice President -
Customers and Corporate Secretary filed a Form 4, reporting an exercise of
employee stock options, which was one week late.
11
<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>
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Southwest Airlines 100.00 190.29 85.41 117.49 112.57 189.33
S&P 500 100.00 110.04 111.56 152.47 188.47 249.05
S&P
Transportation 100.00 119.03 99.87 138.50 159.18 204.96
======= ======= ======= ======= ======= =======
</TABLE>
12
<PAGE> 15
AMENDMENT TO ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED SHARES OF COMMON STOCK
(ITEM 2)
Recently, the Board of Directors of the Company has approved, and is
recommending to the shareholders for approval at the Annual Meeting, an
amendment to Article Four of the Articles of Incorporation to increase the
number of authorized shares of Common Stock from 680,000,000 to 850,000,000. The
Company presently has authorized 680,000,000 shares of Common Stock, $1.00 par
value. As of December 31, 1997, 221,207,083 shares were issued and outstanding,
and the Company had approximately 49,000,000 additional shares reserved for
issuance pursuant to employee stock benefit plans and an additional
approximately 270,000,000 shares reserved for issuance upon exercise of rights
outstanding under the Common Share Purchase Rights Plan established in July
1986. Except as indicated with respect to currently reserved shares of Common
Stock, the Company has no present intention, plan, understanding or agreement to
issue additional shares of Common Stock. The Board of Directors, however,
believes that the proposed increase in authorized shares of Common Stock, at the
same par value, is desirable at this time to enhance the Company's flexibility
in connection with other possible future actions such as stock dividends or
splits or funding employee benefit plans.
Holders of Common Stock have no pre-emptive or other rights to
subscribe for additional shares. Depending upon the purpose for which any
additional shares are issued, shareholder approval might not be necessary.
Further issuance of additional shares of Common Stock might dilute, under
certain circumstances, either shareholders' equity or voting rights.
REQUIRED VOTE
The affirmative vote by the holders of at least two-thirds of the
outstanding shares of Common Stock of the Company is required for approval of
the proposed amendment. The Board of Directors recommends a vote FOR the
proposed amendment.
13
<PAGE> 16
SHAREHOLDER PROPOSAL
(ITEM 3)
An owner* of the requisite number of shares of Common Stock has given
notice that he intends to present for action at the Annual Meeting the following
resolution:
"RESOLVED: The Shareholders request The Board eliminate the quarterly
dividend by the 1Q 2000."
The following statement was submitted in support of such resolution:
"Southwest recently defended the dividend because "it makes our Stock
eligible for institutions that invest only in dividend-paying securities."(1) As
of the close of business Nov. 18, 1997, the Benchmark 30-year Treasury yield
was 6.068%, the S&P 500 was 1.444%, whereas Southwest was only 0.168%.(2) Also,
save Delta Airlines, Southwest is the only major U.S. airline that presently
pays a dividend. Despite having no dividend, the major U.S. airlines listed
below have a healthy percentage of institutional investors:(3)
<TABLE>
<CAPTION>
% Institutional Investors Source
------------------------- ------
<S> <C> <C>
AMR 83% 01-NOV-97 S&P SG
UAL 74% 02-NOV-97 S&P SG
Continental 89% 01-NOV-97 S&P SG
Northwest 37% 02-NOV-97 S&P SG
U.S. Airways 71% 01-NOV-97 S&P SG
America West 61% 01-NOV-97 S&P SG
Delta 73% 02-NOV-97 S&P SG
Southwest Airlines 54% 30-OCT-97 S&P SG
</TABLE>
S&P SG = Standard & Poors Stock Guide
Furthermore, Southwest is "concerned that elimination of the dividend
would send a negative message to Wall Street about our own view of our company's
prospects."(1) A study was recently performed comparing the merits of a dividend
program versus a share repurchase program. Shareholders in the highest federal
income tax bracket each year since 1976 who owned 156 shares since 4Q 1976 (when
dividend payments began) have realized approximately $3,400 in dividends after
federal income taxes as of Oct. 1, 1997. If these dividends over time were
reinvested without cost since 1976, the investment would be worth approximately
$283,000 after present federal capital gains taxes for 5 year plus holdings. If
the dividends were not reinvested, the investment value would be worth
approximately $264,000 after federal taxes. Had Southwest instead used the
dividend payout to repurchase stock regularly since 1976, the investment value
of 156 shares invested in 1976 would be worth approximately $303,000 after
present federal capital gains taxes. Therefore, in the company's continuous
efforts to maximize shareholder value, eliminating the dividend for, AT MINIMUM,
an ongoing share repurchase program can be easily justified to Wall Street.
Other uses such as ADDITIONAL cash retention and debt reduction programs for
future growth would also be preferred to the present dividend program.
Finally, in most cases, Southwest is preferred by investors of all
types because of the high quality of leadership it possesses, the truly high
value and investment it places in its employees, the low relative costs it
fortuitously pursues, and the virtually limitless and favorable future growth
opportunities with which it is presented at this time, not because it maintains
a dividend."
14
<PAGE> 17
Therefore,
"GIVEN that Southwest is in the highly capital intensive
aerospace industry;
GIVEN that other major U.S. airlines demonstrate the ability
to retain a relatively high percentage of institutional
investors without a dividend;
GIVEN the dividend yield is not competitive relative to those
of such industries as energy, real estate, tobacco, consumer
durable and non-durables, the S&P 500, or the 30-Year
Treasury; and
GIVEN that taxes on dividends are substantially higher
relative to taxes on capital gains, a dividend is not in the
best interest of ALL long-term Southwest shareholders, and its
elimination is favored in this proposal."
- --------------------------
Reference 1: Southwest Airlines Co. Memorandum dated September 5, 1997.
Reference 2: USAA Brokerage Services, San Antonio, Texas.
Reference 3: S&P Stock Guide Reports 3Q 1997.
Please mark your proxy "FOR", if you do not, the company will vote your
proxy "AGAINST".
- ---------------------------
* The Company will provide the name, address and number of shares owned
by the proponent, upon request.
BOARD OF DIRECTORS POSITION
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ADOPTION OF THIS PROPOSAL,
FOR THE FOLLOWING REASONS:
Notwithstanding the information presented in this shareholder's
proposal, it is the position of the Board of Directors of Southwest that it is
not in the best interest of all shareholders to discontinue the dividend at this
time. Though there are institutional investors without investment restrictions
related to dividends, there are others who are not permitted to invest in
companies which do not pay a dividend. The Board of Directors does not want to
foreclose Southwest as an investment opportunity for such investors. Further,
the Board feels that there is a substantial risk of a negative reaction,
resulting in an unfavorable impact on stock values, of a discontinuance of the
dividend, no matter what the Company's actual results or prospects may be.
Finally, the Board notes that since the dividend was first adopted in
1976, approximately $7,000,000 in dividends have been paid to Employee
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.
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, 1998. 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.
15
<PAGE> 18
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 1999 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 3, 1998.
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 6, 1998
16
<PAGE> 19
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 21, 1998, or at any
adjournments thereof, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR ALL NOMINEES."
<TABLE>
<S> <C> <C>
(1) ELECTION OF DIRECTORS [ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote
below (except those indicated to for all nominees listed
the contrary below, see below
instructions)
C. Webb Crockett, William P. Hobby and Travis C. Johnson
</TABLE>
INSTRUCTION: to withhold authority to vote for any individual nominee, write
that nominee's name in the space provided here.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "APPROVE" THE FOLLOWING:
(2) amendment to the Company's Articles of Incorporation to increase the
authorized number of shares of Common Stock.
[ ] APPROVE or [ ] DISAPPROVE or [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "DISAPPROVE" THE FOLLOWING
SHAREHOLDER PROPOSAL:
(3) shareholder proposal related to elimination of the cash dividend as
described in proxy statement related to the meeting.
[ ] APPROVE or [ ] DISAPPROVE or [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "WITH" AUTHORITY ON THE FOLLOWING
MATTER:
(4) authority to vote on any business that may properly come before the
meeting.
[ ] WITH or [ ] WITHOUT
(Please Date and Sign on Reverse Side)
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, "APPROVE" ITEM 2, "DISAPPROVE" ITEM
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: ________, 1998
----------------------------
----------------------------
Please sign exactly as name
appears on this card. Joint
owners should each sign.
Executors, administrators,
trustees, etc., should give
their full titles.
