<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 1-7259
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
P.O. BOX 36611
DALLAS, TEXAS 75235-1611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 792-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------------------ -----------------------------
Common Stock ($1.00 par value) New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates as of
February 29, 2000:
$9,045,708,531
Number of shares of Common Stock outstanding as of the close of
business on February 29, 2000:
497,413,174 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 17, 2000: PART III
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<PAGE> 2
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Southwest Airlines Co. ("Southwest") is a major domestic airline that
provides primarily shorthaul, high-frequency, point-to-point, low-fare service.
Southwest was incorporated in Texas and commenced Customer Service on June 18,
1971 with three Boeing 737 aircraft serving three Texas cities - Dallas,
Houston, and San Antonio.
At yearend 1999, Southwest operated 312 Boeing 737 aircraft and
provided service to 56 airports in 55 cities in 29 states throughout the United
States. Southwest commenced service to Islip, New York in March 1999,
Raleigh-Durham, North Carolina in June 1999, Hartford, Connecticut in October
1999, and will commence service to Albany, New York in May 2000.
Based on data for 1999, Southwest Airlines is the 4th largest carrier
in the United States based on domestic passengers boarded and second largest
based on departures.
The business of the Company is somewhat seasonal. Quarterly operating
income and, to a lesser extent, revenues tend to be lower in the first quarter
(January 1 - March 31).
FUEL
The cost of fuel is an item having significant impact on the Company's
operating results. The Company's average cost of jet fuel per gallon for
scheduled carrier service over the past five years was as follows:
<TABLE>
<S> <C>
1995 $.55
1996 $.65
1997 $.62
1998 $.46
1999 $.53
</TABLE>
In January 2000, jet fuel prices averaged approximately $.78 per
gallon, including gains from hedging activities. The Company is unable to
predict the extent of future fuel cost changes. The Company has standard
industry arrangements with major fuel suppliers. Standard industry fuel
contracts do not provide material protection against price increases or for
assured availability of supplies. Although market conditions can significantly
impact the price of jet fuel, at present these conditions have not resulted in
an inadequate supply of jet fuel.
Prior to 1999, the Company's principal hedging program utilized the
purchase of crude oil call options at a nominal premium and at volumes of up to
30 percent of its quarterly fuel requirements. However, in order to provide
greater protection against increasing fuel costs, the Company significantly
increased its hedging activities during the first half of 1999. During the
second half of 1999, the Company did not have a significant portion of its fuel
purchases hedged. As of February 24, 2000, the Company had hedged its exposure
to fuel price increases for approximately 57 percent and 85 percent for first
and second quarter 2000, respectively, and 100 percent for the third and fourth
quarters. For more discussion of current fuel costs, the impact of these costs
on the Company's operations, and the effect of hedging transactions, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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REGULATION
Economic. The Dallas Love Field section of the International Air
Transportation Competition Act of 1979, as amended in 1997 (commonly known as
the "Wright Amendment"), as it affects Southwest's scheduled service, provides
that no common carrier may provide scheduled passenger air transportation for
compensation between Love Field and one or more points outside Texas, except
that an air carrier may transport individuals by air on a flight between Love
Field and one or more points within the states of Alabama, Arkansas, Kansas,
Louisiana, Mississippi, New Mexico, Oklahoma, and Texas if (a) "such air carrier
does not offer or provide any through service or ticketing with another air
carrier" and (b) "such air carrier does not offer for sale transportation to or
from, and the flight or aircraft does not serve, any point which is outside any
such states." Southwest does not interline or offer joint fares with any other
air carrier. The Wright Amendment does not restrict Southwest's intrastate Texas
flights or its air service from points other than Love Field.
The Department of Transportation ("DOT") has significant regulatory
jurisdiction over passenger airlines. Unless exempted, no air carrier may
furnish air transportation over any route without a DOT certificate of
authorization, which does not confer either exclusive or proprietary rights. The
Company's certificates are unlimited in duration and permit the Company to
operate among any points within the United States, its territories and
possessions, except as limited by the Wright Amendment, as do the certificates
of all other U.S. carriers. DOT may revoke such certificates, in whole or in
part, for intentional failure to comply with any provisions of subchapter IV of
the Federal Aviation Act of 1958, or any order, rule or regulation issued
thereunder or any term, condition or limitation of such certificate; provided
that, with respect to revocation, the certificate holder has first been advised
of the alleged violation and has been given a reasonable time to effect
compliance.
DOT prescribes uniform disclosure standards regarding terms and
conditions of carriage, and prescribes that terms incorporated into the Contract
of Carriage by reference are not binding upon passengers unless notice is given
in accordance with its regulations.
Safety. The Company is subject to the jurisdiction of the Federal
Aviation Administration ("FAA") with respect to its aircraft maintenance and
operations, including equipment, ground facilities, dispatch, communications,
flight training personnel, and other matters affecting air safety. To ensure
compliance with its regulations, the FAA requires airlines to obtain operating,
airworthiness, and other certificates, which are subject to suspension or
revocation for cause. The Company has obtained such certificates. The FAA,
acting through its own powers or through the appropriate U. S. Attorney, also
has the power to bring proceedings for the imposition and collection of fines
for violation of the Federal Air Regulations.
The Company is subject to various other federal, state, and local laws
and regulations relating to occupational safety and health, including
Occupational Safety and Health Administration (OSHA) and Food and Drug
Administration (FDA) regulations.
Environmental. Certain airports, including San Diego, Burbank, and
Orange County, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number of hourly or
daily operations or the time of such operations. In some instances, these
restrictions have caused curtailments in service or increases in operating
costs, and such restrictions could limit the ability of Southwest to expand its
operations at the affected airports. Local authorities at other airports may
consider adopting similar noise regulations, but such regulations are subject to
the provisions of the Airport Noise and Capacity Act of 1990 and regulations
promulgated thereunder.
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Operations at John Wayne Airport, Orange County, California, are
governed by the Airport's Phase 2 Commercial Airline Access Plan and Regulation
(the "Plan"). Pursuant to the Plan, each airline is allocated total annual seat
capacity to be operated at the airport, subject to renewal/reallocation on an
annual basis. Service at this airport may be adjusted annually to meet these
requirements.
The Company is subject to various other federal, state, and local laws
and regulations relating to the protection of the environment, including the
discharge or disposal of materials such as chemicals, hazardous waste, and
aircraft deicing fluid. Potential future regulatory developments pertaining to
such things as control of engine exhaust emissions from ground support equipment
and prevention of leaks from underground aircraft fueling systems could increase
operating costs in the airline industry. The Company does not believe, however,
that such environmental regulatory developments will have a material impact on
the Company's capital expenditures or otherwise adversely effect its operations,
operating costs, or competitive position. Additionally, in conjunction with
airport authorities, other airlines, and state and local environmental
regulatory agencies, the Company is undertaking voluntary investigation or
remediation of soil or groundwater contamination at several airport sites. While
the full extent of any contamination at such sites and the parties responsible
for such contamination have not been determined, the Company does not believe
that any environmental liability associated with such sites will have a material
adverse effect on operations, costs, or profitability.
Customer Service Commitment. During 1999, the airline transportation
industry faced possible legislation dealing with certain customer service
practices. As a compromise with Congress, the industry, working with the Air
Transport Association, responded by adopting and filing with the DOT written
plans disclosing how it would commit to improving performance. Southwest
Airlines formalized its dedication to Customer satisfaction by adopting its
Customer Service Commitment, a comprehensive plan which embodies the Mission
Statement of Southwest Airlines: dedication to the highest quality of Customer
Service delivered with a sense of warmth, friendliness, individual pride, and
Company Spirit. The Customer Service Commitment can be reviewed by clicking on
"About SWA" at www.southwest.com. Congress is expected to monitor the effects of
the industry's plans, and there can be no assurance that legislation will not be
proposed in the future to regulate airline practices.
MARKETING AND COMPETITION
Southwest focuses principally on point-to-point, rather than
hub-and-spoke, service in shorthaul markets with frequent, conveniently timed
flights, and low fares. For example, Southwest's average aircraft trip length in
1999 was 465 miles with an average duration of approximately 1.5 hour. At
yearend, Southwest served approximately 280 one-way nonstop city pairs.
Southwest's point-to-point route system, as compared to hub-and-spoke,
provides for more direct nonstop routings for shorthaul customers and,
therefore, minimizes connections, delays, and total trip time. Southwest focuses
on nonstop, not connecting, traffic. As a result, approximately 76 percent of
the Company's Customers fly nonstop. In addition, Southwest serves many
conveniently-located satellite or downtown airports such as Dallas Love Field,
Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank,
Manchester, Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood and Long
Island airports, which are typically less congested than other airlines' hub
airports and enhance the Company's ability to sustain high Employee productivity
and reliable ontime performance. This operating strategy also permits the
Company to achieve high asset utilization. Aircraft are scheduled to minimize
the amount of time the aircraft is at the gate, currently less than 25 minutes,
thereby reducing the number of aircraft and gate facilities that would otherwise
be required. Southwest does not interline with other airlines, nor have any
commuter feeder relationships.
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Southwest employs a very simple fare structure, featuring low,
unrestricted, unlimited, everyday coach fares. The Company operates only one
aircraft type, the Boeing 737, which simplifies scheduling, maintenance, flight
operations, and training activities.
In January 1995, Southwest was the first major airline to introduce a
Ticketless travel option, eliminating the need to print a paper ticket
altogether. Southwest also entered into an arrangement with SABRE, the computer
reservation system in which Southwest has historically participated to a limited
extent, providing for ticketing and automated booking on Southwest in a very
cost-effective manner. In 1996, Southwest began offering Ticketless travel
through the Company's home page on the Internet's World Wide Web at
http://www.southwest.com. At the end of 1999, approximately 80% of Southwest's
Customers chose the Ticketless travel option. In January 2000, approximately 25%
of Southwest's passenger revenues came through its Internet site.
The airline industry is highly competitive as to fares, frequent flyer
benefits, routes, and service, and some carriers competing with the Company have
greater financial resources, larger fleets, and wider name recognition. Several
of the Company's larger competitors offer low-cost, shorthaul service in markets
served by the Company, which represents a more direct threat in Southwest's
market niche. Certain major United States airlines have established marketing
alliances with each other, including Northwest Airlines/Continental Airlines,
American Airlines/Alaska Airlines, and Continental Airlines/America West
Airlines. Profit levels in the air transport industry are highly sensitive to
changes in operating and capital costs and the extent to which competitors match
an airline's fares and services. The profitability of a carrier in the airline
industry is also impacted by general economic trends.
The Company is also subject to varying degrees of competition from
surface transportation in its shorthaul markets, particularly the private
automobile. In shorthaul air services that compete with surface transportation,
price is a competitive factor, but frequency and convenience of scheduling,
facilities, transportation safety, and Customer Service may be of equal or
greater importance to many passengers.
INSURANCE
The Company carries insurance of types customary in the airline
industry and at amounts deemed adequate to protect the Company and its property
and to comply both with federal regulations and certain of the Company's credit
and lease agreements. The policies principally provide coverage for public and
passenger liability, property damage, cargo and baggage liability, loss or
damage to aircraft, engines, and spare parts, and workers' compensation.
FREQUENT FLYER AWARDS
Southwest's frequent flyer program, Rapid Rewards, is based on trips
flown rather than mileage. Rapid Rewards Customers earn a flight credit for each
one-way trip flown or two flight credits for each round trip flown. Rapid
Rewards Customers can also receive flight credits by using the services of
non-airline partners, which include credit card partners, a telephone company,
car rental agencies, hotels, and the Southwest Airlines First USA(R) Visa card.
Rapid Rewards offers two types of travel awards. The Rapid Rewards Award Ticket
("Award Ticket") offers one free roundtrip travel award to any Southwest
destination after the accumulation of 16 flight credits within a consecutive
twelve-month period. The Rapid Rewards Companion Pass ("Companion Pass") is
granted after flying 50 roundtrips (or 100 one-way trips) on Southwest within a
consecutive twelve-month period. The Companion Pass offers unlimited free
roundtrip travel to any Southwest destination for a companion of the qualifying
Rapid Rewards member. In order for the companion to use this pass, the Rapid
Rewards member must purchase a ticket or use an Award Ticket. Additionally, the
Rapid Rewards member and companion must travel together on the same flight.
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Trips flown are valid for flight credits toward Award Tickets and
Companion Passes for twelve months only; Award Tickets and Companion Passes are
automatically generated when earned by the Customer rather than allowing the
Customer to bank trip credits indefinitely and Award Tickets and Companion
Passes are valid for one year with an automatic expiration date. "Black out"
dates apply during peak holiday periods.
The Company also sells flight credits to business partners including
credit card companies, phone companies, hotels, and car rental agencies. These
flight credits may be redeemed for Award Tickets having the same program
characteristics as those earned by flying.
Customers redeemed approximately 1,248,000, 927,000 and 782,000 Award
Tickets and flights on Companion Passes during 1999, 1998 and 1998 respectively.
The amount of free travel award usage as a percentage of total Southwest revenue
passengers carried was 4.3 percent in 1999, 3.5 percent in 1998 and 3.1 percent
in 1997. The number of Award Tickets outstanding at December 31, 1999 and 1998
was approximately 846,000 and 688,000, respectively. These numbers do not
include partially earned Award Tickets. The Company currently does not have a
system to accurately estimate partially earned Award Tickets. However, these
partially earned Award Tickets may equal approximately 45 to 55 percent of the
current outstanding Award Tickets. Since the inception of Rapid Rewards in 1987,
approximately, 14 percent of all Award Tickets have expired without being used.
The number of Companion Passes for Southwest outstanding at December 31, 1999
and 1998 was approximately 32,000 and 21,000, respectively. The Company
currently estimates that 3 to 4 trips will be redeemed per outstanding Companion
Pass. The Company's frequent flyer program has not had a material impact on its
results of operations or financial condition.
The Company accounts for its frequent flyer program obligations by
recording a liability for the estimated incremental cost of flight awards the
Company expects to be redeemed (except for credits sold to business partners).
This method recognizes an average incremental cost to provide roundtrip
transportation to one additional passenger. The estimated incremental cost
associated with a flight awards does not include any contribution to overhead or
profit. The estimated incremental costs include direct passenger costs such as
fuel, food and other operational costs. The incremental cost is accrued at the
time an award is earned and revenue is subsequently recognized, at the amount
accrued, when the free travel award is used. For credits sold to business
partners prior to January 1, 2000 revenue was recognized when the credits were
sold. Subsequent to January 1, 2000, Southwest does not accrue incremental cost
for the expected redemption of free travel awards for credits sold to business
partners since revenue from the sale of these credits is deferred until the
credits are utilized as part of an Award Ticket. The liability for free travel
awards earned but not used at December 31, 1999 and 1998 was not material.
EMPLOYEES
At December 31, 1999, Southwest had 27,653 active employees, consisting
of 8,916 flight, 1,316 maintenance, 14,017 ground customer and fleet service and
3,404 management, accounting, marketing, and clerical personnel.
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Southwest has ten collective bargaining agreements covering
approximately 83 percent of its employees. The following table sets forth the
Company's employee groups and collective bargaining status:
<TABLE>
<CAPTION>
Employee Group Represented by Agreement amendable on
-------------- -------------- ----------------------
<S> <C> <C>
Customer Service and International Association of November 2002
Reservations Machinists and Aerospace
Workers, AFL-CIO ("IAM")
Flight Attendants Transportation Workers of May 2002
America, AFL-CIO ("TWU")
Ramp, Operations and TWU December 1999
Provisioning (in negotiations)
Pilots Southwest Airlines Pilots' September 2004
Association ("SWAPA")
Flight Dispatchers Southwest Airlines Employee November 2009
Association
Appearance Technicians International Brotherhood of August 2000
Teamsters ("Teamsters")
Stock Clerks Teamsters August 2000
Mechanics Teamsters August 2001
Flight Simulator Technicians Teamsters October 2000
Flight/Ground School Southwest Airlines Professional December 2010
Instructors and Flight Crew Instructors Association
Training Instructors
</TABLE>
ITEM 2. PROPERTIES
AIRCRAFT
Southwest operated a total of 312 Boeing 737 aircraft as of December
31, 1999, of which 96 and 7 were under operating and capital leases,
respectively. The remaining 209 aircraft were owned.
Southwest was the launch customer for the Boeing 737-700 aircraft, one
of the newest generation of the Boeing 737 aircraft type. The first 737-700
aircraft was delivered in December 1997 and entered revenue service in January
1998. At December 31, 1999, Southwest had 57 737-700 aircraft in service.
In total, at December 31, 1999, the Company had 85 firm orders to
purchase Boeing 737 Aircraft as follows:
<TABLE>
<CAPTION>
Type Seats 2000 2001 2002 2003 2004
---- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
737-700 137 31 23 21 5 5
</TABLE>
The Company also has 62 options for deliveries in 2003 through 2006.
The average age of the Company's fleet at December 31, 1999 was 8.2
years.
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GROUND FACILITIES AND SERVICES
Southwest leases terminal passenger service facilities at each of the
airports it serves to which it has added various leasehold improvements. The
Company leases land on a long-term basis for its maintenance centers located at
Dallas Love Field, Houston Hobby, and Phoenix Sky Harbor, its training center
near Love Field, which houses five 737 simulators, and its corporate
headquarters, also located near Love Field. The maintenance, training center,
and corporate headquarters buildings on these sites were built and are owned by
Southwest. At December 31, 1999, the Company operated nine reservation centers.
The reservation centers located in Little Rock, Arkansas; Chicago, Illinois;
Albuquerque, New Mexico; and Oklahoma City, Oklahoma occupy leased space. The
Company owns its Dallas, Texas; Houston, Texas; Phoenix, Arizona; Salt Lake
City, Utah; and San Antonio, Texas reservation centers.
The Company performs substantially all line maintenance on its aircraft
and provides ground support services at most of the airports it serves. However,
the Company has arrangements with certain aircraft maintenance firms for major
component inspections and repairs for its airframes and engines, which comprise
the majority of the annual maintenance costs.
ITEM 3. LEGAL PROCEEDINGS
The Company received a statutory notice of deficiency from the Internal
Revenue Service (the "IRS") in which the IRS proposed to disallow deductions
claimed by the Company on its federal income tax returns for the taxable years
1989 through 1991 for the costs of certain aircraft inspection and maintenance
procedures. The IRS has proposed similar adjustments to the tax returns of
numerous other members of the airline industry. In response to the statutory
notice of deficiency, the Company filed a petition in the United States Tax
Court on October 30, 1997, seeking a determination that the IRS erred in
disallowing the deductions claimed by the Company and that there is no
deficiency in the Company's tax liability for the taxable years in issue. The
Company cannot predict when the Tax Court's decision will be entered. Management
believes that the final resolution of this controversy will not have a
materially adverse effect upon the financial condition or results of operations
of the Company. This forward-looking statement is based on management's current
understanding of the relevant law and facts; it is subject to various
contingencies including the views of legal counsel, changes in the IRS'
position, the potential cost and risk associated with litigation, and the
actions of the IRS, judges and juries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Southwest, their positions, and their
respective ages (as of March 1, 2000) are as follows:
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER CONTINUOUSLY
NAME POSITION AGE SINCE
---- -------- --- -----
<S> <C> <C> <C>
Herbert D. Kelleher Chairman of the Board, President, 68 1967
and Chief Executive Officer
Colleen C. Barrett Executive Vice President-Customers 55 1978
and Corporate Secretary
John G. Denison Executive Vice President- 55 1986
Corporate Services
James C. Wimberly Executive Vice President, 47 1985
Chief Operations Officer
Gary C. Kelly Vice President-Finance, 44 1986
Chief Financial Officer
James F. Parker Vice President-General Counsel 53 1986
Ron Ricks Vice President-Governmental Affairs 50 1986
Dave Ridley Vice President-Ground Operations 47 1998
Joyce C. Rogge Vice President - Marketing 42 1997
Elizabeth P. Sartain Vice President - People 45 1999
</TABLE>
Executive officers are elected annually at the first meeting of
Southwest's Board of Directors following the annual meeting of shareholders or
appointed by the President pursuant to Board authorization.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
No applicable disclosure.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Southwest's common stock is listed on the New York Stock Exchange and
is traded under the symbol LUV. The high and low sales prices of the common
stock on the Composite Tape and the quarterly dividends per share paid on the
common stock, as adjusted for the August 1998 and July 1999 three-for-two stock
splits, were:
<TABLE>
<CAPTION>
PERIOD DIVIDEND HIGH LOW
------ -------- ---- ---
<S> <C> <C> <C>
1999
1st Quarter $ .00500 $22.92 $14.92
2nd Quarter 0.00550 23.58 19.54
3rd Quarter 0.00550 22.29 14.38
4th Quarter 0.00550 18.81 15.00
1998
1st Quarter $ .00445 $14.28 $10.22
2nd Quarter 0.00445 13.81 11.22
3rd Quarter 0.00500 15.58 11.46
4th Quarter 0.00500 15.83 10.21
</TABLE>
As of February 29, 2000, there were 10,548 holders of record of the
Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, Herbert D. Kelleher, President and Chief Executive
Officer, exercised unregistered options to purchase Southwest Common Stock as
follows (the numbers have not been adjusted for the subsequent stock split):
<TABLE>
<CAPTION>
Number of Shares Purchased Exercise Price Date of Exercise
-------------------------- -------------- ----------------
<S> <C> <C>
303,750 $1.00 1/15/99
75,938 $1.32 1/15/99
</TABLE>
The issuance of the above options and shares to Mr. Kelleher were
deemed exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), by reason of the provision of Section 4(2) of the Act
because, among other things, of the limited number of participants in such
transactions and the agreement and representation of Mr. Kelleher that he was
acquiring such securities for investment and not with a view to distribution
thereof. The certificates representing the shares issued to Mr.
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Kelleher contain a legend to the effect that such shares are not registered
under the Act and may not be transferred except pursuant to a registration
statement which has become effective under the Act or to an exemption from such
registration. The issuance of such shares was not underwritten.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December
31, 1999 has been derived from the Company's consolidated financial statements.
This information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues..................... $4,735,587 $4,163,980 $3,816,821 $3,406,170 $2,872,751
Operating expenses..................... 3,954,011 3,480,369 3,292,585 3,055,335 2,559,220
---------- ---------- ---------- ---------- ----------
Operating income....................... 781,576 683,611 524,236 350,835 313,531
Other expenses(income), net............ 7,965 (21,501) 7,280 9,473 8,391
---------- ---------- ---------- ---------- ----------
Income before income taxes............. 773,611 705,112 516,956 341,362 305,140
Provision for income taxes............. 299,233 271,681 199,184 134,025 122,514
---------- ---------- ---------- ---------- ----------
Net income ............................ $ 474,378 $ 433,431 $ 317,772 $ 207,337 $ 182,626
========== ========== ========== ========== ==========
Net income per share, basic(1)......... $ .94 $ .87 $ .64 $ .42 $ .38
Net income per share, diluted(1)....... $ .89 $ .82 $ .62 $ .41 $ .37
Cash dividends per common share(1)..... $ .0215 $ .0189 $ .0147 $ .0130 $ .0119
Total assets at period-end............. $5,652,113 $4,715,996 $4,246,160 $3,723,479 $3,256,122
Long-term obligations at period-end.... $ 871,717 $ 623,309 $ 628,106 $ 650,226 $ 661,010
Stockholders' equity at period-end..... $2,835,788 $2,397,918 $2,009,018 $1,648,312 $1,427,318
OPERATING DATA:
Revenue passengers carried............. 57,500,213 52,586,400 50,399,960 49,621,504 44,785,573
Revenue passenger miles (RPMs) (000s).. 36,479,322 31,419,110 28,355,169 27,083,483 23,327,804
Available seat miles (ASMs) (000s)..... 52,855,467 47,543,515 44,487,496 40,727,495 36,180,001
Load factor (2)........................ 69.0% 66.1% 63.7% 66.5% 64.5%
Average length of passenger haul (miles) 634 597 563 546 521
Trips flown............................ 846,823 806,822 786,288 748,634 685,524
Average passenger fare................. $ 78.25 $ 75.38 $ 72.21 $ 65.88 $ 61.64
Passenger revenue yield per RPM........ 12.33(cent) 12.62(cent) 12.84(cent) 12.07(cent) 11.83(cent)
Operating revenue yield per ASM........ 8.96(cent) 8.76(cent) 8.58(cent) 8.36(cent) 7.94(cent)
Operating expenses per ASM............. 7.48(cent) 7.32(cent) 7.40(cent) 7.50(cent) 7.07(cent)
Fuel cost per gallon (average)......... 52.71(cent) 45.67(cent) 62.46(cent) 65.47(cent) 55.22(cent)
Number of Employees at year-end........ 27,653 25,844 23,974 22,944 19,933
Size of fleet at year-end (3).......... 312 280 261 243 224
</TABLE>
- ------------------
(1) On May 20, 1999 the Company's Board of Directors declared a three for
two stock split on the Company's Common Stock, distributed on July 19,
1999. Except as specifically noted elsewhere, all share and per share
data in this annual report have been restated to give effect to the
stock split, as well as prior stock splits previously disclosed.
(2) Revenue passenger miles divided by available seat miles.
(3) Includes leased aircraft.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR IN REVIEW
In 1999, Southwest posted a profit for the 27th consecutive year. The Company
posted record operating revenues; record operating income; the highest
operating profit margin since 1981 of 16.5 percent; and a record load factor of
69.0 percent. The Company also experienced a record annual profit for the
eighth consecutive year. We experienced strong revenue growth and continued
strong demand for our product. Fuel prices in fourth quarter 1999 rose to their
highest levels since 1991.
At the end of 1999, Southwest served 55 cities in 29 states. We targeted the
East Coast for our 1999 expansion, adding service to Islip, New York, on Long
Island in March 1999, Raleigh-Durham, North Carolina, in June 1999, and
Hartford, Connecticut, in October 1999 and have been very pleased with the
results in each of these new Southwest cities. The Company recently announced
plans to commence service to Albany, New York, in May 2000 and will begin
serving at least one other new city in 2000. In addition, we plan to continue
to add flights between cities we already serve.
Capacity is expected to grow approximately 12 percent in 2000 with the net
addition of at least 30 aircraft. The Company will purchase 31 new Boeing
737-700s scheduled for delivery during the year and has agreed to a long-term
lease arrangement to acquire another 737-700 in March of 2000. In addition, two
of the Company's older 737-200s are scheduled for retirement during the year.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998 The Company's consolidated net income for 1999 was
$474.4 million ($.89 per share, diluted), as compared to the corresponding 1998
amount of $433.4 million ($.82 per share, diluted), an increase of 9.4 percent.
The prior years' earnings per share amounts have been restated for the 1999
three-for-two stock split (see Note 8 to the Consolidated Financial
Statements). Operating income increased 14.3 percent for 1999 to $781.6
million.
OPERATING REVENUES Consolidated operating revenues increased 13.7 percent in
1999 primarily due to a 13.5 percent increase in passenger revenues. The
increase in passenger revenues was primarily due to a 9.3 percent increase in
revenue passengers carried and a 16.1 percent increase in revenue passenger
miles (RPMs). The passenger revenue yield per RPM decreased 2.3 percent to
$.1233 for 1999 primarily due to an increase in average length of passenger
haul of 6.2 percent partially offset by a 3.8 percent increase in average
passenger fare. The Company expects the trend toward gradually increasing
lengths of passenger haul to continue in 2000. (The immediately preceding
sentence is a forward-looking statement involving uncertainties that could
result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, competitive responses from
other air carriers and general economic conditions.)
The 16.1 percent increase in RPMs in 1999 exceeded the 11.2 percent increase in
available seat miles (ASMs), resulting in an increase in load factor from 66.1
percent in 1998 to 69.0 percent in 1999. The 1999 ASM growth resulted from the
net addition of 32 aircraft during the year. Favorable load factor and revenue
trends continued in January 2000. The load factor for January 2000 was 60.1
percent, up .9 points from January 1999's load factor of 59.2 percent.
11
<PAGE> 13
Freight revenues increased 4.6 percent in 1999 compared to 1998 primarily due
to added capacity and modest rate increases. Other revenues increased 31.0
percent in 1999 compared to 1998. Approximately 54 percent of the increase was
due to increased revenues from the sale of flight segment credits to marketing
partners in the Company's Rapid Rewards frequent flyer program, and
approximately 33 percent of the increase was due to an increase in charter
revenue. Beginning January 1, 2000, the Company will change its method of
accounting for the sale of flight segment credits. See Recent Accounting
Developments in Note 1 to the Consolidated Financial Statements.
OPERATING EXPENSES Consolidated operating expenses for 1999 were $3,954.0
million, compared to $3,480.4 million in 1998, an increase of 13.6 percent,
compared to the 11.2 percent increase in capacity. Operating expenses per ASM
increased 2.2 percent in 1999 primarily due to a 15.4 percent increase in
average jet fuel prices. Excluding fuel expense, operating expenses per ASM for
1999 increased 0.8 percent.
Based on current trends, unit costs are expected to continue to reflect year
over year unfavorable comparisons in first quarter 2000 as a result of higher
jet fuel prices. Excluding jet fuel costs, the Company is expecting nonfuel
unit cost declines in first quarter 2000 compared to first quarter 1999. (The
immediately preceding two sentences are forward-looking statements involving
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to, the
largely unpredictable levels of jet fuel prices and any unscheduled required
aircraft airframe or engine repairs.)
Operating expenses per ASM for 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
OPERATING EXPENSES PER ASM
- -------------------------------------------------------------------------------------------------------
Increase Percent
1999 1998 (Decrease) Change
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.39(cent) 2.35(cent) .04(cent) 1.7%
Employee profitsharing and
savings plans .36 .35 .01 2.9
Fuel and oil .93 .82 .11 13.4
Maintenance materials and
repairs .70 .64 .06 9.4
Agency commissions .30 .33 (.03) (9.1)
Aircraft rentals .38 .43 (.05) (11.6)
Landing fees and other rentals .46 .45 .01 2.2
Depreciation .47 .47 -- --
Other 1.49 1.48 .01 0.7
---------- ---------- ---------- ---------
Total 7.48(cent) 7.32(cent) .16(cent) 2.2%
========== ========== ========== =========
</TABLE>
Salaries, wages, and benefits per ASM increased 1.7 percent in 1999. This
increase resulted primarily from increases in benefits costs, specifically
workers' compensation and health care expense.
12
<PAGE> 14
Employee profitsharing and savings plans expense per ASM increased slightly due
to higher earnings available for profitsharing.
Fuel and oil expenses per ASM increased 13.4 percent in 1999, primarily due to
a 15.4 percent increase from 1998 in the average jet fuel cost per gallon. The
average price paid for jet fuel in 1999 was $.5271, including the effects of
hedging activities, compared to $.4567 in 1998. The Company's 1999 average jet
fuel price is net of approximately $14.8 million in gains from hedging
activities. Hedging activities in 1998 were not significant. For fourth quarter
1999, the average cost per gallon increased 54.5 percent to $.6713 compared to
$.4346 in fourth quarter 1998, including the effects of hedging activities. As
of February 24, 2000, the Company had hedged its exposure to fuel price
increases with combinations of purchased crude oil call options, crude oil
collars, and/or fixed price swap agreements approximating the following
percentages of 2000 anticipated fuel requirements: 57 percent for first
quarter; 85 percent for second quarter; 100 percent for third quarter; and 100
percent for fourth quarter. However, the Company is expecting significantly
higher jet fuel prices for first quarter 2000 compared to first quarter 1999
due to the historically low prices experienced in first quarter 1999. (The
immediately preceding sentence is a forward-looking statement involving
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to, the
largely unpredictable levels of jet fuel prices.) In January 2000, jet fuel
prices averaged approximately $.78 per gallon, including gains from hedging
activities. The average cost of jet fuel in January 1999 was $.3812 per gallon.
Maintenance materials and repairs per ASM increased 9.4 percent in 1999
compared to 1998. Routine heavy maintenance or airframe inspections and repairs
represented approximately 74 percent of the increase, while engine inspection
and repair costs represented approximately 25 percent of the increase. The
increase in airframe inspections and repairs was due primarily to a heavier
volume of routine airframe checks scheduled for 1999 versus 1998. Further, a
portion of the Company's scheduled airframe checks was outsourced in 1999 as
the volume of work exceeded the available internal headcount and facilities
necessary to perform such maintenance. In 1998, the Company performed all of
this type of routine heavy maintenance internally; thus, the majority of these
costs was reflected in salaries and wages. The increases in engine inspection
and repair costs were primarily related to the Company's 737-200 aircraft. The
Company's 737-200 aircraft engine inspections and repairs are performed on a
time and materials basis and are not covered by the Company's power-by-the-hour
engine maintenance contract with General Electric Engine Services, Inc. The
737-200 aircraft experienced an increase both in the number of engine
inspections and repairs and the average cost per repair. Currently, we expect
no material change in unit cost for maintenance materials and repairs in 2000
versus 1999. (The immediately preceding sentence is a forward-looking statement
involving uncertainties that could result in actual results differing
materially from expected results. Such uncertainties include, but may not be
limited to, any unscheduled required aircraft airframe or engine repairs.)
Agency commissions per ASM decreased 9.1 percent in 1999 compared to 1998,
primarily due to a decrease in the percentage of commissionable sales to 34.8
percent of total sales in 1999 compared to 39.8 percent in 1998. Based on
recent trends, the Company expects agency commissions to decrease on a per ASM
basis in 2000. (The immediately preceding sentence is a forward-looking
statement involving uncertainties that could result in actual results differing
materially from expected results. Such uncertainties include, but may not be
limited to, changes in passenger revenue levels and/or consumer ticket
purchasing habits.)
13
<PAGE> 15
Aircraft rentals per ASM decreased 11.6 percent in 1999 compared to 1998,
primarily due to a lower percentage of the aircraft fleet being leased.
Approximately 30.8 percent of the Company's aircraft fleet were under operating
lease at December 31, 1999, compared to 35.4 percent at December 31, 1998.
Depreciation expense per ASM was flat for 1999 compared to 1998. Although the
Company owned a higher percentage of its aircraft fleet in 1999 versus 1998,
unit cost was flat due to a change in the estimated useful lives of the
Company's Boeing 737-300/-500 aircraft from 20 years to 23 years. See Note 2 to
the Consolidated Financial Statements. This change in accounting estimate was
made January 1, 1999, and resulted in a decrease to depreciation expense of
approximately $25.7 million for 1999. As the Company's fleet ownership
percentage continues to increase in 2000 compared to 1999, the Company
anticipates an increase in depreciation expense per ASM. (The immediately
preceding sentence is a forward-looking statement involving uncertainties that
could result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, a change in the Company's
aircraft financing strategy.)
Other operating expenses per ASM increased 0.7 percent in 1999 compared to
1998. This increase was primarily due to increased credit card processing costs
resulting from a higher percentage of the Company's ticket sales purchased with
credit cards.
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and other gains and losses. Interest expense
decreased 3.8 percent in 1999 primarily due to the February 1998 redemption of
$100 million of senior unsecured 9 1/4% Notes originally issued in February
1991. Capitalized interest increased 22.2 percent in 1999 as a result of higher
1999 progress payment balances for scheduled future aircraft deliveries.
Interest income for 1999 decreased 18.9 percent primarily due to lower invested
cash balances. Other losses in 1999 resulted primarily from a write-down
associated with the consolidation of certain software development projects.
Other gains in 1998 primarily consisted of contractual penalties received from
Boeing due to delays in the delivery of 737-700 aircraft.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, increased slightly to 38.68 percent in 1999 from 38.53 percent in 1998.
1998 COMPARED WITH 1997 The Company's consolidated net income for 1998 was
$433.4 million ($.82 per share, diluted), as compared to the corresponding 1997
amount of $317.8 million ($.62 per share, diluted), an increase of 36.4
percent. Both of the earnings per share amounts have been restated for the 1999
three-for-two stock split (see Note 8 to the Consolidated Financial
Statements).
OPERATING REVENUES Consolidated operating revenues increased by 9.1 percent in
1998, compared to 1997, primarily from an 8.9 percent increase in passenger
revenues. The increase in passenger revenues was primarily a result of a 10.8
percent increase in revenue passenger miles (RPMs) offset by a 1.7 percent
decrease in passenger revenue yield per RPM. While Southwest's passenger
revenues increased 8.9 percent in 1998, the RPM yield decline resulted from
higher load factors, a 6.0 percent increase in passenger trip lengths, and
higher federal excise taxes on domestic tickets.
The 10.8 percent increase in RPMs in 1998 exceeded the 6.9 percent increase in
available seat miles (ASMs), resulting in an increase in load factor from 63.7
percent in 1997 to 66.1 percent in 1998. The 1998 ASM growth resulted from the
net addition of 19 aircraft during the year.
14
<PAGE> 16
Freight revenues increased 3.9 percent in 1998 compared to 1997, which fell
short of the 6.9 percent increase in ASMs for the same period. United States
mail revenue declined 2.5 percent in 1998 and 9.4 percent for fourth quarter
1998 as the postal service shifted business away from commercial carriers.
Other air freight revenues increased 8.5 percent in 1998 due to increased
capacity.
Other revenues increased 22.7 percent in 1998 to $101.7 million, compared to
$82.9 million in 1997. This increase was primarily due to increased revenues
from the sale of flight segment credits to companies participating in the
Company's Rapid Rewards frequent flyer program.
OPERATING EXPENSES Consolidated operating expenses for 1998 were $3,480.4
million, compared to $3,292.6 million in 1997, an increase of 5.7 percent,
compared to the 6.9 percent increase in capacity. Operating expenses per ASM
decreased 1.1 percent in 1998, compared to 1997, primarily due to a 26.9
percent decrease in average jet fuel cost per gallon. The decrease in average
jet fuel prices was offset by a $36.1 million increase in Employee
profitsharing and savings plan contributions and an increase in maintenance
costs primarily due to unusually low aircraft engine inspection and repair
costs in the first half of 1997.
Salaries, wages, and benefits per ASM increased 4.0 percent in 1998. This
increase resulted primarily from a 6.9 percent increase in 1998 average salary
and benefits cost per Employee. The increase in average salary and benefits
cost per Employee primarily is due to higher effective wage rates, lower
productivity in 1998 caused by Boeing aircraft delivery delays, and increased
health care and workers' compensation costs.
Employee profitsharing and savings plans expense per ASM increased 16.7 percent
in 1998, primarily due to higher earnings available for profitsharing.
Fuel and oil expenses per ASM decreased 26.1 percent in 1998, primarily due to
a 26.9 percent decrease from 1997 in the average jet fuel cost per gallon. The
average price paid for jet fuel in 1998 was $.4567 compared to $.6246 in 1997.
Maintenance materials and repairs per ASM increased 10.3 percent in 1998,
compared to 1997, primarily as a result of an unusually low number of aircraft
engine inspections and repairs in the first six months of 1997.
Agency commissions per ASM decreased 5.7 percent in 1998, when compared to
1997, primarily due to a decrease in the percentage of commissionable sales.
Aircraft rentals per ASM decreased 4.4 percent in 1998, compared to 1997,
primarily due to a lower percentage of the aircraft fleet being leased.
Depreciation expense per ASM increased 6.8 percent in 1998, compared to 1997,
primarily due to a higher percentage of the aircraft fleet being owned.
Other operating expenses per ASM increased 2.1 percent in 1998, compared to
1997, primarily due to increased costs resulting from the Year 2000 remediation
program and increased revenue- related costs such as credit card processing and
communications, partially offset by lower insurance costs.
15
<PAGE> 17
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and other gains and losses. Interest expense
decreased $7.2 million in 1998 primarily due to the February 1998 redemption of
$100 million of senior unsecured 9 1/4% Notes originally issued in February
1991. Capitalized interest increased $5.8 million in 1998 as a result of higher
1998 progress payment balances. Interest income for 1998 decreased primarily
due to lower invested cash balances. Other gains in 1998 primarily included
contractual penalties due from Boeing as a result of aircraft delivery delays.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, was unchanged from 1997 to 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,001.7 million in 1999 compared
to $886.1 million in 1998. Also, during fourth quarter 1999, additional funds
of $256 million were generated from two separate financing transactions. See
Note 5 to the Consolidated Financial Statements for further information on
these borrowings. Cash generated in 1999 was primarily used to finance
aircraft-related capital expenditures and provide working capital.
During 1999, net capital expenditures were $1,167.8 million, which primarily
related to the purchase of 32 new 737-700 aircraft, four used 737-300 aircraft,
five used 737-200 aircraft, and progress payments for future aircraft
deliveries. The five 737-200 aircraft were previously on lease by the Company
prior to being purchased.
At December 31, 1999, capital commitments of the Company primarily consisted of
scheduled aircraft acquisitions and related flight equipment. As of December
31, 1999, Southwest had 85 new 737-700s on firm order, including 31 to be
delivered in 2000, with options to purchase another 62 737-700s during
2003-2006. Aggregate funding required for firm commitments approximated
$1,965.7 million through the year 2004, of which $687.9 million related to
2000. See Note 3 to the Consolidated Financial Statements for further
information on commitments.
On September 23, 1999, the Company announced its Board of Directors had
authorized the repurchase of up to $250 million of the Company's common stock.
Repurchases will be made in accordance with applicable securities laws in the
open market or in private transactions from time to time, depending on market
conditions, and may be discontinued at any time. As of December 31, 1999, 5.6
million shares had been repurchased at a total cost of $90.5 million.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1999, of $418.8 million,
internally generated funds, and a revolving credit line with a group of banks
of up to $475 million (none of which had been drawn at December 31, 1999). In
addition, the Company will also consider various borrowing or leasing options
to maximize earnings and supplement cash requirements.
The Company currently has outstanding shelf registrations for the issuance of
$318.8 million of public debt securities, which it may utilize for aircraft
financings in 2000 and 2001.
16
<PAGE> 18
MARKET RISK
Southwest has interest rate risk in that it holds floating rate debt
instruments and has commodity price risk in that it must purchase jet fuel to
operate its aircraft fleet. To the extent the Company does not have hedges in
place, jet fuel will be purchased at prevailing market prices. Southwest also
has market sensitive instruments in the form of the types of hedges it utilizes
to decrease its exposure to jet fuel price increases in addition to its debt
instruments. The Company also operates 103 aircraft under operating and capital
leases. However, leases are not considered market sensitive financial
instruments and, therefore, are not included in the interest rate sensitivity
analysis below. Commitments related to leases are disclosed in Note 6 to the
Consolidated Financial Statements. The Company does not purchase or hold any
derivative financial instruments for trading purposes.
Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. Jet fuel consumed in
1999 and 1998 represented approximately 12.5 and 11.2 percent of Southwest's
operating expenses, respectively. Southwest endeavors to acquire jet fuel at
the lowest prevailing prices possible.
Prior to December 1998, the Company hedged its exposure to jet fuel market
price risk primarily with purchased, "out of the money," crude oil call
options. In December 1998, in order to take advantage of historically low jet
fuel prices, Southwest increased its fuel hedging activity by entering into
fixed price swap agreements hedging approximately 77 percent and 56 percent of
its jet fuel needs in first and second quarter 1999, respectively. In January
1999, the Company increased its hedging position for second quarter 1999 to 74
percent. During the second half of 1999, the Company did not have a significant
portion of its fuel purchases hedged as futures prices were substantially
higher than then-current prices.
Since mid-1999, energy markets and prices have changed radically. As a result,
the Company has adjusted its hedge strategy. The Company utilizes financial
derivative instruments for both short-term and long-term time frames when it
appears the Company can take advantage of market conditions. At December 31,
1999, the Company had a mixture of purchased crude oil call options and fixed
price swap agreements in place to hedge approximately 10.1 percent of its 2000
total anticipated jet fuel requirements. The Company had also entered into
fixed price swap agreements to hedge a small percentage of its 2001 and 2005
anticipated requirements. See Note 7 to the Consolidated Financial Statements.
In January and February 2000, the Company increased its hedging position by
adding fixed price swap agreements and crude oil collars. As of February 24,
2000, the Company's total positions were approximately 57 percent for first
quarter 2000, 85 percent for second quarter 2000, 100 percent for third quarter
2000, 100 percent for fourth quarter 2000, 50 percent for first quarter 2001,
50 percent for second quarter 2001, and 20 percent for third quarter 2001. The
Company's fuel hedging strategy could result in the Company not fully
benefiting from certain fuel price declines.
The fair values of outstanding fixed price swap agreements and purchased crude
oil call options related to the Company's jet fuel market price risk at
December 31, 1999 and 1998, and during the year ended 1998, were not material.
For 1999, the Company realized approximately $14.8 million in gains from
hedging activities. A hypothetical ten percent increase or decrease in the
underlying fuel-related commodity prices from the December 31, 1999, prices
would correspondingly change the fair value of the derivative commodity
instruments in place and their related cash flows by approximately $3 million.
17
<PAGE> 19
Airline operators are also inherently capital intensive, as the vast majority
of the Company's assets are aircraft, which are long lived. The Company's
strategy is to capitalize itself conservatively and grow capacity steadily and
profitably. While Southwest does use financial leverage, it has maintained a
strong balance sheet and "A-" or equivalent credit ratings on its senior
unsecured fixed-rate debt with three rating agencies (Standard & Poor's,
Moody's, and Duff & Phelps). The Company's Aircraft Secured Notes ($200
million) do not give rise to significant fair value risk but do give rise to
interest rate risk because these borrowings are effectively floating-rate debt.
The Company's $56 million in secured borrowings completed in 1999 does not give
rise to significant fair value risk because these borrowings are also
floating-rate debt. Although there is interest rate risk associated with these
secured borrowings, the risk is somewhat mitigated by the fact that the Company
may prepay this debt on any of the semi-annual principal and interest payment
dates. See Note 5 to the Consolidated Financial Statements for more information
on these 1999 borrowings.
As disclosed in Note 5 to the Consolidated Financial Statements, the Company
had outstanding senior unsecured notes totaling $500 million at December 31,
1999, and at December 31, 1998. These long-term notes represent only 10.0
percent and 12.1 percent of total noncurrent assets at December 31, 1999 and
1998, respectively. The unsecured long-term debt currently has an average
maturity of nine years at fixed rates averaging 8.3 percent at December 31,
1999, which is comparable to average rates prevailing over the last ten years.
The Company does not have significant exposure to changing interest rates on
its unsecured long-term debt because the interest rates are fixed and the
financial leverage is modest.
Additionally, the Company does not have significant exposure to changing
interest rates on invested cash, which was $419 million and $379 million at
December 31, 1999 and 1998, respectively. The Company invests available cash in
certificates of deposit and investment grade commercial paper that have
maturities of three months or less. As a result, the interest rate market risk
implicit in these investments at December 31, 1999, is low, as the investments
mature within three months. The Company has not undertaken any additional
actions to cover interest rate market risk and is not a party to any other
interest rate market risk management activities.
A hypothetical ten percent change in market interest rates over the next year
would not have a material effect on the fair value of the Company's debt
instruments or its short-term cash investments. See Note 7 to the Consolidated
Financial Statements for further information on the fair value of the Company's
financial instruments. Because of the floating rate nature of the Company's
secured borrowings, a ten percent change in market interest rates as of
December 31, 1999, would correspondingly change the Company's earnings and cash
flows by approximately $1.4 million in 2000. However, a ten percent change in
market rates would not impact the Company's earnings or cash flow associated
with the Company's publicly traded fixed-rate debt or its cash investments.
IMPACT OF THE YEAR 2000
The Company has completed all significant aspects of its Year 2000 project. The
Company's Year 2000 project encompassed information technology systems as well
as embedded technology assets along with assessments of material third-party
relationships and associated risks.
All of the Company's internal systems and software, including virtually all
software and services provided by third parties, appropriately handled the Year
2000 date changeover and the Company's
18
<PAGE> 20
operations were also unaffected. While the Company has experienced no Year 2000
related disruptions to date, there are remaining risks associated with the Year
2000 issue and the Company continues to monitor possible future implications of
Year 2000 issues. Based on currently available information, management believes
that Year 2000 related disruptions, if any, will not have a material adverse
effect on the Company's financial condition or results of operations.
19
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Market Risk".
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
SOUTHWEST AIRLINES CO.
We have audited the accompanying consolidated balance sheets of Southwest
Airlines Co. as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest Airlines
Co. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Dallas, Texas
January 18, 2000
21
<PAGE> 23
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands except per share amounts) 1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 418,819 $ 378,511
Accounts receivable 73,448 88,799
Inventories of parts and supplies, at cost 65,152 50,035
Deferred income taxes (Note 11) 20,929 20,734
Prepaid expenses and other current assets 52,657 36,076
------------ ------------
Total current assets 631,005 574,155
Property and equipment, at cost (Notes 3, 5, and 6):
Flight equipment 5,768,506 4,709,059
Ground property and equipment 742,230 720,604
Deposits on flight equipment purchase contracts 338,229 309,356
------------ ------------
6,848,965 5,739,019
Less allowance for depreciation 1,840,799 1,601,409
------------ ------------
5,008,166 4,137,610
Other assets 12,942 4,231
------------ ------------
$ 5,652,113 $ 4,715,996
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 156,755 $ 157,415
Accrued liabilities (Note 4) 535,024 477,448
Air traffic liability 256,942 200,078
Current maturities of long-term debt (Note 5) 7,873 11,996
Other current liabilities 3,872 3,716
------------ ------------
Total current liabilities 960,466 850,653
Long-term debt less current maturities (Note 5) 871,717 623,309
Deferred income taxes (Note 11) 692,342 549,207
Deferred gains from sale and leaseback of aircraft 222,700 238,412
Other deferred liabilities 69,100 56,497
Commitments and contingencies (Notes 3, 6, and 11)
Stockholders' equity (Notes 8 and 9):
Common stock, $1.00 par value: 1,300,000 shares authorized;
505,005 and 335,904 shares issued in 1999
and 1998, respectively 505,005 335,904
Capital in excess of par value 35,436 89,820
Retained earnings 2,385,854 2,044,975
Treasury stock, at cost: 5,579 and 5,402 shares in
1999 and 1998, respectively (90,507) (72,781)
------------ ------------
Total stockholders' equity 2,835,788 2,397,918
------------ ------------
$ 5,652,113 $ 4,715,996
============ ============
</TABLE>
See accompanying notes.
22
<PAGE> 24
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(In thousands except per share amounts) 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 4,499,360 $ 3,963,781 $ 3,639,193
Freight 102,990 98,500 94,758
Other 133,237 101,699 82,870
------------ ------------ ------------
Total operating revenues 4,735,587 4,163,980 3,816,821
OPERATING EXPENSES:
Salaries, wages, and benefits (Note 10) 1,455,237 1,285,942 1,136,542
Fuel and oil 492,415 388,348 494,952
Maintenance materials and repairs 367,606 302,431 256,501
Agency commissions 156,419 157,766 157,211
Aircraft rentals 199,740 202,160 201,954
Landing fees and other rentals 242,002 214,907 203,845
Depreciation (Note 2) 248,660 225,212 195,568
Other operating expenses 791,932 703,603 646,012
------------ ------------ ------------
Total operating expenses 3,954,011 3,480,369 3,292,585
------------ ------------ ------------
OPERATING INCOME 781,576 683,611 524,236
OTHER EXPENSES (INCOME):
Interest expense 54,145 56,276 63,454
Capitalized interest (31,262) (25,588) (19,779)
Interest income (25,200) (31,083) (36,616)
Other (gains) losses, net 10,282 (21,106) 221
------------ ------------ ------------
Total other expenses (income) 7,965 (21,501) 7,280
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 773,611 705,112 516,956
PROVISION FOR INCOME TAXES (NOTE 11) 299,233 271,681 199,184
------------ ------------ ------------
NET INCOME $ 474,378 $ 433,431 $ 317,772
============ ============ ============
NET INCOME PER SHARE, BASIC (NOTES 8, 9, AND 12) $ .94 $ .87 $ .64
============ ============ ============
NET INCOME PER SHARE, DILUTED (NOTES 8, 9, AND 12) $ .89 $ .82 $ .62
============ ============ ============
</TABLE>
See accompanying notes.
23
<PAGE> 25
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
---------------------------------------------------------------------------
COMMON CAPITAL IN EXCESS RETAINED TREASURY
(In thousands except per share amounts) STOCK OF PAR VALUE EARNINGS STOCK TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 145,112 $ 181,650 $ 1,321,550 $ -- $ 1,648,312
Three-for-two stock split (Note 8) 73,578 (73,578) -- -- --
Issuance of common stock upon
exercise of executive stock
options and pursuant to
Employee stock option and
purchase plans (Note 9) 2,517 37,818 -- -- 40,335
Tax benefit of options exercised -- 9,806 -- -- 9,806
Cash dividends, $.0147 per share -- -- (7,207) -- (7,207)
Net income - 1997 -- -- 317,772 -- 317,772
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 221,207 155,696 1,632,115 -- 2,009,018
Three-for-two stock split (Note 8) 111,894 (111,894) -- -- --
Purchase of shares of treasury stock (Note 8) -- -- -- (100,000) (100,000)
Issuance of common and treasury
stock upon exercise of executive
stock options and pursuant to
Employee stock option and
purchase plans (Note 9) 2,803 24,434 (10,184) 27,219 44,272
Tax benefit of options exercised -- 21,584 -- -- 21,584
Cash dividends, $.0189 per share -- -- (10,387) -- (10,387)
Net income - 1998 -- -- 433,431 -- 433,431
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 335,904 89,820 2,044,975 (72,781) 2,397,918
Three-for-two stock split (Note 8) 167,954 (89,878) (78,076) -- --
Purchase of shares of treasury stock (Note 8) -- -- -- (90,507) (90,507)
Issuance of common and treasury
stock upon exercise of executive
stock options and pursuant to
Employee stock option and
purchase plans (Note 9) 1,147 7,811 (45,134) 72,781 36,605
Tax benefit of options exercised -- 27,683 -- -- 27,683
Cash dividends, $.0215 per share -- -- (10,289) -- (10,289)
Net income - 1999 -- -- 474,378 -- 474,378
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 $ 505,005 $ 35,436 $ 2,385,854 $ (90,507) $ 2,835,788
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
24
<PAGE> 26
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 474,378 $ 433,431 $ 317,772
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 248,660 225,212 195,568
Deferred income taxes 142,940 108,335 81,711
Amortization of deferred gains on sale and leaseback of aircraft (15,172) (15,251) (15,414)
Amortization of scheduled airframe inspections & repairs 28,949 22,763 20,540
Changes in certain assets and liabilities:
Accounts receivable 15,421 (12,269) (3,090)
Other current assets (31,698) 1,589 6,243
Accounts payable and accrued liabilities 64,335 53,194 8,751
Air traffic liability 56,864 46,737 (4,757)
Other current liabilities 156 19,293 (4,204)
Other 16,877 3,101 7,468
------------ ------------ ------------
Net cash provided by operating activities 1,001,710 886,135 610,588
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,167,834) (947,096) (688,927)
------------ ------------ ------------
Net cash used in investing activities (1,167,834) (947,096) (688,927)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 255,600 -- 98,764
Payment of long-term debt and
capital lease obligations (12,107) (118,859) (12,665)
Payment of cash dividends (10,842) (9,284) (6,593)
Proceeds from Employee stock plans 64,288 44,272 40,335
Repurchase of common stock (90,507) (100,000) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 206,432 (183,871) 119,841
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 40,308 (244,832) 41,502
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 378,511 623,343 581,841
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 418,819 $ 378,511 $ 623,343
============ ============ ============
CASH PAYMENTS FOR:
Interest, net of amount capitalized $ 26,604 $ 33,384 $ 42,372
Income taxes $ 131,968 $ 147,447 $ 107,066
</TABLE>
See accompanying notes.
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that primarily provides shorthaul, high-frequency, point-to-point,
low-fare service. The consolidated financial statements include the accounts of
Southwest and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. Certain prior year amounts have been restated
to conform to the current year presentation.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and financial
institutions. Cash and cash equivalents are highly liquid and have original
maturities of three months or less. Cash and cash equivalents are carried at
cost, which approximates market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and
supplies are carried at average cost. These items are charged to expense when
issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to
estimated residual values over periods ranging from 20 to 25 years for flight
equipment and 3 to 30 years for ground property and equipment. See Note 2 for
further information on aircraft depreciation. Property under capital leases and
related obligations are recorded at an amount equal to the present value of
future minimum lease payments computed on the basis of the Company's incremental
borrowing rate or, when known, the interest rate implicit in the lease.
Amortization of property under capital leases is on a straight-line basis over
the lease term and is included in depreciation expense. The Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows to be generated by those assets are less than the carrying amounts of
those assets.
AIRCRAFT AND ENGINE MAINTENANCE The cost of scheduled engine inspections and
repairs and routine maintenance costs for aircraft and engines are charged to
maintenance expense as incurred. Scheduled airframe inspections and repairs,
known as "D" checks, are generally performed every ten years. Costs related to
"D" checks are capitalized and amortized over the estimated period benefited,
presently the least of ten years, time until the next "D" check, or the
remaining life of the aircraft. Modifications that significantly enhance the
operating performance or extend the useful lives of aircraft or engines are
capitalized and amortized over the remaining life of the asset.
26
<PAGE> 28
REVENUE RECOGNITION Passenger revenue is recognized when transportation is
provided. Tickets sold but not yet used are included in "Air traffic liability,"
which includes estimates that are evaluated and adjusted periodically. Any
adjustments resulting therefrom are included in results of operations for the
periods in which the evaluations are completed.
FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of
providing free travel awards earned under its Rapid Rewards frequent flyer
program. The Company also sells flight segment credits and related services to
companies participating in its Rapid Rewards frequent flyer program. The revenue
related to the sale of flight segment credits is recognized when the credits are
sold (see Recent Accounting Developments).
ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 1999, 1998, and 1997 was
$137.7 million, $119.7 million, and $113.0 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, the
Company accounts for stock-based compensation plans utilizing the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees and related Interpretations. See Note 9.
DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes purchased crude oil call
options and fixed price swap agreements to hedge a portion of its exposure to
fuel price increases. The cost of purchased crude oil call options and gains and
losses on fixed price swap agreements, including those terminated or settled
early, are deferred and charged or credited to fuel expense in the same month
that the underlying fuel being hedged is used. The Company recognized gains of
$14.8 million in 1999 from hedging activities. The gains are recorded as a
reduction of fuel and oil expense. Gains and losses on hedging transactions for
1998 and 1997 were not material.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. In 1999, the FASB issued SFAS 137, which
delayed the effective date of SFAS 133 by one year. SFAS 133 is required to be
adopted in years beginning after June 15, 2000. SFAS 133 permits early adoption
as of the beginning of any fiscal quarter after its issuance. The Company
expects to adopt the new Statement effective January 1, 2001. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what the effect of SFAS 133 will be on the earnings and financial
position of the Company.
27
<PAGE> 29
RECENT ACCOUNTING DEVELOPMENTS In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin 101 (SAB 101), Revenue Recognition
in Financial Statements. This statement gives specific guidance and
clarification on the conditions that must be met before an entity may recognize
revenue. SAB 101 must be adopted no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company will adopt SAB 101
effective January 1, 2000, and change its method of accounting used to recognize
revenue for the sale of flight segment credits to companies participating in its
Rapid Rewards frequent flyer program. Prior to the issuance of SAB 101, the
Company recorded revenue to Other Revenue when flight segment credits were sold,
which is a commonly used method of accounting within the airline industry.
However, in accordance with SAB 101, revenue received from the sale of flight
segment credits and associated with future travel will be deferred and
recognized as the ultimate free travel awards are flown. Also as part of this
change, this revenue will be classified as Passenger Revenue in the Company's
Consolidated Statement of Income.
As of January 1, 2000, the cumulative effect of this accounting change will
reduce first quarter 2000 net income by approximately $22.1 million (net of
provision for income taxes of approximately $14.0 million). Adopting this new
method of accounting for 1999, 1998, and 1997, would have produced the following
pro forma results: Net income would have been reduced by $3.9 million, $5.0
million, and $5.5 million, respectively (net of provision for income taxes and
profitsharing of approximately $2.5 million, $3.1 million, and $3.5 million,
respectively). Earnings per share, basic and diluted, would have been reduced by
$.01 per share for each year, except 1999 basic earnings per share would not
change. However, while pro forma amounts will be presented in future financial
statements, these years will not be restated.
2. CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1999, the Company revised the estimated useful lives of its
737-300 and -500 aircraft from 20 years to 23 years. This change was the result
of the Company's assessment of the remaining useful lives of the aircraft based
on the manufacturer's design lives, the Company's increased average aircraft
stage (trip) length, and the Company's previous experience. The effect of this
change was to reduce depreciation expense approximately $25.7 million and
increase net income $.03 per diluted share for the year ended December 31, 1999.
3. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Thirty-one 737-700 aircraft are scheduled for delivery in
2000, 23 in 2001, 21 in 2002, five in 2003, and five in 2004. In addition, the
Company has options to purchase up to 62 737-700s during 2003-2006. The Company
has the option, which must be exercised two years prior to the contractual
delivery date, to substitute 737-600s or 737-800s for the 737-700s scheduled
subsequent to 2001. Aggregate funding needed for fixed commitments is
approximately $1,965.7 million, subject to adjustments for inflation, due as
follows: $687.9 million in 2000, $520.1 million in 2001, $515.8 million in 2002,
$152.8 million in 2003, and $89.1 million in 2004.
28
<PAGE> 30
4. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
Employee profitsharing and
savings plans (Note 10) $ 138,566 $ 123,195
Aircraft rentals 131,219 121,868
Vacation pay 62,937 54,781
Other 202,302 177,604
------------ ------------
$ 535,024 $ 477,448
============ ============
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
9.4% Notes due 2001 $ 100,000 $ 100,000
8 3/4% Notes due 2003 100,000 100,000
Aircraft Secured Notes due 2004 200,000 --
8% Notes due 2005 100,000 100,000
7 7/8% Notes due 2007 100,000 100,000
French Credit Agreements 55,844 --
7 3/8% Debentures due 2027 100,000 100,000
Capital leases (Note 6) 123,834 133,190
Other 1,886 4,481
------------ ------------
881,564 637,671
Less current maturities 7,873 11,996
Less debt discount 1,974 2,366
------------ ------------
$ 871,717 $ 623,309
============ ============
</TABLE>
In fourth quarter 1999, the Company issued $200 million of floating rate
Aircraft Secured Notes, due 2004. The Notes are funded by a bank through a
commercial paper conduit program and are secured by eight aircraft. Interest
rates on the Notes are based on the conduit's actual commercial paper rate, plus
fees, for each period and are expected to average approximately LIBOR plus 36
basis points, over the term of the Notes. Interest is payable monthly and the
Company can prepay the Notes in whole or in part prior to maturity.
Also in fourth quarter 1999, the Company entered into two identical 13-year
floating rate financing arrangements, whereby it effectively borrowed a total of
$56 million from French banking partnerships. For presentation purposes, the
Company has classified these identical borrowings as one $56 million
transaction. The effective rate of interest over the 13-year term of the loans
is LIBOR plus 32 basis points. Principal and interest are payable semi-annually
on June 30 and
29
<PAGE> 31
December 31 for each of the loans and the Company may terminate the arrangements
in any year on either of those dates, with certain conditions. The Company has
pledged two aircraft as collateral for the entire transaction.
On February 28, 1997, the Company issued $100 million of senior unsecured 7 3/8%
Debentures due March 1, 2027. Interest is payable semi-annually on March 1 and
September 1. The Debentures may be redeemed, at the option of the Company, in
whole at any time or in part from time to time, at a redemption price equal to
the greater of the principal amount of the Debentures plus accrued interest at
the date of redemption or the sum of the present values of the remaining
scheduled payments of principal and interest thereon, discounted to the date of
redemption at the comparable treasury rate plus 20 basis points, plus accrued
interest at the date of redemption.
On March 7, 1995, the Company issued $100 million of senior unsecured 8% Notes
due March 1, 2005. Interest is payable semi-annually on March 1 and September 1.
The Notes are not redeemable prior to maturity.
On September 9, 1992, the Company issued $100 million of senior unsecured 7 7/8%
Notes due September 1, 2007. Interest is payable semi-annually on March 1 and
September 1. The Notes are not redeemable prior to maturity.
During 1991, the Company issued $100 million of senior unsecured 9.4% Notes and
$100 million of senior unsecured 8 3/4% Notes due July 1, 2001 and October 15,
2003, respectively. Interest on the Notes is payable semi-annually. The Notes
are not redeemable prior to maturity.
In addition to the credit facilities described above, Southwest has an unsecured
Bank Credit Agreement with a group of banks that permits Southwest to borrow
through May 6, 2002, on a revolving credit basis, up to $475 million. Interest
rates on borrowings under the Credit Agreement can be, at the option of
Southwest, the greater of the agent bank's prime rate or the federal funds rate
plus .5 percent, .17 percent over LIBOR, or a fixed rate offered by the banks at
the time of borrowing. The commitment fee is .08 percent per annum. There were
no outstanding borrowings under this agreement, or prior similar agreements, at
December 31, 1999 or 1998.
6. LEASES
Total rental expense for operating leases charged to operations in 1999, 1998,
and 1997 was $318.2 million, $305.2 million, and $296.5 million, respectively.
The majority of the Company's terminal operations space, as well as 96 aircraft,
was under operating leases at December 31, 1999. The amounts applicable to
capital leases included in property and equipment were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
Flight equipment $ 164,957 $ 230,486
Less accumulated depreciation 85,722 133,073
------------ ------------
$ 79,235 $ 97,413
============ ============
</TABLE>
30
<PAGE> 32
Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
1999, were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(In thousands) CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
2000 $ 16,871 $ 278,328
2001 17,391 261,419
2002 17,561 235,601
2003 17,750 210,667
2004 17,650 186,500
After 2004 102,399 1,832,541
--------- -----------
Total minimum lease payments 189,622 $ 3,005,056
===========
Less amount representing interest 65,788
---------
Present value of minimum lease payments 123,834
Less current portion 4,384
---------
Long-term portion $ 119,450
---------
</TABLE>
The aircraft leases generally can be renewed, at rates based on fair market
value at the end of the lease term, for one to five years. Most aircraft leases
have purchase options at or near the end of the lease term at fair market value,
but generally not to exceed a stated percentage of the lessor's defined cost of
the aircraft.
7. FINANCIAL INSTRUMENTS
The Company has historically utilized purchased crude oil call options and fixed
price swap agreements to hedge a portion of its exposure to fuel price
increases. During 1999, the Company recognized gains of $14.8 million from
hedging activities. At December 31, 1999, the Company had hedged positions in
place to limit its exposure to fuel price increases at the following levels:
<TABLE>
<CAPTION>
APPROXIMATE % OF APPROXIMATE TYPE
EXPECTED REQUIREMENTS GALLONS OF HEDGE
PERIOD HEDGED HEDGED INSTRUMENT
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter 2000 27% 63.0 million options
Second Quarter 2000 -- -- --
Third Quarter 2000 5% 13.7 million swaps
Fourth Quarter 2000 10% 26.3 million swaps
First Quarter 2001 9% 23.1 million swaps
</TABLE>
The fair value of these agreements at December 31, 1999, representing the amount
the Company would receive if the agreements were settled early, was not
material.
31
<PAGE> 33
Any outstanding call options or fixed swap agreements expose the Company to
credit loss in the event of nonperformance by the counterparties to the
agreements, but the Company does not expect any of the counterparties to fail to
meet their obligations. The credit exposure related to these financial
instruments is represented by the fair value of contracts with a positive fair
value at the reporting date. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty, and monitors the market position of the program and its relative
market position with each counterparty. At December 31, 1999, the Company had an
agreement with one counterparty containing a bilateral collateral provision
whereby cash deposits are required if market risk exposure exceeds a specified
threshold amount. Neither the Company nor the counterparty exceeded the
threshold amount at December 31, 1999. The Company is in the process of
negotiating similar agreements with other counterparties.
The Company does not hold or issue any financial instruments for trading
purposes.
The carrying amounts and estimated fair values of the Company's long-term debt
at December 31, 1999, were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(In thousands) CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
9.4% Notes due 2001 $100,000 $103,330
8 3/4% Notes due 2003 100,000 104,160
Aircraft Secured Notes due 2004 200,000 200,000
8% Notes due 2005 100,000 101,460
7 7/8% Notes due 2007 100,000 100,730
French Credit Agreements 55,844 55,844
7 3/8% Debentures due 2027 100,000 92,680
</TABLE>
The estimated fair values of the Company's long-term debt were based on quoted
market prices. The carrying values of all other financial instruments
approximate their fair value.
8. COMMON STOCK
The Company has one class of common stock. Holders of shares of common stock are
entitled to receive dividends when and if declared by the Board of Directors and
are entitled to one vote per share on all matters submitted to a vote of the
shareholders.
At December 31, 1999, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (97.9 million shares) and upon exercise
of rights (602.9 million shares) pursuant to the Common Stock Rights Agreement,
as amended (Agreement).
Pursuant to the Agreement, each outstanding share of the Company's common stock
is accompanied by one common share purchase right (Right). Each Right entitles
its holder to
32
<PAGE> 34
purchase one additional share of common stock at an exercise price of $4.94 and
is exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0033 per Right prior to the
time that 15 percent of the common stock has been acquired by a person or group.
If the Company is acquired, as defined in the Agreement, each Right will entitle
its holder to purchase for $4.94 that number of the acquiring company's or the
Company's common shares, as provided in the Agreement, having a market value of
two times the exercise price of the Right. The Rights will expire no later than
July 30, 2006.
On September 25, 1997, the Company's Board of Directors declared a three-for-two
stock split, distributing 73.6 million shares on November 26, 1997. On July 22,
1998, the Company's Board of Directors declared a three-for-two stock split,
distributing 111.9 million shares on August 20, 1998. On May 20, 1999, the
Company's Board of Directors declared a three-for-two stock split, distributing
168.0 million shares on July 19, 1999. Unless otherwise stated, all per share
data presented in the accompanying consolidated financial statements and notes
thereto have been restated to give effect to the stock splits.
During third quarter 1998, the Company completed a $100 million common stock
repurchase program, resulting in the repurchase of 7.3 million shares at an
average cost of $13.65 per share. All of the acquired shares were subsequently
reissued under the Employee stock option and purchase plans.
As of September 23, 1999, the Company's Board of Directors authorized the
Company to repurchase up to $250 million of its outstanding common stock. As of
December 31, 1999, this program had resulted in the repurchase of 5.6 million
shares at an average cost of $16.22 per share. All of the acquired shares are
held as common stock in treasury, less shares reissued under the Employee stock
option and purchase plans. When treasury shares are reissued, the Company uses a
first-in, first-out method and the excess of repurchase cost over reissuance
price, if any, is treated as a reduction of retained earnings.
9. STOCK PLANS
At December 31, 1999, the Company had eight stock-based compensation plans and
other stock options outstanding, which are described below. The Company applies
APB 25 and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation expense is recognized for its fixed
option plans because the exercise prices of the Company's Employee stock options
equal or exceed the market prices of the underlying stock on the dates of grant.
Compensation expense for other stock options is not material.
The Company has seven fixed option plans. Under the 1991 Incentive Stock Option
Plan, the Company may grant options to key Employees for up to 30.4 million
shares of common stock. Under the 1991 Non-Qualified Stock Option Plan, the
Company may grant options to key Employees and non-employee directors for up to
2.5 million shares of common stock. All
33
<PAGE> 35
options granted under these plans have ten-year terms and vest and become fully
exercisable at the end of three, five, or ten years of continued employment,
depending upon the grant type.
Under the 1995 Southwest Airlines Pilots' Association Non-Qualified Stock Option
Plan (SWAPA Plan), the Company may grant options to Pilots for up to 60.8
million shares of common stock. An initial grant of approximately 49.2 million
shares was made on January 12, 1995, at an option price of $5.93 per share,
which exceeded the market price of the Company's stock on that date. Options
granted under the initial grant vest in ten annual increments of ten percent. On
September 1 of each year of the agreement beginning in 1996, additional options
will be granted to Pilots who become eligible during that year. Additional
options granted on September 1, 1999, 1998, and 1997, vest in five annual
increments of 20.0 percent, six annual increments of 16.7 percent, and seven
annual increments of 14.3 percent, respectively. Options under all grants must
be exercised prior to January 31, 2007, or within a specified time upon
retirement or termination.
Under the 1996 Incentive Stock Option Plan, the Company may grant options to key
Employees for up to 20.3 million shares of common stock. Under the 1996
Non-Qualified Stock Option Plan, the Company may grant options to key Employees
and non-employee directors for up to 1.9 million shares of common stock. All
options granted under these plans have ten-year terms and vest and become fully
exercisable at the end of three, five, or ten years of continued employment,
depending upon the grant type.
Under the 1998 Southwest Airlines Employee Association Non-Qualified Stock
Option Plan (SAEA Plan), the Company may grant options to Dispatchers for up to
1.6 million shares of common stock. An initial grant of 1.1 million shares was
made on September 10, 1998, at an option price of $13.08 per share, which
exceeded the market price of the Company's stock on that date. Options granted
under the initial grant vest in annual increments of varying percentages,
depending on seniority level, through 2006. On December 1 of each year of the
agreement beginning in 1998 and through December 1, 2008, additional options
will be granted to Dispatchers who become eligible during that year. No options
were granted on December 1, 1998 or 1999. Options under all grants must be
exercised prior to June 30, 2012, or within a specified time upon retirement or
termination.
Under the 1999 Southwest Airlines Professional Instructors' Association
Non-Qualified Stock Option Plan (SWAPIA Plan), the Company may grant options to
Professional Instructors for up to 525,000 shares of common stock. An initial
grant of approximately 229,500 shares was made on May 20, 1999, at an option
price of $22.60 per share, which exceeded the market price of the Company's
stock on that date. Options granted under the initial grant vest in ten annual
increments of ten percent. On January 1 of each year of the agreement beginning
in 2001, additional options will be granted to Professional Instructors who
become eligible during that year. Options under all grants must be exercised
prior to June 30, 2012, or within a specified time upon retirement or
termination.
Under all fixed option plans, except the SWAPA, SAEA, and SWAPIA Plans, the
exercise price of each option equals the market price of the Company's stock on
the date of grant. Under the
34
<PAGE> 36
SWAPA, SAEA, and SWAPIA Plans, for additional options granted each September 1,
December 1, and January 1, respectively, the exercise price will be equal to 105
percent of the fair value of such stock on the date of the grant.
Information regarding the Company's seven fixed stock option plans, as adjusted
for stock splits, is summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
INCENTIVE PLANS NON-QUALIFIED PLANS
------------------------ ------------------------
AVERAGE AVERAGE
EXERCISE EXERCISE
(In thousands, except exercise prices) OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding December 31, 1996 21,046 $ 4.90 50,639 $ 5.94
Granted - Incentive Plans 5,524 6.45 -- --
Granted - SWAPA Plan -- -- 1,984 8.79
Granted - Other Non-Qualified Plans -- -- 327 6.45
Exercised (2,592) 4.02 (3,987) 5.90
Surrendered (1,507) 6.48 (223) 6.04
---------- ----------
Outstanding December 31, 1997 22,471 5.27 48,740 6.06
Granted - Incentive Plans 4,108 11.81 -- --
Granted - SWAPA Plan -- -- 1,354 12.91
Granted - SAEA Plan -- -- 1,107 13.08
Granted - Other Non-Qualified Plans -- -- 384 11.79
Exercised (3,541) 4.18 (3,782) 6.05
Surrendered (1,252) 7.01 (371) 6.63
---------- ----------
Outstanding December 31, 1998 21,786 6.59 47,432 6.46
Granted - Incentive Plans 3,064 17.56 -- --
Granted - SWAPA Plan -- -- 1,306 17.52
Granted - SAEA Plan -- -- -- --
Granted - SWAPIA Plan -- -- 230 22.60
Granted - Other Non-Qualified Plans -- -- 303 17.46
Exercised (3,197) 4.55 (2,313) 6.31
Surrendered (1,102) 8.14 (440) 7.07
---------- ----------
Outstanding December 31, 1999 20,551 $ 8.46 46,518 $ 6.92
========== ==========
Exercisable December 31, 1999 5,279 $ 6.86 22,174 $ 6.50
Available for granting in future periods 15,981 9,279
</TABLE>
The following table summarizes information about stock options outstanding under
the seven fixed option plans at December 31, 1999:
35
<PAGE> 37
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
OPTIONS WTD-AVERAGE OPTIONS
RANGE OF EXERCISE OUTSTANDING AT REMAINING WTD-AVERAGE EXERCISABLE AT WTD-AVERAGE
PRICES 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
- ----------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.78 TO $ 2.31 3,182 1.1 yrs $ 1.85 1,664 $ 1.92
$ 3.36 TO $ 3.57 606 2.1 yrs 3.56 245 3.57
$ 5.57 TO $ 8.06 50,132 6.8 yrs 6.13 22,246 6.06
$ 8.80 TO $13.08 8,484 8.1 yrs 11.48 2,633 11.26
$15.72 TO $22.60 4,665 8.6 yrs 17.80 665 17.73
---------- ----------
$ 1.78 TO $22.60 67,069 6.7 yrs $ 7.40 27,453 $ 6.57
========== ==========
</TABLE>
The Company has granted options to purchase the Company's common stock related
to employment contracts with the Company's president and chief executive
officer. Depending upon the grant, these options have terms of ten years from
the date of grant or ten years from the date exercisable and vest and become
fully exercisable over three or four years. No options were granted in 1999,
1998, or 1997. At December 31, 1999, 1998, and 1997, total options of 5.0
million, 5.5 million, and 5.9 million were outstanding, respectively. At
December 31, 1999, total options of 4.5 million were exercisable at exercise
prices ranging from $1.00 to $6.96 per share. Options for 570,000, 342,000, and
531,000 shares were exercised in 1999, 1998, and 1997, respectively.
Under the 1991 Employee Stock Purchase Plan (ESPP), at December 31, 1999, the
Company is authorized to issue up to a balance of 1.3 million shares of common
stock to Employees of the Company at a price equal to 90 percent of the market
value at the end of each purchase period. Common stock purchases are paid for
through periodic payroll deductions. Participants under the plan received
649,000 shares in 1999, 677,000 shares in 1998, and 990,000 shares in 1997 at
average prices of $16.24, $11.63, and $7.11, respectively.
Pro forma information regarding net income and net income per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
Employee stock-based compensation plans and other stock options under the fair
value method of SFAS 123. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants under the fixed option
plans in 1999, 1998, and 1997, respectively: dividend yield of .12 percent, .16
percent, and .22 percent; expected volatility of 35.66 percent, 38.20 percent,
and 38.23 percent; risk-free interest rate of 6.68 percent, 4.66 percent, and
5.80 percent; and expected lives of 5.0 years for all periods. Assumptions for
the stock options granted to the Company's president and chief executive officer
were the same as for the fixed option plans except for the weighted-average
expected lives of 8.0 years.
The weighted-average fair value of options granted under the fixed option plans,
except the SAEA and SWAPIA Plans, during 1999, 1998, and 1997 was $7.45, $4.78,
and $2.72,
36
<PAGE> 38
respectively, for the incentive plans; $6.79, $4.76, and $3.41, respectively,
for the SWAPA Plan; and $7.39, $4.77, and $2.72, respectively, for other
non-qualified plans. The weighted-average fair value of options granted in 1998
under the SAEA Plan was $4.83. The weighted-average fair value of options
granted in 1999 under the SWAPIA Plan was $8.81. The weighted-average fair value
of each purchase right under the ESPP granted in 1999, 1998, and 1997, which is
equal to the ten percent discount from the market value of the common stock at
the end of each purchase period, was $1.75, $1.29, and $0.79, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's Employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Employee stock options.
For purposes of pro forma disclosures, the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the
vesting period. The Company's pro forma net income and net income per share is
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(In thousands except per share amounts) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET INCOME:
As reported $ 474,378 $ 433,431 $ 317,772
Pro forma $ 459,669 $ 421,097 $ 306,553
NET INCOME PER SHARE, BASIC:
As reported $ .94 $ .87 $ .64
Pro forma $ .91 $ .84 $ .62
NET INCOME PER SHARE, DILUTED:
As reported $ .89 $ .82 $ .62
Pro forma $ .86 $ .79 $ .60
</TABLE>
As required, the pro forma disclosures above include only options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures.
37
<PAGE> 39
10. EMPLOYEE PROFITSHARING AND SAVINGS PLANS
Substantially all of Southwest's Employees are members of the Southwest Airlines
Co. Profitsharing Plan. Total profitsharing expense charged to operations in
1999, 1998, and 1997 was $138.3 million, $120.7 million, and $91.3 million,
respectively.
The Company sponsors Employee savings plans under Section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time Employees. The amount
of matching contributions varies by Employee group. Company contributions
generally vest over five years with credit for prior years' service granted.
Company matching contributions expensed in 1999, 1998, and 1997 were $53.7
million, $46.4 million, and $39.7 million, respectively.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated depreciation $ 782,341 $ 641,673
Scheduled airframe maintenance 47,168 40,073
Other 110,638 95,485
------------ ------------
Total deferred tax liabilities 940,147 777,231
DEFERRED TAX ASSETS:
Deferred gains from sale and
leaseback of aircraft 101,960 107,157
Capital and operating leases 64,704 61,275
Other 102,070 80,326
------------ ------------
Total deferred tax assets 268,734 248,758
------------ ------------
Net deferred tax liability $ 671,413 $ 528,473
============ ============
</TABLE>
The provision for income taxes is composed of the following:
38
<PAGE> 40
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(In thousands) 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT:
Federal $ 137,393 $ 143,989 $ 102,938
State 18,900 19,357 14,535
------------ ------------ ------------
Total current 156,293 163,346 117,473
DEFERRED:
Federal 128,984 96,237 75,990
State 13,956 12,098 5,721
------------ ------------ ------------
Total deferred 142,940 108,335 81,711
------------ ------------ ------------
$ 299,233 $ 271,681 $ 199,184
============ ============ ============
</TABLE>
The Company received a statutory notice of deficiency from the Internal Revenue
Service (IRS) in July 1995 in which the IRS proposed to disallow deductions
claimed by the Company on its federal income tax returns for the taxable years
1989 through 1991 for the costs of certain aircraft inspection and maintenance
procedures. The IRS has proposed similar adjustments to the tax returns of
numerous other members of the airline industry. In response to the statutory
notice of deficiency, the Company filed a petition in the United States Tax
Court on October 30, 1997, seeking a determination that the IRS erred in
disallowing the deductions claimed by the Company and there is no deficiency in
the Company's tax liability for the taxable years in issue. It is expected that
the Tax Court's decision will not be entered for several years. Management
believes the final resolution of this controversy will not have a material
adverse effect upon the financial position or results of operations of the
Company.
The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax at statutory
U.S. tax rates $ 270,764 $ 246,789 $ 180,935
Nondeductible items 6,664 5,099 5,893
State income taxes,
net of federal benefit 21,356 20,445 13,166
Other, net 449 (652) (810)
------------ ------------ ------------
Total income
tax provision $ 299,233 $ 271,681 $ 199,184
============ ============ ============
</TABLE>
39
<PAGE> 41
12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In thousands except per share amounts) 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NUMERATOR:
Net income, available to
common stockholders $ 474,378 $ 433,431 $ 317,772
============ ============ ============
DENOMINATOR:
Weighted-average shares
outstanding, basic 503,065 500,013 492,947
Dilutive effect of
Employee stock options 32,862 29,736 18,836
------------ ------------ ------------
Adjusted weighted-average
shares outstanding,
diluted 535,927 529,749 511,783
============ ============ ============
NET INCOME PER SHARE:
Basic $ 0.94 $ 0.87 $ 0.64
============ ============ ============
Diluted $ 0.89 $ 0.82 $ 0.62
============ ============ ============
</TABLE>
The Company has excluded 259,700, and 1,141,355 shares from its calculations of
dilutive earnings per share in 1999 and 1997, respectively, as they represent
antidilutive stock options for the respective periods presented. There were no
antidilutive stock options in 1998.
40
<PAGE> 42
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
1999 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $1,075,571 $1,220,432 $1,235,166 $1,204,481
Operating income 166,617 254,331 206,463 154,165
Income before income taxes 156,102 256,598 207,949 152,962
Net income 95,847 157,757 126,978 93,796
Net income per share, basic .19 .31 .25 .19
Net income per share, diluted .18 .29 .24 .18
</TABLE>
<TABLE>
<CAPTION>
1998 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $942,653 $1,078,841 $1,094,830 $1,047,656
Operating income 111,693 208,548 203,919 159,451
Income before income taxes 114,057 216,547 211,055 163,453
Net income 70,008 133,393 129,645 100,385
Net income per share, basic .14 .27 .26 .20
Net income per share, diluted .13 .25 .24 .19
</TABLE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
<PAGE> 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" incorporated herein by reference, from
pages 1-3 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 17, 2000. See "Executive Officers of the Registrant"
in Part I following Item 4 for information relating to executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers," incorporated herein by
reference, from pages 7-12 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 17, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein
by reference, from pages 7-12 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 17, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference, from
pages 1-3 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 17, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements included in Item 8 above are filed as part of
this annual report.
2. Financial Statement Schedules:
There are no financial statement schedules filed as part of this annual
report, since the required information is included in the consolidated
financial statements, including the notes thereto, or the circumstances
requiring inclusion of such schedules are not present.
3. Exhibits:
3.1 Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Registration
Statement on Form S-3 (File No. 33-52155)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (File No.
1-7259)); Amendment to Restated Articles of Incorporation of
Southwest (incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-7259)); Amendment to Restated
Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.2 to Southwest's Registration Statement
on Form S-8 (File No. 333-82735).
3.2 Bylaws of Southwest, as amended through March 2000.
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest
and Bank of America National Trust and Savings Association,
and the other banks named therein, and such banks.
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for
42
<PAGE> 44
the year ended December 31, 1997 (File No. 1-7259)); First
Amendment to Competitive Advance and Revolving Credit Facility
Agreement dated August 7, 1998 (incorporated by reference to
Exhibit 4.1 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-7259); Second
Amendment to Competitive Advance and Revolving Credit Facility
Agreement dated January 20, 1999 (incorporated by reference to
Exhibit 4.1 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-7259)).
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A/A dated
August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of its
total consolidated assets. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon
request.
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.4 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1. (incorporated by reference to Exhibit 10.3 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)); Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1997 (File No. 1-7259)); Supplemental Agreements
Nos. 5, 6, and 7; (incorporated by reference to Exhibit 10.1
to Southwest's Annual Report on form 10-K for the year ended
December 31, 1998 (File No. 1-7259)); Supplemental Agreements
Nos. 8, 9, and 10.
Pursuant to 17 CFR 240.24b-2, confidential information has
been omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission.
43
<PAGE> 45
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
10.2 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.4 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.8 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.12 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K for the
year ended December 31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
A copy of each exhibit may be obtained at a price of 15 cents per page,
$10.00 minimum order, by writing to: Director of Investor Relations, Southwest
Airlines Co., P.O. Box 36611, Dallas, Texas 75235-1611.
(b) There were no Form 8-K's filed during the fourth quarter of 1999.
44
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHWEST AIRLINES CO.
March 16, 2000
By /s/ Gary C. Kelly
-------------------------
Gary C. Kelly
Vice President-Finance,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on March 16, 2000 on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Herbert D. Kelleher Chairman of the Board of Directors,
- ------------------------------------- President and Chief Executive Officer
Herbert D. Kelleher
/s/ Gary C. Kelly Vice President-Finance
- ------------------------------------- (Chief Financial and Accounting Officer)
Gary C. Kelly
/s/ Samuel E. Barshop Director
- -------------------------------------
Samuel E. Barshop
/s/ Gene H. Bishop Director
- -------------------------------------
Gene H. Bishop
/s/ C. Webb Crockett Director
- -------------------------------------
C. Webb Crockett
/s/ William P. Hobby, Jr. Director
- -------------------------------------
William P. Hobby, Jr.
/s/ Travis C. Johnson Director
- -------------------------------------
Travis C. Johnson
/s/ R. W. King Director
- -------------------------------------
R. W. King
/s/ Walter M. Mischer, Sr. Director
- -------------------------------------
Walter M. Mischer, Sr.
/s/ June M. Morris Director
- -------------------------------------
June M. Morris
</TABLE>
<PAGE> 47
INDEX TO EXHIBITS
3.1 Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Registration
Statement on Form S-3 (File No. 33-52155)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (File No.
1-7259); Amendment to Restated Articles of Incorporation of
Southwest (incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-7259)); Amendment to Restated
Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.2 to Southwest's Registration Statement
on Form S-8 (File No. 333-82735).
3.2 Bylaws of Southwest, as amended through March, 2000.
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest
and Bank of America National Trust and Savings Association,
and the other banks named therein, and such banks.
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-7259)); First Amendment to Competitive
Advance and Revolving Credit Facility Agreement dated August
7, 1998 (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-7259)); Second Amendment to
Competitive Advance and Revolving Credit Facility Agreement
dated January 20, 1999 (incorporated by reference to Exhibit
4.1 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 1-7259)).
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A/A dated
August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of
E-1
<PAGE> 48
its total consolidated assets. Copies of such instruments will
be furnished to the Securities and Exchange Commission upon
request.
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.4 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1. (incorporated by reference to Exhibit 10.3 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)).; Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1997 (File No. 1-7259)); Supplemental Agreements
Nos. 5, 6, and 7 (incorporated by reference to Exhibit 10.1 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1998 (File No. 1-7259)), Supplemental Agreements
Nos. 8, 9, and 10.
Pursuant to 17 CFR 240.24b-2, confidential information has
been omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission.
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
10.2 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.4 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.8 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
E-2
<PAGE> 49
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.12 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K for the
year ended December 31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
A copy of each exhibit may be obtained at a price of 15 cents per page,
$10.00 minimum order, by writing to: Director of Investor Relations, Southwest
Airlines Co., P.O. Box 36611, Dallas, Texas 75235-1611.
(b) There were no Form 8-K's filed during the fourth quarter of 1999.
E-3
<PAGE> 1
EXHIBIT 3.2
BYLAWS
(as amended through March 16, 2000)
of
SOUTHWEST AIRLINES CO.
Dallas, Texas
<PAGE> 2
SOUTHWEST AIRLINES CO.
BYLAWS
ARTICLE I
IDENTIFICATION AND OFFICES
Section 1. Name: The name of the corporation is SOUTHWEST AIRLINES CO.
Section 2. Principal Business Office: The principal business office of the
corporation shall be in Dallas, Texas.
Section 3. Other Offices: The corporation may also have offices at such
other places within or without the State of Texas as the Board of Directors may
from time to time determine or the business of the corporation may require.
ARTICLE II
THE SHAREHOLDERS
Section 1. Place of Meetings: All meetings of the shareholders for the
election of directors shall be held at the principal executive offices of the
corporation in Dallas, Texas, or at such other place as may be designated by the
Board of Directors of the corporation. Meetings of the shareholders for any
other purpose may be held at such time and place, within or without the State of
Texas, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meetings: Annual meetings of shareholders shall be held
on such date and at such time as shall be designated from time to time by the
Board of Directors. At each annual meeting, the shareholders shall elect a Board
of Directors and transact such other business as may be properly brought before
the meeting.
Section 3. Special Meetings: Special meetings of the shareholders may be
called by the President and shall be called by the Secretary upon written
request, stating the purpose or purposes therefor, by a majority of the whole
Board of Directors or by the holders of at least ten (10) percent (or such
greater percentage not exceeding a majority as may be specified in the Articles
of Incorporation) of all of the shares entitled to vote at the meeting.
Section 4. Notice of Meetings: Written or printed notice of all
shareholders' meetings stating the place, day and hour, and, in the case of a
special meeting, the purpose or purposes
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for which the meeting is called, shall be delivered not less than ten (10) days
nor more than sixty (60) days before the date of the meeting, either personally
or by mail, by or at the direction of the officer or person calling the meeting,
to each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
addressed to the shareholder at his address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid.
Section 5. Purpose of Special Meetings: Business transacted at all special
meetings of shareholders shall be confined to the purposes stated in the notice
thereof.
Section 6. Fixing Record Date: For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive a distribution by the corporation
(other than a distribution involving a purchase or redemption by the corporation
of any of its own shares) or a share dividend or in order to make a
determination of shareholders for any other purpose, the Board of Directors may
fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than sixty (60) days, and, in
the case of a meeting of shareholders, not less than ten (10) days, prior to the
date on which the particular action requiring such determination of shareholders
is to be taken. If no record date is fixed for the determination of shareholders
entitled to notice of or vote at a meeting of shareholders, or shareholders
entitled to receive a distribution by the corporation (other than a distribution
involving a purchase or redemption by the corporation of any of its own shares)
or a share dividend, the date on which notice of the meeting is mailed or the
date on which the resolution of the Board of Directors declaring such
distribution or share dividend is adopted, as the case may be, shall be the
record date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this Section, such determination shall apply to any adjournment
thereof.
Section 7. Voting List: The officer or agent having charge of the stock
transfer books for the shares of the corporation, shall make, at least ten (10)
days before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten (10) days prior to such meeting, shall be kept
on file at the registered office of the corporation and shall be subject to
inspection by any shareholder at any time during usual business hours; such list
shall also be produced and be kept open at the time and place of the meeting and
shall be subject to the inspection of any shareholder during the whole time of
the meeting. The original stock transfer books shall be prima facie evidence as
to who are the shareholders entitled to examine such list or transfer books or
to vote at any meeting of shareholders.
Section 8. Quorum: The holders of a majority of the shares entitled to vote
(counting for such purposes all abstentions and broker nonvotes), represented in
person or by proxy, shall constitute a quorum at meetings of the shareholders,
except as otherwise provided in the Articles of Incorporation. If, however, such
quorum shall be not present or represented at a meeting of the shareholders, the
holders of a majority of the shares entitled to vote thereat,
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<PAGE> 4
and represented in person or by proxy, shall have power to recess the meeting
from time to time, without notice other than power to recess the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such recessed meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally convened had a quorum
been present. Shareholders present at a duly organized meeting with a quorum
present may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
Section 9. Voting at Meetings:
(a) With respect to any matter other than the election of
directors or a matter for which the affirmative vote of the holders of
a specified portion of the shares entitled to vote is required by the
Texas Business Corporation Act, the act of the shareholders shall be
the affirmative vote of the holders of a majority of the shares
entitled to vote on, and voted for or against, the matter at a meeting
of shareholders at which a quorum is present; provided that, for
purposes of this sentence, all abstentions and broker nonvotes shall
not be counted as voted either for or against such matter. With
respect to the election of directors, directors shall be elected by a
plurality of the votes cast by the holders of shares entitled to vote
in the election of directors at a meeting of shareholders at which a
quorum is present; provided, that abstentions and broker nonvotes
shall not be counted as votes cast either for or against any nominee
for director.
(b) Each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote at a meeting
of shareholders, except to the extent that the voting rights of shares
of any class or series are limited or denied by the Articles of
Incorporation, or as otherwise provide by law. No shareholder shall
have the right of cumulative voting.
(c) A shareholder may vote either in person or by proxy executed
in writing by the shareholder or by his duly authorized attorney in
fact. No proxy shall be valid after eleven (11) months from the date
of its execution unless otherwise provided in the proxy. Each proxy
shall be revocable unless the proxy form conspicuously states that the
proxy is irrevocable and the proxy is coupled with an interest.
Section 10. Actions by Shareholders Without a Meeting: Any action required
by law to be taken at a meeting of the shareholders, or any action which may be
taken at a meeting of the shareholders, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the shareholders entitled to vote with respect to the subject matter thereof.
Section 11. Inspectors of Election: The chairman of each meeting of
shareholders shall appoint one or more persons to act as inspectors of election.
The inspectors of election shall report to the meeting the number of shares of
each class and series of stock, and of all
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<PAGE> 5
classes, represented either in person or by proxy. The inspectors of election
shall oversee the vote of the shareholders for the election of directors and for
any other matters that are put to a vote of shareholders at the meeting; receive
a ballot evidencing votes cast by the proxy committee of the Board of Directors;
judge the qualifications of shareholders voting; collect, count, and report the
results of ballots cast by any shareholders voting in person; and perform such
other duties as may be required by the chairman of the meeting or the
shareholders.
Section 12. Notice of Shareholder Business: At an annual meeting of
shareholders, only such business shall be conducted as shall have been brought
before the meeting (i) by or at the direction of the Board of Directors or (ii)
by any shareholder of the corporation who complies with the notice procedures
set forth in this Section 12. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation, not less than sixty (60) days
nor more than ninety (90) days prior to the meeting; provided, however, that in
the event that less than thirty (30) days' notice or prior public disclosure of
the date of the meeting is given or made to the shareholders, notice by the
shareholder to be timely must be received not later than the close of business
on the tenth (10th) day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting the following
information: (a) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting; (b) the name and address, as they appear on the corporation's
books, of the shareholder proposing such business; (c) the number of shares of
the corporation which are beneficially owned by the shareholder; and (d) any
material interest of the shareholder in such business. Notwithstanding anything
in these Bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 12.
The chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 12, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 12, a shareholder seeking to have a
proposal included in the corporation's proxy statement shall comply with the
requirements of Regulation 14A under the Securities Exchange Act of 1934, as
amended (including, but not limited to, Rule 14a-8 or its successor provision).
Section 13. Notice of Shareholder Nominees: Nominations of persons for
election to the Board of Directors of the corporation may be made at a meeting
of shareholders (i) by or at the direction of the Board of Directors or (ii) by
any shareholder of the corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 13. Nominations by shareholders shall be made pursuant to timely
notice in writing to the Secretary of the corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than sixty (60) days nor
more than ninety (90) days prior to the meeting; provided,
4
<PAGE> 6
however, that in the event that less than thirty (30) days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth (10th) day following the day on which such notice
of the date of the meeting was mailed or such public disclosure was made. Such
shareholder's notice shall set forth (a) as to each person whom the shareholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); and (b) as to the
shareholder giving the notice (i) the name and address, as they appear on the
corporation's books, of such shareholder and (ii) the number of shares of the
corporation which are beneficially owned by such shareholder. At the request of
the Board of Directors, any person nominated by the Board of Directors for
election as a director shall furnish to the Secretary of the corporation that
information required to be set forth in a shareholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth in these Bylaws. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Management: The business and affairs of the corporation shall be
managed by a Board of Directors.
Section 2. Number; Term of Office; Qualifications: The number of directors
of the corporation shall be determined from time to time by resolution of the
Board of Directors, but no decrease in such number shall have the effect of
shortening the term of any incumbent director. At each annual meeting of
shareholders, the shareholders shall elect directors to hold office until the
next succeeding annual meeting, except in case of the classification of
directors as provided in these Bylaws. Each director shall hold office for the
term for which he is elected and until his successor shall have been elected and
qualified or until his earlier death, retirement, resignation, or removal for
cause in accordance with the provisions of these Bylaws. Directors need not be
residents of the State of Texas or shareholders of the corporation, but they
must be less than seventy (70) years of age at the time of election and they
must have been nominated in accordance with the procedures set forth in these
Bylaws in order to be eligible for election as directors.
Section 3. Classification of Directors: Effective at the time of the annual
meeting of shareholders in 1990, in lieu of electing the whole number of
directors annually, the directors
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<PAGE> 7
shall be divided into three classes, Class I, Class II and Class III, each class
to be as nearly equal in number as possible, and the remainder of this Section 3
shall be effective. Each director shall serve for a term ending on the date of
the third annual meeting of shareholders following the annual meeting at which
such director was elected; provided, however, that each initial director in
Class I shall hold office until the first annual meeting of shareholders after
his election; each initial director in Class II shall hold office until the
second annual meeting of shareholders after his election; and each initial
director in Class III shall hold office until the third annual meeting of
shareholders after his election. In the event of any increase or decrease in the
authorized number of directors, (i) each director then serving as such shall
nevertheless continue as a director of the class of which he is a member until
the expiration of his current term or until his prior death, retirement,
resignation, or removal for cause in accordance with the provisions of these
Bylaws, and (ii) the newly created or eliminated directorships resulting from
such increase or decrease shall be apportioned by the Board of Directors among
the three classes of directors so as to maintain such classes as nearly equal in
number as possible.
Section 4. Vacancies; Increases in the Number of Directors: Any vacancy
occurring in the Board of Directors may be filled in accordance with the
following paragraph of this Section 4 or may be filled by the affirmative vote
of a majority of the remaining directors though less than a quorum of the Board
of Directors. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office.
Any vacancy occurring in the Board of Directors or any directorship to be
filled by reason of an increase in the number of directors (i) may be filled by
election at an annual or special meeting of shareholders called for that purpose
or (ii) may be filled by the Board of Directors; provided that, with respect to
any directorship to be filled by the Board of Directors by reason of an increase
in the number of directors (a) such directorship shall be for a term of office
continuing only until the next election of one or more directors by shareholders
and (b) the Board of Directors may not fill more than two such directorships
during the period between any two successive annual meetings of shareholders. If
the Board of Directors is classified, any director elected at an annual or
special meeting of shareholders to fill a directorship created by reason of an
increase in the number of directors shall be elected for a term coterminous with
the remaining term of the other members of the class to which he has been
designated in accordance with the provisions of these Bylaws.
Section 5. Removal: At any meeting of shareholders called expressly for
that purpose, any director may be removed, but only for cause, by vote of the
holders of a majority of the shares then entitled to vote for the election of
directors.
Section 6. Place of Meeting: Meetings of the Board of Directors, regular or
special, may be held either within or without the State of Texas.
Section 7. First Meeting: The first meeting of each newly elected Board
shall be held immediately following the shareholders' meeting at which the
directors are elected and at the place at which such annual meeting is held, or
the directors may meet at such time and place
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<PAGE> 8
as shall be fixed by the consent in writing of the directors. No notice of such
meeting shall be necessary to the newly elected directors in order to legally
constitute the meeting provided a quorum shall be present.
Section 8. Regular Meetings: Regular meetings of the Board of Directors may
be held without notice at such time and place as shall from time to time be
determined by resolution of the Board of Directors.
Section 9. Special Meetings: Special meetings of the Board of Directors may
be called by the President on two days' notice to each director, either
personally, by telephone, by mail, or by telegram. Special meetings shall be
called by the President, or by the Secretary, in like manner and on like notice
on the written request of the majority of the whole Board of Directors.
Section 10. Purpose of Meetings: Neither the purpose of, nor the business
to be transacted at, any regular or special meeting of the Board of Directors
need be specified in the notice or waiver of notice of such meeting.
Section 11. Quorum: A majority of the number of directors shall constitute
a quorum for the transaction of business at any meeting thereof. The act of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, unless the act of a greater number
is required by law or the Articles of Incorporation or these bylaws. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section 12. Committee of Directors: The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, including an "Executive Committee," each committee to consist of one
or more of the directors of the corporation, which, to the extent provided in
said resolution, shall have and may exercise all of the authority of the Board
of Directors in the business and affairs of the corporation, except where action
of the Board is mandatorily required by law, and may have power to authorize the
seal of the corporation to be affixed to all papers which may require it. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Such committees
shall keep regular minutes of their proceedings and report the same to the Board
when required.
Section 13. Action Without Meeting: Any action required or permitted to be
taken at a meeting of the Board of Directors or any committee may be taken
without a meeting if a consent in writing, setting forth the action so taken, is
signed by all the members of the Board of Directors or committee, as the case
may be. Such consent shall have the same force and effect as a unanimous vote at
a meeting. The signed consent, or a signed copy, shall be placed in the minute
book.
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<PAGE> 9
ARTICLE IV
OFFICERS
Section 1. Number and Designation: The officers of the corporation shall
consist of a President, a Vice President, a Secretary, an Assistant Secretary, a
Treasurer, an Assistant Treasurer, and, if the Board of Directors so elects, a
Chairman of the Board. Any two or more offices may be held by the same person,
except that the President and Secretary shall not be the same person.
Section 2. Election: The Board of Directors at its first meeting after the
annual meeting of the shareholders may elect a Chairman of the Board from among
its members and shall elect a President, a Vice President, a Secretary, an
Assistant Secretary, a Treasurer, and an Assistant Treasurer, none of whom need
to be a member of the Board.
Section 3. Other Officers: The President may appoint such other officers
and agents as he may deem necessary for the efficient and successful conduct of
the business of the corporation, but none of such other officers and agents
shall be given a contract of employment unless such is first approved by the
Board of Directors.
Section 4. Term of Office and Removal: The officers, agents, or members of
any committees of the corporation elected or appointed by the Board of Directors
shall hold office until their successors are chosen and qualify in their stead;
provided, that any such officer, agent, or member of such committees may be
removed at any time by the majority vote of the whole Board of Directors
whenever in its sole judgment the best interests of the corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Any officer or agent appointed by the
President may be removed at any time by majority vote of the whole Board of
Directors or by the President. Election or appointment of an officer or agent
shall not of itself create contract rights.
Section 5. Compensation: The salaries of all officers of the corporation
shall be fixed by, or at the direction of, the Board of Directors or its
Compensation Committee.
Section 6. The Chairman of the Board: If elected, the Chairman of the Board
shall preside at all meetings of the shareholders and directors; and he shall
have such other powers and duties as the Board of Directors shall prescribe.
Section 7. The President: The President shall be the chief executive
officer of the corporation; in the absence of the Chairman of the Board or if
there be no Chairman of the Board, he shall preside at all meetings of the
shareholders and directors; shall be ex officio a member of all standing
committees; and shall see that all orders and resolutions of the Board of
Directors are carried into effect. The President may execute deeds, conveyances,
notes, bonds, and other contracts either or without the attestation of the
Secretary required thereon and either with or without the seal of the
corporation.
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<PAGE> 10
Section 8. Vice Presidents: The Vice Presidents, in the order of their rank
and seniority in office, in the absence or disability of the President shall
perform the duties and exercise the powers of the President, and shall perform
such other duties as the Board of Directors shall prescribe.
Section 9. The Secretary: The Secretary shall attend all meetings of the
Board of Directors and all meetings of the shareholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. He shall give, or
cause to be given, notice of all meetings of the shareholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or President, under whose supervision he
shall be; he shall keep the seal the corporation and, when authorized by the
Board, affix the same to any instrument requiring it and, when so affixed, it
shall be attested by his signature or by the signature of the Treasurer or an
Assistant Secretary or Assistant Treasurer.
Section 10. The Assistant Secretaries: The Assistant Secretaries, in order
of their seniority in office, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and shall
perform such other duties as the Board of Directors shall prescribe.
Section 11. The Treasurer: The Treasurer shall have supervision over the
corporate funds and securities and shall keep or cause to be kept full and
accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit or cause to be deposited all moneys and other
valuable effects in the name and to the credit of the corporation in such
depositories as may be designated by the Board of Directors, shall disburse the
funds of the corporation as may be ordered by the Board, taking proper vouchers
for such disbursements, and shall render to the President and directors, at the
regular meetings of the Board, or whenever they may require it, an account of
all the transactions under his supervision as Treasurer and of the financial
condition of the corporation. If required by the Board of Directors, the
Treasurer and persons acting under this supervision shall give the corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to
the Board for the faithful performance of their duties and for the restoration
to the corporation, in case of their death, resignation, retirement, or removal
from office, of all books, papers, vouchers, money, and other property of
whatever kind in their possession or under their control belonging to the
corporation.
Section 12. The Assistant Treasurers: The Assistant Treasurers, in the
order of their seniority in office, shall, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties as the Board of Directors shall prescribe.
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ARTICLE V
CERTIFICATES REPRESENTING SHARES
Section 1. Form and Issuance: The certificates representing shares of the
corporation of each class or series shall be in such form as approved by
resolution of the Boards of Directors and as may be required by law and shall be
numbered and entered in the stock records of the corporation as they are issued.
They shall show the holder's name and number of shares and shall be signed by
the Chairman of the Board, if any, or the President and the Secretary of the
corporation, and may be sealed with the seal of the corporation or a facsimile
thereof. The signatures of the Chairman of the Board or President and of the
Secretary upon a certificate may be facsimiles. In case any officer who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the corporation with the same effect as if he were such officer at the
date of its issuance. No certificate shall be issued for any share until the
consideration therefor, fixed as provided by law, has been fully paid.
Section 2. Fractional Shares: The corporation may, but shall not be
obligated to, issue a certificate for a fractional share, and the Board of
Directors may, in lieu thereof, arrange for the disposition thereof by those
entitled thereto, pay the fair value in cash or issue scrip in registered or
bearer form which shall entitle the holder to receive a certificate for a full
share only upon the surrender of such scrip aggregating a full share. A
certificate for a fractional share shall, but scrip shall not, unless otherwise
provided herein, entitle the holder to exercise voting rights, to receive
dividends, or to participate in any of the assets of the corporation in the
event of liquidation. Such scrip if issued shall become void if not exchanged
for certificates representing full shares within one year after its issue, or
such scrip may be subject to the condition that the shares for which it is
exchangeable may be sold by the corporation and the proceeds thereof distributed
to the holders of such scrip, and the same may be subject to any other
conditions which the Board of Directors may deem advisable.
Section 3. Lost, Stolen, or Destroyed Certificates. The Board of Directors
may direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen, or destroyed, upon the making of an affidavit of the
fact by the person claiming the certificate of stock to be lost, stolen, or
destroyed, and by such other persons as may have knowledge of the pertinent
facts with reference thereto. When authorizing such issue of a new certificate
or certificates, the Board of Directors may, in its discretion, and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen, or destroyed certificate or certificates, or his legal representative,
to make proof of loss, theft, or destruction in such manner as it shall require
and/or give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfer of Shares: Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment, or authority to
transfer, and upon payment of all taxes as may be imposed by law, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its books.
10
<PAGE> 12
Section 5. Registered Shareholders: The corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Texas.
ARTICLE VI
NOTICES
Section 1. Waiver in Writing: Whenever any notice is required to be given
any shareholder or director under the provisions of the law or the Articles of
Incorporation or these Bylaws, a waiver thereof in writing signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
Section 2. Waiver by Attendance: Attendance of a director or a shareholder,
whether in person or by proxy, at any meeting shall constitute a waiver of
notice of such meeting, except where such director or shareholder attends a
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends and Reserves: Dividends upon the shares of the
corporation, subject to the provisions, if any, of the Articles of
Incorporation, may in the exercise of its discretion be declared by the Board of
Directors at any regular or special meeting, to the extent permitted by law.
Dividends may be paid in cash, in property, or in shares of the corporation.
Before payment of any dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors from time
to time in their absolute discretion, think proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the directors shall
think conducive to the interest of the corporation, and the directors may modify
or abolish any such reserve in the manner in which it was created.
Section 2. Fiscal Year: The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
11
<PAGE> 13
Section 3. Seal: The corporate seal shall have inscribed therein the name
of the corporation and shall be in such form as may be approved by the Board of
Directors. Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
Section 4. Amendments to Bylaws: All of the powers of this corporation,
insofar as the same may be lawfully vested by these Bylaws in the Board of
Directors, are hereby conferred upon the Board of Directors of this corporation.
In furtherance and not in limitation of that power, the Board of Directors may
amend or repeal these Bylaws, or adopt new bylaws, unless (i) such power shall
be reserved exclusively to the shareholders in whole or part by the Articles of
Incorporation or the laws of Texas or (ii) the shareholders in amending,
repealing or adopting a particular bylaw shall have expressly provided that the
Board of Directors may not amend or repeal that bylaw. Unless the Articles of
Incorporation or a bylaw adopted by the shareholders shall provide otherwise as
to all or some portion of the corporation's bylaws, the shareholders may amend,
repeal, or adopt (but only by the affirmative vote of the holders of not less
than eighty (80) percent of the then outstanding shares of capital stock of the
corporation entitled to vote with respect thereto) the corporation's bylaws even
though the bylaws may also be amended, repealed, or adopted by the Board of
Directors.
Section 5. Preferred Shareholders: The provisions of Sections 12 and 13 of
Article II and of Sections 2, 3, 4 and 5 of Article III are subject to the
rights of any holders of any class or series of stock having a preference over
the Common Stock of the corporation as to dividends or upon liquidation to elect
directors under specified circumstances.
Section 6. Action With Respect to Securities of Other Corporations: Unless
otherwise directed by the Board of Directors, the chief executive officer shall
have power to vote and otherwise act on behalf of the corporation, in person or
by proxy, at any meeting of shareholders of, or with respect to any action of
shareholders of, any other corporation in which the corporation may hold
securities and otherwise to exercise any and all rights and powers which the
corporation may possess by reason of its ownership of securities in such other
corporation.
ARTICLE VIII
INDEMNIFICATION
Section 1. Right to Indemnification: Subject to the limitations and
conditions as provided in this Article VIII, each person who was or is made a
party to, or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative (hereinafter called a "proceeding"),
12
<PAGE> 14
or any appeal in such a proceeding or any inquiry or investigation that could
lead to such a proceeding, by reason of the fact that he (or a person of whom he
is the legal representative) is or was a director or officer of the corporation
(or while a director or officer of the corporation is or was serving at the
request of the corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, proprietorship, trust,
employee benefit plan, or other enterprise) shall be indemnified by the
corporation to the fullest extent permitted by the Texas Business Corporation
Act, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the corporation
to provide broader indemnification rights than said law permitted the
corporation to provide prior to such amendment) against judgments, penalties
(including excise and similar taxes and punitive damages), fines, settlements
and reasonable expenses (including, without limitation, court costs and
attorneys' fees) actually incurred by such person in connection with such
proceeding, appeal, inquiry or investigation, and indemnification under this
Article VIII shall continue as to a person who has ceased to serve in the
capacity which initially entitled such person to indemnity hereunder; provided,
however, that in no case shall the corporation indemnify any such person (or the
legal representative of any such person) otherwise than for his reasonable
expenses, in respect of any proceeding (i) in which such person shall have been
finally adjudged by a court of competent jurisdiction (after exhaustion of all
appeals therefrom) to be liable on the basis that personal benefit was
improperly received by him, whether or not the benefit resulted from an action
taken in such person's official capacity, or (ii) in which such person shall
have been found liable to the corporation; and provided, further, that the
corporation shall not indemnify any such person for his reasonable expenses
actually incurred in connection with any proceeding in which he shall have been
found liable for willful or intentional misconduct in the performance of his
duty to the corporation. The rights granted pursuant to this Article VIII shall
be deemed contract rights, and no amendment, modification or repeal of this
Article VIII shall have the effect of limiting or denying any such rights with
respect to actions taken or proceedings arising prior to any such amendment,
modification or repeal. it is expressly acknowledged that the indemnification
provided in this Article VIII could involve indemnification for negligence or
under theories of strict liability.
Section 2. Advance Payment: The right to indemnification conferred in this
Article VIII shall include the right to be paid or reimbursed by the corporation
the reasonable expenses incurred by a person of the type entitled to be
indemnified under Section 1 who was, or is threatened to be made a named
defendant or respondent in a proceeding, in advance of the final disposition of
the proceeding and without any determination as to the person's ultimate
entitlement to indemnification; provided, however, that the payment of such
expenses incurred by any such person in advance of the final disposition of a
proceeding shall be made only upon delivery to the corporation of a written
affirmation by such person of his good faith belief that he has met the standard
of conduct necessary for indemnification under this Article VIII and a written
undertaking, by or on behalf of such person, to repay all amounts so advanced if
it shall be ultimately determined that such person is not entitled to be
indemnified under this Article VIII or otherwise.
13
<PAGE> 15
Section 3. Indemnification of Employees and Agents: The corporation, by
adoption of a resolution of the Board of Directors, may indemnify and advance
expenses to an employee or agent of the corporation to the same extent and
subject to the same conditions under which it may indemnify and advance expenses
to directors and officers under this Article VIII; and the corporation may so
indemnify and advance expenses to persons who are not or were not directors,
officers, employees, or agents of the corporation but who are or were serving at
the request of the corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, proprietorship, trust,
employee benefit plan, or other enterprise against any liability asserted
against him and incurred by him in such a capacity or arising out of his status
as such a person to the same extent that it may indemnify and advance expenses
to directors and officers under this Article VIII.
Section 4. Appearance as a Witness: Notwithstanding any other provision of
this Article VIII, the corporation may pay or reimburse expenses incurred by a
director or officer in connection with his appearance as a witness or his other
participation in a proceeding at a time when he is not a named defendant or
respondent in the proceeding.
Section 5. Nonexclusivity of Rights: The right to indemnification and the
advancement and payment of expenses conferred in this Article VIII shall not be
exclusive of any other right which a director or officer or other person
indemnified pursuant to Section 3 of this Article VIII may have or hereafter
acquire under any law (common or statutory), provision of the Articles of
Incorporation or these Bylaws, agreement, vote of shareholders or disinterested
directors or otherwise.
Section 6. Insurance: The corporation may purchase and maintain insurance,
at its expense, to protect itself and any person who is or was serving as a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, proprietorship, employee
benefit plan, trust, or other enterprise against any expense, liability, or
loss, whether or not the corporation would have the power to indemnify such
person against such expense, liability, or loss under this Article VIII.
Section 7. Shareholder Notification: To the extent required by law, any
indemnification of or advance of expenses to a director or officer in accordance
with this Article VIII shall be reported in writing to the shareholders with or
before the notice or waiver of notice of the next shareholders' meeting or with
or before the next submission to shareholders of a consent to action without a
meeting and, in any case, within the 12-month period immediately following the
date of the indemnification or advance.
Section 8. Savings Clause: If this Article VIII or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify and advance expenses to each director,
officer, and other person indemnified pursuant to this Article VIII to the
extent permitted by any applicable portion of this Article VIII that shall not
have been invalidated.
14
<PAGE> 1
EXHIBIT 10.1
Supplemental Agreement No. 8
to
Purchase Agreement No. 1810
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of March 20, 1999, by and
between THE BOEING COMPANY, a Delaware corporation with its principal offices in
Seattle, Washington, (Boeing) and SOUTHWEST AIRLINES CO., a Texas corporation
with its principal offices in City of Dallas, State of Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement No. 1810
dated January 19, 1994, relating to Boeing Model 737-7H4 aircraft (the
Agreement) and;
WHEREAS, Buyer has agreed to exercise the option to purchase six (6)
additional Option Aircraft and to accelerate delivery of those Option Aircraft
from July 2006 (2) and October 2006 four (4) to June 2000 three (3), July 2000
one (1) and August 2000 two (2);
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
- --------------------------------------------------------------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. No. 1810 SA-8-1
K/SWA
<PAGE> 2
1. The Table of Contents of the Agreement is deleted in its entirety and a new
Table of Contents is attached hereto and incorporated into the Agreement by this
reference.
2. Article 1, entitled "Subject Matter of Sale," paragraph 1.1 entitled "The
Aircraft" is deleted in its entirety and replaced by a new paragraph 1.1 revised
to reflect one hundred thirty-six (136) Aircraft. Such new page 1-1 is attached
hereto and incorporated into the Agreement by this reference.
3. Article 2, entitled "Delivery, Title and Risk of Loss," paragraph 2.1,
entitled "Time of Delivery," is deleted in its entirety and replaced by a new
paragraph 2.1 revised to add three (3) Block "L" Aircraft for delivery in June
2000, to add one (1) Block "L" Aircraft for delivery in July 2000 and to add two
(2) Block "L" Aircraft for delivery in August 2000. Such new pages 2-1, 2-2 and
2-3 are attached hereto and incorporated into the Agreement by this reference.
4. Article 3, entitled "Price of Aircraft", paragraph 3.4 entitled "Advance
Payment Base Price," subparagraph 3.4.1 entitled "Advance Payment Base Price" is
revised by adding Advance Payment Base Prices for the Block "L" June 2000, July
2000 and August 2000 Aircraft. Such new pages 3-1, 3-2, 3-3 and 3-4 are attached
hereto and incorporated into the Agreement by this reference.
5. Letter Agreement No. 6-1162-RLL-933R6 entitled "Option Aircraft" is deleted
in its entirety and replaced with Letter Agreement No. 6-1162-RLL-933R7 attached
hereto and incorporated herein by this reference. The third paragraph is revised
to refer to fifty-two (52) Rollover Option Aircraft. Article 2 entitled
"Delivery of Rollover Option Aircraft," paragraph 2.1 is revised to change the
quantity of Rollover Option Aircraft from eighteen (18) to twelve (12) in the
year 2009; paragraph 2.2 and subparagraphs 2.2.1 and 2.2.2 are revised by
changing the quantity of Rollover Option Aircraft from fifty-eight (58) to
fifty-two (52).
P.A. No. 1810 SA-8-2
K/SWA
<PAGE> 3
6. All references in the Letter Agreements associated with Purchase Agreement
No. 1810 shall be deemed to refer to the purchase by Buyer of one hundred
thirty-six (136) Model 737-7H4 Aircraft, sixty-two (62) Model 737-7H4 Option
Aircraft and fifty-two (52) Model 737-7H4 Rollover Option Aircraft, to the
extent such reference is not specifically addressed herein.
7. Concurrent with execution of this Supplemental Agreement, Buyer will pay to
Boeing ***. Such amount reflects the difference in advance payments due as a
result of the exercise of the Option to purchase six Aircraft and the deposits
due for six Rollover Option Aircraft converted to Option Aircraft.
The Agreement will be deemed to be supplemented to the extent herein provided
and as so supplemented will continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /s/ DAWN S. FOSTER By: /s/ LAURA WRIGHT
------------------------ ---------------------
Its: ATTORNEY-IN-FACT Its: TREASURER
----------------------- --------------------
P.A. No. 1810 SA-8-3
K/SWA
<PAGE> 4
PURCHASE AGREEMENT
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
Purchase Agreement Number 1810
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. No. 1810 i
K/SWA SA-8
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page SA
Number Number
------ ------
ARTICLES
- --------
<S> <C> <C> <C>
1. Subject Matter of Sale..........................................1-1 SA-8
2. Delivery, Title and Risk
of Loss.........................................................2-1 SA-8
3. Price of Aircraft...............................................3-1 SA-8
4. Taxes...........................................................4-1
5. Payment.........................................................5-1
6. Excusable Delay.................................................6-1
7. Changes to the Detail
Specification...................................................7-1 SA-1
8. Federal Aviation Requirements and
Certificates and Export License.................................8-1
9. Representatives, Inspection,
Flights and Test Data...........................................9-1
10. Assignment, Resale or Lease....................................10-1
11. Termination for Certain Events.................................11-1
12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance..................................................12-1
13. Buyer Furnished Equipment and
Spare Parts....................................................13-1
14. Contractual Notices and Requests...............................14-1
15. Miscellaneous..................................................15-1
</TABLE>
P.A. No. 1810 ii
K/SWA SA-8
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
EXHIBITS
- --------
<S> <C> <C>
A Aircraft Configuration SA-1
B Product Assurance Document SA-1
C Customer Support Document
D Price Adjustments Due to
Economic Fluctuations - Aircraft
E Buyer Furnished Equipment
Provisions Document
F Defined Terms Document
LETTER AGREEMENTS
- -----------------
1810-1 Waiver of Aircraft Demonstration Flight
</TABLE>
P.A. No. 1810 iii
K/SWA SA-8
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C> <C>
6-1162-RLL-932 Promotional Support
6-1162-RLL-933R7 Option Aircraft SA-8
6-1162-RLL-934R1 Disclosure of Confidential SA-1
Information
6-1162-RLL-935R1 Performance Guarantees SA-1
6-1162-RLL-936R4 Certain Contractual Matters SA-4
6-1162-RLL-937 Alternate Advance Payment Schedule
6-1162-RLL-938 ***
6-1162-RLL-939R1 Certification Flight Test Aircraft SA-1
6-1162-RLL-940R1 Training Matters SA-1
6-1162-RLL-941R1 Other Matters SA-1
6-1162-RLL-942 Open Configuration Matters
6-1162-RLL-943R1 Substitution Rights SA-6
6-1162-RLL-944 Airframe Maintenance Material Cost
Protection Program
6-1162-RLL-945 Comparison of 737-7H4 and 737-3H4
Block Fuel Burn
6-1162-RLL-1855R3 Additional Contractual Matters SA-4
6-1162-RLL-1856 *** SA-1
6-1162-RLL-1857 Service Ready Validation Program SA-1
Field Test
6-1162-RLL-1858R1 Escalation Matters SA-4
</TABLE>
P.A. No. 1810 iv
K/SWA SA-8
<PAGE> 8
TABLE OF CONTENTS CON'T
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C> <C>
6-1162-RLL-2036 Amortization of Costs for
Customer Unique Changes SA-1
6-1162-RLL-2037 Reconciliation of the Aircraft SA-1
Basic Price
6-1162-RLL-2073 Maintenance Training Matters SA-1
</TABLE>
P.A. No. 1810 v
K/SWA SA-8
<PAGE> 9
PURCHASE AGREEMENT NO. 1810
Relating to
BOEING MODEL 737-7H4 AIRCRAFT
--------------------------
This Agreement is entered into as of January 19th 1994, by and between
The Boeing Company, a Delaware corporation, with its principal office in
Seattle, Washington (Boeing), and Southwest Airlines Co., a Texas corporation,
with its principal office in the City of Dallas, State of Texas (Buyer).
Accordingly, Boeing and Buyer agree as follows:
P.A. No. 1810 1-1
K/SWA SA-8
<PAGE> 10
ARTICLE 1. Subject Matter of Sale.
1.1 The Aircraft. Subject to the terms and conditions of this
Agreement, Boeing will manufacture and deliver to Buyer and Buyer will purchase
and accept delivery from Boeing of one hundred thirty-six (136) Boeing Model
737-7H4 aircraft (the Aircraft) manufactured in accordance with Boeing Detail
Specification D6-38808-1, dated October 30, 1996, as described in Exhibit A, as
modified from time to time in accordance with this Agreement (Detail
Specification).
1.2 Additional Goods and Services. In connection with the sale of the
Aircraft, Boeing will also provide to Buyer certain other things under this
Agreement, including data, documents, training and services, all as described in
this Agreement.
1.3 Performance Guarantees. Any performance guarantees applicable to
the Aircraft will be expressly included in this Agreement. Where performance
guarantees are included in this Agreement other than within the Detail
Specification, such guarantees will be treated as being incorporated in the
Detail Specification by this reference.
1.4 Defined Terms. For ease of use, certain terms are treated as
defined terms in this Agreement. Such terms are identified with a capital letter
and set forth and/or defined in Exhibit F.
P.A. No. 1810 1-2
K/SWA
<PAGE> 11
ARTICLE 2. Delivery, Title and Risk of Loss.
2.1 Time of Delivery. The Aircraft will be delivered to Buyer by
Boeing, assembled and ready for flight and Buyer will accept delivery of the
Aircraft, in accordance with the following schedule:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
<S> <C> <C> <C>
Block A Aircraft
----------------
October 1997 Two (2)
November 1997 Two (2)
Block B Aircraft
----------------
January 1998 Two (2)
February 1998 Three (3)
March 1998 Two (2)
April 1998 Two (2)
May 1998 Two (2)
June 1998 One (1)
July 1998 Two (2)
September 1998 Two (2)
Block C Aircraft
----------------
February 1999 Four (4)
May 1999 Four (4)
July 1999 Four (4)
August 1999 One (1)
September 1999 Three (3)
Block D Aircraft
----------------
November 1999 Two (2)
December 1999 One (1)
January 2000 One (1)
March 2000 Four (4)
July 2000 Four (4)
September 2000 Three (3)
Block E Aircraft
----------------
January 2001 Three (3)
March 2001 Three (3)
July 2001 Three (3)
September 2001 Three (3)
</TABLE>
P.A. No. 1810 15-1
K/SWA
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
Block F Aircraft
----------------
October 1998 One (1)
November 1998 Two (2)
December 1998 Two (2)
Block G Aircraft
----------------
March 1999 Two (2)
Block H Aircraft
----------------
June 1999 Two (2)
July 1999 One (1)
August 1999 One (1)
September 1999 Two (2)
October 1999 One (1)
April 2000 Three (3)
October 2000 Three (3)
April 2001 Three (3)
October 2001 Three (3)
Block I Aircraft
----------------
January 2002 Four (4)
March 2002 Four (4)
April 2002 Two (2)
July 2002 Four (4)
October 2002 Four (4)
Block J Aircraft
----------------
January 2003 Four (4)
March 2003 One (1)
Block K Aircraft
----------------
April 2004 Two (2)
July 2004 Three (3)
</TABLE>
P.A. No. 1810 15-2
K/SWA
<PAGE> 13
<TABLE>
<S> <C> <C> <C>
Block L Aircraft
----------------
October 1999 One (1)
November 1999 Two (2)
December 1999 One (1)
June 2000 Three (3)
July 2000 One (1)
August 2000 Two (2)
November 2000 Two (2)
December 2000 One (1)
July 2001 One (1)
September 2001 One (1)
October 2001 One (1)
September 2002 Three (3)
</TABLE>
2.2 Notice of Target Delivery Date. Boeing will give Buyer notice of
the Target Delivery Date of the Aircraft approximately 30 days prior to the
scheduled month of delivery.
2.3 Notice of Delivery Date. If Boeing gives Buyer at least 7 days'
notice of the delivery date of the Aircraft, and an Aircraft delivery is delayed
beyond such delivery date due to the responsibility of Buyer, Buyer will
reimburse Boeing for all costs incurred by Boeing as a result of such delay,
including amounts for storage, insurance, Taxes, preservation or protection of
the Aircraft and interest on payments due.
2.4 Place of Delivery. The Aircraft will be delivered at an airport
facility selected by Boeing in the State of Washington, unless mutually agreed
otherwise.
2.5 Title and Risk of Loss. Title to and risk of loss of an Aircraft
will pass from Boeing to Buyer upon delivery of such Aircraft, but not prior
thereto.
2.6 Bill of Sale. Upon delivery of an Aircraft Boeing will deliver to
Buyer a bill of sale conveying good title to such Aircraft, free of all liens,
claims, charges and encumbrances of every kind whatsoever, and such other
appropriate documents of title as Buyer may reasonably request.
P.A. No. 1810 15-3
K/SWA
<PAGE> 14
ARTICLE 3. Price of Aircraft.
3.1 Definitions.
3.1.1 Special Features are the features incorporated in
Exhibit A which have been selected by Buyer.
3.1.2 Base Aircraft Price is the Aircraft Basic Price
excluding the price of Special Features.
3.1.3 Aircraft Basic Price is comprised of the Base Aircraft
Price and the price of the Special Features.
3.1.4 Economic Price Adjustment is the adjustment to the
Aircraft Basic Price (Base Aircraft and Special Features) as calculated pursuant
to Exhibit D.
3.1.5 Aircraft Price is the total amount Buyer is to pay for
the Aircraft at the time of delivery.
3.2 Aircraft Basic Price ***.
The Aircraft Basic Price, expressed in July 1992 dollars, is
set forth below:
<TABLE>
<CAPTION>
Base Special Aircraft
Aircraft Price Features Basic Price
<S> <C> <C> <C>
Block A, B, C,
D & E Aircraft *** *** ***
Block F & G
Aircraft *** *** ***
Block H
Aircraft *** *** ***
Block I
Aircraft *** *** ***
Block J
Aircraft *** *** ***
Block K
Aircraft *** *** ***
Block L Aircraft
*** *** ***
</TABLE>
3.3 Aircraft Price. The Aircraft Price will be established at the time
of delivery of such Aircraft to Buyer and will be the sum of:
3.3.1 the Aircraft Basic Price, which is *** for the Block A,
B, C, D and E Aircraft, *** for the Block F and G Aircraft, *** for the Block H
Aircraft, *** for the
P.A. No. 1810 15-4
K/SWA
<PAGE> 15
Block I Aircraft, *** for the Block J Aircraft, *** for the Block K Aircraft and
*** for the Block L Aircraft; plus
3.3.2 the Economic Price Adjustments for the Aircraft Basic
Price, as calculated pursuant to the formulas set forth in Exhibit D (Price
Adjustments Due to Economic Fluctuations - Aircraft); plus
3.3.3 other price adjustments made pursuant to this Agreement
or other written agreements executed by Boeing and Buyer.
3.4 Advance Payment Base Price.
3.4.1 Advance Payment Base Price. For advance payment
purposes, the following estimated delivery prices of the Aircraft (Advance
Payment Base Price) have been established, using currently available forecasts
of the escalation factors used by Boeing as of the date of signing this
Agreement. The Advance Payment Base Price of each Aircraft is set forth below:
<TABLE>
<CAPTION>
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
------------------ --------------------
<S> <C> <C>
Block A Aircraft ***
----------------
October 1997 ***
November 1997 ***
Block B Aircraft ***
----------------
January 1998 ***
February 1998 ***
March 1998 ***
April 1998 ***
May 1998 ***
June 1998 ***
July 1998 ***
September 1998 ***
Block C Aircraft ***
----------------
February 1999 ***
May 1999 ***
July 1999 ***
August 1999 ***
September 1999 ***
</TABLE>
P.A. No. 1810 15-5
K/SWA
<PAGE> 16
Block D Aircraft ***
----------------
<TABLE>
<S> <C>
November 1999 ***
December 1999 ***
January 2000 ***
March 2000 ***
July 2000 ***
September 2000 ***
Block E Aircraft ***
----------------
January 2001 ***
March 2001 ***
July 2001 ***
September 2001 ***
Block F Aircraft ***
----------------
October 1998 ***
November 1998 ***
December 1998 ***
Block G Aircraft ***
----------------
March 1999 ***
Block H Aircraft ***
----------------
June 1999 ***
July 1999 ***
August 1999 ***
September 1999 ***
October 1999 ***
April 2000 ***
October 2000 ***
April 2001 ***
October 2001 ***
Block I Aircraft ***
----------------
January 2002 ***
March 2002 ***
April 2002 ***
July 2002 ***
October 2002 ***
Block J Aircraft ***
----------------
January 2003 ***
March 2003 ***
</TABLE>
P.A. No. 1810 15-6
K/SWA
<PAGE> 17
Block K Aircraft ***
--------------------
<TABLE>
<S> <C> <C> <C>
April 2004 ***
July 2004 ***
Block L Aircraft ***
--------------------
October 1999 ***
November 1999 ***
December 1999 ***
June 2000 ***
July 2000 ***
August 2000 ***
November 2000 ***
December 2000 ***
July 2001 ***
September 2001 ***
October 2001 ***
September 2002 ***
</TABLE>
3.4.2 Adjustment of Advance Payment Base Prices - Long-Lead
Aircraft. For Aircraft scheduled for delivery 36 months or more after the date
of this Agreement, the Advance Payment Base Prices appearing in Article 3.4.1
will be used to determine the amount of the first advance payment to be made by
Buyer on the Aircraft. No later than 25 months before the scheduled month of
delivery of each affected Aircraft, Boeing will increase or decrease the Advance
Payment Base Price of such Aircraft as required to reflect the effects of (i)
any adjustments in the Aircraft Basic Price pursuant to this Agreement and (ii)
the then-current forecasted escalation factors used by Boeing. Boeing will
provide the adjusted Advance Payment Base Prices for each affected Aircraft to
Buyer, and the advance payment schedule will be considered amended to substitute
such adjusted Advance Payment Base Prices.
P.A. No. 1810 15-7
K/SWA
<PAGE> 18
6-1162-RLL-933R7
Southwest Airlines Co.
P.O. Box 36611 - Love Field
Dallas, Texas 75235
Subject: Letter Agreement No. 6-1162-RLL-933R7 to
Purchase Agreement No. 1810 -
Option Aircraft
This Letter Agreement amends Purchase Agreement No. 1810 dated as of January 19,
1994 (the Agreement) between The Boeing Company (Boeing) and Southwest Airlines
Co. (Buyer) relating to Model 737-7H4 aircraft (Aircraft).
All terms used and not defined herein will have the same meaning as in the
Agreement.
In consideration of the purchase by Buyer of the Aircraft, Boeing hereby agrees
to manufacture and sell to Buyer sixty-two (62) additional Model 737-7H4
aircraft as described in paragraph 1 of Attachment A hereto (Option Aircraft)
and fifty-two (52) Model 737-7H4 Rollover Option Aircraft (Rollover Option
Aircraft), subject to the terms and conditions set forth below.
1. Delivery of Option Aircraft.
The Option Aircraft will be delivered to Buyer during or before the
months set forth in the following schedule:
- --------------------------------------------------------------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. No. 1810
K/SWA SA-8
<PAGE> 19
Southwest Airlines Co.
6-1162-RLL-933R7 Page 2
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
-------------- -------- --------
<S> <C> <C>
March 2003 Three (3) M
April 2003 Two (2) M
July 2003 Four (4) M
October 2003 Four (4) M
January 2004 Four (4) N
March 2004 One (1) N
April 2004 One (1) N
August 2004 Two (2) N
September 2004 Three (3) N
October 2004 Two (2) N
</TABLE>
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
-------------- -------- ------
<S> <C> <C>
January 2005 Four (4) O
March 2005 Four (4) O
April 2005 Two (2) O
July 2005 Four (4) O
October 2005 Four (4) O
January 2006 Four (4) P
March 2006 Four (4) P
April 2006 Two (2) P
July 2006 Four (4) P
October 2006 Four (4) P
</TABLE>
2. Delivery of Rollover Option Aircraft.
2.1 The Rollover Option Aircraft will be delivered to Buyer during or
before the years set forth in the following schedule:
<TABLE>
<CAPTION>
Option
Year of Number of Aircraft
Delivery Option Aircraft Block
-------- --------------- --------
<S> <C> <C>
2007 Twenty (20) Q
2008 Twenty (20) R
2009 Twelve (12) S
</TABLE>
2.2 The fifty-two (52) Rollover Option Aircraft are offered to Buyer
subject to the following conditions:
P.A. No. 1810
K/SWA SA-8
<PAGE> 20
Southwest Airlines Co.
6-1162-RLL-933R7 Page 3
2.2.1 Buyer can exercise any fifty-two (52) of the sixty-two
(62) Option Aircraft, and will be offered a Rollover Option Aircraft for each
option aircraft exercised up to and including fifty-two (52).
2.2.2 Conversely to Article 2.2.1 above, if Buyer does not
exercise a minimum of fifty-two (52) Option Aircraft, one Rollover Option
Aircraft will be deleted for each Option Aircraft not exercised by Buyer.
2.2.3 When Buyer exercises one or more Option Aircraft, Boeing
will offer the same quantity of Rollover Option Aircraft to Buyer in the years
identified in Article 2.1 above.
2.2.4 The Rollover Option Aircraft delivery month offered by
Boeing to Buyer will be at least 24 months from the Option exercise date of the
corresponding option.
2.2.5 When Boeing offers the Rollover Option Aircraft to
Buyer, Buyer will accept such Rollover Option Aircraft by wire transferring
$100,000 to Boeing. In the event Buyer exercises its option to purchase the
Rollover Option Aircraft, such application will be in accordance with Article
4.1 herein.
3. Price.
3.1 The advance payment base prices of the Option Aircraft set forth
below and in paragraph 2.1 of Attachment A represent the estimated delivery
prices of the Option Aircraft. The Option Aircraft pricing elements and
associated pricing terms and conditions are given in Attachment A.
3.2 Price and escalation provisions for Model 737-7H4 aircraft
delivering after 2002, are not currently available. The estimated Advance
Payment Base Prices shown in paragraph 3.3 below and in paragraph 2.1 of
Attachment A are based on currently available price and escalation provisions.
As price and escalation provisions become available for Model 737-7H4 aircraft
delivering after 2002, such price and escalation provisions will be
appropriately applied to the applicable Option Aircraft.
For additional information relating to price and escalation provisions
applicable to Option Aircraft delivering after 2002 refer to paragraphs 2.2 and
3.2 of Attachment A.
P.A. No. 1810
K/SWA SA-8
<PAGE> 21
Southwest Airlines Co.
6-1162-RLL-933R7 Page 4
3.3 The Advance Payment Base Prices of the Option Aircraft indicated
below do include an amount for special features in addition to those
specifically described in Attachment A but do not include any amount for items
of Buyer Furnished Equipment (BFE). An estimate for typical special features is
*** per Aircraft (expressed in 1992 STE dollars) and for BFE is *** per Aircraft
(expressed in delivery year dollars).
<TABLE>
<CAPTION>
Month and Year Advance Payment Base
of Delivery Price per Option Aircraft
-------------- -------------------------
<S> <C> <C>
Block M Aircraft***
-------------------
March 2003
April 2003
July 2003
October 2003
Block N Aircraft***
-------------------
January 2004
March 2004
April 2004
August 2004
September 2004
October 2004
Block O Aircraft***
-------------------
January 2005
March 2005
April 2005
July 2005
October 2005
Block P Aircraft***
-------------------
January 2006
March 2006
April 2006
July 2006
October 2006
</TABLE>
3.4 The Option Aircraft purchase price will be the applicable basic
price thereof at the time of Option Aircraft delivery adjusted in accordance
with Boeing's Aircraft escalation provisions contained in the definitive
agreement to purchase the Option Aircraft. The purchase price will include the
price for Seller Purchased Equipment (SPE) if Buyer has
P.A. No. 1810
K/SWA SA-8
<PAGE> 22
Southwest Airlines Co.
6-1162-RLL-933R7 Page 5
elected to change Buyer Furnished Equipment (BFE) to SPE.
4. Option Aircraft Payment.
4.1 In consideration of the granting of the option as set forth herein,
on or before the date Boeing and Buyer enter into a definitive agreement to
purchase the Aircraft, Buyer will pay a deposit to Boeing of $100,000 for each
Option Aircraft (Deposit). In the event Buyer exercises its option herein, the
amount of the Deposit will be credited against the first advance payment due for
such Option Aircraft pursuant to the advance payment schedule set forth in
paragraph 3 of Attachment A. The Deposits for the Option Aircraft will be
refunded to Buyer, without interest, if the parties do not enter into a
definitive Agreement for the Aircraft.
In the event that, after the parties enter into a definitive agreement to
purchase the Aircraft, Buyer does not exercise its option to purchase the Option
Aircraft pursuant to the terms and conditions set forth herein, Boeing will be
entitled to retain the Deposits for the Option Aircraft except as provided in
paragraphs 6 herein.
4.2 Advance payments in the amount of 30% of the advance payment base
price will be payable on the Option Aircraft in accordance with paragraph 3 of
Attachment A. The remainder of the Option Aircraft purchase price is due at the
time of delivery of the Option Aircraft.
5. Option Exercise.
5.1 To exercise its Option, Buyer will give written or telegraphic
notice thereof to Boeing on or before eighteen (18) months prior to the first
day of the delivery month of each Option Aircraft.
In such notice Buyer will select the Option Model type, and the applicable
delivery positions.
5.2 It is understood and agreed that Boeing may accelerate the option
exercise dates specified above if Boeing must make production decisions which
are dependent on Buyer's decision to buy the Option Aircraft. If Boeing elects
to accelerate the option exercise dates, Boeing will do so by giving written or
telegraphic notice thereof to Buyer. Such notice will specify the revised option
exercise dates, which will not be earlier than 30 days after the date of
P.A. No. 1810
K/SWA SA-8
<PAGE> 23
Southwest Airlines Co.
6-1162-RLL-933R7 Page 6
transmittal of such notice, and the Option Aircraft delivery positions affected
by such revision. If Buyer fails to exercise its option for any Option Aircraft
affected by such revised dates, the Deposit applicable to such Option Aircraft
will be promptly refunded, with interest, to Buyer. The interest rate for
calculation of the interest associated with such refund is the rate of two
percent (2%) below the Citibank base rate in effect from time to time during the
period the option deposit is held by Boeing.
6. Contract Terms.
It is understood that Boeing and Buyer will use their best efforts to
enter into a definitive agreement for the Option Aircraft within thirty (30)
days after Buyer exercises an option to purchase Option Aircraft pursuant to
paragraph 5 covering the detailed terms and conditions for the sale of such
Option Aircraft.
Such definitive agreement will include the terms and conditions contained herein
together with the terms and conditions, not inconsistent herewith, contained in
Boeing's then-current standard form of purchase agreement for the sale of Model
737-700 aircraft in effect as of the date of option exercise and such additional
terms and conditions as may be mutually agreed upon. In the event the parties
have not entered into such an agreement within the time period contemplated
herein, either party may, exercisable by written or telegraphic notice given to
the other within thirty (30) days after such period, terminate the purchase of
such Option Aircraft.
7. Termination of Option to Purchase.
Either Boeing or Buyer may terminate the option to purchase an Option
Aircraft if any of the following events are not accomplished by the respective
dates contemplated in this letter agreement, or in the Agreement, as the case
may be:
(i) termination of the purchase of the Aircraft under the Agreement for
any reason;
(ii) payment by Buyer of the Deposit with respect to an Option Aircraft
pursuant to paragraph 4.1 herein;
(iii) exercise of an option to purchase an Option Aircraft pursuant to
the terms hereof. Any termination of an option to purchase by Boeing which is
based on the termination of the purchase of
P.A. No. 1810
K/SWA SA-8
<PAGE> 24
Southwest Airlines Co.
6-1162-RLL-933R7 Page 7
Aircraft under the Agreement will be on a one-for-one basis, for each Aircraft
so terminated.
Any cancellation of an option to purchase which is based on failure to make the
required Deposit or to exercise the option to purchase shall only apply to the
Option Aircraft so canceled.
Termination of an option to purchase provided by this letter agreement will be
caused by either party giving written notice to the other within 10 days after
the applicable date. Upon receipt of such notice, all rights and obligations of
the parties with respect to an Option Aircraft for which the option to purchase
has been terminate will thereupon terminate.
If termination is result of a revision of an option exercise date by Boeing
pursuant to paragraph 5.2, Boeing will promptly refund to Buyer, without
interest, any payments received from Buyer, including the Deposit, with respect
to the Option Aircraft for which the option is terminated. If termination is for
any other reason, Boeing will promptly refund to Buyer, without interest, any
payments received from Buyer with respect to the affected Option Aircraft,
except the Deposit, which Buyer may apply to any model Boeing aircraft purchased
by Buyer from Boeing at a future date.
8. Confidential Treatment. Buyer understands that certain commercial and
financial information contained in this Letter Agreement including any
attachments hereto is considered by Boeing as confidential. Buyer agrees that it
will treat this Letter Agreement and the
P.A. No. 1810
K/SWA SA-8
<PAGE> 25
Southwest Airlines Co.
6-1162-RLL-933R7 Page 8
information contained herein as confidential and will not, without the prior
written consent of Boeing, disclose this Letter Agreement or any information
contained herein to any other person or entity except as provided in Letter
Agreement No. 6-1162-RLL-934R1.
Very truly yours,
THE BOEING COMPANY
By: /s/ DAWN S. FOSTER
------------------------
Its: ATTORNEY-IN-FACT
------------------------
ACCEPTED AND AGREED TO this
date: March 30, 1999
SOUTHWEST AIRLINES CO.
By: /s/ LAURA WRIGHT
------------------------
Its: TREASURER
------------------------
Attachments
P.A. No. 1810
K/SWA SA-8
<PAGE> 26
Attachment A to
6-1162-RLL-933R7
Page 1
Model 737-7H4 Aircraft
1. Option Aircraft Description and Changes.
1.1 Aircraft Description. The Option Aircraft is described by Boeing
Detail Specification D6-38808-1, Dated October 30 ,1996.
1.2 Changes. The Detail Specification will be revised to include:
(1) Changes applicable to the basic Model 737-700 aircraft
which are developed by Boeing between the date of the Detail Specification and
the signing of a definitive agreement to purchase the Option Aircraft.
(2) Changes mutually agreed upon.
(3) Changes required to obtain a Standard Certificate of
Airworthiness.
(4) To provide sufficient Option Aircraft manufacturing and
procurement lead time it is necessary for Boeing and Buyer to reach final
agreement on the Option Aircraft configuration, including BFE/SPE vendor
selection fifteen (15) months prior to delivery of each Option Aircraft. If such
items are not resolved by the indicated dates, Boeing reserves the right to
amend this letter agreement:
(i) to adjust the scheduled delivery of the Option
Aircraft to a later time period and,
(ii) to make such other changes as are appropriate
and consistent with the revised Option Aircraft deliveries.
1.3 Effect of Changes. Changes to the Detail Specification incorporated
pursuant to the provisions of the clauses above will include the effects of such
changes upon Option Aircraft weight, balance, design and performance.
Performance guarantees for the Option Aircraft which are mutually acceptable to
the parties will be included in the definitive agreement for the Option
Aircraft.
P.A. No. 1810
K/SWA SA-8
<PAGE> 27
Attachment A to
6-1162-RLL-933R7
Page 2
2. Price Description
2.1 Price Elements Per Aircraft
<TABLE>
<CAPTION>
1 2 3
- - -
AIRCRAFT & ADV. PMT.
AIRCRAFT ESTIMATED SPECIAL ESTIMATED BASE PRICE
DELIVERY FEATURES PRICE ESTIMATED ESCALATION (Elements)
MO. & YR. (JULY 1992$) ESCALATION SHARING 1 + 2 + 3
- --------- ----------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BLOCK M
- -------
March 2003 *** *** -*** ***
April 2003 *** *** -*** ***
July 2003 *** *** -*** ***
October 2003 *** *** -*** ***
BLOCK N
- -------
January 2004 *** *** -*** ***
March 2004 *** *** -*** ***
April 2004 *** *** -*** ***
August 2004 *** *** -*** ***
September 2004 *** *** -*** ***
October 2004 *** *** -*** ***
BLOCK O
- -------
January 2005 *** *** -*** ***
March 2005 *** *** -*** ***
April 2005 *** *** -*** ***
July 2005 *** *** -*** ***
October 2005 *** *** -*** ***
BLOCK P
- -------
January 2006 *** *** -*** ***
March 2006 *** *** -*** ***
April 2006 *** *** -*** ***
July 2006 *** *** -*** ***
October 2006 *** *** -*** ***
</TABLE>
P.A. No. 1810
K/SWA SA-8
<PAGE> 28
Attachment A to
6-1162-RLL-933R7
Page 3
2. Price Description. (Continued)
2.2 Price Adjustments For Option Aircraft Delivering From
March 2003 through December 2009.
2.2.1 Special Features. The price for Special Features
incorporated in the Option Aircraft Detail Specification will be adjusted to
Boeing's then-current prices for such features as of the date of execution of
the definitive agreement for the Option Aircraft.
2.2.2 Escalation Adjustments. For escalation provisions
applicable to Option Aircraft delivering after 2002, see paragraph 2.2.6 below.
2.2.3 Base Price Adjustments for FAA Changes. The Aircraft
Basic Price of the Option Aircraft will be adjusted for any FAA mandated changes
incorporated into the Aircraft.
2.2.4 Price Adjustments for Changes. Boeing may adjust the
Aircraft Basic Price and the Advance Payment Base Price for any changes mutually
agreed upon subsequent to the date that Buyer and Boeing enter into a definitive
agreement for the Option Aircraft.
2.2.5 Base Price Adjustments. The Aircraft Basic Price of the
Option Aircraft will be adjusted to Boeing's then-current prices as of the date
of execution of the definitive agreement for the Option Aircraft in accordance
with the agreement reached below. The Aircraft Basic Price starting point for
options delivering in 2003 is *** (July 1992 STE), for options delivering in
2004 is *** (July 1992 STE), for options delivering in 2005 through 2009 is ***
(July 1992 STE). Such Aircraft Basic Price may increase in accordance with
paragraphs 2.2.1, 2.2.2, 2.2.3 and 2.2.4. For any other changes to the Aircraft
Basic Price, Boeing may increase the Aircraft Basic Price by a maximum of ***
(July 1992 STE) for Aircraft delivering in 2005 and by a maximum of *** (July
1992 STE) per year or portion thereof starting in January 2006.
2.2.6 Prices for Long Lead Time Aircraft. Boeing has not
established escalation provisions for Model 737-700 aircraft for delivery 2003
and after. Such escalation provisions (i) will be incorporated into the Option
Aircraft definitive agreement when such information is available and (ii) will
be the then-current escalation provisions applicable to the same model aircraft
and engines delivering in the same time period as the Option Aircraft. The
resulting revisions to the definitive agreement will
P.A. No. 1810
K/SWA SA-8
<PAGE> 29
Attachment A to
6-1162-RLL-933R7
Page 4
include but not be limited to, adjustment of the Aircraft Basic Price of the
Option Aircraft, the Advance Payment Base Price, the Aircraft escalation
provisions and the advance payment amounts due on the Option Aircraft.
2.2.7 BFE to SPE. An estimate of the total price for items of
Buyer Furnished Equipment (BFE) changed to Seller Purchased Equipment (SPE)
pursuant to the Configuration Specification is included in the Option Aircraft
price build-up. The purchase price of the Option Aircraft will be adjusted by
the price charged to Boeing for such items plus 10% of such price. If all BFE
except developmental avionics is converted to SPE, Boeing will waive the 10%
fee.
3. Advance Payment Schedules, Prices and Adjustments.
3.1 Buyer will pay to Boeing advance payments for the Option Aircraft
on the dates and in the amounts determined below.
P.A. No. 1810
K/SWA SA-8
<PAGE> 30
Attachment A to
6-1162-RLL-933R7
Page 2
<TABLE>
<CAPTION>
Amount Due per Aircraft
-----------------------
(Percentage times
Due Date of Payment Advance Payment Base Price)
- -------------------
<S> <C>
Deposit 100,000 (if applicable)
18 months prior to the first 15% (less the
day of the scheduled delivery Deposit if any)
month of the Aircraft
12 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
9 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
---
Total 30%
</TABLE>
Any advance payments that would be past due as of the date of signing the
definitive purchase agreement for the Option Aircraft in accordance with the
above schedule are due and payable on such date.
3.2 Option Aircraft advance payment base prices will be increased or
decreased, as appropriate, at the time of signing of the definitive purchase
agreement for the Option Aircraft, using the then-current forecasted aircraft
escalation factors used by Boeing, to determine the amount of the advance
payments to be made by Buyer on the Option Aircraft.
P.A. No. 1810
K/SWA SA-8
<PAGE> 31
Attachment B to
6-1162-RLL-933R7
Page 1
PRICE ADJUSTMENT DUE TO
ECONOMIC FLUCTUATIONS
AIRCRAFT PRICE ADJUSTMENT
(July 1992 Base Price)
1. Formula.
The Aircraft Price Adjustment will be determined at the time of
Aircraft delivery in accordance with the following formula:
Pa = (P)(L + M - 1)
Where:
Pa = Aircraft Price Adjustment.
L = .65 x ECI
-----
116.2
M = .35 x ICI
-----
115.9
P = Aircraft Basic Price (as set forth in Article 3.2 of this
Agreement).
ECI = A value using the "Employment Cost Index for workers in aerospace
manufacturing" (aircraft manufacturing, standard industrial
classification code 3721, compensation, base month and year June
1989 = 100), as released by the Bureau of Labor Statistics, U.S.
Department of Labor on a quarterly basis for the months of March,
June, September and December, calculated as follows: A three-month
arithmetic average value (expressed as a decimal and rounded to the
nearest tenth) will be determined using the months set forth in the
table below for the applicable Aircraft, with the released
Employment Cost Index value described above for the month of March
also being used for the months of January and February; the value
for June also used for April and May; the value for September also
used for July and August; and the value for December also used for
October and November.
P.A. No. 1810
K/SWA SA-8
<PAGE> 32
Attachment B to
6-1162-RLL-933R7
Page 2
ICI = The three-month arithmetic average of the released monthly values
for the Industrial Commodities Index as set forth in the "Producer
Prices and Price Index" (Base Year 1982 = 100) as released by the
Bureau of Labor Statistics, U.S. Department of Labor values
(expressed as a decimal and rounded to the nearest tenth) for the
months set forth in the table below for the applicable Aircraft.
In determining the value of L, the ratio of ECI divided by 116.2 will
be expressed as a decimal rounded to the nearest ten-thousandth and then
multiplied by .65 with the resulting value also expressed as a decimal and
rounded to the nearest ten-thousandth.
In determining the value of M, the ratio of ICI divided by 115.9 will
be expressed as a decimal rounded to the nearest ten-thousandth and then
multiplied by .35 with the resulting value also expressed as a decimal and
rounded to the nearest ten-thousandth.
<TABLE>
<CAPTION>
Months to be Utilized
Month of Scheduled in Determining the
Aircraft Delivery Value of ECI and ICI
- ----------------- -------------------------
<S> <C>
January June B, July B, Aug. B
February July B, Aug. B, Sept. B
March Aug. B, Sept. B, Oct. B
April Sept. B, Oct. B, Nov. B
May Oct. B, Nov. B, Dec. B
June Nov. B, Dec. B, Jan. D
July Dec. B, Jan. D, Feb. D
August Jan. D, Feb. D, Mar. D
September Feb. D, Mar. D, Apr. D
October Mar. D, Apr. D, May D
November Apr. D, May D, June D
December May D, June D, July D
</TABLE>
The following definitions of B and D will apply:
B = The calendar year before the year in which the
scheduled month of delivery as set forth in Paragraph 1
occurs.
D = The calendar year during which the scheduled month of
delivery as set forth in Paragraph 1 occurs.
P.A. No. 1810
K/SWA SA-8
<PAGE> 33
Attachment B to
6-1162-RLL-933R7
Page 3
2. If at the time of delivery of an Aircraft Boeing is unable to determine the
Aircraft Price Adjustment because the applicable values to be used to determine
the ECI and ICI have not been released by the Bureau of Labor Statistics, then:
2.1 The Aircraft Price Adjustment, to be used at the time of delivery
of each of the Aircraft, will be determined by utilizing the escalation
provisions set forth above. The values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Aircraft Price Adjustment. If no values have been released for an
applicable month, the provisions set forth in Paragraph 2.2 below will apply. If
prior to delivery of an Aircraft the U.S. Department of Labor changes the base
year for determination of the ECI or ICI values as defined above, such rebased
values will be incorporated in the Aircraft Price Adjustment calculation. The
payment by Buyer to Boeing of the amount of the Purchase Price for such
Aircraft, as determined at the time of Aircraft delivery, will be deemed to be
the payment for such Aircraft required at the delivery thereof.
2.2 If prior to delivery of an Aircraft the U.S. Department of Labor
substantially revises the methodology used for the determination of the values
to be used to determine the ECI and ICI values (in contrast to benchmark
adjustments or other corrections of previously released values), or for any
reason has not released values needed to determine the applicable Aircraft Price
Adjustment, the parties will, prior to delivery of any such Aircraft, select a
substitute for such values from data published by the Bureau of Labor Statistics
or other similar data reported by non-governmental United States organizations,
such substitute to lead in application to the same adjustment result, insofar as
possible, as would have been achieved by continuing the use of the original
values as they may have fluctuated during the applicable time period.
Appropriate revision of the formula will be made as required to reflect any
substitute values. However, if within 24 months from delivery of the Aircraft
the Bureau of Labor Statistics should resume releasing values for the months
needed to determine the Aircraft Price Adjustment, such values will be used to
determine any increase or decrease in the Aircraft Price Adjustment for the
Aircraft from that determined at the time of delivery of such Aircraft.
P.A. No. 1810
K/SWA SA-8
<PAGE> 34
Attachment B to
6-1162-RLL-933R7
Page 4
2.3 In the event escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States Government,
the parties agree, to the extent they may lawfully do so, to equitably adjust
the Purchase Price of any affected Aircraft to reflect an allowance for
increases or decreases in labor compensation and material costs occurring since
February, 1992, which is consistent with the applicable provisions of paragraph
1 of this Exhibit D.
3. For the calculations herein, the values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Aircraft Price Adjustment.
Note: Any rounding of a number, as required under this Exhibit D with respect
to escalation of the airframe price, will be accomplished as follows:
if the first digit of the portion to be dropped from the number to be
rounded is five or greater, the preceding digit will be raised to the
next higher number.
P.A. No. 1810
K/SWA SA-8
<PAGE> 35
EXHIBIT 10.1
Supplemental Agreement No. 9
to
Purchase Agreement No. 1810
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of April 29, 1999, by and
between THE BOEING COMPANY, a Delaware corporation with its principal offices in
Seattle, Washington, (Boeing) and SOUTHWEST AIRLINES CO., a Texas corporation
with its principal offices in City of Dallas, State of Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement No. 1810
dated January 19, 1994, relating to Boeing Model 737-7H4 aircraft (the
Agreement) and;
WHEREAS, Buyer has agreed to exercise the option to purchase six (6)
additional Option Aircraft and to accelerate delivery of those Option Aircraft
from July 2006 (2) and October 2006 four (4) to September 2000 (1), October 2000
(1), November 2000 (1), December 2000 (1), January 2001 (1) and February 2001
(1);
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
- --------------------------------------------------------------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. No. 1810 SA-9-1
K/SWA
<PAGE> 36
1. The Table of Contents of the Agreement is deleted in its entirety and a new
Table of Contents is attached hereto and incorporated into the Agreement by this
reference.
2. Article 1, entitled "Subject Matter of Sale," paragraph 1.1 entitled "The
Aircraft" is deleted in its entirety and replaced by a new paragraph 1.1 revised
to reflect one hundred forty-two (142) Aircraft. Such new page 1-1 is attached
hereto and incorporated into the Agreement by this reference.
3. Article 2, entitled "Delivery, Title and Risk of Loss," paragraph 2.1,
entitled "Time of Delivery," is deleted in its entirety and replaced by a new
paragraph 2.1 revised to add six (6) Block "L" Aircraft for delivery in
September 2000 (1), October 2000 (1), November 2000 (1), December 2000 (1),
January 2001 (1) and February 2001 (1). Such new pages 2-1, 2-2 and 2-3 are
attached hereto and incorporated into the Agreement by this reference.
4. Article 3, entitled "Price of Aircraft", paragraph 3.4 entitled "Advance
Payment Base Price," subparagraph 3.4.1 entitled "Advance Payment Base Price"
is revised by adding Advance Payment Base Prices for the exercised Block "L"
September 2000, October 2000, November 2000, December 2000, January 2001 and
February 2001 Aircraft, and by revising the Advance Payment Base Prices to
reflect current escalation factors as of the date of this Supplemental
Agreement for the Block "H" April 2001 and October 2001 Aircraft and the Block
"L" November 2000, December 2000, July 2001, September 2001 and October 2001
Aircraft. Such new pages 3-1, 3-2, 3-3 and 3-4 are attached hereto and
incorporated into the Agreement by this reference.
5. Letter Agreement No. 6-1162-RLL-933R7 entitled "Option Aircraft" is deleted
in its entirety and replaced with Letter Agreement No. 6-1162-RLL-933R8 attached
hereto and incorporated herein by this reference. The third paragraph is revised
to refer to forty-six (46) Rollover Option Aircraft. Article 2 entitled
"Delivery of Rollover Option Aircraft," paragraph 2.1 is revised to change the
quantity of Rollover Option Aircraft from twelve (12) to six (6) in the year
2009; paragraph 2.2 and subparagraphs 2.2.1 and 2.2.2 are revised by changing
the quantity of Rollover Option Aircraft from fifty-two (52) to forty-six (46).
6. All references in the Letter Agreements associated with Purchase Agreement
No. 1810 shall be deemed to refer to
P.A. No. 1810 SA-9-2
K/SWA
<PAGE> 37
the purchase by Buyer of one hundred forty-two (142) Model 737-7H4 Aircraft,
sixty-two (62) Model 737-7H4 Option Aircraft and forty-six (46) Model 737-7H4
Rollover Option Aircraft, to the extent such reference is not specifically
addressed herein.
P.A. No. 1810 SA-9-3
K/SWA
<PAGE> 38
7. Concurrent with execution of this Supplemental Agreement, Buyer will pay to $
***. Such amount reflects the difference in advance payments due as a result of
the exercise of the Option to purchase six Aircraft, the revision in Advance
Payment Base Price for Aircraft as described above and the deposits due for six
Rollover Option Aircraft converted to Option Aircraft.
The Agreement will be deemed to be supplemented to the extent herein provided
and as so supplemented will continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST aIRLINES cO.
By: /S/ DAWN S. FOSTER By: /S/ LAURA WRIGHT
------------------------ -------------------------------------
Its: ATTORNEY-IN-FACT Its: TREASURER
----------------------- ------------------------------------
P.A. No. 1810 SA-9-4
K/SWA
<PAGE> 39
PURCHASE AGREEMENT
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
Purchase Agreement Number 1810
- --------------------------------------------------------------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. No. 1810 15-1
K/SWA
<PAGE> 40
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page SA
Number Number
------ ------
ARTICLES
- --------
<S> <C> <C>
1. Subject Matter of Sale........................................ 1-1 SA-9
2. Delivery, Title and Risk
of Loss....................................................... 2-1 SA-9
3. Price of Aircraft............................................. 3-1 SA-9
4. Taxes......................................................... 4-1
5. Payment....................................................... 5-1
6. Excusable Delay............................................... 6-1
7. Changes to the Detail
Specification................................................. 7-1 SA-1
8. Federal Aviation Requirements and
Certificates and Export License............................... 8-1
9. Representatives, Inspection,
Flights and Test Data......................................... 9-1
10. Assignment, Resale or Lease................................... 10-1
11. Termination for Certain Events................................ 11-1
12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance................................................. 12-1
13. Buyer Furnished Equipment and
Spare Parts................................................... 13-1
14. Contractual Notices and Requests.............................. 14-1
15. Miscellaneous................................................. 15-1
</TABLE>
P.A. No. 1810 15-2
K/SWA
<PAGE> 41
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
EXHIBITS
- --------
<S> <C> <C>
A Aircraft Configuration SA-1
B Product Assurance Document SA-1
C Customer Support Document
D Price Adjustments Due to
Economic Fluctuations - Aircraft
E Buyer Furnished Equipment
Provisions Document
F Defined Terms Document
</TABLE>
LETTER AGREEMENTS
1810-1 Waiver of Aircraft Demonstration Flight
P.A. No. 1810 15-3
K/SWA
<PAGE> 42
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C>
6-1162-RLL-932 Promotional Support
6-1162-RLL-933R8 Option Aircraft SA-9
6-1162-RLL-934R1 Disclosure of Confidential SA-1
Information
6-1162-RLL-935R1 Performance Guarantees SA-1
6-1162-RLL-936R4 Certain Contractual Matters SA-4
6-1162-RLL-937 Alternate Advance Payment Schedule
6-1162-RLL-938 ***
6-1162-RLL-939R1 Certification Flight Test Aircraft SA-1
6-1162-RLL-940R1 Training Matters SA-1
6-1162-RLL-941R1 Other Matters SA-1
6-1162-RLL-942 Open Configuration Matters
6-1162-RLL-943R1 Substitution Rights SA-6
6-1162-RLL-944 Airframe Maintenance Material Cost
Protection Program
6-1162-RLL-945 Comparison of 737-7H4 and 737-3H4
Block Fuel Burn
6-1162-RLL-1855R3 Additional Contractual Matters SA-4
6-1162-RLL-1856 *** SA-1
6-1162-RLL-1857 Service Ready Validation Program SA-1
Field Test
6-1162-RLL-1858R1 Escalation Matters SA-4
</TABLE>
P.A. No. 1810 15-4
K/SWA
<PAGE> 43
TABLE OF CONTENTS CON'T
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C>
6-1162-RLL-2036 Amortization of Costs for
Customer Unique Changes SA-1
6-1162-RLL-2037 Reconciliation of the Aircraft SA-1
Basic Price
6-1162-RLL-2073 Maintenance Training Matters SA-1
</TABLE>
P.A. No. 1810 15-5
K/SWA
<PAGE> 44
PURCHASE AGREEMENT NO. 1810
Relating to
BOEING MODEL 737-7H4 AIRCRAFT
-----------------------------
This Agreement is entered into as of January 19th 1994, by and between
The Boeing Company, a Delaware corporation, with its principal office in
Seattle, Washington (Boeing), and Southwest Airlines Co., a Texas corporation,
with its principal office in the City of Dallas, State of Texas (Buyer).
Accordingly, Boeing and Buyer agree as follows:
P.A. No. 1810 15-6
K/SWA
<PAGE> 45
ARTICLE 1. Subject Matter of Sale.
1.1 The Aircraft. Subject to the terms and conditions of this
Agreement, Boeing will manufacture and deliver to Buyer and Buyer will purchase
and accept delivery from Boeing of one hundred forty-two (142) Boeing Model
737-7H4 aircraft (the Aircraft) manufactured in accordance with Boeing Detail
Specification D6-38808-1, dated October 30, 1996, as described in Exhibit A, as
modified from time to time in accordance with this Agreement (Detail
Specification).
1.2 Additional Goods and Services. In connection with the sale of the
Aircraft, Boeing will also provide to Buyer certain other things under this
Agreement, including data, documents, training and services, all as described in
this Agreement.
1.3 Performance Guarantees. Any performance guarantees applicable to
the Aircraft will be expressly included in this Agreement. Where performance
guarantees are included in this Agreement other than within the Detail
Specification, such guarantees will be treated as being incorporated in the
Detail Specification by this reference.
1.4 Defined Terms. For ease of use, certain terms are treated as
defined terms in this Agreement. Such terms are identified with a capital letter
and set forth and/or defined in Exhibit F.
P.A. No. 1810 15-7
K/SWA
<PAGE> 46
ARTICLE 2. Delivery, Title and Risk of Loss.
2.1 Time of Delivery. The Aircraft will be delivered to Buyer by
Boeing, assembled and ready for flight and Buyer will accept delivery of the
Aircraft, in accordance with the following schedule:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
----------- --------------------
Block A Aircraft
----------------
<S> <C>
October 1997 Two (2)
November 1997 Two (2)
</TABLE>
<TABLE>
<CAPTION>
Block B Aircraft
----------------
<S> <C>
January 1998 Two (2)
February 1998 Three (3)
March 1998 Two (2)
April 1998 Two (2)
May 1998 Two (2)
June 1998 One (1)
July 1998 Two (2)
September 1998 Two (2)
</TABLE>
<TABLE>
<CAPTION>
Block C Aircraft
----------------
<S> <C>
February 1999 Four (4)
May 1999 Four (4)
July 1999 Four (4)
August 1999 One (1)
September 1999 Three (3)
</TABLE>
<TABLE>
<CAPTION>
Block D Aircraft
----------------
<S> <C>
November 1999 Two (2)
December 1999 One (1)
January 2000 One (1)
March 2000 Four (4)
July 2000 Four (4)
September 2000 Three (3)
</TABLE>
<TABLE>
<CAPTION>
Block E Aircraft
----------------
<S> <C>
January 2001 Three (3)
March 2001 Three (3)
July 2001 Three (3)
September 2001 Three (3)
</TABLE>
P.A. No. 1810 15-8
K/SWA
<PAGE> 47
<TABLE>
<CAPTION>
Block F Aircraft
----------------
<S> <C>
October 1998 One (1)
November 1998 Two (2)
December 1998 Two (2)
</TABLE>
<TABLE>
<CAPTION>
Block G Aircraft
----------------
<S> <C>
March 1999 Two (2)
</TABLE>
<TABLE>
<CAPTION>
Block H Aircraft
----------------
<S> <C>
June 1999 Two (2)
July 1999 One (1)
August 1999 One (1)
September 1999 Two (2)
October 1999 One (1)
April 2000 Three (3)
October 2000 Three (3)
April 2001 Three (3)
October 2001 Three (3)
</TABLE>
<TABLE>
<CAPTION>
Block I Aircraft
----------------
<S> <C>
January 2002 Four (4)
March 2002 Four (4)
April 2002 Two (2)
July 2002 Four (4)
October 2002 Four (4)
</TABLE>
<TABLE>
<CAPTION>
Block J Aircraft
----------------
<S> <C>
January 2003 Four (4)
March 2003 One (1)
</TABLE>
<TABLE>
<CAPTION>
Block K Aircraft
----------------
<S> <C>
April 2004 Two (2)
July 2004 Three (3)
</TABLE>
<TABLE>
<CAPTION>
Block L Aircraft
----------------
<S> <C>
October 1999 One (1)
November 1999 Two (2)
December 1999 One (1)
June 2000 Three (3)
July 2000 One (1)
August 2000 Two (2)
September 2000 One (1)
October 2000 One (1)
November 2000 Three (3)
December 2000 Two (2)
January 2001 One (1)
February 2001 One (1)
July 2001 One (1)
September 2001 One (1)
October 2001 One (1)
September 2002 Three (3)
</TABLE>
P.A. No. 1810 15-9
K/SWA
<PAGE> 48
2.2 Notice of Target Delivery Date. Boeing will give Buyer notice of
the Target Delivery Date of the Aircraft approximately 30 days prior to the
scheduled month of delivery.
2.3 Notice of Delivery Date. If Boeing gives Buyer at least 7 days'
notice of the delivery date of the Aircraft, and an Aircraft delivery is delayed
beyond such delivery date due to the responsibility of Buyer, Buyer will
reimburse Boeing for all costs incurred by Boeing as a result of such delay,
including amounts for storage, insurance, Taxes, preservation or protection of
the Aircraft and interest on payments due.
2.4 Place of Delivery. The Aircraft will be delivered at an airport
facility selected by Boeing in the State of Washington, unless mutually agreed
otherwise.
2.5 Title and Risk of Loss. Title to and risk of loss of an Aircraft
will pass from Boeing to Buyer upon delivery of such Aircraft, but not prior
thereto.
2.6 Bill of Sale. Upon delivery of an Aircraft Boeing will deliver to
Buyer a bill of sale conveying good title to such Aircraft, free of all liens,
claims, charges and encumbrances of every kind whatsoever, and such other
appropriate documents of title as Buyer may reasonably request.
P.A. No. 1810 15-10
K/SWA
<PAGE> 49
ARTICLE 3. Price of Aircraft.
3.1 Definitions.
3.1.1 Special Features are the features incorporated in
Exhibit A which have been selected by Buyer.
3.1.2 Base Aircraft Price is the Aircraft Basic Price
excluding the price of Special Features.
3.1.3 Aircraft Basic Price is comprised of the Base Aircraft
Price and the price of the Special Features.
3.1.4 Economic Price Adjustment is the adjustment to the
Aircraft Basic Price (Base Aircraft and Special Features) as calculated pursuant
to Exhibit D.
3.1.5 Aircraft Price is the total amount Buyer is to pay for
the Aircraft at the time of delivery.
3.2 Aircraft Basic Price.
The Aircraft Basic Price, expressed in July 1992 dollars, is
set forth below:
<TABLE>
<CAPTION>
Base Special Aircraft
Aircraft Price Features Basic Price
<S> <C> <C> <C>
Block A, B, C,
D & E Aircraft $ *** $ *** $ ***
Block F & G
Aircraft $ *** $ *** $ ***
Block H
Aircraft $ *** $ *** $ ***
Block I
Aircraft $ *** $ *** $ ***
Block J
Aircraft $ *** $ *** $ ***
Block K
Aircraft $ *** $ *** $ ***
Block L Aircraft
$ *** $ *** $ ***
</TABLE>
3.3 Aircraft Price. The Aircraft Price will be established at the time
of delivery of such Aircraft to Buyer and will be the sum of:
3.3.1 the Aircraft Basic Price, which is *** for the Block A,
B, C, D and E Aircraft, *** for the Block F and G Aircraft, *** for the Block H
Aircraft, *** for the
P.A. No. 1810 15-11
K/SWA
<PAGE> 50
Block I Aircraft, *** for the Block J Aircraft, *** for the Block K Aircraft and
*** for the Block L Aircraft; plus
3.3.2 the Economic Price Adjustments for the Aircraft Basic
Price, as calculated pursuant to the formulas set forth in Exhibit D (Price
Adjustments Due to Economic Fluctuations - Aircraft); plus 3.3.3 other price
adjustments made pursuant to this Agreement or other written agreements executed
by Boeing and Buyer.
3.4 Advance Payment Base Price.
3.4.1 Advance Payment Base Price. For advance payment
purposes, the following estimated delivery prices of the Aircraft (Advance
Payment Base Price) have been established, using currently available forecasts
of the escalation factors used by Boeing as of the date of signing this
Agreement. The Advance Payment Base Price of each Aircraft is set forth below:
<TABLE>
<CAPTION>
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
- ------------------ ------------------
Block A Aircraft ***
----------------
<S> <C>
October 1997
November 1997
</TABLE>
<TABLE>
<CAPTION>
Block B Aircraft ***
----------------
<S> <C>
January 1998
February 1998
March 1998
April 1998
May 1998
June 1998
July 1998
September 1998
</TABLE>
<TABLE>
<CAPTION>
Block C Aircraft ***
----------------
<S> <C>
February 1999
May 1999
July 1999
August 1999
September 1999
</TABLE>
<TABLE>
<CAPTION>
Block D Aircraft ***
----------------
<S> <C>
November 1999
December 1999
January 2000
March 2000
July 2000
September 2000
</TABLE>
P.A. No. 1810 15-12
K/SWA
<PAGE> 51
<TABLE>
<CAPTION>
Block E Aircraft ***
----------------
<S> <C>
January 2001
March 2001
July 2001
September 2001
</TABLE>
<TABLE>
<CAPTION>
Block F Aircraft ***
----------------
<S> <C>
October 1998
November 1998
December 1998
</TABLE>
<TABLE>
<CAPTION>
Block G Aircraft ***
----------------
<S> <C>
March 1999
</TABLE>
<TABLE>
<CAPTION>
Block H Aircraft ***
----------------
<S> <C>
June 1999
July 1999
August 1999
September 1999
October 1999
April 2000
October 2000
April 2001
October 2001
</TABLE>
<TABLE>
<CAPTION>
Block I Aircraft ***
----------------
<S> <C>
January 2002
March 2002
April 2002
July 2002
October 2002
</TABLE>
<TABLE>
<CAPTION>
Block J Aircraft ***
----------------
<S> <C>
January 2003
March 2003
</TABLE>
<TABLE>
<CAPTION>
Block K Aircraft ***
----------------
<S> <C>
April 2004
July 2004
</TABLE>
P.A. No. 1810 15-13
K/SWA
<PAGE> 52
<TABLE>
<CAPTION>
Block L Aircraft ***
----------------
<S> <C>
October 1999
November 1999
December 1999
June 2000
July 2000
August 2000
September 2000
October 2000
November 2000
December 2000
January 2001
February 2001
July 2001
September 2001
October 2001
September 2002
</TABLE>
3.4.2 Adjustment of Advance Payment Base Prices - Long-Lead
Aircraft. For Aircraft scheduled for delivery 36 months or more after the date
of this Agreement, the Advance Payment Base Prices appearing in Article 3.4.1
will be used to determine the amount of the first advance payment to be made by
Buyer on the Aircraft. No later than 25 months before the scheduled month of
delivery of each affected Aircraft, Boeing will increase or decrease the Advance
Payment Base Price of such Aircraft as required to reflect the effects of (i)
any adjustments in the Aircraft Basic Price pursuant to this Agreement and (ii)
the then-current forecasted escalation factors used by Boeing. Boeing will
provide the adjusted Advance Payment Base Prices for each affected Aircraft to
Buyer, and the advance payment schedule will be considered amended to substitute
such adjusted Advance Payment Base Prices.
P.A. No. 1810 15-14
K/SWA
<PAGE> 53
6-1162-RLL-933R8
Southwest Airlines Co.
P.O. Box 36611 - Love Field
Dallas, Texas 75235
Subject: Letter Agreement No. 6-1162-RLL-933R8 to
Purchase Agreement No. 1810 -
Option Aircraft
This Letter Agreement amends Purchase Agreement No. 1810 dated as of January 19,
1994 (the Agreement) between The Boeing Company (Boeing) and Southwest Airlines
Co. (Buyer) relating to Model 737-7H4 aircraft (Aircraft).
All terms used and not defined herein will have the same meaning as in the
Agreement.
In consideration of the purchase by Buyer of the Aircraft, Boeing hereby agrees
to manufacture and sell to Buyer sixty-two (62) additional Model 737-7H4
aircraft as described in paragraph 1 of Attachment A hereto (Option Aircraft)
and forty-six (46) Model 737-7H4 Rollover Option Aircraft (Rollover Option
Aircraft), subject to the terms and conditions set forth below.
1. Delivery of Option Aircraft.
The Option Aircraft will be delivered to Buyer during or before the
months set forth in the following schedule:
- --------------------------------------------------------------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. No. 1810
K/SWA SA-9
<PAGE> 54
Southwest Airlines Co.
6-1162-RLL-933R8 Page 2
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
- -------------- -------- --------
<S> <C> <C>
March 2003 Three (3) M
April 2003 Two (2) M
July 2003 Four (4) M
October 2003 Four (4) M
January 2004 Four (4) N
March 2004 One (1) N
April 2004 One (1) N
August 2004 Two (2) N
September 2004 Three (3) N
October 2004 Two (2) N
</TABLE>
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
- -------------- -------- --------
<S> <C> <C>
January 2005 Four (4) O
March 2005 Four (4) O
April 2005 Two (2) O
July 2005 Four (4) O
October 2005 Four (4) O
January 2006 Four (4) P
March 2006 Four (4) P
April 2006 Two (2) P
July 2006 Four (4) P
October 2006 Four (4) P
</TABLE>
2. Delivery of Rollover Option Aircraft.
2.1 The Rollover Option Aircraft will be delivered to Buyer during or
before the years set forth in the following schedule:
<TABLE>
<CAPTION>
Option
Year of Number of Aircraft
Delivery Option Aircraft Block
- -------- --------------- --------
<S> <C> <C>
2007 Twenty (20) Q
2008 Twenty (20) R
2009 Six (6) S
</TABLE>
2.2 The forty-six (46) Rollover Option Aircraft are offered to Buyer
subject to the following conditions:
P.A. No. 1810
K/SWA SA-9
<PAGE> 55
Southwest Airlines Co.
6-1162-RLL-933R8 Page 3
2.2.1 Buyer can exercise any forty-six (46) of the sixty-two
(62) Option Aircraft, and will be offered a Rollover Option Aircraft for each
option aircraft exercised up to and including forty-six (46).
2.2.2 Conversely to Article 2.2.1 above, if Buyer does not
exercise a minimum of forty-six (46) Option Aircraft, one Rollover Option
Aircraft will be deleted for each Option Aircraft not exercised by Buyer.
2.2.3 When Buyer exercises one or more Option Aircraft, Boeing
will offer the same quantity of Rollover Option Aircraft to Buyer in the years
identified in Article 2.1 above.
2.2.4 The Rollover Option Aircraft delivery month offered by
Boeing to Buyer will be at least 24 months from the Option exercise date of the
corresponding option.
2.2.5 When Boeing offers the Rollover Option Aircraft to
Buyer, Buyer will accept such Rollover Option Aircraft by wire transferring
$100,000 to Boeing. In the event Buyer exercises its option to purchase the
Rollover Option Aircraft, such application will be in accordance with Article
4.1 herein.
3. Price.
3.1 The advance payment base prices of the Option Aircraft set forth
below and in paragraph 2.1 of Attachment A represent the estimated delivery
prices of the Option Aircraft. The Option Aircraft pricing elements and
associated pricing terms and conditions are given in Attachment A.
3.2 Price and escalation provisions for Model 737-7H4 aircraft
delivering after 2002, are not currently available. The estimated Advance
Payment Base Prices shown in paragraph 3.3 below and in paragraph 2.1 of
Attachment A are based on currently available price and escalation provisions.
As price and escalation provisions become available for Model 737-7H4 aircraft
delivering after 2002, such price and escalation provisions will be
appropriately applied to the applicable Option Aircraft.
For additional information relating to price and escalation provisions
applicable to Option Aircraft delivering after 2002 refer to paragraphs 2.2 and
3.2 of Attachment A.
P.A. No. 1810
K/SWA SA-9
<PAGE> 56
Southwest Airlines Co.
6-1162-RLL-933R8 Page 4
3.3 The Advance Payment Base Prices of the Option Aircraft indicated
below do include an amount for special features in addition to those
specifically described in Attachment A but do not include any amount for items
of Buyer Furnished Equipment (BFE). An estimate for typical special features is
$ *** per Aircraft (expressed in 1992 STE dollars) and for BFE is $ *** per
Aircraft (expressed in delivery year dollars).
<TABLE>
<CAPTION>
Month and Year Advance Payment Base
of Delivery Price per Option Aircraft
- ----------- -------------------------
Block M Aircraft
----------------
<S> <C>
March 2003 ***
April 2003 ***
July 2003 ***
October 2003 ***
</TABLE>
<TABLE>
<CAPTION>
Block N Aircraft
----------------
<S> <C>
January 2004 ***
March 2004 ***
April 2004 ***
August 2004 ***
September 2004 ***
October 2004 ***
</TABLE>
<TABLE>
<CAPTION>
Block O Aircraft
----------------
<S> <C>
January 2005 ***
March 2005 ***
April 2005 ***
July 2005 ***
October 2005 ***
</TABLE>
<TABLE>
<CAPTION>
Block P Aircraft
----------------
<S> <C>
January 2006 ***
March 2006 ***
April 2006 ***
July 2006 ***
October 2006 ***
</TABLE>
3.4 The Option Aircraft purchase price will be the applicable basic
price thereof at the time of Option Aircraft delivery adjusted in accordance
with Boeing's Aircraft escalation provisions contained in the definitive
agreement to purchase the Option Aircraft. The purchase price will include the
price for Seller Purchased Equipment (SPE) if Buyer has elected to change Buyer
Furnished Equipment (BFE) to SPE.
P.A. No. 1810
K/SWA SA-9
<PAGE> 57
Southwest Airlines Co.
6-1162-RLL-933R8 Page 5
4. Option Aircraft Payment.
4.1 In consideration of the granting of the option as set forth herein,
on or before the date Boeing and Buyer enter into a definitive agreement to
purchase the Aircraft, Buyer will pay a deposit to Boeing of $100,000 for each
Option Aircraft (Deposit). In the event Buyer exercises its option herein, the
amount of the Deposit will be credited against the first advance payment due for
such Option Aircraft pursuant to the advance payment schedule set forth in
paragraph 3 of Attachment A. The Deposits for the Option Aircraft will be
refunded to Buyer, without interest, if the parties do not enter into a
definitive Agreement for the Aircraft.
In the event that, after the parties enter into a definitive agreement to
purchase the Aircraft, Buyer does not exercise its option to purchase the Option
Aircraft pursuant to the terms and conditions set forth herein, Boeing will be
entitled to retain the Deposits for the Option Aircraft except as provided in
paragraphs 6 herein.
4.2 Advance payments in the amount of 30% of the advance payment base
price will be payable on the Option Aircraft in accordance with paragraph 3 of
Attachment A. The remainder of the Option Aircraft purchase price is due at the
time of delivery of the Option Aircraft.
5. Option Exercise.
5.1 To exercise its Option, Buyer will give written or telegraphic
notice thereof to Boeing on or before eighteen (18) months prior to the first
day of the delivery month of each Option Aircraft.
In such notice Buyer will select the Option Model type, and the applicable
delivery positions.
5.2 It is understood and agreed that Boeing may accelerate the option
exercise dates specified above if Boeing must make production decisions which
are dependent on Buyer's decision to buy the Option Aircraft. If Boeing elects
to accelerate the option exercise dates, Boeing will do so by giving written or
telegraphic notice thereof to Buyer. Such notice will specify the revised option
exercise dates, which will not be earlier than 30 days after the date of
P.A. No. 1810
K/SWA SA-9
<PAGE> 58
Southwest Airlines Co.
6-1162-RLL-933R8 Page 6
transmittal of such notice, and the Option Aircraft delivery positions affected
by such revision. If Buyer fails to exercise its option for any Option Aircraft
affected by such revised dates, the Deposit applicable to such Option Aircraft
will be promptly refunded, with interest, to Buyer. The interest rate for
calculation of the interest associated with such refund is the rate of two
percent (2%) below the Citibank base rate in effect from time to time during the
period the option deposit is held by Boeing.
6. Contract Terms.
It is understood that Boeing and Buyer will use their best efforts to
enter into a definitive agreement for the Option Aircraft within thirty (30)
days after Buyer exercises an option to purchase Option Aircraft pursuant to
paragraph 5 covering the detailed terms and conditions for the sale of such
Option Aircraft.
Such definitive agreement will include the terms and conditions contained herein
together with the terms and conditions, not inconsistent herewith, contained in
Boeing's then-current standard form of purchase agreement for the sale of Model
737-700 aircraft in effect as of the date of option exercise and such additional
terms and conditions as may be mutually agreed upon. In the event the parties
have not entered into such an agreement within the time period contemplated
herein, either party may, exercisable by written or telegraphic notice given to
the other within thirty (30) days after such period, terminate the purchase of
such Option Aircraft.
7. Termination of Option to Purchase.
Either Boeing or Buyer may terminate the option to purchase an Option
Aircraft if any of the following events are not accomplished by the respective
dates contemplated in this letter agreement, or in the Agreement, as the case
may be:
(i) termination of the purchase of the Aircraft under the Agreement for
any reason;
(ii) payment by Buyer of the Deposit with respect to an Option Aircraft
pursuant to paragraph 4.1 herein;
(iii) exercise of an option to purchase an Option Aircraft pursuant to
the terms hereof. Any termination of an option to purchase by Boeing which is
based on the termination of the purchase of
P.A. No. 1810
K/SWA SA-9
<PAGE> 59
Southwest Airlines Co.
6-1162-RLL-933R8 Page 7
Aircraft under the Agreement will be on a one-for-one basis, for each Aircraft
so terminated.
Any cancellation of an option to purchase which is based on failure to make the
required Deposit or to exercise the option to purchase shall only apply to the
Option Aircraft so canceled.
Termination of an option to purchase provided by this letter agreement will be
caused by either party giving written notice to the other within 10 days after
the applicable date. Upon receipt of such notice, all rights and obligations of
the parties with respect to an Option Aircraft for which the option to purchase
has been terminate will thereupon terminate.
If termination is result of a revision of an option exercise date by Boeing
pursuant to paragraph 5.2, Boeing will promptly refund to Buyer, without
interest, any payments received from Buyer, including the Deposit, with respect
to the Option Aircraft for which the option is terminated. If termination is for
any other reason, Boeing will promptly refund to Buyer, without interest, any
payments received from Buyer with respect to the affected Option Aircraft,
except the Deposit, which Buyer may apply to any model Boeing aircraft purchased
by Buyer from Boeing at a future date.
8. Confidential Treatment. Buyer understands that certain commercial and
financial information contained in this Letter Agreement including any
attachments hereto is considered by Boeing as confidential. Buyer agrees that it
will treat this Letter Agreement and the
P.A. No. 1810
K/SWA SA-9
<PAGE> 60
Southwest Airlines Co.
6-1162-RLL-933R8 Page 8
information contained herein as confidential and will not, without the prior
written consent of Boeing, disclose this Letter Agreement or any information
contained herein to any other person or entity except as provided in Letter
Agreement No. 6-1162-RLL-934R1.
Very truly yours,
THE BOEING COMPANY
By /S/ DAWN S. FOSTER
--------------------------
Its ATTORNEY-IN-FACT
------------------------
ACCEPTED AND AGREED TO this
date: April 29, 1999
SOUTHWEST AIRLINES CO.
By /S/ LAURA WRIGHT
--------------------------
Its TREASURER
------------------------
Attachments
P.A. No. 1810
K/SWA SA-9
<PAGE> 61
Attachment A to
6-1162-RLL-933R8
Page 1
Model 737-7H4 Aircraft
1. Option Aircraft Description and Changes.
1.1 Aircraft Description. The Option Aircraft is described by Boeing
Detail Specification D6-38808-1, Dated October 30 ,1996.
1.2 Changes. The Detail Specification will be revised to include:
(1) Changes applicable to the basic Model 737-700 aircraft
which are developed by Boeing between the date of the Detail Specification and
the signing of a definitive agreement to purchase the Option Aircraft.
(2) Changes mutually agreed upon.
(3) Changes required to obtain a Standard Certificate of
Airworthiness.
(4) To provide sufficient Option Aircraft manufacturing and
procurement lead time it is necessary for Boeing and Buyer to reach final
agreement on the Option Aircraft configuration, including BFE/SPE vendor
selection fifteen (15) months prior to delivery of each Option Aircraft. If such
items are not resolved by the indicated dates, Boeing reserves the right to
amend this letter agreement:
(i) to adjust the scheduled delivery of the Option
Aircraft to a later time period and,
(ii) to make such other changes as are appropriate
and consistent with the revised Option Aircraft deliveries.
1.3 Effect of Changes. Changes to the Detail Specification incorporated
pursuant to the provisions of the clauses above will include the effects of such
changes upon Option Aircraft weight, balance, design and performance.
Performance guarantees for the Option Aircraft which are mutually acceptable to
the parties will be included in the definitive agreement for the Option
Aircraft.
P.A. No. 1810
K/SWA SA-9
<PAGE> 62
Attachment A to
6-1162-RLL-933
Page 2
P.A. No. 1810
K/SWA
2. Price Description
2.1 Price Elements Per Aircraft
<TABLE>
<CAPTION>
1 2 3
- - -
AIRCRAFT & ADV. PMT.
AIRCRAFT ESTIMATED SPECIAL ESTIMATED BASE PRICE
DELIVERY FEATURES PRICE ESTIMATED ESCALATION (Elements)
MO. & YR. (JULY 1992$) ESCALATION SHARING 1 + 2 + 3
- --------- ---------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BLOCK M
- -------
March 2003 $ *** *** *** ***
April 2003 $ *** *** *** ***
July 2003 $ *** *** *** ***
October 2003 $ *** *** *** ***
BLOCK N
- -------
January 2004 $ *** *** *** ***
March 2004 $ *** *** *** ***
April 2004 $ *** *** *** ***
August 2004 $ *** *** *** ***
September 2004 $ *** *** *** ***
October 2004 $ *** *** *** ***
BLOCK O
- -------
January 2005 $ *** *** *** ***
March 2005 $ *** *** *** ***
April 2005 $ *** *** *** ***
July 2005 $ *** *** *** ***
October 2005 $ *** *** *** ***
BLOCK P
- -------
January 2006 $ *** *** *** ***
March 2006 $ *** *** *** ***
April 2006 $ *** *** *** ***
July 2006 $ *** *** *** ***
October 2006 $ *** *** *** ***
</TABLE>
Continued Next Page...
P.A. No. 1810
K/SWA SA-9
<PAGE> 63
Attachment A to
6-1162-RLL-933R8
Page 3
2. Price Description. (Continued)
2.2 Price Adjustments For Option Aircraft Delivering From March 2003
through December 2009.
2.2.1 Special Features. The price for Special Features incorporated in
the Option Aircraft Detail Specification will be adjusted to Boeing's
then-current prices for such features as of the date of execution of the
definitive agreement for the Option Aircraft.
2.2.2 Escalation Adjustments. For escalation provisions applicable to
Option Aircraft delivering after 2002, see paragraph 2.2.6 below.
2.2.3 Base Price Adjustments for FAA Changes. The Aircraft Basic Price
of the Option Aircraft will be adjusted for any FAA mandated changes
incorporated into the Aircraft.
2.2.4 Price Adjustments for Changes. Boeing may adjust the Aircraft
Basic Price and the Advance Payment Base Price for any changes mutually agreed
upon subsequent to the date that Buyer and Boeing enter into a definitive
agreement for the Option Aircraft.
2.2.5 Base Price Adjustments. The Aircraft Basic Price of the Option
Aircraft will be adjusted to Boeing's then-current prices as of the date of
execution of the definitive agreement for the Option Aircraft in accordance with
the agreement reached below. The Aircraft Basic Price starting point for options
delivering in 2003 is $ *** (July 1992 STE), for options delivering in 2004 is $
*** (July 1992 STE), for options delivering in 2005 through 2009 is $ *** (July
1992 STE). Such Aircraft Basic Price may increase in accordance with paragraphs
2.2.1, 2.2.2, 2.2.3 and 2.2.4. For any other changes to the Aircraft Basic
Price, Boeing may increase the Aircraft Basic Price by a maximum of $ *** (July
1992 STE) for Aircraft delivering in 2005 and by a maximum of $ *** (July 1992
STE) per year or portion thereof starting in January 2006.
2.2.6 Prices for Long Lead Time Aircraft. Boeing has not established
escalation provisions for Model 737-700 aircraft for delivery 2003 and after.
Such escalation provisions (i) will be incorporated into the Option Aircraft
definitive agreement when such information is available and (ii) will be the
then-current escalation provisions applicable to the same model aircraft and
engines delivering in the same time period as the Option Aircraft. The resulting
revisions to the definitive agreement will
P.A. No. 1810
K/SWA SA-9
<PAGE> 64
Attachment A to
6-1162-RLL-933R8
Page 4
include but not be limited to, adjustment of the Aircraft Basic Price of the
Option Aircraft, the Advance Payment Base Price, the Aircraft escalation
provisions and the advance payment amounts due on the Option Aircraft.
2.2.7 BFE to SPE. An estimate of the total price for items of Buyer
Furnished Equipment (BFE) changed to Seller Purchased Equipment (SPE) pursuant
to the Configuration Specification is included in the Option Aircraft price
build-up. The purchase price of the Option Aircraft will be adjusted by the
price charged to Boeing for such items plus 10% of such price. If all BFE except
developmental avionics is converted to SPE, Boeing will waive the 10% fee.
3. Advance Payment Schedules, Prices and Adjustments.
3.1 Buyer will pay to Boeing advance payments for the Option Aircraft
on the dates and in the amounts determined below.
P.A. No. 1810
K/SWA SA-9
<PAGE> 65
Attachment A to
6-1162-RLL-933R8
Page 5
<TABLE>
<CAPTION>
Amount Due per Aircraft
(Percentage times
Due Date of Payment Advance Payment Base Price)
- -------------------
<S> <C>
Deposit $100,000 (if applicable)
18 months prior to the first 15% (less the
day of the scheduled delivery Deposit if any)
month of the Aircraft
12 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
9 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
---
Total 30%
</TABLE>
Any advance payments that would be past due as of the date of signing the
definitive purchase agreement for the Option Aircraft in accordance with the
above schedule are due and payable on such date.
3.2 Option Aircraft advance payment base prices will be increased or
decreased, as appropriate, at the time of signing of the definitive purchase
agreement for the Option Aircraft, using the then-current forecasted aircraft
escalation factors used by Boeing, to determine the amount of the advance
payments to be made by Buyer on the Option Aircraft.
P.A. No. 1810
K/SWA SA-9
<PAGE> 66
Attachment B to
6-1162-RLL-933R8
Page 1
PRICE ADJUSTMENT DUE TO
ECONOMIC FLUCTUATIONS
AIRCRAFT PRICE ADJUSTMENT
(July 1992 Base Price)
1. Formula.
The Aircraft Price Adjustment will be determined at the time of
Aircraft delivery in accordance with the following formula:
Pa = (P)(L + M - 1)
Where:
Pa = Aircraft Price Adjustment.
L = .65 x ECI
-----
116.2
M = .35 x ICI
-----
115.9
P = Aircraft Basic Price (as set forth in
Article 3.2 of this Agreement).
ECI = A value using the "Employment Cost Index for workers in
aerospace manufacturing" (aircraft manufacturing, standard
industrial classification code 3721, compensation, base month
and year June 1989 = 100), as released by the Bureau of Labor
Statistics, U.S. Department of Labor on a quarterly basis for
the months of March, June, September and December, calculated
as follows: A three-month arithmetic average value (expressed
as a decimal and rounded to the nearest tenth) will be
determined using the months set forth in the table below for
the applicable Aircraft, with the released Employment Cost
Index value described above for the month of March also being
used for the months of January and February; the value for
June also used for April and May; the value for September also
used for July and August; and the value for December also used
for October and November.
P.A. No. 1810
K/SWA SA-9
<PAGE> 67
Attachment B to
6-1162-RLL-933R8
Page 3
2. If at the time of delivery of an Aircraft Boeing is unable to determine the
Aircraft Price Adjustment because the applicable values to be used to determine
the ECI and ICI have not been released by the Bureau of Labor Statistics, then:
2.1 The Aircraft Price Adjustment, to be used at the time of delivery
of each of the Aircraft, will be determined by utilizing the escalation
provisions set forth above. The values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Aircraft Price Adjustment. If no values have been released for an
applicable month, the provisions set forth in Paragraph 2.2 below will apply. If
prior to delivery of an Aircraft the U.S. Department of Labor changes the base
year for determination of the ECI or ICI values as defined above, such rebased
values will be incorporated in the Aircraft Price Adjustment calculation. The
payment by Buyer to Boeing of the amount of the Purchase Price for such
Aircraft, as determined at the time of Aircraft delivery, will be deemed to be
the payment for such Aircraft required at the delivery thereof.
2.2 If prior to delivery of an Aircraft the U.S. Department of Labor
substantially revises the methodology used for the determination of the values
to be used to determine the ECI and ICI values (in contrast to benchmark
adjustments or other corrections of previously released values), or for any
reason has not released values needed to determine the applicable Aircraft Price
Adjustment, the parties will, prior to delivery of any such Aircraft, select a
substitute for such values from data published by the Bureau of Labor Statistics
or other similar data reported by non-governmental United States organizations,
such substitute to lead in application to the same adjustment result, insofar as
possible, as would have been achieved by continuing the use of the original
values as they may have fluctuated during the applicable time period.
Appropriate revision of the formula will be made as required to reflect any
substitute values. However, if within 24 months from delivery of the Aircraft
the Bureau of Labor Statistics should resume releasing values for the months
needed to determine the Aircraft Price Adjustment, such values will be used to
determine any increase or decrease in the Aircraft Price Adjustment for the
Aircraft from that determined at the time of delivery of such Aircraft.
P.A. No. 1810
K/SWA SA-9
<PAGE> 68
Attachment B to
6-1162-RLL-933R8
Page 4
2.3 In the event escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States Government,
the parties agree, to the extent they may lawfully do so, to equitably adjust
the Purchase Price of any affected Aircraft to reflect an allowance for
increases or decreases in labor compensation and material costs occurring since
February, 1992, which is consistent with the applicable provisions of paragraph
1 of this Exhibit D.
3. For the calculations herein, the values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Aircraft Price Adjustment.
Note: Any rounding of a number, as required under this Exhibit D with respect
to escalation of the airframe price, will be accomplished as follows:
if the first digit of the portion to be dropped from the number to be
rounded is five or greater, the preceding digit will be raised to the
next higher number.
<PAGE> 69
EXHIBIT 10.1
Supplemental Agreement No. 10
to
Purchase Agreement No. 1810
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of August 2, 1999, by and
between THE BOEING COMPANY, a Delaware corporation with its principal offices in
Seattle, Washington, (Boeing) and SOUTHWEST AIRLINES CO., a Texas corporation
with its principal offices in City of Dallas, State of Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement No. 1810
dated January 19, 1994, relating to Boeing Model 737-7H4 aircraft (the
Agreement) and;
WHEREAS, Buyer has agreed to accelerate one Block H Aircraft from April
2000 to March 2000;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
- --------------------------------------------------------------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. No. 1810 SA-10-1
K/SWA
<PAGE> 70
1. The Table of Contents of the Agreement is deleted in its entirety and a new
Table of Contents is attached hereto and incorporated into the Agreement by this
reference.
2. Article 2, entitled "Delivery, Title and Risk of Loss," paragraph 2.1,
entitled "Time of Delivery," is deleted in its entirety and replaced by a new
paragraph 2.1 revised to add one (1) Block H Aircraft delivering in March 2000
and to change the quantity of Block H Aircraft delivering in April 2000 from
three (3) to two (2). Such new pages 2-1, 2-2 and 2-3 are attached hereto and
incorporated into the Agreement by this reference.
3. Article 3, entitled "Price of Aircraft", paragraph 3.4 entitled "Advance
Payment Base Price," subparagraph 3.4.1 entitled "Advance Payment Base Price" is
revised by adding an Advance Payment Base Price for the Block H Aircraft
delivering in March 2000. Such new pages 3-1, 3-2, 3-3 and 3-4 are attached
hereto and incorporated into the Agreement by this reference.
4. All references in the Letter Agreements associated with Purchase Agreement
No. 1810 shall be deemed to refer to the purchase by Buyer of one hundred
forty-two (142) Model 737-7H4 Aircraft, sixty-two (62) Model 737-7H4 Option
Aircraft and forty-six (46) Model 737-7H4 Rollover Option Aircraft, to the
extent such reference is not specifically addressed herein.
5. Within three (3) business days of execution of this Supplemental Agreement,
Boeing will refund to Buyer ***. Such amount reflects the difference in advance
payments due as a result of the acceleration of one (1) Block H Aircraft from
April 2000 to March 2000.
The Agreement will be deemed to be supplemented to the extent herein provided
and as so supplemented will continue in full force and effect.
P.A. No. 1810 SA-10-2
K/SWA
<PAGE> 71
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /s/ DAWN S. FOSTER By: /s/ LAURA WRIGHT
------------------------ ------------------
Its: ATTORNEY-IN-FACT ITS: TREASURER
----------------------- -----------------
P.A. No. 1810 SA-10-3
K/SWA
<PAGE> 72
PURCHASE AGREEMENT
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
Purchase Agreement Number 1810
- --------------------------------------------------------------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT
APPLICATION FILED WITH THE COMMISSION.
P.A. No. 1810 15-1
K/SWA
<PAGE> 73
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page SA
Number Number
------ ------
<S> <C> <C> <C>
ARTICLES
1. Subject Matter of Sale..........................................1-1 SA-9
2. Delivery, Title and Risk
of Loss.........................................................2-1 SA-10
3. Price of Aircraft...............................................3-1 SA-10
4. Taxes...........................................................4-1
5. Payment.........................................................5-1
6. Excusable Delay.................................................6-1
7. Changes to the Detail
Specification...................................................7-1 SA-1
8. Federal Aviation Requirements and
Certificates and Export License.................................8-1
9. Representatives, Inspection,
Flights and Test Data...........................................9-1
10. Assignment, Resale or Lease....................................10-1
11. Termination for Certain Events.................................11-1
12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance..................................................12-1
13. Buyer Furnished Equipment and
Spare Parts....................................................13-1
14. Contractual Notices and Requests...............................14-1
15. Miscellaneous..................................................15-1
</TABLE>
P.A. No. 1810 15-2
K/SWA
<PAGE> 74
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
<S> <C> <C>
EXHIBITS
- --------
A Aircraft Configuration SA-1
B Product Assurance Document SA-1
C Customer Support Document
D Price Adjustments Due to
Economic Fluctuations - Aircraft
E Buyer Furnished Equipment
Provisions Document
F Defined Terms Document
LETTER AGREEMENTS
1810-1 Waiver of Aircraft Demonstration Flight
</TABLE>
P.A. No. 1810 15-3
K/SWA
<PAGE> 75
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
<S> <C> <C>
RESTRICTED LETTER AGREEMENTS
- ----------------------------
6-1162-RLL-932 Promotional Support
6-1162-RLL-933R8 Option Aircraft SA-9
6-1162-RLL-934R1 Disclosure of Confidential SA-1
Information
6-1162-RLL-935R1 Performance Guarantees SA-1
6-1162-RLL-936R4 Certain Contractual Matters SA-4
6-1162-RLL-937 Alternate Advance Payment Schedule
6-1162-RLL-938 ***
6-1162-RLL-939R1 Certification Flight Test Aircraft SA-1
6-1162-RLL-940R1 Training Matters SA-1
6-1162-RLL-941R1 Other Matters SA-1
6-1162-RLL-942 Open Configuration Matters
6-1162-RLL-943R1 Substitution Rights SA-6
6-1162-RLL-944 Airframe Maintenance Material Cost
Protection Program
6-1162-RLL-945 Comparison of 737-7H4 and 737-3H4
Block Fuel Burn
6-1162-RLL-1855R3 Additional Contractual Matters SA-4
6-1162-RLL-1856 *** SA-1
6-1162-RLL-1857 Service Ready Validation Program SA-1
Field Test
6-1162-RLL-1858R1 Escalation Matters SA-4
</TABLE>
P.A. No. 1810 15-4
K/SWA
<PAGE> 76
TABLE OF CONTENTS CON'T
<TABLE>
<CAPTION>
SA
Number
------
<S> <C> <C>
RESTRICTED LETTER AGREEMENTS
- ----------------------------
6-1162-RLL-2036 Amortization of Costs for
Customer Unique Changes SA-1
6-1162-RLL-2037 Reconciliation of the Aircraft SA-1
Basic Price
6-1162-RLL-2073 Maintenance Training Matters SA-1
</TABLE>
P.A. No. 1810 15-5
K/SWA
<PAGE> 77
PURCHASE AGREEMENT NO. 1810
Relating to
BOEING MODEL 737-7H4 AIRCRAFT
----------------------------
This Agreement is entered into as of January 19th 1994, by and between
The Boeing Company, a Delaware corporation, with its principal office in
Seattle, Washington (Boeing), and Southwest Airlines Co., a Texas corporation,
with its principal office in the City of Dallas, State of Texas (Buyer).
Accordingly, Boeing and Buyer agree as follows:
P.A. No. 1810 15-6
K/SWA
<PAGE> 78
ARTICLE 2. Delivery, Title and Risk of Loss.
2.1 Time of Delivery. The Aircraft will be delivered to Buyer by
Boeing, assembled and ready for flight and Buyer will accept delivery of the
Aircraft, in accordance with the following schedule:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
<S> <C> <C>
Block A Aircraft
----------------
October 1997 Two (2)
November 1997 Two (2)
Block B Aircraft
----------------
January 1998 Two (2)
February 1998 Three (3)
March 1998 Two (2)
April 1998 Two (2)
May 1998 Two (2)
June 1998 One (1)
July 1998 Two (2)
September 1998 Two (2)
Block C Aircraft
----------------
February 1999 Four (4)
May 1999 Four (4)
July 1999 Four (4)
August 1999 One (1)
September 1999 Three (3)
Block D Aircraft
----------------
November 1999 Two (2)
December 1999 One (1)
January 2000 One (1)
March 2000 Four (4)
July 2000 Four (4)
September 2000 Three (3)
Block E Aircraft
----------------
January 2001 Three (3)
March 2001 Three (3)
July 2001 Three (3)
September 2001 Three (3)
</TABLE>
P.A. No. 1810 15-7
K/SWA
<PAGE> 79
<TABLE>
<S> <C> <C>
Block F Aircraft
----------------
October 1998 One (1)
November 1998 Two (2)
December 1998 Two (2)
Block G Aircraft
----------------
March 1999 Two (2)
Block H Aircraft
----------------
June 1999 Two (2)
July 1999 One (1)
August 1999 One (1)
September 1999 Two (2)
October 1999 One (1)
March 2000 One (1)
April 2000 Two (2)
October 2000 Three (3)
April 2001 Three (3)
October 2001 Three (3)
Block I Aircraft
----------------
January 2002 Four (4)
March 2002 Four (4)
April 2002 Two (2)
July 2002 Four (4)
October 2002 Four (4)
Block J Aircraft
----------------
January 2003 Four (4)
March 2003 One (1)
Block K Aircraft
----------------
April 2004 Two (2)
July 2004 Three (3)
</TABLE>
P.A. No. 1810 15-8
K/SWA
<PAGE> 80
<TABLE>
<S> <C> <C>
Block L Aircraft
----------------
October 1999 One (1)
November 1999 Two (2)
December 1999 One (1)
June 2000 Three (3)
July 2000 One (1)
August 2000 Two (2)
September 2000 One (1)
October 2000 One (1)
November 2000 Three (3)
December 2000 Two (2)
January 2001 One (1)
February 2001 One (1)
July 2001 One (1)
September 2001 One (1)
October 2001 One (1)
September 2002 Three (3)
</TABLE>
2.2 Notice of Target Delivery Date. Boeing will give Buyer notice of
the Target Delivery Date of the Aircraft approximately 30 days prior to the
scheduled month of delivery.
2.3 Notice of Delivery Date. If Boeing gives Buyer at least 7 days'
notice of the delivery date of the Aircraft, and an Aircraft delivery is delayed
beyond such delivery date due to the responsibility of Buyer, Buyer will
reimburse Boeing for all costs incurred by Boeing as a result of such delay,
including amounts for storage, insurance, Taxes, preservation or protection of
the Aircraft and interest on payments due.
2.4 Place of Delivery. The Aircraft will be delivered at an airport
facility selected by Boeing in the State of Washington, unless mutually agreed
otherwise.
2.5 Title and Risk of Loss. Title to and risk of loss of an Aircraft
will pass from Boeing to Buyer upon delivery of such Aircraft, but not prior
thereto.
2.6 Bill of Sale. Upon delivery of an Aircraft Boeing will deliver to
Buyer a bill of sale conveying good title to such Aircraft, free of all liens,
claims, charges and encumbrances of every kind whatsoever, and such other
appropriate documents of title as Buyer may reasonably request.
P.A. No. 1810 15-9
K/SWA
<PAGE> 81
ARTICLE 3. Price of Aircraft.
3.1 Definitions.
3.1.1 Special Features are the features incorporated in
Exhibit A which have been selected by Buyer.
3.1.2 Base Aircraft Price is the Aircraft Basic Price
excluding the price of Special Features.
3.1.3 Aircraft Basic Price is comprised of the Base Aircraft
Price and the price of the Special Features.
3.1.4 Economic Price Adjustment is the adjustment to the
Aircraft Basic Price (Base Aircraft and Special Features) as calculated pursuant
to Exhibit D.
3.1.5 Aircraft Price is the total amount Buyer is to pay for
the Aircraft at the time of delivery.
3.2 Aircraft Basic Price.
The Aircraft Basic Price, expressed in July 1992 dollars, is
set forth below:
<TABLE>
<CAPTION>
Base Special Aircraft
Aircraft Price Features Basic Price
-------------- -------- -----------
<S> <C> <C> <C>
Block A, B, C,
D & E Aircraft $*** $*** $***
Block F & G
Aircraft $*** $*** $***
Block H
Aircraft $*** $*** $***
Block I
Aircraft $*** $*** $***
Block J
Aircraft $*** $*** $***
Block K
Aircraft $*** $*** $***
Block L Aircraft
$*** $*** $***
</TABLE>
3.3 Aircraft Price. The Aircraft Price will be established at the
time of delivery of such Aircraft to Buyer and will be the sum of:
3.3.1 the Aircraft Basic Price, which is ($***) for the Block
A, B, C, D and E Aircraft, ($***) for the Block F and G Aircraft, ($***) for the
Block H Aircraft, ($***) for the Block I Aircraft, ($***) for the Block J
P.A. No. 1810 15-10
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<PAGE> 82
Aircraft, ($***) for the Block K Aircraft and ($***) for the Block L Aircraft;
plus
3.3.2 the Economic Price Adjustments for the Aircraft Basic
Price, as calculated pursuant to the formulas set forth in Exhibit D (Price
Adjustments Due to Economic Fluctuations - Aircraft); plus
3.3.3 other price adjustments made pursuant to this Agreement
or other written agreements executed by Boeing and Buyer.
3.4 Advance Payment Base Price.
3.4.1 Advance Payment Base Price. For advance payment
purposes, the following estimated delivery prices of the Aircraft (Advance
Payment Base Price) have been established, using currently available forecasts
of the escalation factors used by Boeing as of the date of signing this
Agreement. The Advance Payment Base Price of each Aircraft is set forth below:
<TABLE>
<CAPTION>
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
------------------ --------------------
<S> <C> <C>
Block A Aircraft
----------------
October 1997 $***
November 1997 $***
Block B Aircraft
----------------
January 1998 $***
February 1998 $***
March 1998 $***
April 1998 $***
May 1998 $***
June 1998 $***
July 1998 $***
September 1998 $***
</TABLE>
P.A. No. 1810 15-11
K/SWA
<PAGE> 83
<TABLE>
<S> <C> <C>
Block C Aircraft
----------------
February 1999 $***
May 1999 $***
July 1999 $***
August 1999 $***
September 1999 $***
Block D Aircraft
----------------
November 1999 $***
December 1999 $***
January 2000 $***
March 2000 $***
July 2000 $***
September 2000 $***
Block E Aircraft
----------------
January 2001 $***
March 2001 $***
July 2001 $***
September 2001 $***
Block F Aircraft
----------------
October 1998 $***
November 1998 $***
December 1998 $***
Block G Aircraft
----------------
March 1999 $***
Block H Aircraft
----------------
June 1999 $***
July 1999 $***
August 1999 $***
September 1999 $***
October 1999 $***
March 2000 $***
April 2000 $***
October 2000 $***
April 2001 $***
October 2001 $***
</TABLE>
P.A. No. 1810 15-12
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<PAGE> 84
<TABLE>
<S> <C> <C>
Block I Aircraft
----------------
January 2002 $***
March 2002 $***
April 2002 $***
July 2002 $***
October 2002 $***
Block J Aircraft
----------------
January 2003 $***
March 2003 $***
Block K Aircraft
----------------
April 2004 $***
July 2004 $***
Block L Aircraft
----------------
October 1999 $***
November 1999 $***
December 1999 $***
June 2000 $***
July 2000 $***
August 2000 $***
September 2000 $***
October 2000 $***
November 2000 $***
December 2000 $***
January 2001 $***
February 2001 $***
July 2001 $***
September 2001 $***
October 2001 $***
September 2002 $***
</TABLE>
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<PAGE> 85
3.4.2 Adjustment of Advance Payment Base Prices - Long-Lead
Aircraft. For Aircraft scheduled for delivery 36 months or more after the date
of this Agreement, the Advance Payment Base Prices appearing in Article 3.4.1
will be used to determine the amount of the first advance payment to be made by
Buyer on the Aircraft. No later than 25 months before the scheduled month of
delivery of each affected Aircraft, Boeing will increase or decrease the Advance
Payment Base Price of such Aircraft as required to reflect the effects of (i)
any adjustments in the Aircraft Basic Price pursuant to this Agreement and (ii)
the then-current forecasted escalation factors used by Boeing. Boeing will
provide the adjusted Advance Payment Base Prices for each affected Aircraft to
Buyer, and the advance payment schedule will be considered amended to substitute
such adjusted Advance Payment Base Prices.
P.A. No. 1810 15-14
K/SWA
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 333-20275, 33-48178, 33-57327, 33-40652, 33-40653, 333-64431,
333-67627, 333-67631, 333-82735, and 333-89303, and Forms S-3 Nos. 333-29257 and
33-59113) of Southwest Airlines Co. and in the related Prospectuses of our
report dated January 18, 2000, with respect to the consolidated financial
statements of Southwest Airlines Co. included in this Annual Report (Form 10-K)
for the year ended December 31, 1999.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
22
Dallas, Texas
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 418,819
<SECURITIES> 0
<RECEIVABLES> 73,448
<ALLOWANCES> 0
<INVENTORY> 65,152
<CURRENT-ASSETS> 631,005
<PP&E> 6,848,965
<DEPRECIATION> 1,840,799
<TOTAL-ASSETS> 5,652,113
<CURRENT-LIABILITIES> 960,466
<BONDS> 0
0
0
<COMMON> 505,005
<OTHER-SE> 2,330,783
<TOTAL-LIABILITY-AND-EQUITY> 5,652,113
<SALES> 0
<TOTAL-REVENUES> 4,735,587
<CGS> 0
<TOTAL-COSTS> 3,954,011
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,145
<INCOME-PRETAX> 773,611
<INCOME-TAX> 299,233
<INCOME-CONTINUING> 474,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 474,378
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.89
</TABLE>
