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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950134-02-000776.txt : 20020414
<SEC-HEADER>0000950134-02-000776.hdr.sgml : 20020414
ACCESSION NUMBER: 0000950134-02-000776
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020204
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SOUTHWEST AIRLINES CO
CENTRAL INDEX KEY: 0000092380
STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512]
IRS NUMBER: 741563240
STATE OF INCORPORATION: TX
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-07259
FILM NUMBER: 02526519
BUSINESS ADDRESS:
STREET 1: 2702 LOVE FIELD DR
STREET 2: P O BOX 36611
CITY: DALLAS
STATE: TX
ZIP: 75235
BUSINESS PHONE: 2147924000
MAIL ADDRESS:
STREET 1: PO BOX 36611
CITY: DALLAS
STATE: TX
ZIP: 75235-1611
FORMER COMPANY:
FORMER CONFORMED NAME: AIR SOUTHWEST CO
DATE OF NAME CHANGE: 19760108
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d93658e10-k.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2001
<TEXT>
<PAGE>
================================================================================
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, 2001 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 [ ]
Aggregate market value of Common Stock held by nonaffiliates as of
December 31, 2001:
$14,155,000,000
Number of shares of Common Stock outstanding as of the close of
business on December 31, 2001:
766,773,730 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 15, 2002: PART III
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. [ ]
================================================================================
<PAGE>
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 year-end 2001, Southwest operated 355 Boeing 737 aircraft and provided
service to 59 airports in 58 cities in 30 states throughout the United States.
Southwest commenced service to West Palm Beach, Florida in January 2001 and to
Norfolk, Virginia in October 2001. In March 2001, Southwest discontinued service
to San Francisco International Airport.
Based on data for second quarter 2001 (the latest available data),
Southwest Airlines is the 4th largest carrier in the United States based on
domestic passengers boarded and the second largest based on scheduled domestic
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).
RECENT DEVELOPMENTS
On September 11, 2001, terrorists hijacked and used two American Airlines,
Inc. aircraft and two United Air Lines, Inc. aircraft in terrorist attacks on
the United States ("terrorist attacks"). As a result of these terrorist attacks,
the Federal Aviation Administration ("FAA") immediately suspended all commercial
airline flights on the morning of September 11. The Company resumed flight
activity on September 14 and was operating its normal pre-September 11 flight
schedule by September 18, 2001. From September 11 until the Company resumed
flight operations on September 14, Southwest canceled approximately 9,000
flights. Although flight operations were suspended, the Company continued to
incur nearly all of its normal operating expenses (with the exception of certain
direct trip-related expenditures such as fuel, landing fees, etc.). Once the
Company resumed operations, revenues were severely impacted and ticket refund
activity increased. In fourth quarter 2001, revenues recovered sufficiently for
the Company to report a profit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act ("Stabilization Act"). The
Stabilization Act provides for up to $5 billion in cash grants and $10 billion
in loan guarantees to qualifying U.S. airlines and freight carriers to
compensate for direct and incremental losses, as defined in the Stabilization
Act, associated with the terrorist attacks. The Stabilization Act also provides
for other items such as protection against certain insurance coverage increases,
delaying payments of excise taxes, and certain protections against lawsuits for
the airlines directly involved in the attacks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion of the cash grants provided by the Stabilization Act.
In response to the decrease in demand for air travel since the terrorist
attacks, the Company has modified its schedule for future aircraft deliveries
and the timing of its future capital expenditure commitments. See "Properties -
Aircraft" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for further discussion
of the Company's long-term commitments for aircraft.
1
<PAGE>
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 over the past five
years was as follows:
<Table>
<Caption>
COST AVERAGE PRICE PERCENT OF
YEAR (Millions) PER GALLON OPERATING EXPENSES
---- --------- ------------- ------------------
<S> <C> <C> <C>
1997 $495.0 $.62 15.0%
1998 $388.3 $.46 11.2%
1999 $492.4 $.53 12.5%
2000 $804.4 $.79 17.4%
2001 $770.5 $.71 15.6%
</Table>
From October 1, 2001 through December 31, 2001, the average price per
gallon was $.6030. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of Southwest's fuel
hedging activities.
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." The Wright Amendment does not restrict flights operated with
aircraft having 56 or fewer passenger seats. 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 public
convenience and necessity, 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 or regulation
issued thereunder or any term of such certificate; provided that, with respect
to revocation, the certificate holder has first been advised of the alleged
violation and fails to comply after being given a reasonable time to do so.
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.
2
<PAGE>
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.
Security. On November 19, 2001, President Bush signed into law the
Aviation and Transportation Security Act ("Security Act"). The Security Act
generally provides for enhanced aviation security measures. The Security Act
established a new Transportation Security Administration ("TSA") within the
Department of Transportation to be headed by the new Under Secretary of
Transportation for Security with supervision by the new Transportation Security
Oversight Board. The TSA is to assume the aviation security functions previously
residing in the FAA and assume the passenger screening contracts at U.S.
airports by February 17, 2002. The TSA will provide for the screening of all
passengers and property, including cargo and baggage, which will be performed by
federal employees by November 19, 2002. The Security Act also requires that a
system be in operation to screen all checked baggage at U.S. airports by January
18, 2002; Southwest has complied with this requirement. Beginning February 1,
2002, a $2.50 per enplanement security fee is imposed on passengers (maximum of
$5.00 per one-way trip), with authority granted to the TSA to impose additional
fees on air carriers if necessary to cover additional federal aviation security
costs.
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.
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 the Company's operations, costs, or profitability.
3
<PAGE>
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 customer service practices.
MARKETING AND COMPETITION
Southwest focuses principally on point-to-point, rather than
hub-and-spoke, service in markets with frequent, conveniently timed flights and
low fares. For example, Southwest's average aircraft trip stage length in 2001
was 514 miles with an average duration of approximately 1.5 hours. At year-end,
Southwest served approximately 344 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 Customers and, therefore,
minimizes connections, delays, and total trip time. Southwest focuses on
nonstop, not connecting, traffic. As a result, approximately 75 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 are at the gate, currently approximately 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.
Southwest employs a relatively simple fare structure, featuring low,
unrestricted, unlimited, everyday coach fares, as well as even lower fares
available on a restricted basis. 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 at http://www.southwest.com. For
the year ended December 31, 2001, approximately 85 percent of Southwest's
Customers chose the Ticketless travel option. For the year ended December 31,
2001, approximately 40 percent of Southwest's passenger revenues came through
its Internet site, which has become a vital part of the Company's distribution
strategy.
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. 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. In
2001, AMR Corp., parent of American Airlines, completed its acquisition of the
assets of Trans World Airlines.
4
<PAGE>
Immediately after the terrorist acts of September 11, and in the face of
weak demand for air service, most major carriers (not including Southwest)
announced significant service reductions, grounded aircraft and furloughed
employees. Southwest's competitors have reduced service in several markets
served by Southwest. Some carriers have sought relief from certain financial
obligations and may seek additional protection from such obligations in
bankruptcy. On the other hand, some of the Company's competitors may qualify for
federal loan guarantees authorized by the Stabilization Act. Enhanced security
measures have had, and will continue to have, a significant impact on the
airport experience for passengers. Security requirements are still evolving on a
daily basis; however, to date, they have not impacted Southwest's aircraft
utilization. It is currently not possible to assess the impact of these events
on airline competition.
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 security procedures, 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.
After the September 11 terrorist attacks, the Company's insurers provided
notice that coverage for aircraft damage and for liability due to war and
terrorist activities would be canceled in seven days. In both cases, new
coverage was made available at significantly higher rates. The Company has
purchased the new coverage, which in the case of the third party liability
insurance contains a new sub-limit of $50 million. Pursuant to authority granted
in the Stabilization Act, the FAA has supplemented this insurance until March
21, 2002 with a third party liability policy covering losses in excess of $50
million. Further, the FAA has reimbursed the Company for the increased cost of
its insurance for the month of October 2001. While the FAA has authority to
provide reimbursement of premiums for a period of 180 days from September 11,
there is no assurance that any further reimbursements will be forthcoming.
The Company's existing insurance policies for war and terrorism coverage
continue to contain a seven day cancellation clause which the insurers may
invoke at any time. There is also no assurance that the FAA will be authorized
to continue to provide insurance for third party terrorism and war risk coverage
in excess of $50 million after March 21, 2002.
FREQUENT FLYER AWARDS
Southwest's frequent flyer program, Rapid Rewards, is based on trips flown
rather than mileage. Rapid Rewards Customers earn a flight segment credit for
each one-way trip flown or two credits for each round trip flown. Rapid Rewards
Customers can also receive flight segment credits by using the services of
non-airline partners, which include a telephone company, car rental agencies,
hotels, and credit card partners, including 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
5
<PAGE>
after the accumulation of 16 flight segment 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.
Trips flown are valid for flight segment 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 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 segment credits to business partners
including credit card companies, phone companies, hotels, and car rental
agencies. These credits may be redeemed for Award Tickets having the same
program characteristics as those earned by flying.
Customers redeemed approximately 1.7 million, 1.6 million and 1.2 million
Award Tickets and flights on Companion Passes during 2001, 2000 and 1999,
respectively. The amount of free travel award usage as a percentage of total
Southwest revenue passengers carried was 5.4 percent in 2001, 4.9 percent in
2000 and 4.3 percent in 1999. The number of Award Tickets outstanding at
December 31, 2001 and 2000 was approximately 1,296,000 and 985,000,
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 80
percent or more 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, 2001 and 2000 was approximately 48,000 and 41,000,
respectively. The Company currently estimates that 3 to 4 trips will be redeemed
per outstanding Companion Pass.
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 flight segment credits sold to
business partners). This method recognizes an average incremental cost to
provide roundtrip transportation to one additional passenger. The estimated
incremental cost includes direct passenger costs such as fuel, food and other
operational costs, but does not include any contribution to overhead or profit.
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 flight segment credits sold to business partners prior to January 1,
2000 revenue was recognized when the credits were sold. Beginning January 1,
2000, revenue from the sale of flight segment credits and associated with future
travel is deferred and recognized when the ultimate free travel award is flown
or the credits expire unused. Accordingly, Southwest does not accrue incremental
cost for the expected redemption of free travel awards for credits sold to
business partners. The liability for free travel awards earned but not used at
December 31, 2001 and 2000 was not material.
EMPLOYEES
At December 31, 2001, Southwest had 31,580 active employees, consisting of
10,710 flight, 1,600 maintenance, 15,020 ground customer and fleet service and
4,250 management, accounting, marketing, and clerical personnel.
Southwest has ten collective bargaining agreements covering approximately
82 percent of its employees. The following table sets forth the Company's
employee groups and collective bargaining status:
6
<PAGE>
<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
Flight Attendants Transportation Workers of June 2002
America, AFL-CIO ("TWU")
Ramp, Operations and TWU June 2006
Provisioning
Pilots Southwest Airlines Pilots' September 2004
Association
Flight Dispatchers Southwest Airlines Employee November 2009
Association
Aircraft Appearance International Brotherhood of February 2009
Technicians Teamsters ("Teamsters")
Stock Clerks Teamsters August 2008
Mechanics Teamsters In Negotiations
Flight Simulator Technicians Teamsters November 2008
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 355 Boeing 737 aircraft as of December 31,
2001, of which 92 and 7 were under operating and capital leases, respectively.
The remaining 256 aircraft were owned.
Southwest was the launch customer for the Boeing 737-700 aircraft, 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, 2001, Southwest had 106 Boeing 737-700 aircraft in service.
In total, at December 31, 2001, the Company had firm orders and options to
purchase Boeing 737 Aircraft as follows:
7
<PAGE>
FIRM ORDERS AND OPTIONS TO PURCHASE BOEING 737-700 AIRCRAFT*
<Table>
<Caption>
DELIVERY YEAR FIRM ORDERS OPTIONS ROLLING OPTIONS
------------- ----------- ------- ---------------
<S> <C> <C> <C>
2002 11
2003 21
2004 23 13
2005 24 20
2006 22 20
2007 25 9 20
2008-2012 6 25 197
--- --- ---
TOTALS 132 87 217
=== === ===
</Table>
*Of the 32 Firm Orders indicated for 2002 and 2003, 19 aircraft are to be
acquired from a special purpose trust (rather than Boeing). The balance of 13
Firm Orders in those years, as well as the remaining aircraft orders described
in the above table, are directly with The Boeing Company. See Footnote 4 to the
Consolidated Financial Statements.
The Company currently intends to retire its fleet of 30 Boeing 737-200
aircraft over the next four years.
The average age of the Company's fleet at December 31, 2001 was 8.75
years.
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, 2001, 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 aircraft maintenance costs.
ITEM 3. LEGAL PROCEEDINGS
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. 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.
8
<PAGE>
On December 21, 2000, the national office of the IRS published a revenue ruling
in which it concluded that aircraft inspection and maintenance is currently
deductible as an ordinary and necessary business expense. In accordance with the
revenue ruling, the IRS conceded the proposed adjustments to the deductions
claimed by the Company for aircraft inspection and maintenance expense, and on
June 1, 2001, a decision was entered by the Tax Court holding that there is no
deficiency in income tax for the taxable years 1989 through 1991.
The IRS similarly proposed to disallow deductions claimed by the
Company on its federal income tax returns for the taxable years 1992 through
1994 primarily related to the costs of certain aircraft inspection and
maintenance expenses. During 2001, the IRS conceded the proposed adjustments to
the deductions claimed for aircraft inspection and maintenance expenses.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Southwest, their positions, and their
respective ages (as of January 1, 2002) are as follows:
<Table>
<Caption>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
James F. Parker Vice Chairman of the Board and 55
Chief Executive Officer
Colleen C. Barrett Director, President and Chief Operating Officer 57
Donna D. Conover Executive Vice President- Customer Service 48
Gary C. Kelly Executive Vice President and Chief Financial Officer 46
James C. Wimberly Executive Vice President- Chief Operations Officer 48
Joyce C. Rogge Senior Vice President - Marketing 44
Ross Holman Vice President - Systems 50
Ron Ricks Vice President-Governmental Affairs 52
Dave Ridley Vice President-Ground Operations 48
</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. Each of the above
individuals has worked for Southwest Airlines Co. for more than the past five
years, except Ross Holman, who joined the Company in March 1998. Prior to that
time, Mr. Holman was Chief Information Officer of PageNet since 1996.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors to file reports of ownership and changes in
ownership in Company Common Stock with the Securities and Exchange Commission
and the New York Stock Exchange. During 2001, one report involving the
acquisition of 2,550 shares of Southwest Common Stock was filed five days late
by Gene H. Bishop, a member of the Board of Directors.
9
<PAGE>
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 February 2001 three-for-two stock split, were:
<Table>
<Caption>
PERIOD DIVIDEND HIGH LOW
------ -------- ---- ---
<S> <C> <C> <C>
2000
1ST QUARTER $0.00367 $ 13.92 $ 10.00
2ND QUARTER 0.00367 15.17 12.38
3RD QUARTER 0.00367 16.67 12.75
4TH QUARTER 0.00367 23.33 15.75
2001
1ST QUARTER $0.00450 $ 23.27 $ 16.00
2ND QUARTER 0.00450 20.03 16.55
3RD QUARTER 0.00450 20.23 11.25
4TH QUARTER 0.00450 20.00 14.52
</Table>
As of December 31, 2001, there were 11,324 holders of record of the
Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 2001, Herbert D. Kelleher, President and Chief Executive Officer,
exercised unregistered options to purchase Southwest Common Stock as follows:
<Table>
<Caption>
NUMBER OF SHARES PURCHASED* EXERCISE PRICE DATE OF EXERCISE
- -------------------------- -------------- ----------------
<S> <C> <C>
512,582 $ 1.00 January 2, 2001
380,845 $ 1.00 January 2, 2001
400,619 $ 3.358 January 2, 2001
</Table>
*These numbers do not take into account the February 2001 three-for-two stock
split.
The issuances 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 "Securities Act"), by reason of the provision of Section 4(2) of
the Securities 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. Kelleher contain a legend to the effect that such shares are not registered
under the Securities Act and may not be transferred except pursuant
10
<PAGE>
to a registration statement which has become effective under the Securities 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,
2001 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. Share and per
share information in this Report has been adjusted for the effect of the
February 2001 three-for-two stock split.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues ........................ $ 5,555,174 $ 5,649,560 $ 4,735,587 $ 4,163,980 $ 3,816,821
Operating expenses ........................ 4,924,052 4,628,415 3,954,011 3,480,369 3,292,585
------------ ------------ ------------ ------------ ------------
Operating income .......................... 631,122 1,021,145 781,576 683,611 524,236
Other expenses(income), net ............... (196,537) 3,781 7,965 (21,501) 7,280
------------ ------------ ------------ ------------ ------------
Income before income taxes ................ 827,659 1,017,364 773,611 705,112 516,956
Provision for income taxes ................ 316,512 392,140 299,233 271,681 199,184
------------ ------------ ------------ ------------ ------------
Net income ................................ $ 511,147 $ 625,224(3) $ 474,378 $ 433,431 $ 317,772
============ ============ ============ ============ ============
Net income per share, basic ............... $ .67 $ .84(3) $ .63 $ .58 $ .43
Net income per share, diluted ............. $ .63 $ .79(3) $ .59 $ .55 $ .41
Cash dividends per common share ........... $ .0180 $ .0147 $ .0143 $ .0126 $ .0098
Total assets at period-end ................ $ 8,997,141 $ 6,669,572 $ 5,653,703 $ 4,715,996 $ 4,246,160
Long-term obligations at period-end ....... $ 1,327,158 $ 760,992 $ 871,717 $ 623,309 $ 628,106
Stockholders' equity at period-end ........ $ 4,014,053 $ 3,451,320 $ 2,835,788 $ 2,397,918 $ 2,009,018
OPERATING DATA:
Revenue passengers carried ................ 64,446,773 63,678,261 57,500,213 52,586,400 50,399,960
Revenue passenger miles (RPMs) (000s) ..... 44,493,916 42,215,162 36,479,322 31,419,110 28,355,169
Available seat miles (ASMs) (000s) ........ 65,295,290 59,909,965 52,855,467 47,543,515 44,487,496
Load factor (1) ........................... 68.1% 70.5% 69.0% 66.1% 63.7%
Average length of passenger haul (miles) .. 690 663 634 597 563
Trips flown ............................... 940,426 903,754 846,823 806,822 786,288
Average passenger fare .................... $ 83.46 $ 85.87 $ 79.35 $ 76.26 $ 72.81
Passenger revenue yield per RPM ........... 12.09c. 12.95c. 12.51c. 12.76c. 12.94c.
Operating revenue yield per ASM ........... 8.51c. 9.43c. 8.96c. 8.76c. 8.58c.
Operating expenses per ASM ................ 7.54c. 7.73c. 7.48c. 7.32c. 7.40c.
Fuel cost per gallon (average) ............ 70.86c. 78.69c. 52.71c. 45.67c. 62.46c.
Number of Employees at year-end ........... 31,580 29,274 27,653 25,844 23,974
Size of fleet at year-end (2) ............. 355 344 312 280 261
</Table>
- ----------
(1) Revenue passenger miles divided by available seat miles.
(2) Includes leased aircraft.
(3) Excludes cumulative effect of accounting change of $22.1 million ($.03 per
share).
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR IN REVIEW
In 2001, Southwest posted a profit for the 29th consecutive year in one of the
most challenging operating environments the air travel industry has ever faced.
During the year, Southwest also increased our domestic market share, made
enhancements that will improve our Customer Service, and ended the year with
more Employees and aircraft than we had when we began the year. Despite the
onset of a recession early in 2001 and the September 11, 2001 terrorist attacks
against the United States (the terrorist attacks), Southwest was profitable in
each quarter of the year, including the third and fourth quarters after
excluding federal grants recognized in these quarters under the Air
Transportation Safety and System Stabilization Act (the Act). (See Note 3 to the
Consolidated Financial Statements for further details on the terrorist attacks
and the Act.) Although we were unable to match some of the Company's
record-setting performance levels reached in 2000, our business strategy -
primarily short haul, high frequency, low fare, point-to-point, high quality
Customer Service - continued to serve us well during some difficult times in
2001.
In 2001, we continued to maintain our cost advantage over our industry while the
recession and events of September 11 put downward pressure on revenues. In
response to uncertainties following September 11 and the precipitous drop in
demand for air travel, Southwest amended its agreement with The Boeing Company
to defer aircraft deliveries (see Note 4 to the Consolidated Financial
Statements) but did not ground airplanes, reduce service, or furlough Employees.
Following the temporary FAA shutdown of U.S. air space following the terrorist
attacks, load factors have steadily improved to somewhat normal, average
historical levels. However, these load factors have resulted from significant
fare discounting, which continues to result in year-over-year declines in
passenger revenue yields per RPM (passenger yields) and operating revenue yields
per ASM.
As we begin 2002, in addition to the difficult revenue environment for
commercial airlines, the Company is faced with increased war risk insurance and
passenger security costs resulting from continually evolving security laws and
directives. In response to the terrorist attacks, the airline industry has
worked diligently with Congress, the DOT, the FAA, and law enforcement officials
to enhance security. During fourth quarter 2001, the Company was able to offset
these additional costs because of lower jet fuel prices and through internal
cost reduction initiatives implemented following the terrorist attacks. However,
there can be no assurance the Company will be able to continue to offset future
cost increases resulting from the changing commercial airline environment. (The
immediately preceding sentence is a forward-looking statement that involves
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited to,
additional laws or directives that could increase the Company's costs or result
in changes to the Company's operations, etc.)
During 2001, we began service to two new cities, West Palm Beach, Florida, and
Norfolk, Virginia, while also discontinuing service to San Francisco
International Airport due to airport congestion. We have been pleased with the
initial results in both of the new Southwest cities. Prior to September 11, the
Company also continued to add flights between cities already served. Southwest
ended 2001 serving 58 cities in 30 states. Immediately following the terrorist
attacks, Southwest suspended fleet growth. However, by the end of the year,
Southwest had announced plans for modest growth to resume in early 2002.
12
<PAGE>
Currently, available seat mile (ASM) capacity is expected to grow approximately
3.5 percent in 2002 with the planned net addition of at least 8 aircraft. The
Company will place in service at least 11 new Boeing 737-700s scheduled for
delivery during the year and will retire three of the Company's older 737-200s.
(The immediately preceding sentences are forward-looking statements that involve
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited to,
future capacity decisions made by the Company, demand for air travel, changes in
the Company's aircraft retirement schedule, etc.)
RESULTS OF OPERATIONS
2001 COMPARED WITH 2000 The Company's consolidated net income for 2001 was
$511.1 million ($.63 per share, diluted), as compared to 2000 net income, before
the cumulative effect of change in accounting principle, of $625.2 million ($.79
per share, diluted), a decrease of 18.2 percent. The prior years' net income per
share amounts have been restated for the 2001 three-for-two stock split (see
Note 11 to the Consolidated Financial Statements). Consolidated results for 2001
included $235 million in gains that the Company recognized from grants under the
Act and special pre-tax charges of approximately $48 million arising from the
terrorist attacks (see Note 3 to the Consolidated Financial Statements).
Excluding the grant and special charges related to the terrorist attacks, net
income for 2001 was $412.9 million ($.51 per share, diluted). The cumulative
effect of change in accounting principle for 2000 was $22.1 million, net of
taxes of $14.0 million (see Note 2 to the Consolidated Financial Statements).
Net income and net income per share, diluted, after the cumulative change in
accounting principle, for 2000, were $603.1 million and $.76, respectively.
Operating income for 2001 was $631.1 million, a decrease of 38.2 percent
compared to 2000.
Following the terrorist attacks, all U.S. commercial flight operations were
suspended for approximately three days. However, the Company continued to incur
nearly all of its normal operating expenses (with the exception of certain
direct trip-related expenditures such as fuel, landing fees, etc.). The Company
cancelled approximately 9,000 flights before resuming flight operations on
September 14, although we did not resume our normal pre-September 11 flight
schedule until September 18, 2001. Once the Company did resume operations, load
factors and passenger yields were severely impacted, and ticket refund activity
increased. The Company estimates that from September 11 through September 30, it
incurred operating losses in excess of $130 million.
The effects of the terrorist attacks continued to be felt throughout fourth
quarter 2001. The Company's operating income during fourth quarter 2001 was
$37.1 million, a decrease of 85.2 percent compared to fourth quarter 2000.
Without consideration of any federal grant under the Act the Company expects to
recognize in first quarter 2002 (see Note 3 to the Consolidated Financial
Statements), it is not yet known whether the Company will be profitable in first
quarter 2002, due to uncertain economic conditions and the difficult airline
industry revenue environment.
OPERATING REVENUES Consolidated operating revenues decreased 1.7 percent due
primarily to a 1.6 percent decrease in passenger revenues. The decrease in
passenger revenues was a direct result of the terrorist attacks. Because of the
terrorist attacks, fluctuations in passenger revenue can best be explained by
discussing the year in two distinct time periods: January through August, 2001,
and September through December, 2001.
13
<PAGE>
From January through August, 2001, passenger revenues were approximately 8.7
percent higher than the same period in 2000 due primarily to an increase in
capacity, as measured by ASMs, of 11.6 percent. The capacity increase was due to
the addition of 14 aircraft during 2001 (all prior to September 11) and was
partially offset by a decrease of 1.9 percent in passenger yield. Passenger
yields decreased as a result of fare discounting by the Company and the airline
industry in general as the United States economy weakened throughout the year.
The Company's load factor (RPMs divided by ASMs) over this time period was 71.2
percent, compared to 71.7 percent for the same period in 2000.
From September through December, 2001, passenger revenues were approximately
21.7 percent lower than the same period of 2000. Capacity increased 4.0 percent
and the Company's load factor fell to 62.0 percent, compared to 68.2 percent
during the same period of 2000. Passenger yields were 17.2 percent lower during
this period versus the same period of 2000 due to aggressive fare sales
following the terrorist attacks.
For the full year, the Company experienced a 1.2 percent increase in revenue
passengers carried, a 5.4 percent increase in revenue passenger miles (RPMs),
and a 9.0 percent increase in ASMs. The Company's load factor for 2001 was off
2.4 points to 68.1 percent and there was a 6.7 percent decrease in 2001
passenger yield.
Load factors in January 2002 continued to trail those experienced in January
2001. Additionally, passenger yields remain significantly below prior year
levels. As a result, the Company expects first quarter 2002 revenue per
available seat mile to continue to fall below first quarter 2001 levels. (The
immediately preceding sentence is a forward-looking statement, which involves
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited to,
additional incidents that could cause the public to question the safety and/or
efficiency of air travel, competitive pressure such as fare sales and capacity
changes by other carriers, general economic conditions, operational disruptions
as a result of bad weather, the impact of labor issues, and variations in
advance booking trends.) See Note 1 to the Consolidated Financial Statements for
further information on the Company's revenue recognition policy.
As a result of weak economic conditions throughout 2001, consolidated freight
revenues decreased 17.6 percent. There were decreases in both the number of
freight shipments and revenue per shipment. Following the September 11, 2001
terrorist attacks, the United States Postal Service made the decision to shift a
portion of the mail that commercial carriers had previously carried to freight
carriers. As a result of this decision, the Company expects to experience a
decrease in freight revenues during at least the first half of 2002 when
compared to 2001. (The immediately preceding sentence is a forward-looking
statement, which involves uncertainties that could result in actual results
differing materially from expected results. Some significant factors include,
but may not be limited to, general economic conditions, subsequent shifts in
business by the United States Postal Service, and capacity changes by other
carriers.) Other revenues increased 20.3 percent due primarily to an increase in
commissions earned from programs the Company sponsors with certain business
partners, such as the Company sponsored First USA Visa card.
OPERATING EXPENSES Consolidated operating expenses for 2001 increased 6.4
percent, compared to the 9.0 percent increase in capacity. Operating expenses
per ASM decreased 2.5 percent to $.0754, compared to $.0773 in 2000, due
primarily to a decrease in average jet fuel prices. The average fuel cost per
gallon in 2001 was $.7086, 10.0 percent lower than the average cost per gallon
in 2000 of $.7869. Excluding fuel expense, operating expenses per ASM decreased
.3 percent.
14
<PAGE>
Operating expenses per ASM for 2001 and 2000 were as follows:
<Table>
<Caption>
Increase Percent
2001 2000 (decrease) change
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.51c. 2.41c. .10c. 4.1%
Employee retirement plans .33 .40 (.07) (17.5)
Fuel and oil 1.18 1.34 (.16) (11.9)
Maintenance materials and repairs .61 .63 (.02) (3.2)
Agency commissions .16 .27 (.11) (40.7)
Aircraft rentals .29 .33 (.04) (12.1)
Landing fees and other rentals .48 .44 .04 9.1
Depreciation .49 .47 .02 4.3
Other 1.49 1.44 .05 3.5
-------- -------- -------- --------
Total 7.54c. 7.73c. (.19)c. (2.5)%
======== ======== ======== ========
</Table>
Approximately 59 percent of the increase in Salaries, wages, and benefits per
ASM was due to increases in salaries and wages from higher average wage rates
within certain workgroups and increased headcount due in part to the increased
security requirements following the September terrorist attacks. The remaining
41 percent of the increase in Salaries, wages, and benefits per ASM was due to
higher benefits costs, primarily health care costs.
The Company's Ramp, Operations, and Provisioning Agents are subject to an
agreement with the Transport Workers Union of America, (TWU), which became
amendable in December 2000. The Company reached an agreement with the TWU, which
was ratified by its membership in June 2001. The new contract becomes amendable
in June 2006.
The Company's Mechanics are subject to an agreement with the International
Brotherhood of Teamsters (the Teamsters), which became amendable in August 2001.
Southwest is currently in negotiations with the Teamsters for a new contract.
The Company's Flight Attendants are subject to an agreement with the TWU, which
becomes amendable in June 2002. The Company's Customer Service and Reservations
Agents are subject to an agreement with the International Association of
Machinists and Aerospace Workers, which becomes amendable in November 2002.
Employee retirement plans expense per ASM decreased 17.5 percent, due primarily
to the decrease in Company earnings available for profitsharing. The decrease in
earnings more than offset an increase in expense due to a 4th quarter amendment
made to the Company's profitsharing plan. This amendment enabled the Company to
take into consideration federal grants under the Act and special charges
resulting from the terrorist attacks in the calculation of profitsharing.
Fuel and oil expense per ASM decreased 11.9 percent, due primarily to a 10.0
percent decrease in the average jet fuel cost per gallon. The average cost per
gallon of jet fuel in 2001 was $.7086 compared to $.7869 in 2000, including the
effects of hedging activities. The Company's 2001 and 2000 average jet fuel
prices are net of approximately $79.9 million and $113.5 million in gains from
hedging activities, respectively. The Company's 2001 hedging gains were
calculated according to the requirements of Statement of Financial Accounting
Standards No. 133, as amended (SFAS 133), which the Company
15
<PAGE>
adopted January 1, 2001. See Note 2 and Note 9 to the Consolidated Financial
Statements. As detailed in Note 9 to the Consolidated Financial Statements, the
Company has hedges in place for approximately 60 percent of its anticipated fuel
consumption in 2002. Considering current market prices and the continued
effectiveness of the Company's fuel hedges, we are forecasting our first quarter
2002 average fuel cost per gallon to be below first quarter 2001's average fuel
cost per gallon of $.7853. The majority of the Company's near term hedge
positions are in the form of option contracts, which should enable the Company
to continue to benefit to a large extent from a decline in jet fuel prices. (The
immediately preceding two sentences are forward-looking statements, which
involve 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, the continued effectiveness
of the Company's fuel hedges, and changes in the Company's overall fuel hedging
strategy.)
Maintenance materials and repairs per ASM decreased 3.2 percent. This decrease
was due primarily to the Company's capacity growth exceeding the increase in
expense. Virtually all of the Company's 2001 capacity growth versus the prior
year was accomplished with new aircraft, most of which have not yet begun to
incur any meaningful repair costs. The decrease in engine expense was partially
offset by an increase in expense for airframe inspections and repairs. In
addition to an increase in the number of airframe inspections and repairs, the
cost per event increased compared to 2000. Currently, the Company expects an
increase in maintenance materials and repairs expense per ASM in first quarter
2002 versus first quarter 2001. (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 and regulatory requirements.)
Agency commissions per ASM decreased 40.7 percent, due primarily to a change in
the Company's commission rate policy. Effective January 1, 2001, the Company
reduced the commission rate paid to travel agents from ten percent to eight
percent for Ticketless bookings, and from ten percent to five percent for paper
ticket bookings. Effective October 15, 2001, the Company reduced the commission
paid to travel agents to five percent (with no cap), regardless of the type of
ticket sold. Due to this most recent commission policy change in October 2001,
we expect agency commissions to show a year-over-year decrease in first quarter
2002 on a per-ASM basis. (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 consumer ticket purchasing habits.)
Aircraft rentals per ASM decreased 12.1 percent due primarily to a lower
percentage of the aircraft fleet being leased. Approximately 25.9 percent of the
Company's aircraft were under operating lease at December 31, 2001, compared to
27.3 percent at December 31, 2000. Based on the Company's current new aircraft
delivery schedule and scheduled aircraft retirements for 2001, we expect a
decline in aircraft rental expense per ASM in 2002. (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 the Company's
current schedule for purchase and/or retirement of aircraft.)
Landing fees and other rentals per ASM increased 9.1 percent primarily as a
result of the Company's expansion of facilities at several airports, including
Baltimore-Washington International Airport and Chicago Midway Airport. As a
result of the terrorist attacks, most other major airlines have reduced their
16
<PAGE>
flight schedules and/or have retired aircraft early due to the decrease in
demand for air travel. Since Southwest has not reduced the number of flights it
offers, the Company expects that the airport costs it shares with other airlines
on the basis of relative flights landed or passengers carried, such as landing
fees and common space rentals, will increase on a per-ASM basis in future
periods. In fourth quarter 2001, landing fees and other rentals per ASM
increased 21.4 percent. The Company currently expects a similar year-over-year
increase in first quarter 2002. (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 competitors' flight schedules, demand for
air travel, etc.)
Depreciation expense per ASM increased 4.3 percent due primarily to the growth
in the Company's aircraft fleet prior to the September 11, 2001 terrorist
attacks. The Company had received delivery of 14 new 737-700 aircraft prior to
September 11, bringing the percentage of owned aircraft in the Company's fleet
to 74.1 percent by the end of 2001 compared to 72.7 percent at the end of 2000.
Other operating expenses per ASM increased 3.5 percent due primarily to a
significant increase in passenger liability, aircraft hull, and third party
liability insurance costs following the terrorist attacks. The Company's
insurance carriers cancelled their war risk and terrorism insurance policies
following the terrorist attacks and reinstated such coverage at significantly
higher rates than before. Although the Company was reimbursed for a portion of
the higher rates by the federal government for one month during fourth quarter
2001, we have assumed no further reimbursements. As a result, the Company
currently expects continued year-over-year increases in insurance costs for the
near term future, including first quarter 2002. (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 financial stability of
companies offering insurance policies to the airline industry, the level of
competition within the insurance industry, etc.)
OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense was flat compared
to the prior year. Following the terrorist attacks, the Company borrowed the
full $475 million available under its revolving credit facility and issued
$614.3 million in long-term debt in the form of Pass-Through Certificates (see
Note 7 to the Consolidated Financial Statements.) The increase in expense caused
by these borrowings was offset by a decrease in interest rates on the Company's
floating rate debt and the July 2001 redemption of $100 million of unsecured
notes. Based on the Company's recent borrowings, we expect interest expense to
be higher on a year-over-year basis in first quarter 2002. (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, subsequent financing decisions
made by the Company.) Capitalized interest decreased 25.3 percent primarily as a
result of lower 2001 progress payment balances for scheduled future aircraft
deliveries compared to 2000. The lower progress payments were due in part to the
deferral of Boeing 737 aircraft firm orders and options following the terrorist
attacks. Interest income increased 6.2 percent due primarily to higher invested
cash balances, partially offset by lower rates of return. Other gains in 2001
resulted primarily from $235 million received as the Company's share of
government grant funds under the Act provided to offset the Company's direct and
incremental losses following the terrorist attacks, through the end of 2001. The
Company expects to receive up to an additional $50 million in 2002, but
determined that due to some uncertainties regarding the amount to be received,
accrual of any amounts in 2001 as a receivable was not proper. (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
17
<PAGE>
to, subsequent modifications or amendments to the Act, interpretations of the
meaning of direct and incremental losses, and changes in the government's
expected schedule of distributing grant funds, etc.) See Note 3 to the Company's
Consolidated Financial Statements for further discussion of the Act and grants
from the government.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, decreased slightly to 38.24 percent in 2001 from 38.54 percent in 2000.
The decrease resulted primarily from lower effective state tax rates in 2001.
2000 COMPARED WITH 1999 The Company's consolidated net income for 2000 before
the cumulative effect of a change in accounting principle was $625.2 million
($.79 per share, diluted), an increase of 31.8 percent. The cumulative change in
accounting principle, related to the adoption of SEC Staff Accounting Bulletin
No. 101, was $22.1 million, net of taxes of $14.0 million (see Note 2 to the
Consolidated Financial Statements). Net income, after the cumulative change in
accounting principle, was $603.1 million. Net income per share, diluted, after
consideration of the accounting change, was $.76 compared to $.59 in 1999.
Operating income was $1,021.1 million, an increase of 30.7 percent compared to
1999.
OPERATING REVENUES Consolidated operating revenues increased 19.3 percent due
primarily to a 19.8 percent increase in passenger revenues. The increase in
passenger revenues primarily resulted from the Company's increased capacity,
strong demand for commercial air travel, and excellent marketing and revenue
management. The Company experienced a 10.7 percent increase in revenue
passengers carried, a 15.7 percent increase in RPMs, and a 3.6 percent increase
in passenger yield. The increase in passenger yield was due primarily to an 8.2
percent increase in average passenger fare, partially offset by a 4.6 percent
increase in average length of passenger haul. The increase in average passenger
fare was due primarily to modest fare increases combined with a higher mix of
full-fare passengers.
The increase in RPMs exceeded a 13.3 percent increase in ASMs resulting in a
load factor of 70.5 percent, or 1.5 points above the prior year. The increase in
ASMs resulted primarily from the net addition of 32 aircraft during the year.
Freight revenues increased 7.5 percent due primarily to an increase in capacity.
Other revenues, which consist primarily of charter revenues, increased 1.2
percent. This increase was less than the Company's increase in capacity due
primarily to the Company's decision to utilize more of its aircraft to satisfy
the strong demand for scheduled service and, therefore, make fewer aircraft
available for charters.
OPERATING EXPENSES Consolidated operating expenses for 2000 increased 17.1
percent, compared to the 13.3 percent increase in capacity. Operating expenses
per ASM increased 3.3 percent to $.0773, compared to $.0748 in 1999, due
primarily to an increase in average jet fuel prices. The average fuel cost per
gallon in 2000 was $.7869, which was the highest annual average fuel cost per
gallon experienced by the Company since 1984. Excluding fuel expense, operating
expenses per ASM decreased 2.6 percent.
Salaries, wages, and benefits per ASM increased slightly, as increases in
productivity in several of the Company's operational areas were more than offset
by higher benefits costs, primarily workers' compensation expense, and increases
in average wage rates within certain workgroups.
18
<PAGE>
Employee retirement plans expense per ASM increased 11.1 percent, due primarily
to the increase in Company earnings available for profitsharing.
Fuel and oil expense per ASM increased 44.1 percent, due primarily to a 49.3
percent increase in the average jet fuel cost per gallon. The average price per
gallon of jet fuel in 2000 was $.7869 compared to $.5271 in 1999, including the
effects of hedging activities. The Company's 2000 and 1999 average jet fuel
prices are net of approximately $113.5 million and $14.8 million in gains from
hedging activities, respectively.
Maintenance materials and repairs per ASM decreased 10.0 percent primarily
because of a decrease in engine maintenance expense for the Company's 737-200
aircraft fleet as 1999 was an unusually high period for engine maintenance on
these aircraft. Engine repairs for the Company's 737-200 aircraft are expensed
on a time and materials basis. These engine repairs represented approximately 75
percent of the total decrease, while a decrease in airframe inspections and
repairs per ASM represented the majority of the remaining decrease. The decrease
in airframe inspections and repairs was due primarily to a greater amount of
this work being performed internally versus 1999, when a large portion of this
type of work was outsourced. Therefore, in 2000, a larger portion of the cost of
these repairs was reflected in salaries and wages.
Agency commissions per ASM decreased 10.0 percent, due primarily to a decrease
in commissionable revenue. Approximately 31 percent of the Company's 2000
revenues were attributable to direct bookings through the Company's Internet
site compared to approximately 19 percent in the prior year. The increase in
Internet revenues contributed to the Company's percentage of commissionable
revenues decreasing from 34.6 percent in 1999 to 29.1 percent in 2000.
Aircraft rentals decreased 13.2 percent due primarily to a lower percentage of
the aircraft fleet being leased. Approximately 27.3 percent of the Company's
aircraft were under operating lease at December 31, 2000, compared to 30.8
percent at December 31, 1999.
Landing fees and other rentals per ASM decreased 4.3 percent primarily as a
result of a decrease in landing fees per ASM of 6.7 percent, partially offset by
a slight increase in other rentals. Although landing fees declined on a per-ASM
basis, they were basically flat on a per-trip basis. The growth in ASMs exceeded
the trip growth due primarily to a 5.8 percent increase in stage length (the
average distance per aircraft trip flown).
Other operating expenses per ASM decreased 3.4 percent due primarily to
Company-wide cost reduction efforts. The Company also reduced its advertising
expense 9.5 percent per ASM, taking advantage of our national presence,
increasing brand awareness, and strong Customer demand.
OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense increased 29.1
percent due primarily to the Company's issuance of $256 million of long-term
debt in fourth quarter 1999. Capitalized interest decreased 11.9 percent
primarily as a result of lower 2000 progress payment balances for scheduled
future aircraft deliveries compared to 1999. Interest income increased 59.0
percent due primarily to higher invested cash balances and higher rates of
return. Other losses in 1999 resulted primarily from a write-down associated
with the consolidation of certain software development projects.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, decreased slightly to 38.54 percent in 2000 from 38.68 percent in 1999.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.5 billion in 2001 compared to
$1.3 billion in 2000. The increase in operating cash flows was due primarily to
the deferral of approximately $186 million in tax payments until January 2002,
as provided for in the Act, which more than offset the decrease in net income.
Net cash provided by financing activities was $1.3 billion in 2001 compared to a
net use of $59.5 million in 2000. Financing cash flows were generated from
borrowings the Company made from its $475 million revolving credit facility and
the issuance of $614.3 million in long-term debt. These borrowings were
partially offset by the redemption of $100 million unsecured notes in 2001. See
Note 6 and Note 7 to the Consolidated Financial Statements for more information
on these financing activities. Cash generated in 2001 was primarily used to
finance aircraft-related capital expenditures and provide working capital.
During 2001, net capital expenditures were $1.0 billion, which primarily related
to the purchase of 14 new 737-700 aircraft delivered to the Company, 11 new
737-700 aircraft the Company has effectively purchased via a special purpose
trust (the Trust), and progress payments for future aircraft deliveries. See
Note 4 to the Consolidated Financial Statements for more information on the
Trust. The Company's contractual commitments consist primarily of scheduled
aircraft acquisitions. As a result of the terrorist attacks, the Company was
able to modify its future aircraft delivery dates through the amendment of our
purchase contract with The Boeing Company and through the creation of the Trust.
Through the Trust, as of December 31, 2001, Southwest will take delivery and
place in service 11 new 737-700 aircraft in 2002 and eight new 737-700 aircraft
in 2003. Excluding aircraft scheduled to be delivered from the Trust, as of
December 31, 2001, the Company has no new 737-700 aircraft deliveries scheduled
for 2002, 13 in 2003, 23 in 2004, 24 in 2005, 22 in 2006, 25 in 2007, and 6 in
2008. The Company also has a total of 87 purchase options for new 737-700
aircraft for years 2004 through 2008 and purchase rights for an additional 217
737-700s during 2007-2012. In total, Southwest's Trust deliveries, firm orders,
options, and purchase rights through 2012 are at 436 aircraft. 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. The following table
provides details regarding the Company's contractual cash obligations subsequent
to December 31, 2001:
<Table>
<Caption>
CONTRACTUAL CASH OBLIGATIONS BY YEAR (IN MILLIONS)
------------------------------------------------------------------------
BEYOND
2002 2003 2004 2005 2006 5 YEARS TOTAL
------ ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt (1) $ 40 $ 130 $ 232 $ 142 $ 541 $ 291 $1,376
Short-term borrowings 475 -- -- -- -- -- 475
Operating lease commitments 290 275 243 217 185 1,590 2,800
Aircraft purchase commitments (2) 319 689 685 719 641 622 3,675
------ ------ ------ ------ ------ ------ ------
Total Contractual cash obligations $1,124 $1,094 $1,160 $1,078 $1,367 $2,503 $8,326
====== ====== ====== ====== ====== ====== ======
</Table>
(1) Includes amounts classified as interest for capital lease obligations
(2) Includes amounts payable to the Trust - see Note 4 to the Consolidated
Financial Statements.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 2001 of $2.28 billion and
internally generated funds. In addition, the Company will also consider various
borrowing or leasing options to maximize earnings and supplement cash
requirements. The Company believes it has access to a wide variety of financing
arrangements because of its excellent credit ratings and modest leverage.
20
<PAGE>
The Company currently has outstanding shelf registrations for the issuance of
$704 million of public debt securities, which it may utilize for aircraft
financings in 2002 and 2003.
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 are 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, 2001, in
aggregate, 18.3 million shares had been repurchased at a total cost of $199.2
million, of which $108.7 million was completed in 2000. No shares were
repurchased in 2001.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 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. The Company purchases jet fuel at prevailing market prices, but
seeks to minimize its average jet fuel cost through execution of a documented
hedging strategy. Southwest has market sensitive instruments in the form of
fixed rate debt instruments and derivative instruments used to hedge its
exposure to jet fuel price increases. The Company also operates 99 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 8 to the Consolidated Financial Statements. The Company does not purchase
or hold any derivative financial instruments for trading purposes. See Note 2 to
the Consolidated Financial Statements for information on the Company's
accounting for its hedging program and Note 9 to the Consolidated Financial
Statements for further detail on the Company's financial derivative instruments.
The fair values of outstanding financial derivative instruments related to the
Company's jet fuel market price risk at December 31, 2001 were a net liability
of approximately $19.4 million, which is classified in accrued liabilities in
the Consolidated Balance Sheet. The fair values of the derivative instruments,
depending on the type of instrument, were determined by the use of present value
methods or standard option value models with assumptions about commodity prices
based on those observed in underlying markets. An immediate ten percent increase
or decrease in underlying fuel-related commodity prices from the December 31,
2001 prices would correspondingly change the fair value of the commodity
derivative instruments in place by approximately $55 million. Changes in the
related commodity derivative instrument cash flows may change by more or less
than this amount based upon further fluctuations in futures prices as well as
related income tax effects. This sensitivity analysis uses industry standard
valuation models and holds all inputs constant at December 31, 2001 levels,
except underlying futures prices.
Airline operators are inherently capital intensive, as the vast majority of the
Company's assets are expensive aircraft, which are long-lived. The Company's
strategy is to capitalize conservatively and grow capacity steadily and
profitably. While the Company uses financial leverage, it has maintained a
strong balance sheet and an "A" credit rating on its senior unsecured fixed-rate
debt with Standard & Poor's and Fitch ratings agencies, and a "Baa1" or
equivalent credit rating with Moody's rating agency. The Company's Aircraft
Secured Notes and French Credit Agreements do not give rise to significant fair
value risk but do give rise to interest rate risk because these borrowings are
floating-rate debt. Although there is interest rate risk associated with these
secured borrowings, the risk is somewhat mitigated by the
21
<PAGE>
fact that the Company may prepay this debt on any of the semi-annual principal
and interest payment dates. See Note 7 to the Consolidated Financial Statements
for more information on these borrowings. As disclosed in Note 7 to the
Consolidated Financial Statements, the Company had outstanding senior unsecured
notes totaling $400 million at December 31, 2001. Also, as disclosed in Note 7,
the Company issued $614.3 million in long-term debt in November 2001 in the form
of Pass-Through Certificates (Certificates), which are secured by aircraft the
Company owns. The total of the Company's long-term unsecured notes represented
only 6.2 percent of total noncurrent assets at December 31, 2001. The unsecured
long-term debt currently has a weighted-average maturity of 9.0 years at fixed
rates averaging 7.6 percent at December 31, 2001, which is comparable to average
rates prevailing over the last ten years. The Certificates bear interest at a
combined weighted-average rate of 5.8 percent. The Company does not have
significant exposure to changing interest rates on its unsecured long-term debt
or its Certificates because the interest rates are fixed and the financial
leverage is modest.
The Company also has some risk associated with changing interest rates due to
the short term nature of its invested cash, which was $2.28 billion at December
31, 2001. The Company invests available cash in certificates of deposit and
investment grade commercial paper that generally have maturities of three months
or less; therefore, the returns earned on these investments parallel closely
with floating interest rates. The Company has not undertaken any additional
actions to cover interest rate market risk and is not a party to any other
material interest rate market risk management activities.
A hypothetical ten percent change in market interest rates as of December 31,
2001 would not have a material effect on the fair value of the Company's fixed
rate debt instruments. See Note 9 to the Consolidated Financial Statements for
further information on the fair value of the Company's financial instruments. A
change in market interest rates could, however, have a corresponding effect on
the Company's earnings and cash flows associated with its Aircraft Secured
Notes, French Credit Agreements, and invested cash because of the floating rate
nature of these items. Assuming floating market rates in effect as of December
31, 2001 were held constant throughout a twelve month period, a hypothetical ten
percent change in those rates would correspondingly change the Company's net
earnings and cash flows associated with these items by approximately $2.1
million. 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 Certificates.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
(In thousands, except per share amounts) DECEMBER 31,
2001 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,279,861 $ 522,995
Accounts and other receivables 71,283 138,070
Inventories of parts and supplies, at cost 70,561 80,564
Deferred income taxes 46,400 28,005
Prepaid expenses and other current assets 52,114 61,902
------------ ------------
Total current assets 2,520,219 831,536
Property and equipment, at cost:
Flight equipment 7,534,119 6,831,913
Ground property and equipment 899,421 800,718
Deposits on flight equipment purchase contracts 468,154 335,164
------------ ------------
8,901,694 7,967,795
Less allowance for depreciation 2,456,207 2,148,070
------------ ------------
6,445,487 5,819,725
Other assets 31,435 18,311
------------ ------------
$ 8,997,141 $ 6,669,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 504,831 $ 312,716
Accrued liabilities 547,540 499,874
Air traffic liability 450,407 377,061
Aircraft purchase obligations 221,840 --
Short-term borrowings 475,000 --
Current maturities of long-term debt 39,567 108,752
------------ ------------
Total current liabilities 2,239,185 1,298,403
Long-term debt less current maturities 1,327,158 760,992
Deferred income taxes 1,058,143 852,865
Deferred gains from sale and leaseback of aircraft 192,342 207,522
Other deferred liabilities 166,260 98,470
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value: 2,000,000 shares authorized;
766,774 and 507,897 shares issued in 2001
and 2000, respectively 766,774 507,897
Capital in excess of par value 50,409 103,780
Retained earnings 3,228,408 2,902,007
Accumulated other comprehensive income (loss) (31,538) --
Treasury stock, at cost: 3,735 shares in 2000 -- (62,364)
------------ ------------
Total stockholders' equity 4,014,053 3,451,320
------------ ------------
$ 8,997,141 $ 6,669,572
============ ============
</Table>
See accompanying notes.
23
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
(In thousands, except per share amounts) 2001 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 5,378,702 $ 5,467,965 $ 4,562,616
Freight 91,270 110,742 102,990
Other 85,202 70,853 69,981
------------ ------------ ------------
Total operating revenues 5,555,174 5,649,560 4,735,587
OPERATING EXPENSES:
Salaries, wages, and benefits 1,856,288 1,683,689 1,455,237
Fuel and oil 770,515 804,426 492,415
Maintenance materials and repairs 397,505 378,470 367,606
Agency commissions 103,014 159,309 156,419
Aircraft rentals 192,110 196,328 199,740
Landing fees and other rentals 311,017 265,106 242,002
Depreciation 317,831 281,276 248,660
Other operating expenses 975,772 859,811 791,932
------------ ------------ ------------
Total operating expenses 4,924,052 4,628,415 3,954,011
------------ ------------ ------------
OPERATING INCOME 631,122 1,021,145 781,576
OTHER EXPENSES (INCOME):
Interest expense 69,827 69,889 54,145
Capitalized interest (20,576) (27,551) (31,262)
Interest income (42,562) (40,072) (25,200)
Other (gains) losses, net (203,226) 1,515 10,282
------------ ------------ ------------
Total other expenses (income) (196,537) 3,781 7,965
------------ ------------ ------------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 827,659 1,017,364 773,611
PROVISION FOR INCOME TAXES 316,512 392,140 299,233
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 511,147 625,224 474,378
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAXES -- (22,131) --
------------ ------------ ------------
NET INCOME $ 511,147 $ 603,093 $ 474,378
============ ============ ============
NET INCOME PER SHARE, BASIC BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .67 $ .84 $ .63
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- (.03) --
------------ ------------ ------------
NET INCOME PER SHARE, BASIC $ .67 $ .81 $ .63
============ ============ ============
NET INCOME PER SHARE, DILUTED BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .63 $ .79 $ .59
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- (.03) --
------------ ------------ ------------
NET INCOME PER SHARE, DILUTED $ .63 $ .76 $ .59
============ ============ ============
</Table>
See accompanying notes.
24
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
----------------------------------------------------------------------------------------
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY
(In thousands, except per share amounts) STOCK PAR VALUE EARNINGS INCOME (LOSS) STOCK TOTAL
------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 335,904 $ 89,820 $ 2,044,975 $ -- $ (72,781) $ 2,397,918
Three-for-two stock split 167,954 (89,878) (78,076) -- -- --
Purchase of shares of treasury stock -- -- -- -- (90,507) (90,507)
Issuance of common and treasury stock
pursuant to Employee stock plans 1,147 7,811 (45,134) -- 72,781 36,605
Tax benefit of options exercised -- 27,683 -- -- -- 27,683
Cash dividends, $.0143 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
Purchase of shares of treasury stock -- -- -- -- (108,674) (108,674)
Issuance of common and treasury stock
pursuant to Employee stock plan 2,892 6,667 (75,952) -- 136,817 70,424
Tax benefit of options exercised -- 61,677 -- -- -- 61,677
Cash dividends, $.0147 per share -- -- (10,988) -- -- (10,988)
Net income - 2000 -- -- 603,093 -- -- 603,093
------------ ------------ ------------ ---------- ------------ ------------
Balance at December 31, 2000 507,897 103,780 2,902,007 -- (62,364) 3,451,320
Three-for-two stock split 253,929 (136,044) (117,885) -- -- --
Issuance of common and treasury stock
pursuant to Employee stock plans 4,948 28,982 (52,753) -- 62,364 43,541
Tax benefit of options exercised -- 53,691 -- -- -- 53,691
Cash dividends, $.0180 per share -- -- (14,108) -- -- (14,108)
Net income - 2001 -- -- 511,147 -- -- 511,147
Other comprehensive income (loss) -- -- -- (31,538) -- (31,538)
------------ ------------ ------------ ---------- ------------ ------------
Balance at December 31, 2001 $ 766,774 $ 50,409 $ 3,228,408 $ (31,538) $ -- $ 4,014,053
============ ============ ============ ========== ============ ============
</Table>
See accompanying notes.
25
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------------
(In thousands) 2001 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 511,147 $ 603,093 $ 474,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 317,831 281,276 248,660
Deferred income taxes 207,922 153,447 142,940
Amortization of deferred gains on sale and
leaseback of aircraft (15,180) (15,178) (15,172)
Amortization of scheduled airframe inspections
and repairs 43,121 36,328 28,949
Income tax benefit from Employee stock
option exercises 53,691 61,677 27,683
Changes in certain assets and liabilities:
Accounts and other receivables 66,787 (63,032) 13,831
Other current assets (9,027) (24,657) (31,698)
Accounts payable and accrued liabilities 202,506 129,438 66,081
Air traffic liability 73,346 120,119 56,864
Other 32,464 15,775 16,877
------------ ------------ ------------
Net cash provided by operating activities 1,484,608 1,298,286 1,029,393
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (997,843) (1,134,644) (1,167,834)
------------ ------------ ------------
Net cash used in investing activities (997,843) (1,134,644) (1,167,834)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 614,250 -- 255,600
Payments of long-term debt and capital
lease obligations (110,600) (10,238) (12,107)
Payments of cash dividends (13,440) (10,978) (10,842)
Proceeds from revolving credit facility 475,000 -- --
Proceeds from trust arrangement 266,053 -- --
Proceeds from Employee stock plans 43,541 70,424 36,605
Repurchases of common stock -- (108,674) (90,507)
Other, net (4,703) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,270,101 (59,466) 178,749
------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,756,866 104,176 40,308
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 522,995 418,819 378,511
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,279,861 $ 522,995 $ 418,819
============ ============ ============
CASH PAYMENTS FOR:
Interest, net of amount capitalized $ 47,682 $ 36,946 $ 26,604
Income taxes $ 65,905 $ 150,000 $ 131,968
</Table>
See accompanying notes.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides primarily 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 accounting principles generally accepted
in the United States 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 generally 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 generally 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, the 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.
REVENUE RECOGNITION Tickets sold are initially deferred as "Air traffic
liability". Passenger revenue is recognized when transportation is provided.
"Air traffic liability" primarily represents tickets sold for future travel
dates and estimated refunds, or exchanges, of tickets sold for past travel
dates. Estimated refunds and exchanges, including the underlying assumptions,
are evaluated each reporting period with resulting adjustments included in
"Passenger revenue". Factors which may affect estimated refunds include, but may
not be limited to, the Company's refund policy, the mix of refundable and
non-refundable fares, and fare sale activity. The Company's estimation
techniques have been consistently applied from year to year; however, as with
any estimates, actual refund and
27
<PAGE>
exchange activity may vary from estimated amounts. The Company believes it is
unlikely that materially different estimates would be reported under different
assumptions or conditions.
FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of
providing free travel for 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. Prior to
2000, revenue from the sale of flight segment credits was recognized when the
credits were sold. However, beginning January 1, 2000, funds received from the
sale of flight segment credits and associated with future travel is deferred and
recognized as Passenger revenue when the ultimate free travel awards are flown
or the credits expire unused. See Note 2.
ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 2001, 2000, and 1999 was
$147.6 million, $141.3 million, and $137.7 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 12.
FINANCIAL DERIVATIVE INSTRUMENTS The Company utilizes a variety of derivative
instruments, including both crude oil and heating oil based derivatives, to
hedge a portion of its exposure to jet fuel price increases. These instruments
consist primarily of purchased call options, collar structures, and fixed price
swap agreements. Prior to 2001, the net cost paid for option premiums and gains
and losses on all financial derivative instruments, including those terminated
or settled early, were deferred and charged or credited to fuel expense in the
same month that the underlying jet fuel being hedged was used. However,
beginning January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities", as amended, which changed the way it accounts for financial
derivative instruments. See Note 2 and Note 9.
RECENT ACCOUNTING DEVELOPMENTS During 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations",
which is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The pronouncement addresses the recognition and
re-measurement of obligations associated with the retirement of tangible
long-lived assets. On October 3, 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", which is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and applies to all
long-lived assets (including discontinued operations). The Company does not
expect these standards to have a material impact on future financial statements
or results of operations.
2. ACCOUNTING CHANGES
Effective January 1, 2001, the Company adopted SFAS 133. SFAS 133 requires the
Company to record all financial derivative instruments on its balance sheet at
fair value. Derivatives that are not designated as
28
<PAGE>
hedges must be adjusted to fair value through income. If a derivative is
designated as a hedge, depending on the nature of the hedge, changes in its fair
value that are considered to be effective, as defined, either offset the change
in fair value of the hedged assets, liabilities, or firm commitments through
earnings or are recorded in "Accumulated other comprehensive income (loss)"
until the hedged item is recorded in earnings. Any portion of a change in a
derivative's fair value that is considered to be ineffective, as defined, is
recorded immediately in "Other (gains) losses, net" in the Consolidated
Statement of Income. Any portion of a change in a derivative's fair value that
the Company elects to exclude from its measurement of effectiveness is required
to be recorded immediately in earnings.
Under the rules established by SFAS 133, the Company has alternatives in
accounting for its financial derivative instruments. The Company primarily uses
financial derivative instruments to hedge its exposure to jet fuel price
increases and accounts for these derivatives as cash flow hedges, as defined. In
accordance with SFAS 133, the Company must comply with detailed rules and strict
documentation requirements prior to beginning hedge accounting. As required by
SFAS 133, the Company assesses the effectiveness of each of its individual
hedges on a quarterly basis. The Company also examines the effectiveness of its
entire hedging program on a quarterly basis utilizing statistical analysis. This
analysis involves utilizing regression and other statistical analysis which
compare changes in the price of jet fuel to changes in the prices of the
commodities used for hedging purposes (crude oil and heating oil). If these
statistical techniques do not produce results within certain predetermined
confidence levels, the Company could lose its ability to utilize hedge
accounting, which could cause the Company to recognize all gains and losses on
financial derivative instruments in earnings in the periods following the
determination that the Company no longer qualified for hedge accounting. This
could, in turn, depending on the materiality of periodic changes in derivative
fair values, increase the volatility of the Company's future earnings.
Upon adoption of SFAS 133, the Company recorded the fair value of its fuel
derivative instruments in the Consolidated Balance Sheet and a deferred gain of
$46.1 million, net of tax, in "Accumulated other comprehensive income (loss)".
See Note 10 for further information on Comprehensive income. During 2001, the
Company recognized approximately $8.2 million as a net expense in "Other (gains)
losses, net", related to the ineffectiveness of its hedges. During 2001, the
Company recognized approximately $17.5 million of net expense, related to
amounts excluded from the Company's measurements of hedge effectiveness, in
"Other (gains) losses, (net)". The 2001 adoption of SFAS 133 has resulted in
more volatility in the Company's financial statements than in the past due to
the changes in market values of its derivative instruments and some
ineffectiveness that has been experienced in its fuel hedges. See Note 9 for
further information on the Company's derivative instruments.
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101
(SAB 101) issued by the Securities and Exchange Commission in December 1999. As
a result of adopting SAB 101, the Company changed the way it recognizes revenue
from 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 in "Other revenue" when flight segment credits were sold,
consistent with most other major airlines. Beginning January 1, 2000, the
Company recognizes Passenger revenue when free travel awards resulting from the
flight segment credits sold are flown or credits expire unused. Due to this
change, the Company recorded a cumulative effect charge in first quarter 2000 of
$22.1 million (net of income taxes of $14.0 million) or $.03 per share, basic
and diluted. Adopting this method of accounting for 1999 would have reduced the
Company's Net income by $3.9 million or $.01 per basic share. Net income per
share, diluted, would not have changed.
29
<PAGE>
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 per share, diluted, by $.02 for the year ended December 31,
1999.
3. FEDERAL GRANTS AND SPECIAL CHARGES RELATED TO TERRORIST ATTACKS
On September 11, 2001, terrorists hijacked and used two American Airlines, Inc.
aircraft and two United Air Lines, Inc. aircraft in terrorist attacks on the
United States (terrorist attacks). As a result of these terrorist attacks, the
Federal Aviation Administration (FAA) immediately suspended all commercial
airline flights on the morning of September 11. The Company resumed flight
activity on September 14 and was operating its normal pre-September 11 flight
schedule by September 18, 2001. From September 11 until the Company resumed
flight operations on September 14, Southwest cancelled approximately 9,000
flights.
On September 22, 2001, President Bush signed into law the Air Transportation
Safety and System Stabilization Act (the Act). The Act provides for up to $5
billion in cash grants to qualifying U.S. airlines and freight carriers to
compensate for direct and incremental losses, as defined in the Act, from
September 11, 2001 through December 31, 2001, associated with the terrorist
attacks. Each airline's total eligible grant is being determined based on that
airline's percentage of ASMs during August 2001 to total eligible carriers' ASMs
for August 2001, less an undetermined amount set aside for eligible carriers
that provide services not measured by ASMs. The Department of Transportation
(DOT) will make the final determination of the amount of eligible direct and
incremental losses incurred by each airline. Direct and incremental losses,
while defined generally in the Act, are subject to interpretation by the DOT.
Lastly, final applications for grants must be accompanied by Agreed Upon
Procedures reports from independent accountants and may be subject to additional
audit or review by the DOT and Congress.
During third quarter and fourth quarter 2001, the Company recognized in "Other
gains" approximately $235 million from grants under the Act. The Company
believes its actual direct and incremental losses related to the September 11
terrorist attacks will exceed the total amount for which the Company will be
ultimately eligible. The Company may recognize up to approximately $50 million
in additional amounts during 2002 from the Act upon completion and approval of
the final application based on the DOT's final interpretations of the Act.
However, due to many uncertainties regarding the interpretation of the Act, the
Company believed that recognizing gains in excess of the $235 million in 2001
was not appropriate.
In addition, the Company recorded special charges of $48 million in 2001 arising
from the terrorist attacks. Total special charges included a $30 million
reduction in "Passenger revenue" resulting from refunds of nonrefundable fares,
$13 million in charges to "Other operating expenses" for write-downs of various
assets due to impairment, and other charges that are included in "Other (gains)
losses, net".
30
<PAGE>
4. COMMITMENTS
In response to the decrease in demand for air travel since the terrorist
attacks, the Company modified its schedule for future aircraft deliveries and
the timing of its future capital expenditure commitments. In November 2001,
Southwest entered into a trust arrangement with a special purpose entity (the
Trust) and assigned its purchase agreement with Boeing to the Trust with respect
to 19 Boeing 737-700 aircraft originally scheduled to be delivered from
September 2001 through April 2002. Southwest subsequently entered into a
purchase agreement with the Trust to purchase the aircraft at new delivery dates
from January 2002 through April 2003. As of December 31, 2001, the Trust has
purchased a total of eleven completed aircraft, and the remaining eight aircraft
will be purchased by the Trust from Boeing when the aircraft are completed in
2002. Southwest has the option to accelerate purchases from the Trust at any
time.
Although Southwest does not have legal title to the assets of the Trust and has
not guaranteed the liabilities of the Trust, Southwest does exercise certain
rights of ownership over the Trust assets. Consequently, the assets (i.e.,
"Flight equipment" and "Deposits on flight equipment purchase contracts") and
associated liabilities (i.e., "Aircraft purchase obligations") of the Trust have
been recorded in the accompanying Consolidated Balance Sheet as of December 31,
2001.
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Excluding the aircraft acquired or to be acquired by the
Trust, the Company has contractual purchase commitments with Boeing for no
737-700 aircraft deliveries in 2002, 13 scheduled for delivery in 2003, 23 in
2004, 24 in 2005, 22 in 2006, and 31 thereafter. In addition, the Company has
options to purchase up to 87 737-700s during 2004-2008 and purchase rights for
an additional 217 737-700s during 2007-2012. 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. Including the amounts
associated with the Trust that are included as liabilities in the Company's
Consolidated Balance Sheet as of December 31, 2001, aggregate funding needed for
firm commitments is approximately $3.7 billion, subject to adjustments for
inflation, due as follows: $319 million in 2002, $689 million in 2003, $685
million in 2004, $719 million in 2005, $641 million in 2006, and $622 million
thereafter.
5. ACCRUED LIABILITIES
<Table>
<Caption>
(In thousands) 2001 2000
- -------------- ---------- ----------
<S> <C> <C>
Retirement plans (Note 13) $ 147,110 $ 180,340
Aircraft rentals 120,554 117,302
Vacation pay 83,105 72,115
Other 196,771 130,117
---------- ----------
$ 547,540 $ 499,874
========== ==========
</Table>
6. SHORT-TERM BORROWINGS
In September 2001, the Company borrowed the full $475 million available under
its unsecured revolving credit line with a group of banks. Borrowings under the
credit line bear interest at six-month LIBOR plus 17 basis points and amounts
are repayable on or before May 6, 2002. The interest rate (approximately 3.26%
31
<PAGE>
as of December 31, 2001), however, may change based on changes in the Company's
credit rating. The Company intends to repay the borrowings in full prior to the
due date with either cash on hand or proceeds from the issuance of long-term
debt securities. The full $475 million is classified as a current liability in
the Consolidated Balance Sheet at December 31, 2001. There were no outstanding
borrowings under this agreement at December 31, 2000.
7. LONG-TERM DEBT
<Table>
<Caption>
(In thousands) 2001 2000
- -------------- ---------- ----------
<S> <C> <C>
9.4% Notes due 2001 $ -- $ 100,000
8 3/4% Notes due 2003 100,000 100,000
Aircraft Secured Notes due 2004 200,000 200,000
8% Notes due 2005 100,000 100,000
Pass Through Certificates 614,250 --
7 7/8% Notes due 2007 100,000 100,000
French Credit Agreements 52,310 54,243
7 3/8% Debentures due 2027 100,000 100,000
Capital leases (Note 8) 109,268 117,083
---------- ----------
1,375,828 871,326
Less current maturities 39,567 108,752
Less debt discount and issue costs 9,103 1,582
---------- ----------
$1,327,158 $ 760,992
========== ==========
</Table>
On October 30, 2001, the Company issued $614.3 million Pass Through Certificates
consisting of $150.0 million 5.1% Class A-1 certificates, $375.0 million 5.5%
Class A-2 certificates, and $89.3 million 6.1% Class B certificates. A separate
trust was established for each class of certificates. The trusts used the
proceeds from the sale of certificates to acquire equipment notes, which were
issued by Southwest on a full recourse basis. Payments on the equipment notes
held in each trust will be passed through to the holders of certificates of such
trust. The equipment notes were issued for each of 29 Boeing 737-700 aircraft
owned by Southwest and are secured by a mortgage on such aircraft. Interest on
the equipment notes held for the certificates is payable semiannually, beginning
May 1, 2002. Beginning May 1, 2002, principal payments on the equipment notes
held for the Class A-1 certificates are due semiannually until the balance of
the certificates mature on May 1, 2006. The entire principal of the equipment
notes for the Class A-2 and Class B certificates are scheduled for payment on
November 1, 2006.
In July 2001, the Company redeemed $100 million of senior unsecured 9.4% Notes
originally issued in 1991.
In fourth quarter 1999, the Company issued $200 million of floating rate
Aircraft Secured Notes (the 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.
32
<PAGE>
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 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.
During 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.
During 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 8 3/4% Notes
due October 15, 2003. Interest on the Notes is payable semi-annually. The Notes
are not redeemable prior to maturity.
The net book value of the assets pledged as collateral for the Company's secured
borrowings, primarily aircraft and engines, was $958.0 million at December 31,
2001.
As of December 31, 2001, aggregate annual principal maturities for the five-year
period ending December 31, 2006 were $40 million in 2002, $130 million in 2003,
$232 million in 2004, $142 million in 2005, $541 million in 2006, and $291
million thereafter.
8. LEASES
Total rental expense for operating leases charged to operations in 2001, 2000,
and 1999 was $358.6 million, $330.7 million, and $318.2 million, respectively.
The majority of the Company's terminal operations space, as well as 92 aircraft,
were under operating leases at December 31, 2001. The amounts applicable to
capital leases included in property and equipment were:
<Table>
<Caption>
(In thousands) 2001 2000
- -------------- ---------- ----------
<S> <C> <C>
Flight equipment $ 165,085 $ 164,909
Less accumulated depreciation 99,801 92,763
---------- ----------
$ 65,284 $ 72,146
========== ==========
</Table>
33
<PAGE>
Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
2001, were:
<Table>
<Caption>
(In thousands) CAPITAL LEASES OPERATING LEASES
- -------------- -------------- ----------------
<S> <C> <C>
2002 $ 17,562 $ 290,378
2003 17,751 275,013
2004 17,651 242,483
2005 23,509 217,170
2006 13,379 185,125
After 2006 65,395 1,589,559
---------- ----------
Total minimum lease payments 155,247 $2,799,728
==========
Less amount representing interest 45,979
----------
Present value of minimum
lease payments 109,268
Less current portion 8,692
----------
Long-term portion $ 100,576
==========
</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,
generally limited to a stated percentage of the lessor's defined cost of the
aircraft.
9. DERIVATIVE AND FINANCIAL INSTRUMENTS
Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. Jet fuel and oil consumed
in 2001, 2000, and 1999 represented approximately 15.6, 17.4 percent, and 12.5
percent of Southwest's operating expenses, respectively. The Company endeavors
to acquire jet fuel at the lowest possible prices. Because jet fuel is not
traded on an organized futures exchange, liquidity for hedging is limited.
However, the Company has found that both crude oil and heating oil contracts are
effective commodities for hedging jet fuel. The Company has financial derivative
instruments in the form of the types of hedges it utilizes to decrease its
exposure to jet fuel price increases. The Company does not purchase or hold any
derivative financial instruments for trading purposes.
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, 2001, the Company had a mixture of purchased call
options, collar structures, and fixed price swap agreements in place to hedge
approximately 60 percent of its 2002 total anticipated jet fuel requirements,
approximately 47 percent of its 2003 total anticipated jet fuel requirements,
and a small portion of its 2004-2005 total anticipated jet fuel requirements. As
of December 31, 2001, the majority of the Company's 2002 hedges are effectively
heating oil-based positions in the form of option contracts. All remaining hedge
positions are crude oil-based positions.
34
<PAGE>
During 2001, 2000, and 1999, the Company recognized gains in "Fuel and oil"
expense of $79.9 million, $113.5 million, and $14.8 million, respectively, from
hedging activities. At December 31, 2001 and 2000, approximately $8.2 million
and $49.9 million, respectively, was due from third parties from expired
derivative contracts, and accordingly, are included in "Accounts and other
receivables" in the accompanying Consolidated Balance Sheet. The Company
accounts for its fuel hedge derivative instruments as cash flow hedges, as
defined. Therefore, all changes in fair value that are considered to be
effective are recorded in "Accumulated other comprehensive income (loss)" until
the underlying jet fuel is consumed. The fair value of the Company's financial
derivative instruments at December 31, 2001, was a net liability of
approximately $19.4 million and is classified as "Accrued liabilities" in the
Consolidated Balance Sheet. The fair value of the derivative instruments,
depending on the type of instrument, was determined by the use of present value
methods or standard option value models with assumptions about commodity prices
based on those observed in underlying markets.
As of December 31, 2001, the Company had approximately $31.1 million in
unrealized losses, net of tax, in "Accumulated other comprehensive income
(loss)" related to fuel hedges. Included in this total are approximately $22.2
million in net unrealized losses that are expected to be realized in earnings
during 2002. Upon the adoption of SFAS 133 on January 1, 2001, the Company
recorded unrealized fuel hedge gains of $46.1 million, net of tax, of which
$45.5 million was realized in earnings during 2001.
Outstanding financial derivative instruments expose the Company to credit loss
in the event of nonperformance by the counterparties to the agreements. However,
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 risk, the Company selects and periodically
reviews 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, 2001, the Company had
agreements with five counterparties containing early termination rights and/or
bilateral collateral provisions whereby security is required if market risk
exposure exceeds a specified threshold amount or credit rating falls below
certain levels. Neither the Company nor the counterparties exceeded such
threshold amounts at December 31, 2001. The Company is in the process of
negotiating similar agreements with other counterparties.
The carrying amounts and estimated fair values of the Company's long-term debt
at December 31, 2001 were as follows:
<Table>
<Caption>
(In thousands) CARRYING VALUE FAIR VALUE
- -------------- -------------- ----------
<S> <C> <C>
8 3/4% Notes due 2003 $ 100,000 $ 106,954
Aircraft Secured Notes due 2004 200,000 200,000
8% Notes due 2005 100,000 107,602
Pass Through Certificates 614,250 605,839
7 7/8% Notes due 2007 100,000 108,455
French Credit Agreements 52,310 52,310
7 3/8% Debentures due 2027 100,000 96,150
</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.
35
<PAGE>
10. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of certain financial
derivative instruments, which qualify for hedge accounting, and unrealized gains
and losses on certain investments. Comprehensive income totaled $479.6 million
for 2001. The difference between Net income and Comprehensive income for 2001 is
as follows:
<Table>
<Caption>
(In thousands) 2001
- -------------- ----------
<S> <C>
Net income $ 511,147
Unrealized (loss) on derivative instruments,
net of deferred taxes of $(20,719) (31,063)
Other, net of deferred taxes of $(320) (475)
----------
Total other comprehensive income (loss) (31,538)
----------
Comprehensive income $ 479,609
==========
</Table>
A rollforward of the amounts included in "Accumulated other comprehensive income
(loss)", net of taxes, is shown below:
<Table>
<Caption>
Fuel Accumulated other
hedge comprehensive
(In thousands) derivatives Other income (loss)
- -------------- ----------- ---------- -----------------
<S> <C> <C> <C>
Balance at December 31, 2000 $ -- $ -- $ --
January 1, 2001 transition adjustment 46,089 -- 46,089
2001 changes in fair value (31,665) (475) (32,140)
Reclassification to earnings (45,487) -- (45,487)
---------- ---------- ----------
Balance at December 31, 2001 $ (31,063) $ (475) $ (31,538)
========== ========== ==========
</Table>
11. 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, 2001, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (140.3 million shares authorized of
which 40.2 million shares have not yet been granted) and upon exercise of rights
(323.0 million shares) pursuant to the Common Share Purchase 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 is
exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0022 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
36
<PAGE>
defined in the Agreement, each Right will entitle its holder to purchase for
$3.29 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 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. On January 18, 2001,
the Company's Board of Directors declared a three-for-two stock split,
distributing 253.9 million shares on February 15, 2001. Unless otherwise stated,
all share and per share data presented in the accompanying consolidated
financial statements and notes thereto have been restated to give effect to
these stock splits.
On September 23, 1999, the Company's Board of Directors authorized the
repurchase of up to $250 million of its outstanding common stock. This program
to date has resulted in the repurchase of 18.3 million shares at an average cost
of $10.85 per share between October 1999 and December 2000. No shares were
repurchased in 2001. All of these acquired shares were subsequently reissued
under Employee stock plans.
12. STOCK PLANS
At December 31, 2001, the Company had twelve stock-based compensation plans,
excluding a plan covering the Company's Board of Directors and plans related to
employment contracts with certain Executive Officers of the Company. 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.
Of the Company's twelve stock-based compensation plans, eleven are fixed option
plans that cover various Employee groups. Under these plans, the Company may
grant up to 141 million shares of common stock, of which 32.4 million shares
were available for granting in future periods as of December 31, 2001. Under
plans covered by collective bargaining agreements, options granted to Employees
generally have terms similar to the term of, and vest in annual increments over
the remaining life of, the respective collective bargaining agreement. Options
granted to Employees not covered by collective bargaining agreements have
ten-year terms and vest and become fully exercisable over three, five, or ten
years of continued employment, depending upon the grant type.
Aggregated information regarding the Company's eleven fixed stock option plans,
as adjusted for stock splits, is summarized below:
37
<PAGE>
<Table>
<Caption>
COLLECTIVE BARGAINING PLANS OTHER EMPLOYEE PLANS
----------------------------- -----------------------------
AVERAGE EXERCISE AVERAGE EXERCISE
(In thousands, except exercise prices) OPTIONS PRICE OPTIONS PRICE
- -------------------------------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1998 68,909 $ 4.30 34,919 $ 4.40
Granted 2,304 11.70 5,051 12.19
Exercised (3,327) 4.13 (4,938) 3.11
Surrendered (612) 4.33 (1,701) 5.56
---------- ----------
Outstanding December 31, 1999 67,274 4.32 33,331 4.61
Granted 4,707 18.23 11,904 13.86
Exercised (7,895) 4.47 (7,416) 3.47
Surrendered (686) 5.15 (1,461) 8.67
---------- ----------
Outstanding December 31, 2000 63,400 5.59 36,358 8.66
Granted 1,665 19.05 4,022 18.75
Exercised (4,166) 4.48 (4,135) 4.77
Surrendered (349) 8.71 (1,394) 10.87
---------- ----------
Outstanding December 31, 2001 60,550 $ 6.05 34,851 $ 10.20
========== ==========
Exercisable December 31, 2001 38,483 $ 5.15 10,696 $ 9.20
Available for granting in future periods 10,741 21,634
</Table>
The following table summarizes information about stock options outstanding under
the eleven fixed option plans at December 31, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -------------------------------------
WTD-AVERAGE
OPTIONS OUTSTANDING REMAINING WTD-AVERAGE OPTIONS EXERCISABLE WTD-AVERAGE
RANGE OF EXERCISE PRICES AT 12/31/01 (000'S) CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/01 (000'S) EXERCISE PRICE
- ------------------------ ------------------- ---------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.23 TO $ 3.35 79 .8 yrs $ 2.40 70 $ 2.42
$ 3.71 TO $ 5.38 59,035 4.9 yrs 4.08 36,973 4.04
$ 5.85 TO $ 8.73 9,850 6.1 yrs 7.64 4,554 7.47
$10.10 TO $15.07 8,829 7.2 yrs 11.32 3,023 11.46
$15.25 TO $22.81 17,556 8.0 yrs 17.36 4,553 17.23
$23.92 TO $23.93 52 10.3 yrs 23.93 6 23.93
------------ ------------
$ 2.23 TO $23.93 95,401 5.7 yrs $ 7.57 49,179 $ 6.03
============ ============
</Table>
Under the amended 1991 Employee Stock Purchase Plan (ESPP), at December 31,
2001, the Company is authorized to issue up to a remaining balance of 7.8
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 1,025,000 shares in 2001, 1,029,000 shares in 2000, and
974,000 shares in 1999 at average prices of $16.42, $13.34, and $10.83,
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
38
<PAGE>
weighted-average assumptions used for grants under the fixed option plans in
2001, 2000, and 1999, respectively: dividend yield of .065 percent, .10 percent,
and .12 percent; expected volatility of 34.80 percent, 34.87 percent, and 35.66
percent; risk-free interest rate of 4.46 percent, 5.04 percent, and 6.68
percent; and expected lives ranging from 5 years to 6 years, depending upon the
type of grant.
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.
The fair value of options granted under the fixed option plans during 2001
ranged from $5.69 to $9.11. The fair value of options granted under the fixed
option plans during 2000 ranged from $4.47 to $9.79. The fair value of options
granted under the fixed option plans during 1999 ranged from $4.17 to $5.87. The
weighted-average fair value of each purchase right under the ESPP granted in
2001, 2000, and 1999, which is equal to the ten percent discount from the market
value of the common stock at the end of each purchase period, was $1.82, $1.48,
and $1.17, respectively.
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 are
as follows:
<Table>
<Caption>
(In thousands except per share amounts) 2001 2000 1999
- --------------------------------------- ------------ ------------ ------------
NET INCOME:
<S> <C> <C> <C>
As reported $ 511,147 $ 603,093 $ 474,378
Pro forma $ 485,946 $ 583,707 $ 461,875
NET INCOME PER SHARE, BASIC:
As reported $ .67 $ .81 $ .63
Pro forma $ .64 $ .78 $ .61
NET INCOME PER SHARE, DILUTED:
As reported $ .63 $ .76 $ .59
Pro forma $ .61 $ .74 $ .58
</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.
13. EMPLOYEE RETIREMENT PLANS
The Company has defined contribution plans covering substantially all of
Southwest's Employees. The Southwest Airlines Co. Profitsharing Plan is a money
purchase defined contribution plan and Employee stock purchase plan. The Company
also sponsors Employee savings plans under section 401(k) of the
39
<PAGE>
Internal Revenue Code, which include Company matching contributions. The 401(k)
plans cover substantially all Employees. Contributions under all defined
contribution plans are based primarily on Employee compensation and performance
of the Company.
Company contributions to all retirement plans expensed in 2001, 2000, and 1999
were $214.6 million, $241.5 million, and $192.0 million, respectively.
14. 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, 2001 and 2000, are as
follows:
<Table>
<Caption>
(In thousands) 2001 2000
- -------------- ------------ ------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated depreciation $ 1,246,009 $ 1,049,791
Scheduled airframe maintenance 89,292 71,519
Other 31,770 23,805
------------ ------------
Total deferred tax liabilities 1,367,071 1,145,115
DEFERRED TAX ASSETS:
Deferred gains from sale and
leaseback of aircraft 101,755 107,686
Capital and operating leases 76,990 77,151
Accrued employee benefits 83,450 80,050
State taxes 37,715 28,843
Other 55,418 26,525
------------ ------------
Total deferred tax assets 355,328 320,255
------------ ------------
Net deferred tax liability $ 1,011,743 $ 824,860
============ ============
</Table>
The provision for income taxes is composed of the following:
<Table>
<Caption>
(In thousands) 2001 2000 1999
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
CURRENT:
Federal $ 98,378 $ 197,875 $ 137,393
State 10,212 26,671 18,900
---------- ---------- ----------
Total current 108,590 224,546 156,293
DEFERRED:
Federal 187,296 151,694 128,984
State 20,626 15,900 13,956
---------- ---------- ----------
Total deferred 207,922 167,594 142,940
---------- ---------- ----------
$ 316,512 $ 392,140 $ 299,233
========== ========== ==========
</Table>
40
<PAGE>
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. 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. On December 21, 2000, the national office of the IRS
published a revenue ruling in which it concluded that aircraft inspection and
maintenance is currently deductible as an ordinary and necessary business
expense. In accordance with the revenue ruling, the IRS conceded the proposed
adjustments to the deductions claimed by the Company for aircraft inspection and
maintenance expense, and on June 1, 2001, a decision was entered by the Tax
Court holding that there is no deficiency in income tax for the taxable years
1989 through 1991.
The IRS similarly proposed to disallow deductions claimed by the Company on its
federal income tax returns for the taxable years 1992 through 1994 primarily
related to the costs of certain aircraft inspection and maintenance expenses.
During 2001 the IRS conceded the proposed adjustments to the deductions claimed
for aircraft inspection and maintenance expenses. 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) 2001 2000 1999
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory
U.S. tax rates $ 289,681 $ 356,077 $ 270,764
Nondeductible items 7,318 6,801 6,664
State income taxes,
net of federal benefit 20,045 27,671 21,356
Other, net (532) 1,591 449
---------- ---------- ----------
Total income
tax provision $ 316,512 $ 392,140 $ 299,233
========== ========== ==========
</Table>
41
<PAGE>
15. NET INCOME PER SHARE
The following table sets forth the computation of net income per share, basic
and diluted:
<Table>
<Caption>
(In thousands except per share amounts) 2001 2000 1999
- --------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
NUMERATOR:
Net income before cumulative effect
of change in accounting principle $ 511,147 $ 625,224 $ 474,378
Cumulative effect of change in
accounting principle -- (22,131) --
------------ ------------ ------------
Net income $ 511,147 $ 603,093 $ 474,378
============ ============ ============
DENOMINATOR:
Weighted-average shares
outstanding, basic 762,973 748,617 754,598
Dilutive effect of Employee
stock options 44,142 47,699 49,293
------------ ------------ ------------
Adjusted weighted-average
shares outstanding, diluted 807,115 796,316 803,891
============ ============ ============
NET INCOME PER SHARE:
Basic before cumulative effect
of change in accounting principle $ .67 $ .84 $ .63
Cumulative effect of change
in accounting principle -- (.03) --
------------ ------------ ------------
Net income per share, basic $ .67 $ .81 $ .63
============ ============ ============
Diluted before cumulative effect
of change in accounting principle $ .63 $ .79 $ .59
Cumulative effect of change
in accounting principle -- (.03) --
------------ ------------ ------------
Net income per share, diluted $ .63 $ .76 $ .59
============ ============ ============
</Table>
The Company has excluded 5.7 million, 11.7 million, and 6.7 million shares from
its calculations of net income per share, diluted, in 2001, 2000, and 1999,
respectively, as they represent antidilutive stock options for the respective
periods presented.
42
<PAGE>
REPORT OF 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, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2 to the financial statements, in 2001 the Company changed
its method of accounting for derivative financial instruments and in 2000 the
Company changed its method of accounting for the sale of flight segment credits.
ERNST & YOUNG LLP
Dallas, Texas
January 16, 2002
43
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED
------------------------------------------------------------------
2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ 1,242,647 $ 1,460,675 $ 1,478,834 $ 1,467,404
Operating income 155,408 314,558 300,109 251,070
Income before income taxes 155,973 310,865 301,073 249,453
Net income 95,643(1) 190,622 184,298 154,661
Net income per share, basic .13(1) .26 .25 .21
Net income per share, diluted .12(1) .24 .23 .19
</Table>
<Table>
<Caption>
2001 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues $ 1,428,617 $ 1,553,785 $ 1,335,125 $ 1,237,647
Operating income 210,157 290,862 92,986 37,117
Income before income taxes 196,502 287,451 245,870 97,836
Net income 121,045 175,633 150,964 63,505
Net income per share, basic .16 .23 .20 .08
Net income per share, diluted .15 .22 .19 .08
</Table>
(1) Excludes cumulative effect of accounting change of $22.1 million ($.03 per
share, basic and diluted).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" incorporated herein by reference from the definitive
Proxy Statement for Southwest's Annual Meeting of Shareholders to be held May
15, 2002. See "Executive Officers of the Registrant" in Part I following Item 4
for information relating to executive officers.
44
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers," incorporated herein by reference from
the definitive Proxy Statement for Southwest's Annual Meeting of Shareholders to
be held May 15, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein by
reference from the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 15, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference from the definitive
Proxy Statement for Southwest's Annual Meeting of Shareholders to be held May
15, 2002.
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); Amendment to Restated Articles of Incorporation of Southwest
(incorporated by reference to Exhibit 3.1 to Southwest's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-7259).
3.2 Bylaws of Southwest, as amended through May 2001 (incorporated by
reference to Exhibit 3.2 to Southwest's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 (File No. 1-7259).
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
45
<PAGE>
(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 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));
Amendment No. 1 to Rights Agreement dated March 15, 2001 (incorporated by
reference to Exhibit 1 to Form 8-A Amendment No. 3 dated April 25, 2001
(File No. 1-7529)).
4.4 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)).
4.5 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 (incorporated by reference to
Exhibit 10.1 to Southwest's Annual Report on form 10-K for the year ended
December 31, 1999 (File No. 1-7259)); Supplemental Agreements Nos. 11, 12,
13 and 14 (incorporated by reference to Exhibit 10.1 to Southwest's
Quarterly Report on form 10-Q for the quarter ended September 30, 2000
(File No. 1- 7259)); Supplemental Agreements Nos. 15, 16, 17, 18 and 19
(incorporated by reference to Exhibit 10.1 to Southwest's Quarterly Report
on form 10-Q for the quarter ended September 30, 2001 (File No. 1-7259)).
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.
10.2 Aircraft Acquisition and Sale Agreement dated as of November 13, 2001
among The Amor Trust, Wilmington Trust Company, Wells Fargo Bank
Northwest, National Association and Southwest (incorporated by reference
to Exhibit 10.2 to Southwest's Quarterly Report on form 10-Q for the
quarter ended September 30, 2001 (File No. 1-7259)).
46
<PAGE>
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.
10.3 Purchase Agreement Assignment dated as of November 13, 2001 between The
Amor Trust and Southwest (incorporated by reference to Exhibit 10.3 to
Southwest's Quarterly Report on form 10-Q for the quarter ended September
30, 2001 (File No. 1-7259)).
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.
10.4 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)).
10.5 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)).
10.6 1996 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, 1996 (File No. 1-7259)).
10.7 2001 employment agreement and related stock option agreements between
Southwest and Herbert D. Kelleher (incorporated by reference to Exhibit 10
to Southwest's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001 (File No. 1-7259)).
10.8 1991 Incentive Stock Option Plan (incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-8 (File No. 33-40652)).
10.9 1991 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit
4.2 to Registration Statement on Form S-8 (File No. 33-40652)).
10.10 1991 Employee Stock Purchase Plan as amended September 21, 2000
(incorporated by reference to Exhibit 4 to Amendment No. 1 to Registration
Statement on Form S-8 (file No. 333-40653)).
10.11 Southwest Airlines Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.8 to Southwest's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-729)); Amendment No. 1 to Southwest Airlines
Co. Profit Sharing Plan.
10.12 Southwest Airlines Co. 401(k) Plan.
10.13 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)).
10.14 1996 Incentive Stock Option Plan (incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-20275)).
47
<PAGE>
10.15 1996 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit
4.2 to Registration Statement on Form S-8 (File No. 333-20275)).
10.16 Employment Agreement dated as of June 19, 2001 between Southwest and James
F. Parker.
10.17 Employment Agreement dated as of June 19, 2001 between Southwest and
Colleen C. Barrett.
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.
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) The following reports on Form 8-K were filed during the fourth quarter of
2001.
On October 3, 2001, Southwest filed a Current Report on Form 8-K for the purpose
of filing the Company's October 3, 2001 press release reporting September 2001
traffic results as Exhibit 99.1.
On October 29, 2001, Southwest filed a Current Report on Form 8-K to file, under
Item 7-Financial Statements and Exhibits, certain documents related to its
Registration Statement on Form S-3 (File No. 333- 71392).
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHWEST AIRLINES CO.
January 30, 2002
By /s/ Gary C. Kelly
-------------------------------------
Gary C. Kelly
Executive Vice President,
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 January 30, 2002 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
- -----------------------------------------
Herbert D. Kelleher
/s/ James F. Parker Chief Executive Officer and Director
- -----------------------------------------
James F. Parker
/s/ Colleen C. Barrett President, Chief Operating Officer and Director
- -----------------------------------------
Colleen C. Barrett
/s/ Gary C. Kelly Executive Vice President and Chief Financial Officer
- ----------------------------------------- (Chief Financial and Accounting Officer)
Gary C. Kelly
/s/ Samuel E. Barshop Director
- -----------------------------------------
Samuel E. Barshop
Director
- -----------------------------------------
Gene H. Bishop
/s/ C. Webb Crockett Director
- -----------------------------------------
C. Webb Crockett
/s/ William H. Cunningham Director
- -----------------------------------------
William H. Cunningham
/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/ June M. Morris Director
- -----------------------------------------
June M. Morris
</Table>
<PAGE>
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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); Amendment to Restated
Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 3.1 to Southwest's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001
(File No. 1-7259).
3.2 Bylaws of Southwest, as amended through May 2001
(incorporated by reference to Exhibit 3.2 to
Southwest's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001 (File No. 1-7259).
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 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)); Amendment No. 1 to Rights Agreement dated
March 15, 2001 (incorporated by reference to Exhibit 1
Form 8-A Amendment No. 3 dated April 25, 2001 (File No.
1-7529)).
4.4 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)).
4.5 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
</Table>
<PAGE>
<Table>
<S> <C>
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 (incorporated
by reference to Exhibit 10.1 to Southwest's Annual
Report on form 10-K for the year ended December 31,
1999 (File No. 1-7259)); Supplemental Agreements Nos.
11, 12, 13 and 14 (incorporated by reference to Exhibit
10.1 to Southwest's Quarterly Report on form 10-Q for
the quarter ended September 30, 2000 (File No. 1-
7259)); Supplemental Agreements Nos. 15, 16, 17, 18 and
19 (incorporated by reference to Exhibit 10.1 to
Southwest's Quarterly Report on form 10-Q for the
quarter ended September 30, 2001 (File No. 1-7259)).
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.
10.2 Aircraft Acquisition and Sale Agreement dated as of
November 13, 2001 among The Amor Trust, Wilmington
Trust Company, Wells Fargo Bank Northwest, National
Association and Southwest (incorporated by reference to
Exhibit 10.2 to Southwest's Quarterly Report on form
10-Q for the quarter ended September 30, 2001 (File No.
1-7259)).
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.
10.3 Purchase Agreement Assignment dated as of November 13,
2001 between The Amor Trust and Southwest (incorporated
by reference to Exhibit 10.3 to Southwest's Quarterly
Report on form 10-Q for the quarter ended September 30,
2001 (File No. 1-7259)).
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.
10.4 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)).
10.5 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)).
10.6 1996 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, 1996 (File No.
1-7259)).
10.7 2001 employment agreement and related stock option
agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10 to Southwest's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 (File No. 1-7259)).
10.8 1991 Incentive Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on
Form S-8 (File No. 33-40652)).
</Table>
<PAGE>
<Table>
<S> <C>
10.9 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on
Form S-8 (File No. 33-40652)).
10.10 1991 Employee Stock Purchase Plan as amended September
21, 2000 (incorporated by reference to Exhibit 4 to
Amendment No. 1 to Registration Statement on Form S-8
(file No. 333-40653)).
10.11 Southwest Airlines Co. Profit Sharing Plan
(incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 1-7259)), Amendment
No. 1 to Southwest Airlines Co. Profit Sharing Plan.
10.12 Southwest Airlines Co. 401(k) Plan.
10.13 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)).
10.14 1996 Incentive Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on
Form S-8 (File No. 333-20275)).
10.15 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on
Form S-8 (File No. 333-20275)).
10.16 Employment Agreement dated as of June 19, 2001 between
Southwest and James F. Parker.
10.17 Employment Agreement dated as of June 19, 2001 between
Southwest and Colleen C. Barrett.
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.
</Table>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>3
<FILENAME>d93658ex10-11.txt
<DESCRIPTION>AMENDMENT NO.1 TO PROFIT SHARING PLAN
<TEXT>
<PAGE>
EXHIBIT 10.11
AMENDMENT NO. 1 TO THE
SOUTHWEST AIRLINES CO. PROFIT SHARING PLAN
Pursuant to the authority of the Board of Directors of Southwest
Airlines Co., and the provisions of Article XVII thereof, the Southwest Airlines
Co. Profit Sharing Plan is hereby amended effective as of November 15, 2001 in
the following respects only:
1. Article II, Subsection 2.1(c), is hereby amended to read as
follows:
"(c) Annual Compensation: The total amounts paid by the Company or any
Eligible Affiliate to an Employee as remuneration for personal services rendered
during each Plan Year, including expense allowances (to the extent includible in
the gross income of the Employee) and any amounts not includible in the gross
income of the Employee pursuant to Sections 125 or 402(g)(1) of the Code, but
excluding director's fees, expense reimbursements and nontaxable expense
allowances, prizes and awards, items of imputed income, contributions made by
the Company under this Plan or any other employee benefit plan or program it
maintains, such as group insurance, hospitalization or like benefits, amounts
realized or recognized from qualified or nonqualified stock options or when
restricted stock or property held by the Employee either becomes freely
transferable or is no longer subject to a substantial risk of forfeiture, and
amounts, if any, paid to an Employee in lieu of a Company Contribution to this
Plan in the event that such Company Contribution would constitute an annual
addition, as defined in Section 415(c)(2) of the Code, in excess of the
limitations under Section 415(c) of the Code. Annual Compensation shall include
amounts otherwise includible, as provided above, which are paid by the Company
or an Eligible Affiliate to the Employee through another person, pursuant to the
common paymaster provisions of Sections 3121(s) and 3306(p) of the Code.
Notwithstanding the foregoing, for purposes of determining Annual Compensation
for the 2001 Plan Year, Annual Compensation shall include the value of the
number of hours (or, in the case of flight attendants and pilots, the value of
the number of trips) donated by an Employee to the Company pursuant to the
"Pledge to LUV" program, provided that inclusion of such additional amounts will
not cause the Plan to fail to meet the requirements of Section 401(a)(4) of the
Code.
"The Annual Compensation of each Member or former Member taken into
account under the Plan for any Plan Year shall not exceed $150,000, as adjusted
by the Secretary of the Treasury for increases in the cost of living at the time
and in the manner set forth in Section 401(a)(17)(B) of the Code. Furthermore,
for purposes of an allocation under the Plan based on Annual Compensation,
Annual Compensation shall only include amounts attributable to the period an
Employee is a Member of the Plan."
2. Article IV, Section 4.1, the second paragraph, is hereby amended to
read as follows:
"For purposes of the foregoing, ANP is the operating profit of the
Company for such Plan Year. As used herein, the term 'operating profit' of the
Company for any Plan Year shall mean its income for such Plan Year before income
taxes, derived in accordance with generally accepted accounting principles, and
as set forth in the
<PAGE>
Company's audited statement of income included in the annual report to
shareholders, before provision for any contribution to this Plan, excluding (1)
nonoperating or non-recurring gains or losses not arising from the Company's
usual business operations, including gains or losses from the sale or exchange
of capital assets, as set forth in the Company's audited statement of income or
disclosed in the notes thereto, and (2) profits or losses incurred by TranStar
or any separately definable division of the Company; provided, however that
notwithstanding the foregoing, profits and losses incurred by Morris Air
Corporation shall be taken into account for Plan Years beginning after December
31, 1993. Notwithstanding the foregoing, 'operating profit' shall be adjusted to
take into account any special pre-tax gains resulting from cash grants under the
Air Transportation Safety and System Stabilization Act of 2001, net of special
charges arising from the events of September 11, 2001, including, but not
limited to, charges resulting from refunds, write-downs of various assets due to
impairment, and the deferral of aircraft firm orders and options."
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing instrument comprising Amendment No. 1 to the Southwest Airlines Co.
Profit Sharing Plan, the Company has caused these presents to be duly executed
in its name and behalf by its proper officers thereunto duly authorized the 15th
day of November, 2001.
SOUTHWEST AIRLINES CO.
ATTEST:
/s/ DEBORAH ACKERMAN By: /s/ JAMES F. PARKER
- ------------------------------- -------------------------------
Deborah Ackerman James F. Parker
Assistant Secretary Chief Executive Officer
<PAGE>
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this 28th day of December, 2001, personally appeared James. F. Parker,
to me known to be the individual person who subscribed the name of SOUTHWEST
AIRLINES CO., as its Chief Executive Officer, to the foregoing instrument and
acknowledged to me that he executed the same as his free and voluntary act and
deed and the free and voluntary act and deed of such corporation, for the uses
and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, the day and year last above
written.
/s/ MICHELLE LUSK
-----------------------------------
Notary Public in and for the State
of Texas
My Commission Expires:
7/5/02
- ----------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>4
<FILENAME>d93658ex10-12.txt
<DESCRIPTION>SOUTHWEST AIRLINES CO. 401(K) PLAN
<TEXT>
<PAGE>
EXHIBIT 10.12
SOUTHWEST AIRLINES CO.
401(k) PLAN
<PAGE>
SOUTHWEST AIRLINES CO.
401 (k) PLAN
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
<S> <C>
ARTICLE I - PURPOSE...........................................................1
ARTICLE II DEFINITIONS AND CONSTRUCTION.......................................2
2.1. DEFINITIONS..........................................................2
2.2. CONSTRUCTION.........................................................8
ARTICLE III - ELIGIBILITY AND PARTICIPATION...................................9
3.1. ELIGIBILITY REQUIREMENTS.............................................9
3.2. NOTIFICATION OF ELIGIBILITY..........................................9
3.3. RE-ENTRY OF PRIOR MEMBERS............................................9
ARTICLE IV - CONTRIBUTIONS....................................................9
4.1. SALARY REDUCTION CONTRIBUTIONS.......................................9
4.2. COMPANY MATCHING CONTRIBUTIONS......................................10
4.3. QUALIFIED NONELECTIVE CONTRIBUTIONS.................................10
4.4. SEVEN THOUSAND DOLLAR ($7,000.00) TEST..............................10
4.5. DEFERRAL PERCENTAGE TEST............................................10
4.6. CONTRIBUTION PERCENTAGE TEST........................................12
4.7. ROLLOVER CONTRIBUTIONS..............................................13
ARTICLE V - ADJUSTMENT OF INDIVIDUAL ACCOUNTS................................14
5.1. INDIVIDUAL ACCOUNTS.................................................14
5.2. METHOD OF ADJUSTMENT................................................15
5.3. SALARY DEFERRAL ELECTIONS...........................................15
ARTICLE VI - ALLOCATIONS.....................................................16
6.1. SALARY REDUCTION, COMPANY MATCHING, AND ROLLOVER CONTRIBUTIONS......16
6.2. QUALIFIED NONELECTIVE CONTRIBUTIONS.................................16
6.3. FORFEITURES.........................................................17
6.4. NOTIFICATION TO MEMBERS.............................................17
6.5. MAXIMUM ANNUAL ADDITION TO ACCOUNT OR BENEFIT.......................17
ARTICLE VII - RETIREMENT.....................................................19
7.1. NORMAL OR LATE RETIREMENT...........................................19
7.2. BENEFIT.............................................................19
ARTICLE VIII - DEATH.........................................................20
8.1. DEATH OF PARTICIPANT................................................20
8.2. DESIGNATION OF BENEFICIARY..........................................20
8.3. BENEFIT.............................................................20
8.4. NO BENEFICIARY......................................................20
</Table>
i
<PAGE>
<Table>
<S> <C>
ARTICLE IX - DISABILITY......................................................21
9.1. DISABILITY..........................................................21
9.2. BENEFIT.............................................................21
ARTICLE X - TERMINATION OF EMPLOYMENT AND FORFEITURES........................21
10.1. ELIGIBILITY AND BENEFITS.........................................21
10.2. TIME OF PAYMENT..................................................22
10.3. FORFEITURES......................................................22
10.4. FORFEITURE FOR CAUSE.............................................22
ARTICLE XI - WITHDRAWALS AND LOANS...........................................23
11.1. LOANS TO MEMBERS.................................................23
11.2. WITHDRAWALS......................................................24
ARTICLE XII - INVESTMENT OF THE TRUST FUND...................................26
12.1. MEMBER DIRECTION OF INVESTMENT...................................26
12.2. CONVERSION OF INVESTMENTS........................................27
ARTICLE XIII - ADMINISTRATION................................................28
13.1. APPOINTMENT OF COMMITTEE.........................................28
13.2. COMMITTEE POWERS AND DUTIES......................................28
13.3. DUTIES AND POWERS OF THE PLAN ADMINISTRATOR......................29
13.4. RULES AND DECISIONS..............................................30
13.5. COMMITTEE PROCEDURES.............................................30
13.6. AUTHORIZATION OF BENEFIT PAYMENTS................................30
13.7. PAYMENT OF EXPENSES..............................................30
13.8. INDEMNIFICATION OF MEMBERS OF THE COMMITTEE......................30
ARTICLE XIV - NOTICES........................................................31
14.1. NOTICE TO TRUSTEE................................................31
14.2. SUBSEQUENT NOTICES...............................................31
14.3. RELIANCE UPON NOTICE.............................................31
ARTICLE XV - BENEFIT PAYMENTS................................................31
15.1. METHOD OF PAYMENT................................................31
15.2. TIME OF PAYMENT..................................................31
15.3. CASH OUT DISTRIBUTION............................................33
15.4. MINORITY OR DISABILITY PAYMENTS..................................34
15.5. DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS....................34
15.6. DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS...............35
ARTICLE XVI - TRUSTEE........................................................36
16.1. APPOINTMENT OF TRUSTEE...........................................36
16.2. APPOINTMENT OF INVESTMENT MANAGER................................36
16.3. RESPONSIBILITY OF TRUSTEE AND INVESTMENT MANAGER.................36
16.4. BONDING OF TRUSTEE AND INVESTMENT MANAGER........................37
ARTICLE XVII - AMENDMENT AND TERMINATION OF PLAN.............................37
17.1. AMENDMENT OF PLAN................................................37
17.2. TERMINATION OF PLAN..............................................37
17.3. SUSPENSION AND DISCONTINUANCE OF CONTRIBUTIONS...................37
17.4. LIQUIDATION OF TRUST FUND........................................38
17.5. CONSOLIDATION OR MERGER..........................................38
</Table>
ii
<PAGE>
<Table>
<S> <C>
ARTICLE XVIII - GENERAL PROVISIONS...........................................38
18.1. NO EMPLOYMENT CONTRACT...........................................38
18.2. MANNER OF PAYMENT................................................39
18.3. NONALIENATION OF BENEFITS........................................39
18.4. TITLES FOR CONVENIENCE ONLY......................................39
18.5. VALIDITY OF PLAN.................................................39
18.6. PLAN BINDING.....................................................39
18.7. RETURN OF CONTRIBUTIONS..........................................39
18.8. MISSING MEMBERS OR BENEFICIARIES.................................40
18.9. QUALIFIED MILITARY SERVICE.......................................40
ARTICLE XIX - TOP-HEAVY RULES................................................40
19.1. DEFINITIONS......................................................40
19.2. DETERMINATION OF TOP-HEAVY STATUS................................41
19.3. MINIMUM COMPANY CONTRIBUTION.....................................42
ARTICLE XX - FIDUCIARY PROVISIONS............................................43
20.1. GENERAL ALLOCATION OF DUTIES.....................................43
20.2. FIDUCIARY DUTY...................................................43
20.3. FIDUCIARY LIABILITY..............................................43
20.4. CO-FIDUCIARY LIABILITY...........................................43
20.5. DELEGATION AND ALLOCATION........................................44
</Table>
iii
<PAGE>
SOUTHWEST AIRLINES CO.
401(k) PLAN
PREAMBLE
WHEREAS, SOUTHWEST AIRLINES CO., a corporation formed under the laws of
the State of Texas (the "Company") has previously adopted a profit sharing plan
and trust designated as the Southwest Airlines Co. Profit Sharing Plan,
effective as of January 1, 1973, which was subsequently amended and restated in
its entirety, effective as of January 1, 1986, and which was again amended and
restated in its entirety, effective as of January 1, 1991, to comply with the
Tax Reform Act of 1986 and subsequent legislation and to continue the cash or
deferred feature of the plan as a separate Plan (the "Prior Plan"); and
WHEREAS, the Company now desires to again amend and restate the Prior
Plan in its entirety for compliance with the Uruguay Round Agreements Act
("GATT"), the Uniformed Services Employment and Reemployment Rights Act of 1994
("USERRA"), the Small Business Job Protection Act of 1996, the Taxpayer Relief
Act of 1997, and subsequent legislation and to incorporate amendments that have
previously been made (hereinafter referred to as the "Plan");
NOW, THEREFORE, in consideration of the premises and to carry out the
purposes and intent as set forth above, effective as of January 1, 1997, except
as otherwise specifically provided herein, the Prior Plan is hereby restated and
amended in its entirety, superseded and replaced by this Plan, and the Company
does hereby adopt this restated Plan for the benefit of its eligible employees.
There will be no gap or lapse in time or effect between such plans, and the
existence of a qualified plan shall be continuous and uninterrupted.
The terms and conditions of this Plan are as follows:
ARTICLE I
Purpose
The purpose of this Plan is to reward Employees of the Company for
their loyal and faithful service, to help the Employees accumulate funds for
their later years, and to provide funds for their Beneficiaries in the event of
death or disability. The benefits provided by this Plan will be paid from a
Trust Fund established by the Company and will be in addition to the benefits
Employees are entitled to receive under any other programs of the Company and
under the Social Security Act.
This Plan and the separate related Trust forming a part hereof are
established and shall be maintained for the exclusive benefit of the Members
hereunder and their Beneficiaries. No part of the Trust Fund can ever revert to
the Company, except as hereinafter provided, or be used for or diverted to
purposes other than the exclusive benefit of the Members of this Plan and their
Beneficiaries.
<PAGE>
ARTICLE II
Definitions and Construction
2.1. Definitions: Where the following words and phrases appear in this
Plan, they shall have the respective meanings set forth below, unless their
context clearly indicates to the contrary:
(a) Affiliate: A member of a controlled group of corporations
(as defined in Section 414(b) of the Code), a group of trades or
businesses (whether or not incorporated) which are under common control
(as defined in Section 414(c) of the Code), or an affiliated service
group (as defined in Section 414(m) of the Code) of which the Company
is a member, or any entity otherwise required to be aggregated with the
Company pursuant to Section 414(o) of the Code and the regulations
issued thereunder.
(b) Allocation Date: The date on which Annual Additions (as
defined in subsection 6.5(b) hereof) are to be allocated to the
Individual Accounts of the Members of the Plan, such date to be the
last day of each Plan Year.
(c) Annual Compensation: The total amounts paid by the Company
to an Employee as remuneration for personal services rendered during
each Plan Year including any amounts not includable in the gross income
of the Employee pursuant to Sections 125, 402(e)(3), 403(b), 457 or
402(h)(1)(B) (and effective January 1, 1998, 132(f)(4)) of the Code and
expense allowances (to the extent includable in the gross income of the
Employee), but excluding director's fees, expense reimbursements and
nontaxable expense allowances, prizes and awards, (effective September
16, 1999, items of imputed income), contributions made by the Company
under this Plan or any other employee benefit plan or program it
maintains, such as group insurance, hospitalization or like benefits,
amounts realized or recognized from qualified or nonqualified stock
options or when restricted stock or property held by the Employee
either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture, and amounts, if any, paid to an
Employee in lieu of a Company contribution to the Southwest Airlines
Co. Profit Sharing Plan in the event that such Company contribution
would constitute an annual addition, as defined in Section 415(c)(2) of
the Code, in excess of the limitations under Section 415(c) of the
Code. Annual Compensation shall include amounts otherwise includable,
as provided above, that are paid by the Company to the Employee through
another person, pursuant to the common paymaster provisions of Sections
3121(s) and 3306(p) of the Code.
Effective January 1, 1999, the Annual Compensation of each
Member or former Member taken into account under the Plan for any Plan
Year shall not exceed $150,000, as adjusted by the Secretary of the
Treasury for increases in the cost of living at the time and in the
manner set forth in Section 401(a)(17)(B) of the Code. If a Plan Year
consists of fewer than twelve (12) months, then the $150,000 limitation
will be multiplied by a fraction, the numerator of which is the number
of months in the Plan Year, and the denominator of which is twelve
(12). Furthermore, for purposes of an allocation under the Plan based
on Annual Compensation, Annual Compensation shall only include amounts
actually paid to an Employee during the period he is a Member of the
Plan.
2
<PAGE>
(d) Beneficiary: A person designated by a Member or former
Member to receive benefits hereunder upon the death of such Member or
former Member.
(e) Break in Service: An Employee shall have a Break in
Service for each Plan Year in which he completes fewer than 501 Hours
of Service with the Company unless he is on a leave of absence
authorized by the Company in accordance with its leave policy.
(f) Code: The Internal Revenue Code of 1986, as amended.
(g) Committee: The persons who may be appointed to administer
the Plan in accordance with Article XIII.
(h) Common Stock: The common stock of the Company.
(i) Company: Southwest Airlines Co., or its successor or
successors.
(j) Company Matching Contributions: Contributions that may be
made by the Company for any Plan Year on behalf of a Member who has
elected to receive Salary Reduction Contributions for such Plan Year as
provided in Section 4.2 hereof. Company Matching Contributions shall be
determined on behalf of Members whose conditions of employment are
governed by a collective bargaining agreement between the Company and a
labor union in accordance with the terms of such collective bargaining
agreement, as then in effect, and shall be determined on behalf of
Members whose conditions of employment are not so governed in the sole
and absolute discretion of the board of directors of the Company.
(k) Company Matching Contribution Account: A separate
subaccount to which is credited a Member's Company Matching
Contributions, if any, and any earnings attributable thereto, adjusted
to reflect any withdrawals, distributions, or investment losses
attributable thereto.
(l) Disability: A physical or mental condition which, in the
judgment of the Committee, totally and presumably permanently prevents
the Employee from engaging in any substantial gainful employment with
the Company. A determination of Disability shall be based upon
competent medical evidence satisfactory to the Committee. The Committee
shall apply the rules with respect to Disability uniformly and
consistently to all Employees in similar circumstances.
(m) Effective Date: January 1, 1997, except as otherwise
specifically provided herein.
(n) Employee: Any person who is receiving remuneration for
personal services rendered to the Company, or who would be receiving
such remuneration except for an authorized leave of absence; provided,
however, that any individual whose conditions of employment are
governed by a collective bargaining agreement between the Company and a
labor union shall not be considered an Employee unless the collective
bargaining agreement provides for coverage of such individual under the
Plan. In no
3
<PAGE>
event shall any individual employed by TranStar Airlines or any other
Affiliate or subsidiary of the Company be considered an Employee.
Notwithstanding the foregoing, individuals whose conditions of
employment are governed by a collective bargaining agreement that does
not provide for coverage of such individual under the Plan shall
nonetheless be deemed to be an Employee for purposes of crediting
service pursuant to the provisions of subsections 2.1(s), (ii) and (mm)
hereunder.
The term "Employee" shall also include any "leased employee,"
as such term is defined below, deemed to be an employee of an Employer
or any Affiliate as provided in Sections 414(n) or (o) of the Code. The
term "leased employee" means any person (other than an employee of the
recipient) who, pursuant to an agreement between the recipient and any
other person ("leasing organization"), has performed services for the
recipient (or for the recipient and related persons determined in
accordance with Section 414(n)(6) of the Code) on a substantially
full-time basis for a period of at least one year, and such services
are performed under the primary direction of or control by the
recipient. Contributions or benefits provided by the leasing
organization that are attributable to services performed for the
recipient shall be treated as provided by the recipient.
Notwithstanding the foregoing, a leased employee shall not be
considered an employee of the recipient if: (i) such employee is
covered by a money purchase pension plan that provides: (1) a
nonintegrated employer contribution rate of at least ten percent (10%)
of compensation, as defined in Section 415(c)(3) of the Code, but
including amounts contributed pursuant to a salary reduction agreement
that are excludable from the employee's gross income under Section 125,
Section 402(e)(3), Section 402(h)(1)(B), or Section 403(b) of the Code,
(2) immediate participation, and (3) full and immediate vesting; and
(ii) leased employees do not constitute more than twenty percent (20%)
of the recipient's nonhighly compensated work force.
(o) Entry Date: January 1, April 1, July 1 and October 1 of
each year.
(p) ERISA: The Employee Retirement Income Security Act of
1974, as amended.
(q) Fund or Trust Fund: All assets of whatsoever kind or
nature held from time to time by the Trustee in the Trust Fund forming
a part of this Plan, without distinction as to income and principal and
without regard to source, i.e., allocations, contributions, earnings,
forfeitures, or gifts.
(r) Highly Compensated Employee: The term Highly Compensated
Employee includes highly compensated active employees and highly
compensated former employees. A highly compensated active employee
includes any Employee who performs Service for the Company during the
determination year and who, during the look-back year received
compensation from the Company in excess of $80,000 (as adjusted
pursuant to Section 415(d) of the Code). The term Highly Compensated
Employee also includes Employees who are Five Percent (5%) Owners (as
defined in Section 19.1(f) hereof) at any time during the look-back
year or determination year. For purposes of this Section 2.1(s), the
determination year shall be the Plan Year. The look-back year shall be
the twelve-month period immediately preceding the determination
4
<PAGE>
year. For purposes of this Section 2.1(r), the term "compensation"
shall have the same meaning as set forth in Section 415(c)(3) of the
Code.
A highly compensated former employee includes any Employee who
separated from service (or was deemed to have separated from service)
prior to the determination year, performs no Service for the Company
during the determination year, and was a highly compensated active
employee for either the separation year or any determination year
ending on or after the Employee's 55th birthday. The determination of
the identity of Highly Compensated Employees will be made in accordance
with Section 414(q) of the Code and the regulations thereunder.
(s) Hour of Service: An Hour of Service shall include all
hours for which pay is received or for which an Employee is entitled to
payment, whether worked or not, plus service credit on the basis of the
number of his regularly scheduled working hours for any other period of
absence for which the Employee is paid or entitled to payment and which
is authorized by the Company in accordance with its uniform leave
policy for vacation, holiday, sick leave, illness, Disability, layoff,
military service, or civic duty. In no event shall credit for the
number of Hours of Service attributable to a single continuous period
for which no duties are performed exceed 501. Service credit shall also
be given for each other leave of absence authorized by the Company for
which the Employee is paid or entitled to payment.
Hours of Service shall be computed on an equivalency basis,
whereby for each month during which an Employee would be credited with
at least one Hour of Service (or, in the case of flight attendants, one
trip), such Employee shall be credited with one hundred ninety (190)
Hours of Service.
These hours must be credited to Employees in the computation
period during which the duties were performed, or if no duties were
performed, during which the applicable period of absence occurred, and
not when paid, if different. Credit must also be given, without
duplicating any hours described above, for each hour for which back
pay, irrespective of mitigation of damages, has been awarded or agreed
to by the Company. These hours must be credited in the computation
period or periods to which the award or agreement pertains rather than
that in which the payment, award, or agreement was made.
In determining the number of Hours of Service to be credited
to an Employee in the case of a payment that is made or due to an
Employee under the provisions of the paragraphs above, the Committee
shall apply the rules set forth in Department of Labor Regulations
2530.200 b-2(b) and (c), which rules are incorporated into and made a
part of this Plan by reference.
For purposes of determining whether an Employee has incurred a
Break in Service as defined in Section 2.1(e), the Committee shall
credit an Employee with Hours of Service during absence from work for
maternity or paternity reasons that would otherwise have been credited
to such Employee but for such absence. For purposes of this Plan, an
Employee shall be deemed to be on maternity or paternity leave if the
5
<PAGE>
Employee's absence from work is (1) by reason of the pregnancy of the
Employee, (2) by reason of the birth of a child of the Employee, (3) by
reason of the placement of a child with the Employee in connection with
the adoption of such child by the Employee, or (4) for purposes of
caring for such child for a period beginning immediately following such
birth or placement. The Hours of Service credited under this paragraph
shall be limited to the lesser of (1) the number necessary to prevent
the Employee from incurring a Break in Service or (2) 501 Hours of
Service. Hours of Service credited under this paragraph shall be
credited in the Plan Year in which the absence begins, but if the
Employee does not need those Hours of Service to prevent a Break in
Service in the Plan Year in which the absence began, then they shall be
credited in the immediately following Plan Year.
Hours of Service during the period prior to January 1, 1976
shall be determined from whatever records may be reasonably accessible
to the Company and, if such records are insufficient, the Company may
make whatever calculations are necessary to approximate Hours of
Service for such period in a manner uniformly applicable to all
Employees similarly situated. These provisions shall be construed by
resolving any questions or ambiguities in favor of crediting Employees
with Hours of Service.
(t) Individual Account: The account or record maintained by
the Committee showing the monetary value of the individual interest in
the Trust Fund of each Member, former Member, and Beneficiary.
(u) Investment Managers: The qualified and acting Investment
Managers, as defined in ERISA, who under this Plan may be appointed by
the Company to invest and manage Plan assets as fiduciaries.
(v) Member: An Employee who has met the eligibility
requirements for participation in this Plan, as set forth in Article
III hereof.
(w) Named Fiduciary: The Committee shall be the Named
Fiduciary designated to manage the operation and administration of the
Plan.
(x) Normal Retirement Date: The date on which a Member attains
the age of sixty (60) years.
(y) Plan: Southwest Airlines Co. 401(k) Plan, as amended from
time to time.
(z) Plan Administrator: Such person or persons as designated
by the Committee, which shall be the Committee unless and until it
designates such other person or persons.
(aa) Plan Year: The annual period beginning January 1st and
ending December 31st, both dates inclusive of each year.
(bb) Prior Plan: The Southwest Airlines Co. 401(k) Plan,
effective January 1, 1991, as heretofore amended and restated from time
to time.
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(cc) Qualified Nonelective Contributions: Contributions which
may, at the election of the Company, be made to the Plan by the Company
in an amount necessary to assure the Plan's compliance with the
deferral percentage test described in Section 4.5 hereof or the
contribution percentage test described in Section 4.6 hereof.
(dd) Retirement: Termination of employment after a Member has
reached his Normal Retirement Date. Retirement shall be considered as
commencing on the day immediately following a Member's last day of
employment.
(ee) Rollover Contributions: Contributions that may be made to
the Plan by a Member or Employee, as provided in Section 4.7 hereof.
(ff) Rollover Contribution Account: A separate subaccount to
which is credited a Member's or Employee's Rollover Contributions, if
any, and any earnings attributable thereto, adjusted to reflect any
withdrawals, distributions, or investment losses attributable thereto
(gg) Salary Reduction Contributions: Contributions made to the
Plan by the Company, at the election of a Member, in lieu of cash
compensation, pursuant to a salary reduction agreement, as provided in
Section 4.1 hereof.
(hh) Salary Reduction Contribution Account: A separate
subaccount to which is credited a Member's Salary Reduction
Contributions, Qualified Nonelective Contributions, if any, and any
earnings attributable thereto, adjusted to reflect any withdrawals,
distributions, or investment losses attributable thereto.
(ii) Service: A period or periods of employment by an Employee
used in determining eligibility for Plan participation or in
determining the amount of benefits. If the Company is a member of a
controlled group of corporations (as defined in Section 414(b) of the
Code), is one of a group of trades or businesses (whether or not
incorporated) which are under common control (as defined in Section
414(c) of the Code), is a member of an affiliated service group (as
defined in Section 414(m) of the Code), or is otherwise required to be
aggregated with any entity pursuant to Section 414(o) of the Code and
the regulations issued thereunder, then Service shall include any
employment with any member of such controlled group of corporations,
such group of trades or businesses under common control, such
affiliated service group, or such other entity required to be so
aggregated, including Service prior to the Effective Date.
(jj) Trust: Southwest Airlines Co. 401(k) Trust, as amended
from time to time, which was established to hold and invest Salary
Reduction Contributions, Company Matching Contributions, and Qualified
Nonelective Contributions, if any, made under the Plan and Prior Plan
for the exclusive benefit of the Members included in the Plan from
which the benefits will be distributed.
(kk) Trustee: The qualified and acting Trustee under the
Trust, who shall be the fiduciary designated to invest and manage the
Plan assets, other than those that may be managed exclusively by an
Investment Manager, and to operate and administer the Trust Fund.
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(ll) Valuation Date: Each business day on which the financial
markets are open for trading activity.
(mm) Vesting Service: Vesting Service is the period of
employment used in determining eligibility for benefits. A year of
Vesting Service shall be granted for each Plan Year in which an
Employee has completed 1,000 or more Hours of Service with the Company,
subject to the following exceptions:
(i) Vesting Service prior to January 1, 1973 shall be
excluded.
(ii) Vesting Service completed after December 31,
1972 and prior to January 1, 1976 shall be excluded if such
service would have been disregarded under the break in service
rules of the Prior Plan, as then in effect. For this purpose,
break in service rules are those rules that result in the loss
of prior vesting because of service termination or failure to
complete a required period of service within a specified time.
(iii) Prior to January 1, 1985, in the case of an
Employee who has any Break in Service, all years of Vesting
Service incurred after such Break shall be disregarded for
purposes of measuring years of Vesting Service before such
Break. However, effective January 1, 1985 and thereafter, in
the case of an Employee who has a Break in Service, his years
of Vesting Service before such Break in Service shall not be
taken into account until he has completed a year of Vesting
Service following his reemployment. In the case of an Employee
who has five (5) or more consecutive Breaks in Service, all
years of Vesting Service incurred after such Breaks in Service
will be disregarded for purposes of measuring years of Vesting
Service before such Breaks in Service.
(iv) Prior to January 1, 1985, if an Employee who
does not have any nonforfeitable right to his Company Matching
Contribution Account incurs a period of consecutive Breaks in
Service that equals or exceeds the aggregate number of years
of Vesting Service incurred before such period, then all of
his prior years of Vesting Service before such period shall no
longer be credited to him. However, effective January 1, 1985,
and thereafter, if an Employee who does not have any
nonforfeitable right to his Company Matching Contribution
Account incurs a period of consecutive Breaks in Service that
equals or exceeds the greater of (1) five or (2) the aggregate
number of years of Vesting Service incurred before such
period, then all of his prior years of Vesting Service before
such period shall no longer be credited to him.
2.2. Construction: The masculine gender, where appearing in the Plan,
shall be deemed to include the feminine gender, unless the context clearly
indicates to the contrary. The words "hereof," "herein," "hereunder," and other
similar compounds of the word "here" shall mean and refer to the entire Plan,
not to any particular provision or section. The Plan and Trust shall each form a
part of the other by reference, and terms shall be used therein interchangeably.
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ARTICLE III
Eligibility and Participation
3.1. Eligibility Requirements: Every Employee on the Effective Date,
who was a Member in the Prior Plan on the day before the Effective Date, shall
continue to be a Member in the Plan. Every other Employee shall be eligible to
become a Member in the Plan as of the first Entry Date concurrent with or next
following his employment commencement date. The employment commencement date is
the first day for which an Employee is entitled to be credited hereunder with an
Hour of Service. Non-resident aliens who receive no earned income from the
Company that constitutes income from sources within the United States shall not
be eligible to participate in the Plan. A person who is not treated as an
Employee on the Company's books and records (such as a person who as a matter of
practice is treated by the Company as an independent contractor, but who is
later determined to be an Employee as a matter of fact) shall not be an eligible
Employee during any part of a Plan Year in which such person was not treated as
an Employee despite any retroactive recharacterization.
3.2. Notification of Eligibility: The Committee shall promptly notify
in writing each Employee of his qualification as a Member and shall furnish each
new Member a copy of such explanation of the Plan as the Committee shall provide
for that purpose. Any Employee who is eligible to become a Member may elect to
participate in the Plan upon the date on which he first becomes eligible by
executing and filing with the Committee, prior to or upon such date, an
application form furnished by the Committee. An Employee who does not become a
Member on the date on which he first becomes eligible may become a Member on any
subsequent Entry Date by executing and filing with the Committee, prior to or
upon such date, an application form furnished by the Committee.
3.3. Re-entry of Prior Members: An Employee who terminates employment
after becoming a Member hereunder shall be eligible to participate immediately
upon his completion of one Hour of Service following his reemployment by the
Company. An Employee who terminates employment after satisfying the requirements
of Section 3.1 hereof, but prior to the first Entry Date following the
satisfaction of such requirements, shall be eligible to participate immediately
upon his completion of one Hour of Service following his reemployment by the
Company, or if later, the first Entry Date following the satisfaction of such
requirements.
ARTICLE IV
Contributions
4.1. Salary Reduction Contributions: Each Member may elect to have
contributed on his behalf to the Trust Fund, on a pre-tax basis, any whole
percentage of his Annual Compensation which is not less than one percent (1%)
and which does not exceed fifteen percent (15%); provided, however, such amount
may not exceed Seven Thousand Dollars ($7,000.00), indexed for increases in the
cost of living as provided in Section 402(g)(5) of the Code, in any taxable year
of such Member. Salary Reduction Contributions shall be elected pursuant to a
salary deferral election, in accordance with Section 5.3 hereof. Salary
Reduction Contributions are at all times one hundred percent (100%) vested and
nonforfeitable. Salary Reduction Contributions made on behalf of a Member shall
be added to the Trust Fund as soon as
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<PAGE>
practicable after deduction from a Member's paycheck and shall be credited to
the Individual Account of the Member as of each Valuation Date, as provided in
Section 6.1.
4.2. Company Matching Contributions: The Company may, as provided
below, contribute to the Trust Fund a Company Matching Contribution. Company
Matching Contributions shall be determined on behalf of Members whose conditions
of employment are governed by a collective bargaining agreement between the
Company and a labor union in accordance with the terms of such collective
bargaining agreement, as then in effect, and shall be determined on behalf of
Members whose conditions of employment are not so governed, in the sole and
absolute discretion of the board of directors of the Company. If a Company
Matching Contribution is made, such Contribution will equal a specified
percentage of the Member's Salary Reduction Contributions, not to exceed the
specific dollar amount set forth in the collective bargaining agreement, if
applicable, or otherwise established by the board of directors of the Company.
Company Matching Contributions shall be added to the Trust Fund as soon as
practicable after deduction of the applicable Salary Reduction Contributions
from a Member's paycheck and credited, as of each Valuation Date, to the Company
Matching Contribution Account of each Member who has elected to have Salary
Reduction Contributions made to the Trust Fund on his behalf during the
applicable period.
4.3. Qualified Nonelective Contributions: The Company may, for each
Plan Year, contribute to the Trust Fund Qualified Nonelective Contributions.
Qualified Nonelective Contributions are at all times one hundred percent (100%)
vested and nonforfeitable. Qualified Nonelective Contributions shall be added to
and become a part of the Trust Fund, and as of each Allocation Date, shall be
credited to the Individual Accounts of the Members, as provided in Section 6.2.
4.4. Seven Thousand Dollar ($7,000.00) Test: If a Member's Salary
Reduction Contributions hereunder should exceed Seven Thousand Dollars
($7,000.00), indexed for increases in the cost of living as set forth in Section
402(g)(5) of the Code, in any taxable year of the Member, the excess (with
earnings thereon) shall be distributed to the Member. If the Member also
participates in another elective deferral program (within the meaning of Section
402(g)(3) of the Code), and if when aggregating his elective deferrals under all
such programs an excess of deferral contributions arises under the dollar
limitation in Code Section 402(g) with respect to such Member, the Member shall,
no later than March 1st following the close of the Member's taxable year, notify
the Committee as to the portion of such excess deferrals to be allocated to this
Plan, and such excess so allocated to this Plan (with earnings thereon) shall be
distributed to the Member. In the event there is a loss allocable to an excess
deferral, any distribution to a member as required by this Section shall be no
greater than the lesser of: (a) the value of the Member's Salary Reduction
Contribution Account or (b) the Member's excess deferrals for the Plan Year. Any
distribution under this Section shall be made to the Member no later than the
April 15th immediately following the close of the Member's taxable year for
which such excess deferrals were made.
4.5. Deferral Percentage Test: As soon as administratively feasible
after the end of each Plan Year (or other applicable period), the Committee
shall determine:
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(a) The "deferral percentage" for each Employee who is then
eligible for Salary Reduction Contributions, which in the case of a
Highly Compensated Employee, shall be the ratio of the amount of such
Highly Compensated Employee's Salary Reduction Contributions for such
Plan Year to the Highly Compensated Employee's compensation (as defined
in Section 2.1(r) hereof) for such Plan Year and which, in the case of
an Employee who is not a Highly Compensated Employee, shall be the
ratio of the amount of such Employee's Salary Reduction Contributions
for the prior Plan Year to such Employee's compensation (as defined in
Section 2.1(r) hereof) for the prior Plan Year;
(b) The "highly compensated deferral percentage," which shall
be the average of the "deferral percentages" for all Highly Compensated
Employees then eligible for Salary Reduction Contributions; and
(c) The "nonhighly compensated deferral percentage," which
shall be the average of the "deferral percentages" for all Employees
then eligible for Salary Reduction Contributions who were not included
in the "highly compensated deferral percentage" in (b) above.
In no event shall the "highly compensated deferral percentage" exceed
the greater of: (1) a deferral percentage equal to one and one-fourth (1-1/4)
times the "nonhighly compensated deferral percentage" or (2) a deferral
percentage equal to two (2) times the "nonhighly compensated deferral
percentage," but not more than two (2) percentage points greater than the
"nonhighly compensated deferral percentage," or such lesser amount as the
Secretary of Treasury may prescribe to prevent the multiple use of this
alternative limitation, as set forth in Section 1.401(m)-2(b) of the Treasury
Regulations. In the event that multiple use of the alternative limitation occurs
with respect to any Plan Year, then either the "highly compensated contribution
percentage," as defined in Section 4.5 hereof, or the "highly compensated
deferral percentage," as defined above, shall be reduced, such reduction and the
Highly Compensated Employees to whom such reduction shall apply to be determined
by the Committee in accordance with Section 1.401(m)-2(c) of the Treasury
Regulations. If the above deferral percentage test would otherwise be violated
as of the end of the Plan Year, then subject to satisfaction of the conditions
described in Section 401(k)-1(b)(5) of the Treasury Regulations, the "deferral
percentage," as defined in (a) above, shall instead be the ratio of the sum of
the Employee's Salary Reduction Contributions, Qualified Nonelective
Contributions, if any, and to the extent necessary to satisfy the deferral
percentage test, Company Matching Contributions for the applicable Plan Year to
the Employee's compensation (as defined in Section 2.1(s) hereof) for the
applicable Plan Year. Any Company Matching Contributions so utilized to satisfy
the deferral percentage test shall at all times be one hundred percent (100%)
vested and nonforfeitable and shall be excluded from consideration for purposes
of the contribution percentage test described in Section 4.6. If after
consideration of Qualified Nonelective Contributions, if any, and applicable
Company Matching Contributions, as described above, the deferral percentage test
would still be violated as of the end of the Plan Year, then notwithstanding any
other provision hereof, every Salary Reduction Contribution included in the
"highly compensated deferral percentage" for a Member whose deferral percentage
is greater than the permitted maximum shall be revoked to the extent necessary
to comply with such deferral percentage test, and the amount of such Salary
Reduction Contribution, to the extent
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<PAGE>
revoked, shall constitute an "excess contribution" to be distributed to such
Member (with earnings thereon) no later than the last day of the Plan Year
following the Plan Year for which such contribution was made. Excess
contributions are allocated to the Highly Compensated Employees with the largest
amounts of Employer contributions that are taken into account in calculating the
deferral percentage test for the Plan Year in which the excess arose, beginning
with the Highly Compensated Employee with the largest amount of such Employer
contributions and continuing in descending order until all excess contributions
have been allocated. For purposes of the preceding sentence, the "largest"
amount is determined after distribution of any amounts distributed hereunder
pursuant to Section 4.4 hereof. In the event there is a loss allocable to an
excess contribution, any distribution to a Member as required by this Section
shall be no greater than the lesser of: (a) the value of the Member's Salary
Reduction Contribution Account or (b) the Member's excess contribution for the
Plan Year during which such excess contribution was made.
If a Highly Compensated Employee participates in two (2) or more plans
maintained by the Company or any Affiliate that are subject to the deferral
percentage test, then such Employee's deferral percentage shall be determined by
aggregating his participation in all such plans. In addition, if the Company
maintains two (2) or more plans subject to the deferral percentage test and such
plans are treated as a single plan for purposes of the coverage requirements for
qualified plans under Code Section 410(b), then such plans are treated as a
single plan for purposes of the deferral percentage test.
4.6. Contribution Percentage Test: As soon as administratively feasible
after each Plan Year (or other applicable period), the Committee shall
determine:
(a) The "contribution percentage" for each Employee who is
then eligible to receive Company Matching Contributions, which in the
case of a Highly Compensated Employee, shall be the ratio of the sum of
such Employee's Company Matching Contributions for such Plan Year to
the Highly Compensated Employee's compensation (as defined in Section
2.1(r) hereof) for such Plan Year, and which in the case of an Employee
who is not a Highly Compensated Employee, shall be the ratio of the
amount of such Employee's Company Matching Contributions for the prior
Plan Year to such Employee's compensation (as defined in Section 2.1(r)
hereof) for the prior Plan Year;
(b) The "highly compensated contribution percentage," which
shall be the average of the "contribution percentages" for all eligible
Highly Compensated Employees; and
(c) The "nonhighly compensated contribution percentage," which
shall be the average of the "contribution percentages" for all
Employees then eligible who were not included in the "highly
compensated contribution percentage" in (b) above.
In no event shall the "highly compensated contribution percentage"
exceed the greater of: (1) a contribution percentage equal to one and one-fourth
(1-1/4) times the "nonhighly compensated contribution percentage" or (2) a
contribution percentage equal to two (2) times the "nonhighly compensated
contribution percentage," but not more than two (2) percentage points greater
than the "nonhighly compensated contribution percentage," or such lesser amount
as the
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Secretary of Treasury may prescribe to prevent the multiple use of this
alternative limitation as set forth in Section 1.401(m)-2(b) of the Treasury
Regulations. In the event that multiple use of the alternative limitation occurs
with respect to any Plan Year, then either the "highly compensated deferral
percentage," as defined in Section 4.5 hereof, or the "highly compensated
contribution percentage," as defined above, shall be reduced, such reduction and
the Highly Compensated Employees to whom such reduction shall apply to be
determined by the Committee in accordance with Section 1.401(m)-2(c) of the
Treasury Regulations. If the above contribution percentage test would otherwise
be violated as of the end of the Plan Year, then subject to satisfaction of the
conditions described in Section 1.401(m)-1(b)(5) of the Treasury Regulations,
the "contribution percentage," as defined in (a) above, shall instead be the
ratio of the sum of the Employee's Company Matching Contributions, Qualified
Nonelective Contributions, if any, and to the extent necessary to satisfy the
contribution percentage test, Salary Reduction Contributions for the applicable
Plan Year to the Employee's compensation (as defined in Section 2.1(s) hereof)
for the applicable Plan Year. Any Salary Reduction Contributions or Qualified
Nonelective Contributions so utilized to satisfy the contribution percentage
test shall be excluded from consideration for purposes of the deferral
percentage test described in Section 4.5. If after consideration of applicable
Salary Reduction Contributions and Qualified Nonelective Contributions, if any,
as described above, the contribution percentage test would still be violated as
of the end of the Plan Year, then notwithstanding any other provision hereof,
every Company Matching Contribution included in the "highly compensated
contribution percentage" for a Member whose contribution percentage is greater
than the permitted maximum shall automatically be revoked to the extent
necessary to comply with such contribution percentage test and the amount of
such contribution, to the extent revoked, shall constitute an "excess aggregate
contribution" to be distributed to such Member (with earnings thereon) or
forfeited, if applicable, no later than the last day of the Plan Year following
the Plan Year for which such contribution was made. Excess aggregate
contributions are allocated to the Highly Compensated Employees with the largest
amounts of Employer contributions taken into account in calculating the
contribution percentage test for the Plan Year in which the excess arose,
beginning with the Highly Compensated Employee with the largest amount of such
Employer contributions and continuing in descending order until all excess
aggregate contributions have been allocated. For purposes of the preceding
sentence, the "largest amount" is determined after first determining required
distributions under Section 4.4 hereof, and then determining excess
contributions under Section 4.5. In the event there is a loss allocable to an
excess aggregate contribution, any distribution to a Member as required by this
Section shall be no greater than the lesser of: (a) the value of the Member's
Company Matching Contribution Account or (b) the Member's excess aggregate
contribution for the Plan Year.
If a Highly Compensated Employee participates in two (2) or more plans
maintained by the Company or any Affiliate that are subject to the contribution
percentage test, then such Employee's contribution percentage shall be
determined by aggregating his participation in all such plans. In addition, if
the Company maintains two (2) or more plans subject to the contribution
percentage test and such plans are treated as a single plan for purposes of the
coverage requirements for qualified plans under either Code Section 410(b) or
401(a)(4), then such plans are treated as a single plan for purposes of the
contribution percentage test.
4.7. Rollover Contributions: Any Member who has received a distribution
of his entire interest in a plan that meets the requirements of Section 401(a)
of the Code may, in
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accordance with procedures approved by the Committee, contribute cash to the
Trust Fund only in an amount equal to such distribution, provided that the
following conditions are met:
(a) The transfer occurs on or before the 60th day following
his receipt of such distribution, or if such distribution has
previously been deposited in an individual retirement account (as
defined in Section 408 of the Code), such distribution has been so
deposited no earlier than July 1, 1987, and the transfer occurs on or
before the 60th day following his receipt of such distribution from the
individual retirement account;
(b) If the amount contributed is transferred directly from the
other plan without first having been deposited in an individual
retirement account, the maximum amount of such transfer shall be the
fair market value of that portion of the distribution that would be
includible in gross income if not so transferred (determined without
regard to Section 402(c) of the Code); and
(c) If the amount contributed has previously been deposited in
an individual retirement account, then the amount transferred must
equal the entire amount in the individual retirement account.
The Committee shall develop such procedures, and may require such information
from a Member desiring to make such a transfer, as it deems necessary or
desirable to determine that the proposed transfer will meet the requirements of
this Section. Upon approval by the Committee, the amount transferred shall be
deposited in the Trust and shall be credited, as of the Valuation Date next
following such transfer, to a Rollover Contribution Account for the Member.
An Employee, prior to satisfying the eligibility conditions of the
Plan, as set forth in Section 3.1 hereof, may make a Rollover Contribution to
the Trust Fund to the same extent and in the same manner as a Member. If an
Employee makes a Rollover Contribution to the Trust Fund prior to satisfying the
Plan's eligibility conditions, the Committee and Trustee shall treat the
Employee as a Member for all purposes of the Plan except for purposes of sharing
in Company Matching Contributions, Salary Reduction Contributions, or Qualified
Nonelective Contributions under the Plan until he actually becomes a Member. If
the Employee terminates employment prior to becoming a Member, the Trustee will
distribute his Rollover Contribution Account to him in accordance with the
provisions of Article XV hereof as if such Employee were a Member of the Plan.
Each Member's Rollover Contribution Account shall be 100% vested and
nonforfeitable at all times and shall share in asset adjustments pursuant to
Section 5.2 herein, but shall not share in Company contributions. Upon
termination of employment, the total amount of a Member's Rollover Contribution
Account shall be distributed in accordance with Article XV hereof.
ARTICLE V
Adjustment of Individual Accounts
5.1. Individual Accounts: The Committee shall establish an Individual
Account for each Member showing the monetary value of the individual interest in
the Trust Fund of each Employee, former Employee, and Beneficiary. The
Individual Account of each Member shall be composed of a Company Matching
Contribution Account, to which Company Matching
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Contributions, if any, shall be credited, a Salary Reduction Contribution
Account, to which Salary Reduction Contributions and Qualified Nonelective
Contributions, if any, shall be credited, and, if applicable, a Rollover
Contribution Account. Such accounts are primarily for accounting purposes and do
not require a segregation of the Trust Fund, except as otherwise provided
herein.
5.2. Method of Adjustment: As of each Valuation Date, before any
restoration of accounts as required pursuant to Section 15.3 hereof and before
taking into account contributions of the Company for the period since the last
preceding Valuation Date, the Committee or the Trustee, as directed by the
Committee, shall value the assets of each investment fund and adjust the
Individual Accounts of all Members who have elected to participate in such
investment fund as follows:
(a) The Committee shall determine the market value of the
investment fund, including the effect of expenses of administration and
other charges against such investment fund since the last Valuation
Date.
(b) The Committee shall determine the total aggregate value of
all Individual Accounts participating in the investment fund as shown
in its records as of the prior Valuation Date. The Individual Account
balances of Employees, former Employees, and Beneficiaries shall be
reduced by any amounts paid to them from the investment fund since the
last Valuation Date.
(c) The Committee shall then adjust the value of each
Individual Account participating in the investment fund by crediting
each Individual Account with its proportion of the difference between
(a) and (b) if (a) is the larger or charging it with its proportion of
the difference between (a) and (b) if (b) is larger; the proportion to
be so credited or charged to each Individual Account shall be
calculated by multiplying the difference between (a) and (b) by a
fraction, the numerator of which is the then value of said Individual
Account and the denominator of which is the then aggregate value of all
Individual Accounts participating in such investment fund.
5.3. Salary Deferral Elections: Each Member who desires to make Salary
Reduction Contributions shall indicate such intent by making an election to be
effective as of the Entry Date on which he becomes a Member of the Plan. Such
election must be made prior to the applicable Entry Date and shall be effective
for each payroll period thereafter until modified or amended, as provided below.
The terms of such election shall evidence the Member's intent to have
the Company withhold from his compensation each payroll period a whole
percentage of his Annual Compensation, which is not less than one percent (1%)
and does not exceed fifteen percent (15%), and which does not exceed the
limitations of Article IV. In furtherance of such election, the Company will
make a contribution to the Trust Fund on behalf of the Member for each payroll
period in an amount equal to the total amount by which the Member's Annual
Compensation from the Company was reduced during such payroll period pursuant to
such election.
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Notwithstanding the above, salary deferral elections shall be governed
by the following general guidelines:
(a) A salary deferral election shall apply to each payroll
period during which such election is in effect. Upon termination of
employment, such election will become void.
(b) A Member may revoke his salary deferral election at any
time upon advance notice to the Committee, within the time period
established by the Committee, and thus discontinue all future
withholding thereafter. Following such a revocation, a Member may elect
to resume withholding effective as of the first day of the payroll
period next following the payroll period in which the revocation
occurs, or as of the first day of any payroll period thereafter. A
resumption of withholding following the revocation of a salary deferral
election may be made only upon advance notice to the Committee, within
the time period established by the Committee, and in the manner
prescribed by the Committee. A Member may increase the percentage to be
withheld from his Annual Compensation or decrease the percentage to be
withheld from his Annual Compensation upon advance notice to the
Committee, within the time period established by the Committee, and in
the manner prescribed by the Committee, such increase or decrease to be
effective as of the first day of the payroll period next following the
timely receipt by the Committee of such notice.
(c) The Company may unilaterally amend or revoke a salary
deferral election with any Member at any time, if the Company
determines that such revocation or amendment is necessary to insure
that a Member's Annual Additions, as defined in subsection 6.5(b)
hereof, for any Plan Year will not exceed the limitations of Article VI
or to insure that the requirements of Section 401(k) of the Code have
been satisfied with respect to the amount which may be withheld and
contributed on behalf of a Highly Compensated Employee.
ARTICLE VI
Allocations
6.1. Salary Reduction, Company Matching, and Rollover Contributions:
Salary Reduction Contributions and Company Matching Contributions shall be
credited to the Individual Accounts of the Members and former Members, as of
each Valuation Date, in accordance with each Member's or former Member's salary
deferral election and the Company Matching Contribution, if any, made with
respect to such Salary Reduction Contributions. Rollover Contributions shall be
credited to the Individual Accounts of Members as provided in Section 4.7
hereof.
6.2. Qualified Nonelective Contributions: As of each Allocation Date,
but after any adjustment of Individual Accounts as provided in Section 5.2 and
other applicable provisions herein, the Committee shall allocate Qualified
Nonelective Contributions, if any, for the Plan Year ending with said Allocation
Date to the Individual Accounts of all Members and former Members who are not
Highly Compensated Employees for the Plan Year. The amount of the contribution
allocated under this Section 6.2 to the Individual Account of each such Member
or
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<PAGE>
former Member shall be in the proportion that his Annual Compensation bears to
the total Annual Compensation of all such Members and former Members.
6.3. Forfeitures: If a Member or former Member forfeits a portion of
his Individual Account as provided in Section 10.3 hereof, such forfeited amount
shall be used first to restore the Individual Accounts of rehired Members as
required under Section 15.3 hereof. Any remaining forfeitures shall be used to
reduce the Company Matching Contribution. If a Member or former Member who does
not have any nonforfeitable right to his Individual Account terminates his
employment and thereby forfeits his Individual Account, then in the event such
Member or former Member is reemployed before he has incurred five (5) or more
consecutive Breaks in Service, his Individual Account that was forfeited shall
be restored by the Company at the time of his reemployment.
6.4. Notification to Members: At least annually, the Committee shall
advise each Member, former Member, and Beneficiary for whom an Individual
Account is held hereunder of the then balance in such account.
6.5. Maximum Annual Addition to Account or Benefit:
(a) Limitations. If the Employer maintains, or has ever
maintained, this Plan and one or more other qualified defined
contribution plans, the Annual Additions (as defined in subsection (b)
below) allocated under this Plan to any Member's Individual Account
shall be limited in accordance with the allocation provisions of this
subsection 6.5(a).
The amount of the Annual Additions that may be allocated under
this Plan to the Individual Account of any Member as of any Allocation
Date, together with Annual Additions allocated on behalf of any such
member under any other defined contribution plan of the Employer for
the Limitation Year (as defined in subsection (b) below) in which such
Allocation Date occurs, shall not exceed the Maximum Permissible DC
Amount (as defined in subsection (b) below), based upon Annual
Compensation up to such Allocation Date for such Limitation Year.
If the Annual Additions allocated on behalf of a Member or
former Member under this Plan and any other defined contribution plan
of the Employer are to be reduced as of any Allocation Date as a result
of exceeding the limitations described in the next preceding two
paragraphs, such reduction shall be, to the extent required, effected
by first reducing the Annual Additions to be allocated on behalf of
such Member or former Member under such other defined contribution plan
of the Employer as of such Allocation Date.
If as a result of the first three paragraphs of this
subsection 6.5(a) the allocation of Annual Additions under this Plan is
to be reduced, such reduction shall be made as follows:
(1) To the extent permitted under applicable Treasury
Regulations, the amount of such reduction consisting of Salary
Reduction Contributions, and
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<PAGE>
earnings attributable thereto, shall be paid to the Member or
former Member as soon as administratively feasible.
(2) If an excess amount still exists after applying
subparagraph (1), the excess amount shall be allocated to a
suspense account as of such Allocation Date and held therein
until the next succeeding Valuation Date or Dates on which
Company Matching Contributions or Qualified Nonelective
Contributions, if any, may be allocated under the provisions
of the Plan, at which time such excess amount shall be used to
reduce such Company Matching Contributions and Qualified
Nonelective Contributions, if any. In the event of termination
of the Plan, the suspense account shall revert to the Company.
(3) If a suspense account is in existence at any time
during a Limitation Year pursuant to this Section, it will not
participate in the allocation of the Trust Fund's investment
gains and losses.
(b) Definitions Applicable to Section 6.5. For purposes of
Section 6.5, the following definitions shall apply:
(1) Annual Additions: Annual Additions are the sum of
the following amounts allocated on behalf of a Member or
former Member for a Limitation Year:
(i) all Employer contributions;
(ii) forfeitures, if any;
(iii) all Employee contributions; and
(iv) amounts allocated after March 31, 1984,
to an individual medical benefit account, as defined
in Code Section 415(l)(2), which is part of a pension
or annuity plan maintained by the Employer, and
amounts derived from contributions paid or accrued
after December 31, 1985, in taxable years ending
after such date, which are attributable to
post-retirement medical benefits allocated to the
separate account of a key employee (as defined in
Code Section 419A(d)(3)) under a welfare benefit plan
(as defined in Code Section 419(e)) maintained by the
Employer.
The Annual Additions for any Limitation Year
beginning before January 1, 1987, shall not be recomputed to
treat all Employee Contributions as Annual Additions. Nothing
in this definition of Annual Additions shall be construed as
requiring the allocation of forfeitures to the Individual
Accounts of Members, former Members, or Beneficiaries rather
than to reduce Company Matching Contributions, as provided in
Section 6.3 hereof.
(2) Employer: Employer shall mean, in addition to the
Company (as defined in Section 2.1(i) hereof, all members of a
controlled group of corporations (as defined in Section 414(b)
of the Code as modified by Section 415(h)), all
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<PAGE>
commonly controlled trades or businesses (as defined in Section 414(c)
as modified by Section 415(h)) or affiliated service groups (as defined
in Section 414(m)) of which the Company is a part, and any other entity
required to be aggregated with the Company pursuant to regulations
under Section 414(o) of the Code.
(3) Limitation Year: The Limitation Year shall be the twelve
(12) consecutive month period ending on the last day of December or any
other twelve (12) consecutive month period for all qualified plans of
the Company pursuant to a written resolution the Company adopts.
(4) Maximum Permissible DC Amount: The Maximum Permissible DC
Amount for a given Limitation Year is equal to the lesser of (i) 25% of
compensation or (ii) $30,000. For purposes of this subparagraph (b)(4),
compensation shall mean compensation as defined in Section 3401(a) of
the Code and all other payments of compensation to an Employee by the
Company (in the course of the Company's trade or business) for which
the Company is required to furnish the Employee a written statement
under Sections 6041(d), 6051(a)(3), and 6052 of the Code without regard
to any rules under Section 3401(a) that limit the remuneration included
in wages based on the nature or location of the employment or the
services performed. For Limitation Years beginning after December 31,
1997, compensation shall include any amounts not includable in the
gross income of an Employee pursuant to Sections 125, 132(f)(4),
402(e)(3), 403(b), 457, or 402(h)(l)(B) of the Code applicable to such
Limitation Year. If a short Limitation Year is created because of an
amendment changing the Limitation Year to a different twelve (12)
consecutive month period, the $30,000 referred to above is multiplied
by a fraction, the numerator of which is equal to the number of months
in the short Limitation Year and the denominator of which is twelve.
ARTICLE VII
Retirement
7.1. Normal or Late Retirement: A Member, upon reaching his Normal
Retirement Date for the purposes of this Plan, shall be one hundred percent
(100%) vested in his Individual Account, and such amount contained therein shall
be nonforfeitable. If a Member continues in the employment of the Company beyond
his Normal Retirement Date, he shall continue to participate in the Plan.
7.2. Benefit: Upon Retirement (whether normal or late Retirement in
accordance with Section 7.1), a Member shall be entitled to the entire amount to
the credit of his Individual Account as of the Valuation Date concurrent with or
next following his date of Retirement, including his portion, if any, of
Qualified Nonelective Contributions allocated after his date of Retirement,
adjusted for earnings and losses, if any, that accrue to the Valuation Date
immediately preceding the date of distribution, if later. Upon his Retirement
under this Article VII, a Member shall receive the benefits to which he is
entitled at the time and in the manner provided in Article XV hereof.
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<PAGE>
ARTICLE VIII
Death
8.1. Death of Participant: Upon the death of a Participant while
employed by the Company, such Participant's Individual Account shall thereupon
become one hundred percent (100%) vested, and the amount contained therein shall
be nonforfeitable.
8.2. Designation of Beneficiary: Each Member and former Member may,
from time to time, designate one or more Beneficiaries and alternate
Beneficiaries to receive benefits pursuant to this Article in the event of the
death of such Member or former Member. Such designation shall be made in writing
upon a form provided by the Committee and shall be effective only when filed
with the Committee. The last such designation filed with the Committee shall
control. If a member is married, his spouse shall automatically be his
Beneficiary; provided, however, a Beneficiary other than his spouse may be
designated if (1) his spouse consents in writing to such designation, the
consent acknowledges the effect of such designation, and the designation is
witnessed by a member of the Committee or a notary public; or (2) it is
established to the satisfaction of the Committee that there is sufficient reason
why the consent may not be obtained. Notwithstanding the foregoing, divorce
after the filing of a designation or designations that name the spouse as
beneficiary shall be deemed to revoke such designation or designations if
written notice of such divorce is received by the Committee before payment has
been made in accordance with existing designation or designations on file with
the Committee.
8.3. Benefit: Upon the death of a Member or former Member, his
designated Beneficiary shall be entitled to the entire amount to the credit of
his Individual Account as of the Valuation Date concurrent with or next
following his date of death including his portion, if any, of Qualified
Nonelective Contributions allocated after the date of his death, adjusted for
earnings and losses, if any, that accrue to the Valuation Date immediately
preceding the date of distribution, if later. Payment shall be made at the time
and in the manner provided in Article XV hereof.
8.4. No Beneficiary: If a Member or former Member dies without a
designated Beneficiary surviving him, or if all his Beneficiaries die before
receiving the payment to which they are entitled, then any amounts to which such
Member, former Member, or Beneficiary is entitled hereunder shall be paid to his
estate.
For the purpose of this Plan, the production of a certified copy of the
death certificate of any Employee or other person shall be sufficient evidence
of death, and the Committee shall be fully protected in relying thereon. In the
absence of such proof, the Committee may rely upon such other evidence of death
as it deems necessary or advisable.
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ARTICLE IX
Disability
9.1. Disability: If a Participant's employment with the Company
terminates as a result of his Disability, such Participant's Individual Account
shall thereupon become one hundred percent (100%) vested, and the amount
contained therein shall be nonforfeitable.
9.2. Benefit: In the event of the Disability of a Member or former
Member, he shall be entitled to the entire amount to the credit of his
Individual Account as of the Valuation Date concurrent with or next following
the date on which his termination of employment occurs as a result of his
Disability including his portion, if any, of Qualified Nonelective Contributions
allocated after the date of his termination of employment, adjusted for earnings
and losses, if any, that accrue to the Valuation Date immediately preceding the
date of distribution, if later. Payments shall be made at the time and in the
manner provided in Article XV hereof.
ARTICLE X
Termination of Employment and Forfeitures
10.1. Eligibility and Benefits:
(a) Salary Reduction, Rollover and Qualified Nonelective
Contributions. If a Member's employment with the Company shall
terminate for any reason other than his Retirement under Article VII,
death under Article VIII, or Disability under Article IX, such Member
shall be entitled to all of his Salary Reduction Contribution Account
and all of his Rollover Contribution Account as of the Valuation Date
concurrent with or next following the date on which his termination of
employment occurs, including his portion, if any, of Salary Reduction
Contributions and Qualified Nonelective Contributions allocated after
the date of his termination of employment, adjusted for earnings and
losses, if any, that accrue to the Valuation Date immediately preceding
the date of distribution, if later.
(b) Company Matching Contributions. In addition, such Member
shall be entitled to a percentage of the amount in his Company Matching
Contribution Account as of the Valuation Date concurrent with or next
following the date on which his termination of employment occurs,
including his portion, if any, of Company Matching Contributions
allocated after the date of his termination of employment, adjusted for
earnings and losses, if any, that accrue to the Valuation Date
immediately preceding the date of distribution, if later. The
percentage of a Member's Company Matching Contribution Account to which
he is entitled shall be determined in accordance with the following
schedule:
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<PAGE>
<Table>
<Caption>
Completed Years of Vesting Service Percentage Payable
---------------------------------- ------------------
<S> <C>
Less than 1 year 0%
1 year but less than 2 years 20%
2 years but less than 3 years 40%
3 years but less than 4 years 60%
4 years but less than 5 years 80%
5 years or more 100%
</Table>
The provisions of this paragraph (b) shall be subject to the provisions
of Section 17.3 hereof, which shall be given full effect.
10.2. Time of Payment: The amount to which a Member shall be entitled
under Section 10.1 shall be paid to him at the time and in the manner provided
in Article XV hereof.
10.3. Forfeitures: A Member to whom Section 10.1 is applicable shall
forfeit that portion of the amount in his Individual Account to which he is not
entitled under Section 10.1, and the amount thus forfeited shall be used to
reduce Company Matching Contributions pursuant to the provisions of Section 6.3.
A Member who does not have any nonforfeitable right to his Individual Account
shall be deemed to have received a cashout distribution pursuant to Section 15.3
hereof, and shall forfeit the amount in such Individual Account in the Plan Year
in which his termination of employment occurs. A Member who receives a cashout
distribution in accordance with the provisions of Section 15.3 hereunder shall
forfeit that portion of his Individual Account to which he is not entitled under
Section 10.1 in the Plan Year in which the cashout distribution occurs. A Member
who is entitled to a portion of his Individual Account but who is not one
hundred percent (100%) vested in such Individual Account and who does not
receive a cashout distribution under Section 15.3, shall forfeit that portion of
his Individual Account to which he is not entitled under Section 10.1 in the
Plan Year in which he incurs five (5) consecutive Breaks in Service.
10.4. Forfeiture for Cause: In the event a Member who has not completed
at least five (5) years of Vesting Service is discharged due to his dishonest or
criminal act (proven by conclusive evidence to the unanimous satisfaction of the
Committee) or due to embezzlement, fraud, or dishonesty against and damaging to
the Company whereby the reasons for such discharge are confirmed by resolution
of the board of directors or other governing authority of the Company, the
entire amount credited to the benefit of such Member in his Company Matching
Contribution Account shall be forfeited and neither he nor his Beneficiary shall
be entitled to any benefit hereunder with respect to such amounts. Likewise, any
amounts credited, but not distributed, to the Company Matching Contribution
Account of a former Member who has not completed at least five (5) years of
Vesting Service shall be forfeited upon the discovery of any embezzlement,
fraud, or dishonesty of such former Member against and damaging to the Company.
Notwithstanding the foregoing, in the event the Plan is top-heavy for any Plan
Year, pursuant to Section 19.2 hereof, the provisions of Section 10.1 shall
supercede this Section 10.4 and shall be controlling for all purposes hereunder.
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<PAGE>
ARTICLE XI
Withdrawals and Loans
11.1. Loans to Members: Subject to such rules and regulations as may
from time to time be promulgated by the Committee, the Committee upon
application of a Member may, in its sole and absolute discretion, direct the
Trustee to make a loan or loans to such Member from his Rollover Contribution
Account, and upon depletion of the funds in his Rollover Contribution Account,
from his Salary Reduction Contribution Account upon such terms as the Committee
deems appropriate, subject to the following requirements.
The maximum amount that may be loaned is the lesser of (i) $50,000.00,
reduced as provided below, or (ii) one-half of the sum of the value of the
Member's Rollover Contribution Account and the value of the Member's Salary
Reduction Contribution Account as of the Valuation Date next preceding the date
on which the Committee receives the Member's loan application. The $50,000.00
limitation shall be reduced by the excess (if any) of:
(a) the highest outstanding balance of loans from the Plan to
the Member during the one-year period ending on the day before the date
on which such loan was made, over
(b) the outstanding balance of loans from the Plan to the
Member on the date on which such loan was made.
The minimum amount that may be loaned is the sum of: (i) One Thousand
and No/100 Dollars ($1,000.00) and (ii) an amount equal to the Plan's loan
administration fee in effect on the date on which the loan is made. Only one
loan from the Plan per calendar year may be approved for any Member, and no more
than one such loan may be outstanding at any time. Loans shall be granted by the
Committee in a uniform and nondiscriminatory manner. Each loan shall bear a
reasonable rate of interest and be adequately secured and shall by its terms
require repayment in no later than five years, unless such loan is used to
acquire any dwelling unit that within a reasonable time is to be used
(determined at the time the loan is made) as a principal residence of the
Member. All loans shall be repaid pro rata to the applicable account from which
the loan proceeds were paid pursuant to a salary deduction procedure established
by the Company unless the Member is on an authorized leave of absence or
transfers to a location that does not participate in a salary deduction
procedure, in which case payment shall be made to the principal office of the
Company by check.
All loans to Members granted under this provision are to be considered
a directed investment of such Member. The loan shall remain an asset of the
Trust, but to the extent of the outstanding balance of any such loan at any
time, the Rollover Contribution Account and, if applicable, Salary Reduction
Contribution Account of the Member to whom such loan is made alone shall share
in any interest paid on such loan and alone shall bear any expense or loss
incurred in connection with such loan. The Trustee may retain any principal or
interest paid on any such loan in an interest-bearing segregated account held on
behalf of the Member to whom such loan is made until the Trustee deems it
appropriate to add such amounts to a Member's Rollover Contribution Account, and
if applicable, Salary Reduction Contribution Account. Each loan applicant shall
receive a clear statement of the charges involved in each loan transaction.
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<PAGE>
This statement shall include the dollar amount and annual interest rate of the
finance charge. Any outstanding loan or loans to a Member shall, if not paid
when due, be liquidated out of the interest of such Member; provided, however,
that no such liquidation shall occur prior to the time a Member is entitled to
receive a distribution under Article VII, VIII, IX or X hereof or a withdrawal
under Section 11.2(b) hereof. No distribution shall be made to any Member or
former Member, or to a Beneficiary or Beneficiaries, or the estate of a Member
unless and until all unpaid loans to such Member, together with interest, have
been liquidated, as described above, or paid in full.
11.2. Withdrawals:
(a) Financial Hardship. A Member may, upon the approval of the
Committee, withdraw on account of financial hardship any portion of his
Rollover Contribution Account and upon depletion of the funds in his
Rollover Contribution Account, any portion of his Salary Reduction
Contribution Account other than amounts attributable to Qualified
Nonelective Contributions, if any, and income on such Member's Salary
Reduction Contributions and Qualified Nonelective Contributions, if
any. A Member may not withdraw, on account of hardship, amounts in his
Company Matching Contribution Account. A Member who wishes to request a
hardship withdrawal shall file with the Committee a written request for
withdrawal on a form provided by the Committee. The Committee shall
adopt uniform and nondiscriminatory rules regarding the granting of
such requests and shall evaluate hardship requests made under this
Section. Financial hardship means an immediate and heavy financial need
of the Member for which funds are not reasonably available from other
resources of the Member. If approved by the Committee, any withdrawal
for financial hardship may not exceed the amount deemed necessary to
meet the immediate financial need created by the hardship, including
any amounts necessary to pay any federal, state, or local income taxes
or penalties reasonably anticipated to result from the withdrawal.
Furthermore, the Committee shall not approve the request of any Member
for a hardship withdrawal unless the Member has theretofore made all
withdrawals, other than hardship withdrawals, and has theretofore
obtained all loans permitted under all plans maintained by the Company.
The determination of whether a Member suffers sufficient hardship to
justify the granting of his written request and of the amount permitted
to be withdrawn under this Section shall be made in the sole and
absolute discretion of the Committee after a full review of the
Member's written request and evidence presented by the Member showing
financial hardship.
A distribution will generally be treated as necessary to
satisfy a financial hardship if the Committee relies upon the Member's
written representation, unless the Committee has actual knowledge to
the contrary that the hardship cannot reasonably be relieved:
(1) through reimbursement or compensation by
insurance or otherwise;
(2) by liquidation of the Member's assets;
(3) by cessation of Salary Reduction Contributions
under the Plan; or
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<PAGE>
(4) by other distributions or nontaxable (determined
at the time of the loan) loans from plans maintained by the
Company, or any other employer of such Member, or by borrowing
from commercial sources on reasonable commercial terms in an
amount sufficient to satisfy the financial hardship.
Upon a Member's receipt of a withdrawal for financial
hardship, such Member shall be prohibited from making Salary Reduction
Contributions for a period of at least twelve (12) months, beginning on
the date on which the hardship withdrawal is made. A Member may elect
to resume Salary Reduction Contributions as of the first day of any
payroll period following the last day of such twelve (12) month period
by filing a new salary deferral election within the time period prior
to the first day of such payroll period established by the Committee.
Upon a Member's resumption of Salary Reduction Contributions, the
maximum amount of such contributions that may be made on such Member's
behalf for his taxable year following the taxable year in which the
hardship withdrawal is made, is the applicable dollar limit for such
following taxable year under Section 4.4 hereof, reduced by the amount
of Salary Reduction Contributions made on his behalf for his taxable
year in which the hardship withdrawal is made.
Expenses that may warrant approval of a Member's request for a
hardship withdrawal include:
(1) Medical expenses described in Section 213(d) of
the Code incurred by the Member, the Member's spouse, or any
dependents of the Member (as defined in Section 152 of the
Code) or necessary for those persons to obtain medical care
described in Section 213(d) of the Code and not reimbursed or
reimbursable by insurance;
(2) Expenses (excluding mortgage payments) incurred
to purchase a principal residence of the Member;
(3) Payment of tuition, related educational fees, and
room and board expenses for the next twelve (2) months of
post-secondary education for the Member, his or her spouse, or
children or dependents, as defined above;
(4) Payments necessary to prevent the eviction of the
Member from his principal residence or foreclosure on the
mortgage of the Member's principal residence; or
(5) Such other expenses as the Committee may
determine to be within the intent of this Section.
(b) Attainment of Age 59-1/2. On or after the date on which he
attains age fifty-nine and one-half (59-1/2), a Member who remains
employed by the Company shall have the right at any one time prior to
the close of any Plan Year to elect in writing, within the time period
established by the Committee for such elections, to withdraw all
(including the amount of any then outstanding loan from the Plan), but
not less than all, of his vested interest (determined pursuant to
Section 10.1 hereof, without regard to Articles VII, VIII or IX hereof,
as if he had terminated his employment as of the end of
25
<PAGE>
such Plan Year for a reason other than Disability, Retirement or death)
in his Individual Account as of the end of such Plan Year. A Member who
makes an election under this subsection (b) shall be entitled to have
credited to his Individual Account his allocable share, if any, of the
Company Matching Contributions, Qualified Nonelective Contributions,
and Salary Reduction Contributions for the Plan Year in which the
election is made. An electing Member's vested interest shall be
distributed to him in one lump sum within ninety (90) days after the
close of the Plan Year in which such election is made, or if later, the
date as of which the value of his Individual Account is finally
determined. Partial payment may be made, however, prior to such date in
the sole and absolute discretion of the Committee; provided, however,
in no event shall any partial payment be made if full payment would be
made to the Member in more than one taxable year. A Member who makes an
election under this subsection (b) shall be prohibited from
participating further in the Plan for the Plan Year next following the
Plan Year in which such election is made (and no Company Matching
Contributions, Qualified Nonelective Contributions, or Salary Reduction
Contributions shall be allocated to his Individual Account) until the
first day of the first Plan Year beginning one year after the end of
the Plan Year in which the Member's election under this subsection (b)
was made.
ARTICLE XII
Investment of the Trust Fund
12.1. Member Direction of Investment:
(a) Investment of Contributions. Each Member shall have the
right, within the guidelines established by the Committee, to direct
the Committee to instruct the Trustee to invest all or any portion of
the contributions made by or on behalf of such Member in such
investment funds as may be designated by the Committee from time to
time. The Committee shall direct the Trustee as to the investment funds
in which Members may invest. The Committee may determine to offer as
investment funds any investment fund, program, or other vehicle that is
suitable as a proper and permissible investment of contributions made
to a retirement plan qualified pursuant to Section 401(a) of the Code.
(b) Modification of Investment Media. The Committee shall be
authorized at any time, and from time to time, to modify, alter,
delete, or add to the funds available for investment at the direction
of a Member. In the event a modification occurs, the Committee shall
notify those Members whom the Committee, in its sole and absolute
discretion, determines are affected by the change and shall give such
persons such additional time as is determined by the Committee to
designate the manner and percentage in which amounts invested in those
funds thereby affected shall be invested.
The Committee shall not be obligated to substitute funds of
similar investment criteria for existing funds, nor shall it be
obligated to continue the types of investments presently available to
the Members. Nothing contained herein shall constitute any action by
the Committee as a direction of investment of the assets or an attempt
to control such direction.
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<PAGE>
(c) Investment Direction. Any Member, on or before entry into
the Plan, within the time period established by the Committee, may
designate the manner and the percentage in which the Member desires the
Trustee to invest his current contributions, pursuant to the provisions
set forth above, which designation shall continue in effect until
revoked or modified by the Member. If a Member fails to designate the
investment of his current contributions on or before his entry into the
Plan, or if a Member wishes to change such designation, the Member may
make such designation or change, within the time period established by
the Committee, to become effective for all future contributions as soon
as practicable following the date of receipt by the Committee of such
designation or change, and such designation or change shall continue in
effect until revoked by the Member.
In the event the nature of any fund shall, in the opinion of
the Committee, change, then the Committee shall notify those Members
who the Committee, in its sole and absolute discretion, determines are
affected by the change, who shall have a reasonable period of time, as
determined by the Committee, to designate the manner and the
percentages in which amounts invested in those funds affected by the
change shall be invested.
Any amounts not directed by a Member for investment shall be
invested in the fund or funds designated by the Committee, in is sole
and absolute discretion. The provisions of this Section 12.1 shall be
subject to such administrative rules as may be established by the
Committee. All investment designations shall be made in the manner
prescribed by the Committee.
The Committee shall maintain separate subaccounts in the name
of each Member within his Individual Account to reflect such Member's
accrued benefit attributable to his directed investment in the above
investment media.
12.2. Conversion of Investments:
(a) Member's Individual Account. Effective as of any Valuation
Date, within the time period prior thereto established by the
Committee, and subject to any restrictions on transfer imposed under
particular investment funds, a Member who has an account balance in his
Individual Account in excess of any loan receivables from such Member
may, pursuant to guidelines established by the Committee, direct the
Committee to instruct the Trustee to convert any whole percentage, up
to one hundred percent (100%), of such amount in his Individual Account
(in excess of such loan receivables), which is invested in any of the
investment media set forth in Section 12.1 hereof, into one or more
other of such investment media. Such direction shall be effective as
soon as practicable following the date of receipt by the Committee of
such direction to convert.
(b) Conversion Directions. A direction to convert by any
eligible Member shall be irrevocable and shall be made in the manner
prescribed by the Committee within the time period established by the
Committee. Any conversion of investments pursuant to this Section 12.2
shall not affect a Member's direction of investments with respect to
his future contributions pursuant to Section 12.1.
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<PAGE>
(c) Direction of Spouse. If a Member's spouse who is not a
Member in this Plan acquires an interest in a Member's Individual
Account pursuant to a qualified domestic relations order, then the
Member's spouse may direct the Committee to convert the investment of
the interest to which such spouse is thus entitled in the same manner
and at the same time as the Member may direct a conversion of
investments, as provided above. If such spouse becomes a Member of the
Plan, the spouse shall be entitled to convert such investments in
accordance with the rights of Members in the Plan.
(d) Miscellaneous. The Committee is authorized to establish
such other rules and regulations, including adding additional times to
convert investments, as it determines are necessary to carry out the
provisions of Sections 12.1 and 12.2, the specific dates of conversion
to be determined by the Committee, and all earnings on the Member's
investments after such dates shall be allocated in accordance with the
Member's Individual Accounts, as adjusted on such dates. The Committee
shall be authorized to modify the allocations of earnings, provided
such change is made on a reasonable and nondiscriminatory basis.
ARTICLE XIII
Administration
13.1. Appointment of Committee: The Plan shall be administered by a
Committee consisting of at least three or more persons who shall be appointed by
and serve at the pleasure of the board of directors of the Company. All usual
and reasonable expenses of the Committee may be paid in whole or in part by the
Company, and any expenses not paid by the Company shall be paid by the Trustee
out of the principal or income of the Trust. The members of the Committee shall
not receive compensation with respect to their services for the Committee. The
members of the Committee may serve without bond or security for the performance
of their duties hereunder unless applicable law makes the furnishing of such
bond or security mandatory or unless required by the Company. Any member of the
Committee may resign by delivering his written resignation to the Company and to
the other members of the Committee.
13.2. Committee Powers and Duties: The Committee shall have such powers
as may be necessary to discharge its duties hereunder, including, but not by way
of limitation, the following powers and duties:
(a) to construe and interpret the Plan, decide all questions
of eligibility and determine the amount, manner, and time of payment of
any benefits hereunder;
(b) to prescribe procedures to be followed by distributees in
obtaining benefits;
(c) to make a determination as to the right of any person to a
benefit and to afford any person dissatisfied with such determination
the right to a hearing thereon;
(d) to receive from the Company and from Members such
information as shall be necessary for the proper administration of the
Plan;
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(e) to delegate to one or more of the members of the Committee
the right to act in its behalf in all matters connected with the
administration of the Plan and Trust;
(f) to receive and review reports of the financial condition
and of the receipts and disbursements of the Trust Fund from the
Trustee;
(g) to appoint or employ for the Plan any agents it deems
advisable, including, but not limited to, legal counsel; and
(h) to take any and all further actions from time to time as
the Committee, in its sole and absolute discretion, shall deem
necessary for the proper administration of the Plan.
The Committee shall have no power to add to, subtract from, or modify
any of the terms of the Plan, nor to change or add to any benefits provided by
the Plan, nor to waive or fail to apply any requirements of eligibility for
benefits under the Plan. The Committee shall have full and absolute discretion
in the exercise of each and every aspect of its authority under this Plan,
including without limitation, all of the rights, powers, and authorities
specified in this Section 13.2 and, if applicable, in Section 13.3 hereof.
A majority of the members of the Committee shall constitute a quorum
for the transaction of business. No action of the Committee shall be taken
except upon a majority vote of the Committee members other than as described in
subparagraph (e) above. An individual shall not vote or decide upon any matter
relating solely to himself or vote in any case in which his individual right or
claim to any benefit under the Plan is particularly involved. If in any case in
which a Committee member is so disqualified to act, and the remaining members
cannot agree, the board of directors of the Company will appoint a temporary
substitute member to exercise all the powers of the disqualified member
concerning the matter in which he is disqualified.
13.3. Duties and Powers of the Plan Administrator: The Plan
Administrator shall have such powers as may be necessary to discharge his duties
hereunder, including, but not by way of limitation, the following powers and
duties:
(a) to file with the Internal Revenue Service (and, effective
for Plan Years beginning on or after January 1, 1999, the Secretary of
Labor) the annual report, and with the Internal Revenue Service such
other documents as may be requested by the Internal Revenue Service
from time to time;
(b) to file with the Secretary of Labor such documents as may
be requested by the Secretary of Labor from time to time;
(c) to furnish each Member, former Member, and each
Beneficiary receiving benefits hereunder a summary plan description
explaining the Plan;
(d) to furnish any Member, former Member, or Beneficiary, who
requests in writing, statements indicating such Member's, former
Member's, or Beneficiary's total accrued benefits and nonforfeitable
benefits, if any;
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(e) to furnish to a Member a statement containing information
contained in a registration statement required by Section 6057(a)(2) of
the Code;
(f) to maintain all records necessary for verification of
information required to be filed with any government agency;
(g) to allocate the assets of the Plan available to provide
benefits to Members in the event the Plan should terminate; and
(h) to report to the Trustee all available information
regarding the amount of benefits payable to each Member, the
computations with respect to the allocation of assets, and any other
information which the Trustee may require in order to terminate the
Plan.
13.4. Rules and Decisions: The Committee may adopt such rules as it
deems necessary or desirable. All rules and decisions of the Committee shall be
uniformly and consistently applied to all Employees in similar circumstances.
The Committee is required to provide a notice in writing to any person whose
claim for benefits under the Plan has been denied, setting forth the specific
reasons for such denial. The Committee shall adopt rules or procedures to carry
out the intent of this Section and to provide a basis for a full and fair review
by the Committee of the decision denying the claim and provide such person with
an opportunity to supply any evidence he has to sustain the claim.
13.5. Committee Procedures: The Committee may adopt such bylaws as it
deems desirable. The Committee shall elect one of its members as chairman. The
Committee shall advise the Trustee of such election in writing. The Committee
shall keep a record of all meetings and forward all necessary communications to
the Trustee.
13.6. Authorization of Benefit Payments: The Committee shall issue
directions to the Trustee concerning all benefits which are to be paid from the
Trust Fund pursuant to the provisions of the Plan. The Committee shall keep on
file, in such manner as it may deem convenient or proper, all reports from the
Trustee.
13.7. Payment of Expenses: All expenses incident to the administration,
termination, or protection of the Plan and Trust, including but not limited to,
actuarial, legal, accounting, and Trustee's fees, shall be paid by the Company,
or if not paid by the Company, shall be paid by the Trustee from the Trust Fund
and until paid, shall constitute a first and prior claim and lien against the
Trust Fund.
13.8. Indemnification of Members of the Committee: The Company shall,
to the maximum extent permitted under the Company's bylaws, indemnify the
members of the Committee against liability or loss sustained by them by an act
or failure to act in their capacity as members of the Committee.
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ARTICLE XIV
Notices
14.1. Notice to Trustee: As soon as practicable after a Member ceases
to be in the employ of the Company for any of the reasons set forth in Articles
VII through X, inclusive, the Committee shall give notice to the Trustee, which
notice shall include such of the following information and directions as are
necessary or advisable under the circumstances:
(a) name and address of the Member;
(b) name and address of the Beneficiary or Beneficiaries in
case of a Member's death;
(c) amount to which Member is entitled in case of termination
of employment pursuant to Article X; and
(d) manner and amount of payments to be made pursuant to
Article XV.
If a former Member dies, the Committee shall give a like notice to the
Trustee, but only if the Committee learns of his death.
14.2. Subsequent Notices: At any time and from time to time after
giving the notice as provided for in Section 14.1, the Committee may modify such
original notice or any subsequent notice by means of a further notice or notices
to the Trustee; but any action theretofore taken or payments theretofore made by
the Trustee pursuant to a prior notice shall not be affected by a subsequent
notice.
14.3. Reliance upon Notice: Upon receipt of any notice as provided in
this Article, the Trustee shall promptly take whatever action and make whatever
payments are called for therein, it being intended that the Trustee may rely
upon the information and directions in such notice absolutely and without
question. However, the Trustee may call to the attention of the Committee any
error or oversight that the Trustee believes to exist in any notice.
ARTICLE XV
Benefit Payments
15.1. Method of Payment: As soon as practicable after a Member, former
Member, or Beneficiary is entitled to receive benefits hereunder, as provided in
Articles VII, VIII, IX or X and this Article XV, the Committee shall give
written notice to the Trustee. Such benefits shall be paid to the Member, former
Member, or his Beneficiary in a lump sum. Any benefit payable hereunder will be
paid in cash.
15.2. Time of Payment: Distribution shall be made as soon as
administratively practicable, but in no event later than one (1) year after the
Valuation Date coincident with or immediately following the date on which a
Member, former Member, or Beneficiary shall become entitled to receive a benefit
hereunder. Notwithstanding the foregoing, if the nonforfeitable portion of a
Member's or former Member's Individual Account exceeds Three Thousand Five
Hundred and No/100 Dollars ($3,500.00) in Plan Years beginning before January
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1, 1998, or Five Thousand and No/100 Dollars ($5,000.00) in Plan Years beginning
on or after January 1, 1998, no distributions may commence without the consent
of the Member or former Member until he attains age sixty-two (62). Such consent
must be obtained within the ninety (90) day period ending on the date of
distribution. The Committee shall notify the Member or former Member of the
right to defer any distribution until the date on which he attains age sixty-two
(62). Such notification shall include a general description of the material
features, and an explanation of the relative values of, the optional forms of
benefit available under the Plan in a manner that would satisfy the notice
requirements of Section 417(a)(3) of the Code, and shall be provided no less
than thirty (30) days and no more than ninety (90) days prior to the date of
distribution. Notwithstanding the foregoing, the consent of the Member or former
Member shall not be required to the extent that a distribution is required to
satisfy Section 415 or Sections 401(k)(8) or 401(m)(6) of the Code. In addition,
upon termination of this Plan, if the Plan does not then offer an annuity
option, the Member's or former Member's Individual Account may, without his
consent, be distributed to the Member or former Member or transferred to another
defined contribution plan maintained by an Affiliate. Furthermore, if a
distribution is one to which Sections 401(a)(11) and 417 of the Code do not
apply, such distribution may commence less than thirty (30) days after the
notice required under Section 1.411(a)-11(c) of the Treasury Regulations is
given, provided that: (i) the Committee clearly informs the Member that he has a
right to a period of at least thirty (30) days after receiving the notice to
consider the decision of whether or not to elect a distribution (and, if
applicable, a particular distribution option), and (ii) the Member, after
receiving the notice, affirmatively elects a distribution.
Distribution shall be made no later than the required beginning date,
which is April 1st of the calendar year following the later of: (a) the calendar
year in which a Member or former Member attains age 70 1/2 or (b) the calendar
year in which the Member retires; provided that if a Member or former Member is
a Five Percent (5%) Owner (as defined in Section 19.1(f) hereof), then the
required beginning date is April 1st of the calendar year following the calendar
year in which such Member or former Member attains age 70 1/2. Effective as of
the date on which this restated Plan is adopted, distribution of a Member's
entire Individual Account shall be made in a single lump sum on or before such
Member's or former Member's required beginning date. In the case of a Member who
attains age 70 1/2 prior to the date on which this restated Plan is adopted, the
minimum distribution required for the calendar year immediately preceding the
Member's or former Member's required beginning date must be made on or before
his required beginning date. The minimum distribution for other calendar years,
including the minimum distribution for the calendar year in which the Member's
or former Member's required beginning date occurs, must be made on or before
December 31 of such calendar year. All minimum distributions required under this
Article XV shall be determined and made in accordance with the applicable
Treasury Regulations under Section 401(a)(9) of the Code, including the minimum
distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the
Treasury Regulations. Neither the life expectancy of the Member nor that of his
spouse may be recalculated for purposes of determining minimum distributions.
Notwithstanding any provision herein to the contrary, any Member or
former Member who attains age 70 1/2 in a calendar year after 1995 and prior to
the date on which this restated Plan is adopted, may irrevocably elect, in the
manner established by the Committee, by April 1 of the calendar year following
the year in which the Member or former Member attains age 70 1/2 (or by December
31, 1997 in the case of a Member or former Member who attains age 70 1/2 in
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1996) to defer distributions until April 1 of the calendar year following the
calendar year in which the Member or former Member retires. If no such election
is made, the Member or former Member will begin receiving distributions by the
April 1 of the calendar year following the year in which the Member or former
Member attains age 70 1/2 (or by December 31, 1997 in the case of a Member or
former Member who attains age 70 1/2 in 1996). Furthermore, any Member or former
Member who attains age 70 1/2 in a calendar year prior to 1996, may irrevocably
elect, in the manner established by the Committee, to stop distributions and
recommence distributions as of the April 1 of the calendar year following the
calendar year in which such Member or former Member retires.
If distributions have commenced so that payments are being made over
the life of the Member or former Member, and he dies before his entire interest
has been distributed, then the remaining portion of such interest shall be
distributed at least as rapidly as under the method of distribution being used
as of the date of his death, but in no event later than one year after the
Valuation Date coincident with or immediately following his death. On the other
hand, if a Member or former Member dies before the distribution of any of his
benefits has begun, then his entire interest will be distributed no later than
one year after the Valuation Date coincident with or immediately following his
death. If the designated Beneficiary is the Member's or former Member's
surviving spouse and such surviving spouse dies after the Member or former
Member, but before payment to such surviving spouse is made, then the provisions
of the preceding sentence shall be applied as if the surviving spouse were the
Member or former Member. Furthermore, if the designated Beneficiary is the
surviving spouse of the Member or former Member, then distribution to such
surviving spouse will not be required earlier than the later of: (a) December 31
of the calendar year immediately following the calendar year of the Member's or
former Member's death and (b) December 31 of the calendar year in which the
Member or former Member would have attained age 70 1/2. Distribution of benefits
is considered to have begun, for purposes of this paragraph, on the required
beginning date; provided that if a Member's or former Member's designated
Beneficiary is his surviving spouse, and such surviving spouse dies after the
Member or former Member but before payments to such surviving spouse have begun,
then distribution of benefits is considered to have begun on the date
distribution to the surviving spouse is required to begin pursuant to the
provisions of this paragraph. Any amount paid to the child of a Member or former
Member will be treated as if it had been paid to the surviving spouse if the
amount becomes payable when the child reaches the age of majority. Unless a
Member or former Member elects otherwise, in writing, no distribution hereunder
shall start later than 60 days after the close of the Plan Year in which the
last to occur of the following occurs:
(a) the Member or former Member attains Normal Retirement Age,
(b) the 10th anniversary of the year in which the Member or
former Member commenced participation in the Plan, or
(c) the Member or former Member terminates service with the
Company.
15.3. Cash Out Distribution: If a Member or former Member who has
received a distribution of his benefits hereunder on or before the last day of
the second Plan Year following the year in which his termination of employment
occurs, has forfeited a portion of his Individual
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Account, then in the event such Member or former Member is subsequently rehired
by the Company prior to the date on which he incurs five (5) consecutive Breaks
in Service, he shall be entitled to repay, at any time prior to the earlier of:
(i) the date which is five (5) years after the first date on which he is
subsequently reemployed by the Company and (ii) the date on which he incurs five
(5) consecutive Breaks in Service, the amount of the distribution to him from
his Individual Account. Upon such repayment, the rehired Member's or former
Member's Individual Account shall be credited with the exact amount which was
nonvested at the time of termination. In the event a rehired Member or former
Member who has received a distribution hereunder does not timely repay such
distribution from his Individual Account, as provided above, then the amount he
forfeited at the time of his termination of employment pursuant to the terms of
Section 10.3 hereof shall remain forfeited. His prior years of Vesting Service
shall be taken into account, however, for purposes of determining his vested
interest in contributions following reemployment. If a Member or former Member
who does not have any nonforfeitable right to his Individual Account and thus is
deemed to have received a cashout distribution, pursuant to the provisions of
Section 10.3 hereof, is subsequently reemployed by the Company and five (5)
consecutive Breaks in Service have not occurred, then upon such reemployment,
the rehired Member's or former Member's Individual Account shall be credited
with the exact amount which was nonvested at the time of termination.
15.4. Minority or Disability Payments: During the minority or
Disability of any person entitled to receive benefits hereunder, the Committee
may direct the Trustee to make payments due such person directly to him or to
his spouse or a relative or to any individual or institution having custody of
such person. Neither the Committee nor the Trustee shall be required to see to
the application of payments so made, and the receipt of the payee (including the
endorsement of a check or checks) shall be conclusive as to all interested
parties.
15.5. Distributions Under Domestic Relations Orders: Nothing contained
in this Plan shall prevent the Trustee, in accordance with the direction of the
Committee, from complying with the provisions of a qualified domestic relations
order (as defined in Section 414(p) of the Code).
Effective July 20, 2000, the Plan specifically permits distribution to
an alternate payee under a qualified domestic relations order at any time,
irrespective of whether the Member or former Member has attained his earliest
retirement age under the Plan, as defined in Section 414(p) of the Code;
provided, however, that a distribution to an alternate payee prior to the Member
or former Member's attainment of earliest retirement age is available only if:
(1) the order specifies distribution at that time or permits an agreement
between the Plan and the alternate payee to authorize an earlier distribution;
(2) the order specifies such distribution to be in the form of a single,
lump-sum payment; and (3) if the amount to which the alternate payee is entitled
under the Plan exceeds $5,000, and the order so requires, the alternate payee
consents to any distribution occurring prior to the Member or former Member's
attainment of earliest retirement age. Nothing in this Section 15.5 gives a
Member or former Member a right to receive distribution at a time otherwise not
permitted under the Plan nor does it permit the alternate payee to receive a
form of payment not otherwise permitted under the Plan.
The Plan Administrator shall establish reasonable procedures to
determine the qualified status of a domestic relations order. Upon receiving a
domestic relations order, the Plan
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Administrator shall promptly notify the Member or former Member and any
alternate payee named in the order, in writing, of the receipt of the order and
the Plan's procedures for determining the qualified status of the order. Within
a reasonable period of time after receiving the domestic relations order, the
Plan Administrator shall determine the qualified status of the order and shall
notify the Member or former Member and each alternate payee, in writing, of its
determination. The Plan Administrator shall provide notice under this paragraph
by a mailing to the individual's address specified in the domestic relations
order, or in a manner consistent with Department of Labor regulations. The Plan
Administrator may treat as qualified any domestic relations order entered prior
to January 1, 1985, irrespective of whether it satisfies all the requirements
described in Section 414(p) of the Code.
If any portion of an Individual Account is payable during the period
the Plan Administrator is making its determination of the qualified status of
the domestic relations order, the Committee shall direct the Trustee to
segregate the amounts that are payable into a separate account and to invest the
segregated account solely in fixed income investments. If the Plan Administrator
determines the order is a qualified domestic relations order within eighteen
(18) months of receiving the order, the Committee shall direct the Trustee to
distribute the segregated account in accordance with the order. If the Plan
Administrator does not make its determination of the qualified status of the
order within eighteen (18) months after receiving the order, the Committee shall
direct the Trustee to distribute the segregated account in the manner in which
the Plan would otherwise distribute if the order did not exist and shall apply
the order prospectively if the Plan Administrator later determines the order is
a qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the
qualified domestic relations order, the Committee may direct the Trustee to
invest any amount that is subject to being paid to an alternate payee pursuant
to said order into a segregated subaccount or separate account and to invest the
account in federally insured, interest-bearing savings account(s) or time
deposit(s) (or a combination of both), or in other fixed income investments. A
segregated subaccount shall remain a part of the Trust, but it alone shall share
in any income it earns, and it alone shall bear any expense or loss it incurs.
The Trustee shall make any payments or distributions required under
this Section 15.5 by separate benefit checks or other separate distribution to
the alternate payee(s).
15.6. Direct Rollover of Eligible Rollover Distributions. An individual
who is entitled to a benefit hereunder, the distribution of which would qualify
as an "eligible rollover distribution," as such term is hereinafter defined,
may, in lieu of receiving any payment or payments from the Plan, direct the
Trustee to transfer all or any portion of such payment or payments directly to
the trustee of an "eligible retirement plan" as such term is hereinafter
defined. For purposes of this Section 15.6, the term "eligible rollover
distribution" is defined as any distribution of all or any portion of the
balance to the credit of the distributee, except that an eligible rollover
distribution does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any distribution to
the extent such distribution is required under Code Section 401(a)(9); the
portion
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of any distribution that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to employer
securities); and any hardship distribution described in Code Section
401(k)(B)(i)(IV). For purposes of this Section 15.6, the term "eligible
retirement plan" is defined as an individual retirement account described in
Code Section 408(a), an individual retirement annuity described in Code Section
408(b), an annuity plan described in Code Section 403(a), and a qualified trust
described in Code Section 401(a) that accepts the distributee's "eligible
rollover distribution," or in the case of an eligible rollover distribution to
the surviving spouse, an individual retirement account or individual retirement
annuity). Such election must be made on a form provided by the Committee for
that purpose and received by the Committee no later than the date established by
the Committee preceding the date on which the distribution is to occur. Any
election made pursuant to this Section 15.6 may be revoked at any time prior to
the date established by the Committee preceding the date on which the
distribution is to occur. If an individual who is so entitled has not elected a
direct rollover within the time and in the manner set forth above, such
distributee shall be deemed to have affirmatively waived a direct rollover. A
distributee who wishes to elect a direct rollover shall provide to the
Committee, within the time and in the manner prescribed by the Committee, such
information as the Committee shall reasonably request regarding the eligible
retirement plan or plans to which the payment or payments are to be transferred.
The Committee shall be entitled to rely on the information so provided, and
shall not be required to independently verify such information. The Committee
shall be entitled to delay the transfer of any payment or payments pursuant to
this Section 15.6 until it has received all of the information that it has
requested in accordance with this Section 15.6.
ARTICLE XVI
Trustee
16.1. Appointment of Trustee: A Trustee (or Trustees) shall be
appointed by the Committee to administer the Trust Fund. The Trustee shall serve
at the pleasure of the Committee and shall have such rights, powers, and duties
as are provided to a Trustee under ERISA for the investment of assets and for
the administration of the Trust Fund.
16.2. Appointment of Investment Manager: An Investment Manager (or
Investment Managers) may be appointed by the Committee to manage (including the
power to acquire and dispose of) any part or all of the assets of the Trust
Fund. The Investment Manager shall serve at the pleasure of the Committee, and
shall have the rights, powers, and duties provided to a named fiduciary under
ERISA for the investment of the assets assigned to it. (The Investment Manager
may be referred to from time to time hereafter as "he," "they," or "it," or may
be referred to in the singular or plural, but all such references shall be to
the then acting Investment Manager or Investment Managers serving hereunder.)
16.3. Responsibility of Trustee and Investment Manager: All
contributions under this Plan shall be paid to and held by the Trustee. The
Trustee shall have responsibility for the investment and reinvestment of the
Trust Fund except with respect to the management of those assets specifically
delegated to the Investment Manager and those funds invested pursuant to the
provisions of Section 15.5. The Investment Manager shall have exclusive
management and control of the investment and/or reinvestment of the assets of
the Trust Fund assigned to it in writing by the Trustee. All property and funds
of the Trust Fund, including income from
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investments and from all other sources, shall be retained for the exclusive
benefit of Members or former Members, as provided herein, and shall be used to
pay benefits to Members or former Members or their Beneficiaries, or to pay
expenses of administration of the Plan and Trust Fund to the extent not paid by
the Company.
This Plan and the related Trust are intended to allocate to each
fiduciary the individual responsibilities of the prudent execution of the
functions assigned to each. None of the allocated responsibilities or any other
responsibility shall be shared by the fiduciaries or the Trustee unless such
sharing shall be provided for by a specific provision in this Plan or related
Trust.
16.4. Bonding of Trustee and Investment Manager: Neither the Trustee
nor the Investment Manager shall be required to furnish any bond or security for
the performance of their powers and duties hereunder unless the applicable law
makes the furnishing of such bond or security mandatory.
ARTICLE XVII
Amendment and Termination of Plan
17.1. Amendment of Plan: The Company may, without the assent of any
other party, make from time to time any amendment or amendments to this Plan
that do not cause any part of the Trust Fund to be used for, or diverted to, any
purpose other than the exclusive benefit of Members or former Members of the
Plan. Any such amendment shall be by a written instrument executed by the
Company, and shall become effective as of the date specified in such instrument.
Notwithstanding the foregoing, no amendment to the Plan shall be effective to
the extent that it has the effect of decreasing a Member's or former Member's
accrued benefit, except as provided in Section 412(c)(8) of the Code. For
purposes of the preceding sentence, an amendment which has the effect of
decreasing a Member's or former Member's Individual Account or eliminating an
optional form of benefit, with respect to benefits attributable to service prior
to such amendment, shall be treated as reducing an accrued benefit. If any
amendment changes the vesting schedule set forth in Section 10.1, then a
Member's or former Member's nonforfeitable percentage in his Individual Account
because of a change to the vesting schedule shall not be less than his
nonforfeitable percentage computed under the vesting schedule in effect prior to
the amendment. Furthermore, if any amendment changes the vesting schedule set
forth in Section 10.1, then each Member or former Member having at least three
(3) Years of Vesting Service may elect to be governed under the vesting schedule
set forth in the Plan without regard to the amendment. The Member or former
Member must file his written election with the Committee within sixty (60) days
after receipt of a copy of the amendment. The Committee shall furnish the Member
or former Member with a copy of the amendment and with notice of the time within
which his election must be returned to the Committee.
17.2. Termination of Plan: The Company may at any time, effective as
specified, terminate the Plan by resolution of its board of directors. A
certified copy of such resolution shall be delivered to the Trustee.
17.3. Suspension and Discontinuance of Contributions: In the event the
Company decides it is impossible or inadvisable for it to continue to make its
contributions as provided in Article IV, it shall have the power by appropriate
resolution to either:
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(a) suspend its contributions to the Plan;
(b) discontinue its contributions to the Plan; or
(c) terminate the Plan.
Suspension shall be a temporary cessation of contributions and shall not
constitute or require a termination of the Plan. Such a suspension which has not
ripened into a complete discontinuance shall not constitute or require a
termination of the Plan or Trust or any vesting of Individual Accounts, other
than as prescribed by the provisions of Section 10.1. A complete discontinuance
of contributions by the Company shall not constitute a formal termination of the
Plan and shall not preclude later contributions, but all Individual Accounts of
Members or former Members not theretofore fully vested shall be and become 100%
vested and nonforfeitable in the respective Members or former Members,
irrespective of the provisions of Section 10.1. In such event, Employees who
become eligible to enter the Plan subsequent to the discontinuance shall receive
no benefit, and no additional benefits shall accrue to any of such Employees
unless such contributions are resumed. After the date of a complete
discontinuance of contributions, the Trust shall remain in existence as provided
in this Section 17.3, and the provisions of the Plan and Trust shall remain in
force as may be necessary in the sole and absolute discretion of the Committee.
17.4. Liquidation of Trust Fund: Upon termination or partial
termination of the Plan, the Individual Accounts of all Members, former Members,
and Beneficiaries shall thereupon be and become fully vested and nonforfeitable.
Thereupon, the Trustee shall convert the Trust Fund to cash after deducting all
charges and expenses. The Committee shall then adjust the balances of all
Individual Accounts, as provided in Section 5.2. Thereafter, the Trustee shall
distribute the amount to the credit of each affected Member, former Member, and
Beneficiary, in accordance with the provisions of Article XV hereof.
17.5. Consolidation or Merger: This Plan shall not be merged or
consolidated with, nor shall any assets or liabilities be transferred to, any
other plan, unless the benefits payable on behalf of each Member or former
Member, if the Plan were terminated immediately after such action, would be
equal to or greater than the benefits to which such Member or former Member
would have been entitled if this Plan had been terminated immediately before
such action. The Trustee shall not accept a direct transfer of assets from a
plan subject to the requirements of Section 417 of the Code.
ARTICLE XVIII
General Provisions
18.1. No Employment Contract: Nothing contained in this Plan shall be
construed as giving any person whomsoever any legal or equitable right against
the Committee, the Company, its stockholders, officers or directors, or against
the Trustee, except as the same shall be specifically provided for in this Plan.
Nor shall anything in this Plan give any Member, former Member, or other
Employee the right to be retained in the service of the Company, and the
employment of all persons by the Company shall remain subject to termination by
the Company to the same extent as if this Plan had never been executed.
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<PAGE>
18.2. Manner of Payment: Wherever and whenever it is herein provided
for payments or distributions to be made, whether in money or otherwise, said
payments or distributions shall be made directly into the hands of the Member or
former Member, his Beneficiary, his administrator, executor or guardian, or an
alternate payee pursuant to Section 15.5 herein, as the case may be. A deposit
to the credit of a person entitled to payment in any bank or trust company
selected by such person shall be deemed payment into his hands, and provided
further that in the event any person otherwise entitled to receive any payment
or distribution shall be a minor or an incompetent, such payment or distribution
may be made to his guardian or other person as may be determined by the
Committee.
18.3. Nonalienation of Benefits: Subject to Code Section 414(p) and
Section 15.5 herein relating to qualified domestic relations orders, the
interest of any Member, former Member, or Beneficiary hereunder shall not be
subject in any manner to any indebtedness, judgment, process, creditors' bills,
attachments, garnishment, levy, execution, seizure, or receivership, nor shall
such interest be in any manner reduced or affected by any transfer, assignment,
conveyance, sale, encumbrance, act, omission, or mishap, voluntary or
incidental, anticipatory or otherwise, of or to said Member, former Member, or
Beneficiary, and they and any of them shall have no right or power to transfer,
convey, assign, sell, or encumber said benefits and their interest therein,
legal or equitable, during the existence of this Plan; provided, however, that a
Participant may assign or pledge his vested interest in the Fund as security for
a loan made pursuant to the provisions of Section 11.1 hereof. Notwithstanding
the foregoing, no provision of this Plan shall preclude the enforcement of a
Federal tax levy made pursuant to Section 6331 of the Code or collection by the
United States on a judgment resulting from an unpaid tax assessment.
18.4. Titles for Convenience Only: Titles of the Articles and Sections
hereof are for convenience only and shall not be considered in construing this
Plan. Also words used in the singular or the plural may be construed as though
in the plural or singular where they would so apply.
18.5. Validity of Plan: This Plan and each of its provisions shall be
construed and their validity determined by the laws of the State of Texas, and
all provisions hereof shall be administered in accordance with the laws of said
State, provided that in case of conflict, the provisions of ERISA shall control.
18.6. Plan Binding: This Plan shall be binding upon the successors and
assigns of the Company and the Trustee and upon the heirs and personal
representatives of those individuals who become Members hereunder.
18.7. Return of Contributions: This Plan and the related Trust are
designed to qualify under Sections 401(a) and 501(a) of the Code. Anything
contained herein to the contrary notwithstanding, if the initial determination
letter is issued by the District Director of Internal Revenue to the effect that
this Plan and related Trust hereby created, or as amended prior to the receipt
of such letter, do not meet the requirements of Section 401(a) and 501(a) of the
Code, the Company shall be entitled at its option to withdraw all contributions
theretofore made, in which event the Plan and Trust shall then terminate.
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<PAGE>
Each contribution to the Plan is specifically conditioned on the
deductibility of such contribution under the Code. The Trustee, upon written
request from the Company, shall return to the Company the amount of the
Company's contribution made as a result of a mistake of fact or the amount of
the Company's contribution disallowed as a deduction under Section 404 of the
Code. Such return of contribution must be made within one (1) year after (a) the
Company made the contribution by mistake of fact or (b) the disallowance of the
contribution as a deduction. The amount of contribution subject to being
returned hereunder shall not be increased by any earnings attributable to the
contribution, but such amount subject to being returned shall be decreased by
any losses attributable to it.
18.8. Missing Members or Beneficiaries: Each Member shall file with the
Committee from time to time in writing a mailing address and any change of
mailing address for himself and his designated Beneficiary. Any communication,
statement or notice addressed to a Member or Beneficiary at the last mailing
address filed with the Committee, or if no such address is filed with the
Committee, then at his last mailing address as shown on the Company's records,
shall be binding on the Member or his Beneficiary for all purposes of the Plan.
The Committee shall not be required to search for or locate a Member or
Beneficiary. If the Committee notifies any Member or Beneficiary that he is
entitled to a distribution and also notifies him of the provisions of this
Section 18.8 (or makes reasonable effort to so notify such Member or Beneficiary
by certified letter, return receipt requested, to the last known address, or
such other further diligent effort, including consultation with the Internal
Revenue Service or the Social Security Administration, to ascertain the
whereabouts of such Member or Beneficiary as the Committee deems appropriate)
and the Member or Beneficiary fails to claim his distributive share or make his
whereabouts known to the Committee within three years thereafter, the
distributive share of such Member or Beneficiary will be forfeited and applied
to reduce the Company Matching Contribution. However, if the Member or his
Beneficiary should, thereafter, make a proper claim for such share, it shall be
distributed to him.
18.9. Qualified Military Service: Notwithstanding any provision of this
Plan to the contrary, effective December 12, 1994, contributions, benefits, and
service credit with respect to qualified military service will be provided in
accordance with Section 414(u) of the Code.
ARTICLE XIX
Top-Heavy Rules
19.1. Definitions: For purposes of applying the provisions of this
Article XIX:
(a) "Key Employee" shall mean, as of any Determination Date
(as defined below), any Employee or former Employee who, at any time
during the Plan Year (which includes the Determination Date) or during
the preceding four Plan Years is (i) an officer of the Company having
Annual Compensation greater than fifty percent (50%) of the amount in
effect under Section 415(b)(1)(A) of the Code for any such Plan Year,
(ii) one of the ten Employees of the Company having Annual Compensation
of more than the limitation in effect under Section 415(c)(1)(A) of the
Code and owning the largest interests in the Company, (iii) a Five
Percent (5%) Owner in the Company, or (iv) a One Percent (1%) Owner of
the Company who has Annual Compensation of more than $150,000. The
constructive ownership rules of Section 318 of the Code will apply to
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<PAGE>
determine ownership in the Company. The Committee will make the
determination of who is a Key Employee in accordance with Section
416(i)(1) of the Code and the regulations under that Code Section. The
Beneficiary of a Key Employee shall be treated as a Key Employee for
purposes of determining whether this Plan is top-heavy.
(b) "Non-Key Employee" is an Employee who does not meet the
definition of Key Employee.
(c) "Required Aggregation Group" means:
(1) Each qualified plan of the Company or an
Affiliated Entity (as defined below) in which at least one (1)
Key Employee participates or participated at any time during
the Plan Year which includes the Determination Date, or during
the preceding four Plan Years (regardless of whether the plan
has terminated); and
(2) Any other qualified plan of the Company which
enables a plan described in (1) to meet the requirements of
Section 401(a)(4) or Section 410 of the Code.
(d) "Permissive Aggregation Group" is the Required Aggregation
Group plus any other qualified plans maintained by the Company, but
only if such group would satisfy in the aggregate the requirements of
Section 401(a)(4) and Section 410 of the Code. The Committee shall
determine which plans to take into account in determining the
Permissive Aggregation Group.
(e) "Determination Date" for any Plan Year is the Allocation
Date of the preceding Plan Year or, in the case of the first Plan Year
of the Plan, the Allocation Date of that Plan Year.
(f) "Five Percent (5%) Owner" is any person who owns more than
five percent (5%) of the outstanding stock of the Company or stock
possessing more than five percent (5%) of the total combined voting
power of all stock of the Company.
(g) "One Percent (1%) Owner" is any person who owns more than
one percent (1%) of the outstanding stock of the Company or stock
possessing more than one percent (1%) of the total combined voting
power of all stock of the Company.
(h) "Affiliated Entity" shall mean all the members of (i) a
controlled group of corporations as defined in Section 414(b) of the
Code; (ii) a commonly controlled group of trades or businesses (whether
or not incorporated) as defined in Section 414(c) of the Code; (iii) an
affiliated service group as defined in Section 414(m) of the Code of
which the Company is a part; or (iv) a group of entities required to be
aggregated pursuant to Section 414(o) of the Code and the regulations
issued thereunder.
19.2. Determination of Top-Heavy Status: The Plan is top-heavy for a
Plan Year if the top-heavy ratio as of the Determination Date (as defined in
Section 19.1 above) exceeds sixty percent (60%). The top-heavy ratio is a
fraction, the numerator of which is the sum of the
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<PAGE>
present value of the Individual Accounts of all Key Employees (as defined in
Section 19.1 above) as of the Determination Date, the contributions for all Key
Employees that are due as of the Determination Date, and distributions made to
all Key Employees within the five (5) year period immediately preceding the
Determination Date, and the denominator of which is a similar sum determined for
all Employees in the Plan. If an Employee has not performed any services for the
Company at any time during the five (5) year period ending on the Determination
Date, any amount in the Individual Account of such Employee shall not be taken
into account. The Committee shall calculate the top-heavy ratio without regard
to any Non-Key Employee (as defined in Section 19.1 above) who was formerly a
Key Employee. The Committee shall calculate the top-heavy ratio, including the
extent to which it must take into account distributions, rollovers, and
transfers, in accordance with Section 416 of the Code and the regulations under
that Code Section.
If the Company maintains other qualified plans (including a simplified
employee pension plan), this Plan is top-heavy only if it is part of the
Required Aggregation Group (as defined in Section 19. 1 above), and the
top-heavy ratio for both the Required Aggregation Group and the Permissive
Aggregation Group (as defined in Section 19.1 above) exceeds sixty percent
(60%). The Committee will calculate the top-heavy ratio in the same manner as
required by the first paragraph of this Section 19.2, taking into account all
plans within the aggregation group. The Committee shall calculate the present
value of accrued benefits and the other amounts the Committee must take into
account under defined benefit plans or simplified employee pension plans
included within the group, in accordance with the terms of those plans, Section
416 of the Code, and the regulations under that Code Section. The Committee
shall calculate the top-heavy ratio with reference to the Determination Dates
that fall within the same calendar year.
19.3. Minimum Company Contribution: Notwithstanding anything contained
herein to the contrary, for any Plan Year in which this Plan is determined to be
top-heavy (as determined under Section 19.2 hereof), each Non-Key Employee who
is an eligible Member shall be entitled to a supplemental contribution equal to
three percent (3%) of such Non-Key Employee's Annual Compensation, reduced by
the amount of Qualified Nonelective Contributions, if any, allocated to his
Salary Reduction Contribution Account for the applicable Plan Year. For purposes
of this Section 19.3, an eligible Member is a Non-Key Employee who is employed
by the Company on the last day of the Plan Year.
The percentage referred to in the preceding paragraph shall not exceed
the percentage of Annual Compensation at which Company contributions, including
Salary Reduction Contributions, are made or allocated under this Plan, and all
other qualified defined contribution plans maintained by the Company, to the Key
Employee for whom such percentage is the largest; provided, however, this
sentence shall not apply if the Plan is required to be included in an
Aggregation Group and enables a defined benefit plan required to be included in
such group to meet the requirements of Code Sections 401(a)(4) or 410. If the
minimum allocation is made for a Non-Key Employee pursuant to another qualified
plan maintained by the Company, then the minimum allocation requirement will be
considered satisfied for purposes of this Plan.
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<PAGE>
ARTICLE XX
Fiduciary Provisions
20.1. General Allocation of Duties: Each fiduciary with respect to the
Plan shall have only those specific powers, duties, responsibilities, and
obligations as are specifically given him under the Plan. The board of directors
of the Company shall have the sole responsibility for authorizing its
contributions under the Plan. The Company shall have the sole authority to
appoint and remove the members of the Committee and to amend or terminate this
Plan, in whole or in part. The Committee shall have the sole authority to
appoint and remove the Trustee and Investment Managers. However, neither the
board nor the Committee shall be liable for any acts or omissions of the Trustee
or Investment Manager or be under any obligation to invest or otherwise manage
any assets of the Trust Fund which are subject to the management of the Trustee
or Investment Manager. Except as otherwise specifically provided, the Committee
shall have the sole responsibility for the administration of the Plan, which
responsibility is specifically described herein. Except as otherwise
specifically provided, the Trustee shall have the sole responsibility for the
administration, investment, and management of the assets held under the Plan. It
is intended under the Plan that each fiduciary shall be responsible for the
proper exercise of its own powers, duties, responsibilities, and obligations
hereunder and shall not be responsible for any act or failure to act of another
fiduciary, except to the extent provided by law or as specifically provided
herein.
20.2. Fiduciary Duty: Each fiduciary under the Plan shall discharge its
duties and responsibilities with respect to the Plan:
(a) solely in the interest of the Members of the Plan, for the
exclusive purpose of providing benefits to such Members and their
Beneficiaries, and defraying reasonable expenses of administering the
Plan;
(b) with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims;
(c) by diversifying the investments of the Plan so as to
minimize the risk of large losses, unless under the circumstances it is
prudent not to do so; and
(d) in accordance with the documents and instruments governing
the Plan insofar as such documents and instruments are consistent with
applicable law.
20.3. Fiduciary Liability: A fiduciary shall not be liable in any way
for any acts or omissions constituting a breach of fiduciary responsibility
occurring prior to the date it becomes a fiduciary or after the date it ceases
to be a fiduciary.
20.4. Co-Fiduciary Liability: A fiduciary shall not be liable for any
breach of fiduciary responsibility by another fiduciary unless:
(a) it participates knowingly in, or knowingly undertakes to
conceal, an act or omission of such other fiduciary, knowing such act
or omission is a breach;
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<PAGE>
(b) by its failure to comply with Section 404(a)(1) of ERISA
in the administration of its specific responsibilities which give rise
to its status as a fiduciary, it has enabled such other fiduciary to
commit a breach; or
(c) having knowledge of a breach by such other fiduciary, it
fails to make reasonable efforts under the circumstances to remedy the
breach.
20.5. Delegation and Allocation: The Committee may appoint
subcommittees, individuals, or any other agents as it deems advisable and may
delegate to any of such appointees any or all of the powers and duties of the
Committee. Such appointment and delegations must clearly specify the powers and
duties delegated. Upon such appointment and delegation, the delegating Committee
members shall have no liability for the acts or omissions of any such delegate,
as long as the delegating Committee members do not violate their fiduciary
responsibility in making or continuing such delegation.
IN WITNESS WHEREOF, Southwest Airlines Co. has caused its corporate
seal to be affixed hereto and these presents to be duly executed in its name
and behalf by its proper officers thereunto duly authorized this 16th day of
November, 2001.
SOUTHWEST AIRLINES CO.
ATTEST:
/s/ DEBORAH ACKERMAN By: /s/ JAMES F. PARKER
- ------------------------------- -----------------------------------
Assistant Secretary James F. Parker, Chief Executive
Officer
44
<PAGE>
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this 16th day of November, 2001, personally appeared James F.
Parker, to me known to be the individual person who subscribed the name of
SOUTHWEST AIRLINES CO., as its Chief Executive Officer, to the foregoing
instrument and acknowledged to me that he executed the same as his free and
voluntary Act and deed and the free and voluntary act and deed of such
corporation, for the uses and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, the day and year last above
written.
/s/ LINDA SIMMONS
------------------------------
Notary Public in and for the
State of Texas
My Commission Expires:
12/11/01
- --------------------------------
45
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>5
<FILENAME>d93658ex10-16.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT FOR JAMES F. PARKER
<TEXT>
<PAGE>
EXHIBIT 10.16
EMPLOYMENT CONTRACT
THIS EMPLOYMENT CONTRACT (hereinafter referred to as this "Agreement"),
dated as of June 19, 2001, by and between JAMES F. PARKER (hereinafter referred
to as the "Employee"), a resident of Dallas, Texas, and SOUTHWEST AIRLINES CO.
(hereinafter referred to as "Southwest", which term shall include its subsidiary
companies where the context so admits), a Texas corporation,
WITNESSETH:
WHEREAS the Employee has served as Vice President-General Counsel of
Southwest since February 1986; and
WHEREAS the Employee and Southwest desire to enter into an agreement
for the continuing full-time services of the Employee;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and promises contained herein, Southwest and the Employee agree as
follows:
I. POSITION, DUTIES AND AUTHORITY
A. POSITIONS, DUTIES AND RESPONSIBILITIES. The Employee shall serve as
Chief Executive Officer of Southwest, and, for so long as he shall be
elected to the Board of Directors of Southwest, he shall serve as Vice
Chairman of the Board without additional compensation hereunder. The
Employee's duties and responsibilities as Chief Executive Officer shall
include general oversight of the operational performance of Southwest;
managing costs and generating revenues in order to achieve excellent
financial performance; representing Southwest to its multitude of
exterior constituencies; implementing Southwest's current and long
range business policies and programs; handling, or overseeing, major
contract negotiations; and, in general, maintaining employee morale and
esprit de corps. In
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<PAGE>
addition, he shall perform such other corporate duties and discharge
such other corporate responsibilities as are specified in the bylaws of
Southwest or are designated from time to time by either the Chairman of
the Board of Directors of Southwest or the full Board of Directors.
B. AUTHORITY. The Employee shall be vested with all authority reasonably
necessary to carry out his duties and responsibilities as set forth in
this Article I.
C. NECESSARY SUPPORT AND ENVIRONMENT. The Employee shall be provided with
the secretarial and other support personnel (including a full-time
administrative assistant) and general working environment (including a
private, furnished office) reasonably necessary for him to carry out
his duties and responsibilities as set forth in this Article I.
II. EMPLOYEE'S OBLIGATIONS
A. TIME AND EFFORT. During the term of his employment hereunder, the
Employee shall devote such time and effort as is required to perform
his duties and to discharge his responsibilities hereunder. The
Employee shall generally conform with all policies of Southwest as they
apply to a person of his level of duties and responsibilities.
B. NON-COMPETITION. The Employee recognizes and understands that in
performing the duties and responsibilities of his employment as
outlined in this Agreement and pursuant to his employment at Southwest
prior to the execution of this Agreement, the Employee has occupied and
will occupy a position of trust and confidence, pursuant to which the
Employee has developed and acquired and will develop and acquire
experience and knowledge with respect to various aspects of the
business of Southwest and the manner in which such business is
conducted. It is the expressed intent and agreement of the Employee and
Southwest that such knowledge and experience shall be used in the
furtherance of the
2
<PAGE>
business interests of Southwest and not in any manner which would be
detrimental to such business interests of Southwest. The Employee
therefore agrees that, so long as the Employee is employed pursuant to
this Agreement, unless he first secures the consent of the Board of
Directors of Southwest, the Employee will not invest, engage or
participate in any manner whatsoever, either personally or in any
status or capacity (other than as a shareholder of less than one
percent [1%] of the capital stock of a publicly owned corporation), in
any business or other entity organized for profit engaged in
significant competition with Southwest in the conduct of its air
carrier operations anywhere in the States of Texas, Louisiana,
Oklahoma, New Mexico, Missouri, Arizona, Nevada, California, Arkansas,
Alabama, Tennessee, Kentucky, Michigan, Indiana, Ohio, Maryland,
Illinois, Utah, Washington, Oregon, Nebraska, Florida, Idaho,
Mississippi, New Hampshire, New York, Rhode Island, Connecticut, North
Carolina and Virginia. Although the Employee and Southwest regard such
restrictions as reasonable for the purpose of preserving Southwest and
its proprietary rights, in the event that the provisions of this
Paragraph II-B should ever be deemed to exceed the time or geographic
limitations permitted by applicable laws, then such provisions shall be
reformed to the maximum time or geographic limitations permitted by
applicable laws.
III. TERM
A. TERM. This Agreement and the Employee's employment hereunder shall
commence and become effective on and as of June 19, 2001. The term of
such employment shall expire on June 19, 2004, unless extended by
consent of the parties hereto or earlier terminated pursuant to the
provisions of Article V.
3
<PAGE>
IV. EMPLOYEE'S COMPENSATION
A. BASE SALARY. The Employee's annual Base Salary for the year ending June
19, 2002 which originally was to be the amount of $312,000 shall, in
accordance with Employee's irrevocable agreement to terminate payment
of Employee's salary for the period October 1, 2001 through December
31, 2001, be $234,000, payable in 18 equal semi-monthly installments of
$13,000 commencing with Southwest's second regular payroll date in
June, 2001 and continuing through Southwest's first regular payroll
date in October, 2001, at which point such semi-monthly installments
shall temporarily cease (it being understood and agreed that no Base
Salary shall be due or payable to Employee with respect to the period
commencing October 1, 2001 and continuing through and including
December 31, 2001); with such semi-monthly installments of $13,000 to
recommence with Southwest's first regular payroll date in January, 2002
and continuing through and including Southwest's second regular payroll
date in June, 2002. The Employee's annual Base Salary for the years
ending June 19, 2003 and 2004 shall be $324,480 and $337,460,
respectively. The Employee's Base Salary for the years ending July 19,
2003 and July 19, 2004 shall be payable to the Employee in equal
semi-monthly installments. The Employee's Base Salary installment
payments shall be subject to such payroll and withholding deductions as
may be required by law.
B. PERFORMANCE BONUS. The Board of Directors of Southwest (or the
Compensation Committee thereof) may grant a Performance Bonus to the
Employee, in addition to his Base Salary, at such times and in such
amounts as such Board (or Committee) may determine.
C. DEFERRED COMPENSATION. In addition to the Base Salary provided for in
Paragraph IV-A above, Southwest shall set aside on its books a special
ledger Deferred
4
<PAGE>
Compensation Account (the "Account") for the Employee, and shall credit
thereto Deferred Compensation determined as hereinafter provided.
(Southwest at its election may fund the payment of Deferred
Compensation by setting aside and investing such funds as Southwest may
from time to time determine. Neither the establishment of the Account,
the crediting of Deferred Compensation thereto, nor the setting aside
of any funds shall be deemed to create a trust. Legal and equitable
title to any funds set aside shall remain in Southwest, and the
Employee shall have no security or other interest in such funds. Any
funds so set aside or invested shall remain subject to the claims of
the creditors of Southwest, present and future.) For each full or
partial calendar year as the Employee shall remain in the employment of
Southwest under this Agreement, Deferred Compensation shall accumulate
in an amount equal to any contributions (including forfeitures but
excluding any elective deferrals actually returned to the Employee)
which would otherwise have been made by Southwest on behalf of the
Employee to the Southwest Airlines Co. Money Purchase Plan but which
exceed maximum annual additions under such Plan on his behalf under
federal tax law. If such employment shall terminate prior to December
31 in any calendar year, then Deferred Compensation shall accumulate
and be calculated as provided under the terms of Southwest's Money
Purchase Plan. The Deferred Compensation credited to the Account
(including the Interest hereinafter provided) shall be paid to the
Employee (or to the executors or administrators of his estate) at the
rate of $100,000 per calendar year (subject to such payroll and
withholding deductions as may be required by law), commencing with the
calendar year following the year in which (i) the Employee shall become
sixty-five (65) or (ii) the Employee's employment with Southwest shall
terminate (whether such termination is under this Agreement or
otherwise and whether it is before, on or after the
5
<PAGE>
expiration of the initial term set forth in Paragraph III-A above, and
irrespective of the cause thereof), whichever shall occur later, and
continuing until the entire amount of Deferred Compensation and
Interest credited to the Account shall have been paid. Although the
total amount of Deferred Compensation ultimately payable to the
Employee hereunder shall be computed in accordance with the provisions
set forth above, there shall be accrued and credited to the Account,
beginning on January 1, 2002 and continuing annually thereafter,
amounts equal to simple interest at the rate of ten percent (10%) per
annum, compounded annually ("Interest"), on the accrued and unpaid
balance of the Deferred Compensation credited to the Account as of the
preceding December 31. The Deferred Compensation and Interest to be
paid in any one calendar year shall be paid on the first business day
of such calendar year. Notwithstanding the foregoing, in the event of
the Employee's death, Southwest, in its sole discretion, shall have the
right to pay the unpaid balance of the Deferred Compensation (together
with any accrued Interest thereon) to the executors or administrators
of the Employee's estate in cash in one lump sum on the first business
day of the calendar year next following the calendar year in which the
Employee shall have died. No right, title, interest or benefit under
this Paragraph IV-C shall ever be liable for or charged with any of the
torts or obligations of the Employee or any person claiming under him,
or be subject to seizure by any creditor of the Employee or any person
claiming under him. Neither the Employee nor any person claiming under
him shall have the power to anticipate or dispose of any right, title,
interest or benefit under this Paragraph IV-C in any manner until the
same shall have been actually distributed by Southwest.
D. DISABILITY INSURANCE. Southwest shall provide long term disability
insurance providing for payment, in the event of disability of the
Employee, of $10,000 per month to
6
<PAGE>
age seventy (70). Except as to amounts payable, the terms and
conditions of such policy shall be identical, or substantially similar,
to the disability insurance provided by Southwest for its other
officers as of the date of this Agreement.
E. MEDICAL AND DENTAL EXPENSES. During the term of this Agreement,
Southwest shall reimburse the Employee for all medical and dental
expenses incurred by the Employee and his spouse. Expenses for medical
and dental care shall be deemed to include all amounts paid with
respect to hospital bills, doctor and dental bills and drugs for which
the Employee is not compensated by insurance or otherwise.
F. STOCK OPTION GRANT. Southwest shall grant to the Employee, effective as
of the date hereof, ten-year options to purchase 180,000 shares of its
common stock at $17.11 per share pursuant to Southwest's 1996
Non-Qualified Stock Option Plan, with one-third of such options to be
exercisable immediately and one-third to become exercisable on each of
June 19, 2002 and June 19, 2003.
G. OTHER BENEFITS. The Employee shall be eligible to continue to
participate in all employee pension, profit-sharing, stock purchase,
group insurance and other benefit plans or programs in effect for
Southwest managerial employees generally to the extent of and in
accordance with the rules and agreements governing such plans or
programs, so long as same shall be in effect, with full service credit
where relevant for the Employee's prior employment by Southwest.
Southwest shall reimburse the Employee for reasonable expenses incurred
by him in the performance of his duties and responsibilities hereunder.
The Employee shall be entitled to vacation of three (3) weeks per year
or such longer period as may be established from time to time by
Southwest for its managerial employees generally.
7
<PAGE>
V. TERMINATION PROVISIONS
A. EXPIRATION OR DEATH. The Employee's employment hereunder shall
terminate on June 19, 2004 (or such later date to which the term of
this Agreement may be extended by consent of the parties hereto, in
either case without prejudice to the Employee's privilege to remain an
employee of Southwest thereafter), or upon the Employee's death,
whichever shall first occur, without further obligation or liability of
either party hereunder, except for Southwest's obligation to pay
Deferred Compensation as provided in Paragraph IV-C of this Agreement.
B. TERMINATION FOR CAUSE. Southwest may terminate the Employee's
employment hereunder upon the determination by a majority of its whole
Board of Directors that the Employee has willfully failed and refused
to perform his duties and to discharge his responsibilities hereunder.
Such determination shall be final and conclusive. If the Board of
Directors of Southwest makes such determination, Southwest may (a)
terminate the Employee's employment, effective immediately or at a
subsequent date, or (b) condition his continued employment upon the
circumstances and place a reasonable limitation upon the time within
which the Employee shall comply with such considerations or
requirements. If termination is so effected, Southwest shall have no
further liability to the Employee hereunder except for the obligation
to pay Deferred Compensation as provided in Paragraph IV-C hereof.
C. TERMINATION FOR DISABILITY. Southwest may terminate the Employee's
employment hereunder on account of any disabling illness, hereby
defined to include any emotional or mental disorders, physical diseases
or injuries as a result of which the Employee is, for a continuous
period of ninety (90) days, unable to perform his duties and
8
<PAGE>
to discharge his responsibilities hereunder on a full-time basis.
Southwest shall give to the Employee thirty (30) days' notice of its
intention to effect such termination pursuant to this Paragraph V-C.
If, within such notice period, the Employee shall have recovered from
his disability sufficiently well to resume performance of his duties
and discharge of his responsibilities on a full-time basis (although
still undergoing treatment or rehabilitation), Southwest shall not have
the right to effect such termination. If such disabling illness occurs
as a result of a job-related cause, Southwest shall continue to pay the
Employee regular installments of his Base Salary in effect at the time
of such termination for the remainder of the term of this Agreement. It
is expressly understood and agreed, however, that any obligation of
Southwest to continue to pay the Employee his Base Salary pursuant to
this Paragraph V-C shall be reduced by the amount of any proceeds of
long-term disability insurance provided for the Employee pursuant to
Paragraph IV-D above, and shall also be reduced by the amount of the
proceeds of any worker's compensation or other benefits which the
Employee receives as a result of or growing out of his disabling
illness.
D. CHANGE OF CONTROL TERMINATION. In the event of any change of control of
Southwest, the Employee may, at his option, terminate his employment
hereunder by giving to Southwest notice thereof no later than sixty
(60) days after the Employee shall have determined or ascertained that
such change has occurred, irrespective whether Southwest shall have
purported to terminate this Agreement after such event but prior to
receipt of such notice. If termination is so effected, no later than
the date of such termination Southwest shall pay the Employee as
"severance pay" a lump sum equal to (i) $750,000 plus (ii) an amount
equal to the unpaid installments of his Base Salary in effect at the
time of such termination for the remaining term of this Agreement. If
termination is so effected,
9
<PAGE>
Southwest shall have no other further liability to the Employee
hereunder except for its obligation to pay Deferred Compensation as
provided in Paragraph IV-C above. For purposes of this Paragraph V-D, a
"change of control of Southwest" shall be deemed to occur if (i) a
third person, including a "group" as determined in accordance with
Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the
beneficial owner of shares of Southwest having twenty percent (20%) or
more of the total number of votes that may be cast for the election of
directors of Southwest, or (ii) as a result of, or in connection with,
any cash tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination
of the foregoing transactions (herein called a "Transaction"), the
persons who were directors of Southwest before the Transaction shall
cease to constitute a majority of the Board of Directors of Southwest
or any successor to Southwest.
E. VOLUNTARY TERMINATION. The Employee's employment hereunder shall
terminate forthwith upon his resignation and its acceptance by
Southwest, without further obligation or liability of either party
hereunder, except for Southwest's obligation to pay Deferred
Compensation as provided in Paragraph IV-C above.
VI. MISCELLANEOUS
A. ASSIGNABILITY, ETC. The rights and obligations of Southwest hereunder
shall inure to the benefit of and shall be binding upon the successors
and assigns of Southwest; provided, however, Southwest's obligations
hereunder may not be assigned without the prior approval of the
Employee. This Agreement is personal to the Employee and may not be
assigned by him.
10
<PAGE>
B. NO WAIVERS. Failure to insist upon strict compliance with any provision
hereof shall not be deemed a waiver of such provision or any other
provision hereof.
C. AMENDMENTS. This Agreement may not be modified except by an agreement
in writing executed by the parties hereto.
D. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing in the English language and shall be
deemed to have been given to the person affected by such notice when
personally delivered or when deposited in the United States mail,
certified mail, return receipt requested and postage prepaid, and
addressed to the party affected by such notice at the address indicated
on the signature page hereof.
E. SEVERABILITY. The invalidity or unenforceability of any provision
hereof shall not affect the validity or enforceability of any other
provision hereof.
F. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original but all of which taken
together shall constitute a single instrument.
G. ENTIRE AGREEMENT. This Agreement contains all of the terms and
conditions agreed upon by the parties hereto respecting the subject
matter hereof, and all other prior agreements, oral or otherwise,
regarding the subject matter of this Agreement shall be deemed to be
superseded as of the date of this Agreement and not to bind either of
the parties hereto.
H. GOVERNING LAW. This Agreement shall be subject to and governed by the
laws of the State of Texas.
11
<PAGE>
IN WITNESS WHEREOF, the Employee has set his hand hereto and Southwest
has caused this Agreement to be signed in its corporate name and behalf by one
of its officers thereunto duly authorized, all as of the day and year first
above written.
SOUTHWEST AIRLINES CO.
By: /s/ HERBERT D. KELLEHER
-----------------------------------
Herbert D. Kelleher
Chairman of the Board of Directors
THE EMPLOYEE
/s/ JAMES F. PARKER
-------------------------------------
James F. Parker
Address: P.O. Box 36611
Dallas, Texas 75235-1611
12
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>6
<FILENAME>d93658ex10-17.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT FOR COLLEEN C. BARRETT
<TEXT>
<PAGE>
EXHIBIT 10.17
EMPLOYMENT CONTRACT
THIS EMPLOYMENT CONTRACT (hereinafter referred to as this "Agreement"),
dated as of June 19, 2001, by and between COLLEEN C. BARRETT (hereinafter
referred to as the "Employee"), a resident of Dallas, Texas, and SOUTHWEST
AIRLINES CO. (hereinafter referred to as "Southwest", which term shall include
its subsidiary companies where the context so admits), a Texas corporation,
WITNESSETH:
WHEREAS the Employee has served Southwest since March 1978 in various
executive capacities, most recently as Executive Vice President-Customers and
Corporate Secretary; and
WHEREAS the Employee and Southwest desire to enter into an agreement
for the continuing full-time services of the Employee;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and promises contained herein, Southwest and the Employee agree as
follows:
I. POSITION, DUTIES AND AUTHORITY
A. POSITIONS, DUTIES AND RESPONSIBILITIES. The Employee shall serve as
President and Chief Operating Officer of Southwest, and, for so long as
she shall be elected to the Board of Directors of Southwest, she shall
serve as a member of the Board without additional compensation
hereunder. Further, she shall continue to serve as Corporate Secretary
of Southwest, without additional compensation hereunder, until such
time as the Board of Directors elects otherwise. The Employee's duties
and responsibilities as President and Chief Operating Officer shall
include managing the day to day operations of Southwest; planning the
future course of such operations; achieving excellent Customer and
employee service quality; preserving the Southwest servant leader
culture; assisting the Chief
1
<PAGE>
Executive Officer in implementing Southwest's current and long range
business policies and programs; and, in general, maintaining employee
morale and esprit de corps. In addition, she shall perform such other
corporate duties and discharge such other corporate responsibilities as
are specified in the bylaws of Southwest or are designated from time to
time by any of the Chairman of the Board of Directors of Southwest, the
Chief Executive Officer or the full Board of Directors.
B. AUTHORITY. The Employee shall be vested with all authority reasonably
necessary to carry out her duties and responsibilities as set forth in
this Article I.
C. NECESSARY SUPPORT AND ENVIRONMENT. The Employee shall be provided with
the secretarial and other support personnel (including a full-time
administrative assistant) and general working environment (including a
private, furnished office) reasonably necessary for her to carry out
her duties and responsibilities as set forth in this Article I.
II. EMPLOYEE'S OBLIGATIONS
A. TIME AND EFFORT. During the term of her employment hereunder, the
Employee shall devote such time and effort as is required to perform
her duties and to discharge her responsibilities hereunder. The
Employee shall generally conform with all policies of Southwest as they
apply to a person of her level of duties and responsibilities.
B. NON-COMPETITION. The Employee recognizes and understands that in
performing the duties and responsibilities of her employment as
outlined in this Agreement and pursuant to her employment at Southwest
prior to the execution of this Agreement, the Employee has occupied and
will occupy a position of trust and confidence, pursuant to which the
Employee has developed and acquired and will develop and acquire
experience and knowledge with respect to various aspects of the
business of Southwest and the manner in which such
2
<PAGE>
business is conducted. It is the expressed intent and agreement of the
Employee and Southwest that such knowledge and experience shall be used
in the furtherance of the business interests of Southwest and not in
any manner which would be detrimental to such business interests of
Southwest. The Employee therefore agrees that, so long as the Employee
is employed pursuant to this Agreement, unless she first secures the
consent of the Board of Directors of Southwest, the Employee will not
invest, engage or participate in any manner whatsoever, either
personally or in any status or capacity (other than as a shareholder of
less than one percent [1%] of the capital stock of a publicly owned
corporation), in any business or other entity organized for profit
engaged in significant competition with Southwest in the conduct of its
air carrier operations anywhere in the States of Texas, Louisiana,
Oklahoma, New Mexico, Missouri, Arizona, Nevada, California, Arkansas,
Alabama, Tennessee, Kentucky, Michigan, Indiana, Ohio, Maryland,
Illinois, Utah, Washington, Oregon, Nebraska, Florida, Idaho,
Mississippi, New Hampshire, New York, Rhode Island, Connecticut, North
Carolina and Virginia. Although the Employee and Southwest regard such
restrictions as reasonable for the purpose of preserving Southwest and
its proprietary rights, in the event that the provisions of this
Paragraph II-B should ever be deemed to exceed the time or geographic
limitations permitted by applicable laws, then such provisions shall be
reformed to the maximum time or geographic limitations permitted by
applicable laws.
III. TERM
A. TERM. This Agreement and the Employee's employment hereunder shall
commence and become effective on and as of June 19, 2001. The term of
such employment shall expire on
3
<PAGE>
June 19, 2004, unless extended by consent of the parties hereto or
earlier terminated pursuant to the provisions of Article V.
IV. EMPLOYEE'S COMPENSATION
A. BASE SALARY. The Employee's annual Base Salary for the year ending June
19, 2002 which originally was to be the amount of $309,000 shall, in
accordance with Employee's irrevocable agreement to terminate payment
of Employee's salary for the period October 1, 2001 through December
31, 2001, be $231,750, payable in 18 equal semi-monthly installments of
$12,875 commencing with Southwest's second regular payroll date in
June, 2001 and continuing through Southwest's first regular payroll
date in October, 2001, at which point such semi-monthly installments
shall temporarily cease (it being understood and agreed that no Base
Salary shall be due or payable to Employee with respect to the period
commencing October 1, 2001 and continuing through and including
December 31, 2001); with such semi-monthly installments of $12,875 to
recommence with Southwest's first regular payroll date in January, 2002
and continuing through and including Southwest's second regular payroll
date in June, 2002. The Employee's annual Base Salary for the years
ending June 19, 2003 and 2004 shall be $321,360 and $334,215,
respectively. The Employee's Base Salary for the years ending July 19,
2003 and July 19, 2004 shall be payable to the Employee in equal
semi-monthly installments. The Employee's Base Salary installment
payments shall be subject to such payroll and withholding deductions as
may be required by law.
B. PERFORMANCE BONUS. The Board of Directors of Southwest (or the
Compensation Committee thereof) may grant a Performance Bonus to the
Employee, in addition to her Base Salary, at such times and in such
amounts as such Board (or Committee) may determine.
4
<PAGE>
C. DEFERRED COMPENSATION. In addition to the Base Salary provided for in
Paragraph IV-A above, Southwest shall set aside on its books a special
ledger Deferred Compensation Account (the "Account") for the Employee,
and shall credit thereto Deferred Compensation determined as
hereinafter provided. (Southwest at its election may fund the payment
of Deferred Compensation by setting aside and investing such funds as
Southwest may from time to time determine. Neither the establishment of
the Account, the crediting of Deferred Compensation thereto, nor the
setting aside of any funds shall be deemed to create a trust. Legal and
equitable title to any funds set aside shall remain in Southwest, and
the Employee shall have no security or other interest in such funds.
Any funds so set aside or invested shall remain subject to the claims
of the creditors of Southwest, present and future.) For each full or
partial calendar year as the Employee shall remain in the employment of
Southwest under this Agreement, Deferred Compensation shall accumulate
in an amount equal to any contributions (including forfeitures but
excluding any elective deferrals actually returned to the Employee)
which would otherwise have been made by Southwest on behalf of the
Employee to the Southwest Airlines Co. Money Purchase Plan but which
exceed maximum annual additions under such Plan on her behalf under
federal tax law. If such employment shall terminate prior to December
31 in any calendar year, then Deferred Compensation shall accumulate
and be calculated as provided under the terms of Southwest's Money
Purchase Plan. The Deferred Compensation credited to the Account
(including the Interest hereinafter provided) shall be paid to the
Employee (or to the executors or administrators of her estate) at the
rate of $100,000 per calendar year (subject to such payroll and
withholding deductions as may be required by law), commencing with the
calendar year following the year in which (i) the Employee shall become
sixty-five (65)
5
<PAGE>
or (ii) the Employee's employment with Southwest shall terminate
(whether such termination is under this Agreement or otherwise and
whether it is before, on or after the expiration of the initial term
set forth in Paragraph III-A above, and irrespective of the cause
thereof), whichever shall occur later, and continuing until the entire
amount of Deferred Compensation and Interest credited to the Account
shall have been paid. Although the total amount of Deferred
Compensation ultimately payable to the Employee hereunder shall be
computed in accordance with the provisions set forth above, there shall
be accrued and credited to the Account, beginning on January 1, 2002
and continuing annually thereafter, amounts equal to simple interest at
the rate of ten percent (10%) per annum, compounded annually
("Interest"), on the accrued and unpaid balance of the Deferred
Compensation credited to the Account as of the preceding December 31.
The Deferred Compensation and Interest to be paid in any one calendar
year shall be paid on the first business day of such calendar year.
Notwithstanding the foregoing, in the event of the Employee's death,
Southwest, in its sole discretion, shall have the right to pay the
unpaid balance of the Deferred Compensation (together with any accrued
Interest thereon) to the executors or administrators of the Employee's
estate in cash in one lump sum on the first business day of the
calendar year next following the calendar year in which the Employee
shall have died. No right, title, interest or benefit under this
Paragraph IV-C shall ever be liable for or charged with any of the
torts or obligations of the Employee or any person claiming under her,
or be subject to seizure by any creditor of the Employee or any person
claiming under her. Neither the Employee nor any person claiming under
her shall have the power to anticipate or dispose of any right, title,
interest or benefit under this Paragraph IV-C in any manner until the
same shall have been actually distributed by Southwest.
6
<PAGE>
D. DISABILITY INSURANCE. Southwest shall provide long term disability
insurance providing for payment, in the event of disability of the
Employee, of $10,000 per month to age seventy (70). Except as to
amounts payable, the terms and conditions of such policy shall be
identical, or substantially similar, to the disability insurance
provided by Southwest for its other officers as of the date of this
Agreement.
E. MEDICAL AND DENTAL EXPENSES. During the term of this Agreement,
Southwest shall reimburse the Employee for all medical and dental
expenses incurred by the Employee and her spouse. Expenses for medical
and dental care shall be deemed to include all amounts paid with
respect to hospital bills, doctor and dental bills and drugs for which
the Employee is not compensated by insurance or otherwise.
F. STOCK OPTION GRANT. Southwest shall grant to the Employee, effective as
of the date hereof, ten-year options to purchase 150,000 shares of its
common stock at $17.11 per share pursuant to Southwest's 1996
Non-Qualified Stock Option Plan, with one-third of such options to be
exercisable immediately and one-third to become exercisable on each of
June 19, 2002 and June 19, 2003.
G. OTHER BENEFITS. The Employee shall be eligible to continue to
participate in all employee pension, profit-sharing, stock purchase,
group insurance and other benefit plans or programs in effect for
Southwest managerial employees generally to the extent of and in
accordance with the rules and agreements governing such plans or
programs, so long as same shall be in effect, with full service credit
where relevant for the Employee's prior employment by Southwest.
Southwest shall reimburse the Employee for reasonable expenses incurred
by her in the performance of her duties and responsibilities hereunder.
The Employee shall be entitled to vacation of three (3) weeks per year
or such longer period
7
<PAGE>
as may be established from time to time by Southwest for its managerial
employees generally.
V. TERMINATION PROVISIONS
A. EXPIRATION OR DEATH. The Employee's employment hereunder shall
terminate on June 19, 2004 (or such later date to which the term of
this Agreement may be extended by consent of the parties hereto, in
either case without prejudice to the Employee's privilege to remain an
employee of Southwest thereafter), or upon the Employee's death,
whichever shall first occur, without further obligation or liability of
either party hereunder, except for Southwest's obligation to pay
Deferred Compensation as provided in Paragraph IV-C of this Agreement.
B. TERMINATION FOR CAUSE. Southwest may terminate the Employee's
employment hereunder upon the determination by a majority of its whole
Board of Directors that the Employee has willfully failed and refused
to perform her duties and to discharge her responsibilities hereunder.
Such determination shall be final and conclusive. If the Board of
Directors of Southwest makes such determination, Southwest may (a)
terminate the Employee's employment, effective immediately or at a
subsequent date, or (b) condition her continued employment upon the
circumstances and place a reasonable limitation upon the time within
which the Employee shall comply with such considerations or
requirements. If termination is so effected, Southwest shall have no
further liability to the Employee hereunder except for the obligation
to pay Deferred Compensation as provided in Paragraph IV-C hereof.
C. TERMINATION FOR DISABILITY. Southwest may terminate the Employee's
employment hereunder on account of any disabling illness, hereby
defined to include any
8
<PAGE>
emotional or mental disorders, physical diseases or injuries as a
result of which the Employee is, for a continuous period of ninety (90)
days, unable to perform her duties and to discharge her
responsibilities hereunder on a full-time basis. Southwest shall give
to the Employee thirty (30) days' notice of its intention to effect
such termination pursuant to this Paragraph V-C. If, within such notice
period, the Employee shall have recovered from her disability
sufficiently well to resume performance of her duties and discharge of
her responsibilities on a full-time basis (although still undergoing
treatment or rehabilitation), Southwest shall not have the right to
effect such termination. If such disabling illness occurs as a result
of a job-related cause, Southwest shall continue to pay the Employee
regular installments of her Base Salary in effect at the time of such
termination for the remainder of the term of this Agreement. It is
expressly understood and agreed, however, that any obligation of
Southwest to continue to pay the Employee her Base Salary pursuant to
this Paragraph V-C shall be reduced by the amount of any proceeds of
long-term disability insurance provided for the Employee pursuant to
Paragraph IV-D above, and shall also be reduced by the amount of the
proceeds of any worker's compensation or other benefits which the
Employee receives as a result of or growing out of her disabling
illness.
D. CHANGE OF CONTROL TERMINATION. In the event of any change of control of
Southwest, the Employee may, at her option, terminate her employment
hereunder by giving to Southwest notice thereof no later than sixty
(60) days after the Employee shall have determined or ascertained that
such change has occurred, irrespective whether Southwest shall have
purported to terminate this Agreement after such event but prior to
receipt of such notice. If termination is so effected, no later than
the date of such termination Southwest shall pay the Employee as
"severance pay" a lump sum equal to (i) $750,000 plus (ii) an
9
<PAGE>
amount equal to the unpaid installments of her Base Salary in effect at
the time of such termination for the remaining term of this Agreement.
If termination is so effected, Southwest shall have no other further
liability to the Employee hereunder except for its obligation to pay
Deferred Compensation as provided in Paragraph IV-C above. For purposes
of this Paragraph V-D, a "change of control of Southwest" shall be
deemed to occur if (i) a third person, including a "group" as
determined in accordance with Section 13(d)(3) of the Securities
Exchange Act of 1934, becomes the beneficial owner of shares of
Southwest having twenty percent (20%) or more of the total number of
votes that may be cast for the election of directors of Southwest, or
(ii) as a result of, or in connection with, any cash tender or exchange
offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions
(herein called a "Transaction"), the persons who were directors of
Southwest before the Transaction shall cease to constitute a majority
of the Board of Directors of Southwest or any successor to Southwest.
E. VOLUNTARY TERMINATION. The Employee's employment hereunder shall
terminate forthwith upon her resignation and its acceptance by
Southwest, without further obligation or liability of either party
hereunder, except for Southwest's obligation to pay Deferred
Compensation as provided in Paragraph IV-C above.
VI. MISCELLANEOUS
A. ASSIGNABILITY, ETC. The rights and obligations of Southwest hereunder
shall inure to the benefit of and shall be binding upon the successors
and assigns of Southwest; provided, however, Southwest's obligations
hereunder may not be assigned without the prior
10
<PAGE>
approval of the Employee. This Agreement is personal to the Employee
and may not be assigned by her.
B. NO WAIVERS. Failure to insist upon strict compliance with any provision
hereof shall not be deemed a waiver of such provision or any other
provision hereof.
C. AMENDMENTS. This Agreement may not be modified except by an agreement
in writing executed by the parties hereto.
D. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing in the English language and shall be
deemed to have been given to the person affected by such notice when
personally delivered or when deposited in the United States mail,
certified mail, return receipt requested and postage prepaid, and
addressed to the party affected by such notice at the address indicated
on the signature page hereof.
E. SEVERABILITY. The invalidity or unenforceability of any provision
hereof shall not affect the validity or enforceability of any other
provision hereof.
F. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original but all of which taken
together shall constitute a single instrument.
G. ENTIRE AGREEMENT. This Agreement contains all of the terms and
conditions agreed upon by the parties hereto respecting the subject
matter hereof, and all other prior agreements, oral or otherwise,
regarding the subject matter of this Agreement shall be deemed to be
superseded as of the date of this Agreement and not to bind either of
the parties hereto.
H. GOVERNING LAW. This Agreement shall be subject to and governed by the
laws of the State of Texas.
11
<PAGE>
IN WITNESS WHEREOF, the Employee has set her hand hereto and Southwest
has caused this Agreement to be signed in its corporate name and behalf by one
of its officers thereunto duly authorized, all as of the day and year first
above written.
SOUTHWEST AIRLINES CO.
By: /s/ HERBERT D. KELLEHER
----------------------------------
Herbert D. Kelleher
Chairman of the Board of Directors
THE EMPLOYEE
/s/ COLLEEN C. BARRETT
-------------------------------------
Colleen C. Barrett
Address: P.O. Box 36611
Dallas, Texas 75235-1611
12
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>d93658ex23.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP
<TEXT>
<PAGE>
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, 333-89303, 333-46560, 333-52388, 333-52390,
333-53610, 333-53616 and 333-57478, and Forms S-3 Nos. 333-38257, 33-59113 and
333-71392) of Southwest Airlines Co. and in the related Prospectuses of our
report dated January 16, 2002, 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, 2001.
ERNST & YOUNG LLP
Dallas, Texas
January 29, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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