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<SEC-DOCUMENT>0000950134-03-001681.txt : 20030205
<SEC-HEADER>0000950134-03-001681.hdr.sgml : 20030205
<ACCEPTANCE-DATETIME>20030205152306
ACCESSION NUMBER: 0000950134-03-001681
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030205
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: 03540668
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>d02829e10vk.txt
<DESCRIPTION>FORM 10-K
<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, 2002 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 1-7259
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
P.O. BOX 36611
DALLAS, TEXAS 75235-1611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 792-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock ($1.00 par value) New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X]
No [ ]
Aggregate market value of Common Stock held by nonaffiliates as of
December 31, 2002:
$10,685,364,125
Number of shares of Common Stock outstanding as of the close of
business on December 31, 2002:
776,662,894 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting
of Shareholders, May 14, 2003: 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. [X]
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Southwest Airlines Co. ("Southwest") is a major domestic airline that
provides predominantly 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 2002, Southwest operated 375 Boeing 737 aircraft and
Provided service to 59 airports in 58 cities in 30 states throughout the
United States. Based on data for second quarter 2002 (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).
Southwest's filings with the Securities and Exchange
Commission, including its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports are
accessible free of charge at www.southwest.com.
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 COST PERCENT OF
YEAR (Millions) PER GALLON OPERATING EXPENSES
- ---- ---------- ---------- ------------------
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $388.3 $.46 11.2%
- -----------------------------------------------------------------------------------------------------
1999 $492.4 $.53 12.5%
- -----------------------------------------------------------------------------------------------------
2000 $804.4 $.79 17.4%
- -----------------------------------------------------------------------------------------------------
2001 $770.5 $.71 15.6%
- -----------------------------------------------------------------------------------------------------
2002 $762.1 $.68 14.9%
- -----------------------------------------------------------------------------------------------------
</TABLE>
From October 1, 2002 through December 31, 2002, the average cost per
gallon was $.71. 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
1
<PAGE>
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. 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 certain provisions of
the U.S. Transportation Code, 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.
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"), which has
recently been moved to the new Office of Homeland Security. The TSA assumed the
aviation security functions previously residing in the FAA and assumed passenger
screening contracts at U.S. airports on February 17, 2002. The TSA now provides
for the screening of all passengers and property, which is performed by federal
employees. Beginning February 1, 2002, a $2.50 per enplanement security fee is
imposed on passengers (maximum of $5.00 per one-way trip). Pursuant to authority
granted to the TSA to impose additional fees on air carriers if necessary to
cover additional federal aviation security costs, the TSA has imposed an annual
Security Infrastructure Fee which approximated $23 million for Southwest in 2002
and is expected to approximate $26 million in 2003. Like the FAA, the TSA may
impose and collect fines for violations of its regulations.
Environmental. Certain airports, including San Diego 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.
2
<PAGE>
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.
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 2002
was 548 miles with an average duration of approximately 1.5 hours. At year-end,
Southwest served 338 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 77 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 or offer joint fares 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
3
<PAGE>
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 and then process 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 www.southwest.com. For
the year ended December 31, 2002, more than 85 percent of Southwest's Customers
chose the Ticketless travel option, and approximately 49 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
larger fleets and wider name recognition. Certainmajor United States airlines
have established marketing or codesharing allianceswith each other, including
Northwest Airlines/Continental Airlines, American Airlines/Alaska Airlines, and
United Airlines/USAirways. Northwest Airlines and Continental Airlines have
announced plans to add Delta Air Lines to their alliance in a transaction which
is subject to conditions established by the Department of Transportation.
Since the terrorist acts of September 11, 2001, and in the face of weak
demand for air service, most major carriers (not including Southwest) have
significantly reduced service, grounded aircraft, and furloughed employees. UAL,
the parent of United Airlines, and US Airways have sought relief from financial
obligations in bankruptcy and other, smaller carriers have ceased operation
entirely. America West Airlines and others have received federal loan guarantees
(or conditional approval for guarantees) authorized by federal law and
additional airlines may do so in the future.
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. In response to these measures,
the Company has introduced its new Automated Boarding Passes, as well as RAPID
CHECK-IN kiosks in many airports and it will continue to expand the latter
service offering throughout 2003. It is currently not possible to assess the
ultimate impact of all of these events on airline competition.
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.
Following the terrorist attacks, commercial aviation insurers
significantly increased the premiums and reduced the amount of war-risk coverage
available to commercial carriers. At that time, the federal government stepped
in to provide supplemental third-party war-risk insurance coverage to commercial
carriers
4
<PAGE>
for renewable 60-day periods at substantially lower premiums than prevailing
commercial rates and for levels of coverage not available in the commercial
market. In November 2002, Congress passed the Homeland Security Act of 2002,
which mandated the federal government to provide third party, passenger and hull
war-risk insurance coverage to commercial carriers through August 31, 2003,
which may be extended by the government through December 31, 2003. The Company
is unable to predict whether the government will extend this insurance coverage
past August 31, 2003, whether alternative commercial insurance with comparable
coverage will become available at reasonable premiums, and what impact this will
have on the Company's ongoing operations or future financial performance.
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 after the accumulation of 16 flight segment
credits within a consecutive twelve-month period. The Rapid Rewards Companion
Pass ("Companion Pass") is granted for 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 2.2 million, 1.7 million, and 1.6
million Award Tickets and flights on Companion Passes during 2002, 2001, and
2000, respectively. The amount of free travel award usage as a percentage of
total Southwest revenue passengers carried was 6.8 percent in 2002, 5.4 percent
in 2001, and 4.9 percent in 2000. The number of Award Tickets outstanding at
December 31, 2002 and 2001 was approximately 1.4 million and 1.3 million,
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 60
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, 2002 and 2001 was approximately 55,000 and 48,000,
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. Revenue from the sale of flight segment credits and
5
<PAGE>
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, 2002 and 2001 was not material.
EMPLOYEES
At December 31, 2002, Southwest had 33,705 active employees, consisting
of 10,920 flight, 1,900 maintenance, 16,405 ground customer and fleet service
and 4,480 management, accounting, marketing, and clerical personnel.
Southwest has ten collective bargaining agreements covering
approximately 80.6 percent of its employees. The following table sets forth the
Company's employee groups and collective bargaining status:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
EMPLOYEE GROUP REPRESENTED BY AGREEMENT AMENDABLE ON
-------------- -------------- ----------------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Customer Service and International Association of November 2008 (or 2006 at the
Reservations Machinists and Aerospace Union's option under certain
Workers, AFL-CIO conditions)
- -------------------------------------------------------------------------------------------------------------
Flight Attendants Transportation Workers of In negotiations
America, AFL-CIO ("TWU")
- -------------------------------------------------------------------------------------------------------------
Ramp, Operations and TWU June 2008 (or 2006 at the
Provisioning Union's option under certain
conditions)
- -------------------------------------------------------------------------------------------------------------
Pilots Southwest Airlines Pilots' September 2006
Association
- -------------------------------------------------------------------------------------------------------------
Flight Dispatchers Southwest Airlines Employee November 2009
Association
- -------------------------------------------------------------------------------------------------------------
Aircraft Appearance Aircraft Mechanics Fraternal February 2009
Technicians Association ("AMFA")
- -------------------------------------------------------------------------------------------------------------
Stock Clerks International Brotherhood of August 2008
Teamsters ("Teamsters")
- -------------------------------------------------------------------------------------------------------------
Mechanics AMFA August 2005
- -------------------------------------------------------------------------------------------------------------
Flight Simulator Technicians Teamsters November 2008
- -------------------------------------------------------------------------------------------------------------
Flight/Ground School Southwest Airlines Professional December 2012
Instructors and Flight Crew Instructors Association
Training Instructors
- -------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 2. PROPERTIES
AIRCRAFT
Southwest operated a total of 375 Boeing 737 aircraft as of December
31, 2002, of which 90 and 7 were under operating and capital leases,
respectively. The remaining 278 aircraft were owned.
6
<PAGE>
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, 2002, Southwest had 129 Boeing 737-700 aircraft in service.
In total, at February 1, 2003, the Company had firm orders and options
to purchase Boeing 737 aircraft as follows:
FIRM ORDERS AND OPTIONS TO PURCHASE BOEING 737-700 AIRCRAFT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
DELIVERY YEAR FIRM ORDERS OPTIONS PURCHASE RIGHTS
- ------------- ----------- ------- ---------------
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
2003 17 - -
- ----------------------------------------------------------------------------
2004 23 11 -
- ----------------------------------------------------------------------------
2005 24 18 -
- ----------------------------------------------------------------------------
2006 22 16 -
- ----------------------------------------------------------------------------
2007 25 9 20
- ----------------------------------------------------------------------------
2008-2012 6 25 197
- ----------------------------------------------------------------------------
TOTALS 117 79 217
- ----------------------------------------------------------------------------
</TABLE>
The Company currently intends to retire its fleet of 27 Boeing 737-200
aircraft over the next three years.
The average age of the Company's fleet at December 31, 2002 was 9.2
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, Phoenix Sky Harbor, and Chicago Midway, its
training center near Love Field, which houses six 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, 2002, 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.
Southwest has entered into a concession agreement with the Town of
Islip, New York which gives the Company the right to construct, furnish, occupy,
and maintain a new concourse at the airport. Once all phases of the project are
completed, the concourse would have up to a total of eight gates and is expected
to cost approximately $65 million. The Company is currently expected to be able
to begin operations from this new concourse in 2004, at which time the new
concourse will become the property of the Town of Islip. In return for
constructing the new concourse, Southwest will receive fixed-rent abatements for
a total of 25 years; however, the Company will still be required to pay variable
rents for common use areas.
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.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims arising
in the ordinary course of business, including, but not limited to, examinations
by the Internal Revenue Service (IRS). The IRS regularly examines the Company's
federal income tax returns and, in the course of those examinations, proposes
adjustments to the Company's federal income tax liability reported on such
returns. It is the Company's practice to vigorously contest those proposed
adjustments that it deems lacking of merit. The Company's management does not
expect that the outcome in any of its currently ongoing legal proceedings or the
outcome of any proposed adjustments presented to date by the IRS, individually
or collectively, will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
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, 2003) are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Herbert D. Kelleher Chairman of the Board 71
James F. Parker Vice Chairman of the Board and 56
Chief Executive Officer
Colleen C. Barrett Director, President and Chief Operating Officer 58
Donna D. Conover Executive Vice President - Customer Service 49
Gary C. Kelly Executive Vice President and Chief Financial Officer 47
James C. Wimberly Executive Vice President - Chief Operations Officer 49
Joyce C. Rogge Senior Vice President - Marketing 45
Ron Ricks Vice President - Governmental Affairs 53
Dave Ridley Vice President - Ground Operations 49
</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 Chief Executive Officer pursuant to Board authorization. Each
of the above individuals has worked for Southwest Airlines Co. for more than the
past five years.
8
<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 were:
<TABLE>
<CAPTION>
PERIOD DIVIDEND HIGH LOW
- ------ -------- ---- ---
<S> <C> <C> <C>
2002
1st Quarter $ 0.00450 $ 22.00 $ 17.17
2nd Quarter 0.00450 19.35 14.85
3rd Quarter 0.00450 16.08 10.90
4th Quarter 0.00450 16.70 11.23
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, 2002, there were 11,858 holders of record of the
Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 2002, Herbert D. Kelleher, Chairman of the Board, exercised
unregistered options to purchase Southwest Common Stock as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES PURCHASED EXERCISE PRICE DATE OF EXERCISE
- -------------------------- -------------- ----------------
<S> <C> <C>
415,528 $ 1.00 1/15/02
437,032 $ 2.24 1/15/02
</TABLE>
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 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.
9
<PAGE>
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2002
regarding compensation plans (including individual compensation arrangements)
under which equity securities of Southwest are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO FUTURE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE COMPENSATION PLANS
OF OUTSTANDING OPTIONS, WEIGHTED-AVERAGE EXERCISE (EXCLUDING SECURITIES
WARRANTS AND RIGHTS PRICE OF OUTSTANDING OPTIONS, REFLECTED IN COLUMN (a))
(in thousands) WARRANTS AND RIGHTS* (in thousands)
------------------------------------------------------------------------------------------
PLAN CATEGORY (a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Compensation
Plans Approved by
Security Holders 31,151 $ 9.76 22,538
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation
Plans not Approved by
Security Holders 110,160 9.94 41,767
- ----------------------------------------------------------------------------------------------------------------------
Total 141,311 $ 9.90 64,305
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*As adjusted for stock splits.
See Note 12 to the Consolidated Financial Statements for information
regarding the material features of the above plans. Each of the above plans
provides that the number of shares with respect to which options may be granted,
and the number of shares of Common Stock subject to an outstanding option, shall
be proportionately adjusted in the event of a subdivision or consolidation of
shares or the payment of a stock dividend on Common Stock, and the purchase
price per share of outstanding options shall be proportionately revised.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December
31, 2002 has been derived from the Company's Consolidated Financial Statements.
This information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues......................... $ 5,521,771 $ 5,555,174 $ 5,649,560
Operating expenses......................... 5,104,433 4,924,052 4,628,415
------------ ------------ ------------
Operating income........................... 417,338 631,122 1,021,145
Other expenses(income), net................ 24,656 (196,537) 3,781
------------ ------------ ------------
Income before income taxes................. 392,682 827,659 1,017,364
Provision for income taxes................. 151,713 316,512 392,140
------------ ------------ ------------
Net income ................................ $ 240,969 $ 511,147 $ 625,224(3)
============ ============ ============
Net income per share, basic................ $ .31 $ .67 $ .84(3)
Net income per share, diluted.............. $ .30 $ .63 $ .79(3)
Cash dividends per common share............ $ .0180 $ .0180 $ .0147
Total assets at period-end................. $ 8,953,750 $ 8,997,141 $ 6,669,572
Long-term obligations at period-end........ $ 1,552,781 $ 1,327,158 $ 760,992
Stockholders' equity at period-end......... $ 4,421,617 $ 4,014,053 $ 3,451,320
OPERATING DATA:
Revenue passengers carried................. 63,045,988 64,446,773 63,678,261
Revenue passenger miles (RPMs) (000s)...... 45,391,903 44,493,916 42,215,162
Available seat miles (ASMs) (000s)......... 68,886,546 65,295,290 59,909,965
Load factor (1)............................ 65.9% 68.1% 70.5%
Average length of passenger haul (miles)... 720 690 663
Trips flown................................ 947,331 940,426 903,754
Average passenger fare..................... $ 84.15(5) $ 83.93(4) $ 85.87
Passenger revenue yield per RPM............ 11.69(cents)(5) 12.16(cents)(4) 12.95(cents)
Operating revenue yield per ASM............ 7.96(cents)(5) 8.55(cents)(4) 9.43(cents)
Operating expenses per ASM................. 7.41(cents) 7.48(cents)(4) 7.73(cents)
Fuel cost per gallon (average)............. 68.01(cents) 70.86(cents) 78.69(cents)
Number of Employees at year-end............ 33,705 31,580 29,274
Size of fleet at year-end (2).............. 375 355 344
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998
---- ----
<S> <C> <C>
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues......................... $ 4,735,587 $ 4,163,980
Operating expenses......................... 3,954,011 3,480,369
------------ ------------
Operating income........................... 781,576 683,611
Other expenses(income), net................ 7,965 (21,501)
------------ ------------
Income before income taxes................. 773,611 705,112
Provision for income taxes................. 299,233 271,681
------------ ------------
Net income ................................ $ 474,378 $ 433,431
============ ============
Net income per share, basic................ $ .63 $ .58
Net income per share, diluted.............. $ .59 $ .55
Cash dividends per common share............ $ .0143 $ .0126
Total assets at period-end................. $ 5,653,703 $ 4,715,996
Long-term obligations at period-end........ $ 871,717 $ 623,309
Stockholders' equity at period-end......... $ 2,835,788 $ 2,397,918
OPERATING DATA:
Revenue passengers carried................. 57,500,213 52,586,400
Revenue passenger miles (RPMs) (000s)...... 36,479,322 31,419,110
Available seat miles (ASMs)(000s).......... 52,855,467 47,543,515
Load factor (1)............................ 69.0% 66.1%
Average length of passenger haul (miles)... 634 597
Trips flown................................ 846,823 806,822
Average passenger fare..................... $ 79.35 $ 76.26
Passenger revenue yield per RPM............ 12.51(cents) 12.76(cents)
Operating revenue yield per ASM............ 8.96(cents) 8.76(cents)
Operating expenses per ASM................. 7.48(cents) 7.32(cents)
Fuel cost per gallon (average)............. 52.71(cents) 45.67(cents)
Number of Employees at year-end............ 27,653 25,844
Size of fleet at year-end (2).............. 312 280
</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).
(4) Excludes special items related to the September 11, 2001 terrorist
attacks. Including these items, average passenger fare would decrease
by $.47, passenger revenue yield per RPM would decrease by .07 cents
operating revenue yield per ASM would decrease by .04 cents and
operating expenses per ASM would increase by .06 cents.
(5) Excludes $36 million in revenue from second quarter 2002 related to a
reduction in air traffic liability. Including the $36 million, average
passenger fare would increase by $.57, passenger revenue yield per RPM
would increase by .08 cents, and operating revenue yield per ASM would
increase by .06 cents.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR IN REVIEW
In 2002, Southwest posted a profit for the 30th consecutive year. While the
Company's 2002 profitability fell short of our historical standards, this
performance was remarkable given that the major airlines collectively reported
losses in the billions of dollars. From a financial perspective, 2002 was one of
the worst years, if not the worst, in the history of commercial aviation. It was
a year that included dramatic increases in aviation insurance costs, increased
passenger security costs resulting from continually evolving security laws and
directives, airline industry downsizing, rising energy prices, and a
recessionary airline revenue environment. However, the Company's business
strategy - predominantly shorthaul, high frequency, low-fare, point-to-point,
high-quality Customer Service, low costs - continued to serve Southwest well
throughout the year. The Company has been able to combat many of these higher
exogenous costs by lowering distribution costs and implementing other cost
reduction measures. Throughout the difficult period beginning with the September
11, 2001 terrorist attacks the Company has been profitable every quarter.
During 2002, Southwest successfully met the challenge of dramatic changes in
airport security. Initially, these security changes dramatically altered airport
checkin procedures resulting in longer checkin times for Customers. The Company
invested in additional airport facilities, new technology, changed processes and
added Employees. These actions, at most airports, restored checkin times to
normal durations. Specific changes to the way Customers and baggage are
processed included the implementation of computer-generated baggage tags to
electronically track bags checked by Customers, computer-generated boarding
passes from multiple points in the airport, and the installation of self-service
RAPID CHECK-IN kiosks at airports. Although the Transportation Security
Administration has successfully assumed responsibility for passenger and baggage
screening, and has complied with all federal security mandates as required by
the Aviation and Transportation Security Act, the Company is currently unable to
predict what impact future mandates, if any, will have on the Company's ongoing
operations and future financial performance.
Although the Company did not open any new cities in 2002, it did improve its
quality of service between cities already served and added 23 new 737-700
aircraft to facilitate this growth. These additions, along with the retirement
of three older 737-200 aircraft, resulted in a net capacity increase of 5.5
percent, and brought the Company's all-737 fleet to 375 aircraft at the end of
2002. The Company ended 2002 serving 59 airports in 30 states.
Available seat mile (ASM) capacity is expected to grow approximately four
percent in 2003 with the planned net addition of 11 aircraft. The Company
currently has 17 new Boeing 737-700s scheduled for delivery during the year and
plans to retire six of the Company's older 737-200s.
RESULTS OF OPERATIONS
2002 COMPARED WITH 2001 The Company's consolidated net income for 2002 was
$241.0 million ($.30 per share, diluted), as compared to 2001 net income of
$511.1 million ($.63 per share, diluted), a decrease of $270.1 million or 52.9
percent. Operating income for 2002 was $417.3 million, a decrease of $213.8
million, or 33.9 percent compared to 2001.
Consolidated results for 2002 and 2001 included $48 million and $235 million,
respectively, in gains that the Company recognized from grants under the Air
Transportation Safety and System Stabilization Act (Air Stabilization Act).
Consolidated results for 2002 also included $36 million in additional passenger
revenue from a reduction in estimated refunds and exchanges, contributing to an
12
<PAGE>
increase in forfeited tickets included in "Air traffic liability." Consolidated
results for 2001 also included special pre-tax charges of approximately $48
million arising from the terrorist attacks. See Note 1 and Note 3 to the
Consolidated Financial Statements.
The Company believes that comparative analysis of results can be enhanced by
excluding the impact of these special items. The following table reconciles
results reported in accordance with Generally Accepted Accounting Principles
(GAAP) with results adjusted for special items that are not expected to recur:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Consolidated net income, as reported $ 240,969 $ 511,147
Government grant proceeds, net * (24,796) (123,510)
Passenger revenue adjustments, net * (18,103) 15,749
Special charges arising from terrorist attacks, net * - 9,563
--------- ---------
Adjusted consolidated net income, excluding
special charges and unusual items (non-GAAP) $ 198,070 $ 412,949
========= =========
Net income per share, basic, as reported $ .31 $ .67
Government grant proceeds, net * (.03) (.16)
Passenger revenue adjustments, net * (.02) .02
Special charges arising from terrorist attacks, net * - .01
--------- ---------
Adjusted net income per share, basic, excluding
special charges and unusual items (non-GAAP) $ .26 $ .54
========= =========
Net income per share, diluted, as reported $ .30 $ .63
Government grant proceeds, net * (.03) (.15)
Passenger revenue adjustments, net * (.03) .02
Special charges arising from terrorist attacks, net * - .01
--------- ---------
Adjusted net income per share, diluted, excluding
special charges and unusual items (non-GAAP) $ .24 $ .51
========= =========
</TABLE>
* Net of income tax and Company profitsharing effects.
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
canceled approximately 9,000 flights before resuming flight operations on
September 14, although it did not resume its normal pre-September 11 flight
schedule until September 18, 2002. After operations were fully resumed, load
factors and passenger yields were severely impacted, and ticket refund activity
increased. The Company estimates that from September 11 through September 30,
2001, it incurred operating losses in excess of $130 million.
OPERATING REVENUES Consolidated operating revenues decreased $33.4 million, or
..6 percent, primarily due to a $37.4 million, or .7 percent, decrease in
passenger revenues.
The decrease in passenger revenues was due to lower load factors (revenue
passenger miles or RPMs divided by available seat miles or ASMs) attributable to
the post-September 11, 2001 reduction in demand for air travel, and from lower
passenger yields (passenger revenue divided by RPMs) caused by a decline in
full-fare traffic. The Company's load factor for 2002 was 65.9 percent, compared
to 68.1 percent for 2001, resulting from a capacity (ASM) increase of 5.5
percent versus an RPM increase of only 2.0 percent. Excluding special items,
passenger yields for 2002 were $.1169 compared to $.1216 in 2001, a
13
<PAGE>
decrease of 3.9 percent. In 2002, there continued to be heavy fare discounting
by the Company and the airline industry in general to stimulate demand. The
increase in capacity, as measured by ASMs, was due to the net addition of 20
aircraft during 2002 (net of three aircraft retirements). For the full year, the
Company experienced a 2.2 percent decrease in revenue passengers carried and a
4.3 percent increase in average length of passenger haul (RPMs divided by
revenue passengers carried).
The Company's 2002 load factor was attained only through heavy promotional
activities and aggressive revenue management. Load factors thus far in January
2003 and bookings for February and March 2003 have been satisfactory. However,
we expect the air fare environment to continue to be weak, relative to
pre-September 11, 2001 performance, through the first quarter 2003. If current
booking and revenue trends continue, first quarter 2003 unit revenues should,
however, exceed first quarter 2002's unit revenue of $.0761.
Consolidated freight revenues decreased $6.6 million, or 7.2 percent, primarily
due to a 40.3 percent decrease in mail revenues. Following the terrorist
attacks, the United States Postal Service shifted a portion of the mail that
commercial carriers had previously carried to freight carriers. The mail
decrease more than offset an 11.4 percent increase in other freight revenues.
Other revenues increased $10.5 million, or 12.4 percent, primarily due to an
increase in commissions earned from programs the Company sponsors with certain
business partners, such as the Company-sponsored First USA(R) Visa card.
OPERATING EXPENSES Consolidated operating expenses for 2002 increased $180.4
million, or 3.7 percent, compared to the 5.5 percent increase in capacity.
Operating expenses per ASM decreased 1.7 percent to $.0741, primarily due to
decreases in profitsharing expense, average jet fuel costs, and commission
expense. Excluding 2001 special items, operating expenses per ASM decreased .9
percent. For 2003, the Company currently expects an increase in operating
expenses per ASM primarily due to higher fuel costs and salaries, wages, and
benefits.
To a large extent, changes in operating expenses for airlines are driven by
changes in capacity, or ASMs. The following presents Southwest's operating
expenses per ASM for 2002 and 2001 followed by explanations of these changes on
a per ASM basis:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Increase Percent
2002 2001 (decrease) change
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.89 (cents) 2.84 (cents) .05 (cents) 1.8 %
Fuel and oil 1.11 1.18 (.07) (5.9)
Maintenance materials and repairs .57 .61 (.04) (6.6)
Agency commissions .08 .16 (.08) (50.0)
Aircraft rentals .27 .29 (.02) (6.9)
Landing fees and other rentals .50 .48 .02 4.2
Depreciation .52 .49 .03 6.1
Other 1.47 1.49 (.02) (1.3)
--------------------------------------------------------
Total 7.41 (cents) 7.54 (cents) (.13)(cents) (1.7) %
========================================================
</TABLE>
Salaries, wages, and benefits expense per ASM increased 1.8 percent due to a 5.7
percent increase in salaries and wages per ASM and a 7.6 percent increase in
benefits expense per ASM, partially offset by a 30.3 percent decrease in
Employee retirement plans expense per ASM. The majority of the increase in
salaries and wages was due to headcount additions outpacing the Company's
capacity growth in several
14
<PAGE>
operational areas, due in part to additional security requirements at airports.
The remaining portion of the increase in salaries and wages per ASM was
primarily due to increases in average wage rates.
The increase in benefits expense per ASM was primarily due to higher health care
costs. Employee retirement plans expense per ASM decreased primarily due to the
decrease in Company earnings available for profitsharing. In 2002 and 2001,
earnings available for profitsharing included $48 million and $235 million,
respectively, from grants recognized under the Air Stabilization Act. See Note 3
to the Consolidated Financial Statements. The Company also expects to experience
an increase in salaries, wages, and benefits per ASM in 2003 due to the
continued impact of headcount additions in excess of capacity growth, higher
average wage rates, and higher anticipated health care costs.
The Company's Mechanics are subject to an agreement negotiated with the
International Brotherhood of Teamsters (the Teamsters), that became amendable in
August 2001. The Company reached a tentative agreement with the Teamsters, which
was ratified by its membership in October 2002 (on January 27, 2003, the
Aircraft Mechanics Fraternal Association was certified by the National Mediation
Board as the new representative of the Mechanics). The new contract, which
includes the issuance of stock options, becomes amendable in August 2005.
The Company's Customer Service and Reservations Agents are subject to an
agreement with the International Association of Machinists and Aerospace Workers
(IAM) that became amendable in November 2002. The Company reached a tentative
agreement with the IAM in December 2002, which was approved by IAM membership in
January 2003. The new contract includes the issuance of stock options and
becomes amendable in November 2008 (or 2006 at the Union's option under certain
conditions as defined in the agreement).
The Company's Pilots are subject to an agreement with the Southwest Airlines
Pilots' Association (SWAPA). Although the contract between Southwest and SWAPA
was not amendable until September 2004, during 2002 the Company negotiated an
extension with SWAPA that was ratified by its membership in August 2002. The
extended contract, which includes the issuance of stock options, becomes
amendable in September 2006.
The Company's Ramp, Operations, and Provisioning Agents are represented by the
Transport Workers Union of America (TWU). Although the contract between
Southwest and TWU was not amendable until June 2006, during 2002 the Company
negotiated a two-year contract extension with TWU that was ratified by its
membership in December 2002. The contract extension included the issuance of
stock options. The contract with TWU now becomes amendable in June 2008 (or 2006
at the Union's option under certain conditions as defined in the agreement).
The Company's Flight Attendants are subject to an agreement with the TWU that
became amendable in June 2002. Southwest is currently in negotiations with the
TWU for a new contract.
Fuel and oil expense per ASM decreased 5.9 percent, primarily due to a 4.0
percent decrease in the average jet fuel cost per gallon. The average cost per
gallon of jet fuel in 2002 was $.6801 compared to $.7086 in 2001, excluding fuel
related taxes but including the effects of hedging activities. The Company's
2002 and 2001 average jet fuel costs are net of approximately $44.5 million and
$79.9 million in gains from hedging activities, respectively. 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 83 percent of its anticipated fuel consumption in 2003, including
all of its anticipated requirements for first quarter 2003. Considering current
market prices and the continued effectiveness of the Company's fuel hedges, the
Company is forecasting first quarter 2003 average fuel cost per gallon to be in
the $.70 to $.75 range. The majority of the Company's near term hedge positions
are in the form of option contracts, which protect the Company in the event of
rising jet fuel prices. The Company should also benefit, to a large extent, in
the event of a decline in jet fuel prices.
15
<PAGE>
Maintenance materials and repairs per ASM decreased 6.6 percent. This decrease
was primarily due to a decrease in airframe expense resulting from fewer
outsourced heavy maintenance events versus 2001. More heavy maintenance events
were performed internally in 2002, resulting in the costs associated with those
events being reflected in salaries and wages. Currently, the Company expects an
increase in maintenance materials and repairs expense per ASM in first quarter
and full year 2003, versus 2002, due to an increase in contract rates from
outside vendors as well as the number of engine inspections and repairs
scheduled. The majority of the Company's engine maintenance work is outsourced.
Agency commissions per ASM decreased 50.0 percent, primarily due to a change in
the Company's commission rate policy. Effective October 15, 2001, the Company
reduced the commission paid to travel agents from eight percent for Ticketless
bookings and five percent for paper ticket bookings, to five percent (with no
cap), regardless of the type of ticket sold. In addition, the mix of tickets
sold through travel agents declined from 25 percent in 2001 to 20 percent in
2002, thereby reducing commissionable revenues and commission expense.
Aircraft rentals per ASM decreased 6.9 percent primarily due to a lower
percentage of the aircraft fleet being leased. Approximately 24.0 percent of the
Company's aircraft were under operating lease at December 31, 2002, compared to
25.9 percent at December 31, 2001. Based on the Company's current new aircraft
delivery schedule, scheduled aircraft retirements for 2003, and financing plans,
the Company expects a decline in aircraft rental expense per ASM in 2003,
including the first quarter.
Landing fees and other rentals per ASM increased 4.2 percent primarily as a
result of airport rate increases throughout the Company's system. Moreover,
following the terrorist attacks, most other major airlines reduced their flight
schedules due to the drop in air travel. Since Southwest did not reduce its
flights, the Company incurred higher airport costs based on a greater relative
share of total flights and passengers.
Depreciation expense per ASM increased 6.1 percent primarily due to growth in
the Company's owned aircraft fleet. The Company received delivery of 23 new
737-700 aircraft during 2002, all of which were purchased.
Other operating expenses per ASM decreased 1.3 percent despite a per-ASM
increase of more than 175 percent in aviation insurance costs. (The insurance
cost increases were more than offset through various cost control measures
implemented immediately following the prior year terrorist attacks, including
reductions in personnel related expenses and office expenses: excluding
insurance expense, other operating expenses per ASM decreased 8.5 percent).
Following the terrorist attacks, commercial aviation insurers significantly
increased the premiums and reduced the amount of war-risk coverage available to
commercial carriers. The federal government then stepped in to provide
supplemental third-party war-risk insurance coverage to commercial carriers, for
renewable 60-days periods, at substantially lower premiums than prevailing
commercial rates during 2002 and for levels of coverage not available in the
commercial market. In November 2002, Congress passed the Homeland Security Act
of 2002, which mandated the federal government provide third party, passenger
and hull war-risk insurance coverage to commercial carriers through August 31,
2003, and which permits such coverage to be extended by the government through
December 31, 2003. The Company is unable to predict whether the government will
extend this insurance coverage past August 31, 2003; whether alternative
commercial insurance with comparable coverage will become available at
reasonable premiums; and what impact the outcome will have on the Company's
ongoing operations or future financial performance. As a result of recently
concluded negotiations for 2003 commercial insurance coverage and the additional
coverage provided by the government, the Company currently expects per-ASM
insurance costs to decrease compared to 2002 for at least the near term,
including first quarter 2003.
16
<PAGE>
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and other gains and losses. Interest expense
increased $36.2 million, or 51.8 percent compared to the prior year, due to
higher debt levels. In fourth quarter 2001, the Company issued $614.3 million
in long-term debt in the form of Pass Through Certificates. In first quarter
2002, the Company issued $385 million in unsecured notes. See Note 7 to the
Consolidated Financial Statements for more information on these two borrowings.
The increase in expense caused by these borrowings was partially 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. Capitalized interest
decreased $3.9 million, or 18.7 percent, primarily as a result of lower 2002
progress payment balances for scheduled future aircraft deliveries, compared to
2001. Based on the Company's current schedule of progress payments and
aircraft deliveries, the Company expects progress payment balances, and
corresponding capitalized interest, to increase in 2003 compared to 2002.
Interest income decreased $5.6 million, or 13.2 percent, as higher invested
cash balances for the year were more than offset by lower rates. Other gains in
2002 and 2001 primarily resulted from $48 million and $235 million,
respectively, received as the Company's share of government grant funds under
the Air Stabilization Act. See Note 3 to the Company's Consolidated Financial
Statements for further discussion of the Air Stabilization Act and grants from
the government.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, increased to 38.64 percent in 2002 from 38.24 percent in 2001 primarily
due to the Company's lower earnings in 2002.
2001 COMPARED WITH 2000 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 $114.1 million, or 18.2 percent.
Consolidated results for 2001 included $235 million in gains that the Company
recognized from grants under the Air Stabilization 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, for 2000, after the cumulative change in accounting
principle, were $603.1 million and $.76, respectively. Operating income for
2001 was $631.1 million, a decrease of $390.0 million, or 38.2 percent,
compared to 2000.
OPERATING REVENUES Consolidated operating revenues decreased $94.4 million, or
1.7 percent, primarily due to a 1.6 percent decrease in passenger revenues. The
decrease in passenger revenues was a direct result of the terrorist attacks.
From January through August 2001, passenger revenues were higher by $314.9
million, or 8.7 percent, than the same period in 2000 primarily due to an
increase in capacity, as measured by ASMs, of 11.6 percent. This capacity
increase was due to the addition of 14 aircraft during 2001 (all prior to
September 11) and its revenue effects were partially offset by a decrease of
1.9 percent in passenger yield. Passenger yield decreased as a result of fare
discounting by the Company and the airline industry in general as the United
States economy weakened throughout 2001. 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 $404.2 million, or
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
17
<PAGE>
lower during this period, versus the same period in 2000, due to aggressive fare
sales following the terrorist attacks.
For the full year 2001, 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 6.6 percent decrease in
2001 passenger yield.
As a result of weak economic conditions throughout 2001, consolidated freight
revenues decreased $19.5 million, or 17.6 percent. There were decreases in both
the number of freight shipments and revenue per shipment. Other revenues
increased $14.3 million, or 20.3 percent, primarily due 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 $295.6
million, or 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, primarily due 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.
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 2.84 (cents) 2.81 (cents) .03 (cents) 1.1 %
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 7.54 (cents) 7.73 (cents) (.19) (cents) (2.5) %
========================================================
</TABLE>
Salaries, wages, and benefits per ASM increased 1.1 percent due to a 3.2 percent
increase in salaries and wages per ASM, and a 9.8 percent increase in benefits
expense per ASM, partially offset by a 17.5 percent decrease in Employee
retirement plans expense per ASM. The increase in salaries and wages per ASM was
primarily due to higher average wage rates within certain workgroups and
increased headcount due, in part, to the increased security requirements
following the September terrorist attacks.
The increase in benefits expense per ASM was primarily due to higher benefits
costs, primarily health care. The decrease in Employee retirement plans expense
per ASM was primarily due to the decrease in Company earnings available for
profitsharing. This decrease in earnings more than offset an increase in expense
due to a fourth 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.
18
<PAGE>
Fuel and oil expense per ASM decreased 11.9 percent, primarily due 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.
Maintenance materials and repairs per ASM decreased 3.2 percent. This decrease
was primarily due 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. A 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.
Agency commissions per ASM decreased 40.7 percent, primarily due 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. In addition, the mix of tickets sold through travel agents declined
from 28 percent in 2000 to 25 percent in 2001, thereby reducing commissionable
revenues and commission expense.
Aircraft rentals per ASM decreased 12.1 percent primarily due 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.
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.
Depreciation expense per ASM increased 4.3 percent primarily due to the growth
in the Company's aircraft fleet prior to the 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 primarily due to a
significant increase in aviation insurance costs following the terrorist
attacks. The Company's insurance carriers canceled their war risk and terrorism
insurance policies following the terrorist attacks and reinstated such coverage
at significantly higher rates than before.
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and other gains and losses. Interest expense was
flat compared to 2000. 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. Capitalized interest decreased $7.0 million, or 25.3 percent, primarily
as a result of lower 2001 progress payment balances for scheduled future
aircraft deliveries as 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 $2.5 million, or 6.2
percent, primarily due to higher invested cash balances, partially offset by
lower rates. Other gains in 2001 primarily resulted from $235 million received
as the Company's share of government grant funds
19
<PAGE>
under the Air Stabilization Act, intended to offset the Company's direct and
incremental losses caused by the terrorist attacks, through the end of 2001. See
Note 3 to the Company's Consolidated Financial Statements for further discussion
of the Air Stabilization 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 primarily resulted from lower effective state tax rates in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $520.2 million in 2002 compared to
$1.5 billion in 2001. The decrease in operating cash flows was primarily due to
the decrease in net income and the deferral of approximately $186 million in
2001 excise tax payments until January 2002, as provided for in the Air
Stabilization Act.
Cash flows used in investing activities in 2002 totaled $603.1 million compared
to $997.8 million in 2001. Investing activities in both years consisted
primarily of payments for new 737-700 aircraft delivered to the Company and
progress payments for future aircraft deliveries. Of the 23 new aircraft the
Company put into service during 2002, 11 were recorded (on the Consolidated
Statement of Cash Flows and on the Consolidated Balance Sheet) through the
consolidation of a special purpose trust (the Trust) during 2001. See Note 4 to
the Consolidated Financial Statements for more information on the Trust. A total
of eight new 737-700 aircraft were recorded through consolidation of the Trust
during 2002. The remaining four new 737-700 aircraft delivered to the Company in
2002 were purchased directly from Boeing. The Trust was dissolved prior to
December 31, 2002.
Net cash used in financing activities was $381.7 million in 2002 compared to
cash generated by financing activities of $1.3 billion in 2001. Cash used in
financing activities during 2002 was primarily for the repayment of the
Company's $475 million revolving credit facility that the Company drew down in
September 2001 and for the repayment of the Trust. These uses were partially
offset by cash generated from the issuance of $385 million in unsecured notes in
March 2002. Financing cash flows in 2001 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 2002 and in 2001 was primarily used to finance
aircraft-related capital expenditures and provide working capital.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 2002, of $1.82 billion,
internally generated funds, and a $575 million bank revolving line of credit. 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, unencumbered assets, modest leverage, and consistent
profitability.
The Company has an available revolving credit facility from which it can borrow
up to $575 million from a group of banks. One-half of the facility is short term
and expires on April 23, 2003 if not drawn before that date. The other one-half
expires on April 23, 2005. The Company expects that it will be able to renew the
expiring 365-day facility for an additional 365-day period at reasonable terms.
If the Company is unable to renew, the Company's available credit facility will
be reduced.
20
<PAGE>
The Company currently has outstanding shelf registrations for the issuance of up
to $1.0 billion in public debt securities and pass through certificates, which
it may utilize for aircraft financings in the future.
In 1999, the Company's Board of Directors 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, 2002, 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 or in 2002.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
Southwest has contractual obligations and commitments primarily with regards to
future purchases of aircraft, payment of debt, and lease arrangements.
As of February 1, 2003, Southwest is scheduled to take delivery of 17 new
737-700 aircraft from Boeing in 2003, 23 in 2004, 24 in 2005, 22 in 2006, 25 in
2007, and six in 2008. The Company also has a total of 79 purchase options for
new 737-700 aircraft for years 2004 through 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.
The following table aggregates the Company's expected contractual obligations
and commitments subsequent to December 31, 2002:
<TABLE>
<CAPTION>
PAYMENTS DUE BY PERIOD (IN THOUSANDS)
---------------------------------------------------------------------------
BEYOND
Contractual obligations (1) 2003 2004 - 2005 2006 - 2007 2007 TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term debt $ 120,797 $ 320,320 $ 637,588 $ 516,980 $ 1,595,685
Capital lease commitments (2) 17,751 41,160 26,758 52,016 137,685
Operating lease commitments 281,042 496,371 365,403 1,459,961 2,602,777
Aircraft purchase commitments 597,097 1,394,569 1,139,891 104,924 3,236,481
---------------------------------------------------------------------------
Total contractual cash obligations $1,016,687 $ 2,252,420 $ 2,169,640 $ 2,133,881 $ 7,572,628
===========================================================================
</TABLE>
(1) Does not include other commitments for the purchase of goods and services
which in the aggregate are immaterial.
(2) Includes amounts classified as interest.
There were no outstanding borrowings under the revolving credit facility at
December 31, 2002. See Note 6 to the Consolidated Financial Statements for more
information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with United States Generally Accepted Accounting Principles (GAAP). The
Company's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements. The preparation of financial statements in
accordance with GAAP requires the Company's management to make estimates and
assumptions that affect the amounts reported in the Consolidated Financial
Statements and accompanying footnotes. The Company's estimates and assumptions
are based on historical experiences and changes in the business environment.
However, actual results may differ from
21
<PAGE>
estimates under different conditions, sometimes materially. Critical accounting
policies and estimates are defined as those that are both most important to the
portrayal of the Company's financial condition and results and require
management's most subjective judgments. The Company's most critical accounting
policies and estimates are described below.
Revenue Recognition
As described in Note 1 to the Consolidated Financial Statements, tickets sold
are initially deferred as "Air traffic liability." Passenger revenue is
recognized and air traffic liability is reduced when the service is provided
(i.e., when the flight takes place). "Air traffic liability" primarily
represents tickets sold for future travel dates and estimated future refunds,
exchanges, or forfeitures of tickets sold for past travel dates. The Company's
air traffic liability balance at December 31, 2002 was $412.2 million.
The majority of the Company's tickets sold are nonrefundable, which is the
primary source of forfeited tickets. Tickets that are sold but not flown on the
travel date can be reused for another flight, up to a year from the date of
sale, or can be refunded (if the ticket is refundable). A small percentage of
tickets (or partial tickets) expire unused. Fully refundable tickets are rarely
forfeited. "Air traffic liability" includes an estimate of the amount of future
refunds, exchanges, and forfeitures for all unused tickets once the flight date
has passed. These estimates are based on historical experience over many years.
The Company and members of the airline industry have consistently applied this
accounting method to estimate revenue from forfeited tickets at the date travel
is provided. Estimated future refunds and exchanges included in the air traffic
liability account are constantly evaluated based on subsequent refund and
exchange activity to validate the accuracy of the Company's estimates with
respect to forfeited tickets. Events and circumstances outside of historical
fare sale activity or historical Customer travel patterns can result in actual
refunds, exchanges or forfeited tickets differing significantly from estimates;
however, these differences have historically not been material. Additional
factors that may affect estimated refunds include, but may not be limited to,
the Company's refund and exchange policy, the mix of refundable and
nonrefundable 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 exchange activity may vary from estimated amounts.
Since September 2001, the Company has experienced fluctuations in estimated
refunds and exchanges, and correspondingly, forfeited tickets, due to many of
the factors described above. Following the terrorist events of September 11,
2001, and the subsequent temporary shutdown of U.S. air space, Southwest
temporarily suspended its normal refund policy in order to provide the highest
Service to the Company's Customers, including the refunding of nonrefundable
tickets upon Customer request. As a result, the Company experienced refunds
during September 2001 and through December 2001 far above historical refund
levels and in excess of the Company's contractual obligations. In evaluating
passenger revenue through third quarter 2001, based on these unusually high
refund levels, the Company estimated that approximately $30 million of these
refunds related to revenue previously recognized for estimated forfeited
tickets. As a result, the Company reduced third quarter 2001 "Passenger revenue"
by $30 million and restored "Air traffic liability", accordingly.
Subsequent to third quarter 2001 and through second quarter 2002, the Company
experienced a higher than usual mix of low-fare, nonrefundable ticket sales. The
Company also experienced changes in Customer travel patterns resulting from
various factors including new airport security measures, concerns about further
terrorist attacks, and an uncertain economy. Consequently, the Company recorded
$36 million in additional passenger revenue in second quarter 2002 as Customers
required fewer refunds and exchanges, resulting in more forfeited tickets.
22
<PAGE>
While the Company believes the current estimates included in "Air traffic
liability" and "Passenger revenue" are reasonable, these estimates may continue
to change based on refund, exchange and forfeiture activity varying from
pre-September 2001 patterns.
Accounting for Long-Lived Assets
As of December 31, 2002, the Company had approximately $9.46 billion of
long-lived assets, including $8.02 billion in flight equipment and related
assets. In accounting for long-lived assets, the Company must make estimates
about the expected useful lives of the assets, the expected residual values of
the assets, and the potential for impairment based on the fair value of the
assets and the cash flows they generate.
In estimating the lives and expected residual values of its aircraft, the
Company has primarily relied upon actual experience with the same or similar
aircraft types and recommendations from Boeing, the manufacturer of the
Company's aircraft. Subsequent revisions to these estimates, which can be
significant, could be caused by changes to the Company's maintenance program,
changes in utilization of the aircraft (actual flight hours during a given
period of time), governmental regulations on aging aircraft, and changing market
prices of new and used aircraft of the same or similar types. The Company
evaluates its estimates and assumptions each reporting period and, when
warranted, adjusts these estimates and assumptions. Generally, these adjustments
are accounted for on a prospective basis through depreciation expense, as
required by GAAP.
The Company periodically evaluates its long-lived assets for impairment. Factors
that would indicate potential impairment include, but are not limited to,
significant decreases in the market value of the long-lived asset(s), a
significant change in the long-lived asset's physical condition, and operating
or cash flow losses associated with the use of the long-lived asset. While the
airline industry as a whole has experienced many of these indicators, Southwest
has continued to operate all of its aircraft and continues to experience
positive cash flow. Consequently, the Company has not identified any impairments
related to its existing aircraft fleet. The Company will continue to monitor its
long-lived assets and the airline operating environment.
Financial Derivative Instruments
The Company utilizes financial derivative instruments to manage its risk
associated with changing jet fuel prices, and accounts for them under Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133.) See "Qualitative and
Quantitative Disclosures about Market Risk" for more information on these risk
management activities. SFAS 133 requires that all derivatives be marked to
market (fair value) and recorded on the Consolidated Balance Sheet. The fair
value of the Company's financial derivative instruments recorded on the
Company's Consolidated Balance Sheet as of December 31, 2002, was $157.2
million.
Since the majority of the Company's financial derivative instruments are not
traded on a market exchange, the Company estimates their fair values. Depending
on the type of instrument, the values are 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. Also, since there is not a
reliable forward market for jet fuel, the Company must estimate the future
prices of jet fuel in order to measure the effectiveness of the hedging
instruments in offsetting changes to those prices, as required by SFAS 133.
Forward jet fuel prices are estimated through the observation of similar
commodity futures prices (such as crude oil and heating oil) and adjusted based
on historical variations to those like commodities.
23
<PAGE>
Fair values for financial derivative instruments and forward jet fuel prices are
both estimated prior to the time that the financial derivative instruments
settle, and the time that jet fuel is purchased and consumed, respectively.
However, once settlement of the financial derivative instruments occur and the
hedged jet fuel is purchased and consumed, all values and prices are known and
are realized in the financial statements. Based on these actual results once all
values and prices become known, the Company's estimates have proved to be
materially accurate. Furthermore, since the majority of the Company's hedges
settle within 12 to 24 months from the time the Company enters into the contract
for the derivative financial instrument, the estimates being made are relatively
short-term.
Estimating the fair value of these fuel hedging derivatives and forward prices
for jet fuel will also result in changes in their values from period to period
and thus determine how they are accounted for under SFAS 133. To the extent that
the period to period change in the estimated fair value of a fuel hedging
instrument differs from a period to period change in the estimated price of the
associated jet fuel to be purchased, ineffectiveness of the fuel hedge will
result, as defined by SFAS 133. This could result in the immediate recording of
charges or income, even though the derivative instrument may not expire until a
future period. Historically, the Company has not experienced significant
ineffectiveness in its fuel hedges accounted for under SFAS 133.
See Note 2 and Note 9 to the Consolidated Financial Statements for more
information on SFAS 133 and the Company's fuel hedging activities.
FORWARD-LOOKING STATEMENTS
Some statements in this Form 10-K (or otherwise made by the Company or on the
Company's behalf from time to time in other reports, filings with the Securities
and Exchange Commission, news releases, conferences, World Wide Web postings or
otherwise) which are not historical facts may be "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements about Southwest's estimates, expectations, beliefs,
intentions or strategies for the future, and the assumptions underlying these
forward-looking statements. Southwest uses the words "anticipates," "believes,"
"estimates," "expects," "intends," "forecasts", "may," "will," "should" and
similar expressions to identify these forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from historical experience or the Company's
present expectations. Factors that could cause these differences include, but
are not limited to:
- - Items directly linked to the September 11, 2001 terrorist attacks, such as
the adverse impact of new airline and airport security directives on the
Company's costs and Customer demand for travel, changes in the
Transportation Security Administration's scope for managing U.S. airport
security, the availability and cost of war-risk and other aviation
insurance, including the federal government's provision of third party
war-risk coverage, and the possibility of additional incidents that could
cause the public to question the safety and/or efficiency of air travel.
- - War or other military actions by the U.S. or others.
- - Competitive factors, such as fare sales and capacity decisions by the
Company and its competitors, changes in competitors' flight schedules,
mergers and acquisitions, codesharing programs, and airline bankruptcies.
24
<PAGE>
- - General economic conditions, which could adversely affect the demand for
travel in general and consumer ticket purchasing habits, as well as
decisions by major freight Customers on how they allocate freight
deliveries among different types of carriers.
- - Factors that could affect the Company's ability to control its costs, such
as the results of Employee labor contract negotiations, Employee hiring and
retention rates, costs for health care, the largely unpredictable prices of
jet fuel, crude oil, and heating oil, the continued effectiveness of the
Company's fuel hedges, changes in the Company's overall fuel hedging
strategy, capacity decisions by the Company and its competitors,
unscheduled required aircraft airframe or engine repairs and regulatory
requirements, changes in commission policy, availability of capital
markets, and future financing decisions made by the Company.
- - Disruptions to operations due to adverse weather conditions and air traffic
control-related constraints.
Caution should be taken not to place undue reliance on the Company's
forward-looking statements, which represent the Company's views only as of the
date this report is filed. The Company undertakes no obligation to update
publicly or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
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 97 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 details on the Company's financial derivative
instruments.
Fuel hedging. The fair values of outstanding financial derivative instruments
related to the Company's jet fuel market price risk at December 31, 2002, were a
net asset of $157.2 million. The current portion of these financial derivative
instruments, or $112.8 million, is classified as "Fuel hedge contracts" in the
Consolidated Balance Sheet. The long-term portion of these financial derivative
instruments, or $44.4 million, is included in "Other assets." The fair values of
the derivative instruments, depending on the type of instrument, were determined
by 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, 2002, prices would correspondingly change the fair
value of the commodity derivative instruments in place by approximately $135
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, 2002 levels, except underlying futures prices.
25
<PAGE>
Financial market risk. 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" 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 fact that the Company
may prepay this debt on any of the semi-annual principal and interest payment
dates. See Note 6 and Note 7 to the Consolidated Financial Statements for more
information on the material terms of the Company's short-term and long-term
debt.
As disclosed in Note 7 to the Consolidated Financial Statements, the Company had
outstanding senior unsecured notes totaling $785 million at December 31, 2002.
In addition, as disclosed in Note 7, the Company had outstanding long-term
fixed-rate debt totaling $585.7 million 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 11.7 percent of total noncurrent
assets at December 31, 2002. The unsecured long-term debt currently has a
weighted-average maturity of 8.2 years at fixed rates averaging 7.3 percent at
December 31, 2002, which is comparable to average rates prevailing for similar
debt instruments over the last ten years. The Certificates bear interest at a
combined weighted-average rate of 5.5 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 $1.82 billion at December
31, 2002. The Company invests available cash in certificates of deposit, highly
rated money markets, 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 market interest rate risk management activities.
A hypothetical ten percent change in market interest rates as of December 31,
2002, 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, 2002, were held constant throughout a 12-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 $1.3
million. Using these assumptions and considering the Company's cash balance and
floating-rate debt outstanding at December 31, 2002, an increase in rates would
have a net positive effect on the Company's earnings and cash flows, while a
decrease in rates would have a net negative effect on the Company's earnings and
cash flows. 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.
The Company is also subject to various types of liquidity and financing risk
included in agreements with financial institutions that process credit card
transactions on behalf of the Company, the Company's revolving credit facility,
and outstanding debt agreements. Such risks included the
26
<PAGE>
Company maintaining minimum credit ratings, the Company's assets (for secured
debt) maintaining minimum fair values, and the Company achieving minimum
covenant ratios with regard to its available or outstanding debt agreements. The
Company met or exceeded the minimum standards set forth in these agreements as
of December 31, 2002. However, if conditions change and the Company failed to
meet the minimum standards set forth in the agreements, it could reduce the
availability of cash under the agreements or increase the costs to keep the
agreements intact as written.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
(In thousands, except per share amounts) 2002 2001
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,815,352 $ 2,279,861
Accounts and other receivables 174,393 71,283
Inventories of parts and supplies, at cost 86,016 70,561
Deferred income taxes - 46,400
Fuel hedge contracts 112,847 -
Prepaid expenses and other current assets 43,352 52,114
----------- -----------
Total current assets 2,231,960 2,520,219
Property and equipment, at cost:
Flight equipment 8,024,719 7,534,119
Ground property and equipment 1,041,844 899,421
Deposits on flight equipment purchase contracts 389,094 468,154
----------- -----------
9,455,657 8,901,694
Less allowance for depreciation 2,810,193 2,456,207
----------- -----------
6,645,464 6,445,487
Other assets 76,326 31,435
----------- -----------
$ 8,953,750 $ 8,997,141
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 362,027 $ 504,831
Accrued liabilities 529,109 547,540
Air traffic liability 412,238 450,407
Aircraft purchase obligations - 221,840
Short-term borrowings - 475,000
Current maturities of long-term debt 130,454 39,567
----------- -----------
Total current liabilities 1,433,828 2,239,185
Long-term debt less current maturities 1,552,781 1,327,158
Deferred income taxes 1,227,475 1,058,143
Deferred gains from sale and leaseback of aircraft 183,797 192,342
Other deferred liabilities 134,252 166,260
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value: 2,000,000 shares authorized;
776,663 and 766,774 shares issued in 2002
and 2001, respectively 776,663 766,774
Capital in excess of par value 135,848 50,409
Retained earnings 3,455,448 3,228,408
Accumulated other comprehensive income (loss) 53,658 (31,538)
----------- -----------
Total stockholders' equity 4,421,617 4,014,053
----------- -----------
$ 8,953,750 $ 8,997,141
=========== ===========
</TABLE>
See accompanying notes.
28
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
(In thousands, except per share amounts) 2002 2001 2000
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 5,341,349 $ 5,378,702 $ 5,467,965
Freight 84,675 91,270 110,742
Other 95,747 85,202 70,853
----------- ----------- -----------
Total operating revenues 5,521,771 5,555,174 5,649,560
OPERATING EXPENSES:
Salaries, wages, and benefits 1,992,485 1,856,288 1,683,689
Fuel and oil 762,096 770,515 804,426
Maintenance materials and repairs 390,216 397,505 378,470
Agency commissions 54,669 103,014 159,309
Aircraft rentals 186,992 192,110 196,328
Landing fees and other rentals 344,660 311,017 265,106
Depreciation 356,304 317,831 281,276
Other operating expenses 1,017,011 975,772 859,811
----------- ----------- -----------
Total operating expenses 5,104,433 4,924,052 4,628,415
----------- ----------- -----------
OPERATING INCOME 417,338 631,122 1,021,145
OTHER EXPENSES (INCOME):
Interest expense 106,023 69,827 69,889
Capitalized interest (16,720) (20,576) (27,551)
Interest income (36,964) (42,562) (40,072)
Other (gains) losses, net (27,683) (203,226) 1,515
----------- ----------- -----------
Total other expenses (income) 24,656 (196,537) 3,781
----------- ----------- -----------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 392,682 827,659 1,017,364
PROVISION FOR INCOME TAXES 151,713 316,512 392,140
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 240,969 511,147 625,224
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAXES - - (22,131)
----------- ----------- -----------
NET INCOME $ 240,969 $ 511,147 $ 603,093
=========== =========== ===========
NET INCOME PER SHARE, BASIC BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .31 $ .67 $ .84
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - (.03)
----------- ----------- -----------
NET INCOME PER SHARE, BASIC $ .31 $ .67 $ .81
=========== =========== ===========
NET INCOME PER SHARE, DILUTED BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .30 $ .63 $ .79
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - (.03)
----------- ----------- -----------
NET INCOME PER SHARE, DILUTED $ .30 $ .63 $ .76
=========== =========== ===========
</TABLE>
See accompanying notes.
29
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
-------------------------------------------------------------------------------------
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, 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 plans 2,892 6,667 (75,952) - 136,817 70,424
Tax benefit of options exercised - 61,677 - - - 61,677
Cash dividends, $.015 per share - - (10,988) - - (10,988)
Net income - - 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, $.018 per share - - (14,108) - - (14,108)
Comprehensive income (loss)
Net income - - 511,147 - - 511,147
Unrealized loss on derivative - - - (31,063) - (31,063)
instruments
Other - - - (475) - (475)
-----------
Total comprehensive income 479,609
-------------------------------------------------------------------------------------
Balance at December 31, 2001 766,774 50,409 3,228,408 (31,538) - 4,014,053
Issuance of common stock pursuant
to Employee stock plans 9,889 46,868 - - - 56,757
Tax benefit of options exercised - 38,571 - - - 38,571
Cash dividends, $.018 per share - - (13,929) - - (13,929)
Comprehensive income (loss)
Net income - - 240,969 - - 240,969
Unrealized gain on derivative - - - 87,213 - 87,213
instruments
Other - - - (2,017) - (2,017)
-----------
Total comprehensive income 326,165
-------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 776,663 $ 135,848 $ 3,455,448 $ 53,658 $ - $ 4,421,617
=====================================================================================
</TABLE>
See accompanying notes.
30
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
(In thousands) 2002 2001 2000
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 240,969 $ 511,147 $ 603,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 356,304 317,831 281,276
Deferred income taxes 169,629 207,922 153,447
Amortization of deferred gains on sale and
leaseback of aircraft (15,181) (15,180) (15,178)
Amortization of scheduled airframe inspections
and repairs 46,311 43,121 36,328
Income tax benefit from Employee stock
option exercises 38,571 53,691 61,677
Changes in certain assets and liabilities:
Accounts and other receivables (103,110) 66,787 (63,032)
Other current assets (10,159) (9,027) (24,657)
Accounts payable and accrued liabilities (148,850) 202,506 129,438
Air traffic liability (38,169) 73,346 120,119
Other (16,106) 32,464 15,775
----------- ----------- -----------
Net cash provided by operating activities 520,209 1,484,608 1,298,286
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (603,060) (997,843) (1,134,644)
----------- ----------- -----------
Net cash used in investing activities (603,060) (997,843) (1,134,644)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 385,000 614,250 -
Proceeds from revolving credit facility - 475,000 -
Proceeds from trust arrangement 119,142 266,053 -
Proceeds from Employee stock plans 56,757 43,541 70,424
Payments of long-term debt and capital
lease obligations (64,568) (110,600) (10,238)
Payments of trust arrangement (385,195) - -
Payment of revolving credit facility (475,000) - -
Payments of cash dividends (13,872) (13,440) (10,978)
Repurchases of common stock - - (108,674)
Other, net (3,922) (4,703) -
----------- ----------- -----------
Net cash provided by (used in) financing activities (381,658) 1,270,101 (59,466)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (464,509) 1,756,866 104,176
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,279,861 522,995 418,819
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,815,352 $ 2,279,861 $ 522,995
=========== =========== ===========
CASH PAYMENTS FOR:
Interest, net of amount capitalized $ 79,998 $ 47,682 $ 36,946
Income taxes $ 2,693 $ 65,905 $ 150,000
</TABLE>
See accompanying notes.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides predominantly 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 (GAAP) 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.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit,
money market funds, 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 once the asset is
placed in service. Property under capital leases and related obligations are
recorded at an amount equal to the present value of future minimum lease
payments computed on the basis of the Company's incremental borrowing rate or,
when known, the interest rate implicit in the lease. Amortization of property
under capital leases is on a straight-line basis over the lease term and is
included in depreciation expense.
In estimating the lives and expected residual values of its aircraft, the
Company has primarily relied upon actual experience with the same or similar
aircraft types and recommendations from Boeing, the manufacturer of the
Company's aircraft. Subsequent revisions to these estimates, which can be
significant, could be caused by changes to the Company's maintenance program,
changes in utilization of the aircraft (actual flight hours or cycles during a
given period of time), governmental regulations on aging aircraft, changing
market prices of new and used aircraft of the same or similar types, etc. The
Company evaluates its estimates and assumptions each reporting period and, when
warranted, adjusts these estimates and assumptions. Generally, these adjustments
are accounted for on a prospective basis through depreciation expense, as
required by GAAP.
The Company periodically evaluates its long-lived assets used in operations for
impairment. Impairment losses would be recorded when events and circumstances
indicate that an asset might be impaired and the undiscounted cash flows to be
generated by that asset are less than the carrying amounts of the asset. Factors
that would indicate potential impairment include, but are not limited to,
significant decreases in the market value of the long-lived asset(s), a
significant change in the long-lived asset's physical condition, operating or
cash flow losses associated with the use of the long-lived asset, etc. While the
airline industry as a whole has experienced many of these indicators, Southwest
has continued to operate all of its aircraft and continues to experience
positive cash flow.
32
<PAGE>
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.
In 2001, the American Institute of Certified Public Accountants (AICPA) issued a
Proposed Statement of Position entitled "Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment" (Proposed SOP). The
Proposed SOP, as originally written, would require that all "D" checks be
expensed as incurred. In fourth quarter 2002, the AICPA announced it would be
transitioning this project to the Financial Accounting Standards Board (FASB),
although the AICPA may retain and address certain components of the Proposed
SOP. The FASB and the AICPA have not determined which components, if any, will
be retained by the AICPA for potential issuance in a future SOP. In addition,
the FASB has not set a timetable for addressing the issues raised by the
proposed SOP.
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 and exchanges of tickets sold for past travel dates.
The majority of the Company's tickets sold are nonrefundable. Tickets that are
sold but not flown on the travel date can be reused for another flight, up to a
year from the date of sale, or refunded (if the ticket is refundable). A small
percentage of tickets (or partial tickets) expire unused. The Company estimates
the amount of future refunds, exchanges, and forfeitures for all unused tickets
once the flight date has passed. These estimates are based on historical
experience over many years. The Company and members of the airline industry have
consistently applied this accounting method to estimate revenue from forfeited
tickets at the date travel is provided. Estimated future refunds and exchanges
included in the air traffic liability account are constantly evaluated based on
subsequent refund and exchange activity to validate the accuracy of the
Company's revenue recognition method with respect to forfeited tickets.
Events and circumstances outside of historical fare sale activity or historical
Customer travel patterns can result in actual refunds, exchanges or forfeited
tickets differing significantly from estimates; however, these differences have
historically not been material. Additional factors that may affect estimated
refunds include, but may not be limited to, the Company's refund and exchange
policy, the mix of refundable and nonrefundable 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 exchange activity may
vary from estimated amounts.
Subsequent to third quarter 2001 and through second quarter 2002, the Company
experienced a higher than usual mix of low-fare, nonrefundable ticket sales. The
Company also experienced changes in Customer travel patterns resulting from
various factors including new airport security measures, concerns about further
terrorist attacks, and an uncertain economy. Consequently, the Company recorded
$36 million in additional passenger revenue in second quarter 2002 as Customers
required fewer refunds and exchanges, resulting in more forfeited tickets.
While actual results may vary from these estimates, the Company believes it is
unlikely that materially different estimates for future refunds, exchanges, and
forfeited tickets would be reported based on other reasonable assumptions or
conditions suggested by actual historical experience and other data available at
the time estimates were made.
33
<PAGE>
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 frequent flyer credits and related services to
companies participating in its Rapid Rewards frequent flyer program. Funds
received from the sale of flight segment credits and associated with future
travel are deferred and recognized as Passenger revenue when the ultimate free
travel awards are flown or the credits expire unused. See Note 2 for additional
information on frequent flyer program accounting.
ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 2002, 2001, and 2000 was
$156.4 million, $147.6 million, and $141.3 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION The Company has stock-based compensation plans
covering the majority of its Employee groups, including a plan covering the
Company's Board of Directors and plans related to employment contracts with
certain Executive Officers of the Company. The Company accounts for stock-based
compensation utilizing the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees" and related Interpretations. Accordingly, no
compensation expense is recognized for fixed option plans because the exercise
prices of Employee stock options equal or exceed the market prices of the
underlying stock on the dates of grant. Compensation expense for other stock
options is not material.
The following table represents the effect on net income and earnings per share
if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", to stock-based Employee compensation:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(In thousands except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $ 240,969 $ 511,147 $ 603,093
Add: Stock-based Employee compensation
expense included in reported income,
net of related tax effects 399 402 339
Deduct: Total stock-based Employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects (53,489) (25,603) (19,725)
--------- ---------- ---------
Pro forma net income $ 187,879 $ 485,946 $ 583,707
========= ========== =========
Net income per share
Basic, as reported $ .31 $ .67 $ .81
Basic, pro forma $ .24 $ .64 $ .78
Diluted, as reported $ .30 $ .63 $ .76
Diluted, pro forma $ .23 $ .61 $ .74
</TABLE>
34
<PAGE>
As required, the pro forma disclosures above include 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. 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. See Note 12 for further discussion of
the Company's stock-based Employee compensation.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS No. 148 amends the transition and
disclosure provisions of SFAS No. 123. The Company is currently evaluating SFAS
No. 148 to determine if it will adopt SFAS No. 123 to account for Employee stock
options using the fair value method and, if so, when to begin transition to that
method.
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 and oil"
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.
Since the majority of the Company's financial derivative instruments are not
traded on a market exchange, the Company estimates their fair values. Depending
on the type of instrument, the values are 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. Also, since there is not a
reliable forward market for jet fuel, the Company must estimate the future
prices of jet fuel in order to measure the effectiveness of the hedging
instruments in offsetting changes to those prices, as required by SFAS 133.
Forward jet fuel prices are estimated through the observation of similar
commodity futures prices (such as crude oil and heating oil) and adjusted based
on historical variations to those like commodities.
RECENT ACCOUNTING DEVELOPMENTS In November 2002 the Financial Accounting
Standards Board (FASB) issued Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which disclosures are effective for financial
statements issued after December 15, 2002. While the Company has various
guarantees included in contracts in the normal course of business, primarily in
the form of indemnities, these guarantees would only result in immaterial
increases in future costs, but do not represent significant commitments or
contingent liabilities of the indebtedness of others.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46) which requires the consolidation of variable
interest entities, as defined. FIN 46 is applicable to financial statements to
be issued by the Company after 2002; however, disclosures are required currently
if the Company expects to consolidate any variable interest entities. The
Company does not currently believe that any material entities will be
consolidated with Southwest as a result of FIN 46.
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 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
35
<PAGE>
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 analyses that
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 Accumulated other comprehensive income
(loss). During 2002 and 2001, the Company recognized $4.5 million in additional
income, and $8.2 million in expense, respectively, in "Other (gains) losses,
net", related to the ineffectiveness of its hedges. During 2002 and 2001, the
Company recognized approximately $25.6 million and $17.5 million, respectively,
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.
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.
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. The Company resumed flight activity on September 14, 2001, 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 (Air Stabilization Act). The Air
Stabilization Act provided 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 Air Stabilization Act, from September 11, 2001 through
December 31, 2001, associated with the terrorist attacks. Each airline's total
eligible grant was determined based on that airline's
36
<PAGE>
percentage of available seat miles (ASMs) during August 2001 to total eligible
carriers' ASMs for August 2001, less an amount set aside for eligible carriers
for whom the use of an ASM formula would result in an insufficient
representation of their share of direct and incremental losses.
In 2001, the Department of Transportation (DOT) made a final determination of
the amount of eligible direct and incremental losses incurred by Southwest, and
the Company was allotted 100 percent of its eligible grants, totaling $283
million. The Company recognized $235 million in "Other gains" from grants under
the Air Stabilization Act during the second half of 2001 and recognized an
additional $48 million as "Other gains" from grants under the Air Stabilization
Act in third quarter 2002 coincident with the receipt of its final payment.
Representatives of the DOT or other governmental agencies may perform additional
audit and/or review(s) of the Company's previously submitted final application.
While the Air Stabilization Act is subject to significant interpretation as to
what constitutes direct and incremental losses, management believes the
Company's eligible direct and incremental losses are sufficient to retain 100
percent of its eligible grant following additional audits or reviews, should
they occur.
The Company recorded total special charges of $48 million in 2001 arising from
the terrorist attacks, which included a $30 million reduction in "Passenger
revenue." Following the terrorist events of September 11, 2001, and the
subsequent temporary shutdown of U.S. air space, Southwest temporarily suspended
its normal refund policy in order to provide the highest Service to the
Company's Customers, including refunding nonrefundable tickets upon Customer
request. As a result, the Company's refunds during September 2001 and through
December 2001 were far above historical refund levels and in excess of the
Company's contractual obligations. Refunds are recorded as a reduction in "Air
traffic liability." Based on these unusually high refunds, the Company estimated
that approximately $30 million of these refunds related to revenue previously
recognized for estimated forfeited tickets. As a result, the Company reduced
third quarter 2001 "Passenger revenue" by $30 million and restored "Air traffic
liability" accordingly. Total special charges also included $13 million in
"Other operating expenses", primarily related to write-downs of various assets
due to impairment. Other miscellaneous charges totaling approximately $5 million
were also included in "Other (gains) losses, net."
4. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions from Boeing. The Company has contractual purchase
commitments with Boeing for 17 737-700 aircraft deliveries in 2003, 23 scheduled
for delivery in 2004, 24 in 2005, 22 in 2006, 25 in 2007, and 6 in 2008. In
addition, the Company has options to purchase up to 79 737-700s 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. As of
Feburary 1, 2003, aggregate funding needed for firm commitments is
approximately $3.2 billion, subject to adjustments for inflation, due as
follows: $597 million in 2003, $676 million in 2004, $719 million in 2005, $632
million in 2006, $508 million in 2007, and $105 million thereafter.
In November 2001, in response to decreased demand for air travel following the
terrorist attacks, the Company modified its schedule for future aircraft
deliveries to defer the acquisition of 19 new 737-700 aircraft that were either
already in production at Boeing or were scheduled to be built through April
2002. The Company accomplished this by entering into a trust arrangement with a
special purpose entity (the Trust) and assigned its purchase agreement with
Boeing to the Trust with respect to the 19 aircraft originally scheduled for
delivery between September 2001 and April 2002. Southwest subsequently entered
into a
37
<PAGE>
purchase agreement with the Trust to purchase the aircraft at new delivery dates
from January 2002 to April 2003. The Trust was formed primarily to facilitate
the financing of the Company's near-term aircraft purchase obligations with
Boeing. The Trust purchased 11 of the aircraft in 2001 and eight aircraft in
2002. For these 19 Trust aircraft, the Company recorded the associated assets
("Flight equipment") and liabilities ("Aircraft purchase obligations") in its
financial statements as the aircraft were completed by Boeing and delivered to
the Trust. In the Consolidated Statement of Cash Flows, the Trust's receipt of
these aircraft was recorded as "Purchases of property and equipment" and
"Proceeds from trust arrangement." During 2002, the Company accelerated the
deliveries from the Trust and accepted delivery of all 19 aircraft, thereby
terminating the Trust. The receipt of the aircraft from the Trust was reflected
in the Consolidated Statement of Cash Flows as "Payments of trust arrangement".
The cost of financing these aircraft obligations, approximately $5 million, was
expensed.
5. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------
<S> <C> <C>
Retirement plans (Note 13) $ 71,233 $ 147,110
Aircraft rentals 120,856 120,554
Vacation pay 95,664 83,105
Advances and deposits 80,458 4,557
Other 160,898 192,214
---------- ----------
$ 529,109 $ 547,540
========== ==========
</TABLE>
6. SHORT-TERM BORROWINGS
Following the terrorist attacks 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 bore interest at six-month LIBOR plus
15.5 basis points. The Company repaid this unsecured revolving credit line in
full, plus accrued interest, in March 2002. The $475 million borrowing was
classified as a current liability in the Consolidated Balance Sheet at December
31, 2001. There were no outstanding borrowings under this credit facility at
December 31, 2000. This credit facility was replaced in April 2002.
In April 2002, the Company entered into new unsecured revolving credit facility
agreements from which it can borrow up to $575 million from a group of banks.
One-half of the facility is short term and expires on April 23, 2003 if not
drawn before that date. The other one-half expires on April 23, 2005. The
Company expects that it will be able to renew the expiring 365-day facility for
an additional 365-day period at reasonable terms. If the Company is unable to
renew, the Company's available credit facility will be reduced. The effective
borrowing rate of the credit facility would vary depending on factors in place
at the time funds were drawn, as defined in the agreements.
38
<PAGE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(In thousands) 2002 2001
- ------------------------------------------------------------
<S> <C> <C>
8 3/4% Notes due 2003 $ 100,000 $ 100,000
Aircraft Secured Notes due 2004 175,000 200,000
8% Notes due 2005 100,000 100,000
Pass Through Certificates 585,661 614,250
7 7/8% Notes due 2007 100,000 100,000
French Credit Agreements 50,024 52,310
6 1/2% Notes due 2012 385,000 -
7 3/8% Debentures due 2027 100,000 100,000
Capital leases (Note 8) 100,563 109,268
----------- ----------
1,696,248 1,375,828
Less current maturities 130,454 39,567
Less debt discount and issue costs 13,013 9,103
=========== ==========
$ 1,552,781 $1,327,158
=========== ==========
</TABLE>
On March 1, 2002, the Company issued $385 million senior unsecured Notes (Notes)
due March 1, 2012. The Notes bear interest at 6.5 percent, payable semi-annually
beginning on September 1, 2002. Southwest used the net proceeds from the
issuance of the Notes, approximately $380.2 million, for general corporate
purposes, including the repayment of the Company's credit facility in March
2002. See Note 6.
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. The
Company prepaid $25 million of the Notes during 2002.
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.
39
<PAGE>
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 transactions.
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 $926.1 million at
December 31, 2002.
As of December 31, 2002, aggregate annual principal maturities (not including
interest on capital leases) for the five-year period ending December 31, 2007
were $130 million in 2003, $207 million in 2004, $142 million in 2005, $542
million in 2006, $114 million in 2007, and $561 million thereafter.
8. LEASES
The Company had seven aircraft classified as capital leases at December 31,
2002. The amounts applicable to these aircraft included in property and
equipment were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(In thousands) 2002 2001
- ------------------------------------------------------------------------------
<S> <C> <C>
Flight equipment $ 165,467 $ 165,085
Less accumulated depreciation 106,876 99,801
------------ ------------
$ 58,591 $ 65,284
============ ============
</TABLE>
Total rental expense for operating leases charged to operations in 2002, 2001,
and 2000 was $371.4 million, $358.6 million, and $330.7 million, respectively.
The majority of the Company's terminal operations space, as well as 90
aircraft, were under operating leases at December 31, 2002. Future minimum
lease payments under capital leases and noncancelable operating leases with
initial or remaining terms in excess of one year at December 31, 2002, were:
40
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
OPERATING
(In thousands) CAPITAL LEASES LEASES
- --------------------------------------------------------------------------------------------
<S> <C> <C>
2003 $ 17,751 $ 281,042
2004 17,651 263,343
2005 23,509 233,028
2006 13,379 189,498
2007 13,379 175,905
After 2007 52,016 1,459,961
------------- -------------
Total minimum lease payments 137,685 $ 2,602,777
=============
Less amount representing interest 37,122
-------------
Present value of minimum
lease payments 100,563
Less current portion 9,657
-------------
Long-term portion $ 90,906
=============
</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 2002, 2001, and 2000 represented approximately 14.9, 15.6 percent,
and 17.4 percent of Southwest's operating expenses, respectively. The Company
endeavors to acquire jet fuel at the lowest possible cost. 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. As of January 22, 2003, the Company had a mixture of purchased call
options, collar structures, and fixed price swap agreements in place to hedge
approximately 83 percent of its 2003 total anticipated jet fuel requirements,
approximately 80 percent of its 2004 total anticipated jet fuel requirements,
and portions of its 2005-2008 total anticipated jet fuel requirements. As of
December 31, 2002, the majority of the Company's first quarter 2003 hedges are
effectively heating oil-based positions in the form of option contracts. The
majority of the remaining hedge positions are crude oil-based positions.
During 2002, 2001, and 2000, the Company recognized gains in "Fuel and oil"
expense of $44.5 million, $79.9 million, and $113.5 million, respectively, from
hedging activities. At December 31, 2002 and 2001, approximately $13.1 million
and $8.2 million, respectively, due from third parties from expired derivative
contracts, is 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,
41
<PAGE>
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, 2002, was a net asset of approximately $157.2 million. The
current portion of these financial derivative instruments is classified as
"Fuel hedge contracts" and the long-term portion is classified as "Other
assets" 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, 2002, the Company had approximately $56.2 million in
unrealized gains, net of tax, in "Accumulated other comprehensive income
(loss)" related to fuel hedges. Included in this total are approximately $49.4
million in net unrealized gains that are expected to be realized in earnings
during 2003.
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, 2002, the Company had
agreements with seven 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 ratings fall below
certain levels. 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, 2002 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
ESTIMATED FAIR
(In thousands) CARRYING VALUE VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C>
8 3/4% Notes due 2003 $ 100,000 $ 104,380
Aircraft Secured Notes due 2004 175,000 175,000
8% Notes due 2005 100,000 109,222
Pass Through Certificates 585,661 603,953
7 7/8% Notes due 2007 100,000 112,872
French Credit Agreements 50,024 50,024
6 1/2% Notes due 2012 385,000 402,213
7 3/8% Debentures due 2027 100,000 104,446
</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.
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 $326.2
million and $479.6 million for 2002 and 2001, respectively. The differences
between Net income and Comprehensive income for 2002 and 2001 are as follows:
42
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $ 240,969 $ 511,147
Unrealized gain (loss) on derivative
instruments, net of deferred taxes of
$56,338 and ($20,719) 87,213 (31,063)
Other, net of deferred taxes of ($1,302) and ($320) (2,017) (475)
-------- ---------
Total other comprehensive income 85,196 (31,538)
--------- ---------
COMPREHENSIVE INCOME $ 326,165 $ 479,609
========= =========
</TABLE>
A rollforward of the amounts included in "Accumulated other comprehensive
income (loss)", net of taxes for 2002 and 2001, 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)
2002 changes in fair value 109,571 (2,017) 107,554
Reclassification to earnings (22,358) - (22,358)
--------- -------- ---------
Balance at December 31, 2002 $ 56,150 $ (2,492) $ 53,658
========= ======== =========
</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, 2002, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (218 million shares authorized of
which 57.8 million shares have not yet been granted) and upon exercise of
rights (474.0 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. The Agreement is not applicable to a fully-financed or cash tender
offer for all of the Company's shares of common stock, which remains
43
<PAGE>
open for at least 60 calendar days, is at a price equal to the higher of (a)
65% over the average closing price of the common stock during the 90 days
preceding the offer and (b) the highest closing price during the 52 weeks
preceding the offer, and is accompanied by a written fairness opinion of a
nationally recognized investment banking firm. If the Company is acquired, as
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, 2005.
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 this stock split.
In 1999, the Company's Board of Directors authorized the repurchase of up to
$250 million of its outstanding common stock. This program resulted in the
repurchase of 18.3 million shares at an average cost of $10.85 per share
between October 1999 and December 2000. All of these acquired shares were
subsequently reissued under Employee stock plans. No shares were repurchased in
2002 or 2001.
12. STOCK PLANS
The Company has stock plans covering Employees subject to collective bargaining
agreements (collective bargaining plans) and stock plans covering Employees not
subject to collective bargaining agreements (other Employee plans.) None of the
collective bargaining plans were required to be approved by shareholders.
Options granted to Employees under collective bargaining plans are granted at
or above the fair market value of the Company's common stock on the date of
grant, generally have terms ranging from six to twelve years, and vest
primarily in accordance with the period covered by the respective collective
bargaining agreement. Neither Executive Officers nor members of the Company's
Board of Directors are eligible to participate in any of these collective
bargaining plans. Options granted to Employees through other Employee plans are
granted at the fair market value of the Company's common stock on the date of
grant, have ten-year terms and vest and become fully exercisable over three,
five, or ten years of continued employment, depending upon the grant type. All
of these other Employee plans have been approved by shareholders except the
plan covering non-management, non-contract Employees, which had 6.8 million
options outstanding to purchase the Company's common stock and an additional
2.0 million shares available to grant as of December 31, 2002.
Aggregated information regarding the Company's fixed stock option plans, as
adjusted for stock splits, is summarized below:
44
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
COLLECTIVE BARGAINING PLANS OTHER EMPLOYEE PLANS
---------------------------------- -------------------------------------
(In thousands, except exercise prices) OPTIONS AVERAGE EXERCISE PRICE OPTIONS AVERAGE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Granted 48,414 13.37 4,423 16.90
Exercised (4,211) 4.48 (3,805) 5.75
Surrendered (733) 8.69 (1,317) 12.48
------- ------
Outstanding December 31, 2002 104,020 $ 9.51 34,152 $ 11.47
======= ======
Exercisable December 31, 2002 52,733 $ 6.77 12,924 $ 11.33
Available for granting in future periods 39,850 17,982
</TABLE>
The following table summarizes information about stock options outstanding
under the fixed option plans at December 31, 2002:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- -------------------------------------
WTD-AVERAGE
OPTIONS OUTSTANDING REMAINING WTD-AVERAGE OPTIONS EXERCISABLE WTD-AVERAGE
RANGE OF EXERCISE PRICES AT 12/31/02 (000's) CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/02 (000's) EXERCISE PRICE
- ----------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.30 to $ 4.99 50,811 3.9 yrs $ 4.05 38,717 $ 4.01
$ 5.11 to $ 7.41 3,341 3.0 yrs 5.85 2,586 5.91
$ 7.86 to $11.73 14,247 5.9 yrs 9.84 6,548 9.94
$12.11 to $18.07 61,369 8.4 yrs 13.85 14,738 14.01
$18.26 to $23.94 8,404 7.2 yrs 19.65 3,068 19.91
-------- -------
$ 3.30 to $23.94 138,172 6.3 yrs $ 9.99 65,657 $ 7.67
======== =======
</TABLE>
Under the amended 1991 Employee Stock Purchase Plan (ESPP), which has been
approved by shareholders, as of December 31, 2002, the Company is authorized to
issue up to a remaining balance of 6.5 million shares of common stock to
Employees of the Company. These shares may be issued 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 1.4 million shares in 2002, 1.0 million shares in 2001, and
1.0 million shares in 2000 at average prices of $14.70, $16.42, and $13.34,
respectively. The weighted-average fair value of each purchase right under the
ESPP granted in 2002, 2001, and 2000, which is equal to the ten percent
discount from the market value of the common stock at the end of each purchase
period, was $1.63, $1.82, and $1.48, respectively.
Pro forma information regarding net income and net income per share, as
disclosed in Note 1, has been determined as if the Company had accounted for
its Employee stock-based compensation plans and other stock options under the
fair value method of SFAS 123. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants under the fixed option
plans:
45
<PAGE>
<TABLE>
<CAPTION>
---- ---- ----
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Wtd-average risk-free interest rate 3.4% 4.5% 5.0%
Expected life of option (years) 5.0 5.9 6.0
Expected stock volatility 34.0% 34.8% 34.9%
Expected dividend yield 0.13% 0.07% 0.10%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of short-term traded options that 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 2002
ranged from $3.54 to $8.52. 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.
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
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 2002, 2001, and 2000
were $155.6 million, $214.6 million, and $241.5 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, 2002 and 2001, are as
follows:
46
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(In thousands) 2002 2001
- ---------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated depreciation $ 1,440,565 $ 1,246,009
Scheduled airframe maintenance 70,843 89,292
Other 25,854 31,770
----------- -----------
Total deferred tax liabilities 1,537,262 1,367,071
DEFERRED TAX ASSETS:
Deferred gains from sale and
leaseback of aircraft 95,823 101,755
Capital and operating leases 77,033 76,990
Accrued employee benefits 86,227 83,450
State taxes 43,151 37,715
Other 1,722 55,418
----------- -----------
Total deferred tax assets 303,956 355,328
----------- -----------
Net deferred tax liability $ 1,233,306 $ 1,011,743
=========== ===========
</TABLE>
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(In thousands) 2002 2001 2000
- ------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $ (19,018) $ 98,378 $ 197,875
State 1,102 10,212 26,671
--------- --------- ---------
Total current (17,916) 108,590 224,546
DEFERRED:
Federal 156,545 187,296 151,694
State 13,084 20,626 15,900
--------- --------- ---------
Total deferred 169,629 207,922 167,594
--------- --------- ---------
$ 151,713 $ 316,512 $ 392,140
========= ========= =========
</TABLE>
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) 2002 2001 2000
- -------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory
U.S. tax rates $ 137,439 $ 289,681 $ 356,077
Nondeductible items 6,418 7,318 6,801
State income taxes,
net of federal benefit 9,221 20,045 27,671
Other, net (1,365) (532) 1,591
--------- --------- ---------
Total income
tax provision $ 151,713 $ 316,512 $ 392,140
========= ========= =========
</TABLE>
47
<PAGE>
At December 31, 2002, Southwest Airlines Co. had an estimated tax net operating
loss of $145 million for federal income tax purposes. The Company estimates that
a federal tax refund of $51 million will be realized as a result of utilizing
this net operating loss as a carryback to prior taxable years. The Company has
included this refund in "Accounts and other receivables" in the Consolidated
Balance Sheet at December 31, 2002.
The Internal Revenue Service (IRS) regularly examines the Company's federal
income tax returns and, in the course of which, may propose adjustments to the
Company's federal income tax liability reported on such returns. It is the
Company's practice to vigorously contest those proposed adjustments that it
deems lacking of merit. The Company's management does not expect that the
outcome of any proposed adjustments presented to date by the IRS, individually
or collectively, will have a material adverse effect on the Company's financial
condition, results of operations, or cash flows.
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) 2002 2001 2000
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income before cumulative effect
of change in accounting principle $ 240,969 $ 511,147 $ 625,224
Cumulative effect of change in
accounting principle - - (22,131)
----------- ------------- ------------
Net income $ 240,969 $ 511,147 $ 603,093
=========== ============= ============
Weighted-average shares
outstanding, basic 772,556 762,973 748,617
Dilutive effect of Employee
stock options 36,864 44,142 47,699
----------- ------------- ------------
Adjusted weighted-average
shares outstanding, diluted 809,420 807,115 796,316
=========== ============= ============
Net income per share, basic, before cumulative
effect of change in accounting principle $ .31 $ .67 $ .84
Cumulative effect of change
in accounting principle - - (.03)
----------- ------------- ------------
Net income per share, basic $ .31 $ .67 $ .81
=========== ============= ============
Net income per share, diluted, before cumulative
effect of change in accounting principle $ .30 $ .63 $ .79
Cumulative effect of change
in accounting principle - - (.03)
----------- ------------- ------------
Net income per share, diluted $ .30 $ .63 $ .76
=========== ============= ============
</TABLE>
The Company has excluded 11.0 million, 5.7 million, and 11.7 million shares from
its calculations of net income per share, diluted, in 2002, 2001, and 2000,
respectively, as they represent antidilutive stock options for the respective
periods presented.
48
<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, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, 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
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 21, 2003
49
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
2002 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $1,257,243 $1,472,798 $1,391,191 $1,400,539
Operating income 49,365 188,999 91,141 87,833
Income before income taxes 35,196 169,238 124,324 63,924
Net income 21,385 102,298 74,887 42,399
Net income per share, basic .03 .13 .10 .05
Net income per share, diluted .03 .13 .09 .05
2001 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
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>
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 14, 2003. See "Executive Officers of the Registrant" in Part I
following Item 4 for information relating to executive officers.
50
<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 14, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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 14, 2003.
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 14, 2003.
ITEM 14. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the SEC, and to process, summarize and disclose this information
within the time periods specified in the rules of the SEC. The Company's Chief
Executive and Chief Financial Officers are responsible for establishing and
maintaining these procedures, and, as required by the rules of the SEC, evaluate
their effectiveness. Based on their evaluation of the Company's disclosure
controls and procedures which took place as of a date within 90 days of the
filing date of this report, the Chief Executive and Chief Financial Officers
believe that these procedures are effective to ensure that the Company is able
to collect, process and disclose the information it is required to disclose in
the reports it files with the SEC within the required time periods.
INTERNAL CONTROLS
The Company maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. 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.
51
<PAGE>
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 3.1
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 3.1
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 2002 (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).
4.1 364-Day Competitive Advance and Revolving Credit Facility Agreement
dated as of April 23, 2002 and 3-Year Competitive Advance and
Revolving Credit Facility Agreement dated as of April 23, 2002
(incorporated by reference to Exhibits 10.2 and 10.1, respectively, to
Southwest's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (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
4.2 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.
52
<PAGE>
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)); Supplemental Agreements Nos.
20, 21, 22, 23 and 24 (incorporated by reference to Exhibit 10.3 to
Southwest's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (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.
10.2 Form of Executive Employment Agreement between Southwest and certain
key employees pursuant to Executive Service Recognition Plan
(incorporated by reference to Exhibit 28 to Southwest Quarterly Report
on Form 10-Q for the quarter ended June 30, 1987 (File No. 1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10.8 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.4 1996 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)).
10.5 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)).
10.6 1991 Incentive Stock Option Plan.
10.7 1991 Non-Qualified Stock Option Plan.
10.8 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. 33-40653)).
10.9 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 (incorporated by
reference to Exhibit 10.11 to
53
<PAGE>
Southwest's Annual Report on Form 10-K for the year ended December 31,
2001 (File No. 1-7259)); Amendment No. 2 to Southwest Airlines Co.
Profit Sharing Plan.
10.10 Southwest Airlines Co. 401(k) Plan (incorporated by reference to
Exhibit 10.12 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-7259)); Amendment No. 1 to
Southwest Airlines Co. 401(k) Plan; Amendment No. 2 to Southwest
Airlines Co. 401(k) Plan.
10.11 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)).
10.12 1996 Incentive Stock Option Plan.
10.13 1996 Non-Qualified Stock Option Plan.
10.14 Employment Agreement dated as of June 19, 2002 between Southwest and
James F. Parker (incorporated by reference to Exhibit 10.16 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
2001 (File No. 1-7259)).
10.15 Employment Agreement dated as of June 19, 2002 between Southwest and
Colleen C. Barrett (incorporated by reference to Exhibit 10.17 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
2000 (File No. 1-7259)).
10.16 Southwest Airlines Co. Outside Director Incentive Plan (incorporated
by reference to Exhibit 10.1 to Southwest's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 (File No. 1-7259)).
10.17 1998 SAEA Non-Qualified Stock Option Plan.
10.18 1999 SWAPIA Non-Qualified Stock Option Plan.
10.19 LUV 2000 Non-Qualified Stock Option Plan (incorporated by reference t
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-53610)).
10.20 2000 Aircraft Appearance Technicians Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.1 to Registration Statement on
Form S-8 (File No. 333-52388)).
10.21 2000 Stock Clerks Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8 (File
No. 333-52390)).
10.22 2000 Flight Simulator Technicians Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.1 to Registration Statement on
Form S-8 (File No. 333-53616)).
10.23 2002 SWAPA Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-98761)).
10.24 2002 Bonus SWAPA Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8 (File
No. 333-98761)).
10.25 2002 SWAPIA Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form S-8 (File No.
333-100862)).
54
<PAGE>
10.26 2002 Mechanics Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8 (File
No. 333-100862)).
10.27 2002 Ramp, Operations, Provisioning and Freight Non-Qualified Stock
Option Plan.
10.28 2002 Customer Service/Reservations Non-Qualified Stock Option Plan.
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.
99 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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) No reports on Form 8-K were filed during the fourth quarter of 2002.
55
<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, 2003
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, 2003 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
- -----------------------------
Gary C. Kelly (Chief Financial and Accounting Officer)
/s/ C. Webb Crockett Director
- -----------------------------
C. Webb Crockett
/s/ William H. Cunningham Director
- -----------------------------
William H. Cunningham
/s/ William P. Hobby Director
- -----------------------------
William P. Hobby
/s/ Travis C. Johnson Director
- -----------------------------
Travis C. Johnson
/s/ R.W. King Director
- -----------------------------
R. W. King
/s/ John T. Montford Director
- -----------------------------
John T. Montford
/s/ June M. Morris Director
- -----------------------------
June M. Morris
</TABLE>
56
<PAGE>
CERTIFICATIONS
I, Gary C. Kelly, Executive Vice President and Chief Financial Officer
of Southwest Airlines Co., certify that:
1. I have reviewed this annual report on Form 10-K of Southwest
Airlines Co.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly
57
<PAGE>
affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 5, 2003 /s/ Gary C. Kelly
-----------------------------------
Gary C. Kelly
Executive Vice President - Chief
Financial Officer
58
<PAGE>
CERTIFICATIONS
I, James F. Parker, Chief Executive Officer of Southwest Airlines Co.,
certify that:
1. I have reviewed this annual report on Form 10-K of Southwest
Airlines Co.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly
59
<PAGE>
affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 5, 2003 /s/ James F. Parker
-----------------------------
James F. Parker
Chief Executive Officer
60
<PAGE>
INDEX TO EXHIBITS
3.1 Restated Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.1 to Southwest's Registration Statement on
Form S-3 (File No. 33-52155)); Amendment to Restated Articles of
Incorporation of Southwest (incorporated by reference to Exhibit 3.1
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 3.1
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 2002 (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).
4.1 364-Day Competitive Advance and Revolving Credit Facility Agreement
dated as of April 23, 2002 and 3-Year Competitive Advance and
Revolving Credit Facility Agreement dated as of April 23, 2002
(incorporated by reference to Exhibits 10.2 and 10.1, respectively, to
Southwest's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (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
4.2 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
E-1
<PAGE>
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));
Supplemental Agreements Nos. 20, 21, 22, 23 and 24 (incorporated by
reference to Exhibit 10.3 to Southwest's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002 (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.
10.2 Form of Executive Employment Agreement between Southwest and certain
key employees pursuant to Executive Service Recognition Plan
(incorporated by reference to Exhibit 28 to Southwest Quarterly Report
on Form 10-Q for the quarter ended June 30, 1987 (File No. 1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10.8 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.4 1996 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)).
10.5 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)).
10.6 1991 Incentive Stock Option Plan.
10.7 1991 Non-Qualified Stock Option Plan.
10.8 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. 33-40653)).
10.9 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 (incorporated by reference
to Exhibit 10.11 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 2001 (File No. 1-7259)); Amendment No. 2 to
Southwest Airlines Co. Profit Sharing Plan.
10.10 Southwest Airlines Co. 401(k) Plan (incorporated by reference to
Exhibit 10.12 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-7259)); Amendment No. 1 to
Southwest Airlines Co. 401(k) Plan; Amendment No. 2 to Southwest
Airlines Co. 401(k) Plan.
E-2
<PAGE>
10.11 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)).
10.12 1996 Incentive Stock Option Plan.
10.13 1996 Non-Qualified Stock Option Plan.
10.14 Employment Agreement dated as of June 19, 2002 between Southwest and
James F. Parker (incorporated by reference to Exhibit 10.16 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
2001 (File No. 1-7259)).
10.15 Employment Agreement dated as of June 19, 2002 between Southwest and
Colleen C. Barrett (incorporated by reference to Exhibit 10.17 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
2000 (File No. 1-7259)).
10.16 Southwest Airlines Co. Outside Director Incentive Plan (incorporated
by reference to Exhibit 10.1 to Southwest's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 (File No. 1-7259)).
10.17 1998 SAEA Non-Qualified Stock Option Plan.
10.18 1999 SWAPIA Non-Qualified Stock Option Plan.
10.19 LUV 2000 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-53610)).
10.20 2000 Aircraft Appearance Technicians Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.1 to Registration Statement on
Form S-8 (File No. 333-52388)).
10.21 2000 Stock Clerks Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8 (File
No. 333-52390)).
10.22 2000 Flight Simulator Technicians Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.1 to Registration Statement
on Form S-8 (File No. 333-53616)).
10.23 2002 SWAPA Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-98761)).
10.24 2002 Bonus SWAPA Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8 (File
No. 333-98761)).
10.25 2002 SWAPIA Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form S-8 (File No.
333-100862)).
10.26 2002 Mechanics Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8 (File
No. 333-100862)).
10.27 2002 Ramp, Operations, Provisioning and Freight Non-Qualified Stock
Option Plan.
10.28 2002 Customer Service/Reservations Non-Qualified Stock Option Plan.
E-3
<PAGE>
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.
99 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
E-4
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>3
<FILENAME>d02829exv10w6.txt
<DESCRIPTION>1991 INCENTIVE STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.6
SOUTHWEST AIRLINES CO.
1991 INCENTIVE STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1991 Incentive Stock Option Plan (the
"Plan") for employees of the Company and its subsidiaries.
1. Purpose. The purpose of this Plan is to secure for the Company the
benefits of the additional incentive inherent in the ownership of its Common
Stock by selected key employees of the Company and its subsidiaries who are
important to the success and the growth of the Company and its subsidiaries, and
to help the Company and its subsidiaries secure and retain the services of such
key employees. The Plan shall be administered so as to qualify the options as
"incentive stock options" under Section 422A of the Internal Revenue Code.
2. Stock Option Committee. Subject to the provisions of paragraph 4,
this Plan shall be administered by a Stock Option Committee (the "Committee") of
the Board of Directors (the "Board") of the Company, to be appointed by at least
a majority of the whole Board of Directors. All members of the Committee shall
be "disinterested" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as such Rule is in effect on the date of adoption of this
Plan by the Board. The Committee shall select one of its members as Chairman and
shall adopt such rules and regulations as it shall deem appropriate concerning
the holding of its meetings and the transaction of its business. A majority of
the whole Committee shall constitute a quorum, and the act of a majority of the
members of the Committee present at a meeting at which a quorum is present shall
be the act of the Committee. Any member of the Committee may be removed at any
time either with or without cause by resolution adopted by the Board of
Directors of the Company; and any vacancy on the Committee may at any time be
filled by resolution adopted by the Board of Directors.
3. Grant of Options. The Committee shall have the authority and
responsibility, within the limitations of this Plan, to determine the key
employees to whom options are to be granted, the number of shares that may be
purchased under each option and the option price.
In determining the key employees to whom options shall be granted and
the number of shares to be covered by each such option, the Committee shall take
into consideration the employee's present and potential contribution to the
success of the Company and its subsidiaries and such other factors as the
Committee may deem proper and relevant.
4. Employees Eligible. Options may be granted under this Plan to any
key employee or prospective key employee (conditioned and effective upon his
becoming an employee) of the Company or its subsidiaries. Employees who are also
officers or directors of the Company or its subsidiaries shall not by reason of
such offices be ineligible to receive options under this Plan; provided,
however, that no director who is not also an employee of the Company or any of
its subsidiaries shall be eligible to receive options.
An Employee receiving any option under this Plan is hereinafter
referred to as an "Optionee." Any reference herein to the employment of an
Optionee with the Company shall include his employment with the Company or any
of its subsidiaries.
<PAGE>
5. Stock Subject to Options. Subject to the provisions of paragraph 13,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options granted under this Plan, shall not exceed 3,000,000. If, and to the
extent the options granted under this Plan terminate or expire without having
been exercised, new options may be granted with respect to the shares covered by
such terminated or expired options; provided that the granting and terms of such
new options shall in all respects comply with the provisions of this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted or that may be granted under this Plan.
6. Option Price. The option price of each share of Common Stock
purchasable under any option granted under this Plan shall be not less than the
fair market value thereof at the time the option is granted and shall be set
forth in the option agreement; provided, however, that the option price for any
share of Common Stock purchasable under an option granted to an individual
owning, at the time the option is granted, more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its
subsidiary corporations, shall be one hundred ten percent (110%) of the fair
market value thereof at the time the option is granted.
The fair market value of the Common Stock on any day shall be the mean
between the highest and lowest quoted selling prices of the Common Stock on such
day as reported by the primary national stock exchange on which such stock is
listed. If no sale shall have been made on that day, or if the Common Stock is
not listed on a national exchange at that time, fair market value will be
determined by the Committee.
7. Expiration and Termination of the Plan. Options may be granted under
this Plan at any time and from time to time, prior to ten years from the date of
adoption of this Plan, on which date this Plan will expire, except as to options
then outstanding under this Plan. Such options shall remain in effect until they
have been exercised or have expired. This Plan may be terminated or modified at
any time prior to December 31, 2000, by the Board of Directors except to the
extent prohibited by Section 422A of the Internal Revenue Code.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
8. Exercisability and Duration of Options. Options granted under this
Plan shall become exercisable after the lapse of such period or periods of time
or the occurrence of such event or events as the Committee, in its discretion,
may provide upon the granting thereof.
The unexercised portion of any option granted under this Plan shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
(a) The expiration of 10 years from the date on which such option was
granted; provided, however, that in the case of an Optionee owning, at the time
such option was granted, more than 10% of the
2
<PAGE>
total combined voting power of all classes of stock of the Company or its
subsidiaries, such expiration shall be as of 5 years from the date on which such
option was granted;
(b) The expiration of three months from the date of termination of the
Optionee's employment with the Company or any subsidiary; provided that if the
Optionee shall die during such 3-month period the provisions of subparagraph (c)
below shall apply;
(c) The expiration of 6 months following the issuance of letters
testamentary or letters of administration to the executor or administrator of a
deceased Optionee, if the Optionee's death occurs either during his employment
with the Company or during the 3-month period following the date of termination
of such employment, but not later than 1 year after the Optionee's death;
(d) The termination of the Optionee's employment with the Company for
cause, including breach by the Optionee of an employment agreement with the
Company or any of its subsidiaries or the Optionee's commission of a felony or
misdemeanor (whether or not prosecuted) against the Company or any of its
subsidiaries;
(e) The expiration of such period of time or the occurrence of such
event as the Committee in its discretion may provide upon the granting thereof.
9. Exercise of Options. The options granted hereunder shall be
exercised by the Optionee (or by the person who acquires such options by will or
the laws of descent and distribution or otherwise by reason of the death of the
Optionee) as to all or part of the shares covered by the option, by giving
written of the exercise thereof to the Company at its principal business office,
specifying the number of shares to be purchased, and specifying a business day
(the "exercise date") not less than 5 days nor more than 15 days from the date
such notice is given, for the payment of the purchase price against delivery of
the shares being purchased. In such notice, the Optionee shall elect whether he
or she is to pay for his or her shares in cash or in Common Stock of the
Company, or both, and if payment is to be made in Common Stock, it shall be
valued at its fair market value on the date of such notice, as determined by the
Committee. The giving of such written notice to the Company shall constitute an
irrevocable election to purchase the number of shares specified in the notice on
the date specified in the notice.
The Company shall cause certificates for shares to be delivered to the
Optionee (or the person exercising the Optionee's options in the event of death)
at its principal business office within 10 business days after the exercise
date.
10. Nontransferability of Options. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only he (or his or her guardian or legal representative) may exercise
his or her options.
In the event of the Optionee's death during his employment with the
Company, or during the 30-day period following the date of termination of such
employment, his options shall thereafter be exercisable, as provided in
paragraph 8(c), by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee.
11. Rights of Optionee. Neither the Optionee nor his executors or shall
have any of the rights of a shareholder of the Company with respect to the
shares subject to an option granted under this Plan until certificates for such
shares shall have been issued upon the exercise of such option.
3
<PAGE>
12. Right to Terminate Employment. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time,
subject, however, to the provisions of any agreement of employment between the
Company or any of its subsidiaries and the Optionee.
13. Adjustment Upon Changes in Capitalization, Etc.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any sale, lease, exchange or other disposition of all or any part
of its assets or business or any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of any option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased. In the event of any
such change in the outstanding Common Stock, the aggregate number of shares
available under the Plan may be appropriately adjusted by the Committee whose
determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. If the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or if the Company is to be
dissolved or liquidated, then unless a surviving corporation assumes or
substitutes new options for Options then outstanding hereunder, (i) the time at
which such Options may be exercised shall be accelerated and such Options shall
become exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or consolidation or such dissolution or
liquidation, and (ii) upon such effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class for property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or the purchase
price per share.
4
<PAGE>
14. Purchase for Investment and Legality. The Optionee, by acceptance
of any option granted under this Plan, shall represent and warrant to the
Company that the purchase or receipt of shares of Common Stock upon the exercise
thereof shall be for investment and not with a view to distribution, provided
that such representation and warranty shall be inoperative if, in the opinion of
counsel to the Company, a proposed sale or distribution of such shares is
pursuant to an applicable effective registration statement under the Securities
Act of 1933 or is, without such representation and warranty, exempt from
registration under such Act.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
15. Limitation on Amount of Options. In no event shall the aggregate
fair market value (determined as of the time an option is granted) of the stock
for which options are exercisable for the first time by any Optionee during any
calendar year, under all incentive stock option plans of the Company and its
subsidiaries, exceed $100,000. As used in this Section, the term "incentive
stock option plan" shall mean any plan qualifying as such under Internal Revenue
Code Section 422.
16. Effective Date of Plan. This Plan shall become effective upon its
adoption by the Board of Directors of the Company, subject, however, to its
approval by the Company's shareholders after the date of such adoption.
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>4
<FILENAME>d02829exv10w7.txt
<DESCRIPTION>1991 NON-QUALIFIED STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.7
SOUTHWEST AIRLINES CO.
1991 NON-QUALIFIED STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1991 Non-Qualified Stock Option Plan (the
"Plan") for employees and directors of the Company and its subsidiaries.
1. Purpose. The purpose of this Plan is to secure for the Company the
benefits of the additional incentive inherent in the ownership of its Common
Stock by selected key employees and directors of the Company and its
subsidiaries who are important to the success and the growth of the Company and
its subsidiaries, and to help the Company and its subsidiaries secure and retain
the services of such key employees and directors.
2. Stock Option Committee. Subject to the provisions of paragraph 4,
this Plan shall be administered by a Stock Option Committee (the "Committee") of
the Board of Directors (the "Board") of the Company, to be appointed by at least
a majority of the whole Board of Directors. All members of the Committee shall
be "disinterested" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as such Rule is in effect on the date of adoption of this
Plan by the Board. The Committee shall select one of its members as Chairman and
shall adopt such rules and regulations as it shall deem appropriate concerning
the holding of its meetings and the transaction of its business. A majority of
the whole Committee shall constitute a quorum, and the act of a majority of the
members of the Committee present at a meeting at which a quorum is present shall
be the act of the Committee. Any member of the Committee may be removed at any
time either with or without cause by resolution adopted by the Board of
Directors of the Company; and any vacancy on the Committee may at any time be
filled by resolution adopted by the Board of Directors.
3. Grant of Options. The Committee shall have the authority and
responsibility, within the limitations of this Plan, to determine the key
employees to whom options are to be granted, the number of shares that may be
purchased under each option and the option price.
In determining the key employees to whom options shall be granted and
the number of shares to be covered by each such option, the Committee shall take
into consideration the employee's present and potential contribution to the
success of the Company and its subsidiaries and such other factors as the
Committee may deem proper and relevant.
4. Persons Eligible.
(a) Options may be granted under this Plan to any key employee or
prospective key employee (conditioned and effective upon his becoming an
employee) of the Company or its subsidiaries. Employees who are also officers or
directors of the Company or its subsidiaries shall not by reason of such offices
be ineligible to receive options under this Plan.
(b) Each individual who is not an employee of the Company or its
subsidiaries, who is a director of the Company ("Outside Director") after
adoption of this Plan and who has not previously been granted options under
this, or any other stock option plan of the Company, shall, on the third
business day following the issuance of a press release by the Company containing
its 1990 earnings, shall, on such date, be granted an option to purchase 10,000
shares of the Common Stock (the "Base Grant"), plus 400 shares for each year,
<PAGE>
or part thereof, that such Outside Director has previously served as a director
of the Company, all at a price equal to 100% of the fair market value of the
Common Stock on such date. Each individual who becomes an Outside Director after
such date and who has not previously been granted options under this or any
other stock option plan of the Company shall, on the date of his or her election
to the Board of Directors of the Company, be granted an option to purchase
10,000 shares of the Common Stock (such grant is also referred to herein as the
"Base Grant"), at a price equal to 100 % of the fair market value of the Common
Stock on such date. No Outside Director to whom an option has been granted shall
be eligible to receive additional options under this Plan.
An employee or director receiving any option under this Plan is
hereinafter referred to as an "Optionee." Any reference herein to the employment
of an Optionee with the Company shall include employment with the Company or any
of its subsidiaries. The fair market value of the Common Stock on any day shall
be the mean between the highest and lowest quoted selling prices of the Common
Stock on such day as reported by the national stock exchange on which such stock
is listed. If no sale shall have been made on that day, or if the Common Stock
is not listed on a national exchange at that time, fair market value will be
determined by the Committee.
5. Stock Subject to Options. Subject to the provisions of paragraph 13,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options granted under this Plan, shall not exceed 250,000. If, and to the
extent the options granted under this Plan terminate or expire without having
been exercised, new options may be granted with respect to the shares covered by
such terminated or expired options; provided that the granting and terms of such
new options shall in all respects comply with the provisions of this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted or that may be granted under this Plan.
6. Option Price. The option price of each share of Common Stock
purchasable under any option granted under this Plan shall be not less than the
fair market value thereof at the time the option is granted and shall be set
forth in the option agreement.
7. Expiration and Termination of the Plan. Options may be granted under
this Plan at any time and from time to time, prior to December 31, 2001, on
which date this Plan will expire, except as to options then outstanding under
this Plan. Such options shall remain in effect until they have been exercised or
have expired. This Plan may be terminated or modified at any time prior to
December 31, 2001, by the Board of Directors except with respect to any options
then outstanding under this Plan; provided that any (a) increase in the maximum
number of shares subject to options, as specified in paragraph 5, (b) decrease
in the minimum option price specified in paragraph 6 or (c) change in the number
of and terms of options to be awarded to Outside Directors as specified in
paragraphs 4(b), 8 and 13 shall be subject to approval by the Company's
shareholders, unless made pursuant to the provisions of paragraph 13.
2
<PAGE>
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
8. Exercisability and Duration of Options.
(a) Exercisability. Options granted under this Plan to employees shall
become exercisable after the lapse of such period or periods of time or the
occurrence of such event or events as the Committee, in its discretion, may
provide upon the granting thereof. Any option granted under this Plan to an
Outside Director shall become exercisable as follows (or after the lapse of such
additional period or periods of time or the occurrence of such event or events
as the Committee, in its discretion, may provide upon the granting thereof):
(1) As to the Base Grant to an Outside Director, such options
may be exercised upon the following schedule:
<Table>
<Caption>
Time Elapsed since Grant Options First Exercisable
------------------------ -------------------------
<S> <C>
One Year 1,000
Two Years 1,500
Three Years 2,000
Four Years 2,500
Five Years 3,000
</Table>
After the expiration of five years following the date on which such
grant is made, such options may be exercised as to all of the shares covered
thereby.
(2) As to the additional options granted to an Outside
Director pursuant to paragraph 4(b) hereof, which are dependent on the number of
years which such Outside Director has served on the Board of Directors, such
options may be exercised as to all of the shares covered thereby at any time
after the grant thereof.
(b) Duration. The unexercised portion of any option granted under this
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) The expiration of 10 years from the date on which such
option was granted;
(2) The expiration of three months from the date of
termination of the Optionee's employment with the Company or any subsidiary (or
in the case of an Outside Director, three months from the date such Outside
Director ceases to serve as a member of the Board of Directors for any reason
other than death); provided that if the Optionee shall die during such 3-month
period the provisions of subparagraph (3) below shall apply;
(3) The expiration of 6 months following the issuance of
letters testamentary or letters of administration to the executor or
administrator of a deceased Optionee, if the Optionee's death occurs either
during his employment with the Company (or service as an Outside Director, as
the case may be) or during
3
<PAGE>
the 3-month period following the date of termination of such employment (or
service as an Outside Director, as the case may be), but not later than 1 year
after the Optionee's death;
(4) In the case of employee Optionees, the termination of the
Optionee's employment with the Company for cause, including breach by the
Optionee of an employment agreement with the Company or any of its subsidiaries
or the Optionee's commission of a felony or misdemeanor (whether or not
prosecuted) against the Company or any of its subsidiaries;
(5) In the case of employee Optionees, the expiration of such
period of time or the occurrence of such event as the Committee in its
discretion may provide upon the granting thereof.
9. Exercise of Options. The options granted hereunder shall be
exercised by the Optionee (or by the person who acquires such options by will or
the laws of descent and distribution or otherwise by reason of the death of the
Optionee) as to all or part of the shares covered by the option, by giving
written notice of the exercise thereof to the Company at its principal business
office, specifying the number of shares to be purchased, and specifying a
business day (the "exercise date") not less than 5 days nor more than 15 days
from the date such notice is given, for the payment of the purchase price
against delivery of the shares being purchased. In such notice, the Optionee
shall elect whether he or she is to pay for his or her shares in cash or in
Common Stock of the Company, or both and if payment is to be made in Common
Stock, it shall be valued at its fair market value on the date of such notice,
as determined by the Committee. The giving of such written notice to the Company
shall constitute an irrevocable election to purchase the number of shares
specified in the Notice on the date specified in the Notice.
The Company shall cause certificates for any shares to be delivered to
the Optionee (or the person exercising the Optionee's options in the event of
his death) at its principal business office within 10 business days after the
exercise date.
10. Nontransferability of Options. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only he (or his or her guardian or legal representative) may exercise
his options.
In the event of the Optionee's death during his employment with the
Company, or during the 30-day period following the date of termination of such
employment, his options shall thereafter be exercisable, as provided in
paragraph 8(b), by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee.
11. Rights of Optionee. Neither the Optionee nor his executors or
administrators shall have any of the rights of a shareholder of the Company with
respect to the shares subject to an option granted under this Plan until
certificates for such shares shall have been issued upon the exercise of such
option.
12. Right to Terminate Employment. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time,
subject, however, to the provisions of any agreement of employment between the
Company or any of its subsidiaries and the Optionee.
4
<PAGE>
13. Adjustment Upon Changes in Capitalization, Etc.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any sale, lease, exchange or other disposition of all or any part
of its assets or business or any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased. In the event of any
such change in the outstanding Common Stock, the aggregate number of shares
available under the Plan may be appropriately adjusted by the Committee whose
determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. If the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or if the Company is to be
dissolved or liquidated, then unless a surviving corporation assumes or
substitutes new options for Options then outstanding hereunder (i) the time at
which such Options may be exercised shall be accelerated and such Options shall
become exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or consolidation or such dissolution or
liquidation, and (ii) upon such effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or the purchase
price per share.
14. Purchase for Investment and Legality. The Optionee, by the
acceptance of any option granted under this Plan, shall represent and warrant to
the Company that the purchase or receipt of shares of Common Stock upon the
exercise thereof shall be for investment and not with a view to distribution,
provided that such representation and warranty shall be inoperative if, in the
opinion of counsel to the Company, a proposed sale or distribution of such
shares is pursuant to an applicable effective registration statement under the
Securities Act of 1933 or is, without such representation and warranty, exempt
from registration under such Act.
5
<PAGE>
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
15. Effective Date of Plan. This Plan shall become effective upon its
adoption by the Board of Directors of the Company, subject, however, to its
approval by the Company's shareholders after the date of such adoption.
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>5
<FILENAME>d02829exv10w9.txt
<DESCRIPTION>AMENDMENT NO. 2 TO PROFIT SHARING PLAN
<TEXT>
<PAGE>
EXHIBIT 10.9
AMENDMENT NO. 2
TO SOUTHWEST AIRLINES CO. Profit Sharing Plan
Pursuant to the authority of the Board of Directors of Southwest
Airlines Co., and the provisions of Section 17.1 thereof, the Southwest Airlines
Co. Profit Sharing Plan (the "Plan") is hereby amended in the following respects
only, effective as the dates set forth herein:
(1) Article VI, Section 6.4, subparagraph (b)(4), is hereby amended in
its entirety, effective January 1, 1998, to read as follows:
"(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, effective January 1, 1995, (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,
together with 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)(1)(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."
(2) Article II, Paragraph (ff) of Section 2.1, is hereby amended in its
entirety, effective January 1, 2002:
"(ff) Retirement: Separation from service 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
service."
(3) Article VII, Section 7.1, is hereby amended in its entirety,
effective January 1, 2002, to read as follows:
"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
-1-
<PAGE>
nonforfeitable. If a Member continues in the service of the Company
beyond his Normal Retirement Date, he shall continue to participate in
the Plan."
(4) Effective January 1, 2002, Article VIII shall be amended to add
Section 8.1 to read as follows, and Sections 8.1, 8.2 and 8.3 shall be
renumbered as Sections 8.2, 8.3 and 8.4, respectively:
"8.1 Death of Member: Upon the death of a Member while
employed by the Company, such Member's Individual Account shall
thereupon become one hundred percent (100%) vested, and the amount
contained therein shall be nonforfeitable."
(5) Effective January 1, 2002, Article IX shall be amended to add
Section 9.1 to read as follows, and Section 9.1 shall be renumbered as Section
9.2:
"9.1 Disability: If a Member'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."
(6) Article X, Section 10.3, shall be amended in its entirety,
effective January 1, 2002, to read as follows:
"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 remain in the Trust Fund and shall be allocated
pursuant to the provisions of Section 6.2. 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 separation from service occurs."
(7) Article XV, Section 15.1, is hereby amended in its entirety,
effective January 1, 2002, to read as follows:
"15.1. Method of Payment: As soon as practicable after the
separation from service of a Member, former Member, or Beneficiary who
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 or in whole shares of Common Stock, as
elected by the Member, former Member or Beneficiary; provided, however,
that such benefit shall in any event be paid in whole shares of Common
Stock to the extent that such Member's, former Member's or
Beneficiary's Individual Account is invested in Common Stock, pursuant
to Article XII hereof. Any fractional shares of Common Stock shall be
converted to, and paid, in cash."
(8) Article XV, Section 15.2, is hereby amended in its entirety,
effective January 1, 2002, except as otherwise specified herein, as follows:
-2-
<PAGE>
"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
separation from service of a Member, former Member, or Beneficiary who
is entitled to receive a benefit hereunder. Notwithstanding the
foregoing, if the nonforfeitable portion of a Member's or former
Member's Individual Account exceeds Five Thousand and No/100 Dollars
($5,000.00), no distributions, other than distributions upon the death
of such Member or former Member, may commence without the consent of
the Member or former Member until he attains age sixty-two (62), at
which time distribution shall be made. 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 annuity starting date. The annuity
starting date is the first day of the first period for which a benefit
is paid hereunder. 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 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.
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 attains age 70 1/2 or
(b) the calendar year in which the Member retires; provided that if a
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 attains age
70 1/2. Subject to the provisions of Section 18.11 hereof, distribution
of the entire Individual Account of a Member who attains age 70 1/2 on
or after September 15, 2000 shall be made in a single lump sum on or
before such Member's required beginning date. In the case of a Member
who attained age 70 1/2 prior to September 15, 2000, or in the case of
a Member who is a Five Percent Owner, the minimum distribution required
for the calendar year immediately preceding the 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
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,
and the requirements of this Article will take precedence over any
inconsistent provisions of the Plan. Required minimum distributions
will be determined beginning with the first distribution calendar year
and up to and including the distribution calendar year that includes
the Member's date of death. Effective January 1, 2003, during such
Member's
-3-
<PAGE>
lifetime, the minimum amount that will be distributed for each
distribution calendar year is the lesser of:
(a) the quotient obtained by dividing the Member's
Individual Account balance by the distribution period in the
Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of
the Treasury Regulations, using the Member's age as of the
Member's birthday in the distribution calendar year; or
(b) if the Member's sole designated beneficiary for
the distribution calendar year is the Member's spouse, the
quotient obtained by dividing the Member's Individual Account
balance by the number in the Joint and Last Survivor Table set
forth in section 1.401(a)(9)-9 of the Treasury Regulations,
using the Member's and spouse's attained ages as of the
Member's and spouse's birthdays in the distribution calendar
year.
Notwithstanding any provision herein to the contrary, any
Member who attains age 70 1/2 in a calendar year after 1995 and prior
to September 15, 2000, may irrevocably elect, in the manner established
by the Committee, by April 1 of the calendar year following the year in
which the Member attains age 70 1/2 (or by December 31, 1997 in the
case of a Member who attains age 70 1/2 in 1996) to defer distributions
until April 1 of the calendar year following the calendar year in which
the Member retires. If no such election is made, the Member will begin
receiving distributions by the April 1 of the calendar year following
the year in which the Member attains age 70 1/2 (or by December 31,
1997 in the case of a Member who attains age 70 1/2 in 1996), and any
such distributions shall comply with the provisions of the preceding
paragraph. Furthermore, any 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 retires.
If distributions have commenced so that payments are being
made over the life of the 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 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 surviving spouse and such
surviving spouse dies after the 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.
Furthermore, if the designated Beneficiary is the surviving spouse of
the 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 death and
(b) December 31 of the calendar year in which the 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 designated Beneficiary is his
-4-
<PAGE>
surviving spouse, and such surviving spouse dies after the 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.
Notwithstanding any provision herein to the contrary, 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."
(9) Article XV, Section 15.3, is hereby amended, effective January 1,
2002, to read as follows:
"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
separation from service occurs, has forfeited a portion of his
Individual 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 that 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 distribution 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
that was nonvested at the time of separation from service."
-5-
<PAGE>
(10) Article XXI is hereby added to read as follows:
"ARTICLE XXI
Amendments Pursuant to the Economic Growth and
Tax Relief Reconciliation Act of 2001
21.1 Preamble:
a. Adoption and Effective Date of Amendments: This
Article 21 reflects certain provisions of the Economic Growth
and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This
Article is intended as good faith compliance with the
requirements of EGTRRA and is to be construed in accordance
with EGTRRA and guidance issued thereunder. Except as
otherwise provided, the provisions of this Article 21 shall be
effective for Plan Years beginning on or after January 1,
2002.
b. Inconsistent provisions superseded: The provisions
of this Article 21 shall supersede the provisions of the Plan
to the extent those provisions are inconsistent with the
provisions of this Article.
21.2 Limitations on Contributions: The Annual Additions that
may be contributed or allocated to a Member's Individual Account under
the Plan for any Limitation Year shall not exceed the lesser of:
a. $40,000, as adjusted for increases in the
cost-of-living under section 415(d) of the Code, or
b. 100% of the Member's Compensation, within the
meaning of Section 6.4(b)(4) of the Plan, for the Limitation
Year. The compensation limit referred to in this subparagraph
(b) shall not apply to any contribution for medical benefits
after separation from service (within the meaning of section
401(h) or section 419A(f)(2) of the Code) that is otherwise
treated as an Annual Addition.
21.3 Increase in Annual Compensation Limit: The Annual
Compensation of each Member taken into account in determining
allocations for any Plan Year beginning after December 31, 2001, shall
not exceed $200,000, as adjusted for cost-of-living increases in
accordance with section 401(a)(17)(B) of the Code. Annual Compensation
means compensation during the Plan Year. The cost-of-living adjustment
in effect for a calendar year applies to Annual Compensation for the
Plan Year that begins with or within such calendar year."
21.4 Modification of Top-Heavy Rules:
a. Determination of top-heavy status.
(i) Key Employee. Key Employee means any
Employee or former Employee (including any deceased
Employee) who, at any time during the Plan Year that
includes the Determination Date, was an officer of
the Company having Annual Compensation greater than
$130,000 (as adjusted under section 416(i)(1) of the
Code for Plan Years beginning on or after January 1,
2003), a 5-percent owner of the Company, or a
1-percent owner of the Company having Annual
Compensation of more than $150,000. For this purpose,
Annual Compensation means compensation within the
meaning of Section 6.4(b)(4) of the Plan. The
determination of
-6-
<PAGE>
who is a Key Employee will be made in accordance with
section 416(i)(1) of the Code and the applicable
regulations and other guidance of general
applicability issued thereunder.
(ii) Determination of present values and
amounts. This subsection (ii) shall apply for
purposes of determining the present values of accrued
benefits and the amounts of Individual Account
balances of Employees as of the Determination Date.
(1) Distributions during year ending
on the Determination Date. The present
values of accrued benefits and the amounts
of Individual Account balances of an
Employee as of the Determination Date shall
be increased by the distributions made with
respect to the Employee under the Plan and
any plan aggregated with the Plan under
section 416(g)(2) of the Code during the
1-year period ending on the Determination
Date. The preceding sentence shall also
apply to distributions under a terminated
plan which, had it not been terminated,
would have been aggregated with the Plan
under section 416(g)(2)(A)(i) of the Code.
In the case of a distribution made for a
reason other than separation from service,
death, or disability, this provision shall
be applied by substituting "5-year period"
for "1-year period."
(2) Employees not performing
services during year ending on the
Determination Date. The accrued benefits and
Individual Accounts of any individual who
has not performed services for the Employer
during the 1-year period ending on the
Determination Date shall not be taken into
account.
(b) Minimum benefits. Company Matching Contributions
under the Southwest Airlines Co. 401(k) Plan shall be taken
into account for purposes of satisfying the minimum
contribution requirements of section 416(c)(2) of the Code and
the Plan and shall be treated as matching contributions for
purposes of the actual contribution percentage test and other
requirements of section 401(m) of the Code."
21.5 Direct Rollovers of Plan Distributions: For purposes of
the direct rollover provisions in Section 15.6 of the Plan, for plan
distributions on or after January 1, 2002, the term "eligible
retirement plan" shall mean (i) an individual retirement account
described in Section 408(a) of the Code, (ii) an individual retirement
annuity described in Section 408(b) of the Code (other than an
endowment contract), (iii) a qualified trust described under Section
401(a) of the Code, (iv) an annuity plan described in Section 403(a) of
the Code, (v) an annuity contract described in section 403(b) of the
Code, and (vi) an eligible plan under section 457(b) of the Code that
is maintained by a state, political subdivision of a state, or any
agency or instrumentality of a state or political subdivision of a
state and that agrees to separately account for amounts transferred
into such plan from this Plan. The definition of eligible retirement
plan shall also apply in the case of a distribution to a surviving
spouse, or to a spouse or former spouse who is the
-7-
<PAGE>
alternate payee under a qualified domestic relation order, as defined
in section 414(p) of the Code. Furthermore, for purposes of the direct
rollover provisions in Section 15.6 of the Plan, for plan distributions
on or after January 1, 2002, a portion of a distribution shall not fail
to be an eligible rollover distribution merely because the portion
consists of after-tax employee contributions that are not includible in
gross income. However, such portion may be transferred only to an
individual retirement account or annuity described in Section 408(a) or
(b) of the Code, or to a qualified defined contribution plan described
in Section 401(a) or 403(a) of the Code that agrees to separately
account for amounts so transferred, including separately accounting for
the portion of such distribution that is includible in gross income and
the portion of such distribution that is not so includible."
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing instrument comprising Amendment No. 2 to the Southwest Airlines Co.
Profit Sharing Plan, the Company 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 21 day of November, 2002.
SOUTHWEST AIRLINES CO.
By: /s/ JAMES F. PARKER
-----------------------------------------
James F. Parker, Chief Executive Officer
ATTEST:
/s/ DEBORAH ACKERMAN
- -------------------------------------
Deborah Ackerman, Assistant Secretary
-8-
<PAGE>
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this 21 day of November, 2002, personally appeared JAMES F. PARKER, to
me known to be the identical 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 as the free and voluntary act and deed of such organization for the
uses and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, the day and year last above
written
/s/ MARILYN STRICKLAND
---------------------------------------------
Notary Public in and for the State of Texas
My Commission Expires: 05/31/05
---------
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>6
<FILENAME>d02829exv10w10.txt
<DESCRIPTION>AMENDMENT NO. 1 TO 401(K) PLAN
<TEXT>
<PAGE>
EXHIBIT 10.10
AMENDMENT NO. 1
TO SOUTHWEST AIRLINES CO. 401(k) PLAN
Pursuant to the authority of the Board of Directors of Southwest
Airlines Co., and the provisions of Section 17.1 thereof, the Southwest Airlines
Co. 401(k) Plan (the "Plan") is hereby amended in the following respects only,
effective as of January 1, 2002, except as otherwise specifically provided
herein:
(1) Article IV, Section 4.1 is hereby amended in its entirety,
effective September 1, 2002, to read as follows:
"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 fifty percent (50%);
provided, however, effective January 1, 2002, such amount may not
exceed the applicable dollar amount as set forth in Section
402(g)(1)(B) of the Code, adjusted for taxable years of the Member
beginning after December 31, 2006 for increases in the cost of living
as provided in Section 402(g)(4) of the Code. 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 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."
(2) Article IV, Section 4.2 is hereby amended in its entirety,
effective September 1, 2002, to read as follows:
"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 and, if
applicable, Catch-Up Contributions, not to exceed the specific amount
set forth in
-1-
<PAGE>
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 and,
if applicable, Catch-Up Contributions from a Member's paycheck and
credited, as of each Valuation Date, to the Company Matching
Contribution Account of each eligible Member who has elected to have
Salary Reduction Contributions and, if applicable, Catch-Up
Contributions made to the Trust Fund on his behalf during the
applicable period."
(3) Article IV, Section 4.4 is hereby amended in its entirety to read
as follows:
"4.4 Excess Deferrals: If a Member's Salary Reduction
Contributions hereunder should exceed the applicable dollar amount as
set forth in Section 402(g)(1)(B) of the Code, adjusted for taxable
years of the Member beginning after December 31, 2006 for increases in
the cost of living as provided in Section 402(g)(4) 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) The Plan is hereby amended to add Article 21 to read as follows:
"ARTICLE XXI
Amendments Pursuant to the Economic Growth and
Tax Relief Reconciliation Act of 2001
21.1 Preamble:
a. Adoption and Effective Date of Amendments: This
Article 21 reflects certain provisions of the Economic Growth
and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This
Article is intended as good faith compliance with the
requirements of EGTRRA and is to be construed in accordance
with EGTRRA and guidance issued thereunder.
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Except as otherwise provided, the provisions of this Article
21 shall be effective for Plan Years beginning on or after
January 1, 2002.
b. Inconsistent provisions superseded: The provisions
of this Article 21 shall supersede the provisions of the Plan
to the extent those provisions are inconsistent with the
provisions of this Article.
21.2 Limitations on Contributions: Except to the extent
permitted under Section 21.3 of this Article and section 414(v) of the
Code, if applicable, the Annual Additions that may be contributed or
allocated to a Member's Individual Account under the Plan for any
Limitation Year shall not exceed the lesser of:
a. $40,000, as adjusted for increases in the
cost-of-living under section 415(d) of the Code, or
b. 100% of the Member's compensation, within the
meaning of section 415(c)(3) of the Code, for the Limitation
Year. The compensation limit referred to in this subparagraph
(b) shall not apply to any contribution for medical benefits
after separation from service (within the meaning of section
401(h) or section 419A(f)(2) of the Code) that is otherwise
treated as an Annual Addition.
21.3 Catch-Up Contributions:
a. Eligibility for Catch-Up Contributions: Effective
September 1, 2002, all Members who are eligible to make Salary
Reduction Contributions under this Plan and who have attained
age 50 before the close of the Plan Year shall be eligible to
make Catch-Up Contributions in accordance with, and subject
to, the limitations of section 414(v) of the Code.
b. Effect of Catch-Up Contributions on Plan: Such
Catch-Up Contributions shall not be taken into account for
purposes of the provisions of the Plan implementing the
required limitations of sections 402(g) and 415 of the Code.
The Plan shall not be treated as failing to satisfy the
provisions of the Plan implementing the requirements of
section 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416 of
the Code, as applicable, by reason of the making of such
Catch-Up Contributions."
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<PAGE>
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing instrument comprising Amendment No. 1 to Southwest Airlines Co. 401(k)
Plan, the Company has caused these presents to be duly executed in its name and
behalf by its proper officers thereunto duly authorized this 22 day of July,
2002.
SOUTHWEST AIRLINES CO.
By: /s/ JAMES F. PARKER
-----------------------------------------
James F. Parker, Chief Executive Officer
ATTEST:
/s/ DEBORAH ACKERMAN
- ---------------------------------
Deborah Ackerman, Assistant Secretary
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<PAGE>
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this 22 day of July, 2002, personally appeared JAMES F. PARKER, to me
known to be the identical 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 as
the free and voluntary act and deed of such organization for the uses and
purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, the day and year last above
written
/s/ NOVIE RAE LEACHMAN
---------------------------------------------
Notary Public in and for the State of Texas
My Commission Expires: 05/22/05
----------
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<PAGE>
AMENDMENT NO. 2
TO SOUTHWEST AIRLINES CO. 401(k) PLAN
Pursuant to the authority of the Board of Directors of Southwest
Airlines Co., and the provisions of Section 17.1 thereof, the Southwest Airlines
Co. 401(k) Plan (the "Plan") is hereby amended in the following respects only,
effective as of the dates set forth herein:
(1) Item 8.1 of the Table of Contents is hereby amended, effective
January 1, 2002, to read as follows:
"8.1 DEATH OF MEMBER..."
(2) Article II, Paragraph (dd) of Section 2.1, is hereby amended in its
entirety, effective January 1, 2002:
"(dd) Retirement: Separation from service 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
service."
(3) Article IV, Section 4.4, is hereby amended in its entirety,
effective September 1, 2002, to read as follows:
"4.4 Distribution of Excess Deferrals: If a Member's Salary
Reduction Contributions hereunder should exceed the applicable dollar
amount as set forth in Section 402(g) of the Code ($11,000 for the
Member's taxable year beginning 2002), adjusted for taxable years of
the Member beginning after December 31, 2006 for increases in the cost
of living, as set forth in Section 402(g)(4) of the Code, the excess
(with earnings thereon) shall be reduced as follows:
(a) To the extent that such excess Salary Reduction
Contributions do not exceed the applicable dollar limitation
under Section 414(v), reduced by elective deferrals previously
treated as Catch-Up Contributions, whether under this Plan or
another applicable employer plan (as defined in Section
414(v)(6)(A) of the Code), the amount of such excess Salary
Reduction Contributions shall be recharacterized as Catch-Up
Contributions, if such Member is otherwise eligible to make
Catch-Up Contributions in accordance with Section 21.3 hereof
during the Plan Year in which the excess deferral arises.
(b) If the Member is not eligible to make Catch-Up
Contributions, as provided in Section 21.3 hereof, or to the
extent that recharacterization of such excess Salary Reduction
Contributions, together with elective deferrals previously
treated as Catch-Up Contributions, whether under this Plan or
another applicable
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employer plan (as defined in Section 414(v)(6)(A) of the
Code), exceeds the applicable dollar limitation under Section
414(v), the amount of such excess Salary Reduction
Contributions shall be distributed to the Member. 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 with respect to which such excess
deferrals were made.
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 deemed a Catch-Up Contribution in accordance
with subparagraph (a) herein, as the case may be, or distributed to the
Member in accordance with subparagraph (b) herein. 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: (i)
the value of the Member's Salary Reduction Contribution Account or (ii)
the Member's excess deferrals for the Plan Year."
(4) Article IV, Section 4.5, is hereby amended in its entirety,
effective January 1, 2002, to read as follows:
"(a) Determination of Deferral Percentages: As soon as
administratively feasible after the end of each Plan Year (or other
applicable period) the Committee shall determine:
(i) Deferral Percentage. 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 (less excess Salary Reduction Contributions treated
as Catch-Up Contributions for the Plan Year in accordance with
Section 4.4 above) 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 (less excess Salary Reduction Contributions
treated as Catch-Up Contributions for the Plan Year in
accordance with Section 4.4 above) to such Employee's
compensation (as defined in Section 2.1(r) hereof) for the
prior Plan Year.
(ii) Highly Compensated Deferral Percentage. 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
(iii) Nonhighly Compensated Deferral Percentage. The
"nonhighly compensated deferral percentage," which shall be
the average of the "deferral percentages" for all Employees
then eligible for Salary Reduction Contributions
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who were not included in the "highly compensated deferral
percentage," in (ii) above."
If a Highly Compensated Employee participates in two (2) or more plans
maintained by an Employer 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 an Employer 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 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 deferral percentage test. For purposes
of implementing the deferral percentage test, elective deferrals
treated as Catch-Up Contributions shall be disregarded.
(b) Limitation on Highly Compensated Deferral Percentage. 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."
(c) Recharacterization of Excess Salary Reduction
Contributions. If the above deferral percentage test would otherwise be
violated as of the end of the Plan Year, then, to the extent that the
excess Salary Reduction Contributions of such Highly Compensated
Employees do not exceed the applicable dollar limitation under Section
414(v), reduced by elective deferrals previously treated as Catch-Up
Contributions, whether under this Plan or another elective deferral
program (as defined under Section 402(g)(3)), the amount of the excess
Salary Reduction Contributions of such Highly Compensated Employees
shall be recharacterized as Catch-Up Contributions, if such Member is
otherwise eligible to make Catch-Up Contributions in accordance with
Section 21.3 hereof during the Plan Year in which the excess deferral
arises.
(d) Application of Qualified Nonelective Contributions. If,
after recharacterization of the excess Salary Reduction Contributions
of such Highly Compensated Employees, the deferral percentage test
would still be violated as of the end of the Plan Year, then, subject
to satisfaction of the conditions described in Section 1.401(k)-1(b)(5)
of the Treasury Regulations, the "deferral percentage," as defined in
(a)(i) above, shall instead be the ratio of the sum of the Employee's
Salary Reduction Contributions (less excess Salary Reduction
Contributions treated as Catch-Up Contributions for the Plan Year),
Qualified Nonelective Contributions, if any, and, to the extent
necessary to satisfy the deferral percentage test, Company Matching
Contributions for such Plan Year to the Employee's compensation (as
defined in Section 2.1(r) hereof) for such 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.
(e) Distribution of Excess Contributions. If, after
consideration of Qualified Nonelective Contributions, if any, and
applicable Company Matching Contributions, as
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<PAGE>
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 (other than
excess Salary Reduction Contributions treated as Catch-Up Contributions
for the Plan Year) 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 (other than excess Salary Reduction
Contributions treated as Catch-Up Contributions for the Plan Year), to
the extent revoked, shall constitute an "excess contribution" to be
distributed (with earnings thereon) no later than the last day of the
Plan Year following the Plan Year with respect to which such
contribution was made. Excess contributions are allocated to the Highly
Compensated Employees with the largest amounts of Employer
contributions 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. If an excess contribution is distributed to a Member
in accordance with the foregoing, any Company Matching Contribution
relating to such excess contribution shall be forfeited and then
utilized as described in Section 6.3 hereof, and shall not be taken
into account in determining the Member's contribution percentage under
Section 4.6."
(5) Article IV, Paragraph (a) of Section 4.7, is hereby amended in its
entirety, effective January 1, 2002, to read as follows:
"The transfer occurs on or before the 60th day following his
receipt of such distribution, or such later date as permitted by the
Internal Revenue Service for distributions on and after January 1,
2002; 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, or such
later date as permitted by the Internal Revenue Service for
distributions on and after January 1, 2002;"
(6) Article VI, the second sentence of Section 5.1, is hereby amended
in its entirety, effective September 1, 2002, to read as follows:
"The Individual Account of each Member shall be composed of a
Company Matching Contribution Account, to which Company Matching
Contributions, if any, shall be credited; a Salary Reduction
Contribution Account, to which Salary Reduction Contributions, if any,
and Catch-Up Contributions, if any, together with Qualified Nonelective
Contributions and Company Matching Contributions, if any, utilized to
satisfy the deferral percentage test or the contribution percentage
test, as set forth in
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<PAGE>
Sections 4.5 and 4.6 hereof, if any, shall be credited; and, if
applicable, a Rollover Contribution Account."
(7) Article V, the first paragraph of Section 5.3, is hereby amended in
its entirety, effective September 1, 2002, to read as follows:
"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 such Member first satisfies the
eligibility requirements of Article III hereof, or as of any subsequent
Entry Date. Such election must be made prior to such Entry Date, and
shall be effective for each payroll period thereafter until modified or
amended. Each Member who is eligible to make Catch-Up Contributions
under Section 21.3 hereof and who desires to make such contributions
for the Plan Year shall indicate such intent by making an election in
the manner prescribed by the Committee; provided, however, that a
separate election to make Catch-Up Contributions shall remain effective
no later than the end of the Member's taxable year for which such
separate Catch-Up Contribution election is effective."
(8) Article V, Section 5.3(c), is hereby amended in its entirety,
effective September 1, 2002, to read as follows:
"The Company may unilaterally amend or revoke a salary
deferral election with any Member at any time, including an amendment
to recharacterize an election of Salary Reduction Contributions as an
election of Catch-Up Contributions, if the Company determines that such
revocation or amendment is necessary to ensure 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 ensure that the
requirements of Section 401(k) of the Code and Sections 4.1 and 21.3
hereof have been satisfied with respect to the amount that may be
withheld and contributed on behalf of a Member."
(9) Article VII, Section 7.1, is hereby amended in its entirety,
effective January 1, 2002, to read as follows:
"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 service of the Company beyond his Normal Retirement Date, he
shall continue to participate in the Plan."
(10) Article VIII, Section 8.1, is hereby amended in its entirety,
effective January 1, 2002, to read as follows:
"8.1 Death of Member: Upon the death of a Member while
employed by the Company, such Member's Individual Account shall
thereupon become one hundred percent (100%) vested, and the amount
contained therein shall be nonforfeitable."
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<PAGE>
(11) Article IX, Section 9.1, is hereby amended, effective January 1,
2002, to read as follows:
"9.1 Disability: If a Member's employment with the Company
terminates as a result of his Disability, such Member's Individual
Account shall thereupon become one hundred percent (100%) vested, and
the amount contained therein shall be nonforfeitable."
(12) Article X, Section 10.3, is hereby amended, effective January 1,
2002, to read as follows:
"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 separation from service 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."
(13) Article XI, the last sentence of the third paragraph of Section
11.2, is hereby deleted in its entirety, effective January 1, 2002.
(14) Article XV, Section 15.1, is hereby amended in its entirety,
effective January 1, 2002, to read as follows:
"15.1. Method of Payment: As soon as practicable after the
separation from service of a Member, former Member, or Beneficiary who
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) Article XV, Section 15.2, is hereby amended in its entirety,
effective January 1, 2002, except as otherwise specified herein, to read as
follows:
"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
separation from service of a Member, former Member, or Beneficiary who
is entitled to receive a benefit hereunder. Notwithstanding the
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<PAGE>
foregoing, if the nonforfeitable portion of a Member's or former
Member's Individual Account exceeds Five Thousand and No/100 Dollars
($5,000.00), no distributions, other than distributions upon the death
of such Member or former Member, may commence without the consent of
the Member or former Member until he attains age sixty-two (62), at
which time distribution shall be made. 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 or
former 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 or former 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 attains age 70 1/2 or
(b) the calendar year in which the Member retires; provided that if a
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 attains age 70
1/2. Effective as of November 16, 2001, distribution of a Member's
entire Individual Account shall be made in a single lump sum on or
before such Member's required beginning date. In the case of a Member
who attained age 70 1/2 prior to November 16, 2001, or in the case of a
Member who is a five percent (5%) owner, the minimum distribution
required for the calendar year immediately preceding the 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 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, and the requirements of this Article will take precedence over
any inconsistent provisions of the Plan. Required minimum distributions
will be determined beginning with the first distribution calendar year
and up to and including the distribution calendar year that includes
the Member's date of death. Effective January 1, 2003, during such
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Member's lifetime, the minimum amount that will be distributed for each
distribution calendar year is the lesser of:
(a) the quotient obtained by dividing the Member's
Individual Account balance by the distribution period in the
Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of
the Treasury Regulations, using the Member's age as of the
Member's birthday in the distribution calendar year; or
(b) if the Member's sole designated beneficiary for
the distribution calendar year is the Member's spouse, the
quotient obtained by dividing the Member's Individual Account
balance by the number in the Joint and Last Survivor Table set
forth in section 1.401(a)(9)-9 of the Treasury Regulations,
using the Member's and spouse's attained ages as of the
Member's and spouse's birthdays in the distribution calendar
year.
Notwithstanding any provision herein to the contrary, any
Member who attains age 70 1/2 in a calendar year after 1995 and prior
to November 16, 2001, may irrevocably elect, in the manner established
by the Committee, by April 1 of the calendar year following the year in
which the Member attains age 70 1/2 (or by December 31, 1997 in the
case of a Member who attains age 70 1/2 in 1996) to defer distributions
until April 1 of the calendar year following the calendar year in which
the Member retires. If no such election is made, the Member will begin
receiving distributions by the April 1 of the calendar year following
the year in which the Member attains age 70 1/2 (or by December 31,
1997 in the case of a Member who attains age 70 1/2 in 1996), and any
such distributions shall comply with the provisions of the preceding
paragraph. Furthermore, any 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 retires.
If distributions have commenced so that payments are being
made over the life of the 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 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 surviving spouse and such
surviving spouse dies after the 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.
Furthermore, if the designated Beneficiary is the surviving spouse of
the 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 death and
(b) December 31 of the calendar year in which the 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 designated Beneficiary is his
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<PAGE>
surviving spouse, and such surviving spouse dies after the 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.
Notwithstanding any provision herein to the contrary, 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."
(16) Article XV, Section 15.3, is hereby amended, effective January 1,
2002, to read as follows:
"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
separation from service occurs, has forfeited a portion of his
Individual 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 that 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 distribution 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
that was nonvested at the time of separation from service."
(17) Article XXI is hereby amended to add Section 21.4, effective
January 1, 2002, to read as follows:
"21.4 Increase in Annual Compensation Limit: The Annual
Compensation of each Member taken into account in determining
allocations shall not exceed $200,000, as adjusted for cost-of-living
increases in accordance with section 401(a)(17)(B) of the Code. Annual
Compensation means compensation during the Plan Year. The
cost-of-
-9-
<PAGE>
living adjustment in effect for a calendar year applies to Annual
Compensation for the Plan Year that begins with or within such calendar
year."
(18) Article XXI is hereby amended to add Section 21.5, effective
January 1, 2002, to read as follows:
"21.5 Modification of Top-Heavy Rules:
a. Determination of top-heavy status.
(i) Key Employee. Key Employee means any
Employee or former Employee (including any deceased
Employee) who, at any time during the Plan Year that
includes the Determination Date, was an officer of
the Company having Annual Compensation greater than
$130,000 (as adjusted under section 416(i)(1) of the
Code for Plan Years beginning on or after January 1,
2003), a 5-percent owner of the Company, or a
1-percent owner of the Company having Annual
Compensation of more than $150,000. For this purpose,
Annual Compensation means compensation within the
meaning of Section 2.1(c) of the Plan. The
determination of who is a Key Employee will be made
in accordance with section 416(i)(1) of the Code and
the applicable regulations and other guidance of
general applicability issued thereunder.
(ii) Determination of present values and
amounts. This subsection (ii) shall apply for
purposes of determining the present values of accrued
benefits and the amounts of Individual Account
balances of Employees as of the Determination Date.
(1) Distributions during year ending
on the Determination Date. The present
values of accrued benefits and the amounts
of Individual Account balances of an
Employee as of the Determination Date shall
be increased by the distributions made with
respect to the Employee under the Plan and
any plan aggregated with the Plan under
section 416(g)(2) of the Code during the
1-year period ending on the Determination
Date. The preceding sentence shall also
apply to distributions under a terminated
plan which, had it not been terminated,
would have been aggregated with the Plan
under section 416(g)(2)(A)(i) of the Code.
In the case of a distribution made for a
reason other than separation from service,
death, or disability, this provision shall
be applied by substituting "5-year period"
for "1-year period."
(2) Employees not performing
services during year ending on the
Determination Date. The accrued benefits and
Individual Accounts of any individual who
has not performed services for the Employer
during the 1-year period ending on the
Determination Date shall not be taken into
account.
(b) Minimum benefits. Company Matching Contributions
shall be taken into account for purposes of satisfying the
minimum contribution requirements of section 416(c)(2) of the
Code and the Plan and any Company
-10-
<PAGE>
Matching Contributions that are used to satisfy the minimum
contribution requirements shall be treated as matching
contributions for purposes of the actual contribution
percentage test and other requirements of section 401(m) of
the Code."
(19) Article XXI is hereby amended to add Section 21.6, effective
January 1, 2002, to read as follows:
"21.6 Direct Rollovers of Plan Distributions: For purposes of
the direct rollover provisions in Section 15.6 of the Plan, for plan
distributions on or after January 1, 2002, the term "eligible
retirement plan" shall mean (i) an individual retirement account
described in Section 408(a) of the Code, (ii) an individual retirement
annuity described in Section 408(b) of the Code (other than an
endowment contract), (iii) a qualified trust described under Section
401(a) of the Code, (iv) an annuity plan described in Section 403(a) of
the Code, (v) an annuity contract described in section 403(b) of the
Code, and (vi) an eligible plan under section 457(b) of the Code which
is maintained by a state, political subdivision of a state, or any
agency or instrumentality of a state or political subdivision of a
state and which agrees to separately account for amounts transferred
into such plan from this Plan. The definition of eligible retirement
plan shall also apply in the case of a distribution to a surviving
spouse, or to a spouse or former spouse who is the alternate payee
under a qualified domestic relation order, as defined in section 414(p)
of the Code. Furthermore, the term "eligible rollover distribution"
shall not include any hardship withdrawal."
(20) Article XXI is hereby amended to add Section 21.7, effective
January 1, 2002, to read as follows:
"21.7 Rollovers from Other Plans:
a. Direct Rollovers: For purposes of the rollover
contribution provisions of Section 4.7 of the Plan, a Member
who is entitled to receive an eligible rollover distribution
from (i) a qualified plan described in section 401(a) or
403(a) of the Code, (ii) an annuity contract described in
section 403(b) of the Code, or (iii) an eligible plan under
section 457(b) of the Code that is maintained by a state,
political subdivision of a state, or any agency or
instrumentality of a state or political subdivision of a
state, may, in accordance with procedures approved by the
Committee, elect to transfer directly to the Trustee, as a
trustee-to-trustee transfer, in cash only, an amount equal to
all or a portion of such distribution; provided, however, that
the maximum amount of such transfer shall be the fair market
value of that portion of the distribution that would be
includable in gross income if not so transferred (determined
without regard to Section 402(c) of the Code).
b. Member Rollover Contributions from Other Plans:
For purposes of the rollover contribution provisions of
Section 4.7 of the Plan, any Member who has distributed to him
an amount that qualifies as an eligible rollover distribution
from (i) a qualified plan described in section 401(a) or
403(a) of the Code, (ii) an annuity contract described in
section 403(b) of the Code, (iii) an eligible plan under
section 457(b) of the Code that is maintained by a state,
political subdivision of a state, or any agency or
instrumentality of a state or political
-11-
<PAGE>
subdivision of a state, or (iv) any portion of a distribution
from an individual retirement account annuity described in
section 408(a) or 408(b) of the Code, may, in accordance with
procedures approved by the Committee, contribute, in cash
only, an amount equal to all or any portion of such
distribution that is eligible to be rolled over and that would
otherwise be includible in gross income if not so transferred
(determined without regard to Section 402(c) of the Code)."
(21) Article XXI is hereby amended to add Section 21.8, effective
January 1, 2002, to read as follows:
"21.8 Repeal of Multiple-Use Test: The multiple use test
described in Treasury Regulation section 1.401(m)-2 and Section 4.6 of
the Plan shall not apply for Plan Years beginning on or after January
1, 2002. Any references made throughout the Plan to the multiple use
test shall hereafter be disregarded."
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing instrument comprising Amendment No. 2 to the Southwest Airlines Co.
401(k) Plan, the Company 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 21 day of November, 2002.
SOUTHWEST AIRLINES CO.
By: /s/ JAMES F. PARKER
-----------------------------------------
James F. Parker, Chief Executive Officer
ATTEST:
/s/ DEBORAH ACKERMAN
- ---------------------------------
Deborah Ackerman, Assistant Secretary
-12-
<PAGE>
STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this 21 day of November, 2002, personally appeared JAMES F. PARKER, to
me known to be the identical 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 as the free and voluntary act and deed of such organization for the
uses and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, the day and year last above
written
/s/ MARILYN STRICKLAND
--------------------------------------------
Notary Public in and for the State of Texas
My Commission Expires: 05/31/05
-----------
-13-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>7
<FILENAME>d02829exv10w12.txt
<DESCRIPTION>1996 INCENTIVE STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.12
SOUTHWEST AIRLINES CO.
1996 INCENTIVE STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1996 Incentive Stock Option Plan (the
"Plan") for employees of the Company and its subsidiaries.
1. Purpose. The purpose of this Plan is to secure for the Company the
benefits of the additional incentive inherent in the ownership of its Common
Stock by selected key employees of the Company and its subsidiaries who are
important to the success and the growth of the Company and its subsidiaries, and
to help the Company and its subsidiaries secure and retain the services of such
key employees. The Plan shall be administered so as to qualify the options as
"incentive stock options" under Section 422A of the Internal Revenue Code.
2. Stock Option Committee. Subject to the provisions of paragraph 4,
this Plan shall be administered by a Stock Option Committee (the "Committee") of
the Board of Directors (the "Board") of the Company, to be appointed by at least
a majority of the whole Board of Directors. All members of the Committee shall
be "disinterested" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as such Rule is in effect on the date of adoption of this
Plan by the Board. The Committee shall select one of its members as Chairman and
shall adopt such rules and regulations as it shall deem appropriate concerning
the holding of its meetings and the transaction of its business. A majority of
the whole Committee shall constitute a quorum, and the act of a majority of the
members of the Committee present at a meeting at which a quorum is present shall
be the act of the Committee. Any member of the Committee may be removed at any
time either with or without cause by resolution adopted by the Board of
Directors of the Company; and any vacancy on the Committee may at any time be
filled by resolution adopted by the Board of Directors.
3. Grant of Options. The Committee shall have the authority and
responsibility, within the limitations of this Plan, to determine the key
employees to whom options are to be granted, the number of shares that may be
purchased under each option and the option price.
In determining the key employees to whom options shall be granted and
the number of shares to be covered by each such option, the Committee shall take
into consideration the employee's present and potential contribution to the
success of the Company and its subsidiaries and such other factors as the
Committee may deem proper and relevant. During any calendar year period during
the term of this Plan, options will not be granted to any individual in excess
of 50,000 shares, as adjusted from time to time pursuant to paragraph 13.
Options may not be granted under this Plan if shares are reasonably
available for granting under the 1991 Incentive Stock Option Plan.
4. Employees Eligible. Options may be granted under this Plan to any
key employee or prospective key employee (conditioned and effective upon his
becoming an employee) of the Company or its subsidiaries. Employees who are also
officers or directors of the Company or its subsidiaries shall not
<PAGE>
by reason of such offices be ineligible to receive options under this Plan;
provided, however, that no director who is not also an employee of the Company
or any of its subsidiaries shall be eligible to receive options.
An Employee receiving any option under this Plan is hereinafter
referred to as an "Optionee." Any reference herein to the employment of an
Optionee with the Company shall include his employment with the Company or any
of its subsidiaries.
5. Stock Subject to Options. Subject to the provisions of paragraph 13,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options granted under this Plan, shall not exceed 6,000,000. If, and to the
extent the options granted under this Plan terminate or expire without having
been exercised, new options may be granted with respect to the shares covered by
such terminated or expired options; provided that the granting and terms of such
new options shall in all respects comply with the provisions of this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted or that may be granted under this Plan.
6. Option Price. The option price of each share of Common Stock
purchasable under any option granted under this Plan shall be not less than the
fair market value thereof at the time the option is granted and shall be set
forth in the option agreement; provided, however, that the option price for any
share of Common Stock purchasable under an option granted to an individual
owning, at the time the option is granted, more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its
subsidiary corporations, shall be one hundred ten percent (110%) of the fair
market value thereof at the time the option is granted.
The fair market value of the Common Stock on any day shall be the mean
between the highest and lowest quoted selling prices of the Common Stock on such
day as reported by the primary national stock exchange on which such stock is
listed. If no sale shall have been made on that day, or if the Common Stock is
not listed on a national exchange at that time, fair market value will be
determined by the Committee.
7. Expiration and Termination of the Plan. Options may be granted under
this Plan at any time and from time to time, prior to ten years from the date of
adoption of this Plan, on which date this Plan will expire, except as to options
then outstanding under this Plan. Such options shall remain in effect until they
have been exercised or have expired. This Plan may be terminated or modified at
any time prior to December 31, 2005, by the Board of Directors except to the
extent prohibited by Section 422 of the Internal Revenue Code.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
8. Exercisability and Duration of Options. Options granted under this
Plan shall become exercisable after the lapse of such period or periods of time
or the occurrence of such event or events as the Committee, in its discretion,
may provide upon the granting thereof.
2
<PAGE>
The unexercised portion of any option granted under this Plan shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
(a) The expiration of 10 years from the date on which such option was
granted; provided, however, that in the case of an Optionee owning, at the time
such option was granted, more than 10% of the total combined voting power of all
classes of stock of the Company or its subsidiaries, such expiration shall be as
of 5 years from the date on which such option was granted;
(b) The expiration of three months from the date of termination of the
Optionee's employment with the Company or any subsidiary; provided that if the
Optionee shall die during such 3-month period the provisions of subparagraph (c)
below shall apply;
(c) The expiration of 6 months following the issuance of letters
testamentary or letters of administration to the executor or administrator of a
deceased Optionee, if the Optionee's death occurs either during his employment
with the Company or during the 3-month period following the date of termination
of such employment, but not later than 1 year after the Optionee's death;
(d) The termination of the Optionee's employment with the Company for
cause, including breach by the Optionee of an employment agreement with the
Company or any of its subsidiaries or the Optionee's commission of a felony or
misdemeanor (whether or not prosecuted) against the Company or any of its
subsidiaries;
(e) The expiration of such period of time or the occurrence of such
event as the Committee in its discretion may provide upon the granting thereof.
9. Exercise of Options.
(a) Procedure. The options granted hereunder shall be exercised by the
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option, by giving written notice
(the "Notice") of the exercise thereof to the Company. From time to time the
Committee may establish procedures relating and effecting such exercises. No
fractional shares shall be issued as a result of exercising an option.
(b) Payment. In the Notice, the Optionee shall elect whether he or she
is to pay for his or her shares in cash or in Common Stock of the Company, or
both. If payment is to be made in cash, the Optionee shall deliver to the
Company a cashier's check or electronic funds transfer in the amount of the
exercise price on or before the exercise date. If payment is to be made in
Common Stock, it shall be valued at its fair market value on the date of such
notice, as determined pursuant to paragraph 6 hereof, and the Notice shall be
accompanied by a certificate for at least the number of shares of Common Stock
to be used as payment.
(c) Irrevocable Election. The giving of such written notice to the
Company shall constitute an irrevocable election to purchase the number of
shares specified in the Notice on the date specified in the Notice.
(d) Delivery of Shares. The Company shall cause certificates for shares
to be delivered to the Optionee (or the person exercising the Optionee's options
in the event of death) as soon as practicable after the exercise date.
3
<PAGE>
10. Nontransferability of Options. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his or her options.
In the event of the Optionee's death during his employment with the
Company, or during the 3-month period following the date of termination of such
employment, his options shall thereafter be exercisable, as provided in
paragraph 8(c), by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee.
11. Rights of Optionee. Neither the Optionee nor his or her executors,
administrators, or legal representatives shall have any of the rights of a
shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
12. Right to Terminate Employment. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time,
subject, however, to the provisions of any agreement of employment between the
Company or any of its subsidiaries and the Optionee.
13. Adjustment Upon Changes in Capitalization, Etc.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any sale, lease, exchange or other disposition of all or any part
of its assets or business or any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of any option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased. In the event of any
such change in the outstanding Common Stock, the aggregate number of shares
available under the Plan may be appropriately adjusted by the Committee whose
determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. If the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or if the Company is to be
4
<PAGE>
dissolved or liquidated, then unless a surviving corporation assumes or
substitutes new options for Options then outstanding hereunder, (i) the time at
which such Options may be exercised shall be accelerated and such Options shall
become exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or consolidation or such dissolution or
liquidation, and (ii) upon such effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class for property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or the purchase
price per share.
14. Purchase for Investment and Legality. The Optionee, by acceptance
of any option granted under this Plan, shall represent and warrant to the
Company that the purchase or receipt of shares of Common Stock upon the exercise
thereof shall be for investment and not with a view to distribution, provided
that such representation and warranty shall be inoperative if, in the opinion of
counsel to the Company, a proposed sale or distribution of such shares is
pursuant to an applicable effective registration statement under the Securities
Act of 1933 or is, without such representation and warranty, exempt from
registration under such Act.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
15. Limitation on Amount of Options. In no event shall the aggregate
fair market value (determined as of the time an option is granted) of the stock
for which options are exercisable for the first time by any Optionee during any
calendar year, under all incentive stock option plans of the Company and its
subsidiaries, exceed $100,000. As used in this Section, the term "incentive
stock option plan" shall mean any plan qualifying as such under Internal Revenue
Code Section 422.
16. Effective Date of Plan. This Plan shall become effective upon its
adoption by the Board of Directors of the Company, subject, however, to its
approval by the Company's shareholders after the date of such adoption.
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>8
<FILENAME>d02829exv10w13.txt
<DESCRIPTION>1996 NON-QUALIFIED STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.13
SOUTHWEST AIRLINES CO.
1996 NON-QUALIFIED STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1996 Non-Qualified Stock Option Plan (the
"Plan") for employees and directors of the Company and its subsidiaries.
1. Purpose. The purpose of this Plan is to secure for the Company the
benefits of the additional incentive inherent in the ownership of its Common
Stock by selected key employees and directors of the Company and its
subsidiaries who are important to the success and the growth of the Company and
its subsidiaries, and to help the Company and its subsidiaries secure and retain
the services of such key employees and directors.
2. Stock Option Committee. Subject to the provisions of paragraph 4,
this Plan shall be administered by a Stock Option Committee (the "Committee") of
the Board of Directors (the "Board") of the Company, to be appointed by at least
a majority of the whole Board of Directors. All members of the Committee shall
be "disinterested" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as such Rule is in effect on the date of adoption of this
Plan by the Board. The Committee shall select one of its members as Chairman and
shall adopt such rules and regulations as it shall deem appropriate concerning
the holding of its meetings and the transaction of its business. A majority of
the whole Committee shall constitute a quorum, and the act of a majority of the
members of the Committee present at a meeting at which a quorum is present shall
be the act of the Committee. Any member of the Committee may be removed at any
time either with or without cause by resolution adopted by the Board of
Directors of the Company; and any vacancy on the Committee may at any time be
filled by resolution adopted by the Board of Directors.
3. Grant of Options. The Committee shall have the authority and
responsibility, within the limitations of this Plan, to determine the key
employees to whom options are to be granted, the number of shares that may be
purchased under each option and the option price.
In determining the key employees to whom options shall be granted and
the number of shares to be covered by each such option, the Committee shall take
into consideration the employee's present and potential contribution to the
success of the Company and its subsidiaries and such other factors as the
Committee may deem proper and relevant. During any calendar year period during
the term of this Plan, options will not be granted to any individual in excess
of 50,000 shares, as adjusted from time to time pursuant to paragraph 13.
Options may not be granted under this Plan if shares are available for
granting under the 1991 Non-Qualified Stock Option Plan.
4. Persons Eligible.
(a) Options may be granted under this Plan to any key employee or
prospective key employee (conditioned and effective upon his becoming an
employee) of the Company or its subsidiaries. Employees who are also officers or
directors of the Company or its subsidiaries shall not by reason of such offices
be ineligible to receive options under this Plan.
<PAGE>
(b) Each individual who is not an employee of the Company or its
subsidiaries, who becomes a director of the Company ("Outside Director") after
adoption of this Plan and who has not previously been granted options under
this, or any other stock option plan of the Company, shall, on the date of his
or her election to the Board of Directors of the Company, be granted an option
to purchase 10,000 shares of the Common Stock at a price equal to 100% of the
fair market value of the Common Stock on such date. No Outside Director to whom
an option has been granted shall be eligible to receive additional options under
this Plan.
An employee or director receiving any option under this Plan is
hereinafter referred to as an "Optionee." Any reference herein to the employment
of an Optionee with the Company shall include employment with the Company or any
of its subsidiaries. The fair market value of the Common Stock on any day shall
be the mean between the highest and lowest quoted selling prices of the Common
Stock on such day as reported by the primary national stock exchange on which
such stock is listed. If no sale shall have been made on that day, or if the
Common Stock is not listed on a national exchange at that time, fair market
value will be determined by the Committee.
5. Stock Subject to Options. Subject to the provisions of paragraph 13,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options granted under this Plan, shall not exceed 575,000. If, and to the
extent the options granted under this Plan terminate or expire without having
been exercised, new options may be granted with respect to the shares covered by
such terminated or expired options; provided that the granting and terms of such
new options shall in all respects comply with the provisions of this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted or that may be granted under this Plan.
6. Option Price. The option price of each share of Common Stock
purchasable under any option granted under this Plan shall be not less than the
fair market value thereof at the time the option is granted and shall be set
forth in the option agreement.
7. Expiration and Termination of the Plan. Options may be granted under
this Plan at any time and from time to time, prior to December 31, 2005, on
which date this Plan will expire, except as to options then outstanding under
this Plan. Such options shall remain in effect until they have been exercised or
have expired. This Plan may be terminated or modified at any time prior to
December 31, 2005, by the Board of Directors except with respect to any options
then outstanding under this Plan; provided that any (a) increase in the maximum
number of shares subject to options, as specified in paragraph 5, (b) decrease
in the minimum option price specified in paragraph 6 or (c) change in the number
of and terms of options to be awarded to Outside Directors as specified in
paragraphs 4(b), 8 and 13 shall be subject to approval by the Company's
shareholders, unless made pursuant to the provisions of paragraph 13.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
2
<PAGE>
8. Exercisability and Duration of Options.
(a) Exercisability. Options granted under this Plan to employees shall
become exercisable after the lapse of such period or periods of time or the
occurrence of such event or events as the Committee, in its discretion, may
provide upon the granting thereof. Any option granted under this Plan to an
Outside Director shall become exercisable as follows (or after the lapse of such
additional period or periods of time or the occurrence of such event or events
as the Committee, in its discretion, may provide upon the granting thereof):
<Table>
<Caption>
Time Elapsed since Grant Options First Exercisable
------------------------ -------------------------
<S> <C>
One Year 1,000
Two Years 1,500
Three Years 2,000
Four Years 2,500
Five Years 3,000
</Table>
After the expiration of five years following the date on which such
grant is made, such options may be exercised as to all of the shares covered
thereby.
(b) Duration. The unexercised portion of any option granted under this
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) The expiration of 10 years from the date on which such
option was granted;
(2) The expiration of three months from the date of
termination of the Optionee's employment with the Company or any subsidiary (or
in the case of an Outside Director, three months from the date such Outside
Director ceases to serve as a member of the Board of Directors for any reason
other than death); provided that if the Optionee shall die during such 3-month
period the provisions of subparagraph (3) below shall apply;
(3) The expiration of 6 months following the issuance of
letters testamentary or letters of administration to the executor or
administrator of a deceased Optionee, if the Optionee's death occurs either
during his employment with the Company (or service as an Outside Director, as
the case may be) or during the 3-month period following the date of termination
of such employment (or service as an Outside Director, as the case may be), but
not later than 1 year after the Optionee's death;
(4) In the case of employee Optionees, the termination of the
Optionee's employment with the Company for cause, including breach by the
Optionee of an employment agreement with the Company or any of its subsidiaries
or the Optionee's commission of a felony or misdemeanor (whether or not
prosecuted) against the Company or any of its subsidiaries;
(5) In the case of employee Optionees, the expiration of such
period of time or the occurrence of such event as the Committee in its
discretion may provide upon the granting thereof.
3
<PAGE>
9. Exercise of Options.
(a) Procedure. The options granted hereunder shall be exercised by the
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option, by giving written notice
(the "Notice") of the exercise thereof to the Company. From time to time the
Committee may establish procedures relating and effecting such exercises. No
fractional shares shall be issued as a result of exercising an option.
(b) Payment. In the Notice, the Optionee shall elect whether he or she
is to pay for his or her shares in cash or in Common Stock of the Company, or
both. If payment is to be made in cash, the Optionee shall deliver to the
Company a cashier's check or electronic funds transfer in the amount of the
exercise price on or before the exercise date. If payment is to be made in
Common Stock, it shall be valued at its fair market value on the date of such
notice, as determined pursuant to paragraph 6 hereof and the Notice shall be
accompanied by a certificate for at least the number of shares of Common Stock
to be used as payment.
(c) Irrevocable Election. The giving of such written notice to the
Company shall constitute an irrevocable election to purchase the number of
shares specified in the Notice on the date specified in the Notice.
(d) Withholding Taxes. To the extent that the exercise of any Option
granted pursuant to this Plan or the disposition of shares of Common Stock
acquired by exercise of an Option results in compensation income to the Optionee
for federal or state income tax purposes, the Optionee shall deliver to the
Company at the time of such exercise or disposition such amount of money as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if the Optionee fails to do so, the Company is authorized to
(a) withhold delivery of certificates upon exercise and (b) withhold from
remuneration then or thereafter payable to Optionee any tax required to be
withheld by reason of such resulting compensation income.
(e) Delivery of Shares. The Company shall cause certificates for shares
to be delivered to the Optionee (or the person exercising the Optionee's options
in the event of the death as soon as practicable after the exercise date.
10. Nontransferability of Options. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his options.
In the event of the Optionee's death during his or her employment with
the Company, or during the 30-day period following the date of termination of
such employment, his options shall thereafter be exercisable, as provided in
paragraph 8(b), by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee.
11. Rights of Optionee. Neither the Optionee nor his or her executors,
administrators, or legal representatives shall have any of the rights of a
shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
4
<PAGE>
12. Right to Terminate Employment. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time,
subject, however, to the provisions of any agreement of employment between the
Company or any of its subsidiaries and the Optionee.
13. Adjustment Upon Changes in Capitalization, Etc.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any sale, lease, exchange or other disposition of all or any part
of its assets or business or any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased. In the event of any
such change in the outstanding Common Stock, the aggregate number of shares
available under the Plan may be appropriately adjusted by the Committee whose
determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. If the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or if the Company is to be
dissolved or liquidated, then unless a surviving corporation assumes or
substitutes new options for Options then outstanding hereunder (i) the time at
which such Options may be exercised shall be accelerated and such Options shall
become exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or consolidation or such dissolution or
liquidation, and (ii) upon such effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or the purchase
price per share.
5
<PAGE>
14. Purchase for Investment and Legality. The Optionee, by the
acceptance of any option granted under this Plan, shall represent and warrant to
the Company that the purchase or receipt of shares of Common Stock upon the
exercise thereof shall be for investment and not with a view to distribution,
provided that such representation and warranty shall be inoperative if, in the
opinion of counsel to the Company, a proposed sale or distribution of such
shares is pursuant to an applicable effective registration statement under the
Securities Act of 1933 or is, without such representation and warranty, exempt
from registration under such Act.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
15. Effective Date of Plan. This Plan shall become effective upon its
adoption by the Board of Directors of the Company, subject, however, to its
approval by the Company's shareholders after the date of such adoption.
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>9
<FILENAME>d02829exv10w17.txt
<DESCRIPTION>1998 SAEA NON-QUALIFIED STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.17
SOUTHWEST AIRLINES CO.
1998 SAEA NON-QUALIFIED
STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1998 SAEA Non-Qualified Stock Option Plan.
1. PURPOSE. This Plan is adopted pursuant to the Collective Bargaining
Agreement (the "Agreement") between the Company and the Southwest Airlines
Employee Association ("SAEA") ratified on September 10, 1998.
2. ADMINISTRATION. This Plan shall be administered by an Administrative
Committee (the "Committee") consisting of not more than five (5) persons
designated from time to time by the Chief Executive Officer of the Company,
including as one of its members the President of SAEA or his or her designee.
Members of the Committee may be removed or replaced at any time by the Chief
Executive Officer of the Company. The Administrative Committee shall select one
of its members as Chairman and shall adopt such rules and regulations as it
shall deem appropriate concerning the holding of its meetings, the transaction
of its business and the administration of this Plan. A majority of the whole
Committee shall constitute a quorum, and the act of a majority of the members of
the Committee present at a meeting at which a quorum is present shall be the act
of the Committee; any decision or determination reduced to writing and signed by
a majority of the members of the Administrative Committee shall be fully as
effective as if made by a majority vote at a meeting duly called and held.
3. GRANT OF OPTIONS; PERSONS ELIGIBLE. The Stock Option Committee of
the Board of Directors of the Company, or such other committee as may be
appointed by the Board, shall have the authority and responsibility, within the
limitations of this Plan, to grant options from time to time to persons employed
as dispatchers (including dispatchers in management positions retaining
seniority numbers) by the Company pursuant to the Agreement and as set forth in
the schedule attached as Exhibit A and made a part hereof. Initial Grants (as
defined in Exhibit A) shall be granted at an exercise price of $19.62 per share;
thereafter, Options shall be granted at an exercise price equal to the fair
market value of the Common Stock of the Company on the date of the grant of the
option plus five percent (5%). Only persons who are employed as dispatchers of
SWA on the date of the grant may be granted options under this Plan; under no
circumstances shall executive officers of the Company be eligible to receive
options hereunder.
================================================================================
1998 SAEA NON-QUALIFIED STOCK OPTION PLAN Page 1
<PAGE>
4. DEFINITIONS. An employee receiving any option under this Plan is
hereinafter referred to as an "Optionee." Any reference herein to the employment
of an Optionee with the Company shall include only employment with the Company.
The fair market value of the Common Stock on any day shall be the mean between
the highest and lowest quoted selling prices of the Common Stock on such day as
reported by the primary national stock exchange on which such stock is listed.
If no sale shall have been made on that day, or if the Common Stock is not
listed on a national exchange at that time, fair market value will be determined
by the Committee.
5. STOCK SUBJECT TO OPTIONS. Subject to the provisions of paragraph 12,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options, granted under this Plan, shall not exceed 1,050,000 shares (as
adjusted for the 3-for-2 stock split effective August 20, 1998). If, and to the
extent the options granted under this Plan terminate or expire without having
been exercised, new options may be granted with respect to the shares covered by
such terminated or expired options; provided that the granting and terms of such
new options shall in all respects comply with the provisions of this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted under this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of shares of Common Stock which may thereafter be available, both for
purposes of this Plan and for sale to any one individual, by the number of
shares as to which the Option is exercised.
6. EXPIRATION AND TERMINATION OF THE PLAN. This Plan will expire on
June 30, 2012.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
7. EXERCISABILITY AND DURATION OF OPTIONS.
(a) Exercisability. Options granted under this Plan shall become
exercisable pursuant to the vesting schedule and requirements set forth in
Exhibit A attached hereto.
================================================================================
1998 SAEA NON-QUALIFIED STOCK OPTION PLAN Page 2
<PAGE>
(b) Duration. The unexercised portion of any option granted under this
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) June 30, 2012;
(2) The expiration of three months from the date of
termination of the Optionee's employment with the Company (unless such
termination was as a result of the circumstances set forth in subparagraphs (3)
or (4) below); provided that if the Optionee shall die during such 3-month
period the provisions of subparagraph (3) below shall apply;
(3) The expiration of 12 months following the issuance of
letters testamentary or letters of administration to the executor or
administrator of a deceased Optionee, if the Optionee's death occurs either
during his employment with the Company, during the three-month period following
the date of termination of such employment, or during the 24-month period
following retirement at age 65; or
(4) The expiration of 24 months following the retirement of
the Optionee at age 65; provided that if the Optionee shall die during such
24-month period, the provisions of subparagraph (3) above shall apply.
In the case of subparagraphs (2), (3) and (4) above, the
Optionee shall have the right to exercise any Option prior to such expiration to
the extent it was exercisable at the date of such termination of employment and
shall not have been exercised.
8. EXERCISE OF OPTIONS.
(a) Procedure. The option granted herein shall be exercised by the
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option (but in no event less than
100 shares, unless such exercise is for all remaining shares) by giving written
notice of the exercise thereof (the "Notice") to the Company. From time to time
the Committee may establish procedures relating to effecting such exercises. No
fractional shares shall be issued as a result of exercising an Option.
(b) Payment. In the Notice, the Optionee shall elect whether he or she
is to pay for his or her shares in cash or in Common Stock of the Company, or
both. If payment is to be made in cash, the Optionee shall deliver to the
Company a cashier's check or electronic funds transfer in the amount of the
exercise price on or before the exercise date. If payment is to be made in
Common Stock, (a) it shall be valued at its fair market value on the date of
such notice, as determined pursuant to Paragraph 4 hereof; (b) such Common Stock
must have been owned by the Optionee for at least six months prior to the
exercise date; and (c) the Notice shall be accompanied by a certificate for at
least the number of shares of Common Stock to be used as payment.
================================================================================
1998 SAEA NON-QUALIFIED STOCK OPTION PLAN Page 3
<PAGE>
(c) Irrevocable Election. The giving of such written notice to the
Company shall constitute an irrevocable election to purchase the number of
shares specified in the notice on the date specified in the notice.
(d) Withholding Taxes. To the extent that the exercise of any Option
granted pursuant to this Plan or the disposition of shares of Common Stock
acquired by exercise of an Option results in compensation income to the Optionee
for federal or state income tax purposes, the Optionee shall deliver to the
Company at the time of such exercise or disposition such amount of money as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if the Optionee fails to do so, the Company is authorized to
(a) withhold delivery of certificates upon exercise and (b) withhold from
remuneration then or thereafter payable to Optionee any tax required to be
withheld by reason of such resulting compensation income.
(e) Delivery of Shares. The Company shall cause shares to be delivered
to the Optionee (or the person exercising the Optionee's options in the event of
death) as soon as practicable after the exercise date.
9. NONTRANSFERABILITY OF OPTIONS. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his or her options.
In the event of the Optionee's death during his or her employment with
the Company, during the three-month period following the date of termination of
such employment, or during the 24-month period following retirement at age 65,
the Optionee's options shall thereafter be exercisable, as provided in paragraph
7(b), by his or her executor or administrator, or by the person who acquires
such options by will or the laws of descent and distribution or otherwise by
reason of the death of the Optionee.
10. RIGHTS OF OPTIONEE. Neither the Optionee nor his or her executors,
administrators, or legal representatives shall have any of the rights of a
shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
11. RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time;
subject, however, to the provisions of the Agreement.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board of Directors or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the
================================================================================
1998 SAEA NON-QUALIFIED STOCK OPTION PLAN Page 4
<PAGE>
Company, any issue of debt or equity securities ahead of or affecting Common
Stock or the rights thereof, the dissolution or liquidation of the Company or
any sale, lease, exchange or other disposition of all or any part of its assets
or business or any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased; likewise, the
number of shares to be granted pursuant to the schedule set forth in Exhibit A
shall be appropriately adjusted. In the event of any such change in the
outstanding Common Stock, the aggregate number of shares available under the
Plan shall be appropriately adjusted by the Board of Directors of the Company,
whose determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. If the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or if the Company is to be
dissolved or liquidated, then unless a surviving corporation assumes or
substitutes new options for Options then outstanding hereunder (i) the time at
which such Options may be exercised shall be accelerated and such Options shall
become exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or consolidation or such dissolution or
liquidation, and (ii) upon such effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or to be granted
or the purchase price per share.
13. PURCHASE FOR INVESTMENT AND LEGALITY. The Optionee, by acceptance
of any option granted under this Plan, shall represent and warrant to the
Company that the
================================================================================
1998 SAEA NON-QUALIFIED STOCK OPTION PLAN Page 5
<PAGE>
purchase or receipt of shares of Common Stock upon the exercise thereof shall be
for investment and not with a view to distribution, provided that such
representation and warranty shall be inoperative if, in the opinion of counsel
to the Company, a proposed sale or distribution of such shares is pursuant to an
applicable effective registration statement under the Securities Act of 1933 or
is, without such representation and warranty, exempt from registration under
such Act. The Company shall file a Registration Statement on Form S-8 pursuant
to the Securities Act of 1933, as amended, covering the shares to be offered
pursuant to the Plan and will use its best efforts to maintain such registration
at all times necessary to permit holders of options to exercise them.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
14. EFFECTIVE DATE OF PLAN. This Plan shall become effective on
September 10, 1998 upon its adoption by the Board of Directors of the Company.
================================================================================
1998 SAEA NON-QUALIFIED STOCK OPTION PLAN Page 6
<PAGE>
EXHIBIT A
INITIAL GRANTS
On the Effective Date of the Plan, options will be granted to persons
employed as dispatchers by the Company according to the following schedule.
Initial Grants are based on the Dispatcher's step level for pay purposes as of
December 1, 1997 (the "Seniority Grant Date"), except for employees hired after
the Seniority Grant Date and before the Effective Date, who shall be treated for
purposes of the Initial Grants as being step one employees. Options will vest
annually on the anniversary of the Seniority Grant Date.
<Table>
<Caption>
STOCK OPTION VESTING SCHEDULE
------------------------------------------------------------------------------------------
(DATE OF
RATIFICATION)
DECEMBER 1,
---------------------------------------------------------------------------
STEP LEVEL AS
OF SENIORITY TOTAL SEPT. 10,
GRANT DATE GRANT 1998 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ---------- ----- ----------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6749 453 503 552 601 650 699 748 798 848 897
2 7242 503 552 601 650 699 748 798 848 897 946
3 7686 552 602 649 699 749 798 847 897 947 946
4 8081 602 649 699 749 798 847 897 947 946 947
5 8426 650 699 749 798 847 897 947 946 947 946
6 8721 699 749 798 847 897 947 946 946 946 946
7 8969 749 798 847 897 947 946 947 946 946 946
8 9165 798 848 897 946 946 946 946 946 946 946
9 9314 848 897 947 946 946 946 946 946 946 946
10 9413 897 947 946 947 946 946 946 946 946 946
11 9465 947 946 947 946 947 946 947 946 947 946
12 & Thereafter 9465 947 946 947 946 947 946 947 946 947 946
</Table>
SUBSEQUENT GRANTS
On December 1 of each year, commencing December 1, 1998 through
December 1, 2008 (unless the Plan terminates at an earlier date according to the
terms thereof), options will be granted to persons employed as dispatchers by
the Company who have completed probation during the previous 12 months. Options
will vest annually on the anniversary of the Grant Date, as follows:
================================================================================
EXHIBIT A TO 1998 SAEA NON-QUALIFIED
STOCK OPTION PLAN PAGE 1
<PAGE>
<Table>
<Caption>
Grant
Date STOCK OPTION VESTING SCHEDULE*
- ------- ---------------------------------------------------------------------------------------------------
Grant Total
Dec. 1, Date Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Grant
- ------- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 453 503 552 601 649 699 748 798 847 897 6,747
1999 453 503 552 601 649 699 748 798 847 0 5,850
2000 453 503 552 601 649 699 748 798 0 0 5,003
2001 453 503 552 601 649 699 748 0 0 0 4,205
2002 453 503 552 601 649 699 0 0 0 0 3,457
2003 453 503 552 601 649 0 0 0 0 0 2,758
2004 453 503 552 601 0 0 0 0 0 0 2,109
2005 453 503 552 0 0 0 0 0 0 0 1,508
2006 453 503 0 0 0 0 0 0 0 0 956
2007 453 0 0 0 0 0 0 0 0 0 453
2008 453 0 0 0 0 0 0 0 0 0 453
</Table>
*Year 2 is the first anniversary of the Grant Date, Year 3 is the second
anniversary of the Grant Date, and so on.
All numbers in this Exhibit have been adjusted to reflect the 3-for-2 stock
split effective August 20, 1998.
VESTING REQUIREMENTS
Options will vest on the applicable vesting date under the following
circumstances, and no other:
(a) For Optionees who are employees of the Company on paid status as of
the applicable vesting date; and
(b) For Optionees who are employees of the Company on unpaid status as
of the applicable vesting date (e.g., medical leave, military leave, maternity
leave etc.) who accrue hours of service during the calendar year in which the
vesting date occurs sufficient to qualify for a profit sharing contribution
under the Company's Profit Sharing Plan for such calendar year. By way of
example, if an Optionee is on unpaid medical leave on December 1, 1999, but
during calendar year 1999 accrues sufficient hours of service to qualify for a
profit sharing contribution for 1999, such Optionee's options will vest on
December 1, 1999 as if that Optionee had been on paid status as of December 1,
1999.
================================================================================
EXHIBIT A TO 1998 SAEA NON-QUALIFIED
STOCK OPTION PLAN PAGE 2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.18
<SEQUENCE>10
<FILENAME>d02829exv10w18.txt
<DESCRIPTION>1999 SWAPIA NON-QUALIFIED STOCK OPTION PLAN
<TEXT>
<PAGE>
EXHIBIT 10.18
SOUTHWEST AIRLINES CO.
1999 SWAPIA NON-QUALIFIED STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1999 SWAPIA Non-Qualified Stock Option Plan.
1. PURPOSE. This Plan is adopted pursuant to the Collective Bargaining
Agreement (the "Agreement") between the Company and the Southwest Airlines
Professional Instructors Association ("SWAPIA") ratified on May 20, 1999.
2. ADMINISTRATION. This Plan shall be administered by an Administrative
Committee (the "Committee") consisting of not more than five (5) persons
designated from time to time by the Chief Executive Officer of the Company,
including as one of its members the President of SWAPIA or his or her designee.
Members of the Committee may be removed or replaced at any time by the Chief
Executive Officer of the Company. The Administrative Committee shall select one
of its members as Chairman and shall adopt such rules and regulations as it
shall deem appropriate concerning the holding of its meetings, the transaction
of its business and the administration of this Plan. A majority of the whole
Committee shall constitute a quorum, and the act of a majority of the members of
the Committee present at a meeting at which a quorum is present shall be the act
of the Committee; any decision or determination reduced to writing and signed by
a majority of the members of the Administrative Committee shall be fully as
effective as if made by a majority vote at a meeting duly called and held.
3. GRANT OF OPTIONS; PERSONS ELIGIBLE. The Stock Option Committee of
the Board of Directors of the Company, or such other committee as may be
appointed by the Board, shall have the authority and responsibility, within the
limitations of this Plan, to grant options from time to time to persons employed
as fulltime flight crew training instructors (including flight crew training
instructors in management positions retaining seniority numbers) by the Company
pursuant to the Agreement and as set forth in the schedule attached as Exhibit A
and made a part hereof. Initial Grants (as defined in Exhibit A) shall be
granted at an exercise price of $33.8953 per share; thereafter, Options shall be
granted at an exercise price equal to the fair market value of the Common Stock
of the Company on the date of
1
<PAGE>
the grant of the option plus five percent (5%). Only persons who are employed as
fulltime flight crew training instructors of SWA on the date of the grant may be
granted options under this Plan; under no circumstances shall executive officers
of the Company be eligible to receive options hereunder.
Southwest Airlines employees who enter the instructor work force
without a break in company service and who are participants in another
collectively bargained stock option plan (an "existing plan") will either retain
stock option grants established in accordance with such existing plan, or will
receive grants in accordance with this Plan, whichever is chosen by the employee
involved, but the employee shall not hold grants under both plans
simultaneously. The employee must make the election prior to the scheduled grant
date for options under this Plan. If the employee does not make a timely
election, options previously granted will remain in effect, and no grant will be
made under this Plan. Exercise of options will be done in accordance with the
Plan under which they were awarded. At such time as the employee no longer holds
any vested or unvested options under the other existing plan, the employee will
receive an initial grant under this Plan on the next scheduled grant date. The
total grant shall be based on the employee's step level as of the grant date,
and shall be equal to the number of shares which have not vested prior to the
grant date for that step level, according to Exhibit A.
Southwest Airlines flight crew training instructors who transfer to
another collective bargaining work group covered by an existing stock option
plan will either retain stock option grants established in accordance with this
plan, or will receive grants in accordance with such other existing plan,
whichever is chosen by the employee involved, but the employee shall not hold
grants under both plans simultaneously. The employee must make the election
prior to the next scheduled grant date for options under the other stock option
plan. If the employee does not make a timely election, options previously
granted under this plan will remain in effect and no grant will be made under
the other stock option plan. At such time as the employee no longer holds any
vested or unvested options under this plan, the employee will receive an initial
grant under the other plan on the next scheduled grant date. Unless prohibited
under the other plan, the total grant shall be based on the employee's step
level as of the grant date, and shall be equal to the number of shares which
have not vested prior to the grant date for that step level.
4. DEFINITIONS. An employee receiving any option under this Plan is
hereinafter referred to as an "Optionee." Any
2
<PAGE>
reference herein to the employment of an Optionee with the Company shall include
only employment with the Company. The fair market value of the Common Stock on
any day shall be the mean between the highest and lowest quoted selling prices
of the Common Stock on such day as reported by the primary national stock
exchange on which such stock is listed. If no sale shall have been made on that
day, or if the Common Stock is not listed on a national exchange at that time,
fair market value will be determined on the most recent business day on which
the stock was traded, unless otherwise determined by the Committee.
5. STOCK SUBJECT TO OPTIONS. Subject to the provisions of paragraph 12,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options, granted under this Plan, shall not exceed 350,000 shares. If, and to
the extent the options granted under this Plan terminate or expire without
having been exercised, new options may be granted with respect to the shares
covered by such terminated or expired options; provided that the granting and
terms of such new options shall in all respects comply with the provisions of
this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted under this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of shares of Common Stock which may thereafter be available, both for
purposes of this Plan and for sale to any one individual, by the number of
shares as to which the Option is exercised.
6. EXPIRATION AND TERMINATION OF THE PLAN. This Plan will expire on
June 30, 2012.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
3
<PAGE>
7. EXERCISABILITY AND DURATION OF OPTIONS.
(a) Exercisability. Options granted under this Plan shall become
exercisable pursuant to the vesting schedule and requirements set forth in
Exhibit A attached hereto.
(b) Duration. The unexercised portion of any option granted under this
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) June 30, 2012;
(2) The expiration of three months from the date of
termination of the Optionee's employment with the Company (unless such
termination was as a result of the circumstances set forth in subparagraphs (3)
or (4) below); provided that if the Optionee shall die during such 3-month
period the provisions of subparagraph (3) below shall apply;
(3) The expiration of 12 months following the issuance of
letters testamentary or letters of administration to the executor or
administrator of a deceased Optionee, or admitting testator's will into probate,
if the Optionee's death occurs either during his employment with the Company,
during the three-month period following the date of termination of such
employment, or during the 24-month period following retirement at age 65; or
(4) The expiration of 24 months following the retirement of
the Optionee at or after age 65; provided that if the Optionee shall die during
such 24-month period, the provisions of subparagraph (3) above shall apply.
In the case of subparagraphs (2), (3) and (4) above, the
Optionee shall have the right to exercise any Option prior to such expiration to
the extent it was exercisable at the date of such termination of employment and
shall not have been exercised.
8. EXERCISE OF OPTIONS.
(a) Procedure. The option granted herein shall be exercised by the
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option (but in no event less than
100 shares, unless such exercise is for all remaining shares) by giving written
notice of the exercise thereof (the
4
<PAGE>
"Notice") to the Company. From time to time the Committee may establish
procedures relating to effecting such exercises. No fractional shares shall be
issued as a result of exercising an Option.
(b) Payment. In the Notice, the Optionee shall elect whether he or she
is to pay for his or her shares in cash or in Common Stock of the Company, or
both. If payment is to be made in cash, the Optionee shall deliver to the
Company a cashier's check or electronic funds transfer in the amount of the
exercise price on or before the exercise date. If payment is to be made in
Common Stock, (a) it shall be valued at its fair market value on the date of
such notice, as determined pursuant to Paragraph 4 hereof; (b) such Common Stock
must have been owned by the Optionee for at least six months prior to the
exercise date; and (c) the Notice shall be accompanied by a certificate for at
least the number of shares of Common Stock to be used as payment.
(c) Irrevocable Election. The giving of such written notice to the
Company shall constitute an irrevocable election to purchase the number of
shares specified in the notice on the date specified in the notice.
(d) Withholding Taxes. To the extent that the exercise of any Option
granted pursuant to this Plan or the disposition of shares of Common Stock
acquired by exercise of an Option results in compensation income to the Optionee
for federal or state income tax purposes, the Optionee shall deliver to the
Company at the time of such exercise or disposition such amount of money as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if the Optionee fails to do so, the Company is authorized to
(a) withhold delivery of certificates upon exercise and (b) withhold from
remuneration then or thereafter payable to Optionee any tax required to be
withheld by reason of such resulting compensation income.
(e) Delivery of Shares. The Company shall cause shares to be delivered
to the Optionee (or the person exercising the Optionee's options in the event of
death) as soon as practicable after the exercise date.
9. NONTRANSFERABILITY OF OPTIONS. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his or her options.
5
<PAGE>
In the event of the Optionee's death during his or her employment with
the Company, during the three-month period following the date of termination of
such employment, or during the 24-month period following retirement at age 65,
the Optionee's options shall thereafter be exercisable, as provided in paragraph
7(b), by his or her executor or administrator, or by the person who acquires
such options by will or the laws of descent and distribution or otherwise by
reason of the death of the Optionee.
10. RIGHTS OF OPTIONEE. Neither the Optionee nor his or her executors,
administrators, or legal representatives shall have any of the rights of a
shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
11. RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time;
subject, however, to the provisions of the Agreement.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board of Directors or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of debt or equity securities ahead of or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company or any sale, lease,
exchange or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall
6
<PAGE>
be proportionately reduced, and (ii) in the event of a reduction in the number
of outstanding shares shall be proportionately reduced, and the purchase price
per share shall be proportionately increased; likewise, the number of shares to
be granted pursuant to the schedule set forth in Exhibit A shall be
appropriately adjusted. In the event of any such change in the outstanding
Common Stock, the aggregate number of shares available under the Plan shall be
appropriately adjusted by the Board of Directors of the Company, whose
determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common Stock as to which such option is then
exercisable. If the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than a
previously wholly-owned subsidiary of the Company) or if the Company is to be
dissolved or liquidated, then unless a surviving corporation assumes or
substitutes new options for Options then outstanding hereunder (i) the time at
which such Options may be exercised shall be accelerated and such Options shall
become exercisable in full on or before a date fixed by the Company prior to the
effective date of such merger or consolidation or such dissolution or
liquidation, and (ii) upon such effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or to be granted
or the purchase price per share.
13. PURCHASE FOR INVESTMENT AND LEGALITY. The Optionee, by acceptance
of any option granted under this Plan, shall represent and warrant to the
Company that the purchase or receipt of shares
7
<PAGE>
of Common Stock upon the exercise thereof shall be for investment and not with a
view to distribution, provided that such representation and warranty shall be
inoperative if, in the opinion of counsel to the Company, a proposed sale or
distribution of such shares is pursuant to an applicable effective registration
statement under the Securities Act of 1933 or is, without such representation
and warranty, exempt from registration under such Act. The Company shall file a
Registration Statement on Form S-8 pursuant to the Securities Act of 1933, as
amended, covering the shares to be offered pursuant to the Plan and will use its
best efforts to maintain such registration at all times necessary to permit
holders of options to exercise them.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
14. EFFECTIVE DATE OF PLAN. This Plan shall become effective on May 20,
1999, upon its adoption by the Board of Directors of the Company.
8
<PAGE>
EXHIBIT A
INITIAL GRANTS
On the Effective Date of the Plan, options will be granted to persons
employed as Instructors by the Company according to the following schedule.
Initial Grants are based on the Instructor's step level for pay purposes as of
the Effective Date of the Plan, May 20, 1999. Options will vest annually on
January 1 of subsequent years.
<Table>
<Caption>
STOCK OPTION VESTING SCHEDULE
- ------------------------------------------------------------------------------------------------------------------
Step Level
as of Effective January 1,
Effective TOTAL Date of Plan ------------------------------------------------------------------
Date of Plan GRANT May 20, 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
------------ ----- ------------ ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 5,400 540 540 540 540 540 540 540 540 540 540
5 6,200 620 620 620 620 620 620 620 620 620 620
6 6,500 650 650 650 650 650 650 650 650 650 650
7 7,000 700 700 700 700 700 700 700 700 700 700
8 7,500 750 750 750 750 750 750 750 750 750 750
9 7,800 780 780 780 780 780 780 780 780 780 780
10 8,000 800 800 800 800 800 800 800 800 800 800
11 8,200 820 820 820 820 820 820 820 820 820 820
12 8,400 840 840 840 840 840 840 840 840 840 840
13 8,600 860 860 860 860 860 860 860 860 860 860
14 8,800 880 880 880 880 880 880 880 880 880 880
15 & Above 9,000 900 900 900 900 900 900 900 900 900 900
</Table>
SUBSEQUENT GRANTS
On January 1 of each year, commencing January 1, 2001, through January
1, 2010 (unless the plan terminates at an earlier date according to the terms
thereof), options will be granted to persons employed as Instructors by the
Company who have completed
9
<PAGE>
probation during the previous 12 months. Options will vest annually on the
anniversary of the Grant Date as follows:
<Table>
<Caption>
Grant
Date STOCK OPTION VESTING SCHEDULE*
----- ------------------------------------------------------------------------------------------------------
TOTAL
JAN.1 GRANT DATE YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 GRANT
----- ---------- ------ ------ ------ ------ ------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2001 450 450 450 450 450 450 450 450 450 450 4,500
2002 450 450 450 450 450 450 450 450 450 0 4,050
2003 450 450 450 450 450 450 450 450 0 0 3,600
2004 450 450 450 450 450 450 450 0 0 0 3,150
2005 450 450 450 450 450 450 0 0 0 0 2,700
2006 450 450 450 450 450 0 0 0 0 0 2,250
2007 450 450 450 450 0 0 0 0 0 0 1,800
2008 450 450 450 0 0 0 0 0 0 0 1,350
2009 450 450 0 0 0 0 0 0 0 0 900
2010 450 0 0 0 0 0 0 0 0 0 450
</Table>
*Year 2 is the first anniversary of the Grant Date, Year 3 is the second
anniversary of the Grant Date, and so on.
VESTING REQUIREMENTS
Options will vest on the applicable vesting date under the following
circumstances, and no other:
(a) For Optionees who are employees of the Company on paid status
as of the applicable vesting date; and
(b) For Optionees who are employees of the Company on unpaid
status as of the applicable vesting date (e.g., medical leave,
military leave, maternity leave etc.) who accrue hours of
service during the calendar year prior to the year in which
the vesting date occurs sufficient to qualify for a
profitsharing contribution under the Company's Profitsharing
Plan for such calendar year. By way of example, if an Optionee
is on unpaid medical leave on January 1, 2000, but during
calendar year 1999 accrues sufficient hours of service to
qualify for a profitsharing contribution for 1999, such
Optionee's options will vest on January 1, 2000,
10
<PAGE>
as if that Optionee had been on paid status as of January 1,
2000.
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>11
<FILENAME>d02829exv10w27.txt
<DESCRIPTION>2002 RAMP OPERATIONS PROVISIONING & FREIGHT STOCK
<TEXT>
<PAGE>
EXHIBIT 10.27
SOUTHWEST AIRLINES CO.
2002 RAMP, OPERATIONS, PROVISIONING AND
FREIGHT NON-QUALIFIED STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 2002 Ramp, Operations, Provisioning and
Freight Non-Qualified Stock Option Plan.
1. PURPOSE. This Plan is adopted pursuant to proposed Side Letter of
Agreement No. Ten ("Side Letter Ten") to the Collective Bargaining Agreement
(the "Agreement") between the Company and the Transport Workers Union of
America, AFL - CIO Local 555 representing Ramp, Operations, Provisioning and
Freight Agents ("TWU") ratified on June 14, 2001.
2. ADMINISTRATION. This Plan shall be administered by an Administrative
Committee (the "Committee") consisting of not more than five (5) persons
designated from time to time by the Chief Executive Officer of the Company.
Members of the Committee may be removed or replaced at any time by the Chief
Executive Officer of the Company. The Administrative Committee shall select one
of its members as Chairman and shall adopt such rules and regulations as it
shall deem appropriate concerning the holding of its meetings, the transaction
of its business and the administration of this Plan. A majority of the whole
Committee shall constitute a quorum, and the act of a majority of the members of
the Committee present at a meeting at which a quorum is present shall be the act
of the Committee; any decision or determination reduced to writing and signed by
a majority of the members of the Administrative Committee shall be fully as
effective as if made by a majority vote at a meeting duly called and held.
3. GRANT OF OPTIONS; PERSONS ELIGIBLE.
(a) Persons Eligible. The Stock Option Committee of the Board of
Directors of the Company, or such other committee as may be appointed by the
Board, shall have the authority and responsibility, within the limitations of
this Plan, to grant options from time to time to persons employed as Ramp,
Operations, Provisioning or Freight Agents by the Company pursuant to the
Agreement, or to Supervisory Employees in the Ground Operations or Provisioning
Depts., all as set forth in the schedule attached as Exhibit A and made a part
hereof. Only persons who are employed as Ramp, Operations, Provisioning or
Freight Agents of the Company on the date of the grant may be granted options
under this Plan, or at the option of the Company, Supervisory Employees in the
Company's Ground Operations and Provisioning
===========================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 1
<PAGE>
Depts.; under no circumstances shall officers of the Company be eligible to
receive options hereunder.
(b) Grant Price. Options shall be granted at an exercise price equal to
the fair market value of the Common Stock of the Company on the date of the
grant of the option with initial grants on the date of ratification of Letter of
Agreement No. Ten.
(c) Southwest Airlines Employees Joining the TWU. Southwest Airlines
Employees who enter the work force subject to the Agreement without a break in
company service and who are participants in another stock option plan (an
"existing plan") will retain any vested and unexercised options granted with
such existing plan. The Employee must choose to either retain unvested stock
option grants established in accordance with such existing plan (if permitted by
such other plan), or will receive grants in accordance with this Plan, whichever
is chosen by the Employee involved, but the Employee shall not hold grants under
both plans simultaneously (other than vested and unexercised options in such
existing plan). The Employee must make the election prior to the scheduled grant
date for options under this Plan. If the Employee does not make a timely
election, options previously granted will remain in effect, and no grant will be
made under this Plan. Exercise of options will be done in accordance with the
Plan under which they were awarded. At such time as the Employee no longer holds
any vested or unvested options under the other existing plan, the Employee will
receive an initial grant under this Plan on the next scheduled grant date.
Employees who entered the TWU workforce prior to the initial grant date of
options under this Plan must make the election within 60 days of the date of
ratification of the Agreement.
(d) Transferring to Another Work Group. If an Optionee transfers to
another work group (other than a supervisory, management, or union position
related to the functions covered by this Agreement), any unvested portion of any
option granted in accordance with this Plan, shall automatically and without
notice terminate and become null and void as of the first day such Optionee is
on the payroll for such position. Any vested and unexercised portion of any such
option shall remain exercisable under this Plan.
4. DEFINITIONS. An Employee receiving any option under this Plan is
referred to herein as an "Optionee." Any reference herein to the employment of
an Optionee with the Company shall include only employment with the Company. The
fair market value of the Common Stock on any day shall be the mean between the
highest and lowest quoted selling prices of the Common Stock on such day as
reported by the primary national stock exchange on which such stock is listed.
If no sale shall have been made on that day, or if the Common Stock is not
listed on a national exchange at that time, fair market value will be determined
by the Committee. If the date of grant is not a business day, the grant price
will be calculated using the immediately preceding business day.
5. STOCK SUBJECT TO OPTIONS. Subject to the provisions of paragraph 12,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options, granted under this Plan, shall not exceed 11,500,000 shares. If, and
to the extent the options granted under this Plan terminate or expire without
having been exercised, new options may be granted with respect to the shares
===========================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 2
<PAGE>
covered by such terminated or expired options; provided that the granting and
terms of such new options shall in all respects comply with the provisions of
this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted under this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of shares of Common Stock which may thereafter be available, both for
purposes of this Plan and for sale to any one individual, by the number of
shares as to which the Option is exercised.
6. EXPIRATION AND TERMINATION OF THE PLAN. This Plan will expire on
December 30, 2008, except as to any options then outstanding under this Plan,
which shall remain in effect until they have been exercised or expired; except
that this Plan will be terminated on December 30, 2007, upon delivery of notice
by TWU 555 of its desire to make the Agreement amendable as of June 30, 2007,
pursuant to Section 4 of Side Letter Ten.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
7. EXERCISABILITY AND DURATION OF OPTIONS.
(a) Exercisability. Options granted under this Plan shall become
exercisable pursuant to the vesting schedule and requirements set forth in
Exhibit A attached hereto.
(b) Duration. The unexercised portion of any option granted under this
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) November 1, 2012;
(2) The expiration of three months from the date of termination of
the Optionee's employment with the Company (unless such termination was as a
result of the circumstances set forth in subparagraph (3) below); provided that
if the Optionee shall die during such 3-month period the provisions of
subparagraph (3) below shall apply; or
(3) The expiration of 12 months from the Optionee's death, if the
Optionee's death occurs either during his employment with the Company or during
the three-month period following the date of termination of such employment.
===========================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 3
<PAGE>
In the case of subparagraphs (2) and (3) above, the Optionee shall
have the right to exercise any Option prior to such expiration to the extent it
was exercisable at the date of such termination of employment and shall not have
been exercised.
8. EXERCISE OF OPTIONS.
(a) Procedure. The option granted herein shall be exercised by the
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option by giving notice of the
exercise thereof (the "Notice") to the Company. From time to time the Committee
may establish procedures relating to effecting such exercises. No fractional
shares shall be issued as a result of exercising an Option.
(b) Payment. In the Notice, the Optionee shall elect whether he or she
is to pay for his or her shares in cash or in Common Stock of the Company, or
both. If payment is to be made in cash, the Optionee shall deliver to the
Company funds in the amount of the exercise price on or before the exercise
date. If payment is to be made in Common Stock, (a) it shall be valued at its
fair market value on the date of such notice, as determined pursuant to
Paragraph 4 hereof; (b) such Common Stock must have been owned by the Optionee
for at least six months prior to the exercise date; and (c) the Notice shall be
accompanied by documentation as proof of ownership for the number of shares of
Common Stock to be used as payment.
(c) Irrevocable Election. The giving of such notice to the Company
shall constitute an irrevocable election to purchase the number of shares
specified in the notice on the date specified in the notice.
(d) Withholding Taxes. To the extent that the exercise of any Option
granted pursuant to this Plan or the disposition of shares of Common Stock
acquired by exercise of an Option results in compensation income to the Optionee
for federal or state income tax purposes, the Optionee shall deliver to the
Company at the time of such exercise or disposition such amount of money as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if the Optionee fails to do so, the Company is authorized to
(a) withhold delivery of certificates upon exercise and (b) withhold from
remuneration then or thereafter payable to Optionee any tax required to be
withheld by reason of such resulting compensation income.
(e) Delivery of Shares. The Company shall cause shares to be delivered
to the Optionee (or the person exercising the Optionee's options in the event of
death) as soon as practicable after the exercise date.
9. NONTRANSFERABILITY OF OPTIONS. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his or her options.
===========================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 4
<PAGE>
In the event of the Optionee's death during his or her employment with
the Company, or during the three-month period following the date of termination
of such employment, the Optionee's options shall thereafter be exercisable by
his or her executor or administrator, or by the person who acquires such options
by will or the laws of descent and distribution or otherwise by reason of the
death of the Optionee.
10. RIGHTS OF OPTIONEE. Neither the Optionee nor his or her executors,
administrators, or legal representatives shall have any of the rights of a
Shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
11. RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time;
subject, however, to the provisions of the Agreement.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board of Directors or the
Shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of debt or equity securities ahead of or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company or any sale, lease,
exchange or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased; likewise, the
number of shares to be granted pursuant to the schedule set forth in Exhibit A
shall be appropriately adjusted. In the event of any such change in the
outstanding Common Stock, the aggregate number of shares available under the
Plan shall be appropriately adjusted by the Board of Directors of the Company,
whose determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares
===========================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 5
<PAGE>
of Common Stock as to which such option is then exercisable. If the Company
shall not be the surviving entity in any merger or consolidation (or survives
only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company) or if the Company is to be dissolved or liquidated,
then unless a surviving corporation assumes or substitutes new options for
Options then outstanding hereunder (i) the time at which such Options may be
exercised shall be accelerated and such Options shall become exercisable in full
on or before a date fixed by the Company prior to the effective date of such
merger or consolidation or such dissolution or liquidation, and (ii) upon such
effective date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or to be granted
or the purchase price per share.
13. PURCHASE FOR INVESTMENT AND LEGALITY. The Optionee, by acceptance
of any option granted under this Plan, shall represent and warrant to the
Company that the purchase or receipt of shares of Common Stock upon the exercise
thereof shall be for investment and not with a view to distribution, provided
that such representation and warranty shall be inoperative if, in the opinion of
counsel to the Company, a proposed sale or distribution of such shares is
pursuant to an applicable effective registration statement under the Securities
Act of 1933 or is, without such representation and warranty, exempt from
registration under such Act. The Company shall file a Registration Statement on
Form S-8 pursuant to the Securities Act of 1933, as amended, covering the shares
to be offered pursuant to the Plan and will use its best efforts to maintain
such registration at all times necessary to permit holders of options to
exercise them.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
14. EFFECTIVE DATE OF PLAN; AMENDMENTS. This Plan shall become
effective upon its adoption by the Board of Directors of the Company; provided,
however, if the Agreement is not ratified by TWU on or before December 30, 2002,
this Plan shall be null and void.
===========================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 6
<PAGE>
Exhibit A
INITIAL STOCK OPTION GRANTS AND VESTING
On the date of ratification of Letter Agreement No. Ten to the
Agreement, options will be granted to persons employed as Ramp, Operations,
Provisioning or Freight Agents by the Company according to the following
schedule, and vesting as shown below.
<Table>
<Caption>
PROJECTED
SENIORITY SENIORITY SHARES VESTING SHARES VESTING
AS OF 7/1/02 AS OF 7/1/06 7/1/06 7/1/07 TOTAL GRANT
------------ ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
1st Year Step 4 350 400 750
Step 1 Step 5 400 450 850
Step 2 Step 6 450 500 950
Step 3 Step 7 500 550 1,050
Step 4 Step 8 550 600 1,150
Step 5 Step 9 600 650 1,250
Step 6 Step 10 650 700 1,350
Step 7 Step 11 700 700 1,400
Step 8 Step 11 700 700 1,400
Step 9 Step 11 700 700 1,400
Step 10 Step 11 700 700 1,400
Step 11 Step 11 700+ 700+ 1,400+
</Table>
+ Add ten shares for every full year of service completed above 11 years
as of the vesting date. Example: An Employee who has completed 20 years
of service as of 7/1/06 would receive a total grant of 1,590 shares,
with 790 shares vesting on 7/1/06 and 800 shares vesting 7/1/07.
EMPLOYEES HIRED BETWEEN 7/1/02 AND DATE OF RATIFICATION
Eligible Employees hired between 7/1/02 and Date of Ratification shall be
granted options for a total of 700 shares, with 325 shares vesting 7/1/06 and
375 shares vesting 7/1/07, to be granted upon completion of probation.
=====================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 1
<PAGE>
SUBSEQUENT GRANTS
Options will be granted to persons subsequently employed by the Company
who are covered by the Agreement who have completed probation. Grants will be
made upon completion of probation, at the then applicable Fair Market Value.
Options will vest annually as follows:
<Table>
<Caption>
PROJECTED
SENIORITY SHARES VESTING SHARES VESTING
HIRE DATE AS OF 7/1/06 7/1/06 7/1/07 TOTAL GRANT
- ------------------ ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C>
DOR-6/30/03 Step 3 300 350 650
7/1/03-6/30/04 Step 2 250 300 550
7/1/04-6/30/05 Step 1 200 250 450
7/1/05-6/30/06 1st Year 200 200 400
7/1/06-6/30/07 -- -- 200* 200
7/1/07-6/30/08 -- -- 175* 175
</Table>
* Grants will be made upon completion of probation, not necessarily by 7/1/07.
Any options granted after 7/1/07 will vest immediately upon grant.
VESTING REQUIREMENTS
Options will vest on the applicable vesting date under the following
circumstances, and no other:
For Optionees who are Employees of the Company and on the TWU 555 seniority list
as of the applicable vesting date, and who have been on paid status for at least
1000 hours during the 12 months immediately preceding the vesting date, options
shall vest on the applicable vesting date. Options for Employees of the Company
who are on the TWU 555 seniority list as of the applicable vesting date, but who
were not on paid status for at least 1,000 hours during the 12 months
immediately preceding the vesting date, will vest upon the Employee's completion
of 1,000 hours on paid status during the 12 month period immediately following
the vesting date. If such Optionee is not on paid status for 1,000 hours during
such 12 month period, the options will be canceled.
SUPERVISORY EMPLOYEES
At the Company's option from time to time, Supervisory Employees in the
Company's Ground Operations or Provisioning Depts. may be granted options in
amounts and with vesting and other requirements as may be determined from time
to time by the Compensation Committee of the Board of Directors.
=====================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 2
<PAGE>
EARLY TERMINATION OF THE AGREEMENT
Notwithstanding any other term of this Plan, in the event TWU exercises its
option to make the Agreement amendable as of June 30, 2007, no options shall
vest on or after July 1, 2007 and such options shall immediately terminate.
=====================================================
2002 TWU 555 NON-QUALIFIED STOCK OPTION PLAN Page 3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.28
<SEQUENCE>12
<FILENAME>d02829exv10w28.txt
<DESCRIPTION>2002 CUSTOMER SERVICE/RESERVATIONS STOCK OPTION
<TEXT>
<PAGE>
EXHIBIT 10.28
SOUTHWEST AIRLINES CO.
2002 CUSTOMER SERVICE/RESERVATIONS
NON-QUALIFIED STOCK OPTION PLAN
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 2002 Customer Service/Reservations
Non-Qualified Stock Option Plan.
1. PURPOSE. This Plan is adopted in support of the Collective
Bargaining Agreement between the Company and the International Association of
Machinists and Aerospace Workers, AFL-CIO, representing the class and craft of
employees recognized by the Railway Labor Act as being Customer Service
employees of the Company ("IAM"). The Company anticipates an extension of the
current Agreement in a revised agreement (the "Agreement) pursuant to
negotiations currently underway.
2. ADMINISTRATION. This Plan shall be administered by an Administrative
Committee (the "Committee") consisting of not more than five (5) persons
designated from time to time by the Chief Executive Officer of the Company.
Members of the Committee may be removed or replaced at any time by the Chief
Executive Officer of the Company. The Administrative Committee shall select one
of its members as Chairman and shall adopt such rules and regulations as it
shall deem appropriate concerning the holding of its meetings, the transaction
of its business and the administration of this Plan. A majority of the whole
Committee shall constitute a quorum, and the act of a majority of the members of
the Committee present at a meeting at which a quorum is present shall be the act
of the Committee; any decision or determination reduced to writing and signed by
a majority of the members of the Administrative Committee shall be fully as
effective as if made by a majority vote at a meeting duly called and held.
3. GRANT OF OPTIONS; PERSONS ELIGIBLE.
(a) Persons Eligible. The Stock Option Committee of the Board
of Directors of the Company, or such other committee as may be appointed by the
Board, shall have the authority and responsibility, within the limitations of
this Plan, to grant options from time to time to persons employed as Customer
Service Agents or Reservation Sales Agents by the Company pursuant to the
Agreement, or at the option of the Company, as Supervisory Employees in the
Ground Operations or Reservations Depts., and as set forth in the schedule to be
attached as Exhibit A and made a part hereof. Only persons who are employed as
Customer Service Agents or Reservation Sales Agents of the Company, or at the
option
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 1
<PAGE>
of the Company, as Supervisory Employees in the Ground Operations or
Reservations Depts. on the date of the grant may be granted options under this
Plan; under no circumstances shall officers of the Company be eligible to
receive options hereunder.
(b) Grant Price. Options shall be granted at an exercise price equal to
the fair market value of the Common Stock of the Company on the date of the
grant of the option with initial grants on the date of ratification of the
Agreement.
(c) Southwest Airlines Employees Joining the IAM. Southwest Airlines
Employees who enter the work force subject to the Agreement without a break in
company service and who are participants in another stock option plan (an
"existing plan") will retain any vested and unexercised options granted with
such existing plan. The Employee must choose to either retain unvested stock
option grants established in accordance with such existing plan (if permitted by
such other plan), or will receive grants in accordance with this Plan, whichever
is chosen by the Employee involved, but the Employee shall not hold grants under
both plans simultaneously (other than vested and unexercised options in such
existing plan). The Employee must make the election prior to the scheduled grant
date for options under this Plan. If the Employee does not make a timely
election, options previously granted will remain in effect, and no grant will be
made under this Plan. Exercise of options will be done in accordance with the
Plan under which they were awarded. At such time as the Employee no longer holds
any vested or unvested options under the other existing plan, the Employee will
receive an initial grant under this Plan on the next scheduled grant date.
Employees who enter the IAM work force prior to the initial grant date of
options under this Plan must make the election within 60 days of the date of
ratification of the Agreement.
(d) Transferring to Another Work Group. If an Optionee transfers to
another work group (other than a supervisory, management, or union position
related to the functions covered by this Agreement), any unvested portion of any
option granted in accordance with this Plan, shall automatically and without
notice terminate and become null and void as of the first day such Optionee is
on the payroll for such position. Any vested and unexercised portion of any such
option shall remain exercisable under this Plan.
4. DEFINITIONS. An Employee receiving any option under this Plan is
referred to herein as an "Optionee." Any reference herein to the employment of
an Optionee with the Company shall include only employment with the Company. The
fair market
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 2
<PAGE>
value of the Common Stock on any day shall be the mean between the highest and
lowest quoted selling prices of the Common Stock on such day as reported by the
primary national stock exchange on which such stock is listed. If no sale shall
have been made on that day, or if the Common Stock is not listed on a national
exchange at that time, fair market value will be determined by the Committee. If
the date of grant is not a business day, the grant price will be calculated
using the immediately preceding business day.
5. STOCK SUBJECT TO OPTIONS. Subject to the provisions of paragraph 12,
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options, granted under this Plan, shall not exceed 22,000,000 shares. If, and
to the extent the options granted under this Plan terminate or expire without
having been exercised, new options may be granted with respect to the shares
covered by such terminated or expired options; provided that the granting and
terms of such new options shall in all respects comply with the provisions of
this Plan.
Shares sold or distributed upon the exercise of any option granted
under this Plan may be shares of the Company's authorized and unissued Common
Stock, shares of the Company's issued Common Stock held in the Company's
treasury, or both.
There shall be reserved at all times for sale or distribution under
this Plan a number of shares of Common Stock (either authorized and unissued
shares or shares held in the Company's treasury, or both) equal to the maximum
number of shares which may be purchased or distributed upon the exercise of
options granted under this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of shares of Common Stock which may thereafter be available, both for
purposes of this Plan and for sale to any one individual, by the number of
shares as to which the Option is exercised.
6. EXPIRATION AND TERMINATION OF THE PLAN. This Plan will expire on the
earlier of (a) April 30, 2009 except as to any options then outstanding under
this Plan, which shall remain in effect until they have been exercised or
expired or (b) such earlier date as may be agreed upon in the Agreement.
No modification, extension, renewal or other change in any option
granted under this Plan shall be made after the grant of such option unless the
same is consistent with the provisions of this Plan.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 3
<PAGE>
7. EXERCISABILITY AND DURATION OF OPTIONS.
(a) Exercisability. Options granted under this Plan shall become
exercisable pursuant to the vesting schedule and requirements set forth in
Exhibit A to be attached hereto.
(b) Duration. The unexercised portion of any option granted under this
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) November 1, 2012;
(2) The expiration of three months from the date of
termination of the Optionee's employment with the Company (unless such
termination was as a result of the circumstances set forth in subparagraph (3)
below); provided that if the Optionee shall die during such 3-month period the
provisions of subparagraph (3) below shall apply;
(3) The expiration of 12 months from the Optionee's death, if
the Optionee's death occurs either during his employment with the Company or
during the three-month period following the date of termination of such
employment; or
(4) Such other date as may be set forth in Exhibit A to be set
forth hereto.
In the case of subparagraphs (2) and (3) above, the Optionee
shall have the right to exercise any Option prior to such expiration to the
extent it was exercisable at the date of such termination of employment and
shall not have been exercised.
8. EXERCISE OF OPTIONS.
(a) Procedure. The option granted herein shall be exercised by the
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option by giving notice of the
exercise thereof (the "Notice") to the Company. From time to time the Committee
may establish procedures relating to effecting such exercises. No fractional
shares shall be issued as a result of exercising an Option.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 4
<PAGE>
(b) Payment. In the Notice, the Optionee shall elect whether he or she
is to pay for his or her shares in cash or in Common Stock of the Company, or
both. If payment is to be made in cash, the Optionee shall deliver to the
Company funds in the amount of the exercise price on or before the exercise
date. If payment is to be made in Common Stock, (a) it shall be valued at its
fair market value on the date of such notice, as determined pursuant to
Paragraph 4 hereof; (b) such Common Stock must have been owned by the Optionee
for at least six months prior to the exercise date; and (c) the Notice shall be
accompanied by documentation as proof of ownership for the number of shares of
Common Stock to be used as payment.
(c) Irrevocable Election. The giving of such notice to the Company
shall constitute an irrevocable election to purchase the number of shares
specified in the notice on the date specified in the notice.
(d) Withholding Taxes. To the extent that the exercise of any Option
granted pursuant to this Plan or the disposition of shares of Common Stock
acquired by exercise of an Option results in compensation income to the Optionee
for federal or state income tax purposes, the Optionee shall deliver to the
Company at the time of such exercise or disposition such amount of money as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if the Optionee fails to do so, the Company is authorized to
(a) withhold delivery of certificates upon exercise and (b) withhold from
remuneration then or thereafter payable to Optionee any tax required to be
withheld by reason of such resulting compensation income.
(e) Delivery of Shares. The Company shall cause shares to be delivered
to the Optionee (or the person exercising the Optionee's options in the event of
death) as soon as practicable after the exercise date.
9. NONTRANSFERABILITY OF OPTIONS. No option granted under this Plan or
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his or her options.
In the event of the Optionee's death during his or her employment with
the Company, or during the three-month period following the date of termination
of such employment, the Optionee's options shall thereafter be exercisable by
his or her executor or administrator, or by the person who acquires such options
by will or the laws of descent and distribution or otherwise by reason of the
death of the Optionee.
10. RIGHTS OF OPTIONEE. Neither the Optionee nor his or her executors,
administrators, or legal representatives shall have any of the rights of a
Shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 5
<PAGE>
11. RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any
option granted under this Plan shall confer upon any Optionee the right to
continue in the employment of the Company or affect the right of the Company or
any of its subsidiaries to terminate the Optionee's employment at any time;
subject, however, to the provisions of the Agreement.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) The existence of the Plan and the options granted hereunder shall
not affect in any way the right or power of the Board of Directors or the
Shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of debt or equity securities ahead of or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company or any sale, lease,
exchange or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares
of Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased; likewise, the
number of shares to be granted pursuant to the schedule to be set forth in
Exhibit A shall be appropriately adjusted. In the event of any such change in
the outstanding Common Stock, the aggregate number of shares available under the
Plan shall be appropriately adjusted by the Board of Directors of the Company,
whose determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the Optionee had been the holder of record of
the number of shares of Common
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 6
<PAGE>
Stock as to which such option is then exercisable. If the Company shall not be
the surviving entity in any merger or consolidation (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of the
Company) or if the Company is to be dissolved or liquidated, then unless a
surviving corporation assumes or substitutes new options for Options then
outstanding hereunder (i) the time at which such Options may be exercised shall
be accelerated and such Options shall become exercisable in full on or before a
date fixed by the Company prior to the effective date of such merger or
consolidation or such dissolution or liquidation, and (ii) upon such effective
date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or to be granted
or the purchase price per share.
13. PURCHASE FOR INVESTMENT AND LEGALITY. The Optionee, by acceptance
of any option granted under this Plan, shall represent and warrant to the
Company that the purchase or receipt of shares of Common Stock upon the exercise
thereof shall be for investment and not with a view to distribution, provided
that such representation and warranty shall be inoperative if, in the opinion of
counsel to the Company, a proposed sale or distribution of such shares is
pursuant to an applicable effective registration statement under the Securities
Act of 1933 or is, without such representation and warranty, exempt from
registration under such Act. The Company shall file a Registration Statement on
Form S-8 pursuant to the Securities Act of 1933, as amended, covering the shares
to be offered pursuant to the Plan and will use its best efforts to maintain
such registration at all times necessary to permit holders of options to
exercise them.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon the exercise of any option
granted under this Plan.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 7
<PAGE>
14. EFFECTIVE DATE OF PLAN; AMENDMENTS. This Plan shall become
effective upon its adoption by the Board of Directors of the Company; provided,
however, if a tentative agreement for the Agreement has not been reached between
the Company and the IAM on or before December 30, 2002, at the option of the
Company, this Plan shall be null and void and provided, further, if the
Agreement is not ratified by IAM on or before January 31, 2003, this Plan shall
be null and void in any event. Prior to a Tentative Agreement described in the
preceding sentence, this Plan may be amended by the Board of Directors of the
Company.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 8
<PAGE>
EXHIBIT A
INITIAL STOCK OPTION GRANTS AND VESTING
On the date of ratification of Collective Bargaining Agreement (the
"Agreement") between the Company and the International Association of Machinists
and Aerospace Workers, AFL-CIO, representing the class and craft of Employees
recognized by the Railway Labor Act as being Customer Service Employees of the
Company ("IAM"), options will be granted to persons employed as Customer Service
Agents and Reservation Sales Agents by the Company according to the following
schedule, and vesting as shown below.
<Table>
<Caption>
Shares Shares Shares Shares Shares Shares
Seniority Vesting Vesting Vesting Vesting Vesting Vesting
11/1/02 DOR 11/1/03 11/1/04 11/1/05 11/1/06 11/1/07 Total
- --------- ------- ------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1st Year* 175 200 225 175 350 400 1,525
Step 1 200 225 250 200 400 450 1,725
Step 2 225 250 275 225 450 500 1,925
Step 3 250 275 300 250 500 550 2,125
Step 4 275 300 325 275 550 600 2,325
Step 5 300 325 350 300 600 650 2,525
Step 6 325 350 375 325 650 700 2,725
Step 7 350 375 400 350 700 700 2,875
Step 8 375 400 450 375 700 700 3,000
Step 9 400 450 500 400 700 700 3,150
Step 10 450 500 500 450 700 700 3,300
Step 11-14 500 500 500 500 700+ 700+ 3,400+
</Table>
* Granted upon completion of probation.
+ Add 10 shares for every year of service completed above 11 years as of the
vesting date. Example: An Employee who has completed 20 years of service as of
11/1/06 would receive a total grant of 3,590 shares, with 790 shares vesting
11/1/06 and 800 shares vesting on 11/1/07.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 9
<PAGE>
SUBSEQUENT GRANTS
Options will be granted to persons employed by the Company after
November 1, 2002 who are covered by the Agreement. Grants will be made upon
completion of probation, at the then applicable Fair Market Value. Options will
vest annually as follows:
<Table>
<Caption>
Vesting Vesting Vesting Vesting Vesting
Hire Date 11/1/03 11/1/04 11/1/05 11/1/06 11/1/07 Total
- --------- ------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
11/1/02 - 10/31/03 175 200 175 300 350 1,200
11/1/03 - 10/31/04 175 175 250 300 900
11/1/04 - 10/31/05 175 200 250 625
11/1/05 - 10/31/06** 200 200 400
11/1/06 - 10/31/07** 200*** 200
11/1/07 - 10/31/08** 175*** 175
</Table>
** Grants scheduled to be made on and after 11/1/06 will not be granted if IAM
makes the contract amendable as of 11/1/06.
***Grants made after 11/1/07 will vest immediately upon the grant.
VESTING REQUIREMENTS
Options will vest on the applicable vesting date under the following
circumstances, and no other:
For shares vesting on the Date of Ratification, the Optionee must be an
Employee of the Company and on the IAM seniority list and either (a) on active
status on the Date of Ratification or (b) on paid status for at least 1000 hours
during the 12 months immediately preceding the Date of Ratification or,
alternatively (c) the shares will vest upon the Employee's completion of 1,000
hours on paid status during the 12 month period immediately following the Date
of Ratification.
For shares vesting after the Date of Ratification, the Optionee must be
an Employee of the Company and on the IAM seniority list as of the applicable
vesting date, and have been on paid status for at least 1000 hours during the 12
months immediately preceding the vesting date, and the options shall vest on the
applicable vesting date. Options for Employees of the Company who are on the IAM
seniority list as of the applicable vesting date, but who were not on paid
status for at least 1,000 hours during the 12 months immediately preceding the
vesting date, will vest upon the Employee's completion of 1,000 hours on paid
status during the 12 month period immediately following the vesting date. If
such Optionee is not on paid status for 1,000 hours during such 12 month period,
the options will be canceled.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 10
<PAGE>
EARLY TERMINATION OF THE AGREEMENT
Notwithstanding any other term of this Plan, in the event the IAM exercises its
option to make the Agreement amendable as of October 31, 2006, no options shall
vest on or after October 31, 2006, in which case options vesting on November 1,
2006 and thereafter would be canceled.
================================================================================
2002 IAM NON-QUALIFIED STOCK OPTION PLAN Page 11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>13
<FILENAME>d02829exv23.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
<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, 333-57478, 333-98761, and 333-100862 and Forms S-3 Nos.
333-29257, 33-59113, 333-71392, and 333-100861) of Southwest Airlines Co. and in
the related Prospectuses of our report dated January 21, 2003, 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, 2002.
ERNST & YOUNG LLP
Dallas, Texas
January 30, 2003
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>14
<FILENAME>d02829exv99.txt
<DESCRIPTION>CERTIFICATIONS PURSUANT TO SECTION 906
<TEXT>
<PAGE>
EXHIBIT 99
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Southwest Airlines
Co. (the "Company") for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, James
F. Parker, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1). The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2). The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: February 5, 2003 By: /s/ James F. Parker
----------------- -------------------------------
Name: James F. Parker
Title: Chief Executive Officer
<PAGE>
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Southwest Airlines
Co. (the "Company") for the year ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Gary C.
Kelly, Executive Vice President - Chief Financial Officer, of the Company,
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1). The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2). The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: February 5, 2003 By: /s/ Gary C. Kelly
--------------------- --------------------------------
Name: Gary C. Kelly
Title: Executive Vice President -
Chief Financial Officer
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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